How Teachers Can Make the Most of Their Pension

Pensions are rare these days. But if you’re a public school teacher, yours is likely still alive and well. That being said, just having a pension doesn’t guarantee a riskless retirement. Understanding how your pension works, what choices you’ll face, the other income at your disposal, available healthcare options, and how it all fits together will give you peace of mind as you decide when and how to retire.

Here’s what you need to know:

Pension 101

Pensions come in different flavors, but most teachers are in defined benefit (DB) plans. That means your benefit is determined by a formula with a guaranteed payout. It doesn’t matter how the investments perform behind the scenes; your benefit is set by the rules of the plan.

By contrast, defined contribution (DC) plans are funded by you (and sometimes your employer), invested in the market, and subject to the ups and downs of its performance. These plans don’t promise a set benefit, just the value of what’s there when you start drawing from the funds. You take on the investment risk.

We’re going to focus much of our discussion on defined benefit plans because that’s the type that have the most complex rules.

How Does My Plan Work?

To better understand your pension situation, your first step should be to track down three key documents:

• Your Summary Plan Description (SPD)

• A recent pay stub (to verify contributions)

• Your online pension statement (available through your pension system's portal)

If you’re in Illinois, for example, you're part of TRS (Teachers’ Retirement System), which is a defined benefit plan. As of 2025, teachers contribute 9% of their salary, which covers both pension funding and the Teacher Health Insurance Security (THIS) program. The State of Illinois contributes as well, though it’s historically been underfunded, which is a political issue more than a personal one, but still worth being aware of.

Are You Vested?

In most pension plans, you don’t “own” your pension right away. You have to be vested, which typically takes 5 to 10 years of service. If you leave before vesting, you’ll get your own contributions back, but not the full benefit. If you’re vested, you’re entitled to a benefit—but how and when you take it matters. The formula for calculating your benefit typically includes:

• Years of service

• Final average salary (often your highest 3–5 years)

• A benefit multiplier (e.g., 2.2% per year of service)

• The age at which you file

Your pension filing date can make a big difference—and it doesn’t have to be the day you stop working. You might stop teaching, take another job, and wait a few years to file so your benefit is higher.

This kind of planning is especially important if you’re retiring before your plan’s full retirement age.

Will Your Pension Keep Up with Inflation?

One of the biggest blind spots in retirement planning is accounting for long-term inflation. Most private company pensions don’t account for this because they don’t have to, but most public pensions include a cost-of-living adjustment (COLA). How it's calculated varies widely, which is why the SPD comes in handy.

For example, Illinois TRS includes an Annual Increase of 3% compounded—but only for Tier 1 members (those hired before Jan 1, 2011). Tier 2 members receive a more limited increase tied to the Consumer Price Index, and the COLA isn’t compounded.

If your pension doesn't grow with inflation, then your purchasing power erodes every year, so you’ll need other savings to fill the gap. That’s why we strongly recommend supplemental retirement savings even when a pension is in place.

🕰️ Wondering When to Start Planning? 👉 Read: When Should I Start Planning for Retirement?

Don’t Overlook Health Insurance

One of the most important aspects of retirement that doesn’t get enough attention and planning for teachers is retiree health insurance. Covering your health insurance needs can be a real barrier to making any switch. But if you understand your options, it can free you to make a move you might not otherwise make. Many teacher pension systems include such benefits.

In Illinois, for example, those retiring from teaching (who have started collecting their TRS pension) with at least 8 years of TRS service credit have access to the Teacher Retirement Insurance Program (TRIP). TRIP provides a group health insurance plan between the time you stop teaching and when you qualify for Medicare at age 65. If you’ve decided to delay starting your TRS pension benefit, TRIP isn’t an option, and we should discuss how to cover the risk of a significant health event with other insurance.

Once you hit Medicare age in IL, you transition to TRAIL, which is a Medicare Advantage plan administered by the state. That doesn’t mean TRAIL is always the best option. Depending on your health needs and doctor preferences, original Medicare plus a Medigap supplement may be a better fit, especially if you travel or want broader access to specialists.

This decision deserves a close look.

Why Teachers Still Need to Save

A pension is great, but for most teachers, it won’t be enough. That’s where supplemental savings plans come in. These plans can help you:

• Retire before full pension age

• Cover rising costs due to inflation

• Enable you to enjoy life and be more generous

• Provide for a surviving spouse

Teachers often have access to both 403(b) and 457 plans. Here’s what to know:

• A third-party plan administrator (TPAA) oversees the plan, but you’re responsible for opening the account with one of the available custodians (like Fidelity, TIAA, Voya, etc.) and choosing investments.

• Investments frequently have high fees, and there’s often little help making choices.

• Contribution limits for 2025 are $23,500 for each plan (plus catch-up if over 50).

We also recommend considering Roth IRAs and taxable brokerage accounts for tax diversification and flexibility. The plain vanilla taxable brokerage account is powerful in bridging the gap between when you retire and when you can withdraw from the typical retirement account, since it has no caps on contributions or age-based withdrawal restrictions.

Pro tip: One simple but effective strategy for funding these supplemental savings vehicles is to save your raises. If your current income covers your lifestyle, don’t let pay increases inflate your spending. Redirect those dollars into one of these accounts.

This is one of those decisions you’ll be grateful for down the road.

What About Social Security?

Teaching, retirement, and Social Security can get confusing. On the one hand, most public school teachers do not pay into Social Security, so they typically don’t receive Social Security benefits from their teaching years. But if you’ve worked a summer job, had a side hustle, or plan an encore career, you may still qualify for benefits at some level.

Thanks to the Social Security Fairness Act passed in early 2025, the old rules that reduced Social Security benefits for public pension holders were repealed. Now, if you qualify for benefits based on non-teaching work, you’ll receive your full, unreduced amount. And here’s another game-changing aspect of the Act: If your spouse qualifies for Social Security, you may be eligible for spousal benefits, receiving the higher of your own benefit or 50% of theirs.

These benefits can significantly boost your guaranteed retirement income.

💡 Want to understand your Social Security options?  👉 Attend one of our Social Security seminars

Pension Payout: It Depends

When you retire, you'll need to select a benefit option. Often in financial planning, we say, “It depends,” and picking your benefit payout is no different. Here are the most common choices:

1. Single Life Annuity – Highest payout, ends when you die.

2. Joint & Survivor Annuity – Lower payout, but continues for your spouse after your death.

3. Lump Sum – Rare for most teachers, and usually only offered if you didn’t work long enough to earn a full pension.

There’s no one-size-fits-all answer. To make the right choice, ask these questions:

• What other income sources do you have?

• What are your monthly expenses, and when will big ones go away (like a mortgage)?

• How long do you expect to live—and how does your health compare to the averages?

• Is there an age gap between you and your spouse?

• What’s the internal rate of return (IRR) for each payout option?

Sometimes, the best decision is about peace of mind, not maximizing the benefit amount.

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It’s Not About the Numbers

Retirement isn’t just about the numbers. Sometimes your 'why' is about changing careers, spending more time with your kids, or stepping away before the system says you’re officially eligible.

🔄 Thinking About a Career Pivot? 👉 Read: Making a Smart Career Transition

You can make these choices with confidence, as long as you understand the tradeoffs. The key is to start early, explore your options, and build a plan you can stick to. For teachers, that means knowing how your pension, other income sources, health insurance, and expenses fit together.

You don’t have to figure it out alone. Want a second set of eyes on your pension and retirement plan? Let’s talk. We help teachers understand their options, avoid costly missteps, and create a plan they can feel confident about.