Working for X number of years to get a pension is losing its steam.  Going by the wayside are the days of being employed by one or two employers throughout one’s lifetime, and with it, a secure pension. For teachers, the trend is not much different. While they may stick around longer at their job compared to employees in other industries, the “secure” pension hardly resembles pensions from just a few years earlier.

Some states offer a pension plan for its teachers whereby participants contribute up to 26% of their yearly salary in order to receive a pension after 30+ years of teaching at the same location. In application, it looks like this: annual salary of $50,000 means a mandatory yearly contribution of $13,000. This ‘investment‘ is off-limits to the teacher, let’s call him Teacher A, until retirement decades down the road. Teacher A has no control over how or where the money is invested. In fact, he hardly thinks about that over the course of his task-filled days and nights. Hopefully, it’ll be there for him/her after 30 + years of service.

The remaining $37,000 is taxed and used to pay for housing, transportation, education costs, utilities, food, entertainment, gifts, etc. This type of pension is often deemed attractive to a teacher who desires to stay in a given location, often where they’re from or wants to establish roots in.

Other states are requiring teachers to choose between contributing to a state pension plan or a fee-laden 403b variable or fixed annuity of the school’s choice.  If it sounds expensive to you, that’s because it is. Teacher B might choose this option, willingly, despite its costs because it is portable, and Teacher B doesn’t want to commit to staying in one place, or at one job. Teacher B can’t use “his” money either, until he retires, for the most part, without facing you-better-think-twice penalties.

And then there are some states where teachers are required to contribute to their pension plan and have the option of contributing to a 403b plan too, with monies leftover after paying all other living expenses. Teacher C pays into a pension that pays out if all the various requirements are met, including attaining a certain age – 65 being the increasingly common age – plus a certain number of years spent teaching, usually 30 and at the same location. She also contributes to a 403b plan that is among 30+ such plans that her district approves of. This kind of teacher might be the type to seek out resources as to which 403b vendor to select.

The sentiment common among others like Teacher C is this: I’m getting a pension so this 403b money is “extra”.

That is an expensive conclusion to draw and one that leads them to “turn the other way” when they hear from people like me teaching about the excessive, not-necessary fees that feed the “nice” salesman’s retirement instead of their’s. Worse yet, they’re inevitably not investing in low-cost index funds, and if they are, they include fees wrapped around the investment.

To summarize, Teacher A needs to work at least 15 years in one location in order to just break even and muddles through a 40-year career in one place because his future depends on it.

Teacher B needs to pay inordinate fees as compared to a regulated 401k plan and gives up tens of thousands of dollars in compounded opportunity costs and fees. Teacher B muddles through a 40-year career because his investment choice does not yield what it would have if he invested in a lower-cost option. And because his future depends on it.

Teacher C might have the best deal because she has designed exit plan options. Teacher C is still subject to pension rules and 403b fees but by controlling her spending and her contributions, she can accumulate enough money in her 403b plan to support her own exit strategy while not being beholden to a pension plan’s rules. She knows she’ll have the opportunity to sever service in order to start collecting a pension and accessing her 403b plan, but she has accumulated enough between the two buckets to confidently embrace a career change or her earlier retirement. No muddling through for Teacher C.

In conclusion, take responsibility for your money because, in the end, it’s your money.

 

Dangling Carrot
Tagged on:

Leave a Reply

Your email address will not be published. Required fields are marked *