Our team of advisors has over a decade of experience working with teachers. Every year we help several of our clients comfortably retire from teaching. One of the main ways we help our clients is by educating them on how their benefits work.
This articles goes through the 7 most important retirement terms that all California teachers should know. By understanding these terms and the inner workings of the CalSTRS pension, teachers will be better equipped to plan for their own retirement!
1. CalSTRS
CalSTRS stands for the California State Teachers Retirement System. One of the primary benefits of membership is the CalSTRS Defined Benefit Program, commonly know as the pension. This pension is a professionally managed pool of investments. Active teachers, through payroll deduction, contribute to this pool of money while retired teachers receive monthly payouts from the pool of money.
Currently, the amount that active teachers contribute is currently 10.25% of their paycheck. The amount that retirees receive is based off the equation: Service Credits x Age Factor x Final Compensation.
Watch our YouTube video on the CalSTRS pension HERE!
2. Service Credits
Service Credits are the measure of years of service for your employer. One full time year of service is equal to one service credit. It is possible to earn partial service credits for part time work, but it is not possible to earn more than one service credit per year. Service Credits are an important factor in calculating your final benefit from CalSTRS.
Some important service credit milestones include:
5 Service Credits – The teacher is vested and eligible to receive a lifetime monthly retirement benefit when they retire.
25 Service Credits – The teacher’s Final Compensation is now calculated as the highest 12 months of earnings rather than the average of the 3 highest years of earnings.
30 Service Credits – Career Factor – receive an addition 0.2% added to the Age Factor.
3. Defined Benefit Account
The Defined Benefit Account is the main account that makes up the CalSTRS pension. This represents the actual cash value amount of the pension. A teacher can check their account value on their CalSTRS progress reports as well as online on the CalSTRS website. While the values of the Defined Benefit account can get quite large, the account value only comes into play if the teacher passes away pre-retirement or separates from service. Otherwise, this value is not accessible to participants.
4. Defined Benefit Supplement
The Defined Benefit Supplement is a supplemental cash value account that is part of the CalSTRS pension. In years past, all teachers added a small percent of their pay to the Defined Benefit Supplement. Now, however, teachers only add to the Defined Benefit Supplement when they work extra time (i.e. summer, coaching, after-school, etc.).
A small percentage of the teacher’s extra pay goes into the Defined Benefit Supplement where it earns tax deferred interest over time. The teacher does not have access to this account until they separate from service or retire. When they retire, the teacher has the option to withdraw the full amount, rollover the balance to an Individual Retirement Account, or choose from several annuity payout options.
Watch our YouTube video on the CalSTRS DBS HERE!
5. Survivor Benefit Options
Other than deciding when to retire, deciding their Survivor Benefit Option is probably the most important retirement decision a teacher can make. This decision impacts both the payout to the teacher as well as the percentage of the payout that a surviving spouse would continue to receive. In addition, once the decision is made it cannot be reversed. When the teacher’s CalSTRS Defined Benefit is calculated (Service Credits X Age Factor X Final Compensation), the result is the Member Only Benefit. Other than that, the CalSTRS pension also offers the 100% Survivor Benefit option, 75% Survivor Benefit Option, and 50% Survivor Benefit Option.
Member Only Benefit – This option provides the largest monthly payout to the teacher, but no monthly payout to a surviving spouse. For single retirees, this is typically the selected option.
100% Survivor Benefit Option – This option provides the smallest monthly payout to the teacher, but 100% of the monthly payout would continue to a surviving spouse.
75% Survivor Benefit Option – This option provides the second smallest monthly payout to the teacher, but 75% of the monthly payout would continue to a surviving spouse.
50% Survivor Benefit Option – This option provides the second largest monthly payout to the teacher, but 50% of the monthly payout would continue to a surviving spouse.
Watch our YouTube video on CalSTRS Survivor Benefit Options HERE!
6. Beneficiary
A beneficiary is the person to whom a teacher’s CalSTRS benefits would transfer to if they passed away. If the teacher passed away before retirement, the beneficiary would receive the total amount of the Defined Benefit Account and the Defined Benefit Supplement. If the teacher passed away during retirement, the beneficiary may receive a certain percentage of the teacher’s monthly payout depending on the Survivor Benefit Option the teacher selected at retirement.
7. 403(b)
A 403(b) is a supplementary retirement account that is optional for teachers that want to save above and beyond their pension for retirement. While there is typically no matching program for teachers, contributions are tax deductible and the growth of the investments inside of the account are tax deferred. Teachers can choose to add to a 403(b) through Salary Reduction and generally can add as much or as little as they want to the account (subject to annual contribution limits).
The 403(b) provider and investment options depend on the school district’s approved 403(b) provider list. Your financial advisor can help you choose the 403(b) provider from the approved list that is best suited to you reach your retirement goals.
Watch our YouTube video on your 403(b) Options HERE!
If you have further questions or would like to see how these terms might impact your personal financial plan, click HERE to schedule a meeting.
For more information, check out Teacher Talk with Tori and subscribe to our YouTube Channel HERE.
If you know any teachers who may benefit from this information or from putting together a plan with one of our financial advisors, click HERE introduce them and receive a free meal delivery on us.
To all of you teachers out there, thank you for the incredible dedication and hard work you have demonstrated throughout the year. We appreciate you and look forward continuing to give back through financial education and service.
Stay safe and well,
Alex