Financial Planning for Teachers

Financial planning is important for everyone, regardless of your profession. However, when it comes to teachers, the need for financial planning becomes even more crucial. Unfortunately, teachers are not paid enough so they can’t rely on their income potential to make up for years of bad financial habits. It is essential for teachers to develop good financial skills early on so that they can build wealth and live a life they love.

I started out my career specializing in retirement planning for PERS members, which is Oregon’s State Retirement System, so I ended up working with a lot of educators over the years and have seen firsthand the unique challenges that they face when it comes to their finances.

In honor of teacher appreciation week, I wanted to put together this list of the top financial planning tips that have been the most helpful for teachers over the years.

1. Create a budget

The first step in any financial plan is to create a budget. This is especially important for teachers, who often have to live on a fixed income. Start by tracking your expenses and income for a few months to get an idea of where your money is going. Then, create a budget that includes all of your essential expenses, such as housing, utilities, food, and transportation. Make sure to also set aside some money for savings and any discretionary spending.

Here’s a tip: A lot of teachers get paid in a lump sum for the summer months. While this can be tempting to use on your summer vacation, I recommend putting that paycheck directly into your savings and then transferring your monthly net income into your checking account each month. This will help you to not overspend and be left barely scraping by towards the end of summer.

2. Learn about your state’s pension plan

Another important aspect of financial planning for teachers is understanding your state's pension plan. Pensions can be complex, and it's important to know how your plan works so you can make informed decisions about your retirement savings. It’s also important to make sure you understand the difference between plans for your state so that you don’t make decisions based on information that doesn’t apply to you. For example, in Oregon, Tier 1 members can expect their pension to provide roughly 80% of their working income in retirement but OPSRP members should only expect their pension to pay out roughly 40% of their working income in retirement. For most teachers, your pension is going to be the foundation of your retirement plan so it is important to take it seriously.

Here’s a tip: If you ever move out of state or leave your state’s pension plan, be really careful about rolling over your benefit. It is common to work with an advisor who might not be familiar with your state’s pension plan and might advise you to roll your plan into an IRA, but be careful and make sure you do your due diligence before making this decision. Oftentimes, you will forfeit benefits entitled to you and lose your status if you were to return to the plan.

If you have any questions about your state's pension plan, don't hesitate to reach out.

3. Establish a 403b

As a teacher, you may be eligible for a 403b through your school district. A 403b is the public version of a 401k and offers many similarities. I recommend starting a 403b as soon as you can, even if all you can do is the minimum $25/m contribution. This can be set up directly from your payroll and is most often pre-tax so will reduce your taxable income. However, it is up to each district whether they offer pre-tax contributions and/or post-tax contributions, matching contributions, and whether they provide multiple 403b vendors to choose from. The first step is to gather information from your HR department about what they offer. If you do have multiple 403b vendors to choose from, opt for a vendor that offers mutual funds rather than annuities.

Here’s a tip: You might hear the term TSA referred to synonymously with 403b. TSA stands for tax-sheltered annuity and was the original retirement plan offered for teachers. Because of this, annuities are still very predominant in the school districts. However, I like to look at annuities within a 403b plan as opening an umbrella indoors. The benefit of a TSA is that it is tax-sheltered but you are already getting those same tax benefits underneath the 403b so there is usually no need for the extra fees associated with annuities.

If you have any questions about 403bs and choosing the right option for you, schedule a call with us today.

4. Build an emergency fund

An emergency fund is a crucial component of any financial plan. This fund can help you cover unexpected expenses, such as a medical emergency or car repairs. As a general rule, aim to save three to six months' worth of living expenses in your emergency fund. If you are just starting out, set a small goal, such as saving $1,000, and work your way up from there.

5. Pay off debt

If you have any high-interest debt, such as credit card debt or personal loans, it is important to pay it off as soon as possible. High-interest debt can quickly spiral out of control, making it difficult to achieve your financial goals. Start by making a list of all of your debts, including the balance and interest rate. Then, prioritize paying off the debt with the highest interest rate first.

Here’s a tip: If you have student loans, consider consulting with a professional before prioritizing paying them off. Many teachers may be eligible for the Teacher Loan Forgiveness Program and/or the Public Student Loan Forgiveness Program. It is worth understanding the type of loans you have and exploring all the options available.

6. Establish a Roth IRA

The most common missing element in a teacher’s retirement plan is post-tax money. Your pension and most 403bs are pre-tax so when you get to retirement, you will have taxable income coming in for your pension, and any money you withdraw from your pre-tax accounts will also be taxed as ordinary income. You might hear people argue that you should save all your money in pre-tax accounts while you are working because you are in a higher tax bracket and when you get to retirement, you will be in a lower bracket. Let me tell you, for the majority of retired teachers that I have worked with, this is simply not the case.

Establishing a Roth IRA allows you to have both pre-tax and post-tax money in retirement which gives you power to control your tax bracket and be strategic with your income. You can contribute up to $6,500 per year to a Roth IRA (or $7,500 if you are over age 50), and your contributions will grow tax-free. When you withdraw funds in retirement, you won't owe any taxes on the money you contributed or the earnings it has generated. Keep in mind that there are income limits for contributing to a Roth IRA, so be sure to check with your financial planner or tax professional to see if you are eligible. By establishing a Roth IRA, you can diversify your retirement savings and potentially enjoy tax-free income in retirement.*

7. Build non-retirement wealth

Many teachers do a great job saving for retirement and maintaining an emergency fund but they often don’t have any wealth that they can access prior to retirement. This is especially important for teachers because it is common for your 403b to not allow loans or distributions unless you are separated from service. This is subject to how your district set up the 403b plan and can be found by accessing the plan documents or asking HR. It is also common for teachers to retire prior to 59.5 which is the penalty-free age for accessing IRA money (403bs can be accessed at 55 as long as you are separated from service). I recommend building wealth outside of your retirement accounts that you can access for big purchases, specific financial goals, or early retirement.

8. Take full advantage of discounts and programs available for teachers.

I always recommend that teachers take advantage of the discounts and programs available to them. Many companies offer discounts to educators, and there are also programs specifically designed to help teachers save money. One tip for exploring these discounts and programs is to start by checking with your school or district. They may have partnerships with local businesses or organizations that offer discounts or special deals to teachers. You can also check with national organizations like the National Education Association (NEA) or the American Federation of Teachers (AFT) to see if they offer any programs or discounts for members. Additionally, many retailers and service providers offer discounts for educators, so it's worth doing some research to see if there are any deals that can help you save money on everyday expenses. By taking advantage of these discounts and programs, you can free up more money to put toward your financial goals, such as paying off debt, building your emergency fund, or saving for retirement.

9. Invest in yourself

As a teacher, your education and professional development are important investments in your future. Consider taking classes or attending conferences that can help you improve your skills and advance your career. By investing in yourself, you can increase your earning potential and achieve your financial goals more quickly.

In conclusion, we are honored to have worked with many teachers over the years who have dedicated their lives to shaping the minds of the next generation. Being a teacher is not an easy job, and it takes a special kind of person to inspire and educate young minds. Teachers work long hours, often with limited resources, to provide their students with the knowledge and skills they need to succeed. They are mentors, role models, and champions for their students, and leave a big impact. Sadly, they are not fairly compensated for the work that they do and as such, finances can be a large weight in their lives. We hope these tips can help you take control of your finances and if you need additional support, we would be happy to help.

We are here to help you navigate the complex world of personal finance and help you make informed decisions that align with your goals. Connect with us to take the next step toward reaching your own infinite heights!

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.

*A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.