Monday, May 26, 2008

The "Baby Boomer" Retirement Dilemma. How Much Do You Need To Retire?

The New York City Teaching Corps have many "baby boomers" among them. These "baby boomers" are fast approaching retirement age in the increasing unfriendly New York City school system where teaching in the classroom is becoming more and more difficult. This teaching burden is increased by DOE's policy of recruitment over retention, teacher disrespect, and an increased workload. Further, with Tweed's emphasis on small schools and 20-something administrators, it's difficult for the "baby boomer" teacher not to consider retirement. However, can the "baby boomers" retire comfortably? Let's see.

First, some background. The "baby boomer" generation is defined as the age group between 45 and 62 years of age. This generation has saved on the average of $38,000 in retirement savings, excluding pensions, homes, and social security. However, "baby boomers" with a 401(k) or 403(b) plan has an average retirement savings of $88,000. Not bad but not good either. The $88,000 of retirement savings comes to an annual retirement income of about $6,000 yearly. Not the type of income a retiree can live comfortably on. To get an exact amount, based on your age and retirement savings, you can use the immediate annuity link. Unfortunately, almost 25% of the people with the 401(k)/403(b)plan take ill-advised loans out of their plans. These loans average $8,000 and in many cases. are never paid back into the plan. In other words, lost savings.

As New York City teachers, we are in a much more fortunate position than most. First, many of us will receive a pension that can range from 40% to 60% of our final three years of annual salary (It could be more or less, based upon years worked and age of retirement). Further, we accumulate a modest annuity of $300 per year and averages about $1,000 annually at retirement. However, the bulk of our savings is the 403(b) plan, known as the TDA.

The dilemma for most of the "baby boomer" teachers is "when do I retire"? With the 25/55 plan, boomers can retire at age 55 with no penalty with 25 years of teaching under their belt. This gives these teachers 50% of their final three year salary for the rest of their lives or $45,000 annually. based upon the average final three year salary of $90,000. Therefore, what should my TDA have to have to keep my standard of living the same after I retire? Most financial advisors suggest 75% of the working income or $67,500 annually. Based upon the immediate annuity link, the amount in the TDA should have at retirement should be $325,000! This is about 3.7 times the average balance for all 401(k)/403(b) participants. With more and more "baby boomer" teachers retiring, it is very important to figure out "what type of retirement will I have"?

An alternative plan financial advisors use is the 4% plan. Under this plan you take out 4% of the available balance yearly. if the stock market gives you good returns your retirement savings will increase dramatically. The 4% withdrawal is conservative enough to limit any real pain during stock market downturns. However, you will need about $525,000 to get the same $22,500 return as an annuity. The nice thing about the 4% solution is you can leave a large nest egg to your children or to yourself. Unlike an annuity the money is yours, not the annuity company's. See the Trinity Study article here. A more comprehensive retirement calculator is the T Rowe Price financial calculator link. This calculator allows you to look at many retirement simulations and select the best one for you.

There are numerous alternative calculators that use many different assumptions to determine your retirement income. Some of the simpler ones are here and if you have a retirement shortfall, here. I hope you seriously consider your various retirement options. It is difficult to unretire once you make the decision to retire.

Finally, I do not believe annuities from an insurance company or bank is a good idea. The high cost fees and surrender charges can be expensive. Especially if you try to get out of the annuity within the original seven year period. However, annuities from many of the mutual fund companies like Fidelity, T. Rowe Price, and Vanguard are low-cost and have no surrender charges. Our TDA annuity fall into the later category and keeping part (10-25%) of your retirement savings in a low-cost annuity guarantees a stable flow of income.

Good luck on preparing on your retirement. I hope this information will help you in being better educated on making retirement work for you.


Anonymous said...
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NYC Educator said...

Thanks for this post, Chaz. I'm just in the process of deciding how to arrange my TDA and it was very helpful.

Anonymous said...

I'm not a teacher, but I'm pretty sure I'm not going to have enough saved to retire. I've got a feeling most boomers are going to need to have some form of income after retirement age. A home-based business might be the option for many. I wrote an article on some options called Baby Boomer Retirement Plan.

Anonymous said...

You have comforted the retired people in the world!

Keep writing like this please!

Thank u so much for this informative article. There are many definitions of retirements. However, the best that I have came across till date is — “Retirement is a time when you don’t work for money. It’s the time when money should start working for you.”

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