This is the latest part of a series by Ryan Frailich discussing financial planning for teachers. For more from Ryan, you can sign up for his monthly newsletter here.
One long-standing belief about becoming a teacher is that although salaries are relatively low compared to other professional jobs, the benefits will make up for it. It’s the unwritten – or in many cases explicitly written – commitment to make sure we take care of the people who take care of our kids. Commit yourself to teaching in the same state for your career, and at the end you’ll get paid a pension to support you for the rest of your life.
Things just aren’t that simple anymore. State pension systems are continuously underfunded, and many charter schools aren’t required to offer pensions at all. Teachers, like so many other professionals, are increasingly being made to plan for their own retirements.
The Three-Legged Stool
A common framework for thinking about retirement is the 3-legged stool, shown below:
Increasingly, this traditional 3-legged stool is filled with variations. For example, what happens when you work for an employer that doesn’t offer a pension, as many charter school networks don’t? It’s all left to personal savings & social security:
Another lesser known situation is that in many states pension income reduces your possible social security income. The thinking here is that since teachers are drawing on a publicly (i.e., tax dollar) funded benefit for their pension, they shouldn’t also be eligible for social security, as that would be “double-dipping.” More on this situation in a later post, but this situation can create this 2-legged stool:
Of course, many younger teachers may be worried about the state of social security in general, given all of the headlines about its long-term sustainability. Matt Becker over at Mom & Dad Money wrote a great summary on this, and I am basically in line with his thinking, but no one can say for certain what the future of social security holds. Some people may want to be conservative and prepare for a significantly reduced benefit, or something like this:
And of course, if you don’t have a pension, you’re young, and you’re skeptical about what social security will be like in 45 years but want to plan for it not to exist (I do not believe this will happen but, there are plenty of people who do), then you’re on a 1-legged stool:
I can’t really say for certain which of the above is the situation you’ll be in, but it’s pretty safe to say it’s likely that most of us under 40 will be looking at a situation that relies much more on ourselves creating a plan than on employer or government benefits. Given the possibilities, unsurprisingly many people have a lot of questions.
When I asked my friends, many of whom are teachers or former teachers, about what financial questions people are secretly harboring, the bulk of the questions I got have to do with retirement. Some examples include:
- If you’ve worked in multiple states and have a combination of state retirements/403b’s, should you try to combine them or leave them alone until retirement?
- After you get your 401k sorted out, what’s the next type of account you should consider investing in?
- I have a couple of years in the state’s teacher pension system. How do I roll it into an IRA? (Or should I even roll it?)
- What percentage of my income should I be investing for retirement?
- How do I decipher a pension plan?
So I sat down to write “The Ultimate Guide to Planning for Your Retirement as a Teacher.” I basically got this far before noticing that the answer to almost every question includes the words, “It depends.”
|Question||Answer (Or beginnings of an answer.)|
|If you’ve worked in multiple states and have a combination of state retirements/403b’s, should you try to combine them or leave them alone until retirement?||Well, that depends. Each state has a different pension system, some with much better long-term outlooks than others. Depending on how long you plan to stay in your current state, the answer may change. Generally though, I think it’s best to take control of your funds in an IRA or current workplace account, especially given the widespread problems with teacher 403(b) plans.|
|After you get your 401k sorted out, what’s the next type of account you should consider investing in?||The annual maximum in a 401k/403b is $18,000 (or $24,000 if you’re over age 50.) BUT just because you can go that high doesn’t mean you should. It depends on your other goals, debts, and the investment options available to you in that workplace account.|
|I have a couple of years in Teachers Retirement System of Louisiana(TRSL). How do I roll it into an IRA? (Or should I even roll it?)||If you’ve only worked a couple years and have no plans to return to teaching in a state pension system school, you should roll it to an IRA. You can likely get the paperwork to do this on the state pension system’s website, you’ll get the cash value, and can roll it to an IRA. However, if you plan to work in a school that offers the state pension system for your career, then it gets much harder to say, given the uncertain state of the funding for many state pension systems. As of 2014, for example, the state pension system in Louisiana had a $12 billion dollar unfunded liability, meaning that the gap between what is promised to be paid out and what they project to have going forward is HUGE. However, opinions vary widely on whether a fix will come in at some point to solve that problem.|
|What percentage of my income should I be investing for retirement?||Any less than your employer match is literally leaving dollars on the table that could’ve been yours. So start by matching whatever your employer’s contribution is. Overall, 15% is a good benchmark to shoot for. And of course, save more if you can. The more you save, the less you are spending monthly. The real secret to being able to retire is that when you have fewer regular expenses, it dramatically lowers the amount of money you need to stop working. This makes sense right? If you save 10% of your income, that means you’re spending 90%. If you save 30% of your income, you’re only spending 70%, so you’ll be done saving for retirement faster. (Ok, I oversimplified that, clearly, but read here to totally nerd-out on how much this matters!)|
|How do I decipher a pension plan?||The Google machine? Really, turn to Google, Google “[insert state here] teacher pension formula,” and find their funding formula. It’s often buried, probably has a ton of contingencies, and is subject to change a lot between now and retirement. But it’s a starting point. It’s usually something like this, which is from the state of Minnesota’s teacher retirement system:
Years of service * formula multiplier (1.9%), * highest 5 years average salary.
Example: If Rachel’s highest 5 years average salary were $65,000, and she worked 30 years in the system, she would be paid $37,050 per year in retirement.
Note: There are a number of other variables to this depending on years worked, when they start, type of role, how this impacts social security, and more. It’s just a starting place.
Each of those questions could easily be a full blog post in itself, so we’re going to turn this into a series on retirement planning for teachers. Over the next 3 months (this post + 5 more), I’ll go into the details on each of the topics above and other issues that teachers should be considering as they plan for their retirement. You’ll find that my answers often include the words “It depends.” For that reason, the most important words I will write in the entire series are what follows: Hire a professional to help. Even if you’re a Do-It-Yourselfer with your finances, the value of consulting with a fee-only, fiduciary financial planner is well worth it in this area, particularly if you’re 45+ and starting to see retirement as a real possibility and not just some hallucination. Find someone who knows what your needs are and the ins and outs of your particular state, if possible. Get clear on what you’re paying them and that they’re not just selling you some product (If so, run. Quickly.). A one-time consult may cost a few hundred or even a couple thousands dollars, but that’s well worth it to make sure you have a plan for you, and your family’s, future.
I’m fully aware that for many people, the idea of spending time and money building a retirement plan brings out many emotions and fears. Uncertainty. Confusion. Fights with spouses. This is common, but it it doesn’t have to be. In fact, putting together a plan provides clarity so you can spend less time and energy worrying about your future. Carl Richards from the New York Times, summed it up best with the drawing below:
(c) Ryan Frailich
Ryan Frailich is the founder of Deliberate Finances, a registered investment adviser in the state of Louisiana. Information presented is for educational purposes only and should not be relied on for investment or other financial decisions. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.