What Teachers Should Know About Planning for Retirement
#1 Having IPERS is a Blessing
Guaranteed retirement income is difficult to come by these days. Access to traditional pension plans will continue to decrease over the years for workers. If you are included in IPERS or some other pension system at your school district you should feel very fortunate. Don’t underestimate the value of this future stream of income - it is considerable! This guaranteed income lowers the probability of outliving your retirement savings significantly!
#2 IPERS Probably Isn’t Enough
Yet, IPERS may not be enough. Unfortunately, your IPERS retirement benefit is not adjusted for inflation. Your monthly pension income will stay the same over the years. For example, my mother retired from teaching a couple of years ago with an annual IPERS income of around $40,000 per year. Each year, as prices increase, the purchasing power of her income will decrease. In 10 years, her $40,000 income will only buy the equivalent of $29,674 in today’s dollars (assuming 3% annual inflation). And it will purchase only $25,674 in 15 years. This example shows that if your goal is to keep your current standard of living in retirement, relying on IPERS alone might be a problem. I encourage my teacher colleagues to put additional money away for retirement in order to prepare for this inflation gap.
Another issue is the potential of leaving the teaching profession. If you are a seasoned veteran and have taught for 25 years this might not be that relevant, but if you are just beginning or are midway through your career, this should be a consideration. You never know what the future may hold. I am sure we all have friends who have left the teaching profession for various reasons; many of them would not have predicted it three years beforehand. If you leave IPERS covered employment early, the retirement benefit becomes less impressive. By investing in another retirement account you can protect yourself, just in case.
#3 Roth IRA’s Can Fill the Inflation Gap
If you are looking to save in addition to your pension, generally a Roth IRA is the first place to start. Why? Because Roths are AWESOME! Once you place money into a Roth IRA, it is never taxed again! In 2017, a teacher can contribute up to $5,500 into a Roth IRA. $6,500 if age 50 or older. If you save enough to max out the Roth, the next place to invest would probably be your district's 403(b) plan. Although every family is different so it is wise to look at your unique situation when making these decisions.
#4 Investments May Need to be Adjusted
Because you likely have a traditional pension plan in IPERS, it may be desirable to invest differently than normal with your other long-term investments like your Roth IRA, 403(b), or your spouse’s retirement savings. The important thing is to look at your family’s entire retirement picture, including your IPERS.
Because IPERS is a guaranteed stream of income in retirement, you can think of this as a safe bond investment. Bonds have relatively less risk than stocks over time. It may be an advantage to increase the risk of your other retirement assets, more than you otherwise if you didn’t have your pension. This can maximize growth opportunity while being entirely appropriate as an overall risk profile. Consulting with your financial advisor about this would be wise because there are many factors that play into these decisions.
