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Are you a teacher who wants to learn more about how to improve your financial well-being? This guide to investing for teachers will take you through all of the key things you need to consider.
Investing for teachers is different than it is for everyone else because of one major perk- the pension. While pension systems vary by state, the goal is always the same- to provide a steady stream of income after you retire. But what does that really mean for your retirement? Can you really count on it? Is there anything else you need to do to prepare for retirement?
In this post we will go over things every teacher can do to make sure they are fully prepared for retirement and not fully dependent on the pension.
This post is all about investing for teachers.
Guide to Investing for Teachers:
How is the amount received for my pension determined?
Pensions are different for each state, but most are based on a formula that takes into account some or all of the following: how long you worked, your highest salary, your age at retirement, and how much money you contributed to the pension fund.
In most state pension systems, the longer you work and the higher your salary, the more money you earn. That sounds pretty fair—and it is. But there’s a catch: The amount of money that goes into your pension fund is determined by legislators—not teachers or other employees. So even though teachers contribute to their retirement funds each year out of their own paychecks, lawmakers could reduce those contributions or eliminate them altogether at any time. For this reason it is important for you to learn how to invest on your own so that you will have money to supplement your pension in retirement.
The problem is that most teachers aren’t taught how to invest or how to manage their own money. That’s why we created this guide. We want to help you learn the basics of investing so that you can avoid making costly mistakes.
Step 1: Open a (Roth) IRA
An IRA is an Individual Retirement Account. This means that it has no ties to your employer. You can open an IRA at any bank or brokerage firm. You may want to consider opening a Roth IRA because it offers many benefits over traditional IRAs.
A Roth IRA is funded with after-tax money, meaning that you don’t get to deduct your contribution from your taxable income like you could with a traditional IRA. However, the money grows tax free and your withdrawals in the future are tax free as long as you follow the rules.
In 2023 the maximum yearly contribution to a Roth IRA is $6,500. In order to contribute the maximum amount your annual salary needs to be less than $138,000 if you are single or $218,000 if you are married, filing jointly.
When deciding where to open your Roth IRA, you should consider if you want to be a more hands off or hands on investor. Either way- you’ll want to stick with a company that offers low fees. Nerdwallet is a great resource to compare your options.
Step 2: Fund the Roth IRA
After opening the Roth IRA, you will need to fund it. You can either deposit a lump sum of $6,500 or less OR you can set up recurring monthly contributions.
Step 3: Pick Your Investments
This part is probably the most confusing. Once you have opened your account and added money, you’ll need to actually pick your investments.
If you decide to go with a robo-advisor, it will select your investments for you, but will probably ask you some questions first to determine your risk tolerance. Keep in mind that robo-advisors tend to have slightly higher fees than managing your investments yourself, BUT these can be worth it if it actually gets you to feel more confident with investing.
If you decide to choose your investments on your own, you may want to do a little research. Index funds and ETFs are great options for investors who are looking to get started with investing because they are passively managed and low-cost. They are essentially a collection of stocks in different sectors and industries, which allows you to diversify your portfolio without having to pick specific stocks or bonds.
For example, you can invest in an index fund that tracks the S&P 500 (the top 500 companies in the U.S.) which will give you instant diversification across 500 different companies. This helps to reduce your risk because even if one company’s stock loses value, others will offset those losses with their own gains. You can even invest in the Total Stock Market through the Total Stock Market ETF (ticker symbol – VTI).
There are several books that explain investing in more detail and can help you feel more confident when choosing your investment strategy.
Here are some books that I’ve read that I recommend:
For anyone:
1. Quit Like a Millionaire by Kristy Shen
2. I Will Teach You To Be Rich by Ramit Sethi
Teacher specific:
3. TL;DR Financial Literacy Series – Karl Fisch and Matthew Raleigh
Karl Fisch and Matthew Raleigh have several books designed to help teachers learn more about their pension systems and how to supplement them. While I’ve only read the California specific book, they have different versions for several states.
These books are a great way to learn more about the pension benefits in your specific state. The books are easy to read and well-priced. Here are links to some of the other state-specific books they have written: California, Colorado, Massachusetts, Pennsylvania, New York City, New York State, Indiana, Iowa, and Illinois.
Step 4: Open a 403b or 457b
If you are able to max out the yearly contributions to the Roth IRA, you should consider opening a 403b or 457b account. These have much higher yearly contribution limits – $22,500 for 2023. As a teacher, you have the unique opportunity to open BOTH types of accounts and max out each of them, if you can afford to do so.
Like with an IRA, you can choose to open a traditional or a Roth account. The choice will depend on the tax benefit that makes most sense to you. Is it more beneficial for you to have the tax savings now or in the future? If you choose to go the traditional route, you can lower your taxable income significantly by contributing to one or both of these.
Unlike the IRA, the 403b and 457b providers are offered through your employer. Unfortunately many of these companies have really high fees, which can outweigh the benefits. Because the offerings vary by school district, it’s hard to touch on it here. Use a site like 403bcompare.com to make the right choice for you. In general, if Vanguard, Fidelity, or Charles Schwab are an option, those are great choices.
In conclusion, while the pension is a great benefit for teachers, it is still important to prepare for retirement on your own. The pension alone might not be enough to cover all of your expenses in retirement, and while it is important to be aware of the benefits you are entitled to as a teacher, it is equally important to prepare and save for your own financial future.
