I am married to a teacher, how should we save for retirement?

 

The concerns held by teachers about their long-term benefits are not just held by them, they’re also a concern for their spouses. On more than one occasion, I have been sought out by a spouse of a teacher to provide financial advice. They don’t have a complete grasp on what benefits a teacher will receive or how they should plan around them – especially retirement savings.

So what do I suggest when it comes to saving for retirement?

For families where one of the spouses is a teacher, some radically different things than people not involved in the profession.

 

 1. Plan for the worst

If you are a teacher, you’ve seen how poorly some pension systems are funded. The various administrations explain that everything is fine and there are lots of things they factor in that many other people don’t.

Whichever way you look at it, there are a lot of holes in some of these pension plans.

So how do you plan for that?

You have to be conservative. The benefits you are projected to receive today may not be as high or may be revised in retirement, so you need to save as though it won’t be as high. Maybe save as though the pension won’t exist at all.

Is it likely that a pension will disappear? Not really, especially with a government pension, but stranger things have happened.

In our family, we plan for our retirement as though half of the pension will be available when my wife retires. We live in Illinois, home to one of the worst funded teacher pension systems in the country (at time of writing), so this seems to be a safe bet on our part.

We need to have a portfolio in place that will support us in retirement, and we’ll count the pension as “gravy”.

 

Real men marry teachers

 

2. Be sensitive to future income taxes

Many times I see teachers and their spouses allocating all of their retirement savings to tax-deferred accounts.

*Palm slap forehead*

I jest, but this is not the most effective way to plan for the future. Let’s play out an example:

James is a teacher and earns $70,000 a year, and his spouse Jessica works in corporate America and earns $70,000, for a combined income of $140,000. (I just did the math for you, I love to help when I can.)

In 2013, they fall into the 25% marginal tax bracket, so by saving to a 403(b) and 401(k), they save paying a 15-25% tax on every $1 of income above. (I’m trying to keep this simple based on how tax brackets work!)

Fast forward 25 years when they retire. James is now earning a salary of $125,000 and will receive a pension of $90,000 every year throughout retirement.

James’ pension pays him $90,000/yr, which puts them in a 25% tax bracket. This is the lowest it will ever go. All the money that they take out of their 401(k) and 403(b)’s will be taxed at 25% and above.

So by saving paying 15%-25% in taxes now, they get to pay a minimum rate of 25% taxes later in life. And that’s if tax rates don’t go up.

 

So what should you do if you are in a similar situation?

 

Pay some taxes now to hedge increased tax rates in the future. At this current income level, you are still eligible to save to Roth IRAs and could do a total of $10,000 per year in savings here. Commit to paying taxes on your income now, to be able to take it all (growth and contributions) out tax free in retirement.

If you have Roth 401(k) and Roth 403b options available, then you could do $17,500 each.

The motto for this message is “tax diversification of investments”. That’s a fancy phrase for what was discussed above.

 

3. Be cost conscious

Learn to pick (or find someone like me who can educate you) investing accounts and products that are cost effective to own.

When I go into school districts to run seminars, there are a number of teachers present with varying degrees of knowledge. One thing we talk about is 403(b) costs, but this applies to 401(k)s as well.

–       Did you know that an annuity 403(b) could lock you in for a period of years, and you have to pay to move that money should you want to transfer or withdraw it?

–       Did you know that some funds you invest in can be 20 times more expensive than their competitor, and they don’t perform any better?

–       Even if you don’t use an annuity product (like AXA), do you know how much you are paying the account rep on your account to manage it?

–       In your company 401(k), do you pay any additional management charges? How high are your administration fees?

 

Not many people know how to analyze their accounts in this way, but you would be saving so much more money if you know how to do this. By understanding how much money you pay to maintain your accounts, you can effectively manage how much money you keep. Over the course of a career, this is A LOT of money.

 

If you’re happy to tackle these things yourself, fantastic. If not, why not give me a call and we can see how I can help you. Speak soon!