What Professors Should Know About Saving For Retirement
In a 2017 survey of college professors by Fidelity Investments, college professors gave themselves a "B" grade.1 With a profession that prides itself on learning new concepts what's preventing professors from giving themselves an "A" grade?
In fact, nearly 1/3 of professors are not sure of the investment mix of their retirement savings. They don't even know if their investment risk corresponds to their goals for retirement. It is very difficult to save for a goal if you don't know how much you need to save.
Other interesting findings are that many professors feel like they are "novice" investors. Over 1/3 of professors feel that they are "beginners", but this improves with age. In fact, even with Generation X almost half of them feel inexperienced with investing.
The good news is that the survey found that saving for retirement was a top priority for professors. But over half are concerned that they will outlive their money in retirement. What professors believed they needed the most help with are Medicare/health care costs (34 percent) and choosing specific investments (32 percent).
College professors should know three things about saving for retirement.2
How much will you need? The first consideration is how much money will you need for retirement. You need to plan for at least a 30-year retirement. Consider how much social security you will get. The costs of health care will rise as you age, you should factor in this as well. You also need to consider how you will fund any long term care costs.
How much will you get if you have a pension? If you are lucky enough to have a state pension you can include this in the mix of your retirement assets. Some state plans are very generous and are indexed for inflation, but most are not. In Texas, for instance, the Teachers Retirement System (TRS) is not indexed for inflation and will only cover 2/3rds of your salary.
Use 403(b) or 457(b) plans? Most professors will have access to some form of defined contribution plans. It is wise to save as much as possible in these plans. Some plans offer a match which you should definitely take advantage of. You can sock away $19,500 per year in 2020, with an additional $6,500 age 50 and older catch-up.
Short of a public pension, the most common option for professors to save for retirement is through a 403(b) plan. The 403(b) is similar to 401(k) that workers in the private sector use to save for retirement. Contributions are automatically deducted pre-tax from the professors' take-home pay, and their money grows tax-deferred until it’s withdrawn in retirement. The 457(b) plan and is another defined contribution plan offered to state university employees.
The problem with most 403(b) plans is the lack of investment options. Professors must often select from a very short list of investment options. The list is often overloaded with insurance products like annuities and variable annuities that have low returns and expensive fees and surrender charges.3 These options can be beneficial by protecting your principal and perhaps guaranteeing a lifetime income. But with any guarantees, these often come with much higher costs in terms of higher fees. These higher fees and low returns can erode your retirement savings.
Professors need to more actively engage in their retirement savings strategy. For a profession that prides itself on learning, more should be done to be aware of the important choices that you can make for a successful retirement. It is strongly recommended to talk to a financial planner to help guide you on this important path.
*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 for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us 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.