Despite loving teaching the next generation new skills and wisdom, every teacher reaches a point where they are ready to retire. Many teachers are eligible for a pension above $45,000 per year1 in the state of New York. Some teachers are also able to invest in defined-contribution retirement plans such as 403(b) and 457(b). Unfortunately, most teachers are not eligible to receive social security retirement benefits, which can cause some anxiety around retirement for some teachers. However, there are investment options teachers can make that can help them afford a comfortable lifestyle once they retire. Below, you will find some potentially great investments you can make before you retire from your teaching position.
Roth IRA
Some teachers find that investing in a Roth IRA* is a better option than, or in addition to, their government-issued retirement plans. If you are under the age of 50, you can make a contribution of $5,500 per year, and if you are older than 50, you can invest $6,500 per year, certain income limitations apply. Then, this money is accumulated on a tax-deferred basis. It is important to note that your investments in a Roth IRA are not tax-deductible which is one downside of a Roth IRA. However, your investments are not taxed when withdrawn from your account after you reach the age of 59 and a half and if the account is over five years old.
Investing in a Roth IRA can be a great way to give you some freedom with your retirement investing. They are usually self-directed accounts, giving you the ability to choose which investment options you would like to use. A Roth IRA can be a good option, considering you will generally not be taxed on your withdrawals after age 59 and a half, which is the average retirement age2 for teachers. Not to mention, it is incredibly easy to open up a Roth IRA, as long as you are not limited by the income restrictions3 set in place. If you are looking to diversify your retirement investments, you may want to consider a Roth IRA.
Real Estate
Investing in real estate is a very common investment for people to make in preparation for retirement. There is a reason for this, which is the fact that real estate is considered an easy, fairly low maintenance investment. Purchasing a real estate property that you can lease out to tenants may be an excellent way to make some additional income each month. The trick is to do your research on areas with a high volume of renters and purchase a clean home. You may have to put some additional money into the home to spruce it up, but if you charge your tenants the right price, you could potentially make this money back in addition to some profit over time. You may also be able to write off improvements as a business expense on your taxes, as it is for your investment property, your accountant can provide more complete details regarding tax advantages and disadvantages of real estate investments.
You may be wondering how much money you can potentially make each month from a rental property. Based on the amount you can put down on the home for your mortgage, you will want to charge your tenants a few hundred dollars more than how much you pay the bank each month. For example, if your mortgage payment is $1,500 per month for the home, you would want to charge your tenants $1,800 to $2,000 per month. It is important to research how much other landlords are charging their tenants for similar rentals in the area. Providing the rent you collect is higher than the mortgage payment, you should be able to make back your down payment on the home, and eventually start to earn a profit. For an even more low-maintenance investment, you can hire a property management company to handle the tenants for you, this way it will be easier to sit back and relax during your retirement, however it would be an added expense.
Government Bond Funds
Many teachers invest in government bond funds because they are considered low-risk. Government bond funds are mutual funds invested in debt securities that are issued by the United States government. These bonds are backed by the U.S. government, which means they are generally a safe investment to make. However, they are subject to interest rate fluctuations as well as inflation. This means you may not get as much in interest as you expected to receive when you made the investment. The value of the government bond will either go up or down depending on the interest rate environment. They can be an excellent investment during times of a stable economy and for people who want little risk involved with their investments during retirement.
Treasury Securities
Another investment teachers tend to make are treasury securities. These investments are in the form of treasury bills, notes, and bonds. Local governments oftentimes need to borrow money to pay for projects or debt, so they accept investments from the public and pay them back with interest. Just like with government bond funds, they are subject to inflation, which can affect your return on investment. To help avoid inflation risk, it is oftentimes best to invest in treasury bills, as they mature much faster than the other treasury securities. Typically, the shorter the investment, the less risk that is involved. If you would like a fixed rate of return on investment, treasury bonds earn interest until they are fully mature, at a fixed interest rate. However, treasury bonds take between 10 to 30 years to fully mature. You will be paid for your treasury bond every six months until you are fully paid back at its value. Treasury securities as a type of investment are very low-risk as well as low-maintenance, so they can be a suitable option for retiring teachers.
At the end of the day, if you are making an appropriate investment that you can manage, you are making a smart decision. Diversifying your portfolio and retirement savings is a way to help ensure financial stability in retirement. If you would like investment advice for your specific situation, please feel free to contact us. We will look through your current portfolio and give you suggestions for appropriate investment to make before you retire as a teacher.
*Contributions to a Roth IRA are made with after-tax dollars, which are not eligible for an income tax deduction and may generally be withdrawn tax-free at any time. Earnings may generally be withdrawn income tax-free if the individual has held amounts in a Roth IRA for at least 5 years and the withdrawal is made after age 59 ½. If the withdrawal is made before the 5-year period and age 59 ½, income taxes and an additional 10% federal income tax penalty may apply. Other exceptions may apply. Investments in real estate involve risks such as refinancing, economic impacts, property value changes, operating expenses, and management skill dependency. Equitable Advisors, its affiliates, and financial professionals do not offer real estate brokerage, mortgage lending or related real estate services. Diversification is a method of positioning assets among major investment categories in an effort to manage risk and enhance returns. However, it does not guarantee a profit or protect against loss.
1 “Update: What is the Average Teacher Pension in My State?”, Max Marchitello TeacherPensions.org, January 10, 2019
2 “Why Your Retirement Age Matters”, Amelia Josephson SmartAsset, July 23, 2019
3 “Amount of Roth IRA Contributions That You Can Make for 2020”, IRS, January 10, 2020
The subject matter discussed in this article is for informational purposes only. It is not intended and should not be relied upon as investment or financial advice and does not constitute an offer, recommendation, or solicitation.
