Why You Need a 403(b) or 457 Plan
Could you live on just over half of your teaching salary? What would retirement be like on less than two-thirds of your income?
It sounds scary, but in fact, it’s reality for educators who are counting on CalSTRS or CalPERS as their sole retirement plan. Consider these facts:
60%-65% = Percentage of salary the California State Teachers Retirement System (CalSTRS) pension replaces, on average, for current and retired members.*
$0 = Amount CalSTRS participants can expect in the form of federal Social Security benefits. (Please note that educators participating in the California Public Employees’ Retirement System (CalPERS) do pay Social Security taxes and are eligible to receive benefits. In addition, CalSTRS participants may be eligible for Social Security benefits from a spouse’s earnings or earnings from other jobs, but those benefits may be reduced by the Windfall Elimination Provision (or Government Pension Offset.)
90%- 100% = Percentage of salary financial experts recommend replacing in retirement to maintain same standard of living as your working years.
30%-40% = Percentage of CTA members who take advantage of a 403(b) retirement savings plan to supplement their pension plan.
The bottom line: The majority of educators are facing a retirement savings shortfall. That’s why you need a 403(b) or 457 plan – to make up the difference. Let’s take a closer look at these sources of retirement income:
CalSTRS and CalPERS state pension funds. Your pension, or defined benefit plan, is an important part of your retirement savings. These retirement systems continue to provide a key benefit to educators. Your benefit is based on your age at retirement, years of service and final compensation level. You can run the numbers and estimate your benefit level by using the calculators on your pension’s Web site (www.calstrs.com or www.calpers.ca.gov).
Social Security. Educators with a CalSTRS pension do not pay Social Security taxes. They contribute a greater percentage of pay into the pension fund instead, and therefore are generally not eligible for Social Security benefits. (They may qualify for benefits earned through another job, although those benefits may be reduced due to the Windfall Elimination Provision. For more information, visit https://www.ssa.gov/planners/retire/wep.html.)
Educators and school employees with a CalPERS pension pay 6.2% of salary for Social Security and generally qualify for Social Security benefits. Educators are often confused or mistaken about what they will collect from Social Security in retirement. If you are eligible for Social Security benefits, you should receive an annual statement in the mail with an estimate of your projected benefit from the Social Security Administration.
403(b) and 457 plans. The 403(b) is a tax-deferred retirement plan available for eligible employees of public schools and other tax-exempt organizations. A 457 plan is available for eligible employees of public schools and government workers. They are called defined contribution plans, because the participant makes contributions and investment decisions. It is different than your pension or defined benefit plan through CalSTRS or CalPERS, where you and your employer make contributions and CalSTRS or CalPERS make all of the investment decisions. Ultimately, you are in control of your 403(b) or 457 plan.
Prepare for a Financially Secure Retirement
The 403(b) or 457 plan is designed with features to help you make the most of your retirement savings. In 2014, you can contribute up to $18,000, or an additional $6,000 (total of $24,000) if you are age 50 or better. If you’re a long-term employee who has not consistently contributed to your plan, you may also be eligible to make lifetime catch-up contributions.