Written by: Tom Farrer, CFP®, CRPC®
As the 2020-2021 school year draws near, unfortunately COVID-19 continues to set the agenda and have a dramatic impact on all aspects of our lives as cases continue to increase in the US, as well as locally. When it comes to how and when we return to the classroom, the consequences of our decisions could have a lasting impact on our students, staff, their families, and potentially the communities where we live and work.
On one side of the discussion many educators, community leaders and health experts like Dr. Anthony Fauci feel “very strongly we need to do whatever we can to get the children back to school.”
On the other side of the discussion many educators are worried that they are taking a tremendous and unnecessary risk with their health (and potentially their family’s health) by going back into the classroom at this point. Making matters worse, the logistics of how teachers will maintain a safe social distance of six feet between all children, ensure masks are worn by all their students, and adjust to the ever changing rules and guidelines are simply not understood in many cases causing an even greater concern.
As a result, many teachers are anxious and/or reluctant to return to school. In fact, a USA Today poll conducted in May showed that 20% of educators are not likely to return to school in the fall, while a whopping 65% of teachers want schools to remain closed to slow the spread of the disease. Some are making the difficult decision to leave a profession (and the students) they love due to the dramatic changes that are being planned this fall, or simply leaving for the peace of mind of knowing that they are doing the best they possibly can for the long-term safety of their family.
While the health and well-being of educators, students, and staff should be a top priority as we plan the start of a new school year, there are financial considerations that need to be considered if you cannot return to the classroom due to underlying health conditions, or simply feel the risks are too great. At a minimum, the following financial considerations should be understood: income replacement, long-term impact to retirement benefits, and health insurance planning.
What It Means for You:
As the pandemic continues, so will the uncertainty surrounding what the coming school year will look like. Obviously, there is a lot to consider if you are thinking about leaving the teaching field, or simply retiring earlier than previously planned. Even though recent polls show that people value “Relationships” and “Health” over “Money”, here are 3 money-related issues that should be explored prior to making any life changing decisions:
If you lose your current salary due to a job change or early retirement, first and foremost, you will need to revisit your personal budget and figure out ways of saving money, and how you are going to replace your current income. Now is the time to carefully review your expenses and determine which are essential versus discretionary. It is important that you develop a plan in advance of your decision to ensure you are able to cover all your recurring bills, groceries, insurance, etc. without taking on unnecessary credit card debt or taking a distribution from a qualified retirement savings account and potentially incurring a 10% early withdrawal penalty. The bottom line is if you leave your job and your normal income behind, you will have to change your spending habits quickly until that income can be replaced with other viable scenarios.
Long-Term Impact to Retirement Benefits
Leaving a job prior to your original plan can have a lasting negative impact on your retirement benefits. Most Indiana teachers will have two sources of “guaranteed income” during retirement: Social Security and your TRF defined benefit (or INPRS pension). Unfortunately, both will be permanently reduced by reducing the number of years you work or by reducing your annual salary. TRF members who retire early will receive between 44% and 89% of normal pension benefits depending on your age when you retire.
In addition, Social Security will be reduced if you begin your benefits prior to reaching your full retirement age (FRA). For example, if your full retirement age is 66, and you begin taking your benefits at age 62, your benefits will be reduced by 25% for the rest of your life. Since this is a permanent reduction, it is important to understand the long-term impact to your retirement plan prior to making that decision.
Health Insurance Planning
If you decide to leave employment, or retire early, you are also leaving behind your health insurance coverage. Two things to keep in mind regarding health insurance:
1. Medical costs are increasing at an alarming rate, so obtaining health care coverage on your own will be expensive, even if you go through the Marketplace. Although insurance costs can vary greatly depending on location, level of coverage and family size, one study showed the average monthly premium costs at approximately $1,200/month, plus an annual deductible exceeding $8,000/year!
2. Medicare benefits do not kick in until you reach age 65. Even when you do reach age 65, Medicare benefits only cover an individual (they do not cover a family), so if you are still providing health care coverage for a spouse or family members, you will need to develop a plan to provide your loved ones with medical coverage. Going without proper coverage for even one month could wipe out your entire life savings due to the medical costs of a single illness or a severe injury.
The COVID-19 news continues to be unnerving, but we are here to help you sort through your questions and concerns so you can make the best decisions for you and your family. Thanks for taking a few minutes to review and consider some of the important financial consequences of not returning to the classroom this fall. Before you go, we’d value the opportunity to have a conversation with you to discuss your financial plan, especially if you're considering an early retirement due to COVID-19. Right now is the best time to examine your situation and plan for what’s ahead.
Tom Farrer, CFP®, CRPC® is a Financial Planner with An Exceptional Life Financial, an independent financial planning firm specializing in finance for teachers. He served for six years as an executive at the Indiana Public Retirement System (INPRS), Indiana's largest pension plan and the one that specifically covers teachers' retirement. His passion for working with individuals one-on-one to achieve their goals motivated him to earn the CERTIFIED FINANCIAL PLANNER™ designation in late 2019, and join An Exceptional Life Financial in 2020. He's a proud member of the Financial Planning Association of Greater Indiana, the National Association of Personal Financial Advisors (NAPFA), and the XY Planning Network and serves on the board of the Shepherd's Center of Hamilton County.