Two Retirement Plans for New Teachers

Teachers are some of the hardest working individuals I've ever encountered.  Early mornings and late nights, grading assignments, and handling the emotions of young adults are only a small part of a teacher’s job.  Teachers have a special skill for impacting and shaping young adult’s lives. No one goes into teaching to become rich, but if planned well, they can retire with savings that allow them to enjoy the next chapter of their lives’ comfortably.

Schools have been changing and adapting their retirement accounts frequently over the years.  In the past virtually all public school teachers depended on the teacher pension program.  However, as the program has been underfunded by billions of dollars the states have needed to change the way they plan for the teacher’s retirement.  Below is an outline of a few details of the new retirement plan for new teachers beginning February 1, 2018.

New Teacher Retirement Plan - Two Options:

Option 1:  The Pension Plus Plan:  

The Pension Plus plan is considered a "hybrid retirement account."  The plan combines something similar to the old pension plan with a blend of new retirement investing options.  The pension portion of the retirement plan provides a set monthly amount of money during retirement that is backed by the state of Michigan.  You pay into the program throughout your career, and upon retirement the State promises to give you a specified monthly amount. The Pension Plus plan also involves a portion of investing in an account of your own that is tied to whichever funds you decide to invest with and the amount you get at retirement depends on the performance of the fund.  

You're probably wondering how much money the pension plan will give you at retirement.  It varies.  The amount you will receive from the pension portion is determined by a formula that takes into consideration how many years you worked for the school system and how much money you made in your highest paid years.  As you might imagine, the more years you work for the schools and the more you're paid the higher your pension benefit will be.  

Key Numbers of the Pension Plus Plan:

o   You contribute 6.4% of your paycheck to the pension account.

o  You automatically contribute 4% of your paycheck into your own investment account (a 403(b) account).

  •   The 4% contribution is broken down as follows:
    •   2% of the total contribution is contributed to healthcare in retirement
      • Your Employer matches the full 2% contribution
    •   2% is placed into your retirement account
      • Your employer adds an addition 1% match.

 

Option 2: Defined Contribution Plan:

  The Defined Contribution plan is contributed to a retirement account called a 403(b).  This is less like a traditional teacher pension and more like a 401(k).  You, the teacher, will automatically invest 8% of your paycheck to this retirement account and your employer will also contribute.  This money will be invested how you see fit and at retirement the amount you get will depend on the performance of your investments.  

Your Investments are Broken Down as Follows: 

  •  2% of your automatic contribution goes toward your healthcare in retirement. 
    • Your employer matches and puts 2% into the HealthCare account.
  • The other 6% contribution is matched at half by the school
    • You put in 6% and the employer will add 3%.

 

A few things to consider:

Pension Plus Plan: 

  •  If you want an assured monthly income upon retirement the pension plus plan may be for you. 
  • With this pension portion of this plan your employer takes the risk.  No matter what the stock market does in the future, they are promising to give you a set monthly dollar amount.  

Defined Contribution Plan:

  • · You assume full investment risk – you will not be guaranteed a level payment amount upon retirement. If the market does well and you invest wisely you will make more money.  If the market does poorly or you invest unwisely your account will decline in value.
  •  While offering less of a guarantee, this option has the potential to earn a higher return and thus result in you having more money at retirement.  However, you may also end up with less in retirement if your investments don't do well.  

 

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Michael Custer

Michael Custer 

Michael is a team member of Custer Financial Advisors.  He graduated from Hope College and specializes in working with millennials and former athletes, as he used to play Quarterback in college. To learn more about Michael, visit Custer Financial Advisors or email him.  

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  For advice specific to your situation, please contact us.

DaveRamsey Smart Vestor