When it comes to saving for retirement, the future is now. It may not seem that way, however, especially if you have just started teaching. Molding young minds and stretching a paycheck week to week are enough to think about. Retirement may be 30 years off, so why stress now?
That's what Mary Klein, 54, an eighth-grade teacher in Long Beach, California, thought, too. She had been teaching for 15 years before she enrolled in a retirement plan. Now, with her meager retirement savings, she may have to work until she is 70 to have enough money to live on.
"Financial planning just isn't something many teachers know about or talk much about-at least it wasn't for me," says Klein, who taught parochial school for 10 years before becoming a public school teacher.
In general, financial experts say teachers are in pretty good shape when it comes to their retirement savings. That's largely due to the state-mandated pension plans that exist in every state in the U.S. However, there are teachers like Klein who slip through the cracks for a variety of reasons, or who are unaware of how to get started.
It is possible to get a grip on your financial future, hone your financial know-how, and plan for your retirement without pulling your hair out. It simply requires a bit of thinking ahead and a little research. Mainly, it means not putting it off until later.
First and foremost, says Barbara J. Perry, vice president of public retirement plans for TIAA-CREF, you need to be realistic about the amount of money you need to retire. Once you've done that, you can make an educated decision about the types of
investment plans that might best meet your needs.
You don't need a lot to start, Perry says. The point is to just get started- especially considering that some teachers retire in their 50s, about a decade earlier than most Americans.
Know Your Pension Plan
New York-based financial planner Karen Altfest believes that teachers are in fairly good financial shape when it comes to retirement, since many public school teachers participate in a defined-benefit pension plan (DBP).
Pension plans, mandated by most states, guarantee teachers a pension regardless of changes in the stock market. While working, teachers contribute a certain percentage of their annual salary to be invested through the plan, and states contribute a percentage as well. The amount of this contribution varies from state to state. Upon retirement, teachers receive a fixed amount of money determined by a complex formula.
These government-sponsored pension plans require teachers to work 10 years before they are vested, or guaranteed a pension. A teacher who moves to another state before becoming vested risks losing a substantial portion of his or her pension.
Are You Vested?
Financial experts advise that you make sure you're vested in your pension. Vesting means that money set aside in a retirement plan is yours to keep if you have worked a certain number of years.
John Abraham, senior associate director of research for the American Federation of Teachers, suggests checking with your teachers' union to find out how long you need to work to be vested and what the penalties are for leaving early.
"You often have teachers who move from one state to another just a few months or one year short of being vested and they lose a significant portion of their pension," he notes.
Women are in this position more often than men. They need to be mindful of changes to their retirement savings due to taking a family leave of absence or moving to another state because of a spouse's job change.
"Women often work as many years as men, but because of their breaks in service, their benefits are affected," says Abraham. "They've worked too hard not to be able to recoup all of their pension when they retire."
How Much Should You Save?
If you retire in your mid- to late-50s, financial planners estimate that you'll live for at least another 30 years. If you've taught for 30 years in the same school district and have been contributing to a guaranteed pension plan, you may not need to save much more beyond your pension to maintain your current lifestyle, says Altfest. But she advises that if you're planning a retirement that includes extras such as trips to places you couldn't visit when you were working, you'll have to start saving between 10 and 30 percent of your salary—now.
"Your pension should cover your expenses, and the additional savings could be used for those things you'd like to do when you retire," she says.
Kathy Kristof, a syndicated personal finance columnist and author of Investing 101, agrees. "The longer you're saving the better, because you're making your money work for you over time."
According to T. Rowe Price Associates, a mutual fund investment company, if you invest $100 a month beginning at age 30, by the time you retire at age 65 you would have more than $177,000 in today's dollars. This assumes your money would earn about seven percent interest. If you don't begin saving until you're 45, to amass that same $177,000 in just 20 years would require socking away $335 a month. The older you are before starting your savings plan, the larger the amount you will have to put away each month to meet your goals.
Saving on Your Own
In addition to saving through your pension plan, you also have the option of saving on your own through a tax-sheltered annuity, or TSA. This is also called a 403(b). TSAs are offered through a wide range of companies, including TIAA-CREF, MetLife, Vanguard, ZurichAmerican, and ING.
A TSA allows teachers to contribute up to $11,000 a year. You decide how your money is invested, depending on the type of plan offered, and the money is withdrawn from your paycheck before taxes. How much you decide to contribute to the plan will depend on your age and your monthly budget.
Some local teachers' unions invite financial advisers from companies offering TSAs to teacher orientation to discuss savings options. That's how Corey Romanak started his 403(b) when he began teaching in New Jersey.
"This made saving for retirement easier since there was someone knowledgeable right there for me," says Romanak, 26, who met with a representative from Equitable. The representative returns each year to check up on clients' portfolios.
While getting expert advice is always good, Abraham cautions teachers to be wary of additional fees that might apply. There are all types of brokerage fees commonly attached to TSAs: a commission for the broker; an administrative fee to handle your paper work; a fee to the mutual fund's investment managers. All of these fees are deducted from each investment you make to your fund.
Steps to Financial Fitness
The truth is that you will retire someday. Knowing the rules of your state and district is critical to getting the most out of your retirement savings. Kristof offers three important tips to help you establish a secure financial foundation and be ready for when "30 years from now" is right around the corner:
- Set goals for your money. Prioritize the things that you want the most.
- Make a budget. For one month, write down everything you purchase from a cup of coffee and a muffin to your rent or mortgage. This allows you to examine your spending habits. Often you'll realize that you're spending a lot more money than you thought.
- Understand the power of compound interest. Let your money work on your behalf. But understand that compound interest can also work against you, especially if you carry lots of debt on your credit card and only pay the minimum monthly balance.
Knowing how to invest is simpler than you might think. With a bit of research and a plan, you'll be on your way to securing your financial future.