The TDA Withdrawal is Exempt From State And City Taxes

This post is a reminder that once the educator reaches 55 years of age and retires, all TDA withdrawals are exempt from New York State and City taxes. Just like our regular teacher pension, the retiree only pays Federal taxes.   However, if the retiree moves out of State, the retiree would need to pay State and Local taxes for any TDA withdrawals..

For educators under the age of 72 you can leave all your money in the TDA and can keep on appreciating tax deferred, unless you choose to annuitize the TDA.  However, if you have reached the age of 72, you must withdrawal at least the percentage that the Required Minimum Distribution mandates.  Finally, some people believe there is a $20,000 limit on withdrawals that are exempt from State and City taxes.  That only applies to non-public sector pensions and not to our pension or the TDA withdrawals.

Teachers may be underpaid and not appreciated bit we have a good pension and a great TDA when they are exempt from State and City taxes..

Good News! TRS Will Soon Add A ROTH Option

Over the years I have praised the Teachers' Retirement System (TRS) for it's low administrative fees and their unbeatable Fixed Income Fund that gives an annual dividend of 7% for UFT members and 8.25% for other educators, with no fees!  However, the one weakness TRS has is their lack of a ROTH option.

Unlike TRS funds which are tax deferred where appreciation is not federally taxed until the educator withdraws funds, usually after retirement. The Roth option allows the educator to pay taxes upfront and any appreciation accumulates tax free and is not subject to the Required Minimum Distribution (RMD) at age 72.

For educators near retirement the ROTH option is not as attractive since the educator would have to pay taxes upfront for any funds that are converted to a ROTH option.  On the other hand newer and younger educators who have a long time to retirement, the ROTH option is very attractive since they make less money and the existing tax rates are historically low and can only go higher in the future.

Use this calculator to decide which is best for you once TRS offers a ROTH option.  You can also see a comparison table between our tax deferred TDA and a ROTH option.

Required Minimum Distribution Raised To 72 Years Of Age

Congress passed and the President signed the budget to fund the government.  Included in the budget was the Secure Act.  The Secure Act was a bipartisan agreement that changed and enhanced the pension system.  This included allowing annuities to be part of the IRA or 401k plans and no age restrictions on IRAs.  there are many other significant changes and they can be found Here

For teachers who are near or are retired, the most important change is the SECURE Act pushes the age that triggers RMDs from 70½ to 72.  That gives the retiree another year and a half of appreciation before giving the Federal government their Required Minimum Distribution (RMD).. 

Here are my two posts where I discuss the Required Minimum Distribution and the TDA.  Here and Here. ontill TRS and the UFT allow for a ROTH option,when you pay the Federal Government their money upfront, the RMD is the penalty we pay for having a tax deferred TDA.

All Social Security Retirees Will Get a 1.6% Cost Of Living Increase In 2020

All Social Security retirees will receive a 1.6% cost of living (COLA) increase for 2020.  For the average retiree that is an increase of $24 monthly.  The COLA will be in the January Social Security checks.

Democrats and advocates for seniors feel the COLA does not take into account health care costs and should be higher but its highly unlikely that Congress will pass any adjustments beyond the COLA as they did last year.

Newsday has an article about the Social Security increase Here..

Why The TDA's Fixed Income Fund Is So Popular

One of the best perks New York City teacher,s have is the Tax Deferred Annuity (TDA) ,  Due to a quirk in New York State tax law, the TDA is treated as a public pension and is not subject to State and Local taxes which can be as high as 13% for most teachers who live in New York City and 7% for teachers living outside New York City.  This perk has become even more important since we now have a SALT limitation of $10,000 that can be deducted on our income tax for people who don't take the standard deduction.

The most popular fund in the TDA is the Fixed Income Fund which pays market based rates by guaranteeing a 7% dividend regardless of how the stock market does.  The only negative is that the 7% is not monthly compounded but is adjusted once a year in December to account for any changes in the TDA principal in the Fixed Income Fund (annual adjustment)  You can get a higher return if you annuitize the TDA but that means losing control of your TDA funds and is not recommended here.

Most participants in the TDA select the Fixed Income Fund to place their contributions in.  The latest data showed that70% of all TDA contributions were in the Fixed Income Fund and who can blame then?

an analysis by Financial Planner, Neil Frank of the Chief showed that if a teacher put in $100 monthly in the Fixed Income Fund for the last 30 years, that teacher would have amassed $135,089 in their TDA.  However, if the teacher put alll his or her money in the TDA's equity funds the amount would be $140,947.  The difference by taking a risk with the ups and downs of the equity market is only 4.3%.  For non UFT members like school administrators who receive 8.25% and that resulting in them receiving $147,696 or 4.8% above the educator who put all their money in the TDA's equity funds.  You can thank UFT ex President Randi Wiengarten for the TDA dividend being reduced from 8.25% to 7% for UFT members.

The age-old investment principle that those who take on greater risk are rewarded with greater returns has no application to this TDA Plan; at least for the past 30 years.

All teachers should strongly consider putting the bulk of their TDA contributions into the Fixed Income Fund and to account for inflation, buying equity funds outside the TDA..

Note:  Here is how TRS calculates the interest for the Fixed Income Fund.  Notice it's based on an annual 7% dividend.

The Age To Take The Required Minimum Distribution Will Be Raised To 72.

In what seems to be a rare case of bipartisanship the House passed an enhancement to retirement plans and the Republican dominated Senate is expected to pass it with little or no changes.  As part of the enhancement, the Required Minimum Distribution age will be increased from 70.5 to 72.

That means for our Tax Deferred TDA (403b), we will allow it to accumulate for another two years without paying federal tax.  Unless the IRS changes the longevity percentages, at age 72 the RMD will require that the TDA total to be federally taxed at 3.91%

The RMD table by age can be found here.

Should You Annuitize Your TDA?

One of the options teachers have is to annuitize the TDA when you retire.  There are two ways to annuitize.  The first, is to give it to an insurance company, which under current yields, give you approximately 6% for a 65 year old but be prepared to pay State and City taxes on the annuity.  The second,  is to leave the money with TRS which can give you an annuity, based on your retirement age and with no State and City taxes to pay.  The following annuity interest rate by TRS is as follows:


Age.......................Interest Rate

56.............................8.43%
57.............................8.51% 
58,,,,,,,,,,,,,,,,,,,,,,,,,,,,,8.61%
59.............................8.82%
60.............................8.93%
61.............................9.14%
62.............................9.43%
63.............................9.74%
64...........................10.07%
65..........................10.42%
66...........................10.79%
67...........................11.20%
68...........................11.63%
69...........................12.09%
70...........................12.59%
71...........................13.13%

The difference between a private annuity of 6% and the TRS annuity of 10.42% for a 65 year old educator shows that the difference is due to the profit the private annuity charges while TRS does not charge for the annuity.

Most retirees do not annuitize but put the bulk of their TDA in the Fixed Income option that gives a guaranteed 7% annually.  By not annuirizing the TDA, the educator retains control of their money while annuitizing the TDA means the educator loses control of their savings and once the educator dies, their is no money available to their beneficiaries except for that money that remained from the educator's contributions, minus the money already paid out in the annuity.

Should you annuitize your TDA contributions when you retire?   That decision is up to the educator.  If you choose the annuity option then keep it in the TDA where you will get more for your money as long as you live a long life since when you die, so does the annuity.

What You Should Know About Claiming Social Security Benefits

Claiming your Social Security payments is a retirement milestone. But not everyone receives their Social Security check on the same date. Benefits are paid out on Wednesdays, and those with a date of birth early in the month receive Social Security payments before those who were born later in the month. Understanding the timing of your Social Security direct deposits can help you manage your retirement finances. Here is a breakdown of when to expect Social Security checks, how benefits are paid and guidelines about when to apply.

How do you apply for Social Security?

You can apply for Social Security online at ssa.gov, by calling 1-800-772-1213 or in person at your local Social Security office. You must be at least 61 years and 9 months old to submit an application for retirement or spousal benefits, and payments can start as early as age 62. Your age when you enroll plays a big role in determining your payment amount, so take care to see how much you will receive at various claiming ages.

How much Social Security will I get?

 You can get a personalized estimate of your future Social Security benefit by creating a My Social Security account at ssa.gov/myaccount and viewing your Social Security statement. Your statement lists how much you are likely to receive in retirement if you continue working at your current salary until your full retirement age, age 62 and age 70. "If you look at your Social Security statement today, your estimated benefit is based on your previous year's income," says Ross Menke, a certified financial planner and founder of Lyndale Financial in Nashville, Tennessee. "If you do stop working earlier, that will have an impact on what you would be eligible to receive as a Social Security benefit." The statement also lists how much you will qualify for if you become disabled and what family members might receive if you pass away. Social Security statements are mailed to workers age 60 and older who don't have a My Social Security account.

[Read: 6 Social Security Calculators That Can Help You Decide When to Claim.] 

What is the Social Security tax limit?

 Most workers pay 6.2 percent of their earnings into the Social Security system and employers match this amount. Self-employed workers contribute 12.4 percent of their paychecks. However, earnings that exceed $128,400 in 2018 are not taxed by Social Security or used to calculate retirement payments. Workers who earn more than $128,400 will see a bump in their paycheck when Social Security taxes stop being withheld.

Your Social Security payments might also be taxed in retirement. If the sum of your adjusted gross income, nontaxable interest and half of your Social Security benefit exceeds $25,000 ($32,000 for couples), federal income tax could be due on part of your Social Security benefit. If these income sources exceed $34,000 ($44,000 for couples), up to 85 percent of your Social Security payments may be taxable. There are also several states that tax Social Security benefits.

What is the Social Security wage limit?

 You can work and collect Social Security benefits at the same time. However, if you are younger than your full retirement age, part or all of your Social Security payments could be temporarily withheld. Social Security beneficiaries who are younger than their full retirement age can earn up to $17,040 in 2018 before they will lose one benefit dollar for each $2 earned above the limit. The earnings limit jumps to $45,360 for those who turn their full retirement age in 2018, and the penalty decreases to one dollar withheld for every $3 earned above the limit. However, once you turn your full retirement age your benefit will be recalculated to give you credit for your withheld benefit and continued earnings. You can earn any amount without being subject to Social Security withholding after you turn your full retirement age.

What is the average Social Security benefit?

 Social Security payments to retired workers averaged $1,410 per month in March 2018. The average spousal payment is about half that amount, or $735. Widows and widowers receive survivor's payments worth an average of $1,342 monthly.

What is the maximum Social Security benefit?

The maximum possible Social Security benefit changes depending on the age you retire. A worker who retires at full retirement age in 2018 could be eligible for up to $2,788 per month. The maximum benefit at age 62 drops to $2,158, while someone who delays retirement until age 70 in 2018 could get as much as $3,698 monthly. In order to qualify for these large payments you need to maintain a high income throughout a career of 35 years or more. "Those who receive the maximum benefit possible are those who've earned at or above the highest taxable wage base all of the years that are used in the benefit calculation," says William Meyer, founder and managing principal of Social Security Solutions, a company that analyzes Social Security claiming strategies. "That person would have exceeded the maximum taxable earnings in each of the highest 35 years."

How do I get a new Social Security card?

Many U.S. citizens with a driver's license or state-issued identification card can use their My Social Security account to apply for a replacement Social Security card online. You can also fill out a paper application and mail it in or take it to your local Social Security office.

How do I qualify for Social Security disability? 

 If you have a medical condition that significantly limits your ability to work and perform basic activities such as walking or remembering, you might qualify for Social Security disability payments. Be prepared to provide medical records documenting your condition and why it prevents you from working. Social Security disability payments won't start until six months after your disability began. There's also a several month wait time to process disability applications.

[Read: The Social Security Retirement Age Increases in 2018.]

When will I receive my Social Security check?

Social Security beneficiaries are required to sign up for electronic payments. Social Security benefits can be directly deposited into a bank or credit union account or loaded onto a prepaid debit card. The payment dates vary based on your date of birth. If your birthday falls on or before the tenth of the month, you will receive your payment on the second Wednesday of each month. Those born between the 11th and 20th get their payments on the third Wednesday, and people born late in the month get their direct deposits on the fourth Wednesday.

When Social Security Is Paid

Social Security checks are normally paid on the second, third and fourth Wednesdays of each month. “The exact arrival date for Social Security checks depends on the recipient’s day of birth,” says William Lipovsky, CEO of First Quarter Finance in Lincoln, Nebraska.

If you were born:

• On the 1st through the 10th: Expect a check to be paid on the second Wednesday of the month.
• On the 11th through the 20th: Expect a check to be paid on the third Wednesday of the month.
• On the 21st through the 31st: Expect a check to be paid on the fourth Wednesday of the month.

There is a slight change for holidays. “If the payment date falls on a public holiday, the payment will instead be made on the Tuesday just before the originally scheduled date,” Lipovsky says. You can view the schedule for payments during 2019 at ssa.gov.

How Social Security Checks Are Paid

Beginning on March 1, 2013, Social Security checks are no longer mailed. You can receive your payment through two ways:

Direct deposit. You can choose to have the Social Security check deposited directly into your bank or credit union account.

Direct Express debit card. You can have the Social Security check loaded onto a debit card through the Direct Express card program. You don’t need a bank account for this setup. The card works for making purchases, paying bills or getting cash. However, there may be fees associated with some transactions.

What Time Frame the Amount Covers

Social Security benefits are sent out the month after they are due. “Social Security checks are paid in arrears, so any check received is for the month prior,” says Adam Beaty, a financial planner at Bullogic Wealth Management in Pearland, Texas. For example, your July payment is distributed in August.

Once you start receiving benefits, you might notice that at the beginning of the year your payment amount is different. The Social Security Administration adjusts payments each year to keep pace with inflation. As prices in the U.S. fluctuate, the benefits you receive could change to help cover the rising costs. The annual cost-of-living adjustment is calculated each October and paid out beginning in January.

When Social Security Payments Will Start

Some of the decision regarding when to start Social Security payments is up to you, but your payments could change depending on the age you sign up. “Currently, the earliest you can start taking Social Security retirement benefits is at age 62,” says Logan Allec, a certified public accountant and founder of Money Done Right in Santa Clarita, California. However, if you choose to start payments at age 62, you will receive a reduced benefit.

To receive your full benefit, you’ll need to wait until you reach full retirement age. Your full retirement age depends on when you were born. If you were born between 1943 and 1954, for instance, your full retirement age is 66. If you were born in 1960 or later, your full retirement age is 67.

Whether you should take Social Security benefits early will depend on your situation. If you need to stop working earlier than your full retirement age due to health reasons, you might decide to start taking Social Security to help cover your bills. However, if you have a large amount set aside for retirement, you could choose to draw from those funds and wait until your full retirement age or up until age 70 to start Social Security payments. “This is why it’s essential that you budget for different scenarios,” Allec says. You can sit down with a financial advisor to look at your current plan and create backup strategies.

How to Start Your Benefit

To begin receiving Social Security, you’ll need to fill out an application. You can apply for Social Security online at ssa.gov or make an appointment at your local Social Security office. To avoid any surprises, it’s best to start this process early. “Don’t do it at the last minute,” says Tim Sullivan, a national Social Security advisor and owner of Strategic Wealth Advisors Group in Shelby Township, Michigan. You might begin the process three or four months before you want to start receiving checks. This will give you enough time to make sure you have all the right forms and aren’t missing out on any potential benefits.

Don’t Overlook Taxes

Depending on your financial situation, you may have to pay taxes on your Social Security benefit in retirement. “Many soon-to-be retirees assume that Social Security benefits are not taxable since, after all, they already paid taxes on the income they contributed to Social Security over their working years,” Allec says. “Unfortunately, that is not how the system works, and the method for determining the taxability of your Social Security benefits is not so simple.” Retirees who owe taxes on their Social Security benefit need to make quarterly estimated tax payments to the IRS or have federal taxes withheld from their payments.

If you plan to continue working in retirement or aren’t sure how taxes will work, it might be helpful to sit down with a Social Security advisor before retiring. You can go over your expected taxable income during the coming years, and then determine the right time to start taking Social Security payments in retirement. Research the Social Security process now to avoid any surprises in retirement.

10 Social Security Rules Everbody Should Know About 

 

Documents needed to apply for Social Security.

Maximum TDA Limit Raised To $19,000 For 2019.

Starting  January 2019 the maximum annual limit will increase by $500, from $18,500 to $19,000.   If the educator is 50 years of age or older, the TDA allows a "catch up" contribution of $6,000, which is unchanged from 2018.  Therefore, the total maximum limit for educators 50 years of age or older is $25,000.

The more you contribute to the TDA, the less you pay in taxes that year since your TDA contribution is tax deferred..  Moreover, the TDA is exempt from State and City taxes in New York State.

If You Retire Before 2020 How Does TRS Take Out For The TDA In The Lump Sum Payments?

A commenter brought up  something that I could not answer.   The commenter asked a simple question.  "How does TRS account for TDA contributions if the UFT member retires before 2020?"  My answer is I don't know.

Theoretically, once an educator retires, he or she cannot contribute to the TDA.  However, in this situation,the lump sum payments are money owed to those who worked in the 2008-2009 school years, when the TDA contributions were part of an educator's payroll deduction.  Under the rules, you can contribute to a tax deferred plan as much money as you earned that calendar year, up to the maximum limit decided by the federal government. Isn't the lump sum payments earned income?

My guess is that TRS will punt on the question (football season has started) and refuse to allow newly retired educators to contribute to the TDA by using their lump sum funds.  I did try to get an answer from TRS but did not get a clear response to this question.  They informed me that retirees cannot contribute since they need earned income to contribute to the TDA.  When I brought up the fact that the lump sum payments were earned income the TRS said that they would look into it.  I'm not holding my breath waiting for an answer.  I hope I am wrong on this but I believe that somebody would have to bring a lawsuit to find out if the TRS is required to allow retirees to use their lump sum payments to contribute to their TDA.

Pity The Tier VI Teacher.

A new school year will be starting in September and approximately 5,000 "newbie" teachers will be thrown in the classroom.  The question is how long will they last?  With Charlotte Dainelson, inept administration, and lax student discipline rules, many of these "newbies" will end up quitting.  At best, maybe 50% of the "newbies" will be still in the classroom.  Moreover, 80% will no longer be teaching in the school they started in.  Finally, only 33% will make it to vesting for a pension and less to receive retiree health benefits.

Below summarizes the comparison between the two tiers.

Tier IV.
Vesting for a pension, between 5 to 10 years.
Employee contribution 3% first 10 years , then 0% beyond ten years.
Highest three consecutive years for determining the pension.
Five to ten years to receive retiree health benefits.
Multiplier, 1.67% per year for less than 20 years,  2% between 20 to 30 years.
1.5% per year for years beyond 30 years of service.
Age Reduction Factor, 0.73 to 0.94 from 55 to 61.

Tier VI.
Vesting for a pension, ten years.
Employee contribution 4.5% to 6%, depending on salary. 
Highest five consecutive years for determining pension.
Fifteen years to receive retiree health benefits.
Multiplier, 1.67% per year for the first 20 years. 2% for 20 years or more.
Age reduction factor, 0.48 to 0.94% from 55 to 62.  

To show how unlikely these "newbie" teachers will make it to full retirement, please play my Tier VI retirement game Here

Is Our Pension Inflation Adjusted? Yes, But There Are Restrictions.

Many teachers are retiring this summer and they may want to know how the Cost of Living (COLA) works once you retire.

Back in 2000, the State agreed to give a COLA to State and Local public employees.  However, the COLA has restrictions that come with it.  They are as follows.

• The COLA is one half the Consumer Price Index (CPI).
• Only the first $18,000 is subject to the COLA.
• The COLA adjustment starts five years after retirement if you retire at 62 or older.
• The COLA adjustment starts ten years after retirement if you are 55 or older.
• Maximum COLA is capped at 3% for CPI over 6%.
• Minimum COLA is 1%.
• Surviving spouse gets only one quarter of the COLA adjustment.
• Disability Retire starts getting a COLA five years after starting disability.
• Any outstanding loan at retirement will be considered income and taxed.  Pay off the loan before retiring.

Interestingly, the pension cap of $18,000 that is subject to the COLA adjustment has not changed since 2000, despite the fact that the commutative CPI has increased by 46.1%.  If the pension cap was raised, using the CPI, the pension cap should be $26,300!  You can use this inflation calculator for different time periods Here.

The average NYC teacher pension is $45,000 from 2016 data, that means that only 40% of the pension is subject to the inflation adjustment. You can use the pension table to determine how much money you will get in your pension assuming the maximum.

The Tier VI Teacher Retirement Game Is A Sucker's Game.

The Tier VI retirement game is based upon reasonably conservative assumptions on how difficult it is for a Tier VI teacher to reach their goal of full retirement benefits.

The Tier VI teacher retirement game requires one dice (die) and depends on the law of probability.  Based on the assumptions used for the game, only 9.2% of all Tier VI teachers will be able to reach the goal of full retirement benefits.  That's one out of every 11, not good odds.  The assumptions used in the Tier VI retirement game are as follows:

The first  step is to reach the 10 year vesting period necessary to receive a pension.  Based on the Manhattan Institute report on Fairer Pensions, only 33% of all New York City teachers (Mostly Tier IV) will last long enough in the New York City Public Schools to be vested for a pension.  This is a conservative assumption since the study was done before the New York State Teacher Evaluation System and the use of the Charlotte Dainelson rubric that is used as a weapon against teachers. Other cities report percentages in the teens and that will probably be the value for Tier VI teachers in the future.

Next, for those 33% of Tier VI teachers that are vested, the next goal is obtaining retiree health benefits,  To achieve retiree health benefits the Tier VI teacher must have 15 years in the system,  Since this is only 5 years over the pension vesting period, I assumed that only 17% of Tier VI teachers will not achieve that goal.

To get to the maximum percentage (1.75%) to calculate the 5 year Final Average Salary (FAS), the Tier VI teacher must have a full 20 years in the pension plan.  Otherwise the FAS is calculated using a 1.67% factor rather than the 1.75% factor once they completed their 20 year of service.  According to various studies, only 67% of the teachers (Tiers 1 thru 4) actually reach the 20 year threshold if they had completed 15 years This is true in New York City where veteran teachers are targeted.  Therefore, in the Tier VI retirement game I conservatively used 67% of the Tier VI teachers who reached 15 year of service will last another 5 years to the 20 year goal of maximum percentage when calculating their five year FAS.

Finally, to reach full retirement benefits and a maximum pension, the Tier VI teacher must reach 63 years of age.  Otherwise they are subject to an age reduction factor of as much as 48%!  Only 50% of Tier VI teachers who meet the  above criteria will reach full retirement age.

Is it any wonder that a Tier VI teacher has the odds stacked against them as they strive for full retirement benefits?  If you play the game you only have a 9.2% chance of achieving your goal and that's probably close to what will happen as the Tier VI teacher moves closer to retirement in in the year 2032 and beyond.

The bottom, line is for Tier VI teachers, reaching full retirement is a sucker's game.

How Much Income Do You Need In Retirement?

Most people believe that they must save enough money to replace 100% of their pre-retirement salary to achieve a secure retireent income.  The truth is that the recent retiree only needs a percentage and is based upon their last year's salary.  This is called the retirement replacement ratio.

Empirically, your replacement ratio is inversely related to your pre-retirement income. The higher your income before retirement, the lower your replacement ratio. Social Security serves as the counterbalance, covering a larger proportion of post-retirement income for those who made less pre-retirement. This makes sense, as people with higher paying jobs had proportionally more of their income going to retirement, job-related expenses and taxes before retirement, rather than necessities.

Marlena Lee at Dimensional Fund Advisors found median replacement ratios by income level:  The table below shows the replacement ration, based upon the pre retirement income.

Salary............Replacement Ratio...........Retirement Income

<$25,870.....................82%...........................$21,213

<$49,941.....................72%...........................$35,958

<$86,882.....................62%...........................$53,667

*119,472.....................58%...........................$69,293

*The $119,472 was used since it represents the maximum teacher salary as of June 2018.

Obviously, if a teacher reaches his or her full retirement age, they will have a pension, social security, and TDA savings that , combined, will exceed the retirement replacement income. The reason the retirement replacement income is less than the final salary is that the retiree no longer pays Social Security and Medicare, communing costs, and , everyday job expenses like clothing, food, and materials.

Sounds like teachers should have little problem having a secure retirement income,  However, remember,NYC teachers  who reach full retirement age is the vast minority, even just reaching vesting time to qualify for a pension is difficult with only 33% of Tier IV NYC teachers reaching that mark. I suspect for Tier VI teachers it will be significantly lower.
.

Two Simple Charts That Compare Tier IV and Tier VI Pension Plans.

 Most New York City teachers are either part of two pension systems.  For teachers who were hired before April 1, 2012, they are under the Tier IV pension system.  The remainder, who were hired after April 1, 2012 are under the vastly inferior Tier VI pension system.  Because of the UFT contract, few, if any New York City teachers are under the Tier V pension plan.  However, teachers hired after December 10, 2009, while under Tier IV pension plan, have some aspects of Tier V.  See my post that explains this in more detail.

Both charts take into account an age reduction factor and its obvious under the Tier VI pension plan the age reduction factors makes for a greater reduction of a pension under Tier VI than Tier IV.  Moreover the Final Average Salary (FAS) is five years for Tier VI members rather than the three year FAS for Tier IV.  The use of a  five year FAS has the effect of lowering the average FAS for the Tier VI member.  Finally, full retirement age is 62 years for Tier IV members and in quite a few cases, as low as 55 years of age.  By contrast, tier VI members must reach to 63 years of age and there is no program that allow Tier VI members to retire early, unless they take a steep age reduction factor that will greatly reduce their pension.

For example if we take a Tier IV teacher that retired after 25 years of service.  He would receive 50% of his FAS.  On the other hand, the Tier VI teacher would only receive 43.8% of his five year and lower average FAS.   Even at 20 years, the difference is significant,  The Tier IV teacher would receive 40% of his three year average FAS, while the Tier VI teacher would only receive 35% of his average five year FAS, While reaching his or her full retirement age one year later.  Of course, I suspect that few Tier VI teachers in New York City will be vested, least not to make it to their full retirement age.  Maybe one out of seven or eight (12% to 14%) would be my best guess.

How Much Should A NYC Teacher Be Saving Yearly For Retirement?

Being a NYC teacher can result in a very comfortable retirement, if the teacher invests wisely and makes it to full retirement age.   We have a pension, a 403(b) plan, and Social Security.  All three are exempt from New York State and Local taxes.  Assuming a teacher works 25 years and retires at 62, they will receive 50% of their Final Average Salary (FAS), less if they select a spouse to get part of the pension (about 40%).  NYC teachers will also get Social Security, starting as early as 62 (reduced benefit).  The combination of the two will probably account for 50% or more of the teacher's retirement income.  The remaining 50% will come from the teacher's various savings accounts.  For NYC teachers that may be primarily their TDA,

A July 2011 study by Financial Researcher Wade D. Plau showed that if a person saved an average of 16.62% of their salary annually, that person will have saved the equivalent of 50% of his or her necessary retirement income. Add that to our pension and Social Security and the NYC teacher can expect to achieve a 100% replacement income in retirement  Therefore, if the NYC teacher can last to their full retirement age of 62 or 63, they can expect a financially conformable retirement.

Of course there are a couple of cavorts.   First, how many NYC teachers will reach their full retirement age?  According to a study which I used in a previous post, only 33% of Tier 1-IV teachers in NYC reached that goal.  With the punitive teacher evaluation system and Charlotte Danielson being used to determine teacher effectiveness and the vastly inferior Tier VI pension plan, the percentage of teachers reaching their full retirement age is probably closer to the teens for newer teachers.

Another issue is the improving economy.  Fewer college graduates are going into the low paying education field and even less want to be a classroom teacher. Moreover, many existing teachers leave the high stress classroom environment for greener pastures, be it to the suburbs or outside of the education field.  Finally, the poor quality of NYC school administrators and the lax student discipline rules makes teaching in the NYC classroom a hostile environment.  Consequently, few newer teachers will stick it out for the long term despite the rewards of a comfortable retirement 20 to 30 years down the road.

The bottom line, if you can make it to full retirement age, the NYC teacher will have a financially comfortable retirement but realistically we are talking about the minority of teachers that can stick it out and are  smart enough to save at least 16.62% of their paycheck.

Pension Max Is A Bad Bet.

Over the years  I get questioned about what is the best option to take their pension. I try to give them advice and also encourage them to contact the UFT pension consultants so that they can evaluate all the options.   However, many educators near retirement are contacted by some insurance companies and financial advisers who work for and with insurance companies who have proposed an alternative to taking a joint pension annuity.  This is known as "pension max".   To my knowledge neither the UFT or independent financial advisers push this alternative and for good reason.

The premise of pension max is that the retired educator can take the maximum pension payout and take the difference between the maximum payout and the 100% joint annuity payout and buy a life insurance policy for the spouse.  Since the 100% joint annuity payout averages about 80% , depending on the ages of the spouses,  of the maximum payout, the idea of pension max is attractive at first blush.  However, as you go deeper into the pension max scheme you can see it only benefits the insurance company seeking the product while putting the surviving spouse's income at risk..

Let's assume that the recently retired educator receives a maximum payout of $50,000.  Had he took the 100% joint annuity option, he would only get $40,000 but if he dies, his spouse will continue to receive the $40,000 annual payout until she passes away.  Here is why pension max is a bad bet.

First, if he takes the maximum payout of $50,000 and buys a $500,000 life insurance policy for his spouse with the $10,000 he saves by taking the maximum payout.  His spouse would theoretically receive $40,000 annually from the  life insurance policy once the retired educator dies  This is about an 8% return and while higher than most life insurance policies these days of low interest rates, its close to what most pension funds try to achieve.  The problem is that the $10,000 is really $7.000 since the money is subject to Federal, State, and City taxes.  That means the $7,000 only buys a $350,000 life insurance policy on himself and for his spouse to receive the $40,000 annually,  The life insurance policy would have to average an annual  return of 11.3%!   Not likely achievable.  Realistically, the spouse would have to reduce their annual payout to $32,000.  Therefore, pension max would result in a decrease of $8.000 annually, assuming a generous 8% payout..

Second, there is no guarantee that the insurance company will maintain the interest rate or that the insurance company will continue the life insurance program. Moreover, most life insurance companies charge a surrender fee and maybe other fees that further diminish the payout.

Finally, the 100% joint annuity is reliable and safe while the pension max relies on the financial strength of the company and the stock market.  In other words pension max is a death gamble that can leave your spouse with years of little income if the country goes through another recession or the company has financial issues, not a gamble I would take. Tha,t's why pension max is a bad bet

Retirement And The GOP Tax Plan.

The GOP tax plan will punish high tax states like New York and many other Democratic states by eliminating the State and Local Income tax deduction. In addition, the property tax deduction is limited to $10,000.  The New York Times did an in depth study and published it here.

For example the average deduction State and Local Income tax deduction in Manhattan was $60,400 and 45% took the deduction.  In Westchester, it was  $34,400 and 47% took the deduction.  While in Nassau it was $23,900 and 50% took the deduction.

For educators who live in New York City, they pay approximately 10% of their income to State and Local taxes.  Here is an example:

Teacher #1:  Salary $80,000,   Federal Tax = 25% or $18,863
                                           NYS Tax    = 6.65% or $5,320
                                           NYC Tax    = 3.65% or $2,800
                                           Total Tax  =30.30% or $23,983



As one can see, the 10% Sate and Local tax rate results in taxes of over $8,000.  On the other hand the federal tax will be reduced to 22% and the standard deduction increased.by almost double the existing amount.  However, personal exemptions would be eliminated.  The bottom line is that teacher #1  would probably be paying additional taxes due to the higher standard deduction and elimination of deductions.

On the other hand.  If Teacher #1 retires, then the GOP tax plan is going to reduce his or her taxes since the pension, social security, and TDA are not subject to State and Local taxes.  Moreover, the teacher will be in a lower tax bracket.  Finally, the  larger standard deduction probably makes it unnecessary to itemize with no earned income to tax. Overall, it appears that the GOP tax plan might encourage more educators to retire due to tax considerations.

Should You Contribute To The TRS Balanced Fund?

Starting next month the TRS Bond Fund will be discontinued and replaced by the Balanced Fund.  For educators who are still contributing to the Bond Fund, the same percentage will now be assigned to the Balanced Fund, umless you change your allocation.  While the Balanced Fund is preferable to the Bond Fund the question is should an educator contribute to it?

Normally a balanced fund is an appropriate conservative investment that usually has an asset allocation of between 40% to 60% in stocks and the rest in fixed income investments like bonds, money market funds and government securities.  However, when TRS offers a no fee 7% interest rate Fixed Fund, why bother?  I, for one rather put any conservative investments into a guaranteed 7% return then gamble on the Balance Fund with its allocation of volatile stocks and in our present low interest environment, 2% fixed income investments.

I see the Balanced Fund appropriate for those educators who think stock equity funds.are too risky for their tastes but wants some inflation protection.  Otherwise, the TRS Balanced Fund is not recommended by me at this time. 

Rules Of Thumb For Retirement Decisions.

Over the years I have heard various rules of thumb for teachers who want to reach their safe and secure retirement goals.  These rules of thumb include the combination of age and years, asset allocation, amount to withdraw, doubling their money, and amount to save.  This post will explain each rule of thumb that teachers might want to use to plan their retirement.  Remember, these rules of thumb are only simple guides and not ironclad guarantees.

Savings Rate:  The savings rate necessary to ensure a safe and secure retirement in the future is 15%, excluding pension and social security and approximately 10% when you include the two.  For younger teachers,every time they receive a raise in their salary, add 1% to the savings rate.  That includes both step raises and contractual raises.

Asset Allocation and Age:
For teachers the rule of 120 is usually recommended.  That is taking 120 minus your age and that is what should be invested in equities and the rest in a Fixed Income or Bond Fund.  For example, if you're 40 years of age, then its 120 - 40 = 80% equities/ On the other hand if your 70 years of age, its 120-70 = 50% equities.  For the risk adverse, you can substitute 100 rather than 120,  which is what was commonly used before 2010. A simple method is to use your age to determine the percentage of bonds and other fixed income instruments.  Age 65 = 65% bonds and other fixed income options.

Doubling Your Money:
The rule of 72 is commonly used for long-term investments, based upon historical average rate of return.  Obviously, if your investments exceed the historical average, you will double your money at a faster rate.  The ule of 72 is as follows:  72 /7% = 10.28 years.  I used the TDA's Fixed Fund of 7% since 65% of all TDA funds are in this option.  The rule of 114 is used to triple your money and the rule of 144 is used to quadruple your money.

Retirement Date:
Obviously, its different for different educators.  However, a general rule of thumb used by accounts for civil servents is the rule of 88.  Any combination of age and years worked towards a pension that equals 88 is when an educator should retire.  According to prople who follow this rule, beyond the number, the financial incentive rapidly diminishes. Playing with various retirement scenarios the rule of 88 seems to work, for the most part.  For example, if a teacher retires at 62 with 26 years in, the combination equals 88 and that is the time to retire.  Does it work for all scenarios?  Obviously not but its a fair estimation of when an educator should retire.

Withdrawal Rate:
A conservative withdrawal rate once you retire, is called the 4%  rule.  The 4% rule has proven to have worked under various scenarios and is used as a first withdrawal method.  The 4% rule allows for the retiree to withdraw 4% of his or her total investment and adjust it for inflation year after year.  For example assume a total investment of one million dollars.  The 4% rules allows the retire to withderawal $40,000 that year/  If inflation rises 3% the next year then the retiree can withdraw the $40,000 plus the inflation rate the next year.  For example, 3% of $40,000 is 1,200.  Therefore,the inflation adjusted withdrawal is $41,200.  If the next year the inflation rate remains at 3% then the following year's withdraw would be $41,200 x1.03% = $42,436.

These rules of thumb are simply guides and not the final say for saving, selecting a retirement date, and withdrawing your money.