Most public school systems have what’s known as a teacher retirement system.
They are defined benefit plans (a pension) that
is aimed at replacing were around long before social security.
So, many states chose to opt out of social security and have their employees only pay into the teacher retirement system.
But teachers aren’t necessarily teachers for life.
So, many leave the system and don’t know what to do with their funds.
Here’s a great question from a reader about what to do with teacher retirement system funds once you no longer teach (pre-retirement):
I recently began working at a charter school that doesn’t use the state’s teacher retirement system. I have $26,000 saved. My options are to (1) move into a tax shelter, (2) cash out at $21,000 or (3) leave it alone and collect $750/mo in benefit starting at age 60. I’m 35. What should I do?
My wife teaches too and is now home with the kids. I’ve encouraged her to keep the money in the account until she is absolutely sure she won’t go back to teaching.
If you’re all done with the public system then I’d encourage you to consider moving the money into a rollover IRA with a mutual fund company or a discount broker. This would give you more control and allow you to maintain the same tax deferred status (thus, avoiding taxes and penalties).
These accounts don’t have service fees and they allow you to choose from a variety of low cost funds to place into the account. I personally like the Vanguard target date funds. They are low cost, maintenance free, and simple to understand.
As far as the numbers go, lets try to compare apples to apples:
- $26,000 invested for 25 years (time until you are 60) in a rollover IRA with a modest 6% return would net you $116,000 (or 23 years of $750/mo payments).
- You could also leave the money alone (in the IRA) till you are 70.5 and the account would be worth $211,000 (that would give you well over 30 years of $750/mo payments).
And that’s if you never invest another dollar.
Of course, the stock market is a risk. Over the next 25 years there is no guarantee that it will return at least 6% annually. With your teacher retirement account, it is a defined benefit plan, so it is a guaranteed $750 a month, no matter what happens. Just like social security. In fact, as a teacher you haven’t been paying into social security because you have this system.
So, with the teacher’s retirement system, the best (and worst) you will do is $750/mo. Unless, of course, the state goes completely broke and the entire system falls apart, in which case we’re all screwed. The same could be said of the stock market though.
One other thing to consider is the added benefits you might receive by being a member of the teacher’s retirement system. Some systems may provide disability and other benefits that you would have to consider purchasing on the open market to truly gain the same level of coverage on your own.
I personally like having more control of my investment choices and I have confidence in the market long term to produce returns around 8% annually. I look at it this way: If I could stop paying into social security and invest that money myself I would in a heartbeat. In an ideal world, I’d be left to do my own investing and buy my own insurance.
You have that choice now since this teacher’s retirement system has been your social security for the past several years. Consider your options carefully and be sure to read your teacher retirement system handbook to understand what all you will be giving up by leaving the system.
Okay readers, this is where you step in and give your opinion. What would you do? If you’ve faced this situation before what did you do?
Image by mklapper