If you’re a school employee, your pension is a valuable benefit to help you save for retirement. But you may be worried your contributions won’t be enough to keep up with the cost of living. It’s a valid concern, but with the right strategies you can successfully save enough to live comfortably once you retire.
Here are some steps to help you get started.
Know Your Pension Plan
If you work at a California school, you may be part of the California State Teachers’ Retirement System (CalSTRS) or the California Public Employees’ Retirement System (CalPERS) plans. This depends on your job.
- CalSTRS: For teachers and other certificated employees.
- CalPERS: For classified employees, such as custodians, cafeteria workers and administrative staff.
Both systems have a fixed benefit plan. This means you’ll get a monthly benefit that’s guaranteed based on a formula that considers your years of service, final average salary and age when you retire. However, because these are fixed benefits, over time, they may not adjust for inflation.
Understanding the Impact of Inflation
Inflation can potentially erode the value of your fixed pension payments. Here’s how:
- Rising Costs: The cost of living, including housing, healthcare and everyday expenses will continue to rise. If your pension payments remain the same, your purchasing power decreases.
- No Cost-of-Living Adjustments (COLA): Not all pension plans offer COLA, and even those that do may not fully keep pace with inflation.
Why You Need to Supplement Your Pension
CalPERS research shows your pension only replaces 50%–60% of the income you’ll need when you stop working. That means you’ll potentially need to make up 40% from your own savings to retire and enjoy the same standard of living.
Here are some supplemental retirement savings solutions to consider:
- 403(b) and 457(b) Plans: You can choose to make pre-tax or after-tax contributions to Traditional or Roth plans, allowing you to save up to the IRS limits for additional savings.
- IRAs: You can also invest in a Traditional or Roth Individual Retirement Account to help further diversify your retirement savings.
Invest in Your Future
If you haven’t begun building retirement savings, start by setting up automatic contributions and increase them as your income grows with the goal of reaching 10% of your pretax income. Make a set contribution each month. Known as dollar-cost-averaging, this means you're automatically set up to buy more investment shares when prices are lower and fewer when prices are higher. Remember that dollar-cost averaging won't assure a profit or guard against loss in declining markets.
You have many choices when it comes to investing. Developing a portfolio including a mix of stocks, bonds and real estate can function as a hedge against inflation. Read Investing: Tips to Make Confident Decisions to learn more about your options.
Plan for Healthcare Costs
Healthcare is an important part of your financial picture. Consider these solutions:
- Health Savings Accounts (HSAs): If you have a high-deductible health plan, contribute to an HSA. The funds can be used tax-free for healthcare expenses in retirement.
- Supplemental Insurance: Explore supplemental health insurance to cover gaps in your pension plan’s healthcare benefits. California school employees can typically apply for Cal-COBRA, which extends your healthcare benefits up to 36 months. Some school districts offer retiree supplemental health coverage, but plans vary, so review the details of yours. You can also buy private insurance, obtain coverage from the Health Insurance Marketplace, or get coverage through a spouse’s employer.
Get Professional Guidance
Many credit unions offer no cost or fee-based financial guidance specifically for school employees. A financial advisor can help you develop a financial plan, which is simply a snapshot of your finances, goals and ways to achieve them, including a personalized retirement strategy.
Stay Informed and Engaged
Make sure you understand any changes made to your pension plan through your union and district communications. And if your pension doesn’t currently offer a COLA, advocate for its inclusion. Your union can be a powerful ally in this effort.
Take Action
While the cost of living and inflation can pose challenges to your pension benefits, taking proactive steps now can help you maintain your financial security in retirement. Remember, your pension is just one part of your retirement plan, and with the right strategies, you can build a secure financial future.