The Top Retirement Strategies for Teachers

Educators have an unusual mix of potential income sources in retirement. As a teacher, you're likely to be eligible for a defined-benefit pension plan. Whether you teach in a public school or a nonprofit private school, you'll also typically have access to a defined contribution retirement plan, such as a 403(b) or 457(b).

However, unlike most other Americans, you may not be eligible for Social Security retirement benefits. According to the National Association of State Retirement Administrators, about 40% of public school teachers do not pay into the Social Security system, making them ineligible to claim benefits once they retire.

These variables make retirement planning for teachers unique and sometimes challenging. Here are some retirement moves that educators should consider.

Seek Expert Help

Two good places to begin your search for educator-relevant retirement advice are the websites of the teachers association and the Teachers' Retirement System in your state. Through those, you should be able to connect with retirement or benefits counselors familiar with your state's programs, and their advice is usually free of charge.

"I would counsel teachers to start speaking to a retirement counselor from the state five years before your retirement date," says Jeaninne Escallier Kato, a retired California public school teacher. "Many teachers wait until the last months of their tenure, then find out they didn't work to the best of their payment options."

Kato paid into the California State Teachers Retirement System (CalSTRS) for 36 years and now collects 85% of her former pay, $400 per month for three years' worth of unused sick leave, and additional "longevity pay." She says talking to a retirement counselor helped her plan the formula that would work best for her.

Beyond the free help, you may want to hire a financial advisor to prepare a more comprehensive analysis of your finances. Ask the state counselors or other teachers in your area to recommend advisors who have specific expertise in helping teachers. Make sure to choose an advisor who is a fiduciary, meaning that they're required to act in your best interests.

Save Beyond Your Pension

A significant majority of teachers in the United States have defined-benefit pensions, to which both the teacher and their employer make contributions. In exchange, the state promises a guaranteed payout for life upon retirement.

Payouts vary based on the teacher's length of service, earnings history, and other specifics of the plan. But the amounts generally fall well short of most teachers' financial needs in retirement.

As tabulated by Teacherpensions.org in 2019, the average pension for newly retired teachers in the previous 10 years ranged from around $20,000 a year in states such as Arizona, Florida, and South Carolina to around $50,000 in California, Connecticut, Illinois, and New York. In only one jurisdiction—Ohio—did the average pension crack the $60,000 mark, reaching $66,416.82.

Modest as those numbers are, they may be heading lower in some states due to the underfunding of teachers' pension funds. The funding shortfalls drive changes such as reduced benefits for new hires, increased employee contributions, and lower cost-of-living adjustments for retirees.

Overall, across the nation, teachers' pensions are at their lowest in modern history. In 1965, the average new teacher earned a pension benefit of $720,000 (adjusted for inflation) by the time they reached 65. For the 2023 school year, teachers starting their careers can expect to have a lifetime pension benefit of $668,000.

So, as early as possible in a teaching career, it's wise to begin setting aside some money to supplement your expected pension, such as through a defined contribution plan.

Consider Defined Contribution Plans

If you work full-time for a public school or a tax-exempt private school, you should be eligible to contribute to at least one defined contribution plan sponsored by your employer.

403(b) Plans

The most common type of defined contribution plan for teachers is the 403(b) plan. Closely resembling the private sector's 401(k) plans, a 403(b) lets you have money deducted from your paycheck and put into your chosen investments. In 2023, the IRS's contribution limit was $22,500. In 2024, it is $23,000.

Your contributions are generally tax-deductible, and your investment earnings are tax-deferred; you pay tax on that money only when you make withdrawals in retirement. If you'd prefer to pay the taxes now instead of when you retire, you can contribute to a Roth 403(b) instead if your employer offers the option.

Your employer may make matching contributions to your 403(b) plan, although that's less common than it is with 401(k) plans. For example, your employer might match 50% of your contributions, up to 6% of your salary. So if you earn $75,000 and contribute at least 6% of your salary to the plan, your employer would kick in an additional $2,250. That's essentially free money for retirement.

457(b) Plans

If you work for a public school district, you may be able to participate in a 457(b) plan in addition to or instead of a 403(b) plan. As with 403(b) plans, your 457(b) contributions come directly out of your salary, and your money grows tax-deferred until you withdraw it. 

If you work for a private school that is classified as a tax-exempt organization, you may not have access to a 457(b) unless you are a highly compensated employee; those are the federal government’s rules. One downside of 457(b) plans is that employers usually don’t provide matching contributions. But there’s also an upside: When you leave your job, you can start taking distributions from your 457(b) without penalty, even if you haven’t reached retirement age.

If you’re considering early retirement or early partial retirement, a 457(b) can help you fund that goal. With both 403(b) and 457(b) plans, your contributions were limited to $22,500 per year in 2023 and are limited to $23,000 in 2024. If you are over 50, your plan may allow an additional catch-up contribution of $7,500 in 2024, the same as in 2023.

But there’s another perk with 457(b)s: Participating in one doesn’t preclude you from contributing up to the maximum to a 403(b). If you maxed out your contributions to both a 457(b) and a 403(b) in 2023, you’d be putting away a whopping $45,000 ($46,000 in 2024)—more if you're over 50. And with a 457(b), when you’re three years away from the plan’s stated retirement age, you can opt to start saving even more—either twice the annual limit or the sum of the current year’s limit and any unused portions of previous years’ contribution limits, whichever is less.

Know Your Social Security Options

If you're unsure whether you're contributing to Social Security, a quick glance at your payroll deductions will clarify the matter. You may also qualify for Social Security if you've worked in the private sector, but it typically takes at least 10 years of private-sector work to earn enough credits to be eligible for benefits.

In 15 states, some educational employers do not participate in Social Security, so their teachers neither contribute to the program nor reap its benefits. Those states include Alaska, California, Colorado, Connecticut, Georgia, Illinois, Kentucky, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio, Rhode Island, and Texas—and Washington, D.C. Within those states there is also variation; some school districts participate, and some don't.

Even within so-called no-Social-Security states, though, program participation can be a checkerboard. In California, for example, teachers who participate in CalSTRS do not pay into Social Security but into the CalSTRS fund instead.

Government Pension Offset

Your participation aside, you might be eligible for spousal Social Security benefits if you're married and your spouse pays Social Security taxes. However, if you also have a pension, benefits received through your spouse might be reduced under government pension offset (GPO) rules. Typically, Social Security benefits will be reduced by two-thirds of the monthly pension amount.

For example, if the pension were $600 monthly, the Social Security benefit would be reduced by $400 per month. If the Social Security benefit were expected to be $500 per month, you would only receive $100 from Social Security while getting paid a $600 per month pension.

"Many teachers rely on spousal Social Security benefits, only to find out later that they are dramatically reduced by the GPO rules," warns Wyatt Moerdyk, CCO and managing member, Evidence Advisors Investment Management in San Antonio.

Weigh Working After You Retire

Not everyone wants or can afford to quit working after retiring from a full-time career in teaching. In fact, teachers across the U.S. have faced wage stagnation for years, leading them to make significantly less than other college graduates.

If you expect to teach part-time, work in another profession part-time, or start a full-time encore career, think about how that income might affect what you need to save today.

That being said, not everyone can work when they're older. Some people might have to care for aging parents, and others will find that their health prevents it. Sometimes jobs are hard to find. To play it safe, it's best not to base your financial plan on the assumption that you'll continue to earn income from work after you retire.

Ensure You'll Have Enough Insurance

Continuing to work after you retire can also be a cost-effective way to keep health insurance and other coverage you may need, at least until you're eligible for Medicare at age 65. For example, if you received life or disability insurance as an employee benefit while you were working, make sure you still have enough coverage, and if not, supplement it with a private policy after you retire.

The Bottom Line

While many teachers cannot rely on Social Security benefits during retirement, they do have plenty of other options. Most teachers have access to defined-benefit plans; though these pension amounts have been decreasing over the past few years, teachers can also contribute to defined contribution plans. If you're a teacher and planning your retirement, it is best to take advantage of both these options to ensure a comfortable retirement.