In today’s world, there are usually more articles and stories thrown at us than we could ever hope to read. Many times it’s hard to even keep up with them as we’re scrolling through our news feeds. However, through all of that constant bombardment, when we find a good story it’s memorable, sometimes even life changing. And I’m writing this article today to share a story that I truly believe is one of those gems and will change the way you look at your finances as a teacher.
This story is about a client who came to me for help with financial planning. Let’s call her Rachel. She is a 3rd Grade Teacher at a local elementary school and approached me one day while I was visiting her school. Her story wasn’t atypical, she and her husband were getting close to turning 40, had two children, and felt like they need to be doing more with their finances but weren’t quite sure where to begin. So, we sat down, got to know each other, and they decided they wanted to become clients and start working together.
The first step in the process was to begin reviewing what she and her husband already had in place. At first glance, things looked pretty good, she was saving through her district’s 403(b) and getting a match, same with her husband and his 401(k), they had life insurance, and pretty modest levels of debt they were keeping up with. Pretty good right? Well stay with me because as you likely know the devil can be in the details as we get beyond first glances, and it was. As we got deeper into the review, issues began to arise that if not addressed would have a seriously negative impact on their financial future. We worked through many issues, but the three simplest actually has the biggest effects.
The first issue was her 403(b) account. She was puzzled because when I mentioned it because out of everything they had going on financially, she was certain she had been doing the right thing with it. Each year she contributed 5% of her salary, above and beyond what she needed to get her district’s 2.5% match. She was doing the right thing by contributing as much as she was, but her 403(b) vendor was holding her back. Her 403(b) was invested with a provider that put her into an annuity that was charging 2.5% per year in fees, effectively negating the effect of her district’s match on her retirement savings.
She was shocked. But then I asked her to remember back to when she set up her 403(b) and she told me that when she was hired, there was a representative who helped her to sign-up and she did. This is where many teachers lose out because most districts have several different providers and you have a choice of which to use. You don’t have to sign-up or stay with the first one you meet, and most of the time teachers who do this end up in a situation where they’re being charged way too much in fees, don’t know it, and don’t check on it again because “it’s been taken care of already.” Now in Rachel’s case, most of the other vendors were just as bad, but there was one that only charged ~1% per year in fees she could switch to. We ran the numbers and keeping all other things equal, the change should leave her with ~$48,000 more in her 403(b) at retirement thanks to just the lower fees. She also has access to better investment options too.
To avoid this issue, even if you’ve “already got a guy” or “already signed up” it’s important to look into the details of your 403(b) because “your guy” may have sold you into a 403(b) that’s not in your best interest. If so, it will leave you with tens of thousands less at retirement than if you had been in something different while he pockets a health commission. Remember, many of the “guys” who show up at schools and are on “approved vendor” lists are financial salesmen with the title “Financial Advisor”. They are not required to look out for your best interests. Instead, as long as they can justify what they’re putting you in is “suitable,” not necessarily the best option out there, merely “suitable” they legally can and will set you up with a subpar 403(b) with their company. It’s what happened to Rachel and unfortunately the case for many teachers I encounter. (Learn what to look for in selecting a 403(b) vendor)
The second issue was with her state pension benefits. She wasn’t invested in a crucial part of them! You see, Indiana teachers are covered by the Indiana Public Retirement System (INPRS) which is what’s called a hybrid pension. There are two parts that accumulate over time, a monthly payment after retirement and an account called an Annuity Savings Account (ASA). The ASA is like having a 403(b) with the state that your district contributes a percentage of your salary to and you’re responsible for investing. Well her district has been contributing, but the money was never invested. The entire time she’d been teaching, she’d been missing out on the growth that’s needed to make the ASA work as a viable part of her retirement. It turns out this was also the case with the 401(a) and VEBA accounts she had through her district, but didn’t keep on top of.
Again, she was shocked as I explained the situation to her. Teachers are automatically enrolled in their INPRS benefits when they are hired by their district and receive notification via mail and email with instructions to create an online login so they can view their information and manage their ASA. However, there’s a disconnect in notifying them that these messages are coming. So, if they don’t know to look for them, they can easily be ignored, deleted, or thrown out. The 401(a) and VEBA accounts are a similar story. They’re usually buried in a stack of new hire paperwork, hard to understand, and usually just signed and returned without the optimal options being considered or established. Unfortunately, we can’t get back the time she missed but we did make things right for the future. However, this could be happening to you and costing you tens of thousands of dollars in missed opportunity, like it did Rachel.
To avoid this issue, it’s important to understand how your state’s teacher pension system works or collaborate with a financial professional on an ongoing basis who can guide you. Your pension and other district retirement accounts are a critical piece of your overall retirement plan and can cost you dearly if not handled properly. In addition, mounting budget pressures mean more states are reforming their teacher pensions into hybrid models that place more responsibility and actions on you. Which means it will become even more important to stay on top of how you should make your pension.
The third issue was with her and her husband’s life insurance. They both had $50,000 of coverage through their work, but what they considered their primary coverage was a $250,000 policy each. They were told and believed this would be enough coverage. We worked through a needs analysis together and figured out how much they would need to pay off debts, replace income, and fund college for their kids. It turns out they were grossly short on coverage, to the tune of ~$1,000,000 each. And that wasn’t the only thing. The coverage they did have was costing them way more than it needed to be.
This was because both of their $250,000 policies were whole life policies, which have much higher premiums than other types of life insurance. Her premium was $215 per month and his was $240 per month. If you’re counting, that’s $455 per month on life insurance. I asked her how they ended up with these policies, and sure enough it was through an agent with a large firm that works in lots of schools who talked them into it. The agent told them that not only would they have life insurance coverage, but they would also build up cash value so it would function as an investment too.
Now the agent’s statement was true, whole life insurance does provide both of those things. But was it the optimal strategy for Rachel and her husband, no! It didn’t provide nearly enough coverage to accomplish what it was supposed to if one of them passed away unexpectedly and it provided them with a very inefficient vehicle to utilize as an investment compared to any other investing option. For many teachers, including Rachel, a strategy called “buy term and invest the rest” is a much better way to go. Why? Because we were able to get them both over $1 million in term life insurance coverage for around $100 per month total so they now actually have enough coverage. Then, we were able to take the difference and increase their contributions to their retirement accounts, which are much better accumulation vehicles than any insurance policy.
To avoid this issue, it’s important to understand that obtaining life insurance should be a process that takes time and planning to do right. It should never be a quick pitch where an agent tells you the highlights of a certain type of policy and then you sign up based on what you can afford in premiums each month. Unfortunately, many teachers end up in this scenario because they are sold into these policies by agents that they meet at school. Life insurance agents get a much higher commission for selling whole life than they do term life, so watch out. If they sell you a whole life policy you may end up paying way too much for not enough coverage, like Rachel and her husband were doing.
To wrap things up, I want to make sure to give Rachel some grace. She’s a fantastic teacher and very intelligent woman! She loves and is committed to her students and is immersed in all the things that come along with that, including the dedication of most of her time to providing them the best possible experience she can. When she’s not doing that, she’s also a wife and mother of two kids. On a typical day, the responsibilities of all of that take up most of her time and energy, not leaving much left for many other things. That includes digging into her finances and she hadn’t for a long time until we met.
In working with teachers, I encounter situations like this on a regular basis. I understand your lives are busy. I understand that generally the last thing you want to think about is diving into your finances. But what Rachel’s story shows is that by not being aware, understanding, and finding the right help it could be costing you tens of thousands of dollars and jeopardizing your present and future. For the hard work you put in day after day, you deserve the best future possible. But you have be cognizant that the health of your finances will determine what kind of future is possible. So, it’s important to keep on top of them and work with the right financial professional to tend to them early and often. I would like to thank Rachel for allowing me to share her story with you, hope it has been worth your time, and maybe has even changed the way you think about your finances as a teacher.
An Exceptional Life Financial's mission is to help teachers make the most of their finances so they can live exceptional lives. If you have questions about your finances and would like to work with a firm that's specialized specifically in creating the best possible financial futures for teachers, we’d love to hear from you. We work with teachers across the country so don’t hesitate to reach if you live outside of Indiana.
Mychal Eagleson, CFP®, AAMS® is the President of An Exceptional Life Financial, a firm that specializes in financial planning for teachers and families with special needs. He frequently writes and speaks on personal finance topics relating to these clients. Mychal also serves on the board of the Financial Planning Association of Greater Indiana as the Director of Public Relations & Social Media. To read more of his articles and learn about An Exceptional Life Financial please visit: www.anexceptionallifefinancial.com.