Jean Chatzky
Even before the global pandemic placed a severe strain on to best educate our nation’s youth, teachers faced a unique set of financial circumstances. They work long hours outside of a normal school day, they sometimes have gaps in pay because of summer breaks and are often forced to fund classroom resources out of their own pockets.
During the 2020-2021 academic year, an estimated 3.7 million educators are teaching more than 56 million students in elementary, middle and high schools across the United States, in public, private and charter schools, according to the National Center for Education Statistics.
It’s hard to imagine a group more deserving of our appreciation. As we look to Teacher’s Appreciation Month in May, here are seven tips educators should consider as they plan for their financial futures:
Know your pension plan
For educators, determining their pension offering early in their career is extremely important because this is likely going to be their primary investment vehicle, says Dan Herron, a certified financial planner with Elemental Wealth Advisors in San Luis Obispo, California.
Sometimes, plans change depending on when someone was hired. That means your colleague who started work a few years earlier may have a different benefit.
“Teachers need to fully understand how their benefit is calculated to determine if that monthly/yearly payout will be adequate enough to fund their retirement,” Herron says.
Not all teachers qualify for Social Security benefits
In more than a dozen states, public school teachers don’t pay Social Security payroll taxes and aren’t eligible for retirement benefits from Social Security because of pre-existing state plans.
For states in which public employees, including teachers, do not contribute to Social Security, it is essential to ensure that there are no gaps in retirement income, says Andy Mardock, CFP, who is founder and president of ViviFi Planning.
Raised by an elementary school teacher that taught for more than 35 years, Mardock says the rules around claiming a spousal Social Security benefit also can quickly become complicated and requires thorough research for each individual before you can count on that income.
Determine other benefits
Many teachers have access to benefits offered in addition to their pension. This can include everything from long-term care insurance, life insurance and health insurance. These are often provided at a discount to teachers, so make sure those extra benefits are understood to take advantage of them.
If an educator has access to an HSA, a health savings account for those with high-deductible insurance plans, they can potentially use that to get a tax deduction and fund future health expenses. Teachers also need to make sure they are maximizing benefits that many other educators typically take. These can include student loan interest deductions, the Lifetime Learning Credit, and other educator expense deductions.
Side hustles and taxes
With a median income of $50,000 in the U.S. in recent years, many teachers take on extra work to produce more income to make ends meet and help save for retirement.
When looking at side hustles and taxes, teachers need to make sure they use the correct form, typically a Schedule C, to produce income. As a result, it’s vital to keep excellent records of income and expenses for tax reporting. The extra income also opens the door to utilize another retirement plan, such as an SEP IRA and/or a SOLO 401K. This also could potentially allow for a home office deduction.
Alternative ways to save
With cuts to state pensions, many states and districts have introduced more defined contribution (DC) plans as part of their benefits packages for educators. For example, these may come in the form of a 403(b) account. While these accounts put the onus on teachers to contribute, some plans might match a portion of salary deferrals.
Another option, known as 457 plan, is becoming popular, as some of the accounts have no 10% early withdrawal penalty. That means if the teacher needed income sooner than when he or she retired, they could take it out and avoid that penalty.
A good resource for teachers is 403(B) Wise. They also have a Facebook group where teachers can interact and learn about tips others are using to save for retirement.
Ask about reimbursement plans
Teachers spend a lot of their own money for their classrooms and students. Herron encourages his clients to meet with school administrators to see if they can create a reimbursement program to help them conserve their hard-earned dollars. At some schools, year-long fundraisers are held to help pay for needed classroom supplies.
Get to work on loan forgiveness
A key message on student loan forgiveness for teachers is to start the documentation process now. There are hoops that student loan borrowers have to jump through, such as obtaining an employer sign-off for years of service, before debt can be forgiven.
By researching and starting the process now, he says, you can avoid the regret of missing out on benefits to which you may be entitled. Getting debt out of the way leaves more money available to save for a more secure and happy retirement.
With reporting by Casandra Andrews
Chris O'Shea
