Should You Save Your Retirement From TRS?

Thank you for taking the time from your busy schedule to hear a message that your school district is most likely NOT sharing with you.

In just a few short minutes I want to share with you what mistake I’m speaking about, how you can avoid it and how you can significantly improve your retirement.  This is strictly to make you aware. But after hearing this information you’re going to want to have a meaningful conversation about how to protect yourself and your future financial security.  About 80% of Texas teachers could be making a huge retirement mistake.  The question is, are you one of them?

As I’m sure most of you are aware between 2008 and 2009, the State of Texas amended their pension benefits in a way that both reduced future benefits for their employees and also increased the percentage that employees had to contribute to the pension fund.  And, of course, in 2011 the State of Texas increased the age to receive full pension benefits for those teachers currently under 50 years of age.  This incremental age increase will most likely only continue until the eligibility age falls more closely in line with Social Security.

Here is some information from a study done in 2010 by the Pew Charitable Trusts State and Consumer Initiatives, Texas received a grade of “Needs Improvement” on their pension, as well as for the retiree health care non-pension benefits.  As if it isn’t bad enough that many states are letting their employees and their teachers down, consider a report from the Teachers Salary Project Documentary, “American Teacher.”

As of 2012, there were an estimated 3.2 million public school teachers in the United States.  Of those 3.2 million, 1.8 million will be eligible for retirement over the next 10 years.  Imagine what is going to happen to already struggling and underfunded retirement pension systems over the next decade, as wave after wave of baby boom generation teachers begin to retire.

These teachers who are at the top of the pay scale are no longer contributing into the system, but instead will be taking 75% to 80% of their last salary out of the system every single year, some for as long as another 40 years.

Even if every single teacher who retires is replaced, there is no way that the new incoming teachers, who will likely be near the bottom of the pay scale, will be able to make up for the huge sums of distributions that are now due to these teachers who are retiring over the next 10 years.  Of course, while that’s always been the way it is, that older teachers retire and are replaced by new younger teachers, there’s never been a generation like the baby boomers who are going to be retiring in mass like we are about to see, beginning today.

One other change that you probably are not aware of; as of September of 2014, TRS will no longer be crediting the annual rate of return of 5% as in the past.  While this has always served as a somewhat reasonable reason for former teachers to leave assets behind in their TRS accounts, this benefit is also being reduced.  The current 5% credit will be decreased to a mere 2% in only a few short months, significantly reducing your future account balance.  This is a huge deal.  Consider the following:

If a teacher taught for 7 years before leaving to pursue another career, they would separate from service with approximately $21,000 in their TRS account.  Considering they still had another 30 years until retirement, their future account values would be as follows:

At the current 5% rate of return account value would equal $90,760 after 30 years.

At the new reduced rate of 2%, the account value will equate to $38,038 after 30 years.

I’m sure you agree this is a huge deal, yet very few teachers have any idea that this is coming.  With all of this in mind, it would be very wise to consider the different avenues that are available to save for retirement outside of these pensions.  Fortunately, there are other plans out there and it’s not difficult to get started.  Choosing the best plan compared to the plans 80% of Texas Teachers choose could equate to tens of thousands of dollars more for your retirement years.  Learn what the best retirement plan is for you and why choosing that plan will instantly put you ahead of the vast majority of teachers.

Learn how to get the absolute best plan and be protected just in case Texas further alters pension benefits in the future that could lead to increasing your number of years to work, all the while also increasing your required contribution and decreasing your overall benefit.

It’s important to care about yourself enough to plan and save more than you think you may need for the future, rather than less.  Or, you could simply rely on the state in the hopes it will provide you with the retirement you’ve earned and you deserve.

Social Security Changes Take Many by Surprise

You may have heard various dates thrown around predicting when the Social Security trust fund will finally run dry. It’s a favorite current events small-talk subject (or maybe that’s only in the finance-nerd circles I run in.) I’ve been telling my baby boomer clients for years that they probably have very little to worry about. Surely congress will gut the other programs available to them before they dare disturb an 80-million-strong voting population. Late last October, with the passage in the U.S. Congress of the Bipartisan Budget Act of 2015, I got to eat some crow. You may not have seen much coverage of this bill in the news media. But tucked into the routine budget bill that allowed the government to avoid a shutdown is some curious language relating to Social Security retirement benefits.

What the bill does is eliminate some so-called “creative filing strategies” that have been available to seniors since anyone can remember. The most popular of these is known as “file and suspend.” If you are the spouse with the lower lifetime earnings, and you have reached full retirement age (FRA), this allows a you to elect your benefits, then immediately suspend, or turn off, said benefits. You are now able to elect spousal benefits based on your spouse’s earnings, while allowing your own retirement benefits to continue to “roll up” until you are ready to turn them back on.

This bill was overwhelmingly supported on both sides of the aisle, and numerous articles have been written since then explaining why these changes have minimal impact on most seniors. The problem with statistics is when they don’t apply to you. However little the average person might have saved with these strategies, they made a huge difference to some people, such as divorcees for example.

In his Forbes article, Jamie Hopkins states, “Most of these changes are not entirely surprising as President Obama’s budget proposals over the last few years have made mention of reducing and eliminating ‘aggressive claiming strategies.’” That sounds a lot like the “loophole” argument that politicians love to use when raising taxes. My response would echo United States district judge Learned Hand, who stated in 1935, “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” By this definition, a “loophole” is just a piece of tax code that a politician finds inconvenient.

Mr. Hopkins goes on to say “the most shocking part of the current budget agreement is how quickly this rule change will be implemented and the fact that it would eliminate Social Security benefits for people already collecting.” This puts a very clear point on my frequent caution to retirement planning clients: consider Social Security to be “gravy.” If you rely on the government for your well-being in retirement, don’t forget that they can change the rules whenever and however they choose, and you might have no choice but to play by the new rules.