You qualify to receive a benefit by “vesting”

1 minute

Most public workers have to work five to seven years before qualifying to receive a pension benefit. In some states it is 10 years, in others as few as three years. Reaching this threshold is known as vesting.

Before vesting, no pension benefits have been guaranteed. People who leave public service like teaching before they vest will only be entitled to receive back their own contributions. Or if you move across state lines, you have to start your vesting process all over again because states run their pension systems separately.

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Your pension benefits are based on a formula

2 minutes

Pension benefits are typically a fixed monthly payment in retirement that is guaranteed for life. The value of a pension benefit is based on (1) how long you work and (2) your final average salary.

The formula takes your Years of Service (ex. 30 years) and adjusts it with a Multiplier (ex. 2%) and uses that to determine what percentage of your Final Average Salary (ex. $75,000) will be paid as a pension. In this example, the annual value of the pension would be $45,000, paid out as $3,750 a month.

Notice that the formula does not take into account any of the money that is contributed into the pension fund itself, or investment returns.

 

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Your benefits will be largest if earned in a single state

2 minutes

Every state has their own retirement systems for public employees, such as teachers. Some cities have their own, separate pension systems too (like New York City, Chicago, and Denver). But states do not have processes in place that allow people to transfer their years of service from one state to the next.

Vesting requirements and years of service all have to be completed within the same state. That means if you work 10 years in one state, and 10 years in another, you’ll wind up with two small benefits that are worth less combined than 20 years in a single state.

If you move across state lines you can take money out of your old pension and try to buy credits in a new pension plan. The processes for this are not consistent, not always available, and can be expensive.

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Vesting is not enough to have earned a secure retirement

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If you vested in your pension plan before getting laid off, but only worked 10- to 15-years, then you should check on the value of the benefit you’ve earned. It is probably not enough to base your retirement on.

Remember that pension benefits are based in part on how long you worked. If you worked for 10 Years of Service in a state offering a pension plan with a 2% Multiplier, and if your Final Average Salary was $50,000, then you’d have qualified for a $10,000 pension.

That money is definitely valuable, but if you won’t be retiring for another few decades, a portion of the value of $10,000 will erode with inflation.

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What if you lose your job?

2 minutes

Certainly losing your job isn’t fun, and your first priority will be ensuring the financial stability of your family in the near-term. If you’re thinking about your retirement benefits, there are options to consider:

  • You can leave your money in the pension fund, and try to get a job later with an employer that uses the same retirement system — such as the same school, another school district, or another public service job. You can do this whether or not you’ve vested already.
  • You can roll the money you contributed out of the pension fund and into a retirement plan offered by a future employer or an independent IRA.
  • You can find out from your retirement system what benefit you’ve qualified to collect later in life when it comes time to retire, and factor that into a retirement savings plan that might also include money from a partner, Social Security, and separate retirement savings.

The more you understand about how your retirement benefits work, the more you can be prepared for your family’s financial future. You can dive deeper into these topics with our TeacherRetirementU program, which will give you a broader set of tools for thinking about how pensions and other kinds of retirement benefits work.