For millions of retirees, monthly Social Security payments provide predictable, guaranteed income. But in a handful of states, teachers won’t be among those receiving benefits.
“It’s definitely surprising for some people,” says Andrew Katz-Moses, a former teacher and current financial planner with Katz-Moses Financial in the District of Columbia.
Twelve states and the District of Columbia have opted out of Social Security coverage for their teachers, according to the National Center for Education Statistics. Five states allow school districts to make that decision.
“In Texas, schools have a choice if they want to contribute to both the (state teacher) pension system and Social Security,” explains Laura Redfern, certified financial planner and certified financial transitionist at Shadowridge Asset Management in Austin, Texas. However, contributing to both can be expensive, so many districts opt for only the teacher pension system.
“Teachers who don’t receive Social Security benefits due to their state’s policies have a unique challenge, but there are steps they can take to ensure a secure retirement,” says Eliza Arnold, CEO of Arnie.co, a 401(k) retirement plan provider. Those steps include understanding current benefits, saving in supplemental retirement accounts and budgeting wisely.
[READ: Essential Sources of Retirement Income]
Here are five things you should do if you’re a teacher who expects to retire without Social Security.
— Check your pension benefits.
— Make sure you’re vested.
— Invest in a 403(b) or 457 plan.
— Get a second job.
— Understand the Windfall Elimination Provision.
Check Your Pension Benefits
The first step for planning for a retirement without Social Security is to understand what your pension provides.
“Understand the payout rules, your contribution rate and the state’s contribution rate,” Arnold says. “Pensions can provide a significant portion of your retirement income.”
In the District of Columbia, veteran teachers may receive about 60% of the income they earned during their highest-paying years, according to Katz-Moses. That amount gets adjusted for inflation as well.
Pensions typically offer a survivor option, in which retirees receive a smaller monthly benefit in exchange for ensuring their spouse can continue to receive payments after their death. This option can be especially important for workers ineligible for Social Security benefits since their spouse will not be able to receive survivor benefits from that program.
“There are some great benefits out there for teachers, but you need to learn about them and use them,” Redfern says.
Make Sure You’re Vested
To qualify for a teacher pension, you’ll need to be vested in the plan. That’s one reason to avoid bouncing among jobs — or least jobs that don’t contribute to the same retirement system.
Many states, such as Nevada and Maine, consider a teacher to be vested in the pension system after five years of service. Leaving a job before then could mean a reduced pension benefit or no benefit at all.
For those who are willing to stick with a school system for an extended period, the financial rewards can be significant. “For longtime teachers, the D.C. pension will be more than Social Security,” Katz-Moses says.
[READ: Jobs That Still Offer Traditional Pensions]
Invest in a 403(b) or 457(b) Plan
Even if you expect to receive a sizable pension, it is unlikely to match your pre-retirement income. To fill any gaps in your budget, schools offer teachers the option to save money in 403(b) plans.
“I find that a lot of teachers don’t know about that,” Redfern says.
These plans operate similarly to the 401(k) plans offered by private businesses, and in 2023, teachers age 50 and younger can make up to $22,500 in tax-deductible contributions. Someone age 50 or older can contribute up to $30,000.
“Diversification is key,” Arnold says. “Spread your investments across a mix of stocks, bonds and other assets to manage risk.”
Katz-Moses advises teachers to carefully review the fees attached to these plans. Many school districts offer multiple 403(b) options, and some may have fees as high as 2%. For help in evaluating your available options, the nonprofit 403bwise provides plan scores online.
If you don’t have any low-cost 403(b) options, Katz-Moses suggests seeing whether your district offers a 457(b) plan instead. These often have lower fees. Barring that, using an IRA for retirement savings is another avenue to consider.
Get a Second Job
Many teachers take on second jobs during the summer and school breaks, and these could make them eligible for Social Security. To receive Social Security benefits, workers must earn 40 credits. In 2023, one credit is awarded for every $1,640 in covered earnings — that is, earnings on which Social Security taxes have been paid.
Up to four credits can be earned per year, which means most people become eligible for Social Security benefits after working for 10 years. For teachers with a government pension, though, there are other factors at play.
“The catch is that it’s not just working the 40 credits,” according to Redfern. In addition to earning credits, the covered income must be “substantial.” If not, Social Security benefits could be reduced by the Windfall Elimination Provision.
[See: 15 In-Demand Jobs for Seniors.]
Understand the Windfall Elimination Provision
The Windfall Elimination Provision, and a similar Government Pension Offset, can reduce Social Security benefits for those who are eligible for both Social Security and a pension from non-covered employment. According to the Social Security Administration, the provision was passed in 1983 because it was believed that people receiving both benefits had the “advantage of receiving a Social Security benefit that represented a higher percentage of their earnings.”
“The good news is that the WEP can’t completely wipe out Social Security,” Redfern says. “(You) will get something.” But the bad news is that it can drop monthly payments by as much as $557 in 2023.
However, if you have at least 20 years of substantial earnings, then the WEP deduction is reduced and it phases out entirely after 30 years of substantial earnings. In 2023, substantial earnings are defined as an annual income of $29,700.
“The big problem is that the Social Security statements don’t take it into account,” Redfern says. Someone logging into their online Social Security account might see they have earned 40 Social Security credits and are eligible for benefits. If they don’t realize those potential benefits could be subject to a WEP reduction, it could upend their retirement plans.
The Social Security Administration provides an online calculator for those with non-covered pensions to calculate if and by how much their Social Security benefits could be impacted by WEP. Teachers may also want to consult with a financial advisor for assistance in ensuring their expected retirement income is sufficient to cover expenses.
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How to Retire as a Teacher Without Social Security originally appeared on usnews.com
