The teacher pensions world can get a little lonely. While nearly all of us could benefit from a brush-up on retirement saving practices, teacher-specific advice is hard to come by. To better understand how best to tackle the unique challenges educators face, I connected with NerdWallet's Arielle O'Shea. O'Shea has been reporting on and writing about personal finance for over a decade, and her work has appeared in Esquire, Money, The Billfold, Women's Health and XO Jane. You can (and should!) follow her on Twitter @arioshea.
Kirsten Schmitz: First, I'd love to hear more about your background at NerdWallet. What brought you to the investing and retirement space, and what keeps you here?
Arielle O'Shea: I've been with NerdWallet for about a year, covering retirement and investing. I just recently launched the Arielle Answers column, and I also contribute to Forbes. I've been writing about all things personal finance — with an emphasis on investing and retirement — for over a decade. I love NerdWallet because its mission is essentially to do what I love: We want to bring clarity to financial decisions. Money can be so intimidating, and I want to make it approachable. This is a random story, but it kind of captures why I love what I do: Over the weekend I was in Lowe's buying some lumber for a project. I was so out of my element — I am not a DIYer but of course I was trying to save money by building a shed door myself — and as I was nervously waiting to ask the employee to cut the wood for me, it dawned on me: This is how most people feel about managing their money. I was so intimidated...I didn't know how to explain what I wanted, I wasn't even sure what I wanted, I didn't know the right language to use. So, I want to help put people at ease when they think or talk about money, and I think about that goal with everything I write.
Schmitz: Our work focuses on teacher retirement. About 90 percent of all teachers are enrolled in defined benefit pension plans, but our work suggests many teachers won't stay long enough to qualify for a decent benefit from the pension system. What advice would you have for teachers who aren't certain how long they'll teach?
Schmitz: Our work focuses on teacher retirement. About 90 percent of all teachers are enrolled in defined benefit pension plans, but our work suggests many teachers won't stay long enough to qualify for a decent benefit from the pension system. What advice would you have for teachers who aren't certain how long they'll teach?
O'Shea: The biggest piece of advice in investing applies to this as well: diversify. Don't rely exclusively on your pension; contribute to an individual retirement plan like an IRA as well. If you're wondering about Roth vs. traditional, Roth is often the obvious choice — but there are a few factors you should weigh, including if you expect your tax rate to go up in retirement. For most people, this will be true, which is why the Roth is a great option — you'll be able to pull the money you contributed, plus investment earnings, out in retirement tax-free. You're effectively locking in today's lower tax rate since you don't get a deduction on contributions. Still, it's worth taking a look at your specific situation before you decide. Here is some more on this, from a post by my colleague.
Schmitz: With relatively high turnover in the teaching profession, many teachers will leave without vesting into the pension plan, or they'll qualify for only a relatively small pension once they retire. For those departing teachers, how should they decide what to do with their own contributions?
O'Shea: For most people, the right choice is to roll what you can take with you over into an IRA. If you do it directly, you'll avoid any taxes and penalties — ask your plan how to do that, or the rollover IRA provider can help you. IRAs can be very low-cost — assuming you choose the right one — and you'll have access to a wide range of investment options. Choose low-cost index funds or ETFs to further keep expenses down.
Schmitz: I often see mixed messages about millennial savings habits. Either we're all drowning in student loan debt, ubering everywhere and postponing big purchases, or we're actually doing better than expected, and saving more than people think. How would your advice vary for younger or older teachers? Are there any things young teachers in particular should be aware of?
O'Shea: This is one of my pet peeves for sure! You can find a study to support your views on millennials and money, whatever they may be: They're terrible at saving, they're saving more than their parents, they spend too much, they don't spend at all. I actually think millennials are doing well, considering all of the obstacles in their way (that student loan burden is real). But they're not ALL doing well, and of course how they're doing with their money is directly related to how much money they have. My advice for younger teachers: Save early and often. You don't have to save a lot if you save for a long time. You don't have to be an expert investor. Consistently saving small amounts of money adds up if you start young, due to compound interest.
For older and younger teachers, some of the same advice applies: Know what you're working toward (a retirement calculator helps), limit debt, don't try to keep up with the Jones — for all you know, they're in debt! — and invest appropriately, which means taking risk, especially when you're young and you can weather market fluctuations. As you get older and closer to retirement, you can dial back that risk, but you still want to invest, not just save — saving alone, especially with today's interest rates, won't be enough to make your money grow and last through retirement.
And then finally, limit investment expenses. These can really eat up your returns, and these days, you can get low-cost investments like index funds and even low-cost advice from robo-advisors. There's really no reason to pay 1% or more for your investments, unless you have a complex financial situation and you need a financial advisor.