Over the next 15 years, most of the NYS Teachers Retirement System Tier 4’s employees will have left the workforce. Tier 5 (beginning 1/1/2010) and Tier 6 (beginning 4/1/2012) employees will need to rely more heavily on personal savings/investing to fund their retirement, as their pensions will not be as robust as those of earlier Tier employees.
Unfortunately, those higher-tier employees are the ones borrowing or withdrawing funds from their workplace plans the most. While the factors that play into this trend are complex and sometimes generational in nature, these are the last people who should be doing this. Especially since they will be most dependent on the supplemental income provided by their 403b’s, ROTH IRA’s, etc. The uncertainty surrounding what Social Security Income will look like at retirement for these same individuals also is a burden, and a stressor for many in the millennial era and beyond.
HighPoint Advisors, LLC, is here to offer retirement planning assistance to educators.
Borrowing From Retirement Funds Is A Concern
Regrettably, our office has noticed a trend toward the end of each school year. We have seen an influx of retirement plan distributions through predictably timed loans and hardship withdrawals. The consequences of this are enormous when a lifetime of compounding is taken into consideration. Every year that a teacher steals from his or her retirement funds, extends the time that that employee must work or save more in order to retire down the road. In addition to taking one’s own contributions from retirement, you are also taking the opportunity for future growth on those funds as the funds are no longer invested. Lastly, if you have bad timing of a loan or withdrawal, you may be locking in losses due to volatility in your account and the financial markets.
We understand the toll that inflation has had on families. When inflation peaked in June 2022, families should have been focusing most on creating a balanced budget and controlling their cash flow. Saving for retirement is a required expense and should not be cut or borrowed from. Unfortunately, teachers have been forced to use their own funds to make purchases for their classrooms – in addition to all their normal expenses. As an example of potential support, there are generous donors out there looking for classrooms to support. Check out www.DonorsChoose.org to learn more about raising money for classroom projects.
Differences In Retirement Tiers
Tier 5 and Tier 6 employees are also looking at some aspects of their benefits and feeling shorted when comparing themselves to the Tier 4 employees who immediately preceded them and still work side-by-side with them in the schools. To illustrate the point, consider the following scenario:
With regard to the pension system, a teacher starting at 25 years old and working until age 63 in Tier 4 would receive approximately 72% of their Final Average Salary (FAS). Compare that to a teacher starting at age 25 and working until age 63 in Tier 6, who would retire with 71% of their FAS. While that may seem equal, it does not tell the whole story. Tier 6 pension calculations differ in 3 significant ways:
- Tier 5 and 6 employees must contribute to the pension throughout their entire career in the system.
- Tier 6 employees will face less favorable FAS calculations at retirement. According to the New York State Teachers’ Retirement System, the previous tier’s calculations are based on the average of the highest 3 consecutive years salary, but Tier 6 uses a 5-year average salary.
- Also unique to Tier 6 are the variable contribution rates, which require employees to pay in more to the system as their income rises. Currently, an employee with a salary under $45,000 requires a contribution of only 3%. The contribution rate increases in steps as income increases, all the way to 6% once salary amounts exceed $100,000.
Things You Can Do To Improve Your Situation
We often remind our school system clients how lucky they are to have a pension – as we all know these defined benefit plans have become more rare over time. We try to reinforce to our clients that they should not get caught up in focusing on negativity, and that they need to stay grounded with facts and data. As it is with many things these days, the outlook may not be as bad as it seems.
With this thought in mind, around August each year, our school district employee-clients receive update letters encouraging them to review their information with us. This allows them to update the school district they are working at, new salary amounts, and/or their contribution levels to retirement plans. We find in these conversations that many teachers have moved from one district to another. These moves should prompt action with the retirement planning process. For example, an existing 403b account cannot be used at a new district. These accounts are specific to the employer. It’s easy for us to help you make these plan transitions with our new online enrollment process. You just need to reach out to Financial Advisor Joseph Viviano or Financial Advisor Patrick Newton for assistance with these transactions. We can get you set up and get you ready to go in your new district.
Alternatively, maybe you’re simply moving into a new role within the same school district and your compensation has changed. We want to know this as well, as any changes to your income will have an effect on your retirement savings and retirement income expectations. Let us run a Retirement Income Analysis to help determine your progress toward retirement, as well as how much you should be putting into your retirement savings accounts.
Trust HighPoint, LLC, For Sound Retirement Planning
With a constantly changing landscape, school district employees find themselves needing more help than ever before. We’re here to help! Advisors, Joseph Viviano and Patrick Newton are experienced and very knowledgeable when it comes to the specific needs of those who work in the schools across New York State. Contact us today so we can help you with retirement planning, wealth management, or other financial services.