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.