Listen, investing as a teacher is COMPLICATED!

Disclaimer: This post will be discussing investments and use some technical terms – it’s necessary to make the piece fully understandable. If you want help understanding these, make an appointment using the green button above and I’d be happy to explain in more detail.

There’s a common misunderstanding when it comes to dealing with teachers and their investments. The thought is that since they have a pension at retirement, the investing they do throughout their career doesn’t really matter that much. Their income in retirement is going to be taken care of by their pension.

But that is rarely the case.

Confused about investing

Many teachers need income above-and-beyond their pension when they retire in order to provide the lifestyle they desire. In order to have this extra income, they need a nest-egg that needs to have been built up throughout their career.

Along with saving consistently, how do you go about allocating that portfolio? Do you allocate it according to how much risk the teacher (and possibly their significant other) want to take? Or given the fact that there will be a pension in play, do you invest more conservatively? Or should that be more aggressively? Let’s look at each of these approaches in more detail:

 

Forgot the pension, worry about the person

If you meet with a financial advisor (or any professional who is helping you with your investments), one of the first things they do is to assess how much risk you want to take. This is either done using a questionnaire, a conversation, or (hopefully) a combination of the two. They seek to understand how much you would be able to see your investments drop before having an emotional reaction; how you would invest significant sums of money, and how you would adjust things if you were running out of money.

By doing this, they can assess how much risk you want to take and what portfolio might be appropriate. They then take this information and design a portfolio for your investments. It may not take into account anything else, but it fits your “risk profile”.

 

You have a “guaranteed” amount of income, why risk the rest?

If someone told you that they were going to pay you $60,000 every year when you retire, would you invest aggressively with your other money? Many teachers by nature are conservative, so this thinking tends to reduce their willingness to take risks with their investments. Teachers will receive an annual amount of income via their pension, and they may only need a little bit of extra funds to supplement their pension income. If a conservative portfolio could ensure they achieve this small nest-egg, why would they take more risk with this money? If there is a chance of not having enough by investing aggressively and losing money in the stock market, why do it?

 

You have a “guaranteed” amount of income, why not take some additional risk and see if you can grow a bigger nest-egg?

If you had an investment account of $1,500,000 (1.5 million) and it would never go below that, would you invest all your extra money super-aggressively to try and make the most money you could? That’s how a pension works. An account with $1,500,000 will produce about $60,000 in income per year (the dollar value of the pension used in the previous paragraph). As you’ll always receive that $60,000, why wouldn’t you want to see if you could grow your nest-egg to be the biggest it could be? You may lose some money, but if you don’t need it yet (or at all), why does it matter?

   

 

 

 

As a teacher who’ll receive a pension, how will you invest your money? There is no right answer. With teachers that I work with, I have done conservative and aggressive portfolios, portfolios built on risk profiles or projected needs in retirement, or a mixture of everything. All that matters is you’re comfortable with your choice.

Not sure what is right for you, or how to build a portfolio that suits you? That’s one of things I do for teachers that work with me at Finance for Teachers – I’d be happy to help you.