Solely Relying On Your State Pension For Your Retirement

A Pension can provide a predictable source of income in Retirement, but it is important that teachers realize that their pensions should not be their only source of Retirement income.  Teachers should plan to have a second reliable source of income, such as a 403B, personal savings or income property to live more securely in Retirement.  Teachers that have secondary sources of income have more control over their personal Retirement timeline in addition to greater control over how they may be taxed in Retirement on that income.

It is important to understand that not all teachers will receive a pension.  States can and do set relatively high minimum service requirements, ranging from five to 10 years, and over half of incoming teachers won’t qualify for Retirement benefits in their state.  Of the teachers who do qualify for a pension, their benefits will vary widely.  The statistical average, or mean, hides the fact that only a small percentage of incoming teachers will receive a full career pension at retirement, while many, many more get only a small amount.  In some cases, pensions may be worth less than the value of the teacher's own contributions. 

Waiting Until Retirement to Review Your Pension

Pensions are calculated based on a specific formula; years of service X multiplier X final average salary as defined by your specific state pension.  Some pensions may provide a enhanced pay-outs based on additional pre-payments made via payroll deduction and once certain waiting periods are met.  Not only can all of this be extremely complicated to navigate on your own but if not understood early into your career it can significantly reduce your ability to maximize your pension and adversely impact your Retirement all together.  Understanding the ins and out of your pension and how each payment option works will allow for you to plan pro-actively and Retire on your own terms.

Choosing the Wrong Option Without Guidance

The pension option you choose when you retire is one of the most important financial decisions you’ll make; it will affect you for the rest of your life.  Most state pensions provide multiple options and, in some states, as many as 6 choices for you to decide on, all which determine how much income you and or your beneficiary will receive throughout Retirement.  One box checked vs. the other could be the difference of thousands of dollars you will either receive or not receive in Retirement.

To decide which pension option is best for you, you’ll want to consider:

Your age and your beneficiary age

The health and life expectancy of you and your beneficiary

Your dependents and their financial needs

Your family and its financial situation

Your income needs and future plans

Other factors that may apply to your personal situation

Ways you want to provide for others

IMPORTANT THINGS TO KEEP IN MIND

You have 60 days after the date on the letter notifying you that your pension has been granted to change your pension option. After that time, your selection is final. If you have a spouse, you may not be able to change your pension option after your pension has been granted.

If you have a former spouse, you may be required to provide them a share of your pension under the terms of your signed separation agreement or registered court order.

We recommend that you speak with an independent financial professional before making your pension option decision.



Leaving Less to Your Family

Upon death your pension may be left to a beneficiary as either a lump sum or monthly lifetime payment.  How much your beneficiary will receive and whether they will receive any payment or payments at all can differ greatly from one pension to another.  There are many factors that go into factoring beneficiary payments.  Factors may include, the timing of your death, pension balance at the time of death, vesting schedules and what specific payout option was chosen upon retirement if retired.  Leaving your pension to your beneficiary creates a taxable event that could be easily avoided or mitigated by some simple planning.  Most teachers are unaware of commonly used tax saving strategies that could greatly benefit their beneficiaries.  Planning could be so critical to surviving beneficiaries because the pension benefit is often the largest source of retirement income or inheritance for them.

Understanding your beneficiary options and these tax savings strategies could be the difference of thousands of dollars paid out to you while you are alive and your beneficiary upon your passing. 



Ignoring Future Taxes

When planning for Retirement most tend to focus on their savings amount, rate of return, risk tolerance or in the case of pensions, the monthly benefit amount at specific ages.  However how much you save is equally as important to where you save.  One of the biggest factors in how much Retirement income you will get to keep that is often overlooked is future taxation.  Most teachers do not understand that their pension generates taxable income that may adversely impact other income sources and overall gross household taxes.  Careful planning should be considered prior to electing pension funds and choosing beneficiary options as your pension may also lead to a significant taxable event for them as well.