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We all know one of those special teachers who spend their own personal time and money helping prepare their students for the future. In fact, we can all easily name at least one teacher who made a valuable impact in our own lives.
And while it’s often said that no one becomes a teacher to get rich, there’s no reason why teachers should not be able to retire with dignity after years of service to the families in their communities.
For a long time, teachers relied on state-run pension plans to provide a large portion of their retirement income. But now, teacher pension plans are underfunded by billions of dollars, and states have been forced to cut benefits for future retirees. Teachers can no longer depend on their pensions to provide the same retirement lifestyle yesterday’s teachers enjoyed. It’s now more important than ever that teachers have a plan to supplement their pensions with their own savings.
The Good and Bad of the 403(b)
The most common option for teachers to save for retirement is through a 403(b). On the surface, the 403(b) looks a lot like the 401(k) that workers in the private sector use to save for retirement. Contributions are automatically deducted pre-tax from the teachers’ pay, and their money grows tax-deferred until it’s withdrawn in retirement.
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These are great benefits, but 403(b) plans can have one big downside—the investment options. Teachers must often select from a confusing array of options, and their choices are often overloaded with insurance products like annuities and variable annuities that have low returns and expensive fees and surrender charges. At first glance, these options can seem like a good deal. Many protect teachers’ principal so they don’t lose the money they put in, and annuities guarantee an income for life at retirement.
But these guarantees come with a price—as much as $2.42 per year for every $100 invested in one 403(b) annuity option. Those high fees eat up teachers’ retirement savings, and the low returns keep what’s left from growing into a comfortable nest egg.
On the other hand, mutual funds don’t have a principal guarantee and come with more risk. But they offer higher potential growth, and their fees won’t wreck teachers’ retirement plans. Most growth stock mutual funds’ fees are a fraction of even the least expensive annuities’ costs. But 403(b)s usually offer an extremely limited choice of mutual funds.
You Can Overcome Your Plan’s Shortcomings
With these limitations, how can teachers be sure they’re doing enough to provide a comfortable retirement for themselves?
The good news is that Dave’s Baby Steps work for teachers too! First, get out of debt and then save an emergency fund of 3–6 months of expenses. Next, set a goal to invest 15% of your income for retirement.
That may sound like a lot, especially since 97% of you already devote part of your income to purchasing much-needed supplies for your classroom. But Dave recommends 15% because it is enough to help you reach your retirement savings goals while allowing you to have a healthy standard of living today. So, with careful budgeting, you can save for retirement and still provide the missing necessities for your students.
Once you’re ready to start investing, divide your 15% like this:
If You Receive a Matching Contribution
If your school system matches contributions to your 403(b), contribute enough to receive the match and choose the best mutual fund options included in your plan. Even if the funds aren’t the best, you don’t want to turn down a 100% return on your money.
Invest the remainder of your 15% in a Roth IRA. Roth IRAs allow your savings to grow tax-free, and you won’t have to pay taxes on the money you withdraw when you retire. You can also choose from thousands of mutual fund options.
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Select good, growth stock mutual funds in each of these categories: growth, aggressive growth, growth and income, and international. You can invest up to $5,500 in a Roth IRA in 2014.
Don’t Get a Match? No Problem
If you don’t receive a match in your 403(b), start by investing in a Roth IRA up to the limit. If you max out your Roth and have money left over, invest that portion in your 403(b) to take advantage of the tax-deferred growth.
Keep This in Mind
For teachers who are required to contribute to their school retirement plan, it’s never a good idea to rely solely on a public pension plan when states are facing so many financial challenges. In addition to your pension contributions, Dave recommends you also invest in a Roth IRA. There are lots of variables here, so talk this over with your investing advisor to make sure you’re saving enough to supplement your pension—or even replace it if your state’s plan goes belly-up.
And if you leave your school district for a new job, roll your savings into an IRA so you have more investment options and the opportunity for higher returns on your investments.
Even Teachers Benefit From Teaching
It can be challenging to take your retirement plan into your own hands. But doing so will make you more confident in your ability to support yourself throughout your retirement. Add an extra layer of confidence about your investing decisions by working with an experienced financial advisor who can teach you about investing and educate you about the best ways to save for retirement.
You can rely on your advisor to help you develop your retirement investing plan and keep you on track for the long-term, which is one of the most important factors in the success of your plan. Ask your advisor to show you all of your options and how they work together to give you a secure future—a retirement that offers you a choice of travel, vising family or even volunteering your time to continue training young minds.
As a teacher, you can appreciate the patience it takes to help a new investor understand their options. We can put you in touch with an advisor who shares your heart for teaching and will show you the same care and understanding you have for your students.