Understanding Your TRS Retirement
You’ve spent years, maybe even decades, working as a teacher. You may not have started your career in Texas but you will end it here. With such a big part of your life invested as a teacher, it is important to get the retirement benefits correct so they are not wasted. You’ve been paying in the the Texas Teachers Retirement System (TRS) for awhile now, and need to understand exactly how it works with your retirement. When we talk about retirement for you, we are going to look at three different components:
1. TRS Pension
2. Social Security
3. Retirement Accounts (403(b), IRA)
Your main benefit is going to be your TRS Pension plan which will vary in size and income depending on your tier level, salary, and years of service. Your Social Security is going to be very limited since most teachers do not pay in Social Security, instead you pay into the pension system.
The last component will be any money you save in your 403(b) plan or an IRA account outside of employment. A 403(b) plan is a lot like a 401(k) plan with several important differences. Understanding those differences is vital to making sure you are using the right retirement accounts because a 403(b) is not always the best avenue.
When Can I Retire Under TRS?
In order to retire under TRS, you must be a certain age and accumulated a certain amount of service. The age and amount of service you will need will depend on which tier level you are under the TRS system. The tiers are broken down by the day you started in the system, that is, when you became eligible to participate in the TRS system.
If you became a teacher in the TRS System before 2005 and were already at least 50 years old, you will be Tier 1. If you were in the system before 2005 but not 50 years old at that time, you will be Tier 2.
If you started your employment between 2005 and 2007, you will be Tier 2.
If you employment began after 2014 you will be Tier 5. If you are wondering what happened to Tier 3 and Tier 4, they are reserved for people who have started employment prior to 2005, left, and then came back.
Most Tiers are going to have several different ways to calculate your full-retirement age. First, you can always retire at the age of 65, no matter what tier you are in.
All tiers also have the Rule of 80 to determine if you are eligible for full-retirement. The Rule of 80 says, if you add up your age plus years of service and they add up to 80 or more, you are eligible for full-retirement. Some of tiers still require you to be age 60 or 62, even when using the Rule of 80. It is important to understand what date is your full-retirement age because it will affect how much of your pension you are entitled to.
Your TRS Pension is going to be your biggest asset heading into retirement. You have been paying 7% of your paycheck into the pension system since you started full time employment. The pension has been growing at a very conservative 2% over the years, and will be ready for you to turn on the income stream once you hit retirement.
Once you retire, you will have several options on how to take your pension. You will need to decide which payout option to take. Typically, you will have to choose between taking a lump-sum, 100% payout, or take a reduced payout so you can leave money to your spouse if you were to pass.
There is a multi-step process they will use to calculate your paycheck.
1. Take the average of three or five highest annual salaries
2. Take your total years and multiply it by 2.3%
3. Multiply those two numbers together to get your annual salary
First, you may have noticed that there is no mention of your account balance. You’ve been putting money into this system for years and it has been growing, but now you see that it is not figured into the calculation.
The pension balance is there to cover your annual salary. It is also there in case you opt for the lump-sum payout option. How much you have in there doesn’t factor into your monthly annuity payment. When a pension is first built, actuaries come in and set how much should be contributed to the pension and how it needs to be invested. It is based of this original math that a pension is built, funded, and eventually pays out while remaining solvent.
It is also important to remember this is the gross amount. When you retire, they will ask you how much you want to withhold for taxes so your net amount will be less. Make sure you take that into account when planning your retirement.
Social Security can play a major part in someone’s financial plan. As a teacher in Texas, you are probably not paying into Social Security while you teach. You are already paying 7% into your pension, it would be unfair if the government asked you to pay another 6.2% into Social Security.
Now, this isn’t a rule. There are a few employers that will be paying into Social Security and the TRS Pension. It is best to look at your paycheck and see if you see money coming out for Social Security. Also, if you’ve worked multiple jobs in your career, you could have paid into Social Security in those jobs.
The good news, even though you are not receiving Social Security, your TRS Pension will most likely be a higher amount. The bad news is that without paying into Social Security you will lose a large portion of spousal and survivor benefits.
The last component of your retirement is going to be auxiliary retirement accounts. As a teacher, you will have access to a 403(b) account. You can think of a 403(b) account like a 401(k) account. It is setup by the employer, built by a third-party, funded by you and the employer, and then you can select the investments within the account. 403(b)s are used for non-profit organizations such as schools, hospitals, and churches.
Unfortunately, 403(b) accounts are not only more limited than a 401(k) account but they can be more harmful too. A 403(b) account can only have limited investment options, such as mutual funds and insurance products. Both of these products are targeted by brokers and insurance agents because they are high fee and return a solid commission for the salesperson. The fees in these investment products can typically range from 1.5% – 2% per product. This is a high fee considering most investment products in 401(k)s have fees around 0.40%.
High fees will have a negative impact on the amount of returns you experience over the years. What may seem like a few thousand a year in fees, can quickly add up to a few hundred thousand in fees over your career.
Your school is also not likely to be contributing to your 403(b) plan. Most schools, in our experience, match an extremely small percentage or no percentage at all. Without the benefit of a match to earn more “free money”, 403(b) accounts can be less desirable.
As a teacher, you’ve probably already had an insurance salesperson come to your school and talk to you about managing your 403(b), buying a life insurance product, and probably buying a variable annuity. The salesperson is not a fiduciary working in your best interest, they are after the biggest sales commissions by pushing product you don’t need.
You are not limited to only your 403(b) plan when it comes to retirement. There are outside retirement vehicles such as a Traditional or Roth IRA. It can make sense to look to these accounts first, before looking to invest in your 403(b). With an IRA, you will have a lot more investment options at a lot lower fees. It may seem intimidating to start, fund, and trade on your own retirement account but the process is simple and straightforward.
The Actual Process of Retiring
You’ve reached the point where you are finally ready to retire. Congratulations! As a teacher on the verge of retirement, get ready to begin filling out forms. Before you begin the process, make sure you are ready for retirement both financially and emotionally.
When you are 12-Months out from retirement, you need to submit Form TRS-18 Request for Estimate of Retirement Benefits. This will allow them to go in and begin the calculation of what your annual annuity will be.
At 6-Months, you need to submit a few forms. First, TRS-30 Application for Service Retirement. Next, TRS-228A Federal Income Tax Withholding Certificate. Finally, TRS-278 Direct Deposit Request. This will let them know that you are retiring, how much you want to withhold from your paycheck, and where to send your paycheck.
When you are at 60-Days, it is time to submit TRS-7 Notice of Final Deposit. It is important that you turn all of these documents in, in a timely manner. This will give the TRS System plenty of time to mark down your retirement, setup your benefits, and make sure your benefits get paid to you when you do retire.
Our Customized Financial Consultation Includes:
Customized In-Depth Review
Analysis Partial Lump Sum Options
457(b) Deferred Compensation
Full step-by-step assistance with TMRS paperwork completion and submission Separation Pay Planning
Tax Managed Accounts 401(a)
529 College Planning
Life Insurance Estate Planning
Medical Insurance Options
Do you have a projection for your TRS? If you do not know what you are going to make we can help. Click the link to go to the TRS website.
If you are in higher education and would like additional information regarding ORP, please click on the link below.
Do you have a projection for your Social Security? If you do not know what you are going to make we can help. Click the link to go to the Social Security website.
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