For Indiana teachers, 5 lessons before leaping into retirement!
It happens every year: My husband, a school principal, is basking in the final days of a quiet, relaxing spring break and I hear him say, “I could get used to this!” He’s young enough that retirement is only a pipe dream, but if you’re one of the lucky ones who is ready to make the leap, now is the time for some serious contemplation—and some careful financial planning. It can take up to 90 days for the state to process your paperwork, which means that if your contract ends August 31, you have until May 31 to make some big decisions.
Of course, the first step is to review your most recent quarterly statement from INPRS (formerly TRF) to determine your eligibility. According to INPRS, you are eligible to receive your full pension if you are:
- Age 65 or older with a minimum of 10 years of service credit, OR
- Between ages 60 and 64 with at least 15 years of service credit, OR
- Between ages 55 and 59, and your age plus your service credit total at least 85 (“Rule of 85”)
If you are eligible, that’s great! But it’s only one piece of the equation. Here are 5 homework lessons to help you make your post-classroom years truly golden:
1. Explore your health insurance options. If you are 65 or older, Medicare will likely cover your healthcare costs. However, if you are under 65, the cost of healthcare can have a major impact on your budget and, indeed, your ability to retire early. If you do need coverage to fill the gap between your retirement date and 65, look closely at your coverage options, including:
- Your spouse’s corporate healthcare plan. If available, this is often the easiest and least costly option. However, if your spouse plans to retire before one or both of you turn 65, be sure to think about how you will cover the gap at that time.
- Extended coverage through the corporation. Some school corporations offer a Retiree Health Insurance program that provides interim coverage. However, like COBRA plans, this is often quite expensive.
- A healthcare plan through the healthcare exchange (ObamaCare). The two carriers in the Indiana individual health insurance market for 2019 are CareSource and Ambetter/MHS/Centene/Celtic. The exchange offers tools to help you select the most appropriate plan for you.
- Coverage from an ‘encore’ career. Maybe you have always wanted to work in the non-profit sector or to serve as a librarian or event planner. If an ‘encore’ career is part of your retirement plan, determine if your new employer provides health insurance.
- Funds in your VEBA account. If your school corporation has contributed to a VEBA account on your behalf, these healthcare-designated funds can be used to pay healthcare premiums until you qualify for Medicare.
For details on claiming Medicare, read this great blog post from Market Street’s Aaron Williams, CFP®.
2. Decide the optimal time to claim Social Security. Like choosing when to retire, deciding when to claim Social Security is a much bigger ball of wax than most people realize. While eligibility begins at 62, you don’t reach ‘Full Retirement Age’ (or FRA) until age 66 or 67, depending on your birth year. Waiting until FRA to receive benefits can add significantly to your total monthly paycheck. And waiting until you turn 70 further increases your benefit. Between FRA and age 70, your benefits increase by a whopping 8% each year you delay, plus an annual cost of living adjustment. Even so, waiting to claim isn’t the best decision for everyone, and there are many other factors to think about, including spousal benefits, your overall health, divorce benefits, and if you have enough resources to fund your retirement in the years in between. As a teacher, you also have the option of combining the TRF monthly pension benefit with your estimated Social Security benefits if you retire between ages 50 and 62. Your financial advisor can help you understand all the options and make the best decision for you.
3. Choose how to receive your pension. If you’ve even peeked at the options for claiming your pension, you already understand how complex this decision can be. In some ways, the number of options offered by INPRS is wonderful—there is truly an option to fit almost every need. However, deciding which option is best for you can be pretty daunting. In total, there are more than 5 options (including options within options!) to choose from. Here’s just a quick look at the basics:
- 5-Year Certain and Life gives you a lifetime monthly benefit. If you pass away before receiving 5 years of payments, your beneficiary will get a lump sum benefit for the remainder of those 5 years’ worth of unreceived payments.
- Straight Life gives you a monthly benefit for life, but there are no monthly payments to anyone after your death. (However, if you combine your Annuity Savings Account and your pension and the total of monthly payments received before your death is less than your ASA balance when you retired, your beneficiary will get the difference.)
- 100% Survivor Benefit gives you a reduced monthly benefit for life, and your joint survivor beneficiary will receive the same monthly benefit for his or her lifetime after your death.
- 66-2/3% Survivor Benefit provides you with a reduced monthly benefit for life, and provides your joint survivor beneficiary with 66-2/3 percent of your monthly benefit for his or her lifetime.
- 50% Survivor Benefit gives you a reduced monthly benefit for life, and provides your joint survivor beneficiary with half of your monthly benefit for his or her lifetime.
Of course, each of these options comes with a different price tag. I was working with one retiring teacher who had no major health issues, but who had a younger and very healthy wife. When we looked at their overall financial situation, we decided that the best option for them was to take the 66-2/3% Survivor Benefit. Although it reduces his monthly pension check, when combined with their other retirement savings, we knew the benefit would provide enough assets for his wife to live comfortably should he pass away in the first 10-15 years of retirement.
4. Choose how to receive your Annuity Savings Account. As if that’s not complicated enough, you also need to choose whether to roll your Annuity Savings Account (ASA) into an IRA, combine it with your pension to add to your monthly benefit, or receive the amount in one (taxable!) lump sum. Utilizing an IRA often makes the most sense, but again, your situation is what dictates the optimal choice. INPRS has some great educational programs—including live sessions, online webinars, and more—to help you understand your options, and a financial advisor can help you understand how each option fits within your overall financial situation so you can make the right choice for you.
5. Create your vision for retirement. Last but not least, take a close look at how you want to spend your time in retirement! Not having to head to the classroom each morning may sound like a dream come true, but making the emotional switch from being a valued member of the teaching community to being a retiree can be a major challenge. Don’t let your vision be an afterthought! Read my blog post Women & Retirement: Money Isn’t the Only Challenge to learn all about rethinking retirement and how it can help make the last 10, 20, or 30 years of your life the most fulfilling time of all.
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