If you are a public school educator, then you may be eligible for a pension when you retire. Your pension is only a small portion of your future retirement (especially if you are unsure about the future viability of pensions). Let me briefly introduce you to two lovely options which you should most definitely take advantage of: 403b’s/457’s and IRAs. Did you think that tax shelters are for the rich? Well, yeah. But these accounts are tax shelters that you can take advantage of too.
Brief note: You should focus on saving for retirement after you have finished fully paying down your credit card debt and built your 3-6 month emergency fund. If you are saving for a future college tuition, focus on your retirement instead. If you have student loans, it depends.
If you are young, your investment strategy may be different than the one outlined here.
To 403b, or not to 403b?
It is likely that your employer offers a 403b, an additional retirement account. Take advantage of this. If you are not sure what your employer offers, ask! Talking with my human resources liaison helped me realize how much I did not know.
If you invest in a 403b, pre-tax money is taken out of your paycheck and deposited into your retirement account. The tax deferred nature of these investments has two advantages. First, they lower your taxable income, so you pay less in taxes now. Second, you can typically invest more in pre-tax dollars than post-tax dollars, so it is easier to reach the $19,000 yearly contribution limits. If you can, try to max out on these limits. You will pay taxes on your earnings when you take out the money during retirement, but you will most likely be in a lower tax bracket when you are retired (although this may not be true for younger teachers). Make sure that you diversify your investments in your retirement account, and look for low operating costs.
There are many 403b options. Fortunately for those of you in California, this handy-dandy website recently came out, and it is awesome. While looking through 403bCompare, I was looking for accounts that had very little fees. My top two choices were Vanguard and CalSTRS Pension2. If you expect your tax rate to increase, Pension2 is nice because it offers both pre-tax and post-tax (Roth) contribution options. If you choose the Roth option, when you take money out of the account during retirement, you don’t have to pay taxes on this. This is a nice option for you young teachers who believe that you’ll pay a higher tax rate during retirement.
You maxed out on your $19,000 yearly contribution limit to your 403b? Congrats! You are on your way to retirement. If you have the funds, though there is another game in town — IRA’s. This is a retirement program that you open yourself with a yearly contribution limit of $6000 (as of 2017). There are two types of IRAs: tradiational and Roth IRAs. In traditional IRAs, you invest pre-tax dollars, which is useful if you think that your tax rate is greater now than when you retire. With a traditional IRA, you will have to pay taxes on the money when you take it out during retirement. Roth IRAs use post-tax dollars, and is recommended if you believe that your tax bracket will be higher in retirement than it is now (I’m looking at you, young investors).
If you are looking for low operating costs on your IRA, Fidelity and Vanguard are two popular choices (I have Vanguard accounts). When you open an account, you can link your IRA with your bank account, and make a yearly $6000 contribution online. Note that if you are married and earn jointly more than $203,000 (I assume that most teachers don’t meet this criteria), you cannot contribute to an IRA.
If you maxed out both your 403b and IRA, check to see if your employer offers a 457 retirement account. This is similar to a 403b, but the fees are typically higher, and your employer’s middleman might try to sell you a program that puts more money in their pocket at your expense. Damn commissions. This happened to me. I needed to do a little investigation for me to realize that an alternative 457 that had been offered to me would have less annual fees (less than 2%).