We are more powerful when we empower each other.
My teacher girlfriends are my ride-or-die crew. We go for a run or a glass of wine and talk about anything and everything. I trust them implicitly and share so much of who I am with them. Yet even with all that we share, very few of our conversations are about finances. I have no idea why that is. Maybe because our jobs aren’t based in the financial world? Maybe we’d talk about it more if we were accountants or insurance people? Is it because we don’t know a lot about investing? Or maybe it’s because we don’t think there’s much we can do to change our financial futures.
Well, whatever the reason, I say let’s start talking about it! The truth is that we have SO many choices–and the energy and potential contained in those choices makes me want to shout them from the rooftops! And then I think about how we can help each other and share what we learn the same way we share all of our other experiences and, well, my head starts to spin with all the excitement. There’s just no time to waste and no reason not to start right now.
When I graduated college at age 21, I had ONE professor mention retirement in a day of seminars called “What to do with your life now that you’ve graduated” or something like that. She said she’d be retiring a millionaire and told us she used something called a “tax sheltered annuity”. That’s literally all I remember and all I took away from her talk. Man do I wish I’d followed up and taken action back then! What I know now is that investing early gives you a HUGE advantage in making your money work for you. It doesn’t take much to make a big impact on your future–especially if you start right now. But I was 21, facing the daunting challenge of my first teaching job, had no experience with investing whatsoever and even less of a clue on where or how to start. I wish someone had invited me to sit down with them for an hour and given me the quick and dirty lesson on how to get started.
If I’d had that quick and dirty lesson and started investing $100 a month starting in July 2001 and continued until April 2019, I would have earned $48,745. Compare that to only investing $100 a month from April 2011: I’d have earned $14,533. Are you seeing my point? Time is money here–let’s put it to work! (And to that point, it’s NEVER too late to start. Something is always better than nothing!)
If right now you’re thinking you have no idea how to buy stocks or bonds, you’ll mess it up or do it wrong, or that you can’t do it alone and need a professional financial advisor to do it for you, or that you can’t possibly find the time to learn this stuff–don’t worry. That’s exactly what I thought. It’s what kept me from learning anything and kept me from earning SO much! The truth is that this stuff is EASY! SO much easier than teaching! It takes so much less time than teaching!! And you’re already crushing teaching–so you can definitely do this. So…without further ado, here is the quick and dirty cheat sheet on how to get started.
Step One: Pick an account and open it. It doesn’t even really matter which kind you pick for now. They’re ALL better than doing nothing! We have some unique options as public employees, along with some of the standards that are available to everyone. Here’s a quick outline of your options:
Traditional IRA (Individual Retirement Account)
- Contributions to this account can be deducted from your taxable income–thus lowering your tax burden for the year. Your modified adjusted gross income must be less than $65K if you file single and $104K if you are married and file jointly to deduct the contribution on your taxes (for 2020). Those limits apply to people who are enrolled in their employer’s retirement plan (i.e. a pension or a 403b that includes contributions by your district). If you’re not enrolled in any kind of retirement plan through your district or state, then you can deduct the full amount from your taxes.
- You pay taxes on the money when you withdraw it after age 59.5 (there is a bit of wiggle room here–but it’s not quick and dirty so we’ll skip it for now.)
- You can contribute up to $6,000 per year (under 50 yrs old) and $7,000 (over 50).
- When you set it up through Vanguard, your expenses and fees will be very, very low and you’ll have great options for investment funds. (We’ll get into that in an upcoming post!)
- You have full control over what you invest your money in (which funds, stocks, bonds, etc.)
- When you turn 70 1/2 you’ll have to take out a required amount of money and pay taxes on it. This is called a required minimum distribution.
- This is great for folks in higher tax brackets.
- You put money into this type of account post-tax.
- When you withdraw the money after age 59.5 you do NOT pay taxes on any of it .
- You can contribute up to $6,000 per year (under 50 yrs old) and $7,000 (over 50.
- Your modified adjusted gross income must be less than $135K if you’re single and $199k if you’re married and file jointly to have a Roth account.
- Unlike other retirement accounts, there is no required minimum withdrawal from a Roth IRA once you reach a certain age. It’s a great tool to have if you plan on living a long life because you aren’t required to take out a certain amount of money.
- You can always take out your contributions (not earnings) without a penalty. An excellent backup to have for emergencies.
- Same as Traditional IRA, when you set it up through Vanguard, you’ll have super low fees and tons of great options for what type of assets to buy.
- Great for folks in lower tax brackets.
- The contribution limits are for ANY IRA account, so if you have both a Roth and a Traditional, you can only put in a total $6,000 or $7,000 between both.
HSA: Health Savings Account
- This is the magic bullet of retirement accounts because you can put money in pre-tax and will not pay taxes when you cash out the earnings for medical reimbursement. It can potentially give you a ton of tax-free savings!
- Your school district might offer an HSA through your health insurance plan, or you can get one through Fidelity or Lively or a bank on your own. You have to be enrolled in a high deductible plan to access an HSA.
- Unlike IRAs, you have to wait until you’re 65 to access this money penalty free. At that time, though, you can take as much money out as you’d like for any reason, much like an IRA. But the nice thing about HSAs is that there are no required minimum distributions, which means you’ll have more control over your taxable income and therefore tax rate down the road.
- Depending on your HSA provider, you will have options for which funds to put your money in (although you won’t be as free-wheeling as a Vanguard account).
- Your maximum contribution is $3,550 for individuals and $7,100 for family plans. There’s also a catch-up allowance for folks 55 and older.
- A ridiculously awesome hack for an HSA is to pay your medical expenses out-of-pocket now, save your receipts, and invest the money so it can start growing for you. Then at ANY time, you can submit your receipts for reimbursement from your HSA. So you could invest up to $7000 per year, let it compound for you in the market, and then turn in 30 year old receipts and be reimbursed. Ta-da! Like magic. Except that it’s real.
457 and 403b: The tax-sheltered annuity that my professor mentioned decades ago but I just opened in 2019 (insert facepalm emoji).
- You sign up for these accounts through providers that your district has contracted.
- Ask if your district offers matching contributions to a 403b. If they’ll match a certain percentage of what you contribute–that’s money you don’t want to leave on the table and it makes a 403b far more attractive.
- Each provider that works with your district will have a list of funds to choose from with varying expenses and fees. These offerings can include straightforward investments or more complex annuities. (Mine is actually called an “annuity” but functions as a regular investment account. Whaat??) Clearly the language can be confusing here and the firms your district contracts with can be predatory. It’s important to take the time to ask about all of the fees within these plans. It’s also possible that your district has Vanguard as a provider. If that’s the case–you’re one of the very lucky ones! I am not one of the lucky ones. My 457 plan has fees that are 28x those in my Vanguard accounts, which equals a difference of $8,400 over 10 years. Ouch! So fill up your low-cost Vanguard funds first and then take a look at a 403b or 457 with any money you have left over. This is also a time to take a look at your taxes or have a conversation with your accountant, because investing in these accounts may save you a ton in taxes each year, thus making the higher fees less of a bitter pill.
- The main difference between the accounts is that 403b earnings are available to you after age 59 ½ and 457 earnings are available to you at any time as long as you’re no longer teaching–perfect if you want to leave teaching before you’re 59 ½.
- You will pay taxes on earnings in both accounts, but there is a way to convert them into Roth IRA funds and further reduce your tax burden.
- Contribution limits for both are $19,500 per year. But you can have a 403b and a 457 and put $19,500 into each in one year. (Uh, don’t worry…I’m not there yet, either!)
- Most school districts still have pensions that teachers are required to participate in. Your contribution is taken out of your paycheck pre-tax.
- Unlike any of the plans listed above, your pension will be a LIFETIME benefit to you. Big bonus!
- Also unlike any of the plans above, you have no say in how the money is invested or how much you must contribute. Notsobig bonus.
- You can likely estimate your expected benefit through your state’s teacher retirement plan website. This is worth doing. We can usually expect our monthly pension benefit to be about ⅓ less than what we’ll be earning at the end of our careers.
- While pensions are a great benefit because they’ll pay out for life, many pensions are also in financial trouble and are costing younger teachers disproportionately. Plus, since your pension won’t likely match your current income each month, it makes sense to shore up your future with some additional investment savings.
- Here’s a great article about the reality of pensions. Note the “break-even” points for each state. While this can be sobering information, it’s worth factoring into your long-term plan.
- Last but not least, ask your HR department if you’re contributing to social security. About 40% of teachers don’t contribute to social security and it’s important to know where you stand.
If this seems like a lot to digest, it is. BUT this is also MOST of what you need to know to get started! Don’t be afraid! Pick the one that sounds right to you and get the ball rolling! Your future self will thank you with lots of beach time!
If you enjoyed this post, be sure to subscribe so that you never miss a new article. Also please share it with a teacher friend! Also, contribution limits change often (they usually go up!) so be sure to google the contribution limit for the account type and the current year so you know what you’ve got to work with!