When my aunt founded Minerva nearly 30 years ago, one of the first groups for whom she did a good deal of work were teachers. At the time, the State was looking for assistance with financial planning for teachers, and my aunt was chosen. Between that work and presenting at a teacher’s conference on Jekyll, she soon found herself with a number of teachers as clients.
Fast forward nearly three decades and Minerva has branched out into working with many different types of clients, but we continue to offer financial planning for teachers. While their incomes tend to be lower than those of clients in other professions, they are often able to retire with few financial concerns. So why do teachers find retirement financially feasible when others who might earn a good deal more struggle? Here is what we have found:
They save a significant percentage of their salary – Not only do teachers make the mandatory contribution to their pensions, but many also contribute to their 403b plans (a savings plan similar to a 401k). For those teachers, savings can be 20% or more of their pre-tax salary. Given that so much of their salary is earmarked for savings, the glide path to supporting a retirement budget is much easier than is the case for, for example, an executive earning in the mid-6 figures who saves a much lower percentage of his income.
They have an inflation adjusted pension – When employer contributions to the teacher pension are included, total savings as a percentage of salary more than 40% aren’t unusual. This level of savings funds an inflation adjusted pension. Pensions are a rarity these days, and inflation adjusted pensions even more so.
The TRS pension in Georgia has been particularly generous over the last several years due to the formula used for providing cost of living adjustments. Under this formula, whenever there is any increase in inflation over a 6-month period, the pension payout will increase by 1.5%. In times of very low inflation – as we’ve encountered over the last several years – the value of pension increases outpaces inflation, and the “real” spending power of pension recipients increases.
The pension is well funded – Between and vesting requirement, the pension is in a healthy position. The assumptions the actuaries made in designing the plan weren’t unduly rosy and the Trustees of TRS haven’t elected to reduce pension costs and under-fund the pension. The contrast with many private companies is stark – for years, private companies lobbied to reduce pension funding, using unrealistically high return assumptions to justify doing so. They elected to pursue a short-term benefit – lower pension costs – to the long term detriment of their employees who were depending on a pension.
Though most of us don’t have a pension, the positive experience we’ve found doing financial planning for teachers is still instructive. First, the reduced spending that inevitably comes from saving a high percentage of income makes transitioning to a retirement budget much easier. Second, a source of income aside from social security is key, and the income should adjust for inflation over time. Finally, in putting together an overall savings plan, don’t take the easy way out and assume unrealistically high returns – stress test your plan and fund the amount necessary to meet your goals.
Micah Porter is a Certified Financial Planner™ located in Atlanta (Decatur). For more information please contact us.