Being a member of CalSTRS or CalPERS offers you a major benefit that most Americans do not have: a guaranteed income once you retire. If you meet the requirements for years of service credit and retirement age, you will be able to count on your defined benefit pension during retirement. However, it is important to know that your pension will not replace 100 percent of your pre-retirement income. The average retirement payout for a CalSTRS or CalPERS member is 60-70 percent of pre-retirement salary. With a rise in healthcare costs, living expenses and increased life spans, experts suggest that retirees will need to replace 90 to 100 percent of their pre-retirement income.
As an educator or public employee in California, you will likely have access to a 403b and/or 457 savings plan. These special and completely voluntary plans are designed to allow you to save money for retirement on a tax-advantaged basis. This savings will supplement your CalSTRS or CalPERS pension and can help you live a financially comfortable life during retirement.
403(b) Savings Plan - The 403b is a tax-deferred retirement plan that is available for eligible employees of public schools and other tax-exempt organizations. When you contribute to a 403(b) savings plan, you can do so with any salary made before income tax is paid. Your contributions are allowed to grow tax-deferred until the money is taxed as income when it is withdrawn from the plan during retirement.
457 Savings Plan - A 457 plan is available for eligible employees of public schools as well as government workers. The 457 plan is provided by the employer. The employee defers compensation into the plan on a pre-tax basis. This type of savings plan operates similarly to a 401(k) or 403(b) plan, however there is no 10 percent penalty for withdrawing funds before the age of 59½ as one would experience with a 401(k) plan.
403(b) or 457 plans are specially designed with features to help you make the most of your retirement savings. Both 403(b) and 457 plans help you save on tax payments by allowing you to contribute pre-tax contributions and enjoy tax-deferred earnings. Beginning in 2014, you can now contribute up to $18,000. If you are over age 50, you can contribute an additional $6,000 for a total of $24,000. Long-term employees who have not consistently contributed to a savings plan may be eligible to make lifetime catch-up contributions.
If you have not yet signed up for a supplemental 403(b) or 457 retirement savings plan, act quickly and do so now. Once you have a supplemental 403(b) or 457 retirement savings plan, it is important to contribute as much as you can, even if it is only a small amount per paycheck.