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What Does Retirement Security Mean?

As we’ve discussed in other modules, the purpose of a pension or other retirement benefits for teachers and other employees is to put workers on a path to retirement security. In practical terms, retirement security means having the funds you need to live comfortably once you are no longer working. In financial terms, experts generally indicate that retirement benefits should replace between 60% and 80% of pre-retirement income. But how much is that and how can a teacher get there?

While the specific amount will vary depending on how much a teacher earned while working, the rough guidelines for how to set aside enough to have a secure retirement suggest that teachers need to save between 10% and 15% of their annual salary and earn a 4% real rate of return on those savings.

This goal can be met through any number or combination of plans and benefits. For instance, a teacher enrolled in a traditional pension plan would need combined contributions and benefits set aside each year to equal (or exceed) the 10% to 15% benchmark. Similarly, a teacher in a defined contribution plan would need both her and her employer’s contributions to equal (or exceed) 10 to 15%.

It is important to note that the 60% to 80% replacement recommendation applies to the combined value offered by all of a teacher’s benefits, including Social Security and any supplemental savings. According to the Social Security Administration, Social Security benefits are estimated to replace as much as 40% of an individual’s pre-retirement income, meaning that the burden on a pension would be significantly lower. However, not all teachers are enrolled in Social Security, so all teachers should learn about how their plan and benefits stack up and whether they are on a path toward a secure retirement.

A key question is whether the retirement systems that teachers are enrolled in are actually designed to put them on this path. Is the system designed to meet the needs of the employees or the employer? As we’ve seen, most traditional pension plans only provide long-term retirement security to a small percentage of the teacher workforce. That may fit employers’ needs, if their predominant interest is in rewarding longevity. But teachers need clear information about their own paths to retirement security and an understanding of what their plans will and won’t do to help them achieve their retirement savings goals.