There are many reasons educators may temporarily leave their districts – to raise a family, care for aging parents, return to school or even try out a new career or business. Sometimes, it's not by choice, but because of a district layoff. Regardless of the reason, women have career gaps more often than men, averaging more than 12 years out of the workforce compared with six for men.*
Taking a hiatus from California schools can have a huge impact on your current financial situation and career path – but have you considered the effect it may have on your retirement savings, too?
No matter how productive you are during a break in employment, your 403(b) or 457 plan can falter from lack of regular contributions. Consider two hypothetical educators who each contribute $150 monthly to their defined contribution retirement plan and earn a 6% annual return. The employee who works and contributes for 20 solid years will have built up a nest egg of $69,661. The employee who works and contributes for five years, takes a five-year hiatus with no contributions, then works and contributes for 10 more years will have a smaller nest egg in comparison – just $50,250 after 20 years.**
Making Up for Time Well Spent
Time spent away from your school district is not lost, but it pays to review your retirement plan to find a sound strategy moving forward.
Evaluate current savings. What is the status of your defined benefit pension through CalSTRS or CalPERS and how much will your benefit be affected by time away from your job? How much have you saved in former or current employer-sponsored retirement plans and IRAs? It may be tempting to cash out when you change jobs, go on a hiatus or get laid off, but you have much more to gain by rolling money from a previous employer’s plan into your current plan or an IRA. Plus, if you cash out, you will owe taxes and maybe a 10% penalty on the amount you receive.*** Worse yet, you lose the potential for all future tax-deferred growth on that amount.
Revise goals. Is retirement looming near or far in the future, and more important, are you on track to meet your goals? If taking a break creates a stumbling block in your retirement savings, devise a plan for getting around it. That may mean delaying retirement, making sacrifices to increase savings or downsizing your retirement lifestyle. Use the Retirement Expense Calculator to help figure out how much you will need in order to pursue specific retirement goals.
Step up contributions. Once you’re back to work, take full advantage of your 403(b) and/or 457 plan by increasing your contribution level. Go for the maximum allowable contribution if possible. In 2013, the maximum is $18,000, and an additional $6,000 if you are age 50 or older. If you are eligible for a 403(b) and a 457 plan, you may be able to contribute the maximum to both plans.
Since contributions are taken out of your pay before taxes and they grow tax-deferred over the life of the account, you’ll enjoy the benefits even more by boosting the amount you set aside. And, if you’re age 50 or older, catch-up contributions, if available in your plan, may help you reach your retirement goals sooner. The How Much Can I Save? Calculator can help.
Review your CalSTRS or CalPERS benefits and options. You may be able to purchase additional service credit by redepositing withdrawn funds. For example, if you left your job and withdrew your contributions and interest, you may be able to redeposit the money when you return to membership in either system.
Get Back on Track
To be successful, retirement solutions should fit individual needs. Whether your contributions have lapsed due to a hiatus or one of a thousand other reasons, we have helpful information to help you get your savings goals on course again. Start with this handy calculator, How Much Can I Save in My 403(b) or 457 Plan?
* Source: Center for Retirement Research at Boston College, www.crr.bc.edu/.
** Return shown is for illustration only. Your returns will vary. Assumes $150 is invested each month in a tax-deferred account. Taxes will be due upon withdrawal. Distributions before age 59½ (age 55 if separated from service) may incur a 10% penalty (does not apply to 457 plans).
*** Withdrawals from an employer-sponsored retirement plan made before age 59½ (age 55 if separating from service) may be subject to a 10% IRS penalty. Does not apply to 457 plans.