Retirement Planning for Educators
My wife is an economics professor at Victoria College. As her spouse, I get to experience the cadence of school starting back up as educators return to their classrooms to prepare for the fall semester. There is a lot to think about at this time, from forming syllabuses, creating presentations, getting to know students, as well as just getting back in the classroom after being away for three months. While there is a lot to do, it may also be a good time for teachers to evaluate retirement benefits with school back in session. In this article, I’ll delve into the essential aspects of retirement planning for educators from our personal experience.
Understanding the Unique Landscape
Unlike traditional corporate careers, educators may be part of a pension system like Teacher Retirement System of Texas (TRS). For many Texas teachers, TRS plays a pivotal role in their retirement landscape. My wife, for instance, must meet the “Rule of 80” to receive her retirement benefits. That means her years of service plus her age must equal 80 for her to get full retirement benefits. If she were to retire before that time, benefits could be delayed or reduced by up to 53%! It is important to be familiar with the workings of TRS and how it applies to you, as it often forms a cornerstone of your retirement income.
Leveraging the Power of Tax-Advantaged Accounts
One of the key tools in any teacher’s textbook is the 403(b) plan. The 403(b) plan, akin to the 401(k) in the corporate world, offers teachers an avenue to save for retirement while deferring taxes. This allows you to contribute a portion of your salary pre-tax, which not only lowers your taxable income, but also allows your investments to grow tax-free until withdrawal. As of 2023, the contribution limit stands at $22,500, plus a $7,500 catch-up contribution for those over 50. Some plans may also offer a Roth option that foregoes the tax deduction upfront but allows growth to be tax-free at withdrawal. However, beware one of the potential pitfalls around 403(b) plans – the high-commission annuity! How annuity salespersons formed a foothold in the 403(b) plan market is a mystery to me. Just be aware that there are other options available to you, such as low-cost index funds that can keep growth in your 403(b) and out of annuity commissions!
Double the Savings with a 457(b)
Educators also have an often-overlooked gem of an opportunity that is afforded only to government or non-profit employees. Some may look at this as a tool Congress enacted to give themselves double the tax-deferred savings compared to private sectors employees. I look at it as an opportunity for educators to save! Much like the 403(b), a 457(b) plan provides another tax-advantaged haven for retirement savings. Educators also have the unique ability to simultaneously contribute to both a 403(b) and 457(b) plan, effectively doubling the amount of potential tax-deferred retirement savings available to $45,000 in 2023, plus potential catch-up contributions for those over 50. This benefit shouldn’t be understated for those looking to catch up quickly on retirement savings.
Individual Retirement Accounts (IRAs)
In tandem with a 403(b), educators may be able to harness the benefits of Individual Retirement Accounts (IRAs). Just like their 403(b) and 457(b) plan counterparts, traditional IRAs offer tax deductions upfront, and Roth IRAs forego the deduction to offer tax-free withdrawals during retirement. Educators can contribute a combined amount up to $6,500 annually (plus an additional $1,000 for those above 50) to these accounts. Just be aware that depending on your income, your ability to make tax-deductible contributions may be limited.
Crafting a Comprehensive Strategy
When it comes to retirement, a well-rounded strategy is paramount. Just as you guide your students, seek guidance from a CERTIFIED FINANCIAL PLANNER™ professional. A prudent blend of pension benefits and contributions to tax-advantaged accounts can create a resilient financial foundation that can guide you on your path toward a successful retirement.
Published in the Victoria Advocate
David Faskas is a CFA and CFP® professional with KMH Wealth Management, LLC. He specializes in investments and portfolio management. He is the Chief Investment Officer, Chief Financial Planning Officer, and a managing member of the firm.