I Don’t Teach Anymore. Should I Keep Money in the Teacher’s Retirement System?

Leaving the Teachers Retirement System

What should you do with those old teacher retirement system funds?

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 answer:

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

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Last Edited: July 21, 2012 @ 8:41 am
About Philip Taylor

Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. I probably would leave the money in there. I like having complete control too, but having a small portion in the teacher retirement system is a little bit of diversification that’s pretty low risk. I guess I’m a bit bias. My mother in law just retired and her teacher pension really helps out.

    •  @retirebyforty What would you think of taking the money and placing it into an annuity? Would that give you the same diversification and risk?

      •  @Philip Taylor An annuity would seem to provide a similar level of diversification and risk with greater control over the terms. I agree that as much personal control over an investment as possible is a good thing, even if there is more risk. The biggest benefit to keeping it in the teachers’ retirement system seems to be the possibility of going back to teaching.
         
        The reader didn’t say whether he already had anything invested in the stock market already. If this is his entire retirement savings, taking a look at the riskier but higher yield options may be a great perspective to check out.

  2. I would probably leave it only because it is unlikely she’ll ever get another chance for a guaranteed income stream.  You can always build another $26,000 IRA/401(k)/403(b) but may not have a chance to build another defined benefit account. 
     
    I would also check the IRR on that.  Pretty easy to do on excel where $26,000 is the pot and the stream is $750 in X years for Y years (life expectancy).  
     
    This also allows for more risk taking on the other side that will hopefully work out

  3. thefrugaltoad says:

    I would recommend leaving it in the State Retirement System since it is a guaranteed income stream for as long as you live versus running out of funds with the IRA at age 83.  I’m also a Teacher Phil and in Arizona we pay social security in addition to our state retirement fund contribution, are you serious about not paying social security tax?

    •  @thefrugaltoad Yes, employees with some older state programs are entirely exempt from SS. If I were to become a teacher in Texas I would stop paying into SS.

      • @Philip Taylor  @thefrugaltoad 
        This is NOT true. I was a teacher in Texas for 7 years and had ALL federal taxes taken out of my paycheck INCLUDING social security.

        • @Philip Taylor  @thefrugaltoad
           It depends on the School District.  I’m in San Antonio.  Most districts don’t pay into SocSec, but SAISD does.