Teacher Retirement Planning
Hi everyone, and welcome back to Melissa Making Cents!
As a CERTIFIED FINANCIAL PLANNER™ and a financial coach, there’s little I talk about more often than planning for the future! Planning for the future can come in a lot of different forms. We all have our one-year, five-year, and ten-year plans for our careers (even if we’ve never really thought about it too hard or put it in writing). We plan to buy houses where we can raise families and live our lives! There are countless ways in which we all plan for our future.
However, one of the most common things we think about when we talk about future-planning is planning for retirement! (Unfortunately) getting older is something we all do. There’s just no way around it (let me know if you find one, by the way). And since getting older is just flat-out a reality that we all must deal with, planning for retirement should be something that’s also in all our lives.
Unfortunately, though almost all of us are aware that we need to begin planning for retirement, an alarming percentage of people either put off retirement planning until later in life and are forced to play catchup or just never quite begin planning. These “forget about it” strategies leave too many Americans longing for more and wishing they’d taken a more proactive approach to planning an exit strategy for their career.
Even worse, there are some career paths that put little to no emphasis on planning for retirement. This is especially true of career paths that require professional schooling – like teachers, medical professionals, or trade fields. My only hypothesis for this is that in fields like those there is so much emphasis on learning the tools of the trade that the tools we need to learn to take care of ourselves in the long run are glossed over.
This is unfortunate, too, because often there are great employer-offered retirement options for professionals in fields like these that can and should be taken advantage of in collaboration with an overarching financial and investing strategy. In fact, according to the US Census data, somewhere around one out of every six teachers are millionaires (more than physicians) However, of those only 4-8% got there through means of their own investing. So, without any further introduction, let’s begin talking about some retirement option plans for teachers!
Retirement Planning – General
I find that one of the main barriers to entry when it comes to retirement planning is a lack of general understanding surrounding financial terms. So, quickly, before we get into a more specific plan for teachers, let’s review some of the most common financial terms that you’re likely to find or run across when planning for retirement.
It's also important to understand that what is good for one person may not be good for you. I can't stress enough that you should talk to a qualified financial professional before you setup a financial account and begin investing for your future. I'm only providing a "Cliff's Notes" version of account and investment options in this blog post. No offense to Cliff, but my grades were ALWAYS better when I skipped his notes and actually studied the book or information on my own.
A stock is essentially a percentage of ownership in a public company. Stock can be used as a quick or long-term investing tool. Short-term, one may buy stock in a company hoping for a short-term rise in the stock price (or the price that stock sells for), which allows them to sell it for a higher price, known as a premium. Long-term, you may believe in the overall health, growth, and strategy of the business you’re purchasing stock in and are buying in hopes that overtime the company will steadily grow.
Bonds are often thought of as like stock. However, while you purchase a small ownership stake in a company when you purchase stock; you’re purchasing a portion of debt when you purchase a bond. Bonds are generally less risky than purchasing stock (depending on the company you’re purchasing), and bonds often have options which payout in intervals overtime.
Annuities are a truly massive subject. In fact, I wrote a 3-piece series on Annuities a few months ago. However, an annuity is essentially a contract that you purchase (usually with an insurance firm) in which the annuitant (purchaser of the annuity) agrees to pay in X amount per month now and receive a specified payment either in lumpsum or installments in the future.
Mutual funds are conglomerations (funds) that are composed of various investing assets, like stocks, bonds, foreign currency exchange, and other types of investments. Mutual funds are typically built in a way that aim to provide reliable slow and steady growth.
Financial planners are people who help professionals in a variety of fields, careers, and occupations create goals. Financial planners then create actionable plans and steps for their clients to achieve their financial goals. Financial planners also help their clients plan for emergencies and contingencies which may arise along their financial journey.
An IRA is an Individual Retirement Account. These are accounts in which investments may be placed. These are great tools to use when working for retirement because they come with tax advantages from the government. There are multiple types of IRAs, which you can read about, here.
A 401K is another type of retirement account, which investments may be placed in. These are typically offered (or not) by employers. While its less likely that a government employee or teacher will deal with a 401k, it isn’t impossible. 401k’s are great options because they typically offer some sort of employer match. An employer match means that an employer will contribute up to a certain dollar or percentage amount to match the amount that the employee contributes.
Create a Monthly Budget (How much to spend, save)
The first thing you’ll want to do as a teacher (or really anyone) is create a monthly budget that accounts for how much income you have and how many fixed and variable expenses you have. While this isn’t specific to planning for retirement, it’s a necessary step in creating a financial plan. This can, of course, be done on your own. However, talking to a financial planner or financial coach is perhaps the easiest way to go about this, and will likely result in an optimized budget. If you are going to plan your own budget, remember that you likely don’t want to take on too much too fast. Financial planning and budgeting are like losing weight. Sometimes you need to ease into your new lifestyle, so it isn’t too much of a shock to the system.
Plan for Emergencies
The next thing you’ll likely want to tackle is contingency and emergency planning. While things may be financially great for you right now – emergencies happen, and protecting your income is a vital piece of the puzzle when it comes to financial and retirement planning. The last thing you want to do after carefully planning, budgeting, and investing is for an emergency to force your hand into taking on high-interest credit card debt or a personal loan. Instead, we can work on building an emergency budget and emergency fund that you can lean on in difficult times should they arise.
Understand Current Benefits
One of the first steps you should take when planning for retirement is making sure that you understand what options are offered to you (and your specific situation) by your employer and the government. For instance, if your employer is offering you a 401k, it’s important that you understand the ins and outs of that specific policy so you can go over it with your financial planner to make sure you’re optimizing its use.
In terms of the government, if you’re a career public-school teacher, you likely have great retirement options that are offered by your state or local government. While you might not want these to be the end-all-be-all your retirement plans, it doesn’t hurt to make sure you’re taking advantage of what’s being offered if it’s worthwhile to do so.
Because every employer situation is unique and options vary from state to state and local government to local government, taking information about your offered plans to a financial coach and or financial planner is a great way to get started and identify what options are worth your time/money and which you may want to pass over.
403B and 457B Options are Common for Teachers
As you and your financial planner are digging into your options, you’ll most likely come across 403B’s and 457B’s. These are common retirement account options that are typically offered to public employees and those who work for nonprofits. Often these types of accounts allow you to contribute money from your paycheck before-tax and the earnings on the investments in these accounts aren’t taxed until you withdraw. These options also have Roth versions, which are similar, but allow you to contribute money from your paycheck after-tax and withdraw tax-free when you retire. Which of these four types of plans you would want to pursue is highly dependent on your personal situation.
Build Your Investments
The next step is to begin working on and growing your investments. We now understand what benefits and plans are offered to you through your employer, and state/local governments. So, we’ll add what we want to add to them, and we’ll optimize the scenario of what’s preexisting. This likely means that it’s time to start making regular contributions to your retirement accounts while also opening and contributing regularly to other investment accounts. You may want to add bonds, stocks, mutual funds, or other types of investing strategies to your overall plan.
One thing that’s important here is that we get started early. Compounding interest and rollover contributions will make a massive difference overtime, and the longer they have to work – the more wealth they’ll begin building.
Pay off High Interest Debt
Once we’ve created a budget, created an emergency plan, have an understanding of the options that are preexisting, and create an investing strategy which incorporates teacher-specific retirement and investing accounts, it’s time to start working off debt that’s creating a hole in our pocket where money is leaking out.
Specifically, we want to tackle high-interest debts first because they’re going to make the biggest impact to your bottom line. High interest debt is likely credit card debt, personal loans, and/or financed purchases. While most of our minds collectively move to student debt, paying off your student debt may not be what you want to tackle – it might be best to make sure you’re paying as little as possible each month depending on your situation.
While that may seem counter-intuitive, there’s good reason behind it. Being a teacher, you likely qualify for Public Service Student Loan Forgiveness. This means that if you’re making consecutive payments on time, you’re likely eligible to have the rest of your student debt (in federal student loans) forgiven after you’ve worked in public service for ten years.
Work With Your Financial Professional to Adjust as Needed
YES! We did it…. RIGHT?
Well… um…. Not exactly. These steps are necessary to create a healthy, safe, and thriving financial future. However, the planning, optimization, and dedication to your financial plan is never over. As we get older, we have a larger and larger nest egg that we’re sitting on. At some point, as we begin getting closer to retirement, our plans and mindset need to shift from growing our wealth to protecting it.
This means that as we get older, we want to make the shift towards slower, but more predictable growth in our investment and retirement plans. The closer we get to our goal, the more necessary this becomes. If you’re 99% of the way to your goal, and you’re getting ready to retire within the next year or two, you don’t want to lose a bunch of money overnight on more volatile investments.
Regular Check-Ins with your financial adviser representative and financial coach are necessary to make sure we’re striving towards striking the balance between growth and risk. These meetings also ensure that you’re on-track to meet your goal in your planned timeframe. No one wants to look up a year from retirement and realize they’re actually ten years from retirement. That’s why small adjustments over time are a good idea and a necessary step to take – its like a wellness checkup from the doctor (or a regularly scheduled parent-teacher meeting!).
Okay! Let’s quickly recap what we learned! First, we went over some of the most common financial terms that are used when talking about retirement! I won’t make us go back over them, but if you feel like you need a refresher, feel free to scroll up! Next, we talked about the importance of creating a budget that accounts for your income and expenses. Once we have a budget down, it’s time to start making contributions and planning for emergencies with your emergency budget and emergency fund! This contingency planning allows you to protect your wealth from taking out high interest debt with credit cards or personal loans should an emergency arise.
After that, we talked about how important it is to make sure we’re familiar with the options that are available to us either through the government or through our employers! This is important specifically for teachers and government employees because there are plans like 403B’s and 457B’s that are great options for retirement saving. Once we’ve familiarized ourselves, we know that its time to start taking steps towards regularly contributing to our pre-existing retirement options as well as options that we’ve added on our own. Working with a financial coach or financial planner allows us to strike a balance and optimize those options!
After that, it’s time to start paying off our high interest debts! Things like credit cards, personal loans, and financed purchases typically come with high interest rates, which take away from our growth and financial gain. While it’s tempting to tackle our student debt, it’s important to understand weather or not we qualify for Public Student Loan Forgiveness or not first. Lastly, we need to make sure that we’re checking in on our investment and plans regularly! This helps ensure that we’re staying on-track and aren’t caught off-guard when it comes to our retirement date!
A last word –
Now, we’ve talked about a lot. I’m sure you can probably see why working with a financial coach or financial adviser is so fruitful to so many people. It’s also important to understand that as a teacher, your situation is going to be different from other professions. Heck! Your situation is probably even a lot different from a teacher a few counties over! That’s why working with a financial planner, financial coach, or financial adviser is incredibly important. We work day-in day-out on creating financial, investment, and retirement plans that are focused on personal optimization.
So, if you’re a teacher or other professional who’s interested in creating and optimizing a financial, investment, or retirement plan please, feel free to call or email to schedule an appointment with me. As a CERTIFIED FINANCIAL PLANNER™, financial coach, college planner, and student loan advisor, I bring the full spectrum of financial know-how to the table. I can work with you on anything from coming up with the perfect 401(k) contribution number to paying off your student debt. Together we can create a financial plan that helps you become debt-free, make a savings security blanket, and put your money to work for you!
Until next time...this is Melissa Making Cents!
Melissa Anne Cox, CERTIFIED FINANCIAL PLANNER™, is also a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.