IPERS

My District Just Offered an Early Retirement Package… Now What?

“I am getting out of here as fast as I can.”  


This is what a friend of mine had said for the past ten years.  But, now the reality has hit. He is eligible to take IPERS (his pension plan) and his school district has offered a generous early retirement package.  He can finally do what he has said he would do all these years.


But now he is having second thoughts.


He still loves what he does and is not sure what the next stage of life would look like.  Maybe you are in this situation as well. What should you do?



The Early Retirement Package


School districts have a monetary incentive to get their more seasoned teachers to leave the district. They can hire a younger replacement for much cheaper savings thousands of dollars per year. Some districts attempt to quicken the decision by offering an early retirement package.


The specifics of this incentive vary from district to district but they usually have one or more of the following components:


  • Access to district health insurance for a period of years.

  • A cash payment usually based on salary or amount of years worked in the district.

  • A cash payment for sick days accumulated.



If you are eligible for these benefits it can bring a lot of anxiety as you begin to ask yourself, is

this something I should be thinking about? This, of course, is a major decision that should not be taken lightly.


Below are some things to think about as you consider the specific offer on the table:



What will you do next?


Whether you are going to completely stop working, enter the substitute teaching pool, or do something entirely different, one thing is for sure:


Change is not easy.


Many of you have been in education for many, many years. Teaching may be your main

identity. Giving that up may have some emotional consequences. It will definitely be different.


Reflecting on whether you are prepared for what you will be doing next and whether you will be happy as a result is important.


There are many examples of people not knowing what to do when they retire. Some are miserable. Some have difficulty staying active and their health declines. Many have a difficult time finding meaning in their life.


It is worth taking time to address important considerations:


  • What your lifestyle will be like.

  • What you will do with your time.

  • The hobbies you will have.

  • The potential activities that will motivate you.


The best way I have heard it asked… “What are you retiring to?”


Retiring to an activity or job is typically a better scenario than just retiring to get away from the day to day grind of the classroom.



How will you pay for health insurance?


This is a major consideration for anyone under age 65, the age when you become eligible for

Medicare. Health insurance costs continue to rise and this can be quite a burden. Depending

on your age, this may be an issue to deal with for many years.


If you are close to 65, COBRA may get you to Medicare.  This will give you access to the district’s health insurance policy for up to 18 months.  This option can be costly because you will most likely have to make the entire premium payment each month, both what you have been paying as well as the amount paid by your school district.


Another option is the health exchange (www.healthcare.gov).  Because you would be changing status from employed to retired, you would be eligible for coverage in the plans listed.  


If you are married, going on your spouse’s health plan with their employer may solve the problem.  This may be temporary depending on the age of your spouse and when they plan to retire so that should also be considered.

 


What will be your pension income?


Most of the time a teacher taking an early retirement package will begin taking their monthly

benefit from a pension. It is important to know exactly what the income would be if the decision

is made to take pension income.  Your pension provider can run you an estimate to give you good numbers to work with.  


Compare the the numbers of retiring today to retiring in later years.  It is possible that waiting another year or two will drastically change your financial situation.  


In Iowa, where I live, it is important that teachers know that IPERS benefits are not inflation

adjusted over time. Once you start those monthly benefit checks, the amount will not go up, but

costs surely will.  Every year you receive the same amount of money but your check will buy less and less!


Another reason to get an estimate from your pension plan is because you most likely will have some choices of how to take your benefit. (single annuity, joint annuity, etc.) Work with your financial planner to help you determine what is the best for your particular situation.  


What is your plan for taking Social Security benefits?


If you are going to make a major decision affecting your retirement you will want to map out your

whole retirement situation. I like to think of it as a puzzle. There are many different pieces that you need to figure out how they all fit together.


Here are just a few of the pieces to identify and think about:


  • Other sources of retirement income you have.

  • Which accounts will be withdrawn first.

  • How personal savings should be invested.

  • When Social Security benefits should be taken.

  • Tax considerations.


You do not have to take social security when you leave your job.  You can delay it until age 70 or take it as early as age 62. There is a major difference in monthly payments based on when you do start taking the benefit.  


Social Security benefits are based on a 35 year history of work or a spouse's work history.  So working 1-2 extra years will not typically change the payout much. But delaying the benefit will.  


There are great reasons to delay, but your whole retirement situation should be taken into consideration.


Make sure you have good reasons for taking Social Security in whatever time frame you plan.

If you are married, Social Security should be a decision that is made with the household in mind,

not just you as an individual. What your spouse does may have huge impact on you as well.  Especially after one of you dies.



Your unique situation


As you can see there are many things to consider. Your situation is unique compared to others

so make sure you take your specific situation into account as you look at this. I have only

outlined some of the issues that could be involved.


I know of retired teachers who are loving their post-teaching lives. Some even wish they would have done it a couple years prior when given the first opportunity. On the other hand, I know of others who wish they were still back in the classroom for various reasons.  And still others who probably shouldn’t have made the jump, based on their finances. Because there is a lot to think about, make sure you look at the whole picture.


I wish you luck as you consider this choice, and am happy to help walk you through the choices.


Is IPERS Going Away?

I am beginning to get more and more questions from teachers on what are the chances that IPERS will still be around for them when they retire.  Recent headlines in the Des Moines Register include:

Branstad: Task force will review future of IPERS' pensions

Treasurer: My concern grows for IPERS members

IPERS still faces $5 billion shortfall

With headlines like these, no wonder teachers and other IPERS employees are concerned.

Here are my thoughts on the issue:

1) Overall, I am not too worried about the future of IPERS.

2) IPERS’ funded ratio is 80%.  Yes, that is underfunded, and anything less than 100% sounds scary, this is better than most state public pension plans.  Projections have it 100% in about 28 years.

3) There has been talk about looking into changing IPERS in some way.  I focus on the words TALK and LOOKING.  There has yet to be any legislation in final form to get even close to being voted on by the Iowa Legislature.  This is a process.  If there is going to be changes, we are probably early in the process.

4) As far as I am aware, there has been no elected official that has campaigned for and/or gone on record saying that they think we should get rid of IPERS entirely.  Frankly, that would be dumb politically to do that.  And that is why I am not overly concerned.  There is not a lot of political reasons to move forward with changing IPERS, at least not without a lot of warning.  According to IPERS, one in ten of Iowans is an IPERS member.  This would not be popular.  

5) But what about collective bargaining, you might say?  That happened fast and it seemed to be out of the blue!  Okay, valid point.  But, I don't think it is a fair comparison.  It may be true that not many Iowa Republicans campaigned on changing collective bargaining rules, but many Republicans (across the nation) have had negative opinions on collective bargaining over many years.    

6) The last legislative session had a bill proposal, Senate File 45 that read:

Mandatory defined contribution pension plan for certain public employees: Requires the state retirement plans to develop defined contribution plans for employees hired as of July 2019. Requires the state retirement plans to conduct a study on these alternative retirement plans and submit findings and recommendations to the Public Retirement Systems Committee by October 2018.

Notice that above bill proposal would only have affected newly hired workers. If there was going to be a change, the most likely scenario would be that current workers would be grandfathered in.  

7) If they were to phase out or freeze IPERS, most likely your benefits up to that point would be honored.  It would be very important at that time for an IPERS employee to make some changes.  Specifically to begin saving an appropriate amount in other retirement accounts in order to make up for the years no longer covered by IPERS, but it wouldn't likely be out of the blue.  You would have time to make changes.

8) Changes are a possibility, and it is important that teachers keep aware of the situation and what is being discussed and considered.

9) You can take steps to prepare now.  I already encourage teachers that they should be saving for retirement outside of IPERS for inflation reasons.  If you want to prepare for the worst, a good strategy is to incrementally add to your savings rate into other retirement plans.  This is a good strategy regardless!

All of this leads me to the conclusion that major changes are unlikely anytime soon.  If changes are made, it will probably be years from now and will affect seasoned teachers less than brand new ones.  We will most likely have appropriate time to prepare for negative consequences.  But, keeping tabs on discussions is a good idea.

Teachers should start with making sure they are on track with their retirement goals regardless.  Many families are behind for saving for retirement, even with no changes in IPERS, because their spouses may not be saving enough.  Putting more into saving incrementally is a good idea if you are worried about changes being made.

Action steps that can be taken:

  • Breathe.  There is time to make preparations for these different possibilities.
  • Sit down with your financial planner and make sure your family is on track for retirement planning with current rules in place.  Have them make very conservative assumptions to show the possibility of rules changing.
  • Keep abreast of the situation.  Get IPERS alerts and stay tuned to our Teacher Wealth website.  If major things are being discussed, we will update you.
  • If you are worried, make manageable increases to what you can save for retirement each year.

I hope this helps you understand the current situation.  Email me at Mike@teacherwealth.com if you have questions or thoughts on the matter.   

What Teachers Should Know About Planning for Retirement

#1 Having IPERS is a Blessing

Guaranteed retirement income is difficult to come by these days.  Access to traditional pension plans will continue to decrease over the years for workers.  If you are included in IPERS or some other pension system at your school district you should feel very fortunate.  Don’t underestimate the value of this future stream of income - it is considerable!  This guaranteed income lowers the probability of outliving your retirement savings significantly!

#2 IPERS Probably Isn’t Enough

Yet, IPERS may not be enough.  Unfortunately, your IPERS retirement benefit is not adjusted for inflation.  Your monthly pension income will stay the same over the years.  For example, my mother retired from teaching a couple of years ago with an annual IPERS income of around $40,000 per year.  Each year, as prices increase, the purchasing power of her income will decrease.  In 10 years, her $40,000 income will only buy the equivalent of $29,674 in today’s dollars (assuming 3% annual inflation).   And it will purchase only $25,674 in 15 years.  This example shows that if your goal is to keep your current standard of living in retirement, relying on IPERS alone might be a problem.  I encourage my teacher colleagues to put additional money away for retirement in order to prepare for this inflation gap.

Another issue is the potential of leaving the teaching profession.  If you are a seasoned veteran and have taught for 25 years this might not be that relevant, but if you are just beginning or are midway through your career, this should be a consideration.  You never know what the future may hold.  I am sure we all have friends who have left the teaching profession for various reasons; many of them would not have predicted it three years beforehand.  If you leave IPERS covered employment early, the retirement benefit becomes less impressive.  By investing in another retirement account you can protect yourself, just in case.

#3 Roth IRA’s Can Fill the Inflation Gap

If you are looking to save in addition to your pension, generally a Roth IRA is the first place to start.  Why?  Because Roths are AWESOME!  Once you place money into a Roth IRA, it is never taxed again!  In 2017, a teacher can contribute up to $5,500 into a Roth IRA. $6,500 if age 50 or older.  If you save enough to max out the Roth, the next place to invest would probably be your district's 403(b) plan.  Although every family is different so it is wise to look at your unique situation when making these decisions.

#4 Investments May Need to be Adjusted

Because you likely have a traditional pension plan in IPERS, it may be desirable to invest differently than normal with your other long-term investments like your Roth IRA, 403(b), or your spouse’s retirement savings.  The important thing is to look at your family’s entire retirement picture, including your IPERS.  

Because IPERS is a guaranteed stream of income in retirement, you can think of this as a safe bond investment.  Bonds have relatively less risk than stocks over time.  It may be an advantage to increase the risk of your other retirement assets, more than you otherwise if you didn’t have your pension.  This can maximize growth opportunity while being entirely appropriate as an overall risk profile.  Consulting with your financial advisor about this would be wise because there are many factors that play into these decisions.