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Retirement Tips for Teachers

Author: Daniel Harris

Teachers spend most days, and many nights, working and planning their lessons for students. However, when it comes to retirement, some teachers have not planned enough. Some state and local governments have begun to favor a traditional individual retirement account (IRA) over pensions for budgetary reasons, leaving teachers with more decisions to make on their own than ever before.

Diversify

Age plays an important factor in your investment decisions. If you are younger and have plenty of time until retirement, then a higher allocation of stocks historically gives you better performance over safer fixed-income funds. If you have worked many years and are getting close to your set retirement age, then a fixed-income portfolio is a better choice. According to Openfolio, teachers outperform average investors because they keep diversified and invested portfolios. Frequently trading can rack up brokerage fees and cause missed opportunities over buy-and-hold strategies. By diversifying in products such as index and mutual funds, you can evenly spread your risk across the market. Many districts offer free information and education regarding retirement planning and solutions. Check with your employer and take advantage of any free information or programs available. Also, try contacting the brokerage where you hold your IRA to obtain information on free seminars, webinars and materials that can help guide your decision making.

Age Goal

Early on in your career, set a retirement age goal. Along with your age goal, develop a targeted annual living allowance. This allowance should be sustainable and have the ability to provide the quality of life you desire. There are two important ages to keep in mind with a traditional IRA. At age 55, you can start taking distributions penalty-free, and you must begin taking the minimum required distributions by the year you turn 70.5. Roth IRAs offer tax benefits and do not require withdrawals until after death. Roth IRAs use contributions from your after-tax income, while a traditional IRA takes pretax income. The noticeable difference comes when it is time to begin taking distributions. All earnings and distributions from Roth IRAs are tax-free. Gains made in a traditional IRA are subject to your personal income tax rate upon withdrawal.

Defined Benefits

If you work in an education system that provides a pension, know your defined benefits. Some pensions adjust for inflation while others do not. Medical costs have become one of the largest retirement expenses. Know how much of your medical expenses your retirement benefits cover. When factoring your medical costs during retirement, consider long-term care. Not everyone needs long-term care, but it is a very large expense if you do. The big question is, will your pension provide you with enough money to maintain your current or desired quality of life? If the answer is no, then you need to start planning your supplemental retirement income. By incorporating a plan for long-term care, such as insurance or an annuity rider, you can maintain your quality of life and plan for the unexpected.

As early as possible in your career, it is wise to begin saving for retirement and not just think about it. Educators often receive annual raises during positive budgeting years. If you are contributing to your IRA, this is an optimal time to increase your contribution. If your take-home pay goes up $50 per pay period with your raise, split that with your 401(k) and increase the contribution by $25. The same applies for a promotion to an administrative position.

Toward the end of your career, you can choose to continue working longer, which extends the life of your retirement savings. The longer you can go without dipping into your retirement savings, the higher your potential annual distribution.

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