The question of how much to save for retirement is a big one and figuring out the answer early on can be the difference between your golden years being comfortable or stressful. Now we can use a host of different models and projections to figure out the exact percentage you need to save based on your retirement goals, current savings, and investment choices, but to start with a good rule of thumb is to target saving at least 10% of your income, including any matches you receive. For example, if your district's 403(b) offers a 3% match, then you should be saving at least 7% so that together they equal 10%. Seems simple right?
Well depending on your situation there may be several other factors to consider. Unlike most private sector employees, most teachers have a pension (for Indiana teachers it's the INPRS Pension) so how should that be put into the equation? Generally, I recommend excluding pension contributions when determining how much to save for retirement for two reasons. First, in many states your pension contributions to the state are paid for by your district. This seems great but what I've seen is this used as a convenient excuse for teachers to not start saving any of their own money for retirement. This sets a dangerous precedent and doesn't get you into the habit of consistent saving. Second, even though you're promised pension payments at retirement, unfortunately that doesn't mean it will actually happen. Many state teacher pensions are woefully underfunded which could lead to the inability for you to receive your expected full benefits when the time comes.
Also adding complexity to the equation is the variety of retirement accounts most teachers have set up through their districts and what they will be used for in retirement. In my wife's district, all teachers automatically have a 401(a) and VEBA account, and many participate in the 403(b) plan. The 401(a) and VEBA each have a 0.50% district contribution rate and the 403(b) has no match. But the VEBA is in it's own category because it's required to be used for healthcare expenses in retirement, unlike the 401(a) and 403(b) which can be used for general retirement living expenses. So now, we have two categories to consider and it's important to account for each.
Finally, like in many things finances, the question of taxes needs to come into the equation. And in regards to retirement savings, the question is whether to utilize a pre-tax accounts, Roth accounts, or both? For many teachers, a 403(b) and Roth IRA combination can be an effective strategy that saves them money of fees and provides tax diversifies their retirement accounts. However, this decision is heavily dependent on your current and expected future tax situation, so it should be carefully evaluated to make sure the decision you make is the right one for you.
So, as you can see, the equation to determine how much you should be saving for retirement can be pretty complicated, but one definitely worth exploring to set yourself up for success. However, to simply get yourself off to a good start, remember to think at least 10%!
We’d love to hear from you and answer your questions on how much you should be saving for retirement, which accounts to utilize, and how it all fits into your retirement planning!
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.