Attention teachers who are worried about your financial choices and want to take charge today for a better choices today for a secure retirement tomorrow. Read this free report and discover secrets to help you build stability and predictability into your future. By a 20 year veteran in the financial services industry.

1. TEACHERS FREE REPORT
3 Little-Known Issues that can make a Big Difference
By Alice Howe CFP® www.teachersretirewell.com
1. YOUR ANNUAL SOCIAL SECURITY STATEMENT ESTIMATED
BENEFIT MAY NOT BE ACCURATE.
Due to the Social Security Windfall Elimination Provision (WEP): Teachers’ Social
Security benefits are often less than the amount indicated on the Social Security
Statement received annually.
Social Security benefits are intended to replace only a percentage of a worker’s pre-
retirement earnings. The way Social Security benefit amounts are figured, lower-
paid workers get a larger return for their Social Security withholdings than higher-
paid workers. For example, lower-paid workers receive a Social Security benefit
that averages 55 percent of their pre-retirement earnings. Conversely, the average
rate for higher-paid workers is about 25 percent.
Prior to 1983, people who worked mainly in a job not covered by Social Security
had their Social Security benefits calculated as if they were long-term, lower-paid
workers. They had the advantage of receiving a Social Security benefit
representing a higher percentage of their earnings, plus a pension from a job where
they did not pay Social Security taxes. Congress passed the Windfall Elimination
Provision to treat higher-paid workers with significant pension benefits generated
from income not covered by Social Security and secondary income covered by
Social Security as higher-paid workers.
The classic example is a full-time, career teacher that provides private tutoring
subject to Self-Employment taxes and/or has a summer job subject to Social
Security withholding. When the Social Security Administration prepares annual
statements they cannot determine whether WEP applies. The earnings are treated
as if earned by a long-term, lower-paid worker and the estimated benefit is
calculated accordingly. If in reality WEP does apply, this can lead to a surprise at
benefit application time.
So how do you know if your Social Security benefit will be less than indicated on
your statement? Use the link to the 2009 WEP Electronic Fact Sheet is provided
below. The Fact Sheet will guide you through the process of determining if WEP
applies to you and the percentage that your Social Security benefit will be reduced.
http://www.socialsecurity.gov/pubs/10045.html#amount
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2. Make note of the WEP exceptions. The benefit reduction does not apply to all Social
Security benefit categories. Two of the more commonly applied exceptions are for
widows and persons receiving a small pension. Surviving spouses expecting to
receive their spouse’s WEP adjusted living benefit, as a survivor benefit will get a
pleasant surprise.
They will receive their spouse’s living benefit unadjusted for WEP because WEP does
not apply to survivor benefits. There is also a limitation that your Social Security
benefit cannot be reduced by more than 50% of your pension to protect those only
receiving a small pension based upon their earnings not covered by Social Security.
For more information on WEP refer to the WEP Electronic Fact Sheet and the other
extensive resources available on the Social Security Administration website.
2. WHEN MIGHT ELECTNG A PARTIAL LUMP SUM OPTION FROM
YOUR STATE TEACHER RETIREMENT PLAN MAKE SENSE?
Probably never, if the entire amount of the state teacher retirement plan’s monthly
benefit is needed to satisfy income needs immediately upon retirement.
Example:
A 62-year old teacher and his spouse of the same age have the option of a
100% survivor annuity monthly benefit of $3,336.67 or 100% survivor annuity
monthly benefit $3,008.68 plus a $45,080.04 lump sum.
Difference Lump Sum Annual
Lump Sum Monthly Benefit
$Monthly/$Annually Distribution Rate
$ -0- $3,336.67
$45,080.04 $3,008.68 $327.99/$3,935.88 8.73%
A $45,080.04 lump sum seems like a lot of money compared to a $327.99 monthly
benefit. Let’s review the value of $45,080.04 outside the state teacher retirement
plan since we already know that it is worth $327.99 per month for life if it remains
in the plan.
There are basically two options for the $45,080.04 lump sum. It can either be used
to purchase an insurance company guaranteed immediate annuity or invested.
The insurance company annuity comparison is easy since we are comparing two
monthly benefits expressed in dollars. For an investment comparison, the state
teacher retirement plan distribution rate had to be calculated. If the lump sum is
left in the state teacher retirement plan, the monthly benefit increases by $327.99
monthly which is $3,935.88 annually. Distribution rates are normally expressed in
annual terms. $3,935.88 divided by the lump sum of $45,080.04 indicates an
8.73% distribution rate.
© Your Financial Watchdog LLC

3. A popular annuity website indicates that a $45,080.04 lump sum would purchase a
$224 guaranteed 100% survivor annuity monthly benefit from an investment grade
insurance company. It is clear that the $327.99 monthly benefit realized by leaving
the $45,080.04 lump sum in the state teacher retirement plan is the better option.
Be sure to perform the analysis and verify that leaving the funds in the state
teacher retirement plan is the best option.
Even though leaving the lump sum in the state teacher retirement plan is usually
the best choice for generating maximum current income, the lump sum distribution
option can work for teachers that were confident that they would never need
income from their lump sum benefit and leaving an estate to their heirs was
important to them. In this case the lump sum could be rolled to an IRA and
invested. Although not ideal, if at some point in retirement, income is needed from
the lump sum, it would be available and would only transfer to their heirs upon
death.
If your welfare is your only concern, then I suggest the state teacher retirement
plan annuity-only option. If you want to leave something behind and are extremely
confident that you will not need income from the lump sum, then the annuity
option that includes a lump sum can be selected. The caveat is that a state
teacher retirement plan benefit option that includes a lump sum should
only be selected after painstaking consideration.
3. Is Your State Teacher Retirement Plan On Your Side When It
Comes To Early Retirement?
You may be surprised to learn that the answer is “yes” for many state teacher
retirement plans. First, let’s review the basics so that you can understand this
phenomenon.
Many teachers retiring today are covered by defined benefit (DB) state teacher
retirement plans. The distinguishing characteristic of DB plans is that a direct
relationship between funding and benefits is not required. You have probably seen
the headlines about unfunded corporate and governmental entity pension liabilities.
Unfunded pension obligations, and in the case of teachers, irregular retirement
scenarios can result.
Because of quirks inherent in state teacher retirement DB plans, retirement wealth
is greatly influenced by retirement age. In many plans a teacher receives much
less total retirement benefit than her contemporaries that retire earlier.
All state teacher retirement plans have the basic pull incentives typical of DB plans.
Each additional year worked increases the annual pension benefit. Because the
formulas are based upon years of service multiplied by a percentage factor and final
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4. average pay (usually the last 3 or 5 years), the benefit increases dramatically in the
later stages of one’s career. Even though early retirement is attractive, incremental
pension gain realized from working one additional year is often difficult to resist.
Let’s use the pension formula from our service credit purchase discussion and
assume the teacher starts at age 25 with an initial salary of $25,000 and works for
30 years with an average increase in pay of 2% per year.
Annual Benefit = (years of service) x 2.2% x (final average salary)
Based upon the above formula, a graph of the earned pension benefit would look
like this. Notice that the line gets steadily steeper as the years worked increase.
Annual Pension Benefit
$50,000
$40,000
Annual Benefit
$30,000
$20,000
$10,000
$0
1 6 11 16 21 26 31 36
Years Worked
The formula is straightforward. It is clear that for a typical career path, each year
worked results in an increase in annual benefit. As the years worked increases, the
curve also gradually gets steeper. This indicates that the incremental benefit from
working an additional year increases at a rising rate.
The chart above does not shed light on the total amount of benefit that can be
received. It is natural to assume that there is a direct relationship between the
annual benefit and total benefit that will be received during retirement. If the
annual benefit increases, then it must follow that total benefit increases. This
maximum point is also assumed not to be reached until normal retirement age.
However neither assumption is true.
For most plans there is a spike point that generally occurs while you are still
teaching. At this point, even though each additional year of work increases the
annual benefit, the total expected benefit decreases. Since there is no actuarial
relationship between funding and benefits, the additional annual benefit is offset by
© Your Financial Watchdog LLC

5. the reduction in the benefit of the foregone year of pension benefit and is a
disincentive to continue working. Here’s an example using the formula:
In this example, 25 years of work produced an annual benefit of $27,500 and 26
years produced a benefit of $28,600. This is an annual increase of $1,100. Based
upon the foregone year benefit amount of $27,500, the retiree would have to
collect 25 years of benefits to break even. As a result, the pull to continue working
is waning.
During the era of corporate downsizing, many companies offered their employees
early retirement incentives. Pension benefit early retirement incentives increased
either the retiree’s years of service or age. In many cases both factors were
increased. Additional years of service increase benefits and the increased age
means that the retiree collects the benefits sooner. For instance a 60 year-old
worker that receives a 5-year increase in both service years and age can begin
collecting higher benefits 5 years sooner. In this case the benefit would begin
immediately instead of having to wait 5 years to attain the normal retirement age
of 65.
Most state teacher retirement plans have built-in incentives that mimic those
described above. The simplest requirement is that the regular retirement age is
lowered by simply attaining a specified number of years of service. A little more
complex version is a two-factor rule that the regular retirement age can be lowered
once a teacher reaches a designated combination of age and years of service. A
rule of 80 is common. Once age plus years of service equals 80, retirement age is
lowered.
Once you pass the magic spike point that marks a dramatic increase in pension
benefits, your pension wealth decreases. Even though the annual benefit continues
to increase with years of service, it is offset by the cost of your pension
contributions and the pension benefit that you have foregone.
The bottom line is that if you enjoy your job, continue teaching. Don’t quit doing
what you love. However, if you are in your late forties or early fifties, burnt out
and considering a career change, I encourage you to meet with a pension
representative or engage a financial planner to help you analyze your alternatives.
You may be pleasantly surprised to find that your state teacher retirement plan
may not penalize you for retiring early or changing careers. In fact, it may be to
your advantage.
Discover more great e-resources for teachers at: www.teachersretirewell.com
and please share this with a fellow teacher. Thank you!
© Your Financial Watchdog LLC