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Wanna feel old?

Hand your smartphone to a kid in your school. One of several things will happen. They will:

• make a remark about how old your phone is,
• laugh or despair at the apps you’re using (or not using), 
• be amused at the ‘old school’ songs on your playlist, and/or
• explain how to use your phone or app in ways you never knew about. 

Even if you’re a young 20-something educator, you’ll become old(er) in a heartbeat. 

I felt old the minute I walked into Hough Elementary School as a ‘young’ educator in 1992. And I could not help but feel older than the students (and some of the teachers) who crossed my path over the next three decades. But I also recall feeling younger because I was surrounded by newer generations and their energy. I think that’s one reason that I enjoyed coaching as much as I did. 

Working in PK-12 education, we are surrounded by youth. Between living in a society which persistently values and seeks to preserve youth and being surrounded by kiddoes in our schools, educators can be forgiven for living in a hallucination of youthfulness.

But financial independence and retirement means we must accept and plan for a future in which we will, inevitably, be old(er). As educators, we need to see past this blur of youth to plan for a future which becomes the present faster than you’d imagine. 

Old(er) is in the house

I recently turned 59½. For those of you who have been saving for retirement, you should recognize the significance of this event. After decades in which my investments were cached away and protected by the threat of IRS penalties for early withdrawal, this magic milestone finally arrived. As far as the Internal Revenue Service is concerned, I qualify for retirement. I am legally old(er). 

[Hang the Dollar City ‘Over the Hill’ banners]

Despite this retirement early warning, senior discounts are still years away. A half decade remains before I qualify for Medicare and begin collecting my pension benefits at age 65. And Social Security lies well beyond that, at or after age 67.

But after consistently, patiently, and, at times, aggressively investing into 403(b) and 457(b) retirement plans, I have reached an age in which my nest egg suddenly glows like something laid by a Golden Goose in Willy Wonka’s candy factory. It’s there for the taking.

Back off, Veruca Salt. That egg is MINE!

Welcome to the six figure club

I can’t recall exactly the amount of the first contribution I made to my first 403(b), but it didn’t have a lot of zeros after it. One, maybe two. Like either $50 or $100. Sure it was a monthly contribution, but getting from $100 to $10000 was measured in years, punctuated by some epic stock market peaks and valleys.

And getting to six figures? Decades. 

But thanks to the consistency, frequency, and efficiency of investments over decades of saving, my quarterly statements are all grown up. On paper, I am far wealthier than I ever could have imagined when I first began investing. This is a great thing for my net worth and financial security. But it creates a few new challenges.

Taxes deferred, but not forgotten

Many educators invest in pension, 403(b) and 457(b) plans which offer tax-deferral. Put simply, qualifying contributions to these retirement accounts lower taxable income in the year they are made. But when you begin taking the money out in the future, it is considered taxable income just like the money earned from teaching, driving a bus, or serving up school lunches. And like employment income, the amount you pay depends on where you fall on the progressive tax schedule. 

Since I am not currently in a full-time job and am not collecting pension or Social Security benefits, my wife and I are likely in a lower tax bracket than when we were both working. If I choose to take some money out now, I won’t pay too much in taxes. 

But when we turn 65, we will begin collecting pension benefits. While these will likely be less than what we earned when we were both working, when we add in Social Security benefits, our monthly cash flow will further grow and almost certainly exceed what we made on a month-by-month basis when we were working. 

While that may or may not make us ‘well off,’ we will be a whole lot wealthier than when we started teaching! And when we pull money out of our retirement investments, the hit to our taxes might move us into a tax bracket we never imagined visiting. 

The upshot is that after decades of reasonably stable earnings and taxes, every year after 59½ has the potential to be radically variable as it relates to income and taxes, particularly if you begin taking money out of your retirement investments. On one hand, you may be sitting on a golden nest egg. On the other hand, you might be looking at a sizable tax bill. 

Accumulation meets decumulation

With a wave of baby boomers continuing to age into retirement, financial writers are increasingly focused on the idea of decumulation, a fancy word for spending a lifetime’s worth of investments. As it turns out, shifting from a lifetime of saving to spending your investments is harder than it would seem. 

According to a post on Wellington Management, “Among investors pursuing long-term objectives like retirement, there is an understandable tendency to focus on the accumulation of assets, and the process, while by no means easy, is fairly straightforward, with a limited number of variables to consider. But as populations around the world age and increasingly need to tap into accumulated wealth, there will be a growing focus on and demand for sound decumulation practices — and here the investment challenge is decidedly more complex.”

There are at least three challenges as you begin spending down your retirement assets. 

Not running out of money – as I’ve written in other posts, many educators have leg up thanks to their pensions, but they will still need to figure out if, when, and how they tap into their retirement investments so that these assets can be leveraged across multiple decades of retirement. 

Taxes – as mentioned earlier, taxes suddenly become more complex. To use a phrase jokingly attributed to George W. Bush, you need some strategery to dodge what can be significant taxes as you spend down your various retirement and other investments. Do a Google search for ‘taxes in retirement’ and you’ll get dozens of sponsored pages from various investment and tax sites with advice about how to juggle your retirement assets to maximize return and minimize what you pay in federal and/or state taxes. 

Emotion – while it might seem counterintuitive, after years of investing, it can be hard to shift from saving to spending. For this reason, many retirees underspend in retirement. According to Todd Taylor, head of New York Life’s retail annuities business quoted in Barrons, “…the primary driver behind underspending is uncertainty….Many Americans are responding to all that uncertainty with conservatism,” Taylor says. “They are self-insuring by holding on to their assets.”

On the Bogleheads discussion board, one person wrote, “… after so many years of being frugal and saving, I start to panic when I think of taking money out of my accounts and drawing down the balances.” 

Health and insurance 

Many educators enjoy reasonably good health insurance when they’re working. And while employees are paying more each year, things change very quickly when you’re old(er). Once you move away from covered employment, the cost and complexity of health insurance changes overnight. 

When you’re 65 years old, you qualify for Medicare, but the options, choices, and decisions associated with senior health insurance can feel like gazing into an Escher illustration. Part A? Part B? Part D? Advantage? And I need to make a decision by next week????

If you’re not yet 65 years old and don’t qualify for insurance through employment or your spouse/partner, you’re suddenly going to pay the list price for the insurance that your employer helped subsidize when you were working. In a heartbeat, you’ll realize just how much your employer was contributing to your health insurance premium. 

And, speaking from experience, getting old(er) also reminds us that we cannot outrun our genes, childhood injuries, bad habits, and entropy. Even if you’ve enjoyed a relatively healthy life, getting old(er) means you’ll be spending more money, time, and effort on staying healthy in your later years. 

Whether you’re old or just older than you were last year, I challenge you to begin thinking about some specific strategies for your old(er) future self.

Map your future wealth

While today, you might be living paycheck-to-paycheck and scrambling to pay the bills, if you’re saving into a 403(b), 457(b), and/or a defined contribution pension program, you’re also building some future wealth. Thanks to dollar cost averaging and compounding interest, today’s three figure contributions can become tomorrow’s six figure nest eggs.

Take the time to use a simple online calculator that will give you an estimate of how much money you might have when you get around to becoming financially independent and/or retired. 

There are many calculators out there, but as a starting point, I’d recommend the one at investor.gov, provided by the U.S. Securities and Exchange Commission. It’s relatively simple, uncluttered, and devoid of any advertising or commercial links. You’ll need to know a few basic things.

• How much money you currently have in your investments. You can either add them up or calculate them separately. To start, I’d recommend just adding them up. Round up or round down. You can get fancy next time.  
• What rate of return you’re getting on your investments. Again, this could be calculated separately if you want a more accurate estimate. If you’re not sure what you’re making on your investments, you can usually find an aggregated rate of return on your pension or investment site. If you’re invested in stocks and/or target date funds, plugging in a number between 5-7% is a reasonable back of the napkin starting point. 

I’ll warn you that playing around with the calculators can become a bit habit-forming. While the starting amount is fixed, you’ll inevitably start tweaking the contribution rates and/or estimated rate of return. Keep in mind that rates of return on virtually all retirement investments are variable and subject to the ups and downs of the economy and market. And that this estimate is just that — an estimate. But it will help you get a better sense of the impact of saving consistently over time. And it might even motivate you to save a little more in the future!

Review your tax-advantages

While most educators are likely invested in 403(b), 457(b), and defined contribution pension programs which defer taxes until retirement age, Roth investments are worth exploring to temper your future tax bill.

Investments in Roth accounts are made with after-tax dollars, but grow tax-free and future distributions are also tax-free. While there are specific IRS policies and restrictions unique to Roth programs, these investments are a great way to help you to minimize future taxes in retirement, particularly if the calculations you just made suggest that you might be rich one day….

While Roth options have been around since the 90’s, they are far less common and known in educator investment circles. If they aren’t available through your 403(b) or 457(b) programs, you can always personally fund a Roth IRA on your own.

Begin thinking like an FIE

Finally, it might help for you to begin thinking about what you like to be when you grow up, or at least when you turn 59½ (or 65, or 67). Do you plan to keep working for 30 years? Until a certain year? What is your spouse, partner, and/or family doing? Where are you living? Who’s paying for health insurance? 

You don’t need to have all the answers, but simply imagining a future in which you are old(er) and/or a Financially Independent Educator can help break the hallucination of youthfulness that surrounds us in our schools.

What might you do when you qualify for retirement benefits and/or begin spending your investments? Volunteer for a non-profit? Travel? Go RVing? Move to Portugal? Buy a convertible?

Plant a tree

My wife and I just planted a flowering tree in our front yard. It’s a Texas something or other, but we call it Bubba, because that’s the name of the variety of this species. We selected it based on a few criteria — future size, appearance, hardiness, etc.

We took a selfie next to it because it’s currently a little shorter than we are. But we know that by the time we turn 65, it will be far taller. And, with luck, in another decade, it will be looking down on us.

I think this is a useful metaphor in a few ways.

As educators, we are always working with youth. Our schools are like groves of small trees which we seek to nurture and protect so that they might grow into something amazing. As a teacher librarian, I didn’t have my own classroom, but I did get to see kids grow up as they visited the library over the years.

Kindergarteners who began with picture books grew into fifth graders reading Harry Potter. Geeky tenth graders graduated from manga and edgy young adult novels to being too cool (or busy) as seniors to come to the library any more. I would watch them cross the commencement stage and, like their parents, wonder where the time went.

As financially intelligent educators, we can similarly plan for our future by planting and cultivating investments that will grow with us over time. Invest (or increase investments) in a 403(b) or 457(b). Keep feeding it with consistent contributions. Appreciate its slow growth when the quarterly statements show up. And don’t freak out when the market drops. Storms happen. Your tree might shed a limb, but it will keep growing.

Before you know it, you’ll have one or more investments that stand strong and tall, providing you with happiness and security when you are ready to become a Financially Independent Educator and/or retired.

Trust me, as someone who just turned 30, it’s nice to have some shade when the IRS starts calling you ‘old.’

That and a kid who can explain why my phone isn’t working right. 

You. Can. Do. This.

Now

1. Add up your current retirement savings and do a quick calculation of what you might end up with at your anticipated retirement (or FIE) age.
2. Just for kicks, double your current contribution rate and see what that does to your projected future value
3. If you haven’t started saving for retirement in a 403(b) or 457(b), find out what options your school district offers.

Next

1. Do a little research on Roth retirement accounts.
2. First, check to see if your existing 403(b), 457(b), or defined contribution plans offer a Roth option.
3. If not, find out if you could fund a Roth IRA on your own.