Planning for Retirement

All members are automatically enrolled in the MTRS, (http://www.mass.gov/mtrs/) which entitles all vested employees to a fixed, predictable pension at retirement age.

For an explanation of these benefits and a walk-through please see: BENEFITS BOOKLET

You may also join a voluntary retirement savings program: the 403(b) plan.

It’s advised that you seek out and get counsel from a good retirement professional. The following is merely a starting point.

Public Pension

Participation is mandatory under state law. Vested employees obtain a pension at retirement.

Retirement is governed by Massachusetts General Laws Chapter 32. Your contribution depends upon the date you were hired.

HIRE DATE PERCENT DEDUCTED
Prior to Jan. 1, 1975 5%
Jan. 1, 1975 7%
Jan. 1, 1984 8%
July 1, 1996 9%
1/1/1979 – 7/30/2001 additional 2%
July 1, 2001 and thereafter 11%

Members should check their pay stubs to make sure the correct amount is being taken out. If there’s a mistake, it should be reported immediately by contacting the State-Western Massachusetts Retirement Board at One Monarch Place, Suite 510, Springfield, MA 01144.

Phone number: 413-784-1711

A simple equation is used to determine your retirement allowance.

Your age factor (55 =1.5, 56=1.6, etc.) is multiplied by the number of years of creditable service. This yields a percent.

Next, average your three highest salaried years and then multiple the percent by that average. The maximum percent is 80%. This amount would be your estimated yearly retirement benefit. Dividing that amount by 12 gives you a good idea of your monthly benefit.

These figures are, of course, all before taxes are deducted.

For a chart of this please see: http://www.mass.gov/mtrs/docs/active/retpercentchart.pdf

For a series of frequently asked questions please see: MASS – F.A.Q.

Retirement paperwork can be confusing. It’s a good idea to go into the retirement board 3-5 years before you’re planning to ensure everything goes smoothly. Call and make an appointment with one of the customer service reps.

If you plan to leave the system prior to retirement, consult the CEA before withdrawing your funds out.

Social Security

Massachusetts public employees do not pay into Social Security. Employees can, however, accrue Social Security credits at any time in non-public employment. Those with Social Security credits can combine a Social Security pension with a teacher (public) pension, but some restrictions and offsets generally apply.

Go to http://www.ssa.gov/pubs/10045.html

and for spouses and widows:  http://www.ssa.gov/pubs/10007.html

For current Social Security news pertaining to public employees:

http://www.massretirees.com/social-security/index.html

A Tax-Sheltered Annuity (TSA) or 403(b) Plan

A Tax Sheltered Annuity (TSA) or 403(B) plan is a tax-saving/retirement planning device available to school employees that allows you to shelter income from federal taxation and state taxation. Participation is voluntary. Essentially, funds are removed before taxes are withdrawn so that when tax withdrawals are calculated the present percentage is lower.

Your funds are invested in a financial vehicle (mutual fund, variable annuity, fixed annuity) of your choosing, and they are allowed to grow tax-deferred until withdrawal. At withdrawal, all funds are taxed as regular income. Under most circumstances a 10% IRS penalty is imposed on withdrawals prior to age 59½. (With some restrictions, loans are allowed prior to age 59½.)

Although you are merely postponing taxes, not avoiding them, this process of tax-deferral works to your advantage by allowing what moneys would ordinarily be lost to yearly taxation to ‘work’ for you by being reinvested and generating income themselves.

With a 403(B) you are required to take a minimum distribution from your account balance, as defined by the IRC, no later than by April 1 of the year after you reach age 70 ½ or by April 1 of the year following your separation, whichever is later.

All 403(B) companies are not created equal. Some companies and the plans they offer are better than others. You are advised to investigate fully before you sign on the dotted line. What’s more, some of the companies are insurance companies, and their plan offering includes variable annuities, which are insurance products that contain higher fees.

As an insurance product, variable annuities often contain expensive insurance fees for the consumer. It is often said that these plans are ‘sold,’ not ‘bought.’ You are advised to investigate the differences in plan costs before you sign on the dotted line. The differences between plans are varied, and include insurance fees, surrender fee charges, and plan design fees. All of these should affect your decision and bear serious investigation. You are urged to consult with an independent financial professional before committing to any plan and any salary reduction agreement.

A word of caution: Vendors walking the halls at your school or visiting you in the teachers’ lounge have no special license from the city. Their plans do not operate with any special imprimatur from the city. The vendors are by and large salesman and saleswomen selling an insurance product. Before agreeing to any salary reduction, you are advised to consult with a licensed independent financial planner. Otherwise you may be purchasing what may be a life-time product that will carry with it a heavy lifetime penalty for withdrawal.

State’s Deferred Compensation or 457 Program

Similar in many ways to a 403(b) Plan, the State’s Deferred Compensation Plan:

http://www.mass.gov/smartplan/

It is administered by Great West 1-877-457-1900. It allows you to place pre-tax money into a tax-deferred account composed of a variety of stock and bond mutual funds. Your account is allowed to grow tax-deferred without being taxed until withdrawal, normally at retirement.

In the state’s 457 plan, all the homework has been done for you, as the state has chosen the mutual funds for you. The funds chosen are both actively and passively managed (index) funds. You choose only how much you wish to set aside and where you wish to allocate your funds. Fees are minimal, much lower than in 403(b) plans generally and monitored by the state.

Unlike loans from a TSA, 457 loans are just about impossible to obtain, as they must meet strict federal guidelines as to the definition of an ‘unforeseeable financial emergency’ resulting from specific reasons beyond your control. On the other hand, upon separation from service at any age, one may withdraw funds without an IRS penalty being imposed. Contribution limits are as above with a TSA. As above, too, the 457 Plan has a make-up provision that allows a greater contribution in limited circumstances.

Many other former restrictions of 457 plans have been eliminated under the 2001 tax law changes.

View a comparison of 403(b) and 457 deferred compensation plans.