Author Topic: Helping Girlfriend Who Is A Teacher with Retirement Accounts... (MICHIGAN)  (Read 2563 times)

l2jperry

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Hey all,

My girlfriend is a public school teacher in her second year, and I am trying to help her with her retirement accounts. It's all pretty foreign to me as I am self-employed so don't have access to a 401K or a 457.

Some questions to clarify....

1.) Is a 401K the pension you get from the state? If so, how does that work with early retirement?
2.) Is a 457 just another tax deferred retirement account?
3.) She doesn't have a huge selection of funds to pick from... no VTI, so should I just look for the biggest index fund with the lowest fee that is available to her? Or is there a way for her to be able to invest in VTI (or whatever the mutual fund for it is.) I do a 4 way split with VTI, VXUS, BND, and BNDX... I would like to advise her to do something similar.

Any other good resources for public teachers we should check out, or in general any other advice?

Our goal is to do some slow travel within the next few years. I am close, on my own, to FI to support both of us for a few years of travel... (750K.)

thanks for the help!
« Last Edit: July 21, 2017, 06:52:39 AM by l2jperry »

rubybeth

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Re: Helping Girlfriend Who Is A Teacher with Retirement Accounts...
« Reply #1 on: July 20, 2017, 05:04:45 PM »
Some questions to clarify....

1.) Is a 401K the pension you get from the state? If so, how does that work with early retirement?
2.) Is a 457 just another tax deferred retirement account?
3.) She doesn't have a huge selection of funds to pick from... no VTI, so should I just look for the biggest index fund with the lowest fee that is available to her? Or is there a way for her to be able to invest in VTI (or whatever the mutual fund for it is.) I do a 4 way split with VTI, VXUS, BND, and BNDX... I would like to advise her to do something similar.

Any other good resources for public teachers we should check out, or in general any other advice?

1) Nope. A 401k is just a pre-tax savings fund, like an IRA. It's also known as a "defined contribution plan" vs. a "defined benefit plan" or pension. There's lots and lots of info. on 401ks in this forum. As for accessing it prior to 59.5, read this: https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

2) A 457b may seem like just another weird number name for a retirement savings account (like a 401k or 403b), BUT IT IS NOT!!! IT IS SO MUCH BETTER! I am also a public employee and have access to a 457b, also known as a deferred compensation (or deferred comp) account. The great difference with this type of account is that there is NO AGE REQUIREMENT for distributions. That means it's perfect for those who plan to retire before 59.5. Do a BUNCH of reading on her plan and the fund options. Post the fund options here for advice, if you like. This one is the way to go vs. the 401k if she can max it.

Does she have a pension? If she's not sure, she should look at what's being deducted from her checks. I have both a public pension AND access to the 457b. If she also has a pension, she should be sure she understands the details of that--vesting, rollovers, etc. If she's in a union, then she should have a lot of this info. in her contract.

Secretly Saving

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Re: Helping Girlfriend Who Is A Teacher with Retirement Accounts...
« Reply #2 on: July 20, 2017, 05:10:01 PM »
401k is NOT a state pension. It is a tax deferred account offered by for profit businesses.
Most schools offer 403bs, which are tax deferred accounts for non-profits. 
Some schools offer a 457, another tax deferred account for government entities.
Each type allows for a maximum of $18k to be placed in each.
Some states require teachers to put into social security.  Not all do.
Some states also put into state retirement and require teachers to match it.


Example: EACH YEAR
School sponsored 403b - up to $18k and optional
School/Govt sponsored 457 - up to $18k and optional
State retirement (from district) 11% of salary required
State retirement (from teacher)  11% of salary required
Social security (per tax bracket) - required


ixtap

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Re: Helping Girlfriend Who Is A Teacher with Retirement Accounts...
« Reply #3 on: July 20, 2017, 07:35:15 PM »
Depending on the state, she may have options. Or she may have made a choice unknowingly already.

In both Ohio and Texas, I had the option of contributing to the state teachers retirement fund, (aka defined benefit plan, including both pension and healthcare) OR an individual plan, such as a 403b. The defined benefit plan requires a certain number of service credits to vest. However, it may be possible to roll the funds over to an IRA if she leaves before vesting.

MDM

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Re: Helping Girlfriend Who Is A Teacher with Retirement Accounts...
« Reply #4 on: July 20, 2017, 10:56:00 PM »
Assuming your girlfriend is also in Michigan, appears that "it's complicated...".  You might change the thread title to include "Michigan" as I recall there are some Michigan teachers who post here and that might attract their comments.

E.g., see Michigan to steer new school workers into 401(k)-only plan | WLNS.  Seems that is the state retirement plan - but she likely also has access to 403b and/or 457 plans through her school district.

It may also be difficult to determine exactly what 401k/403b/457 options she does have. 

Can you post the list of fund symbols, names, and expense ratios to which she has access?

MrsPete

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I am a teacher, though not in Michigan -- do understand that things can be very different state to state.  Here's what's true for me:

Pension:   10% of my paycheck goes into the teacher-and-state-employee pension fund (not a choice, pre-tax dollars).  At the 5-year mark, I was vested in the pension plan, which meant that I was a full-fledged member.  If I had left prior to the 5-year mark, my contributions would've been returned to me.  After the 5-year mark, I am assured of being able to draw a benefit, though the longer I work, the higher that benefit will be.  The formula for determining my benefit:

Average of my highest 4 years of salary X .0182 X my years of service

BUT that formula is only true if I either finish 30 years of service OR am 65 years old.  If I retire earlier, the percentage that I receive goes down.  If you're thinking about the two of you retiring when she's around the 5-year mark, she's going to get essentially nothing from the pension.

The pension is for the rest of the recipient's life, whether that's two years or fifty years, which is good because it means you cannot "outlive your money"; however, it's a STATE pension, which means you have to put in all my years in one state.  And since some states are phasing out pensions, a person who takes a leave of absence might come back to find that he or she is no longer eligible for the pension program. 

The rules for your girlfriend's pension are certainly written down and easily found online.  It's important that you know the rules for YOUR OWN STATE and that you filter those rules through your own ideas for the future.  Generally speaking, a pension is only a good deal for a person who puts in the full 30 years and "maxes out" the benefits.   

401K:  This is a personal retirement savings account.  Your girlfriend can decide how much to put into the account, but she cannot pull out money until she's 59 1/2 (without paying a big penalty).  The benefit is that it's pre-tax dollars.  This is more flexible than a pension; the money is hers even if she changes jobs, moves out of state, or whatever.  But she can outlive this money. 

Social Security:  You didn't mention this, but you need to know where she stands with Social Security.  In some states, teachers do not pay into Social Security, which means they don't receive checks later; in my state, teachers pay into BOTH the pension fund AND Social Security, so we get checks from BOTH later.  This can be a problem for teachers -- but, obviously, the right answer is awareness.  I read something online some time back about a teacher who taught 10 years in State 1 /paid into SS for 10 ... then moved to State 2 /did NOT pay into SS for 20 years ... but she assumed that the 10 years she'd paid in was enough to get her a check ... no, SS entered 20 years of zeros for those years, meaning that she received almost nothing.  I'm sure I didn't get those numbers right, but the point is valid. 

Retirement is probably the best benefit teachers still have (so many benefits have dried up for us), but you need to understand the rules to make it work for you.




l2jperry

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Thank-you all for the responses, I have lots of reading to do, and am waiting to get a pay stub from her later this evening. I do believe she is in a Pension program, but we'll see. I'll get back, but wanted to say thanks for the responses so far :D.