How can someone retire on a teacher (or similar) salary?

When should I start thinking about retirement? Am I too young to retire? How do you plan your retirement? How do other people do it? How much money do I need to retire? Most people seem to work until 65, do I have to wait until 65 to retire?

***Disclaimer: If you are not a teacher, simply substitute 403B for 401K, and the same applies.***

All these are questions that teachers ask themselves most of the times when they are about halfway in their careers, few years before retirement age or in those days when we feel we can’t do one more day of dealing with behaviors, parents or administrators.

Unfortunately, the answer to all those questions it is not a one answer fits all scenario; and will depend greatly on your location as well as your expectations. Let me explain:

First of all, teaching salaries will vary greatly according to the state and district you work for. While some states and districts pay decent living wages, some others would make it difficult to live on one income and sustain a family.

Comparisons between public and private school salaries can also be very discrepant. Most public institutions will offer their employees a pension program as well as a 403B plan, whereas private institutions may be more limited in this aspect.

But wherever you are, you need to plan your retirement and make the necessary financial decisions at your reach to make it happen accordingly.

It is never too late to plan your retirement as a teacher ( It’s more like, it’s never too early)

One of the big problems that I see among teachers particularly at the elementary level is that we are so devoted to the profession that we forget to talk about money. “It’s all about the kids” teachers say.

Well, yes. It is all about the kids, but you should also do what is best for yourself and your family.

If there is one thing I could tell my younger self today is “why you didn’t figure out earlier what your FI number was? If you haven’t hear of the FIRE community, FI stands for Financial independent. RE stands for retire early.

Planning your retirement may seem like a daunting task, deserving of financial advisers, accountants and even maybe a shaman to grant the kind of financial security we feel will set us free as we sail into the sunset. The reality though is that there is nobody that can do more for us than what we can do for ourselves. The good thing is that the math is relatively simple.

The first thing you need to have in place is a budget or a system to track your yearly expenses. This will help you pinpoint easily what your biggest expenses are, what your non-negotiable or non-discretionary expenses are. How much income do you need to live and cover your expenses for a week, a month, a year?  Likewise, I think it is helpful to have your expenses classified as discretionary or non-discretionary expenses.

Discretionary expenses are those things that you may not want to cut out of your life but you know you will still see another dawn even if you part ways with, let’s say,  your cable subscription. Likewise, a gym membership, eating out, cellphone bills, kids activities, any random and impulsive purchase you may have in any particular month are eligible to bulk that list of expenses.

Non-discretionary expenses are your basics, such as groceries, utilities, rent or mortgage, health insurance, or any other expense that is truly indispensable in your life.

I also like to add a miscellaneous section for the financial misfortunes of each month, such as car repairs, birthday presents our kids get invited to, house repairs, donations, etc. You get the idea.

Once you have an idea of what you need yearly to live comfortably and what things you are willing to give up to make your retirement happen, you can start drafting a plan as to where that money will come from.

For teachers, the answer may be fairly simple. If you don’t have investments and you are just counting on your pension you have to figure out how much that pension will be and when you will be able to start collecting it.

All across the country, there is a tremendous push for increasing the retirement age for teachers from 60 to 65 years old. The easiest and fastest way to figure this out is by calling your teacher pension fund and ask. They are usually very helpful and can present different scenarios for you with very accurate calculations. For sure they will also have a minimum years of service.

Then the next question is, will your pension suffice your financial needs according to your current budget and its projection into the future when you are planning to retire?

If it doesn’t, you have to make up the difference with supplement income. Likewise, if you are not entitled to a pension through the school or district you work for you need to worry about funding your future life with the product of your investments.

How do you fund or supplement your retirement?

Well, everything goes here. If you are entrepreneurial and have been planning to start a business, that might be it.

However, the easiest way and, I would say, the no-brainer for every single teacher out there is through index fund investments. If you have the option to enroll in a 403B plan through your district you should definitely take advantage of it. Working diligently towards maximizing your contributions will be invaluable at the time of retirement.

How does 403B plan work?

In a nutshell, you decide how much money you would like to contribute out of each paycheck you receive. The funds will automatically be transferred to the investment company you have selected through your school district or organization, without paying any taxes. Usually, as Fidelity does, these companies have preset portfolios with a decent mix of stocks and bonds according to your retirement age, as a way to make it easy for investors. You also have the option of moving your savings from one fund to another, but if you don’t know much or are intimidated by the market, presets can be life savers; one less decision to make!

As 2019 the maximum contribution per year for 403B contributions is set at $19,000.

You also receive a tremendous tax advantage. By contributing to your gold egg nest you also lower your taxable income. That’s right, Uncle Sam wants you to save, and to encourage you they let you pay less tax; in other words, no tax on the amount you put away, and also your contribution will lower your adjusted gross income. It’s a win-win situation.

How does my 403B plan grow?

Unlike bank accounts, your 403B savings will have tremendous potential for growth. By investing in a 403B plan your savings will be tied to the stock market. In the last decades, the return has been around an average of 7%.

Also, the cool thing about investing in your 403B is that you will reap the benefits of compound interests. Which means that if in the first year you manage to contribute $10,000, the following year that amount at a 7% return will increase to $10,700. Now you have extra $700 that will be ready to work for you right away and earn another 7%. In addition to those yields, hopefully, you will be able to continue with new yearly contributions.

Using my favorite but simple interest compound calculator you can see that starting from $0 and maxing out your 403B contributions it will take 23 years to accumulate over a million dollars.

How long could my investment last?

According to a study by Trinity University if you use a rate of 4% as a safe withdrawal rate your savings will be likely to outlive you; which I am sure your family will also appreciate.

Putting it all together

  1. The most important thing in my humble opinion is to figure out how much money you will need to cover your living expenses at the time you are planning to retire.
  2. Second, you need to determine where you are financially. That is your starting point in your financial journey. Don’t feel bad for what you don’t have or haven’t done. Just the fact that you are thinking about this and planning your future should make you feel good.
  3. Set financial goals every year for yourself and your family. Be it paying off a credit card or student loan. Maybe going after your mortgage. All these things will increase your net worth and get you closer to financial independence.

A journey of a thousand miles starts with one step- Lao Tsu

What do you have so far? Do you have a pension? What is the age requirement to start collecting? Not enough? How much more do you need?Have you invested? If not, how much will you have to invest to secure your golden years?

Last but not least, if you do need to supplement your income the 4% rule is a good rule of thumb to get going. Remember, 4% is the safe withdrawal rate. With that said, for each 40K needed you will need one million dollars invested.

For the purpose of this conversation, let’s say you need about 30K to cover your basic expenses. Let’s also add some spending room to go on vacations and short trips with your significant other or even kids. Let’s generously round up to 45K total that you will need yearly.

If your pension grants you 30K with maybe the minimum requirement of years of service, all you have to make up for is 15K. Which 400K in investments should grant you comfortably.

Contributing 10K yearly, starting from zero should take you there in about 20 years. If you increase your contributions that time can potentially be trimmed back many years. 

I know, stashing away 10K or more might sound like a lot, especially if you are spending frivolously in brand new cars, brand-name clothes, happy hours, season tickets and all those things that leave you right at the beginning of the hedonic treadmill. But it’s not impossible!

The most important of all is to start. Do not wait!!! Time is the most valuable resource when investing.

With that said there are also many expenses in your life that can be challenged to increase the gap between what you earn and what you make. You want that gap to widen as far apart as possible to give you more room for increasing your investments.

Conclusion

If you are on your very first year of work you may not be thinking about retirement yet but there is nothing wrong with the thought of finding the shortest path to freedom. A time in your life when you will pick and choose what you want to do. Don’t feel guilty or selfish for leaving your profession. After all, there are many ways in which you can particpate as a valuable member of your community. It’s not the job that gives you value as a person. It’s you and who you are that gives value to any job.

Chasing financial independence will help you see the big picture. It will push you towards making a plan to reach goals; your own goals, not somebody else’s. There is more to life than exchanging time for money. But it depends on what we do with our money if we get to see what that something else is.

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Should teachers invest in 403B plans? Maybe…

Conman

Maybe you are investing in your 403B plan at the same time you are financing a retirement plan for a financial adviser.

If you are a teacher or have a teacher in your family you may know that in most cases these folks with nerves of steel have very few options to make their working time worth more; in other words, it’s not easy to get raises. The only raises teachers get are either based on years of service or additional credit hours of professional development.

Many people may read this and wish for a political debate; not my intention with this post.

However, if one thing is true is that teachers’ opportunities to grow their wealth are limited. And the reason is two folded. On one hand, you have to either spend years of service in the trenches or take more coursework that requires an upfront investment.

Another option that is available to teachers and other public institutions is a 403B plan. A tax-deferred account that allows you to save money. The way it works is you let your employer know how much money you want to be taken out of your paycheck and your money, free of taxes, gets put in a special account with an investing company. Once the account is set and the money is transferred you can invest it in the stock market. You will not be able to touch this money until you are 59.5 years of age, and with the magic of compound interest you will have a decent a mount of cash to supplement your pension or retirement fund.

With that last word I probably lost YOU because many people think of “the market” and Wall Street as some sort of hocus pocus. A too complicated form of money investing for the common Jane or Joe. I get it. That’s what I always thought myself. Moreover, if you lived through the 2008 crash you are probably thinking of potential massive cash losses.

But with all and the market crashes, nothing could be farther from the true. All it takes is a bit of casual reading and few podcasts to get your mind set on track.

Most importantly, don’t make the same mistake I made. Let me tell you my 403B story. Well, not a pleasant one but definitely one that I learned a lot from and should help you avoid some of the pitfalls of investing as an educator .

When I first started working in the public school system I became acquainted with the P.E. teacher of my building. He was about 4 years away from retirement. He was animate about getting me to open a 403B account through my district. I had no idea what it was or how it worked. Coming from a different country, that was something totally out of sight for me. In my mind I had no business trying to invest in the U.S. stock market.

Somehow though, I ended up throwing $40 into it each month with Fidelity. I figured it couldn’t hurt. My P.E. friend told me where to put the money. I did and forgot about it.

A few years later, I remembered about it and went to check how much money was there. Wow! To my surprise, there were $6k+. Not that it was a huge amount of money, but it was a decent amount of cash for someone who was living from paycheck to paycheck.

At the time, when I was working with Fidelity I had no clue about what to do, where to invest or whatever pertain to investing. I did have the desire though of continuing seeing my money grow.

Sure enough, someone I knew from work happened to also work for an investment company. More importantly, it was part of the School District’s 403 plan providers list. He explained to me that the great thing about working with him was that he was also a financial adviser, which could certainly help me finding the right allocation for my money and bring the best yields. What can be wrong with that right? He also let me know that there was a fee of up to 2.5%. Nothing wrong with that I figured. At the time, I was paying 3.6% with my home mortgage; in my mind, I was getting a deal!

You can’t know what you don’t know, right?

I worked for about 3 years with this individual and his company. My money was invested in a lot of Vanguard stuff; remember I had no clue. However, in the midst of all this fog, there was something in me saying that I had to figure out my money. I always had that feeling of being blindfolded and I wanted to take the reins. My ignorance and the convenience of having someone resolving my finances were costing me more than what it should have and I wasn’t even aware of it.

It wasn’t until one day sitting on the couch with my wife, after listening to Dave Ramsey in a YouTube video that I got thinking about my 403b again. Few searches got me to the doors of the Financial Independent community. I started with the MadFientist podcasts. I listened to “Why you should retire before you hit your number” with Chris Hutchins and I WAS HOOKED! My gears really started spinning.

I felt enlightened. What I thought was a great deal of 2.5% for placing my money in Vanguards funds, I realized I could get it for 0.017% by managing my own money. In other words,  what was costing me $850 a year I could get it for $6.8! Holy s***!!! I am not a math genius but I knew that was a huge difference. Even worse when you think about this same difference if you get to have half a million dollars. $12,500 Vs.$85. Nope. It’s not an error. That is the difference of having half a million dollars and paying 2.5% a year or 0.017% in fees.

Needless to say, I pulled my money from that company and went back to work with Fidelity. My then financial adviser argued that he could actually help me to stay invested in the market if it went down and I panicked, and that argument was supposed to justify his fees.  Really? This was laughable to me.

I have kept on reading and listening to awesome podcasts like the ones from Afford Anything with Paula Pant. I read a few books and I feel confident about what I am doing with my money. I am escaping high fees and the hocus-pocus BS of financial advising from someone that is just trying to skim my account and profit from me.

If you are a teacher, or if you are thinking about investing in your 403B, which I would highly recommend to any friend or co-worker, make sure you are not paying high fees. What is a high fee? For me anything above 1% I would have to challenge it and find reasons as of why I am choosing that fund over a total market index fund with fees of 0.017% or at least under 1%.

Currently, there are a lot of school districts handing out their 403B plan management to third-party administrators, also known as TPAs. Unfortunately, no all investment companies are willing to work with TPAs because they work as gatekeepers. TPAs charge a fee to investing companies like Fidelity and Vanguard to serve individuals in the 403B plan of any given institution. As a consequence, many times you have that most of the companies available to employees to invest are garbage. Why garbage? Because they charge an arm and a leg in commissions. They rip you off! It absolutely sucks! Particularly beware of annuity programs. On the other hand, companies that do offer low fees for their services like Vanguard and Fidelity become off limits to you because they are not willing to pay any fees to the the Gate keeper TPA company. Otherwise they couldn’t offer the low fees they offer to their investors.

What to do? Is there a solution?

First and foremost, be in charge. Take the reins of your money and get involved. Nobody will make better choices for you. Learning this stuff is not that hard, and you really don’t need to know the ins and outs of Wall Street to figure that you don’t need a financial adviser to manage your 403B. A financial adviser might have its time and place but I would highly suggest paying an hourly fee before having someone completely in charge of managing your wealth.

Companies like Fidelity and Vanguard, make it easy for people like me. They offer what they call target funds, which are portfolios already preset according to your estimated age of retirement. Do you think you can find a way to outperform the market by finding “that one stock” that will make you a lot of money? Well, don’t. That’s your first lesson as an investor: Don’t try to outperform the market or you will get burned. Shoot for market average, low-cost index funds. Market average is great and all you need.

Also, very important, challenge your current options with your district. It’s your money. You work for it, so you should have a say about where you want your money to be invested. It might take some pressure but don;t just comply with whatever. Talk it over with coworkers, educate yourself and push your administration to find the best possible options for you. Remember, it’s your money; you are not begging.

You may also be paying Union fees regularly with every paycheck, so this is something that all Unions should be talking about and fighting for. Teachers need good and sound 403B plan opportunities. You Union should be fighting this at state level. If you are not in a Union you should find a collective voice about this matter. It’s your money, it’s your life.

I would love to hear about your 401K/403B opportunities in the comments. Do you feel that your company or District selects providers in your best interests? Do they care about the fees some providers charge?