If you’re a teacher in Indiana, I can’t stress enough how important your pension is to your retirement planning. I’m sure you’re thinking, “wow, that’s a no brainer, of course it’s a big deal.” But in reality, you’d be surprised how many teachers are unfamiliar with how it works, what they should be doing, and how to incorporate it into their retirement plans.
Indiana Teacher Pension Basics
In Indiana, the teacher pension is administered through the Indiana Public Retirement System, or INPRS for short. INPRS is what’s called a hybrid pension plan and it’s made up of two parts: a Traditional Pension and a Defined Contribution Account (DC Account).
The traditional pension is just what you’d expect. When you retire, INPRS will pay you a monthly benefit based on a calculation that incorporates several factors. They take care of everything from administration to investing, so there’s not much you need to do until you get close to retiring.
The DC Account is different and is a retirement account for you at INPRS. It’s mandated that 3% of your salary be contributed to it each year, and typically your district contributes that your behalf. Over your career, the goal is for the account balance to grow so at retirement it’s available for you to use how you wish. But here's the surprise for most teachers, investing the DC Account is the YOUR responsibility.
If you're a visual learner, this graphic shows the structure, or you can check out our 1 minute whiteboard video on INPRS.
The Overlooked DC Account
I have a feeling I know what you might be thinking, and yes. If you’ve never logged into the INPRS to select how your DC Account should be invested, the money is sitting there in the Stable Value Fund right now. (To be clear, the Stable Value Fund earns very little). Over a 30-year career, having your money in the Stable Value Fund vs being invested can cost you tens of thousands of dollars in potential earnings.
Now, INPRS has done a good job making it easy to designate and manage the investments in your DC Account. All you need to do is create an INPRS log-in and password at https://www.myinprsretirement.org. Once you’re in, navigate to the “My Account” tab, and then you’ll see “Investments”. Once there, you’ll be able to select investments for your current balance and also set up your account so future contributions are invested as they’re made.
Available investment options for your DC Accounts includes seven funds representing specific asset classes and a suite of target date funds. Since we’re on the subject, I always like to remind clients that it’s important to coordinate your DC Account investments with any other retirement accounts you have to ensure a consistent investing approach.
If you're not sure what to do and need help deciding how you should invest, contact us, we’re happy to help you set up an investment allocation. INPRS also provides several resources on investing basics on their website. (INPRS Investment Education).
So, before we go any further… if you’ve never designated the investments for your DC Account, put it on your to-do list. It’s also important to take a moment during this time to name a beneficiary for your DC Account, which is also done through the INPRS website.
Options at Retirement - Pension
Now, let’s look at the options for your traditional pension payment. INPRS calculates the monthly payment you’ll receive using five factors:
- Your five highest yearly salaries
- Your Years of Service
- Your age at retirement
- A benefit multiplier of 1.1%
- The payment option you select (more on this in a moment)
For example, the benefit for a teacher who meets the regular retirement requirement, has 30 years of service, and a five highest years of salary average of $70,000 would be calculated as:
|Highest Five Years Salary (Average):|
|Benefit Multiplier (1.1%)|
|(equals Pension Base)|
|Years of Service|
|(equals Annual Retirement Benefit)|
|Calculated benefit (option A-1)|
You may notice “(option A-1)” in the line above. That specifies the payment option. In the traditional pension, there are seven options to choose from, each guaranteeing something different. Figuring out which is right for you depends on answering a few questions like:
- Do you have longevity in your family?
- How’s your health?
- Are you married?
- Do you need/want to ensure your survivor(s) receive payments after your death?
- Full or partial survivor payments?
Your situation is unique, so choosing the payment option that will work best with your retirement plan is important. Each has a different effect on your monthly benefit. For our example teacher, the other options available for her payment range from $1,657-$1,941 per month. You are allowed to change options down the road, however, your first choice will affect any future options, so it’s wise to make it count.
Options at Retirement – DC Account
Finally, let’s take a look at the options available for your DC Account at retirement. At this point in time, hopefully it will have grown into a substantial sum. Practically speaking, there are four main options available:
Monthly DC: In this option, you have the ability to annuitize your DC Account to provide a monthly payment similar to your pension payment. As of January 1, 2018, INPRS began partnering with MetLife to provide fixed annuities for this option. However, you are not required to go through them and it can be beneficial to check with multiple insurance companies to get the best rate and structure, if you wish to pursue this option. Similar to the traditional pension payment, you will need to elect a payment option based on the same questions in the previous section.
I’ve seen many teachers choose this option because it seems like a simple solution. However, annuities are complex and don’t forget that once you choose to annuitize and begin receiving monthly payments, your money is no longer yours and goes to the insurance company. This removes any chance of being able to go-back and try again or provide flexibility if your situation changes down the road.
Full or Partial Withdrawal: This option allows you to fully or partially withdrawal money from your DC Account. This money was contributed pre-tax, so that means any withdrawals you take will be subject to income taxes. Also, once the money has been withdrawn it cannot be put back in to regain tax-deferred status.
It can be dangerous to take this option, especially without properly planning for the tax consequences. It’s also important to know how your DC Account money fits into the overall coordination of all your retirement accounts because you may not need to withdrawal any of it immediately when you retire.
Deferment: This option allows you to leave the money in your DC Account there, invested how you choose. If you find yourself in a situation where based on your retirement plan you won’t need to take withdrawals or income from your DC Account, it might be best just to continue as is.
Remember, since your DC Account is a tax deferred retirement account, it will be subject to Required Minimum Distributions starting the year in which you turn 70 ½, just like your other retirement accounts.
Direct Rollover: This option allows you to roll over the money in your DC Account to another retirement account. Doing this preserves the tax-deferred status of the money and can provide two major benefits. First, as we examined earlier, DC Accounts have limited investment choices. Rolling the money into another retirement account could provide you with a much wider range of investment options.
Second, many people find it’s convenient to consolidate their accounts when they retire because it makes coordinating investment strategy, tax decisions, and required minimum distributions an easier process. This can be done if you already have a Traditional IRA and/or a 403(b) you also used to save for retirement.
Make sure you carefully evaluate the options and consider the consequences before you select the option for your DC Account. Unlike the traditional pension payments that can change, the option you choose for your DC Account will likely be permanent.
I hope this article has provided you with a good understanding of how INPRS fits into your retirement and how truly important your are decisions regarding your pension truly are. It’s a unique benefit that if utilized to its potential can serve you well throughout your golden years. Make sure you take advantage of it!
If you have any questions or would like help figuring out what the best options for your pension are, don't hesitate to reach out to us. Contact Us
Mychal Eagleson, CFP®, ChSNC®, AAMS® is the President of An Exceptional Life Financial, an independent financial planning firm specializing in finance for teachers. His passion is helping teachers live exceptional lives using their finances and he is married to an elementary special education teacher. He frequently writes and speaks on teacher finance topics and is passionate about helping teachers plan for successful financial futures. He also serves on the board of the Financial Planning Association of Greater Indiana as the Director of Public Relations & Social Media and the board of the Pike Township Educational Foundation as the Chair of the Strategic Planning Task Force and member of the Finance Committee. To read more of the articles he's written and been quoted in, and to learn about An Exceptional Life Financial please visit: www.anexceptionallifefinancial.com