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Why Wait for 65?

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From the teacher's point of view, early retirement programs can be tempting. Some, like Lang, jump at the opportunity for personal reasons. But others go for it simply because they are fed up. Teaching, after all, is a high-stress job, and many teachers begin to burn out toward the end of their careers.

In most cases, school districts that need to reduce the number of teachers on the payroll offer special early retirement programs during specified periods or "windows.'' During these times, teachers who qualify on the basis of age and years of service can bow out of the classroom early, without taking a cut in pension benefits. The specific guidelines vary, but many programs are based on "the rule of 85,'' which states that teachers can retire early if the sum of their age and their number of years of service totals at least 85.

Under most pension systems without early retirement programs, teachers who stay in the classroom until age 65 are entitled to collect full pension benefits, but those who retire early lose a significant portion of their benefits. Typically, a teacher forfeits 0.5 percent of the final benefit amount for each month he or she retires before the normal retirement age of 65. For example, a teacher who leaves the profession one year early would give up 6 percent of the final pension.

Early retirement programs waive the penalties and often sweeten the deal with other incentives, such as cash bonuses and continued health insurance coverage after retirement. The cash bonus can be a fixed lump sum, a percentage of annual salary, or the equivalent of severance pay--often one or two weeks' pay for each year of service, subject to various maximums.

Whether a teacher retires early or not, calculating pension benefits can be tricky. There are 50 state retirement systems and a number of city and county systems, each with its own procedures. Nonetheless, the most common method--used by about 80 percent of teacher retirement programs--is the benefits formula method, which takes into account three basic factors: the number of years of service, the teacher's final average salary, and a preset, percentage-ofpay figure set by the state or district.

To determine a teacher's pension, the number of years of service in a state (most benefits are not transferable from state to state) is multiplied by the teacher's final average salary (usually based on either the three or five highest-paying years or the three or five final years). This number is then multiplied by a percentage-ofpay figure (usually 1.5 percent to 2.5 percent), and the result is the annual pension benefit.

For example, a teacher who taught 30 years with a final average salary of $40,000 in a district with a 2 percentof-pay multiplier would draw a pension of $24,000 a year. (Thirty times 40,000 equals 1.2 million, and 2 percent of that is 24,000.) Teachers who haven't been in the classroom very long--less than 20 years, for instance--would have neither the high salary nor the high number of years of service to plug into the pension formula. The result would be a low monthly pension.

Even those teachers who have the numbers to draw a significant pension should consider their long-term finances carefully before applying for early retirement. Early retirement can be either a blessing or a curse, "depending on how well a teacher has prepared financially,'' says Judith Hushbeck, senior policy analyst with the American Association of Retired Persons. "Some people find themselves in a financial bind, either because they don't have enough money to live on or because they have an unexpected outlay or emergency.''

The two biggest financial problems for early retirees are inflation and insurance coverage. Most experts say that retirees need about 70 percent to 80 percent of their income to maintain their lifestyle after retirement. (This would include pension money, Social Security, and other retirement income.) But a decade of double-digit inflation can destroy even the most generous teacher pensions. Some states provide automatic cost-ofliving pension increases, but many do not. "Teachers need to have all the details worked out or they can wind up in poverty within 10 or 15 years,'' says Bruce Hineman, executive director of the National Council on Teacher Retirement.

Other teachers get into financial trouble trying to pay insurance premiums. If life and health insurance coverage are not provided as an incentive to retire early, the cost of picking up the coverage may be prohibitive, even at the district's group rate. Some early retirement programs include health insurance coverage through the time that the retiree qualifies for Medicare, but many do not.

Before retiring, teachers also need to consider the tax consequences of any special cash incentives. A teacher who collects a $30,000 lump-sum payment as a retirement incentive, for example, may lose a substantial share to state and federal taxes, making the actual incentive less enticing.

And beyond the financial concerns, teachers should set goals and carefully plan what they want to do with their time after they retire. "For many teachers, the job is much more than financial,'' Lange says. "Teachers are told that they contribute to society, and it's important for their selfconcept that they feel they contribute during their retirement, too.''

Despite the potential drawbacks, many teachers find early retirement programs offer the opportunity to try a second career, travel, or spend time with a spouse. "Most people who take early retirement are thrilled with it,'' Hushbeck says. "They say they'd never go back in a million years or for a million dollars.''

Winifred Conkling
For a free copy of Look Before You Leap, a booklet on early retirement published by the American Associaton of Retired Persons, write: AARP, Worker Equity Department, 1909 K St., N.W., Washington, DC 20049.

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