Tuesday, April 15, 2014
Our Retirement System Is As Good As It Gets.
One of the major perks that we educators have is the retirement system that goes a long way to provide us with lifetime security. If I look at the three stools of retirement, our retirement system provides us with two of the three. A pension, and savings, with social security being the third leg of the stool. Is it any wonder that the newspapers are always claiming that our pensions are too generous by calling it the "pension bomb". However, many of my fellow educators don't take full advantage of what's offered to us and that's a shame. We are known as New York City's "smartest" but when it comes to "financial smarts" we are lacking. Hopefully, I will try to enlighten my fellow educators on how to take advantage of what the retirement system gives us.
Defined Benefit Pension:
We are blessed with a pension plan that can give us a 40% pension after twenty years of service and 60% after thirty years, using the highest three consecutive years of employment. If one is fortunate enough to qualify for the 25/55 program, even better. For tiers 1 to 4 it's very important to finish the twentieth year, since your pension jumps up from 31% after nineteen years to 40% after twenty years for the majority of teachers in the system. Since tier 5 and tier 6 educators have few years in the system, the pension is far away and they have requirements that require twenty-five years for maximizing the pension. Moreover, for tiers 1 to 4 educators, there is no employee contribution to their pension after completing ten years, the City must fund the entire cost. For tiers 5 and 6, employee contributions continue throughout their employment (if you are in the tier 4 25/55 program, employee contributions of 1.84% for that program continue to retirement). You can retire as early as 55 but unless your in the 25/55 program, or have 30 years of service, there will be a significant age reduction factor that will reduce your actual pension. See below. For tiers 2-4 vesting occurs after 5 years while for tier 5-6 you need 10 years.
Annuity Savings Accumulation Fund:
One of the real perks is the ASAF annuity that is added to the pension. Once a teacher reaches their final step increase (8b), every year thereafter the teacher receives $400 yearly which has a 5% interest added to the balance. Teachers who have approximately 25 years in the system can expect the ASAF fund to have about $15,000 in it and is annualized to add an extra thousand or so to the yearly pension. For administrators it is $550 annually.
Teacher Deferred Annuity:
This is a 403b plan known as the TDA. Contributing to the TDA can make or break an educator's retirement plans. Since this is a tax deferral instrument, the more an educator contributes to their TDA, the less they are taxed since the amount taken out of the paycheck is not subject to federal, state, and local taxes until the money is taken out of the TDA. For teachers 50 years old and older, the "Fixed Income Fund" guarantees 7% return annually and in this low inflation environment (between 1-3%) its the best deal in town and most of the TDA should be in the "Fixed Income Fund". For younger teachers, the "Fixed Income Fund" should be a part of your TDA and use it instead of the bond fund which has low yields and far lower returns. Unfortunately, many educators fail to take full advantage of the TDA and put too little into it. The more an educator puts in the TDA, the better retirement he or she will have. For school administrators it's 8.25% until the next contract. The maximum contribution is $17,500 and if over 50 years of age $23,000 for 2014. Cinally, only 70% of the educators re thing advantage of this benefit, it should be 100%!
Retiree Health Benefits:
For tier 4 and 5 employees, ten full years of service entitle the educator for lifetime retiree benefits and this is a godsend since health costs usually increase with age. Therefore, its extremely important to achieve a minimum of ten full years of service to achieve lifetime retiree benefits as soon as age 55. For tier 6 employees its 15 years of service. For tiers 1 to 3 its only five years.
A teacher can take up to 75% of their MACP funds from their pension or 75% of the TDA balance as a loan. I strongly suggest that you take the loan from your MACF in your pension since, if you pay the loan back before you retire, your pension is unaffected. On the other hand, taking a loan out of the TDA will reduce your balance and lose interest and appreciation during the time you take out the loan. If you still have an outstanding loan, your pension will be pertinently reduced by $75 for every thousand dollars owed (amounts vary) and can result in almost $3,000 less in the yearly pension.
Teachers close to retirement are tempted to take the single payer option, even if they are married. This is called "pension max" and instead of having their pension reduced to 85-92% by covering the spouse, the educator takes out a life insurance policy on the spouse with the savings by taking the maximum pension. I personally would not use this risky approach and I strongly urge all future retirees to compare their own circumstances and read up on the pros and cons of "pension max".
Realistically there are very few Tier 1 and 2 members left in teaching and I didn't include them in much of my post. However, the very few that are left have 40 or more years in the system and they are usually no longer in the classroom. These educators can contact TRS for more information specific for their tier. Tier 3 members can and usually automatically convert to tier 4 since tier 3 employees have a social security offset that can reduce their retirement benefit by 50% of your social security benefit that came from public service. Moreover, tier 3 educators who retire before age 62 have a steeper reduction rate that results in a more reduced pension. Finally, tier 3 members are limited to 60% of their final three years for pension purposes while for tier 4 is unlimited. Therefore, almost all tier 3 educators convert to tier 4 status. Tier 5 and 6 employees must pay into the pension system during their employment and have slightly inferior calculation methods that may result in a reduced pension. Two years ago I wrote an article comparing the tier 6 pension to the tiers 4-5 pensions here. Further information can be found comparing the six tiers from the New York State Teacher Retirement System website.
An educator can convert their accumulated sick days into either termination pay until it runs out or get three lump sum checks every six months. By taking termination pay the educator keeps their salary, contributes to the TDA, and accumulates pension credit until the sick days are used up. In both cases the "2 for 1 rule" applies. Meaning for every day of payment or termination pay, two days are taken from the CAR. The termination pay is only good for one semester, if an educator still has days in the CAR, its converted to a lump sum payment and paid six months later.
Educators get three times their final three year salary if they die in service. If they die within one year after retirement they get 50% and within two years 25%. After that its 10%.
If you worked for any State or local government outside the DOE in New York State, you can and should buyback the time. It's to your advantage to do so. TRS will work out a buyback plan to ease your payments. Remember for most of us, every year in the system will increase our pension by 2%. Call TRS and send them a request to buyback the time.
Cost Of Living Adjustment:
The COLA to the pension is given to the first $18,000 of a retiree's pension and starts five years after retirement or 62 if the educator retires at 55, you must wait ten years for the COLA to kick in. .The yearly COLA is 50% of the Consumer Price Index (CPI) and has a 1% minimum but cannot exceed 3% in any one year regardless, even if the CPI is greater than 6%.
For more information call the UFT and ask for their "Pension Handbook". I believe it costs $9 and tell them what tier you are in. For more detailed information and if you're within five years of retirement, then call the UFT Borough office for a pension consultation. You are entitled to have one every year until you retire. However, you can only have one "final retirement consultation" so use it the year you intend to retire.
Note: The age correction factor for the pension is 55, 0.73, 56, 0.76, 57,0.79, 58,0.82, 59,0.85, 60,88, 61,0.94, 62,1.00.