Teacher pensions make for unique retirement planning

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fundyswm
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Joined: Wed Aug 07, 2019 7:02 pm

Teacher pensions make for unique retirement planning

Post by fundyswm »

I am seeking advice and currently have a (relatively) simple financial situation, but I will try to stick to the structure I'm supposed to with these kind of posts.

Emergency funds: $10k in an ally savings account. I consider this to currently be enough for a couple of DINK teachers living in a low cost of living area.

Debt: My wife and I are both high school teachers and have a combined $35,000 in low-interest student loans (avg 5% interest rate). We are paying $1,000 a month total towards these. Thanks to teacher loan forgiveness (my wife will get $17,500 of hers forgiven), we should be student debt free in 2.5 years. This is the only debt we have.

Tax Filing Status: Married filing jointly

Tax Rate: 12% Federal, 4% State (I think?). Our current annual pre-tax income is around $100k

State of Residence: Missouri

Age: I am 27 and my wife is 26

Current retirement assets

Missouri Teacher Pension Plan
We are forced to pay into Missouri's teacher pension plan, which is known as one of the best in the Midwest. Our school district takes out 14.5% of our monthly pre-tax income and matches it and that goes into our state's teacher pension fund. The plan's eligibility requirements are basically set for teachers to be eligible for retirement between the ages of 52-54. If my wife and I never quit teaching, we are on pace to retire at 53 and 52, respectively. Once we retire, our monthly benefit amount is roughly 80% of the average of our highest three paying years. For example, if I made $60k each of my last three years and those were my highest-paid years, my annual retirement benefit would be $48k per year. That would obviously also be taxed at income tax rates at that time. Remember, my wife and I are both in this system, so we would get an annual total of $96k pre-tax in the above example. A lot of retiring teachers don't realize this benefit will be subject to income tax, so many have to continue working after teacher retirement. This has led me to seek out supplemental investing options.

My Roth IRA at Vanguard
100% Vanguard Target Retirement 2055 Fund (VFFVX) (0.15%)
- I have had this account for a year and have $5k in it. I am not quite maxing it out yet, but I will sometime next year.

Additional info:
- My wife and I have no kids (will probably have one in 2-3 years)
- We are currently renting an apartment and plan on doing so for another few years.
- We are forced to have the health insurance our school district provides, which is very much not a HDHP, so an HSA is not possible. It's not great insurance, but the district pays our premiums and we're pretty healthy, so it's fine for our needs.

Questions:
1. Do our pensions mean I should be invested in only stocks in my Roth IRA? VFFVX is currently 90% stocks /10% bonds. I'm starting to think that having the safety of a future pension and investing in any bonds at all is redundant. Should I be more aggressive?

2. If you think my Roth IRA should be 100% in stocks, which specific Vanguard funds do you suggest and how many? I'm aware of the boglehead philosophy with investing, but not sure if my pension situation changes it. There appears to be quite a few people that go all in on VTSAX.

3. Once I start to max out my own Roth IRA, what is the next investing vehicle we should look at opening? I am wanting an account that we can draw from once we retire in our early 50's. I am currently considering either opening an additional Vanguard Roth IRA in my wife's name, a 457, a 403(b), or a taxable investment account. The companies that our school district lets us have 457 or 403(b)s with have funds with 0.9-1.6% expense ratios, so I don't feel great about those. Also: remember that an HSA isn't really an option for us.


Thank you so much for reading and helping.
tibbitts
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Re: Teacher pensions make for unique retirement planning

Post by tibbitts »

That sounds like an excellent pension plan.

I'm sure others will be along any minute telling you you're crazy if you don't defer the full amount you can (2x 403b + 2x 457) plus do two Roths, but I'd say that's a little extreme. In any case I would spread whatever investments you do in a similar way to what a target fund would.

There are very, very few Bogleheads who invest only in VTSAX.

.9% for expenses aren't the end of the world but do take some wind out of your deferred options. You might describe what fixed options are available in your plans.
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Watty
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Re: Teacher pensions make for unique retirement planning

Post by Watty »

fundyswm wrote: Wed Aug 07, 2019 9:22 pm 1. Do our pensions mean I should be invested in only stocks in my Roth IRA? VFFVX is currently 90% stocks /10% bonds. I'm starting to think that having the safety of a future pension and investing in any bonds at all is redundant. Should I be more aggressive?
There are a lot of threads that basically ask if they can treat a pension or Social Security as a bond in their asset allocation. You may be able to search and find some of those.

The short answer is "no".

This is because the reason to own bonds is to reduce the volatility in your portfolio and even if you have a pension you would not want the money that you have invested to be overly volatile. For example if you have a good pension and you only need to save a third as much as someone without a pension then you still need to have some bonds to protect it from market volatility.

Having the pension does decrease your risk profile though since if you have a pension then a 50% drop in your investments will impact your spendable income a lot less than someone with no pension. Because of this it might be reasonable to reduce your bond holdings by maybe a half or a third but not eliminate then altogether.
Small Savanna
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Re: Teacher pensions make for unique retirement planning

Post by Small Savanna »

A consideration with some teacher's retirement systems (I think Missouri included) is that you don't pay into social security. That could be good or bad, but if you're able to do some part time work to at least get your 40 quarters that may translate to a small SS check down the road, plus eligibility for SS disability if you were to switch careers before retirement. It might also be a reason to teach at a private school for a while after retirement. I'd be curious what teachers think about not being covered by social security.
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FiveK
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Re: Teacher pensions make for unique retirement planning

Post by FiveK »

fundyswm wrote: Wed Aug 07, 2019 9:22 pm Questions:
1. Do our pensions mean I should be invested in only stocks in my Roth IRA? VFFVX is currently 90% stocks /10% bonds. I'm starting to think that having the safety of a future pension and investing in any bonds at all is redundant. Should I be more aggressive?

2. If you think my Roth IRA should be 100% in stocks, which specific Vanguard funds do you suggest and how many? I'm aware of the boglehead philosophy with investing, but not sure if my pension situation changes it. There appears to be quite a few people that go all in on VTSAX.

3. Once I start to max out my own Roth IRA, what is the next investing vehicle we should look at opening? I am wanting an account that we can draw from once we retire in our early 50's. I am currently considering either opening an additional Vanguard Roth IRA in my wife's name, a 457, a 403(b), or a taxable investment account. The companies that our school district lets us have 457 or 403(b)s with have funds with 0.9-1.6% expense ratios, so I don't feel great about those. Also: remember that an HSA isn't really an option for us.
fundyswm, welcome to the forum.

1. There's not much difference between 90/10 and 100/0. You are young enough that you could skip bonds for now, but 90/10 is also fine.

2. How many? No fewer than 1 and no more than 5 - and "5" is arbitrary ;). You could simply do VTWAX, or your own mix 'n' match variation of a Three-fund portfolio - Bogleheads.

3. In the 12% federal bracket, going all Roth is reasonable. Investment Order will have more thoughts worth considering.
anonenigma
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Re: Teacher pensions make for unique retirement planning

Post by anonenigma »

Retired California teacher here.

It's good that you're looking downfield, but I advise you to not take your pension too seriously until you have a lot more years in. I'm not talking about the risk that your pension won't be there. It's that half of teachers leave before they've done five years, so at your ages, you've got almost 40 years to go until Medicare (unless you have retiree health benefits, which are rare). Teacher pensions are amazing (I'm grateful every day), but they are back-loaded. If I had retired at 55, the earliest I could have in CA, I'd have received 1.4% of highest salary for each year I'd taught - about 37% of salary in my case. I almost made it to 63, when the age factor maxes at 2.4% per year, so I ended up with almost 75% of salary. Double.

As someone else noted, Missouri teachers (like California teachers and those in 15 other states) don't pay into Social Security, so a partial career in teaching will be problematical. You'll be exposed to the Windfall Elimination Provision and also, when one of you passes away, to the Government Pension Offset. These might put a hitch in your giddyup.

Downfield-wise, if you remain in the profession and earn full-career pensions, and save a lot of savings either after-tax or tax-deferred, you can either: 1) take as much equity risk as you like, because you can afford a market downturn or 2) take minimal risk because you likely won't need to use investment returns to live as you wish. Either viewpoint will likely be valid, depending on your circumstances, of course (helping kids, parents, etc.).

You have a long way to go before retirement, so focus as much as possible on becoming a great teacher and being of service to your students, their families, your colleagues and the community. Teaching is grueling (high school English teacher here), so there are easier ways to make a living, but the intangible rewards can be wonderful. By chance, I run across former students about once a month, some as old as 40, and I'm almost always pleased by the accomplished adults they've become and the thought that I may have played a small role in their progress.
mesaverde
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Re: Teacher pensions make for unique retirement planning

Post by mesaverde »

Hi- I'm 46 and have been teaching in public schools for 21 years. My plan is to be able to retire at age 50. For that to happen I've been maxing out a 457b for many years (this will be my main stream of penalty-free withdrawal income starting at age 50). I've also been contributing quite a bit to a 403b (some years maxed out, some not... usually whatever is necessary to remain in the 12% federal bracket like yourself). I've also been contributing to a Roth. All of these accounts (457b, 403b, Roth) will be relied on until I'm 65. At age 65 I'll start drawing the full benefit on my teacher pension, which will become my main source of income. So I'll "separate from service" at age 50 but leave the teacher pension alone (because it is reduced quite a bit at age 50). I won't start social security payments (which I and my employer have paid into all my life) until age 70, and that will be the icing on the cake.
"Learn from the past, live in the present, plan for the future"
Cody
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Re: Teacher pensions make for unique retirement planning

Post by Cody »

It sounds like you have locked down the details of the loan forgiveness program.

Lots of cases where people, my daughter included, thought they had it but somehow did not qualify.
Jack FFR1846
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Re: Teacher pensions make for unique retirement planning

Post by Jack FFR1846 »

Suze Orman would say that you need $80k as an emergency fund. I would say you need $100k. I doubt anyone would say that $10k is enough. Saying that your jobs are stable and therefor you don't need anymore is rationalization of poor planning. You need to up that e fund before doing anything else.
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02nz
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Re: Teacher pensions make for unique retirement planning

Post by 02nz »

Small Savanna wrote: Wed Aug 07, 2019 10:56 pm A consideration with some teacher's retirement systems (I think Missouri included) is that you don't pay into social security. That could be good or bad, but if you're able to do some part time work to at least get your 40 quarters that may translate to a small SS check down the road, plus eligibility for SS disability if you were to switch careers before retirement. It might also be a reason to teach at a private school for a while after retirement. I'd be curious what teachers think about not being covered by social security.
Those in jobs that don't pay into Social Security, like the OP, are subject to the Windfall Elimination Provision, which reduces by 50% the amount up to the first "bend point" of the Social Security primary insurance benefit (basically, the portion that would be subsidized by other taxpayers).
Grt2bOutdoors
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Re: Teacher pensions make for unique retirement planning

Post by Grt2bOutdoors »

Jack FFR1846 wrote: Thu Aug 08, 2019 7:56 am Suze Orman would say that you need $80k as an emergency fund. I would say you need $100k. I doubt anyone would say that $10k is enough. Saying that your jobs are stable and therefor you don't need anymore is rationalization of poor planning. You need to up that e fund before doing anything else.
I agree with increasing the amount of your efund. Unless you have substantial support from family or other sources (your credit card is not a source).
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
retiredjg
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Re: Teacher pensions make for unique retirement planning

Post by retiredjg »

fundyswm wrote: Wed Aug 07, 2019 9:22 pm [/u][/b]1. Do our pensions mean I should be invested in only stocks in my Roth IRA? VFFVX is currently 90% stocks /10% bonds. I'm starting to think that having the safety of a future pension and investing in any bonds at all is redundant. Should I be more aggressive?
No a pension does not mean to use only stocks. You should invest according to your risk tolerance which is something you don't know right now because it has probably never been tested.

If you (each of you) can't tolerate seeing half your savings disappear for a year or so, don't invest in 100% stocks. During an extended downturn, you will get little comfort from trying to tell yourself "my pension is a bond" and stuff like that.

On the other hand, having a pension may cause you to be more risk tolerant than you would be without a pension. You just cannot assume that a pension means you should be 100% stocks or that it somehow makes it OK to be 100% stocks if that is contrary to your nature.

2. If you think my Roth IRA should be 100% in stocks, which specific Vanguard funds do you suggest and how many? I'm aware of the boglehead philosophy with investing, but not sure if my pension situation changes it. There appears to be quite a few people that go all in on VTSAX.
Yeah, and there are quite a few people investing way ahead of their real abilities right now too. :D That does not mean you should. Inexperience makes people do dumb things. This is just like teens driving too fast. Many of them do it learn the hard way. I suggest using some bonds.

3. Once I start to max out my own Roth IRA, what is the next investing vehicle we should look at opening? I am wanting an account that we can draw from once we retire in our early 50's. I am currently considering either opening an additional Vanguard Roth IRA in my wife's name, a 457, a 403(b), or a taxable investment account. The companies that our school district lets us have 457 or 403(b)s with have funds with 0.9-1.6% expense ratios, so I don't feel great about those. Also: remember that an HSA isn't really an option for us.
Two Roth IRAs should be your first goal. When you can save more than that re-evaluate.
mw1739
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Re: Teacher pensions make for unique retirement planning

Post by mw1739 »

As other posters stated, I wouldn't rely completely on your pension income given your ages. The state may change the pension formula to make it less lucrative in the future. I would start by maxing out each of your Roth IRAs. I would put it 100% in stocks given your pension serves effectively like a bond.

Some other considerations:
- what is your disability coverage if you aren't paying into Social Security?
- what happens to your pension contributions if you or your wife leave teaching?
- Where is all your money going on a $100,000 salary if you don't have kids and you don't own a home?
Admiral
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Re: Teacher pensions make for unique retirement planning

Post by Admiral »

Welcome. Thank you for choosing a teaching career! :beer

A non-vested pension is not something one should use to determine asset allocation. Until it's vested, it's value is simply the surrender value (the cash balance). When it is vested, or close to vested, that's another story.

Save as much as you can afford to save for now. At your age a small amount of bonds or no bonds is appropriate. Read the wiki on the three fund portfolio.
megabad
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Re: Teacher pensions make for unique retirement planning

Post by megabad »

fundyswm wrote: Wed Aug 07, 2019 9:22 pm Missouri Teacher Pension Plan
Once we retire, our monthly benefit amount is roughly 80% of the average of our highest three paying years. For example, if I made $60k each of my last three years and those were my highest-paid years, my annual retirement benefit would be $48k per year. That would obviously also be taxed at income tax rates at that time. Remember, my wife and I are both in this system, so we would get an annual total of $96k pre-tax in the above example.
I would recommend working in today's dollars when planning for retirement as this is less confusing for most folks. In other words, if you plan to receive 80%, I would use 80% of your current salary $80k (or close to it). Definitely true that taxes should be a big consideration for you.

Questions:
1. Do our pensions mean I should be invested in only stocks in my Roth IRA? VFFVX is currently 90% stocks /10% bonds. I'm starting to think that having the safety of a future pension and investing in any bonds at all is redundant. Should I be more aggressive?
I would treat the pension as part of your allocation. I suggest treating this as an annuity/fixed income with a safety factor. Missouri is moderately well funded so I would feel reasonably comfortable that you will receive most of the benefit since you already have the required years (or very close to it). I don't like the term "vested" with pensions. When calculating the annuity value, I would work in today's dollars as I suggest above. Your overall asset allocation would therefore not be affected by having a pension, but the pension would significantly add to your fixed income position possibly resulting in the rest of your portfolio being mostly equities. Depends on your investment policy statement.

2. If you think my Roth IRA should be 100% in stocks, which specific Vanguard funds do you suggest and how many? I'm aware of the boglehead philosophy with investing, but not sure if my pension situation changes it. There appears to be quite a few people that go all in on VTSAX.
As above, it doesn't change your overall plan in my mind but it adds to fixed income. In your case, if you want simplicity, I might use a Lifestrategy fund (maybe growth). Otherwise, a standard 3 fund portfolio or other strategy can work fine.

3. Once I start to max out my own Roth IRA, what is the next investing vehicle we should look at opening? I am wanting an account that we can draw from once we retire in our early 50's. I am currently considering either opening an additional Vanguard Roth IRA in my wife's name, a 457, a 403(b), or a taxable investment account. The companies that our school district lets us have 457 or 403(b)s with have funds with 0.9-1.6% expense ratios, so I don't feel great about those. Also: remember that an HSA isn't really an option for us.
Taxable accounts are your best friend in the 12%/0% LTCG bracket. I wouldn't complicate things unless you see your tax situation changing dramatically in the future.
donaldfair71
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Re: Teacher pensions make for unique retirement planning

Post by donaldfair71 »

One thing I'd suggest is to use your pension cash value as your pension consideration when tallying an allocation, tracking wealth, etc. There is a cash amount that, should you not yet qualify for the annuity, you would receive if you sever employment. Usually it's your own contributions with a small interest amount. It's readily available through the Virginia teachers pension website, but I understand that other states make it harder to find. But it exists, and until collecting the annuity in retirement, it's the only part of a pension I'd consider in an allocation.

Now, when it comes to tax strategy and account types (traditional vs Roth), the potential effects of a pension are absolutely unique from someone who won't possibly be collecting a pension.
megabad
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Re: Teacher pensions make for unique retirement planning

Post by megabad »

donaldfair71 wrote: Thu Aug 08, 2019 10:43 am One thing I'd suggest is to use your pension cash value as your pension consideration when tallying an allocation, tracking wealth, etc. There is a cash amount that, should you not yet qualify for the annuity, you would receive if you sever employment. Usually it's your own contributions with a small interest amount. It's readily available through the Virginia teachers pension website, but I understand that other states make it harder to find. But it exists, and until collecting the annuity in retirement, it's the only part of a pension I'd consider in an allocation.

Now, when it comes to tax strategy and account types (traditional vs Roth), the potential effects of a pension are absolutely unique from someone who won't possibly be collecting a pension.
While OP can certainly choose to value the pension at the refund amount, this would value it at about half of its annuity value in Missouri. This might be prudent depending on how you view state finances, but some might also view it as conservative.

While some view pensions as unique, remember that nearly 100% of Americans that do not receive a pension receive Social Security (or at least they should based upon current law). As such, I don't believe it really changes the general theory much. The size of it can certainly affect your specific asset allocation though in exactly the same manner that Social Security might affect it for others.
Admiral
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Re: Teacher pensions make for unique retirement planning

Post by Admiral »

megabad wrote: Thu Aug 08, 2019 11:15 am
donaldfair71 wrote: Thu Aug 08, 2019 10:43 am One thing I'd suggest is to use your pension cash value as your pension consideration when tallying an allocation, tracking wealth, etc. There is a cash amount that, should you not yet qualify for the annuity, you would receive if you sever employment. Usually it's your own contributions with a small interest amount. It's readily available through the Virginia teachers pension website, but I understand that other states make it harder to find. But it exists, and until collecting the annuity in retirement, it's the only part of a pension I'd consider in an allocation.

Now, when it comes to tax strategy and account types (traditional vs Roth), the potential effects of a pension are absolutely unique from someone who won't possibly be collecting a pension.
While OP can certainly choose to value the pension at the refund amount, this would value it at about half of its annuity value in Missouri. This might be prudent depending on how you view state finances, but some might also view it as conservative.

While some view pensions as unique, remember that nearly 100% of Americans that do not receive a pension receive Social Security (or at least they should based upon current law). As such, I don't believe it really changes the general theory much. The size of it can certainly affect your specific asset allocation though in exactly the same manner that Social Security might affect it for others.
A non-vested pension has no future value beyond the surrender value. SS has a future value with enough credits. If the OP quits or is fired tomorrow, the pension value is simply what's been paid in (plus maybe some interest). It's not like an annuity until it's a sure thing (and if it's private, perhaps not even then!)

If you had no SS credits, would you simply assume a SS payment 40 years in the future that you might not receive? I don't see the value in that. Not only that, but how would you attempt to estimate its value, since you don't know what your earnings might be?

I don't see how it should affect the AA in any way until it's a sure thing.
megabad
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Re: Teacher pensions make for unique retirement planning

Post by megabad »

Admiral wrote: Thu Aug 08, 2019 11:25 am A non-vested pension has no future value beyond the surrender value. SS has a future value with enough credits. If the OP quits or is fired tomorrow, the pension value is simply what's been paid in (plus maybe some interest). It's not like an annuity until it's a sure thing (and if it's private, perhaps not even then!)
OP is "vested" or very close to it (which I would argue is a meaningless term with most state pensions). In any case, I simply pointed out that some might view this as conservative. Your method may still be prudent.

If you had no SS credits, would you simply assume a SS payment 40 years in the future that you might not receive? I don't see the value in that. Not only that, but how would you attempt to estimate its value, since you don't know what your earnings might be?
People do this all the time. There are multiple tools that provide estimates (including the SSA directly). In fact, I would argue that the majority of Americans do this. Doesn't mean that it is right for everyone but it is a possibility.

I don't see how it should affect the AA in any way until it's a sure thing.
As above, I merely pointed out that some might view it as conservative. Some value SS at zero, some do not. This is different for everyone. I would argue there are no "sure things" in life so you have to draw the reasonableness line somewhere you just have to decide where.
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