Maximizing Your Retirement Benefits as a College Professor
Working as a college professor and financial planner myself, I have first-hand experience in how to navigate and maximize retirement benefits in this setting. Retirement is significant for college professors since there is a tendency to stay at the same college for a long time and get comfortable and complacent. Perhaps you get tenure and possibly move into academic administration. As a result, you often don't think about retirement since it seems like a long time away.
But there is a tendency not to think comprehensively about retirement and whether you are taking advantage of the great retirement programs in the university and outside. This blog post will discuss the significant ways to maximize your retirement savings as a college professor and provide concrete recommendations. Keep in mind that each university will have different programs, but I've observed these are the most common ones.
1) Max Out Your 403(b) Plan. Some professors are fortunate enough to have a great pension. A pension will give you a lifetime income stream in retirement. If you don't have a pension, you will typically have an Optional Retirement Plan (ORP) or 403(b). A 403(b) is similar to a 401(k) in the corporate world. Try to contribute up to the maximum amount to your 403(b). If you don't have a pension, most college plans provide a match for your 403(b) contribution, which can be very generous. Unfortunately, most universities will not give a match to both a 403(b) and pension. You could also open a 403(b) plan with the college that allows employee deferrals from your paycheck. The main message is to try to save up to $20,500 in 2022 in your 403(b) plan if you are under 50.
Don't just have the basic pension or ORP default contribution and not go above what the college provides. To maximize your retirement savings, go beyond the default settings. Most universities realize that what is saved in the pension or 403(b) will not provide enough for you to live a comfortable retirement. Therefore, they offer many alternatives to these basic programs. Check with your HR Department and learn more about what other retirement saving you can participate in at your university.
2) Save in a 457 plan. A 457 is an option for many college professors. The benefit of a 457 plan is that the deferral limit is not aggregated with the 403(b) plan. So you could potentially save $20,500 under age 50 in each of these accounts. Also, there is a benefit in that when you separate from service and are under 59.5; you will not pay the 10% penalty on early distributions. If you withdrew the money from the 403(b) plan, you would typically pay a 10% penalty from the distribution.
3) Save in a Roth IRA. Another way to maximize your retirement savings is to save in a Roth IRA. You can put in $6,000 in 2022 if you are under 50. Of course, you will be putting in after-tax money, so there is no tax savings upfront. But the benefit is that when you retire, the money you contributed and earnings will come out tax-free. So a Roth IRA can have tremendous tax savings from tax-free growth in earnings.
So to summarize, you have tried to maximize your ORP and saved money in a Roth IRA. One note to keep in mind is that Roth IRAs have income limits for direct contributions, so you should talk to a financial advisor about doing a backdoor Roth if you are over the income limits.
As you can see, there are many good options to save for retirement being a university professor. However, some unique options like the 457 plan are not available in the private sector. Also, being passive and not actively saving on top of the university defaults might not put you on a solid path to retirement. From my years of experience, most faculty don't take advantage of their retirement benefits. Reach out to me to schedule a call, and I can provide a retirement readiness assessment to make sure you are on target for a successful retirement.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. In addition, individuals involved in the estate planning process should work with an estate planning team, including personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.