By Pam Krueger
Most teachers working in our public system have a pension, and they expect that pension to be a key part of their income after they retire. However, there’s a serious pension crisis right now, and it’s calling attention to some major deficiencies in the system. It’s affecting not only teachers, but anyone who's relying on an employer-funded pension as their main source of income in retirement.
The reality is that a pension is only part of what your retirement income should look like, but that may be a wake-up call for many teachers. Even the most financially savvy educators can benefit by getting help figuring out the math to plan for life after school.
The pension crisis is here
Finance experts have been warning for years that the pension system is a failure, and in the case of public sector pensions, state and city governments have just been kicking the can down the road year after year without actually doing anything to remedy the matter. Data from the American Legislative Exchange Council indicates that unfunded liabilities in state and local government pension plans topped $6 trillion last year, and that number is expected to keep going up.
On one hand, that's a bit of good news because it means teachers will likely receive their pensions during retirement because many school systems aren't allowed to change any benefits. On the other hand, the money to pay for those unfunded liabilities has to come from somewhere, and in the case of state and local governments, it comes from general funds, especially through areas such as property taxes.
Illinois and some other states have laws in place that call for automatic unlimited property tax increases in the event that funding for certain public pensions fall short. This means that your cost of living could increase dramatically as your local government raises taxes to pay for your pension because it just didn't have the funds to pay it. And this is just one reason you can't afford to rely too much on your pension payments after you retire.
Do you really know how your 403(b) savings plan is doing?
In addition to pensions, a lot of teachers participate in a 403(b) savings plan, which is similar to the 401(k) plans that many private sector workers pay into. Contributions automatically come out of your paycheck on a pre-tax basis, with tax payments deferred until withdrawal in retirement. Financial advisors are split when it comes to whether or not teachers should buy into a 403(b) plan, and it's important to understand why. For example, analysis from retirement consultancy Aon found two years ago that 403(b) plans could be wasting almost $10 billion in high fees every year, so it's easy to see why there could be better options for retirement saving elsewhere.
Additionally, unlike 401(k) plans, school districts that are sponsoring a 403(b) plan usually are not considered legal fiduciaries, and thus, are not required to monitor those plans. The result is that many of these plans are limited and may only offer expensive and restrictive insurance products such as variable annuities. However, some plans do offer less expensive options like mutual funds, so if you do plan to participate, be sure to ask about the fees before choosing any of the options for your 403(b).
Here's why you can't afford not to have seriously good advice
Teachers sometimes mistakenly believe that because they have a pension, they can invest their 403(b) savings much more aggressively because their pension will serve as a backstop, but most fiduciary advisors will tell you that this couldn't be further from the truth.
Teachers in some states aren't even eligible for Social Security, so that's also important to factor in if you live in one of those states because that's yet another pot of money you won't have to draw on in retirement. A qualified financial advisor can help you plan around this.
Here are the other major reasons you can't afford not to have solid, unbiased advice:
- 403(b) plans are generally sold by salespeople, who often find teachers who feel vulnerable to be easy prey when it comes to pricey plans that pay them high commission. Instead of buying a 403(b) from a salesperson, it's a much better idea to find a real fiduciary financial advisor who gets paid by fees instead of commission.
- You may need or want a Roth IRA, either instead of or in addition to your 403(b) plan. It all depends on what's best for your financial situation, and only a real fiduciary has a vested interest in working for your best interest rather than his own commissions.
- Fiduciary advisors do much more than just recommend the types of retirement plans that are best for your portfolio. They will also help you plan for the future because even the most adequate pension needs to be planned for carefully so that you don't spend too much each year of your retirement.
- Additionally, a good financial advisor will make sure that you have money invested in multiple cases so that even if one investment goes down, you're still covered because you have other investments that continue to pay off.
My sister taught in public schools for more than 25 years. I know how dedicated she's been to empowering her students, and I've come to understand the unique challenges she's dealt with to prepare for her life beyond the classroom. Since so many educators strive to retire before age 65, it's especially helpful to collaborate with an unbiased expert can analyze cash flow and suggest smart investment strategies that will work well for the next 30 years.