Salary Schedule Lanes: How Much Difference Do They Really Make?

Many school districts have a salary schedule for teachers where your pay increases based on a combination of the number of years you have taught in the district (“steps”) and the educational level you attain (“lanes”). While steps are automatic (well, except for the occasional bad budget year where steps are frozen), lanes are dependent on whether teachers get additional education (and how much they get). Most teachers are aware that if they get additional education and move across the lanes they can increase their salary, but many may not know the huge difference that can make over time.

Again, inspired by a slide Ben Johnson created, I thought it might be helpful to take a look at Littleton Public Schools’ (LPS) salary schedule. LPS has a Schedule A and a Schedule B, with most folks (I believe) on Schedule B, but with Schedule A retained for some veteran teachers who it is more advantageous to stay on the older schedule (LPS pays you whichever schedule is higher for you). For this example, I’ll just focus on Schedule B.

While the salary schedule is generally “set” (at least until there is some kind of major negotiated change like when they added Schedule B), the schedule itself (usually) changes from year to year as each cell is inflated by a yearly increase to help offset inflation. I’ve created a spreadsheet that takes the current Schedule B and inflates future year salaries by 1% each year (as those increases have been rather sparse lately), but you can change that to a different amount if you wish (cell E2, outlined in purple). The first table in the spreadsheet shows what the (projected) salary will be for each step and lane for the next 40 years.

The second table (as you scroll to the right, beginning with Column N) shows the cumulative sum of the salaries in each lane. For example, if you look in cell P11, you’ll see that a teacher in the BA+40 lane will have a total cumulative salary of $368,598 after seven years of teaching. This assumes they are in that lane for all seven years (and that the 1% yearly increase in the schedule is accurate). An important point to keep in mind when looking at this spreadsheet is that very few teachers will remain in the same lane for their entire career (unless they are already at BA+40 or MA+90/DOC when they begin teaching). Because teachers have to complete continuing education credits to remain certified, it is almost a certainty that they will occasionally move horizontally across lanes.

But there is a hard break between BA+40 and MA. If you don’t get your Master’s degree, then you are “stuck” at BA+40, those continuing education credits don’t do you any good (in terms of salary, they obviously hopefully help you become a better teacher). Once you have your Masters, then you can continue moving lanes until you max out at MA+90 (or if you get a Doctorate).

The final table (as you scroll to the right, beginning with Column X) is the “difference” table. This shows the difference between the cumulative salaries in each lane as compared to the MA+90/DOC lane after 10, 20, 30 and 40 years of teaching. For example, here is the difference after 30 years of teaching:

So, after 30 years of teaching, you make about $1 million more (cumulatively) in the MA+90/DOC lane than in the BA lane. (And, likely a more helpful comparison, about $668,000 more if you compare BA+40 to MA+90/DOC).

As you scroll through the table, you’ll notice those numbers start to increase somewhat dramatically as you pass 10, 20, 30 and perhaps head toward 40 years. Again, a reminder that teachers will likely receive salaries in multiple lanes throughout their career, so these numbers won’t match anyone exactly (even if the 1% projected yearly increase was exactly right for 40 years). But it’s still very illustrative of the financial difference moving horizontally across the lanes (and moving horizontally as quickly as you can) can make (and getting your Master’s degree as quickly as you can.) I think focusing on the difference between the BA+40 column and the MA+90/DOC column (because of the hard break if you don’t get a Master’s degree) is probably the most impactful.

A couple of caveats, however. First, getting those additional hours is generally not free (especially getting a Master’s degree), so there is some cost associated with moving horizontally across lanes (but some of that cost is unavoidable, as you have to get recertification hours).

Second, money isn’t everything. Really. So having the time, opportunity and energy to pursue these additional hours has to fit into your life circumstances, as well as what you value and want to do with your life. So please don’t feel “shamed” if you haven’t moved across lanes or if you choose not to. This has to be part of the “good life” that you want to live.

With those caveats in mind, hopefully this spreadsheet shows you the financial impact moving across lanes can have and that will hopefully help inform your decision making. And one more thing, keep in mind that your PERA Defined Benefit is based on your highest average salary (either highest 3 or 5 years, depending on when your PERA membership started), so not only does moving across lanes increase your cumulative salary while you’re working, it continues to increase your cumulative retirement income once you start drawing that PERA benefit for the rest of your life (and possible your co-beneficiary’s life if you choose an Option 2 or Option 3 benefit).

Does this information spur you to accelerate moving across lanes? Or do you feel like you have “enough” and your time and energy is better spent elsewhere? Feel free to leave a comment below or reach out with questions or suggestions.

Fees Matter: Vanguard, PERA, TIAA and MetLife Comparison

Inspired by some of the work Ben Johnson has been doing, I decided to revisit two posts I’ve previously done on the retirement plans (401k/403b/457) available through Littleton Public Schools and Douglas County Public Schools. (Note that the expense ratios are slightly lower now than when I wrote those posts.)

It’s probably worth reading at least one of those posts for context, but I basically compared the fees you would pay for investing in PERA’s 401k/457 plan with those you would pay in the other vendor offered (TIAA for LPS, MetLife for DCSD). In this post I thought I’d take that a step further by showing the compounded effects of those fees over time, as well as throw in a comparison to an IRA at Vanguard.

Important note: IRA’s have much lower contribution limits than 401k/403b/457 ($6,000 vs. $19,500 if you are under the age of 50), so you can invest much more each year into your workplace plans. And there are also income limitations on whether you can contribute to an IRA, whereas there are no income limitations on 401k/403b/457 plans. And don’t forget the behavioral aspect – some folks need to have the money taken directly from their paycheck otherwise they won’t ever end up investing it.

So I created this spreadsheet to illustrate the impact of fees over time. Like all spreadsheets of this nature, it is based on many assumptions and those assumptions may be incorrect. Feel free to make a copy of the spreadsheet and change any of the assumptions you wish. For example, for the return on different asset classes, I put in the long-term compounded average return, but many folks think those will be lower in the future, so feel free to adjust. You also can adjust your asset mix between the different asset classes (I kept it fairly simple by limiting to US Large Cap Stocks, US Small/Mid Cap Stocks, International Stocks, US Bonds, and a Target Date fund choice.) Make sure the asset allocation mix adds up to 100%!

You can also change the initial amount you have invested (currently $0 in my examples) and the amount you are adding to your investment each year (currently $6,000 in my examples). You should not change the fees charged by Vanguard, PERA, TIAA or MetLife (unless you are reading this enough in the future that those have changed as well), nor the columns that keep track of your running totals with each vendor. Note that the fees for each are based on the lowest-cost fund offered within each asset class with each vendor.

You can change any of the numbers that are in cells with a purple outline, leave the rest alone.

So, let’s look at some selected results. First, what if you had an aggressive, all-equity allocation of 40% Large Cap, 30% Small/Mid Cap and 30% International? This is what it look like after 10 years:

As you can see, investing at Vanguard is going to get you the best overall return, and investing with PERA is going to be a better choice than either TIAA (LPS) or MetLife (DCSD).

How about after 30 years?

Wow. You’d have over $110,000 more in Vanguard than with MetLife, and over $90,000 more if you choose PERA over MetLife. And if you take it out to 50 years (think starting when you are 22 and not withdrawing until age 72 when you have to start taking Required Minimum Distributions):

Almost $1.5 million more in Vanguard than in MetLife, $1.2 million more with PERA than MetLife. (Note that these numbers get even further apart with contributions that are greater than $6,000 per year, although the percentage differences will be the same.)

Okay, well what if you just chose a Target Date fund (which is the default option in your 401k/403b/457 plans, and a good, simple choice for lots of folks) and put 100% of your money into that? Here’s after 10 years:

Note that here PERA is actually ahead of Vanguard due to the lower expense ratios on their Target Date funds, but both Vanguard and PERA are still doing much better than TIAA or MetLife.

30 years?

50 years?

Play around with the assumptions in the spreadsheet, including the asset mix that most closely reflects your desired asset allocation. But no matter what mix you choose, Vanguard and PERA will come out the best (usually Vanguard as the best, with PERA only if you go with just a Target Date fund). TIAA will come in a distant third, and MetLife a very distant last place. (And keep in mind that the negotiated fees with TIAA and MetLife are actually pretty good compared to many folks’ 403b choices around the country.)

And yet many employees in LPS and DCSD choose TIAA and MetLife. Why? Perhaps because a sales rep contacted them and was kind, concerned, and “helpful”. Perhaps because they think they can choose investments and “beat the market”. Or perhaps they just chose without much knowledge.

So, now that you know a bit more, what changes might you make with your investments? In general, if your adjusted gross income is not too high (varies depending on Traditional vs. Roth, and increases slightly each year), opening up an IRA at Vanguard is going to be your best choice to fund first (this is assuming you are disciplined enough to invest the money when it doesn’t come directly out of your paycheck).

If you max that out (remember, IRA’s have much lower contribution limits each year), then fund your PERA 401k or 457 next. In LPS, I would choose the 457 over the 401k, as it’s a bit easier to access the money before age 59.5 (unfortunately, DCSD has not chosen to offer the PERA 457), but otherwise the 401k and 457 are essentially the same.

If you are able to max out your personal IRA and your 401k or 457, then you can invest in the one you haven’t yet, as the 401k and 457 are different “buckets” and they each have their own, separate contribution limit (note that the 401k and 403b draw from the same contribution “bucket”). This means that in 2021 if you are under the age of 50 (if your income isn’t so high that you can’t contribute to an IRA), you can contribute up to $6,000 to an IRA, $19,500 to a 457, and another $19,500 to a 401k, for a total of $45,000. If you are 50 or older, you get “catch up” contributions, which gives you an extra $1,000 for your IRA and $6,500 for both the 401k and 457, for a total of $59,000. (And, depending your plan, there may be special catch up contribution provisions in your last 3 years of work that can let you contribute even more.) Keep in mind that for all of these you have the option of doing a Traditional (pre-tax) contribution or a Roth (post-tax) contribution, which is a complicated and entirely different conversation.

As always, feel free to reach out with questions (or comment below).

Free (for Federal Taxes) Alternative to TurboTax

Thanks to Courtney Petros, today I learned about FreeTaxUSA tax preparation software. We were discussing filing taxes and I mentioned that I used to file by hand using the paper forms, but when the IRS stopped mailing them I gave in and switched to TurboTax.


At the time, I think it was about $30 and I convinced myself that was okay. Since then the price has continued to go up (especially because I have a little bit of self-employment income which means I have to upgrade to a more expensive version of TurboTax). While the product itself is fine, I was still frustrated with the expense and the fact that we can’t file for free directly with the IRS.


Courtney said that she used FreeTaxUSA and, at least initially, it looks like a good alternative. (I already filed our taxes this year, so I haven’t used it myself yet, although I may go in and mess around with it later this week.) It appears to be easy to use, although with fewer bells and whistles than TurboTax, so you have to be reasonably confident about what you are doing. The big advantage, of course, is that it’s free. They do charge $14.99 to file your state taxes (I submit Colorado taxes for free through the Colorado state website), and the deluxe version of the federal return is $6.99 which gets you some additional support, which is how they make their money. They are an authorized IRS e-file provider, so they should be secure and legitimate.

I took a look at several reviews (specifically this one and this one and glanced at a few others), and they all seem to agree that it’s exactly what it purports to be and works well as long as you feel fairly confident about what you are doing.


So, I thought I’d share it for those of you who may not have completed your 2020 taxes yet, or who might want to explore using it in the future. If any of you have used it, please leave a comment below and share your experiences.

PERA Votes to Switch from Voya to Empower

The PERA Board voted, pending final contract negotiations, to switch record keepers for the Defined Contribution plans (which includes the 401k/457b plans) from Voya to Empower. Voya came in second place in the RFP process, and it would’ve been “fine” to continue with them, but staff, the consultant, and the Board all thought Empower would provide a better experience to members.

The fee each proposed is essentially identical (Empower was slight higher in their bid). I would suspect that it won’t change the fee structure for the plan/funds at all, but I don’t know that for sure as I don’t know how the proposed fee compares to the current fee. (Since PERA has consistently focused on lowering the fees, I would be surprised to see them go up, but we’ll see.)

I’ve shared screenshots of the two slides below as reference for the pros and cons of each. But, essentially, Empower appears to offer better service, more customized offerings, and better technology. Interestingly, Empower purchased Personal Capital last year and will be integrating that into the platform by year’s end. I think that has huge potential if it’s done correctly.

I also think it’s significant that the PERA staff ranked Empower higher, considering that makes more work for them as part of the conversion. Note that there was going to be a fair amount of work no matter what, because as part of this RFP PERA is going to transition away from single sign on (meaning you will no longer have to sign on to PERA’s website in order to get to Voya – soon Empower), and they will be aggregating the contribution data before it goes to the vendor (right now each employer sends their data to Voya, after this transition it will all get sent to PERA and PERA will send one file to Empower). But, even with that, there will be a ton of work in order to convert the data over and, of course, in communication.

I do not know the timeline of when this transition would actually happen, but my sense would be by the end of this calendar year. I’ll have to see the final details, of course, but at the moment I’m cautiously optimistic about this change.

BlockFi: A Possible Alternative to Low Yield Savings Accounts

I’ve been debating for a while whether to post this here because I will be discussing a much riskier, alternative investment. As someone who argues you should pretty much invest in diversified index funds and forget it (other than rebalancing), this is a bit uncomfortable. But I finally decided to post because many people have been asking if there are any alternatives to the very low interest rates savings accounts and CDs are paying, and I figure you can all do your due diligence to see if this might be right for you. I will include multiple caveats along the way, starting with this: this is a potentially risky investment and there is definitely the potential to lose money (50%, 70%, maybe even 100%). So, hopefully this disclaimer is clear :-).

I learned about BlockFi through the Animal Spirits Podcast. Michael and Ben first had Zac Prince (BlockFi CEO) on last November in this episode. They first discuss Bitcoin (BTC) and cryptocurrencies in general and then start discussing BlockFi specifically at the 16:20 mark. While I will try to briefly describe BlockFi below, you should definitely listen to this entire episode before deciding whether you might want to invest with BlockFi.

Because of the intense interest (pun intended) from listeners, Michael and Ben had Zac back on for some Q & A as part of Episode 180. Zac is on from 35:57 to 47:45, answering questions that listeners had submitted (as well as some from Michael and Ben). Again, highly recommend you listen to this before deciding to invest.

Finally, they had Zac back again at the end of January where the discussion was more about Bitcoin and crypto in general, and less about BlockFi. Still worth your time, but not as important as the first two.

So, what is BlockFi? Briefly (and overly simplified), BlockFi is a “fintech” company providing financial services. They have a retail side and an institutional side. The retail side allows you to invest money and buy and trade cryptocurrencies (like Bitcoin, Ethereum, etc.) and – the main point of this post – allows you to earn interest on what you’ve invested. The institutional side (which is what allows them to pay interest on the retail side) serves as a prime broker to large institutions (companies, endowments, etc.) who want to play in the crypto space but traditional banks won’t currently provide any financing for it. They have also recently added an institutional trading product. (Listen to the episodes, it explains it much better.)

The interest they earn from the money they lend to institutions allows them to pay interest to the retail accounts and they make money on the spread. Currently they can charge very high interest rates to institutions because there isn’t much competition and this is the only way for institutions to borrow for crypto purposes. This, in turn, allows them to pay very high interest rates to retail investors. They fully expect those rates to come down over time, but it will be a relatively slow process as the industry scales up.

So, what kind of interest rates? Well, it depends on which cryptocurrency you invest in. See the chart in the image at the top of this post for the rates on each cryptocurrency, but let me highlight that you can earn 8.6% on GUSD (a “stablecoin”, more on this in a minute) and 6% on Bitcoin (up to 2.5 BTC, then 3% after that). That interest is paid monthly and you have full liquidity (you can buy, sell, or withdraw at any time, with a turnaround of one business day or less). How in the world can they pay that high of interest, when even the best savings accounts are paying 0.5%? It’s because they are able to charge around 10% to lend dollars to institutions, and around 7% to lend crypto to them.

So what’s the catch? There are (at least) two major ones. This is not a bank (they are regulated similar to companies like Square and SoFi), so your money is not FDIC insured. You can lose money – perhaps most or all of it. And (most) cryptocurrencies (like Bitcoin and Ethereum) are very volatile, so this is not for the faint of heart. But this is where GUSD, a “stablecoin”, comes in. Briefly, stablecoins are designed to be, well, relatively stable, with the value staying very close to $1. The best ones (like GUSD) are regulated and have the same number of US Dollars in an audited bank account as they have issued GUSD tokens. There is no guarantee that they will remain close to $1, but with the backing of actual dollars in an actual bank, the volatility should be relatively low (certainly compared to something like Bitcoin).

All of the above is a very brief, simplified explanation, so please listen to those podcasts to learn more (and perhaps do further research). And another reminder that this is not like a bank account – it is much riskier.

So now the main point of this post. After listening to these podcasts and exploring around a bit, I decided to invest a small amount (currently $2,000) in BlockFi, moving it from my savings account (in four batches over the last couple of months as I became more comfortable). While I may decide to invest more over time, at this point I didn’t want to invest any more than what I would be okay with if it should happen to go to $0. While I obviously wouldn’t be happy with losing $2,000, it wouldn’t be life changing, so I’m okay with the risk (and I don’t think it will go to $0). 

All $2,000 is invested in GUSD, so I feel like it is relatively “safe”, and unlikely to vary much from $2,000. BlockFi has a “flex interest” option where you can choose to have your interest invested in the same currency you earned it with, or in another currency. My current setting is that when I receive interest (8.6% annual rate on GUSD) at the end of each month, I have it invested in Bitcoin. (I am currently the proud owner of 0.00021612 BTC :-). I have earned a little over $7 in interest so far, and have accrued $6.81 so far this month that will be paid at the end of the month (recall that I did not invest the full $2,000 initially). The amount I have in Bitcoin earns 6% interest (which also gets reinvested in BTC), but of course the value of Bitcoin is anything but stable. My rationale (rationalization?) is that BTC could lose 90% of its value and I still would be ahead compared to earning 0.5% on my savings account (assuming GUSD stays stable). At this point I am not using BlockFi to actively purchase BTC (other than with interest), but they do appear to be a good platform to do that, as they do not charge any fees, which apparently other crypto platforms do (there is still some spread of 0.5 to 1% when you purchase, but that appears to be less than other platforms, plus no fees). They are also about to launch a rewards credit card, where you’ll get 1.5% back on purchases, but paid in BTC :-).

Since I started this, BTC has skyrocketed by about 70%, so I’m considering switching the flex interest option back to GUSD. While I generally don’t believe in “market timing”, Bitcoin is a bit different and compounding at 8.6% in GUSD seems like a pretty decent alternative (given the assumption that GUSD will be relatively stable). If BTC then drops a lot (which it will), perhaps I will switch back. (I’m not selling my current 0.00021612 of BTC.)

So, with a reminder of the caveat that this is much riskier and more volatile than a bank account and that you can lose money, what are your thoughts on this? For those of you looking for an alternative to very low interest bank accounts, would you consider putting some of your cash into BlockFi? If you do decide to invest, you might consider using my referral code. Please don’t feel compelled to, especially if you think this was all just an attempt to get you to use my referral code – it wasn’t (I promise). I just wanted to share in case anyone is interested, but if you do use the code and deposit at least $100, both you and I will get $10 in BTC as a bonus (you have to leave the balance in there until at least the first interest payment to earn the bonus). But you can also just choose to sign up without using the referral code if you have any concerns. I hope if nothing else this has helped educate you a bit (like it has me) about some of what is happening in the fintech space.

Edit: I forgot one important point for residents of New York State: New York residents can’t participate yet other than to get a loan and rewards card (interest products are not allowed yet in New York per regulations.)

Update 2-24-21: New features of the BlockFi Bitcoin Rewards Credit Card were just announced.

FI for Colorado Teachers Part 7: Case Study 3: Single Teacher

TL;DR: This case study looks at a single teacher and lays out several paths for retiring (or achieving work-optional status) by age 45.

 

Part 1 in this series describes the “what” and the “why” of Financial Independence. Part 2 discusses the process of “how.” Part 3 looked at the possible “what its” and “yeah, buts” objections to accomplishing FI. Part 4 discusses how knowing the rules around taxes can allow you to optimize your finances and help you achieve Financial Independence. Part 5 was a detailed case study of how a teacher married to another teacher could achieve financial independence by age 45. Part 6 was a detailed case study of a teacher married to a non-teacher. This post looks at three scenarios for a single teacher, and lay out some possible paths to achieving Financial Independence and retiring early (or achieving “work optional” status).

You might want to go back and read paragraphs two through seven of part 5 for the background and context for these scenarios (decided not to copy and paste here). Go ahead, the rest of this post will still be here when you come back. Just like in part 5, you really have to look at the spreadsheet and the associated google doc for each scenario to see how the plans unfold.

Scenario 1
Single teacher in their third year of work in 2020. They were hired before July 1, 2019 (which affects what’s included in PERA-includable salary), and assumes the teacher is eligible to purchase 5 years of PERA service credit.

Please note that while I’ve gone over all the spreadsheets many, many times, there is still a possibility that there is a mistake (or more than one). It could be a mistake in a formula, or it could be a mistake in overlooking some aspect. Please, please, please, if you find something that you think might be incorrect, let me know so that I can take a look and adjust it.

Scenario 2
This is similar to Scenario 1, except assumes the teacher is not eligible (or just chooses not to) purchase five years of PERA service credit. This lays out a path to retiring at age 43.

Scenario 3
This scenario looks at a single teacher just starting their employment, and assumes the teacher was hired after July 1, 2019 (which affects how their PERA-includable salary is calculated as well as when they are eligible to retire). This lays out a path to retire at age 43.

Reminder
After looking at some or all of the scenarios in-depth (the links to the doc and the spreadsheet for each), remember to look back at Part 3, the “What Ifs?” and the “Yeah, Buts” to recall that this is a choice. You should align your goals with your values, and you may choose to do some things differently than I’ve schemed out, or not to do this at all. That’s perfectly fine, of course, but be intentional about it.

For example, some folks will look at the “net to live on” columns in these different scenarios and say that’s just not possible. Well, first, realize that is the actual amount you can spend, not your total “income”, which is different than the way a lot of folks think about their spending. And, second, realize that it is possible to live comfortably but not extravagantly on that amount of money, you just have to decide if it fits with your values and goals. I encourage you to actually think it through and then make some decisions that do align with your values and goals, don’t just let your financial life “happen” to you.

  • Part 1: The Concept
  • Part 2: The Process
  • Part 3: The “What Ifs?” and the “Yeah, Buts”
  • Part 4: Tax Optimization
  • Part 5: Case Study 1: Teacher Married to a Teacher
  • Part 6: Case Study 2: Teacher Married to a Non-Teacher

FI for Colorado Teachers Part 6: Case Study 2: Teacher Married to a Non-Teacher

TL;DR: This case study looks at a teacher married to a non-PERA-covered employee and lays out several paths for retiring (or achieving work-optional status) by age 45.

part6

Part 1 in this series describes the “what” and the “why” of Financial Independence. Part 2 discusses the process of “how.” Part 3 looked at the possible “what its” and “yeah, buts” objections to accomplishing FI. Part 4 discusses how knowing the rules around taxes can allow you to optimize your finances and help you achieve Financial Independence. Part 5 was a detailed case study of how a teacher married to another teacher could achieve financial independence by age 45. This post is very similar to part 5, but will look at three scenarios for a teacher married to a non-PERA-covered employee, and lay out some possible paths to achieving Financial Independence and retiring early (or achieving “work optional” status).

You might want to go back and read paragraphs two through seven of part 5 for the background and context for these scenarios (decided not to copy and paste here). Go ahead, the rest of this post will still be here when you come back. Just like in part 5, you really have to look at the spreadsheet and the associated google doc for each scenario to see how the plans unfold.

Scenario 1
Teacher married to a non-PERA-covered employee, in their third year of work in 2020, with a one-year-old child. They were hired before July 1, 2019 (which affects what’s included in PERA-includable salary), and assumes the teacher is eligible to purchase 5 years of PERA service credit.

Please note that while I’ve gone over all the spreadsheets many, many times, there is still a possibility that there is a mistake (or more than one). It could be a mistake in a formula, or it could be a mistake in overlooking some aspect. Please, please, please, if you find something that you think might be incorrect, let me know so that I can take a look and adjust it.

Scenario 2
This is similar to Scenario 1, except assumes the teacher is not eligible (or just choose not to) purchase five years of PERA service credit. This lays out a path to retiring at age 43.

Scenario 3
This scenario looks at two twenty-three year olds just starting their employment, and assumes the teacher was hired after July 1, 2019 (which affects how their PERA-includable salary is calculated as well as when they are eligible to retire). This lays out a path to retire at age 45.

Reminder
After looking at some or all of the scenarios in-depth (the links to the doc and the spreadsheet for each), remember to look back at Part 3, the “What Ifs?” and the “Yeah, Buts” to recall that this is a choice. You should align your goals with your values, and you may choose to do some things differently than I’ve schemed out, or not to do this at all. That’s perfectly fine, of course, but be intentional about it.

For example, some folks will look at the “net to live on” columns in these different scenarios and say that’s just not possible. Well, first, realize that is the actual amount you can spend, not your total “income”, which is different than the way a lot of folks think about their spending. And, second, realize that it is possible to live comfortably but not extravagantly on that amount of money, you just have to decide if it fits with your values and goals. I encourage you to actually think it through and then make some decisions that do align with your values and goals, don’t just let your financial life “happen” to you.

  • Part 1: The Concept
  • Part 2: The Process
  • Part 3: The “What Ifs?” and the “Yeah, Buts”
  • Part 4: Tax Optimization
  • Part 5: Case Study 1: Teacher Married to a Teacher
  • Part 7: Single Teacher

FI for Colorado Teachers Part 5: Case Study 1: Teacher Married to a Teacher

TL; DR: This is the fifth in a series of posts for Colorado teachers about Financial Independence and takes an in-depth look at three scenarios for two teachers married to each other to achieve Financial Independence and retire early (two scenarios at age 45, the other one at age 42).

Part 1 in this series describes the “what” and the “why” of Financial Independence. Part 2 discusses the process of “how.” Part 3 looked at the possible “what its” and “yeah, buts” objections to accomplishing FI. Part 4 discusses how knowing the rules around taxes can allow you to optimize your finances and help you achieve Financial Independence. This post will look at three scenarios for a teacher married to a teacher, and lay out some possible paths to achieving Financial Independence and retiring early (or achieving “work optional” status).

When discussing finances in general, and especially when discussing the idea of Financial Independence, many folks just feel overwhelmed and don’t know where to start. The basic premise behind this entire series of posts is to try to lay out possible paths that teachers in Colorado could take in order to achieve Financial Independence in a way that can help them overcome that feeling of being overwhelmed and give them the confidence in order to pursue it.

While previous posts have laid out the “why”, the “process”, looked at some of the possible “objections”, and then talked a bit about tax optimization, this post is going to be a case study that gets very, very detailed in what this might look like for a married couple who both happen to be teachers, starting from very early in their careers all the way to an early retirement in their forties. I started with this scenario because it happens to be my scenario (well, the being married to a teacher part, not the retiring in our forties part), but also because it is a scenario that actually happens fairly often. (And, again, I’m saying “teacher” married to a “teacher”, but this applies to any PERA-covered employee married to another PERA-covered employee, but focuses on the ins and outs of what a teacher career-path looks like.) In future posts I will look at other scenarios, including a teacher married to a non-PERA covered employee, a single teacher, and teachers who are already well into their career.

As mentioned in part 3, any kind of long-term projection like were trying to do with this case study relies on assumptions. A lot of assumptions. Some – perhaps all – of those assumptions will be incorrect, sometimes by a little and sometimes by a lot. That doesn’t mean you can’t do the projection, it just means that you have to realize the numbers won’t be exact and the decisions you make along the way will likely change as you adapt to the reality of what actually happens.

This is one of the reasons why so many people don’t try to do these projections for themselves, because they figure it won’t be accurate. But by not laying out a general path, they end up making decisions (or, usually, not making decisions) that make the goal very difficult to achieve. This post lays out three different versions of possible paths that will help you achieve Financial Independence, as long as you are willing to be flexible and adaptable along the way to adjust for any changes in the assumptions. You will also be able to make a copy of the spreadsheets I’m going to share and change the assumptions or the specific numbers that apply to you in order to make your own model. The idea is that, for many people, they have to be able to see the big picture laid out in some detail in order to realize it’s even possible. That’s what I’m attempting to do here.

So, let’s get to the three scenarios. Each of the scenarios is similar, but each also has at least one significant variation that necessitates looking at them separately. The reason for that is to try to match three of the most likely general scenarios a married teaching couple might be looking at, to give you a good base to make any modifications for your specific circumstances. For each scenario, there will be a description of the scenario and the particular variation we are examining, and then each scenario will link to an additional document and a spreadsheet. The additional document will lay out all the assumptions, give a “key” for the accompanying spreadsheet, and then give a year-by-year description of what’s going on in the scenario. The spreadsheet will show a year-by-year breakdown of the decisions and financial impacts of those decisions, taking the teachers from their first years in the profession, through an early retirement (if they choose, could be “work optional”), all the way through their retirement years (I stop at age 90, but that doesn’t mean you have to).

Similar to the discussion about assumptions, the spreadsheet also makes a form of “assumption” by some of the “decisions” I’ve made each year along the way while constructing the spreadsheet (“decisions” meaning choices I’ve made in the spreadsheet for how you’ll possibly behave in the future). It’s very important to realize that those “decisions” are not set in stone, those are just examples chosen to show what is possible as well as to try to optimize your savings and investments based on the tax code and your goal of Financial Independence. There are likely “decisions” that could optimize this better than what I chose, and there may be reasons why you want to make different “decisions” along the way, which is where you can make your own copy of the spreadsheet and play some “What ifs?” of your own. Either way, the spreadsheet should help you to be able to see what’s possible and what trade-offs you’ll have to make, and that should help you figure out if this is a path you’d like to take.

For each of the following scenarios, you really have to click through to the linked document and spreadsheet for each one to get the full impact. What’s below is just a brief intro to each scenario.

Scenario 1
This example assumes two married 25-year old teachers with Master’s degrees, about to start their 3rd year of teaching in 2020, with one one-year-old child. They were hired before July 1, 2019 (which matters in terms of how their PERA-includable salary is calculated, as well as when they are eligible to retire). This scenario assumes they are both eligible to purchase 5-years of PERA service credit based on employment they had during high school and college, and that they both choose to purchase those years as soon as they are eligible (which is when they have earned 5 years of PERA service credit). This scenario lays out a path for being able to retire at age 45, and shows the amount available to spend each year while they are working and each year after they retire. It assumes no earned income after age 45, but many folks will continue to have some earned income during this “work optional” phase of their career.

Please note that while I’ve gone over all the spreadsheets many, many times, there is still a possibility that there is a mistake (or more than one). It could be a mistake in a formula, or it could be a mistake in overlooking some aspect. Please, please, please, if you find something that you think might be incorrect, let me know so that I can take a look and adjust it.

Scenario 2
This example assumes two married 25-year old teachers with Master’s degrees, about to start their 3rd year of teaching in 2020, with one one-year-old child. They were hired before July 1, 2019 (which matters in terms of how their PERA-includable salary is calculated, as well as when they are eligible to retire). This scenario assumes they do not choose to purchase any PERA service credit based on non-PERA covered employment during high school or college. This scenario lays out a path for being able to retire at age 42, and shows the amount available to spend each year while they are working and each year after they retire. It assumes no earned income after age 42, but many folks will continue to have some earned income during this “work optional” phase of their career.

Please note that while I’ve gone over all the spreadsheets many, many times, there is still a possibility that there is a mistake (or more than one). It could be a mistake in a formula, or it could be a mistake in overlooking some aspect. Please, please, please, if you find something that you think might be incorrect, let me know so that I can take a look and adjust it.

Scenario 3
This example assumes two married 23-year old teachers with Bachelor’s degrees starting their first year of teaching in 2020. Assume they earn their Master’s degree by age 25 and have one child at age 26. They were hired after July 1, 2019 (which matters in terms of how their PERA-includable salary is calculated, as well as when they are eligible to retire). This scenario assumes they do not choose to purchase any PERA service credit based on non-PERA covered employment during high school or college. This scenario lays out a path for being able to retire at age 45, and shows the amount available to spend each year while they are working and each year after they retire. It assumes no earned income after age 45, but many folks will continue to have some earned income during this “work optional” phase of their career.

Please note that while I’ve gone over all the spreadsheets many, many times, there is still a possibility that there is a mistake (or more than one). It could be a mistake in a formula, or it could be a mistake in overlooking some aspect. Please, please, please, if you find something that you think might be incorrect, let me know so that I can take a look and adjust it.

Reminder
After looking at some or all of the scenarios in-depth (the links to the doc and the spreadsheet for each), remember to look back at Part 3, the “What Ifs?” and the “Yeah, Buts” to recall that this is a choice. You should align your goals with your values, and you may choose to do some things differently than I’ve schemed out, or not to do this at all. That’s perfectly fine, of course, but be intentional about it.

For example, some folks will look at the “net to live on” columns in these different scenarios and say that’s just not possible. Well, first, realize that is the actual amount you can spend, not your total “income”, which is different than the way a lot of folks think about their spending. And, second, realize that it is possible to live comfortably but not extravagantly on that amount of money, you just have to decide if it fits with your values and goals. I encourage you to actually think it through and then make some decisions that do align with your values and goals, don’t just let your financial life “happen” to you.

  • Part 1: The Concept
  • Part 2: The Process
  • Part 3: The “What Ifs?” and the “Yeah, Buts”
  • Part 4: Tax Optimization
  • Part 6: Case Study: Teacher Married to a Non-Teacher
  • Part 7: Single Teacher

FI for Colorado Teachers Part 4: Tax Optimization

TL; DR: This is the fourth in a series of posts for Colorado teachers that looks at the tax code and discusses how you can optimize your financial decisions to take advantage of it. Hint: most people don’t take full advantage of the tax code.

Part 1 in this series describes the “what” and the “why” of Financial Independence. Part 2 discusses the process of “how.” Part 3 looked at the possible “what its” and “yeah, buts” objections to accomplishing FI. This post builds on part 2 and discusses how knowing the rules around taxes can allow you to optimize your finances and help you achieve Financial Independence.

Taxes are an interesting thing. Most folks will begrudgingly admit that they are necessary, but then often go on to complain about how much they have to pay or how unfair the system is for X reason. While there are certainly good arguments that can be made about the fairness of the system and how it could be improved, there are also ways that you can make decisions to address how much taxes you pay. To be clear, this is not cheating on your taxes, this is simply knowing the rules and making decisions to take advantage of those rules. If people would take the time to learn the rules and then adjust their decisions, they might not complain about how much they pay (or, more realistically, complain a bit less).

I am not a tax expert, nor can we go in-depth on all the various aspects of the tax code in this post. But there is some pretty basic information that you can use to your advantage, and some specific aspects that apply just to teachers, both of which you can use to optimize your finances. Spending just a little bit of time learning about the rules and then adjusting your decisions can have a big impact over time.

First, a quick reminder about how Federal taxes work (very simplified, but helpful for our purposes). You have a certain amount of income, some of it earned (your paycheck) and some of it is not (interest, dividends, capital gains, etc.). Some of that earned income you can “shelter” from taxes by investing in tax-deferred accounts, and some if it is automatically sheltered from taxes (your PERA contribution, your insurance premiums if you choose to take them pre-tax, your HSA contributions if you have them, dependent care expenses, etc.).

You then have some deductions to your income which, for the vast majority of taxpayers now, is going to be the standard deduction, with a few other deductions that might apply (for example, teachers also have the $250 teacher expenses deduction they can take).

You then end up with your taxable income, which is taxed using a progressive tax rate (that is adjusted for inflation each year), which means some of your taxable income is taxed at one rate, some of it at another, and perhaps some of it at yet other rates if you have a large taxable income. (Note that some of your unearned income, like qualified dividends and long-term capital gains are treated differently. This is important and we’ll talk about this eventually.) For example, in 2019 for a married couple, the first $19,400 in taxable income is taxed at 10% and any amount over $19,400 and up to $78,950 is then taxed at 12%. If you have taxable income above $78,950 but below $168,400, it gets taxed at 22% (and it continues above that, but most teachers won’t need to worry about that).

Many folks don’t completely understand how this progressive system works and think that all of their taxable income is taxed at whatever tax bracket they are currently in, which can lead not only to misunderstandings about tax policy, but sometimes some poor decisions around your taxes. For example, if your taxable income is $75,000, then the tax you would owe would be $8,612, which is an effective tax rate of 11.48%, not the 12% that many people think that $75,000 would be taxed at. ($19,400 at 10% is $1,940, the remaining $55,600 to get us up to $75,000 is taxed at 12%, which is $6,672 in taxes, for a total of $8,612.)

But it gets even better, because many people don’t actually owe that amount because they also get tax credits. Tax credits are different than tax deductions. Tax deductions get subtracted from your income to then determine your taxable income, but tax credits are dollar-for-dollar offsets to the tax you owe. The most common one for many people is the child tax credit, which is currently $2,000 per child (with up to $1,400 of that refundable). So, for the example above, if they had one child they would owe $6,612 in taxes, not $8,612. There are many other tax credits that could apply, so it’s important to investigate those based on your situation.

State taxes in Colorado are much simpler, as they take your federal taxable income, perhaps make a few adjustments, and then calculate your state tax at a flat (not progressive) rate of 4.63%. This means that all the ways you can lower your federal taxable income (deductions, tax-sheltering, etc.) also lowers your Colorado state tax owed, and then there are a few Colorado-specific tax credits you might be able to utilize (one of the most common is contributions to the Colorado 529 college savings plan are exempt from Colorado state taxes). Also, a quick plug (pun intended) for the Colorado Alternate Fuel Tax Credit, which is a $5,000 tax credit for an electric vehicle (and that’s refundable), which means if you have at least $7,500 in federal tax liability, then you can take a whopping $12,500 in total tax credits if you buy an electric vehicle (subject to phase out limits – Tesla and soon Chevrolet will begin ratcheting down).

Sorry if that was more (or less) than you needed, but we needed to set the stage for the next part of our discussion, which is about how best to take advantage of those rules on your path to financial independence. We’re going to focus on four areas: tax-sheltered accounts, Section 125 deductions, HSA contributions, and possibly optimizing to get the Savers Tax Credit.

Tax-sheltered accounts come in two main variants – pre-tax and post-tax. Pre-tax accounts are things like 401k/403b/457/Regular IRA accounts, where the money you contribute does not get taxed in the current year, but then gets taxed when you withdraw it during retirement (hopefully). Post-tax are the Roth variants of those, where the money you contribute is post-tax, meaning you do pay taxes on that money in the current year, but then any investment earnings you receive do not get taxed, so when you withdraw during retirement there is no tax liability.

For many folks, particularly if you are on the road to Financial Independence and will be considering retiring (work optional phase) early, the pre-tax accounts are the ones you want to focus on. (This post will not be able to go in-depth on why this is probably preferable to using Roths, but there are many resources on the web that discuss this.) This lowers your taxable income (both Federal and State, and often keeps you in the lower tax brackets), allows your investments to grow tax free, and sometimes helps you qualify for the Savers Tax Credit (more on that in a minute).

Every public school teacher in Colorado has access to PERA’s 401k plan (which is a good one). Most teachers then also have access to a 403b and a 457 plan. The 403b is going to be through a vendor other than PERA, but the 457 could be through PERA or that other vendor. Having access to that 457 is a huge advantage for teachers (and most public employees), because it not only allows you to shelter additional money, but also allows you to access that money when you are younger with no penalties (which is huge if you are planning on retiring/work optional at a younger age). (If your district does not offer you a 457 plan, talk to your Human Resources department ASAP. Even if they don’t want to deal with an outside vendor, setting it up with PERA is very easy for your district to do since they already are setup for the 401k.)

In 2019 you can contribute up to $19,000 to your 401k or your 403b – the limit applies to the combined amounts you can put into one or both of those accounts. (If you are over 50 you can contribute an additional $6,000, so up to $25,000). Note that this is per person, so if you are married your spouse can also contribute up to $19,000 (or $25,000 if over 50). But an important point to understand, particularly as your income increases as you grow older, is that you can also contribute up to $19,000 (or $25,000 if over 50) to your 457 plan. That’s in addition to the 401k/403b contribution. Essentially, public employees have double the amount they are able to shelter. (And, in fact, the 457 plan even has an additional “last-three-years” catch-up provision that can effectively allow you to contribute twice as much – $38,000 currently – each year for the last three years you are with with that employer.)

And the 457 is even better than the 401k/403b, because it’s considered “deferred compensation”, which means that you can access that money as soon as you leave that employer. This is different than a 401k/403b, where if you access the money before age 59.5 you may have to pay a penalty. (Note, there are ways to access a 401k/403b before age 59.5 without a penalty, but a 457 is so much easier if you have that option.) This means that if you do achieve Financial Independence and enter the “work optional” stage by quitting your teaching job, you can immediately access any money in your 457 to use as living expenses, even if you are way short of 59.5.

When we get to the case study posts (starting with part 5), we will go more in-depth on how to use this in the best possible way, but here are the two most important points to remember:

  1. Invest as much as you can in your 457 plan and increase it every year until you max it out.
  2. Once you max out the 457, invest as much additional as you can in the 401k/403b.

Many folks look at that and say, “That’s great, but I need money to live on.” That is certainly true, but keep in mind that since these contributions are coming out pre-tax, they don’t actually reduce your net pay by your total contribution. For example, if you contribute $19,000 in a year to your 457, and you normally would be in the 22% federal tax bracket (plus 4.63% Colorado tax bracket), your net pay “only” decreases by $13,940. Now, that’s still a fair amount of money, but it’s a lot less than $19,000. (And, as we’ll see, it might actually be even less than that if you can qualify for the Savers Tax Credit). As you’ll see in the case studies, if you can rein in your lifestyle expenses, most folks can actually save more than they think.

The second area to be aware of is Section 125 Plans. This refers to the part of the tax code that allows you to receive part of your income pre-tax if it is used for particular expenses. The added benefit for teachers is that it comes out pre-PERA contribution (although that will be changing for new hires hired after July 1, 2019). What are these particular expenses? They include insurance premiums (health, dental, vision, etc.), dependent care expenses (child care), and flexible spending account contributions (unless you have a high-deductible health plan, which we’ll discuss below).

All of these end up being expenses you can pay with pre-tax dollars (and pre-PERA dollars for current PERA employees), which can save you a significant amount of money. Again, if you were going to be in the 22% federal tax bracket, plus the 4.63% Colorado tax, you would save 26.63% of the total you spend on these areas. Plus, if you’re a PERA employee hired before July 1, 2019, you save an additional 8% on your PERA contribution (and that will be increasing over the next few years to at least 10% as part of the legislation passed in 2018). (Note that if it is coming out pre-PERA, you want to stop doing this in your last 3-5 years of employment in order to maximize your Highest Average Salary calculation. The amount you “lose” in tax savings during those years is more than made up for in pension income over time.)

If you have access to a High Deductible Health Plan (and most teachers do), then you also have the ability to contribute to a Health Savings Account (HSA). Employers also often kick in a small amount to your HSA in order to encourage you to sign up for the plan. Your contributions do not come out pre-PERA, but they do come out pre-tax and pre-FICA. HSA’s are known as “triple-tax-advantaged” accounts, because they are the only accounts that allow you to contribute pre-tax, earn pre-tax, and withdraw pre-tax. Basically, you never pay tax on this money (as long as you use it for medical expenses). And unlike an FSA, you don’t have to “use it or lose it” each year, can can carry over any balance for as long as you want.

You also have the option to invest this money, which can help it grow even more. From an FI perspective, this is an amazing account, especially if you can afford to not withdraw any money for medical expenses along the way and just let it grow tax free. As long as you save your receipts, you can always withdraw the money in the future when you need it, or you’ll likely have future medical expenses anyway. If you never have medical expenses (unlikely, but it could happen), then you can still withdraw it after age 65 and simply pay taxes on the withdrawals (but no penalty).

If you do have a High Deductible Plan, you can’t also contribute to an FSA (the HSA takes its place). But many district will have a Limited Purpose FSA that you can contribute to, and that money can be used for dental and vision expenses, but not health expenses. While this is “use it or lose it”, if you can estimate your out-of-pocket dental and vision expenses for the year, this is an extra tax strategy you should take advantage of.

Finally, as promised, we’ll talk about the Savers Tax Credit. In order to encourage folks to save for retirement, the Federal Tax code will actually give you money to help save, as long as your income is below a certain threshold. Because all of the previously discussed items (401k/403b/457/HSA/FSA/Section 125 plans) reduce your income threshold, if you can take advantage of enough of them you might also qualify for at least some of the Savers Credit. For example, in 2019 if you’re married and your adjusted gross income is below $64,000, you can claim 10% of your contributions to 401k/403b/457 plans as a tax credit, up to a total of $4,000. So, in our previous example where we discussed that contributing $19,000 to your 401k only reduced your net pay by $13,940, it may actually only reduce your net pay by $12,040, because you might get $1,900 from the Savers Tax Credit (assuming your income is adjusted gross income is low enough to qualify for the 10% Savers Credit). For many teachers, this is possible in your first few years of teaching, as you’ll see in the case studies posts.

There are more tax strategies we could consider, and we certainly will when we discuss the withdrawal stage of Financial Independence, but this gives you the overall approach. By understanding the tax rules and adjusting some of your decisions based on them, most folks can actually save (and invest) much more than they thought. While you can still complain about your taxes, you’ll have actively made some moves to reduce what those taxes were, which will help you on your path to Financial Independence.

  • Part 1: The Concept
  • Part 2: The Process
  • Part 3: The “What Ifs?” and the “Yeah, Buts”
  • Part 5: Case Study: Teacher Married to Another Teacher
  • Part 6: Case Study: Teacher Married to a Non-Teacher
  • Part 7: Single Teacher