LifeGoal Investments Blog
Retirement From Teaching 101: 5 Helpful Strategies
Retirement From Teaching 101: 5 Helpful StrategiesA teacher’s life is not as black and white as it may appear. Inspiring students to learn and discover their strengths each day is crucial to their future and is what teachers do best.
Add in the requirement for lesson planning, and more. Like any job, the work can become exhausting, especially as new teachers are known to put their students first before thinking of their own needs.
How about the need for retirement benefits? Even teachers have dreams of retirement, which is obtainable. A teacher’s retirement system can be turned into reality. To do so, you need to put the planning skills to the test and implement investment strategies to your benefit.
#1 How Do You Define Retirement?This question has no right or wrong answer. You won’t be graded. But although it is not a test, it requires a lot of thought.
How do you describe your ideal retirement? Write it down, or draw it. The responses can be as vague or detailed.
For example, you can note that you no longer want to work day in and day out, or you can jot down destinations you’ve wished to travel to, building out an itinerary.
At most, select five of your top goals. As you look at them, ask yourself: “Are these attainable?” As with any goal, you do not want to set yourself up for failure or disappointment.
Consider this stage the time to brainstorm. This is your opportunity to discover more about yourself and is the starting point of your journey to a delightful and fulfilling retirement.
#2 How Much Money Will Retirees Need?This step will differ from person to person. It depends on numerous factors, such as how elaborate your definition of retirement is, your current financial situation, and your foreseeable health.
How To Build a Budget
- Outline your assets
- Outline your expenses
- Make preparations for the unexpected
- Do you have a budget surplus or loss?
Outline Your Assets
You should have a pulse on what you are bringing to the bank each month. If you are already contributing to a retirement plan, you’ll want to include this income too.
But take a moment and think. Do you have any other underlying assets, hobbies, or skillsets? If so, they too can supplement your future retirement.
Outline Your Expenses
What will it take to live comfortably during retirement? Start by listing recurring, or fixed, expenses. For example:
- Mortgage or rent
- Installment loans
- Utility estimates (water, sewer, electricity, gas, etc.)
- Grocery estimates
This may or may not be a question you can answer immediately. Your health evaluation today can change by tomorrow, so it’s best to be prepared.
Start by including the basic healthcare costs into your budget, including routine wellness visits and annual dental and vision exams. Then you can consider what you may need for long-term care and how it will impact your budget.
Make Preparations for the Unexpected
No matter how much planning you undergo, you should always consider the unexpected. That way, you are prepared versus being caught off guard.
By unexpected, what do we mean? How about:
- The costs associated with maintaining your home? This may not appear to fall into this category; however, homeowners do not always set a reserve fund aside to make major repairs to a roof or an A/C unit, as an example.
- Vehicle maintenance or repair costs? It’ll be difficult to get to and from if your mode of transportation is out of service.
- Seasonal costs? This equates from gift buying for birthdays or Holidays to traveling.
But, when building an inclusive budget, we need to include all variables. Worst case scenario, we still wind up with a surplus to either sweep to our savings or use towards other gratifying options.
Do You Have a Budget Surplus or Loss?
Consider budget building as an experiment. If your budget is at a loss, what would you hypothesize?
There are two scenarios.
- Return and review your expenses. Are there any that you are willing to adjust? Are all of the expenses necessary (need versus wants)?
- What changes can you make today to improve or build on your future wealth?
#3 What Do You Owe Today?Building your budget may have opened your eyes to what your actual spending is each month. Did you really know what you owe before that exercise?
Debt can range from credit card bills to installment loans. The goal for retirement is to pay as much of the debt off as possible without incurring new debt in the process.
There is a range of tools and methods available to pay down debt. Two common methods are the debt avalanche and the debt snowball.
The focus of the debt avalanche method is to identify the credit cards with the highest interest rate. The debt snowball focuses on the smallest outstanding balance.
Choose the method that is most appealing to your situation to begin removing debt from your vision of future retirement. Once chosen, stick to it for the best results.
#4 What Investment Options Are Available To Teachers?
- Defined benefit plan
- Defined contribution plan
To start, you may qualify for either a defined benefit plan or a defined contribution plan.
Defined Benefit Plan ExplainedA defined benefit plan is a fancy way to say pension. It’s important to note that each state operates independently of the other.
To qualify for a pension plan, teachers must reach a pre-determined number of years of service. This is also referred to as the vesting period.
The vesting period can fall between 5 years to 10 years, depending on the state's requirements. Once met, the plan is based on the overall number of years of service and the average salary before retirement.
Here are some questions to consider when retiring with a pension plan:
- How many years of service are required before your pension plan is active and vested?
- Are you contributing to your pension plan? If so, how much?
- Does the state contribute to the plan in addition to your contributions?
- Do you or will you depend on Social Security benefits? Or do you prefer to rely on the pension and other savings for retirement?
- Will my pension be subject to WEP (Windfall Elimination Provision) or GPO (Government Pension Offset)?
Defined Contribution Plan ExplainedRetirement accounts are defined contribution plans. You are likely familiar with 401(k) benefit plans offered throughout industries. However, teachers are often offered a 403(b).
The 403(b) is a tax-sheltered investment plan. That is, you get to choose whether you are making pre-tax contributions to a traditional plan or after-tax contributions to a Roth plan.
The Internal Revenue Service (IRS) sets annual contribution limits to the plan. In 2022, the employee contributions increased to $20,500 per year. Individuals age 50 or older are eligible for an additional contribution of $6,500.
There is a downside, however, to a 403(b) plan. The fees! Check the underlying expense ratios associated with the plans, along with the general and administrative fees.
To combat this, do your research before jumping into your plan.
- Look for low-cost, passive investment options such as exchange-traded funds (ETFs).
- Check for ERISA (Employee Retirement Income Security Act) protection
- Watch for aggressive plan sellers
- Enquire with your employer on a match to the plan contributions
It works similar to the 403(b) to help accelerate your retirement savings. One difference is that the plan allows you to make penalty-free withdrawals at the time of retirement, even if your retirement age is not met.
Consider the 457(b) plan as a method to bridge your savings gap.
It is always best to check with your HR representative, union official, or plan advisor for the most up-to-date and detailed information on your available plans.
Annuities and Mutual Funds
Included in your 403(b) or 457(b) plan is a mixture of annuities and mutual funds.
Annuities are defined as a contract set forth between you and an insurance company, whereas the insurer is required to make payments to you.
There are three types of annuities to choose from:
- Variable annuity - the value fluctuates (up and down) depending on market performance
- Fixed annuity - simplest to use, setting a fixed interest rate and a set guarantee period
- Indexed annuity - a minimum rate is set in addition to that of a market index (i.e., S&P 500 Composite Stock Price Index)
Social Security BenefitsDid you know that not all teachers are eligible for social security benefits? This is important to factor in when considering your retirement income.
The Social Security Act of 1935 originally excluded public employees from having social security coverage. The assumption was made that these employees have existing retirement coverage.
In 1950, Section 218 was passed by Congress to amend the Social Security Act. Thanks to this amendment, states have the choice of extending social security benefits to specified public employees.
Thirty-three states allow teachers to opt-in to social security, 13 have opted out, and five are considered mixed. This means that the states have given the school districts permission to decide whether to opt-in or opt-out.
If you are to opt-in to a pension plan, you are no longer eligible for social security benefits.
Other Investment OptionsDon’t forget; you aren’t limited to the pension, 403(b), and social security as retirement income options.
Traditional IRAs and Roth IRAs are other outlets which you may be eligible for. With Roth IRAs, you are contributing after-tax dollars to your plan versus Traditional IRAs, which are pre-tax.
Roth IRAs have fewer restrictions, allowing the transfer of the account if necessary; however, traditional IRAs have their benefits too and work well for people expecting a lower income tax during retirement.
In 2022, the annual contribution limit for IRAs is $6,000. If you are age 50 or older, you can contribute an additional $1,000 to the plan as a catch-up contribution.
In addition to IRAs, you might also consider investing in an ETF. One great option offered by LifeGoal Investments is our Wealth Builder ETF, which is a diversified portfolio which seeks to provide long-term capital appreciation. We think The Wealth Builder ETF is a great option for long-term retirement savings.
But, think of it this way. Having a summer job can be a temporary outlet to boost your retirement savings.
If you are 50 or older, consider this a method for making the added contributions to your 403(b) that you are eligible for.
The Bottom LineDon’t get caught running down the negative lane, thinking that you’ll never retire. Everyone retires - period. As to when? That is the next question to answer.
The timing of when retirement occurs varies per person. For some, it will be early in life. For others, later.
Your strategy for saving plays a vital role in your retirement from teaching. You can invest, and you can save. Toss the “can’t” mindset in the trash.
LifeGoal Investments is here to help you understand the importance of investing and is ready to help you strategically build a financial portfolio so that you can focus on today and be prepared for the future.