Teachers: Here’s How to Ace Retirement Without Social Security

Investing, Retirement Income
No Social Security, Teacher? Study These Retirement Savings Options

When it comes to saving for retirement, many teachers can’t use the standard lesson plan. What’s different for them? Social Security — or the lack thereof.

About 40% of public school teachers aren’t covered by the Social Security system, according to the National Association of State Retirement Administrators. But, despite this serious drawback, there are ways for teachers to make sure they’re on track for a successful and secure retirement.

Here’s what you need to know about your options:

How teachers can save for retirement

Teacher retirement options vary by state, but you’re generally offered either a pension or a defined contribution plan like a 403(b) or 457(b), or both.

1. Pensions

Pensions have plenty of perks, most notably a guaranteed benefit in retirement that lasts as long as you live. But they’re not without downsides. Many are underfunded, and they typically don’t travel well, requiring you to participate in the plan for a certain number of years before you’re vested (“vested” means promised the full pension benefit you’ve accumulated). Generally, the longer you work, the larger your pension benefit.

To make sure your retirement is all you want it to be, it’s wise to supplement your pension. Read on for two ways to do that.

2. A defined contribution plan

You may be eligible for a 403(b) or 457(b) plan alongside your pension. Both allow you to put aside money for retirement pretax. The annual contribution limit for 2017 is $18,000, with additional catch-up contributions in some cases. If you have both a 403(b) and a 457(b), those limits are separate. You may also earn employer matching contributions.

The money you contribute generally grows tax-deferred and will be taxed as income when you take distributions in retirement. Both plans may also offer a Roth option, which allows you to put away after-tax dollars and take retirement distributions tax-free.

3. A Roth or traditional IRA

These are accounts you would open and fund on your own at an online broker. With an IRA, you can contribute up to $5,500 in 2017, with an extra $1,000 if you’re 50 or older.

Ready to start? These are our top picks for IRA account providers.

Or, if managing your own IRA isn’t your idea of summertime fun, consider a robo-advisor. These companies use computer algorithms to manage your investments for you, at a low cost. Check out the “best robo-advisors for IRAs” on our list of top robo-advisors.

With a traditional IRA, you make tax-deductible contributions, then pay taxes on distributions in retirement. With a Roth IRA, your contributions don’t get you an upfront tax break, but distributions in retirement are tax-free. Depending on your income, you may be able to combine IRA contributions with a 403(b) or 457(b), increasing how much you put away for retirement each year. Review the IRA contribution limits to find out.

Why teachers aren’t covered by Social Security

Remember how 40% of public school teachers aren’t covered by Social Security? That goes back to the initial draft of the Social Security Act in 1935, which left state employees out in the cold. Most states have since opted into Social Security for their public-sector employees, but 15 states haven’t. In those states, teachers and other state and local government workers are exempt from paying Social Security taxes and instead typically rely on a state-run pension plan.

So, why aren’t teachers covered? The short answer: In part, it’s because they don’t pay into the Social Security system. But in some cases, even if they’ve paid in at some point in their career, Social Security benefits — including retirement, disability and survivors benefits — could be reduced if they also have a state pension.

The retirement and disability benefit reduction is due to a rule called the Windfall Elimination Provision, which is designed to block state and local public employees from collecting a pension alongside Social Security benefits. It does that by reducing Social Security retirement benefits. A separate rule, called the Government Pension Offset, can also cut into Social Security survivors benefits.

The Windfall Elimination Provision

You might wonder how Social Security can be reduced if you weren’t covered by the program in the first place. The answer is that it can’t. The Windfall Elimination Provision doesn’t directly affect you if you’ve never paid into the Social Security system; you simply won’t receive benefits.

But if you have contributed to the system — most likely because you paid Social Security taxes in a different job — and you now work for a state or local government in a role that doesn’t participate in Social Security, the Windfall Elimination Provision could reduce any Social Security retirement or disability benefit for which you’re eligible based on that past work.

Your Social Security statements likely won’t reflect that reduction, which is based on a special calculation. The maximum monthly reduction in 2017 is $442.50, limited to one-half of your monthly pension benefit. You will be subject to a smaller cut if you have 21 or more years of “substantial earnings” from a job in which you paid Social Security taxes. If you have 30 or more years of substantial earnings, your benefits won’t be reduced by the Windfall Elimination Provision.

Take the next step with your retirement investments

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.