Saturday, April 04, 2015

Four Step Bucket Approach For Teacher Retirement.



























We educators have a very nice retirement package, assuming we can last long enough to be vested and accumulate enough years to reach at least twenty.  We get a pension that covers approximately 40% (20 years) to 60% (30 years) of our final three year average salary.  Moreover, you can retire with a full pension at age 62 (63 for Tier VI).  Since Social Security is available at age 62, the retired educator, on a full pension, can have a guaranteed monthly income of 75% of their working salary.  Considering you no longer pay Social Security and Medicare taxes (9%) and the cost of commuting and other work related expenses, the retiree will end up with a cost of living similar to their working years.

Lucky for us, the NYC educator has a 403b plan called the TDA that allows us to put away up to $24,000 a year, tax deferred, and the guaranteed fixed interest rate is 7% for UFT members and 8.25% for other educators.  While the educator can decide to put the TDA in equities or bonds, the educators nearing retirement or already retired might want to put 100% in the fixed fund since it gives us a 5% increase over the present day inflation rate of 2%.  Moreover, the TDA is not subject to State or Local taxes on the first $20,000 (thanks Norm) if your primary residence is in New York State.

Therefore, for educators approaching retirement, here is my four step bucket approach that I intend to use when I retire.

Bucket 1:   Pension and Social Security.  Stable Monthly Income.
Bucket 2:  TDA.  7% Interest. Stable Monthly Income.
Bucket 3: Interest & Dividends:  Quarterly/Annual Income
Bucket 4: Equity Appreciation. Variable/Annual Income

For educators its extremely important to have a stock/mutual fund since inflation will slowly eat away at the pension and TDA.  The equity appreciation component is necessary to combat the eroding effects of inflation.   True, in bad years, there will be no equity appreciation and therefore, no bucket four.  However, over the long-term, equities are the only instrument that can overcome the erosion of principal due to inflation.

While Social Security is inflation indexed, it will only account for 25% of a retired educator's income.  Moreover, the pension has an inadequate cost of living adjustment that is only half the inflation rate which ranges from 1% to 3% and only for the first $18,000 of a retiree's pension.  Further, you must wait five years after you retire before the COLA actually kicks in. Therefore, its important for the educator to have a significant portion of their retirement funds in equities.

This advise is not for everyone but its what I intend to follow for my retirement years.

29 comments:

Retired and happy, but miss the kids said...

You are very savvy when it comes to financial advice and you always give the best advice. I feel that you are the UFT Suze Orman for educators. But, I'm a conservative with respect to my TDA. Everything's in fixed, but I would love to invest in the "Equity Appreciation" section of the TDA and hopefully gain a Variable/Annual Income. However, I need a better understanding of the Equity Appreciation, examples of it would be helpful.

So far I have bucket 1-3 but I'm still holding back on #4. Hopefully, you'll give the advice I need to fulfill bucket #4.

Chaz said...

In your situation its tough. Maybe if your income allows you to put away some money than I would op[en up a low fee index fund at Vanguard.

Realistically a minimum of 20% should be in equities as a hedge against inflation.

Anonymous said...

Dear Chaz I just started following your blog andagree with the last comment. You are "the Suzie Orman of educators" If possible. would like get your advice about. I am finishing my 30th year and already 55. I have 400k + in my TDA I know that every year makes a different towards retirment, but given all the recent changes in Albany, how much of a difference do you think one more year will do? And if so, any suggestions to maximize the year finacially?

Chaz said...

It seems to me that the 400k+ will generate $28,000+ a year at retirement.

Since you are not retired, I would take per session funds or reduce your TDA contribution slightly and open a vanguard index fund such as a total stock market index fund

You will need inflation protection.

Anonymous said...

Suggestion appreciated thanks!

ed notes online said...

Chaz -- on TDA or any IRA - only first 20K is not subject to state or local taxes.

ed notes online said...

While the market has outperformed fixed over a long time I learned a lesson in the 2000 crash when my TDA lost around 25% of the value - i had only 30% in fixed. I moved everything into fixed at 8+% and even though the market eventually has come back despite the 2007-8 crash I am happy I let it just grow tax free without agita - now 7% -- but if Cuomo goes after that interest rate - which they can do if they call a constitutional convention in 2017 then that would be trouble. In the meantime the yearly interest accumulating to the TDA is like having a 2nd pension in reserve.

Anonymous said...

How do you figure 75% of salary for pension at 62? Just curious at 55 yrs old and 30 yrs service you can retire with 60%. I get that. How do you get 75% with social security? Just wondering how you arrived at that #. Thx.

Chaz said...

It assumes that Social Security will give one approximately 20% at 62. Add that to the 50-60% from the pension and you end up with 75%, give or take 5% either way.

Obviously, if you wait to 66 it will be higher.

Anonymous said...

This is great, as the previous poster mentioned, our own Suze Orman.
Retired for two years, how much would you suggest as a minimum for opening the Vanguard low fee index fund?
Ideal amount?
You should be doing financial planning lunchtime meetings for the UFT.
Thank you

Anonymous said...

I would add into your recommendations the NYC Deferred Compensation program. Even with a TDA/403b you can contribute another 18,000 pretax or Roth/after tax to their 457 program. They offer very low fees and if you leave service early you can take money immediately at any age! So if you could financially, your pretax contributions could be 36,000-under 50, or 48,000 50+, reducing your taxes greatly.

Anonymous said...

Tier VI maximizes at 55% of final average salary according to what I've seen and it's the final five years salary. You should clarify.

Chaz said...

Anon 7:11

It doesn't matter what vehicle you use as long as you have a minimum of 20% of your total portfolio in equities to help stave off inflation. Personally, I have no problem with your suggestion.

Anon 7:15
There is no Tier VI maximum. However, at 30 years of service it would be 55% and not 60% as it is for Tier IV educators.

Anonymous said...

I thought if one contributes to the max in the 403b, then it is not possible to to contribute to the 457 plan.
I thought the max amount per year was 17.500 or if over 50 22, 500 - and that means any and all tax deferred vehicles [401k, 403b, 457] but not the Roth. Thoughts?

Chaz said...

Anon 9:31

Not true. You can contribute the maximum in each or if your over 50, $48,000.

Bronx ATR said...

Hi Chaz,
Can you collect interest on your TDA, without penalty, if you retire at 55? Thx.

Chaz said...

Yes...In our TDA plan once you are 55 you can take withdrawals without penalty. However, you will still have to pay federal tax and if you exceed $20,000 annual withdrawal, State and Local taxes as well.

Anonymous said...

Gotcha. Thanks.

Anonymous said...

Hi CHAZ,
Love your blog. Side question please.
After going through possible worst case scenarios in my head, I have a question that maybe you can assist with. Next year in June of 2016 I actually complete my 20th year and hit that 20 year longevity Mark, which is nice. Let's say worst case scenario I receive an ineffective for that year and the year after which could mean possible tetmination. So if after my 21st year I receive my 2nd straight evaluation of ineffective, and subsequently am forced out, would I still receive my pension of 21 years at the age of 55 (which would be 10 years later cause I'd only be 45)?
In other words, if removed due to receiving Ineffectives, do you still receive your pension at 55 if you have minimum 20 years?

Chaz said...

Yes, but you would have an age reduction factor of 0.78 if you take it at 55.

Anonymous said...

Chazz 11:14:
Just to clarify, are you saying that as long as we withdraw let's say 18K or 19K any given year (from TDA), we DO NOT pay NYC or NYS taxes? But if we withdraw 21K or 22K any given year, we DO pay NYS and NYC taxes?

If above is correct, that is incredible! The savings we enjoy by not paying state and city taxes on our TDA is quite beneficial, besides our generous pension.

Anonymous said...

With the inferior Tier VI, it appears the only people eligible for the NYC DOE are middle aged(40-50 yrs old... USA life expec is approx 80, so 40-50 IS middle aged) career changers who already put in 15-20 years of work in their previous industry they started in. These people only need to work another 10-15 years to call it a day, and at least they will get a pension after 10 years of service, albeit not a large one.

But how on earth will a 22 year old college grad survive in the classroom until age 63? SIXTY THREE?!?! Over 40 years in the classroom!
Call me a pessimist, but I see that as impossible.

Chaz said...

Anon 6:52

That's correct. You only pay State and Local taxes of that amount above $20,000 annually. The first $20,000 is tax exempt.

Anon 7:31

You and me both!

Anonymous said...

Anon 7:31.

I have thought of that too. We don't see 22 year old new teachers here on the Island but ever the usual 25-27 year old types have got to stick with it close to 40 years.
Given the new and wacky rules coming from Albany I don't see folks making to full retirement age if they start at a youngish age.

Anonymous said...

They are currently and systematically putting the conditions in place so that tomorrow's teachers will not work long enough to get anything more than a temporary salary. They are degrading the work environment daily, creating conditions for more charter schools, over evaluating teachers, junk science, buying out politicians, creating online schools, and let's not forget infuriating the public by focusing on our pensions and time off. This is an attack on the middle class by the billionaires. They want the teaching profession among other things to be a low paid temporary stepping stone and then you are gone. It's time to start looking at the big picture and not so much the day to day blips. They have a ten year plan. And we are looking at the moment. This is the problem.

bill richardson said...

Hi Chaz,

Do you have any idea when we will see the 3% due for 5/1/15 on our check?

Bill Richardson

Anonymous said...

Hi Chaz, I'm a little freaked out about what the 2017 constitutional convention could mean for our pensions. I'll turn 55 at the end of 2019 and I'll have 20 years. I'm hoping to get out then. What kinds of changes can they make to our pensions? What's the worst case scenario? I'd like to be optimistic but given how badly subcontract, tenure, etc. has been shredded over the last decade I want to prepare for the worst! Th a 's.

Anonymous said...

Chaz, I don't know if I can take the madness anymore. 50 pct from tests? WTF?.
How much percent of my pensiondoes someone get after 10 year? 15 years?

Anonymous said...

Does anyone know when he retro raises will be put into the pension allotments. I keep getting the run around from both the union and the DOE. We were promised at a retirement meeting in June 2014 that ALL of them would go into the pension as soon as the new contract was ratified. This has not happened and everyone is denying that this was ever was said. No one in the union seems to be pushing for this.