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How many legs do you have?

At the local Starbucks, reclaimed metal classroom stools used to be lined up along the window bar as part of their retro – hip – industrial decor. I remember these stools both from my days as a student and early days as an educator. Back when I was a student in shop and science classes, there was always jockeying as we shambled into a classroom to find a place to sit.

If we were lucky, we found a stool in which all four legs were intact and the glides were present and balanced. If we came in late or chose poorly, we suffered quietly, sitting on a stool that would rock back and forth through the entire class. (For the record, the internets confirmed that the things on the ends of stool and chair legs are called glides.) 

While modern classroom seating has become more sophisticated, the classic classroom stool is a great way to begin understanding the four main legs of retirement planning, and, wait for it…gliding to financial independence. This post will introduce the idea of a multi-legged strategy for retirement planning and why many educators — pleasant surprise! — start with extra stability. 

The first leg – your pension

The majority of public school educators and many other public service workers still have pensions. Much of the rest of the U.S. working world wishes they had them too. 

Pensions are defined benefit programs which provide you with regular payments (usually monthly) that begin when you qualify for retirement and continue until you die. How much you receive is based on a number of variables including your plan, salary, years of service, and when you retire. There is much more to understand about pensions, but we’ll leave that to the post Why Pensions Are Your Last (Almost) Free Lunch. 

Pensions are a missing leg of retirement planning for most American workers. As a result, few financial bloggers or planners have expertise or provide guidance in the area of pensions or retirement strategies that include pensions as part of the plan. More importantly, a lot of retirement planning advice on the web (4% Rule, etc.) is predicated on NOT having a pension as a component of your retirement plan. This is one of the many reasons for this blog.

The second leg – Social Security

Like pensions, Social Security is also a defined benefit program. Most Americans contribute to Social Security during their working years and when they retire or become disabled, can collect benefits. Your benefits are based on your earning history for Social Security-covered employment. 

Educators in some states do not contribute to Social Security. For my colleagues in Washington, Idaho, and Oregon state, you’re probably good. For my colleagues in California and Texas, et. al., this leg may not be part of your retirement stool. If you have been an educator in more than one state, it’s a good idea to do some research (link above) to find out if and how much you paid into Social Security.

Additional posts about Social Security are in the works….

The third leg – Tax-advantaged accounts

Unlike the other legs (pensions and Social Security), tax-advantaged accounts are usually not automatically part of your payroll deductions and are considered defined contribution plans. Tax-advantaged accounts are often known for their references to the U.S tax code — 401(k), 403(b,) 457(b), 529, HSA, Roth, SEP, etc. Tax-advantaged accounts are external investments you choose to make, most often for the purpose of retirement. They can be made either through elective payroll deductions or independent contributions. 

While there are many types of tax-advantaged accounts, they are all investments which either defer immediate taxes and/or eliminate future taxes. Because of this, they are powerful tools to build wealth and security as a complement to pensions and Social Security. For many non-educators, tax-advantaged accounts make up the vast majority of their retirement savings alongside Social Security. As an educator, they can and should be a ‘bonus’ leg to ensure your financial independence. 

The fourth leg – taxable accounts

Taxable accounts are savings or investments which do not enjoy tax protections. These can range from savings accounts or certificates of deposit (CDs) in a bank or credit union or take the form of other investments such as mutual funds, stocks, bonds, etc. If you receive interest, dividends, or capital gains from them, you pay taxes on that growth. While taxable accounts are often overlooked as a component of retirement savings, they are necessary and useful as part of a basic four leg retirement planning. Taxable accounts should serve as your emergency fund and can be an important part of a bucket strategy for financial independence. 

To quickly review, here are the four legs of the educator retirement plan

Pension (Defined Benefit)
+
Social Security (Defined Benefit)
+
Tax-Advantaged Investments
+
Taxable Investments
=
Financial Independence and Retirement Success

Why four legs are better than three…

And much better than two. 

While educators may not enjoy some perks of working in the private sector (profit sharing, company car, all-you-can-eat energy bars, executive washroom, stock options, etc.), they do have access to pensions. A pension provides guaranteed retirement income until you die.

For a variety of reasons, pensions are simply not available to most non-educators. As a result, retirement for non-educators usually rests on two or three legs vs. four for public educators. Instead of having the guaranteed defined benefits of a pension, non-educators must rely on making their own investments (defined contributions) during their working life to create a large enough ‘nest egg’ that when combined with Social Security and taxable accounts, provide for themselves and their family when they retire. 

When you read about financial planning for non-educators, there are often references to 401(k) and other defined contribution retirement plans. These types of plans emerged in the early 1980s originally as a complement to and then later as a replacement for pensions and defined benefit plans.

This CNBC article provides a great history of this epic shift in retirement planning for Americans. Today, for many workers, defined contribution plans like the 401(k) are one of the only legs for saving for retirement and have become a necessarily outsized part of their future planning. And for those who have neither pensions nor save sufficiently in defined contribution plans, they will rely on another shaky leg, Social Security, which was never designed to fully support the weight of a person’s retirement. 

What does the four legged retirement stool provide?

Stability

If we accept the idea that a four legged stool is more stable than one with fewer legs, then most educators are already ahead of the game when it comes to financial independence and retirement. Because most educators are automatically enrolled in a pension program when they become employed, one very important leg (their pension) is already in place, growing in value with each pay raise and month of service. 

But as I shared in other posts about my parents, educators who sit on two or three legs for their retirement may find themselves on the floor when they stop working. Educators like my parents who rely on only two legs — pension and Social Security — can face financial hardship in their later years. By not making other investments to provide additional security and income, they retired unprepared and underfunded. Savvy educators recognize that supplementing their valuable pensions and Social Security benefits with additional investments (both tax-advantaged and taxable) is the key to financial independence and stability.

Balance

Another advantage that educators enjoy is not having to use defined contribution plans as the main leg of their financial planning. Educators with pensions can use defined contribution investment plans to complement their pensions, building additional wealth and flexibility. By contrast, non-educators and those without access to pensions must accumulate a significant nest egg which must not only be contributed to and managed during their working years, but then strategically utilized to provide retirement income. 

Many financial blogs suggest that retirement savers without pensions should save at least $1 million before retirement with many recommending even more. The reason for this significant amount is that non-educator retirees must use this one pool of money to provide income during the 20-30 years of a typical retirement during which both the economy and financial markets will both rise and fall.  

Security

There are the various projections and concerns about the future of Social Security. While I personally believe that lawmakers will eventually address the need to stabilize Social Security, educators who have three other retirement legs in place can sleep a bit more soundly than non-educators for whom this critical leg keeps their stool from tipping over. 

When I began saving for retirement, my goal was simple — save enough money so that even if Social Security went ‘poof,’ my spouse and I would still be secure. I realize that sounds like I’m a personal finance prepper, but by building a retirement plan which allowed for a shaky leg or two, financial independence suddenly went from ‘maybe someday’ to ‘let’s do this!’ 

Here’s the good news for you. Without much effort on your part, you likely already have some level of retirement security in place. In most cases, you were automatically enrolled in a state educator pension program and with your first paycheck began contributing to your future pension. Additionally, if you were hired in the last few decades, you are also likely invested in a defined contribution plan as many educator pension programs have become ‘hybrids’ which combine defined benefits with defined contributions. 

While current plans are not as generous as they have been in the past, even a modest pension benefit of $1000 a month is worth $360,000 over 30 years of retirement, not counting cost-of-living adjustments. While pensions may not provide enough income, even with Social Security benefits, financially independent educators can fill in the gaps by adding legs to their retirement stool. Each leg does its job to provide stability and balance.

Flexibility

Without getting too geeky here, having four or more legs in your retirement stool also gives you a lot of flexibility when you get around to using the money that you’ve saved and for which you are entitled. Whether you need money for a vacation house, an extra college education, early retirement, or want to manage your taxes when you retire, having different income streams and pots of money (ideally both taxable and tax-free) is the very definition of financial independence. This flexibility gives you choice, agency, and capacity to be well off on your own terms.  

Fifth leg – real estate

Real estate (your home or other property) can also be considered a useful leg of a retirement strategy, providing additional stability both in the present and the future. I don’t include this as part of the core strategy for a few reasons (and you are free to disagree).

First, real estate is often not owned outright, but financed through mortgages or loans, a.k.a. debt. The four legs of this retirement stool all reflect owned or future assets and income — while their value may fluctuate, they are ‘debt independent.’

Second, while real estate can be leveraged in a variety of ways (equity, rental income, reverse mortgage, etc.), accessing that value or income may require selling or borrowing against it. For this reason, I don’t include it as a core leg. But if you own a home or other property, great! This is a useful ‘fifth leg’ to your financial independence. 

Final thoughts from your office chair

Keeping with my theme of mashing up classroom seating with financial planning, I want to shift from the stool to another piece of furniture in schools and classrooms — the office chair — as a sort of metaphorical proof of my multi-legged strategy for financial independence and retirement. 

In the old days, these chairs were beasts -— crafted from oak or steel and festooned with solid steel bolts, springs, and casters. From a distance, these chairs were like tanks, both sturdy and durable. 

But look around a modern school or classroom. Unless you’re teaching in a seriously vintage schoolhouse or scavenged one from a garage sale, you’ll be hard-pressed to find these for one main reason. Though modern chairs are now fashioned from plastic and seem almost disposable, they have something that most older chairs lack — five or six legs, making them more stable and less likely to tip over.

This introduces a Fire Me Mantra — More Leads to More

• More legs provide…
• More options provide…
• More wealth provides…
• More security provides…
• More choice provides…
• More financial independence.

In other posts, we will look at these legs and ‘seating options’ to create even more stability and flexibility as a financially independent educator. 

You. Can. Do. This.

Now

1. Based on this post, which of these legs do you know the least about?
2. Do a back of the napkin / top of the head calculation of how much you have for each of these legs.

Next

1. Start learning more about ONE of the legs listed above.
2. Search the FIRE Me Library or the web to begin learning more.
3. Identify questions or uncertainties that need further exploration.