“Maxing Out” Retirement - The Basics
Photo by Aaron Burden on Unsplash
I’ve had the pleasure of seeing many fellow faculty in one of the FLEX workshops related to pensions, retirement, and sick leave/banking LHE. However, because there are so many good workshops during flex week, I wanted to pass along some good information here so that those interested in attending can have a bit more background and so those unable to attend can also increase their knowledge about retirement options at MCC. (Shameless plug - these are only part of what is covered in Pension Workshop #1, and we go in more depth about your personal pension plan in Pension Workshop #2.)
Understanding the Basics In order to understand the key pieces of your retirement plan, we’ll hit some of the basics and use terminology that you’ll find on the CalSTRS website and with financial planners. I’m basing this on the majority of what faculty will be contributing to for pension plan so you may have to adjust if you’re with PERS.
Defined Benefit - known as a pension (DB) For STRS, you’ll be required to contribute over 10% of your base salary each month. With the Public Employee Pension Reform Act of 2013, called PEPRA, the state created 2 tiers of retirement based on hire date: “2% @ 60” and “2% @ 62.” You can determine which of these you are under by viewing your retirement update on myCalSTRS.com. NOTE: If you’re new to CalSTRS or haven’t checked out their website and your annual reports, I made a short video to help you through (see right/above). “2% at 60” participants contribute 10.25% while “2% at 62” members contribute 10.205%. This is a defined benefit plan which is determined by 3 factors: age factor, service credit, and salary. You may want to consider visiting one of my retirement workshops (usually every flex week) if you’re interested more in this as we start with the basics and build up the knowledge base. For most people, retiring with 30 years of service and an age factor of 2% would mean you get 60% of your highest salary each year going forward.
This seems like you’ll be having a retirement gap of 40%, but remember that you never received 100% of your salary because STRS took 10%. So even if you end with this, your “gap” will only be 30% of your salary. But that’s still a lot and you may need other options to provide you with the retirement options you are looking for.
Defined Benefit Supplement (DBS) - not part of your pension This is a required amount that you pay on anything over and above your base contract salary. While STRS will take the DB rate each month out of your check, the rate is really 8% so if you do work overload or during intersession, you’ll get a payment back from STRS each fall when the reimburse the “excess contributions.” The money in this account is a cash balance so when you retire, you can take it as a lump sum or paid out over a period of time (fixed number of years or ongoing).
If you teach a lot of overload, this may end up being a larger part of covering the retirement gap. However, this is a tough decision for many as working a lot more at MCC means you’re spending less time at home. What do you value more? If you prefer more time at home with friends and family, then you will need to adjust your lifestyle accordingly so that you can simultaneously enjoy your time working and plan for retirement to enjoy that too!
Voluntary Retirement Plans - 403(b), Roth 403(b), and 457(b), also not part of your pension These plans are known as defined contributions because the portion controlled is the contribution and the amount you get out is based on investment decisions. When you pay into these accounts, you’ll have a tax benefit of some type. Here’s the major differences and contribution amounts.
403(b) or 457(b) — these are tax-deferred accounts which means any money you contribute is removed before tax is calculated on your pay. You’ll pay tax when money is removed at retirement. You can contribute up to $19,000 per year in each type of account.
Roth 403(b) — this account is taxed up front but the interest grows tax free. You can contribute a total of $19,000 per year between this type and the 403(b) account.
This is what many people refer to as "maxing out retirement." They mean that they are maxing out their contributions to these accounts. At MCC, that would mean contributing $38,000 per year. (NOTE: this will go up to $19,500 per year for all the accounts listed above in 2020.) This is something you control. When you get your annual increase, take 50% to 90% of it and put it towards one of the voluntary plans. Use the remaining amount to maintain your lifestyle or even pamper yourself a bit while you plan for the future!
Other Investments Some people invest in real estate, contribute to the stock market separately, or put money into other types of accounts with more stability. These are all options but almost all have no tax breaks for the investor.
So what can you do? Start by analyzing your finances and seeing what you have. You can go to CalSTRS and use their calculator tools to help predict the amount you may get from your pension. Calculate what your money needs will be in the future and determine how much of a “gap” you’ll have so you can work to fill that gap with the voluntary plans or other investments. Oh, and don’t forget about that pesky inflation - looking 20 years into the future while thinking about current dollars is not a great plan. Prices will rise over time and you’ll need to prepare for those while you plan.
Now the rest is up to you. A few of you will work to maximize your retirement contributions with 403(b) and 457(b) options along with teaching overload for that extra DBS piece. For others, this will depend on your priorities for your future life, your current life, and your lifestyle choices. If you need the quippy wisdom of some famous financial people, here you go:
“People first, then money, then things.” — Suze Orman
“5 things to make you wealthy: Budget, get out of debt, live on less than what you make, save money, be generous.” — Dave Ramsay
“Comparing yourself financially to others is an exercise in futility; most people who look like they are living better than you, are probably in a lot of debt. Stay below your means by living as if you’re broke while planning for future “what if” moments from STRS unfunded liabilities. And when it comes to your paystubs, check them every month or two because no one will care about the accuracy of your payments but you.” — Scotty
Thanks for your interest in retirement and hope to see you at a workshop in January. Cheers!