Teachers are retiring in droves because of the pandemic and need to rethink their retirement plans, according to Tom Granger, second vice president of qualified plans at Security Benefit, a retirement solutions and annuity company based in Topeka, Kan., that specializes in advising teachers.
Most teachers are part of state pension plans—one of the big draws of their profession in the past. But their benefits are being steadily eroded, Granger says. Now teachers who are thinking of retiring or changing careers need better options.
The number of those K-12 teachers who said they were satisfied with their jobs recently plunged from 69% in March 2020 to 44% in October, according to the Center for State and Local Government Excellence. In addition, 38% of the teachers said the pandemic and the strains it was putting on the teaching profession were making them think of retiring.
According to CNN, teacher retirements are up. Michigan saw a 44% increase in retirements between August and February from the same period last year. The Long Beach Unified School District, one of the largest in California, saw a 35% increase in teachers taking a leave of absence, CNN said.
Many state-sponsored pensions for teachers are defined benefit plans, a retirement program that’s disappearing in other industries, yet some plans pay as little as 35% of a teacher’s salary in retirement. In several states, educators do not contribute to Social Security, so they do not have that source of lifetime income available, Granger said.
There are two provisions in the federal retirement laws and IRS regulations that teachers, and some other individuals, can take advantage for retirement help, Granger said.
To help supplement their teacher’s retirement income, many school districts have adopted a ‘Special Pay Plan’ component to their 403(b) Plan. Special Pay Plans convert unused sick and vacation pay to a non-elective employer contribution that is deposited into the teachers 403(b) account. Eligibility is usually set at age 55 or older and participation is mandatory for eligible individuals, there is no opting out.
The real benefit to the Special Pay Plan is in the FICA tax savings as compared to those amounts being paid as W-2 income, especially in states where teachers are fully participating in Social Security. The FICA tax savings can amount to 15.30% (7.65% employee and 7.65% employer), further boosting the teachers 403(b) account balance.at retirement, Granger said. Special pay plans are part of a 403(b) plan, which is a retirement plan for public schools and certain nonprofit organizations.
Another option is a self-directed solo 401(k) plan, which is available to certain workers such as teachers and freelance writers and is an alternative to IRAs. It is only available after retirement from the school district and is contingent upon having earned income through other self-employment after retiring from teaching. The contribution limit for a solo 401(k) plan for an individual 50 years of age or older is $64,500 a year, whereas it’s only $7,000 for an IRA. The solo 401(K) is ideal for those individuals who have earned income from self-employment and are trying to catch up building a nest egg for retirement, Granger says.
“A lot of teachers are retiring earlier now than they would have” if the pandemic hadn’t happened, “and some are able to continue to put extra money aside for retirement because they have earned income from self-employment and usually are the second income in a family,” Granger says.