Colorado PERA Retirement Options 1, 2 and 3

October 17, 2021 by kfisch in PERA, retirement, Uncategorized and tagged c1, PERA, retirement | Leave a comment

Most Colorado educators are generally aware of the formula that calculates their PERA pension benefit:

Years of Service Credit x 2.5% x Highest Average Salary (HAS)

They also are generally aware of which HAS Table they use so they know when they qualify for a “full” retirement (non-green-shaded areas of your HAS Table).

If you are unfamiliar with either of these things, make sure you investigate further before continuing with this post.

But many educators are not fully aware that they have to choose one of three benefit options when they retire. These options differ in the monthly benefit they pay to you and the benefit (if any) they pay to your cobeneficiary if you die first (typically a spouse, but it doesn’t have to be).

Option 1: This pays you a lifetime monthly benefit as calculated by the formula. When you die, your monthly payment will stop and your beneficiary will receive nothing. (Unless you die fairly soon after retiring and you still have a remaining balance in your DB account, in which case they will get that remaining balance as a lump sum plus a 100% match. It typically only takes a few years for your monthly benefit to exhaust the portion of your DB account that you contributed.)
Option 2: This pays you a lifetime monthly benefit which is slightly lower than what is calculated by the formula. The reason for this is that when you die, your cobeneficiary will continue to receive 50% of your monthly benefit for the rest of their life. How much lower your monthly benefit will be than the Option 1 level depends on your age and the age of your cobeneficiary. Take a look at this spreadsheet for the current Option 2 factors (these factors periodically change as actuarial assumptions change). If your cobeneficiary predeceases you, then your benefit will “pop up” back to the Option 1 level.
Option 3: This pays you a lifetime monthly benefit which is lower than what is calculated by the formula (and slightly lower than the Option 2 benefit). The reason for this is that when you die, your cobeneficiary will continue to receive 100% of your monthly benefit for the rest of their life. How much lower your monthly benefit will be than the Option 1 level depends on your age and the age of your cobeneficiary. Take a look at this spreadsheet for the current Option 3 factors (these factors periodically change as actuarial assumptions change). If your cobeneficiary predeceases you, then your benefit will “pop up” back to the Option 1 level.

To help illustrate this, let’s look at a specific example of a 58 year old teacher who uses HAS Table 2, has 34 years of service credit, their Highest Average Salary (HAS) is $90,000, and their cobeneficiary is 60 years old.

Option 1 Benefit: 34 x 2.5% x $90,000 = $76,500 yearly benefit ($6,375/month). When they die, the monthly benefit stops.
Option 2 Benefit: $76,500 x 0.961847 (Option 2 factor) = $73,581 yearly benefit ($6,132/month). If they die before their cobeneficiary, their cobeneficiary continues to receive $3,066/month for the rest of their life. If their cobeneficiary predeceases them, their monthly benefit pops back up to $6,375/month.
Option 3 Benefit: $76,500 x 0.915142 (Option 3 factor) = $70,008 yearly benefit ($5,834/month). If they die before their cobeneficiary, their cobeneficiary continues to receive $5,834/month for the rest of their life. If their cobeneficiary predeceases them, their monthly benefit pops back up to $6,375/month.

Option	Member Yearly Benefit	Member Monthly Benefit	Cobeneficiary Monthly Benefit (if you die first)
Option 1	$76,500	$6,375	$0
Option 2	$73,582	$6,132	$3,066
Option 3	$70,008	$5,834	$5,834

Which option you choose obviously depends on a lot of circumstances in your life, including (but not limited to) the relative ages of you and your cobeneficiary, the health of you and your cobeneficiary, any retirement your cobeneficiary has, how much savings you have in other accounts that you can draw from, your spending needs, and your values. While this is obviously an important choice, it’s not one you have to make until you are retiring, at which point you typically have at least some insight into all of these factors.

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

February 23, 2019 by kfisch in philosophy, retirement, Uncategorized and tagged FI_Series, retirement | 6 Comments

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).

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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 we’re 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.

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.

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 2: The Process

February 21, 2019 by kfisch in retirement, Uncategorized and tagged FI_Series | 6 Comments

TL; DR: This second post in a series for Colorado teachers describes in general terms the process of “how” you would design a path toward Financial Independence. Hint: it’s pretty straightforward.

Part 1 in this series describes the “what” and the “why” of Financial Independence. This post will focus more on the process, the “how” do you achieve it. While future posts will go into more (perhaps excruciating) detail, this is just a high-level discussion to give an overview of the most important factors you’ll need to look at and the most important decisions you’ll want to make. To be clear, there is not “one right way” to do this, but most folks’ approaches include many common themes, so we’ll explore them here.

In some ways, achieving Financial Independence is remarkably straightforward – spend less than you make, and then save and invest the rest. There are several important decisions you have to get right (the “big rocks”), and then a bunch of smaller decisions you can make (the “little rocks”) that will certainly help, but aren’t as critical, and then the even smaller decisions that will probably have very little effect (the “sand”). The main categories of personal finance are earning, saving, investing, and spending (lifestyle). Within each of these categories (and they are very much interconnected) there are just a few, relatively simple, “big rocks” you have to get right (or mostly right) in order to achieve Financial Independence.

Earnings
Your earnings – how much you make from your job – is obviously an important piece in your financial picture and your ability to achieve Financial Independence. But many folks think you have to earn a very large salary (say, six figures) in order to do this, and that’s just not the case. It is certainly much easier to do this the larger your salary is, and there is definitely a lower limit in terms of practicality (if you’re making minimum wage, then there’s not much room for saving and investing). So, there is definitely some privilege involved here, but perhaps not as much as many folks think.

Since this series is aimed at Colorado teachers, we can throw out both the six figures and the minimum wage and talk about salaries that typically begin somewhere between $35,000 and $45,000 a year and then increase over time. In future posts I will use the salary schedule for Littleton Public Schools (which starts at just over $40,000 with a BA degree) as that is the district I’m most familiar with and is reasonably representative of the salaries along the Colorado Front Range. (Salaries outside the front range are often lower, but often so is the cost of living.)

Because almost all school districts in Colorado have a well-defined salary schedule, it makes it reasonably easy to predict what your future salary will be and what, if anything, you can do to increase it. (While there is some inherent uncertainty regarding future salary schedules based on future economic events, we can make some reasonable assumptions about annual cost-of-living increases to the salary schedule that should be close enough to allow us to plan.)

There are four main ways to increase your salary as a teacher in most districts: have more years of experience, increase your level of education, take on extra roles, and move into administration. Accumulating more years of experience happens automatically and, for the purposes of this series, we will assume you don’t move into administration. (If you do move into administration, obviously your salary will increase and make achieving FI even easier.) So, to maximize your earnings as teacher, you should focus on increasing your level of education and perhaps taking on extra roles.

As most teachers have figured out, it pays to increase your level of education so that you can move horizontally as well as vertically on the typical salary schedule. So from the beginning of your career you should be focused (financially) on moving horizontally through the different education levels as quickly as you can until you hit the “maximum” educational level on the schedule. For most folks, that means getting your Master’s degree and then accumulating additional hours beyond that to the max on the schedule. (Some districts have a PhD category, but most folks probably don’t want to go that far.) For example, on LPS’s salary schedule they recently added an MA+90 category, so to maximize your income you want to get your Master’s as soon as possible and then start accumulating additional hours until you reach MA+90.

The second way to increase your income is to take on additional roles. This is often coaching, sponsoring an activity, or working athletic events. Again, looking at the LPS schedules, you can make anywhere between about $1,200 and $4,000 coaching or sponsoring an activity the first year, and then get small raises each year you continue after that. You can also work athletic events (supervising, taking tickets, working the chain gang, etc.) to earn additional money (not sure what the current amounts are, they are low but not insignificant). Obviously, if you have the time and interest, you can combine several of these options, perhaps coaching in two or even all three seasons, or coaching in one season and working athletic events in the other two seasons. How much you take advantage of this will depend on your interests and preferences as well as your goals that we discussed in part 1.

Finally, you can increase your income outside of your school employment. This can be working a second job (often during the summer) or doing side hustles (with tutoring being a natural one for teachers). Again, how much you take advantage of this depends on your personal preferences and your goals, but you can increase your income by a not insignificant amount with a reasonable time commitment.

Saving and Spending (Lifestyle)
These two “rocks” go together because they are pretty much inseparable. It’s surprising to some people that your savings rate is the most important factor in achieving Financial Independence, not how much you earn on your investments (although that is important as well). Your savings rate is really determined by your spending rate, and your spending rate is really determined by your lifestyle. So, ultimately, the most important factor in your financial well-being and your possible attainment of Financial Independent is your lifestyle.

To be perfectly clear right up front, you don’t have to live like a monk in order to achieve Financial Independence (not that there’s anything wrong with that). But it is really important that you live within your means and, actually, live below your means (which is how you increase your savings). Like most everything else in life, this is a choice, but it’s one that we often make on autopilot. This is where being intentional in how you want to live your life can make such a huge difference.

There has been a ton of research in the last few years that indicates that, once you achieve a certain level of income, happiness and personal fulfillment do not increase simply be earning more money. It is necessary to achieve that initial level of income that covers your basic needs (and at least some of your wants), but after that making more money doesn’t correlate with increased happiness and fulfillment. In general, the research also indicates that “possessions” don’t increase happiness, but “experiences” do. As a teacher in Colorado, you make enough (particularly if you increase your earnings as mentioned above) that it is very possible to achieve this level of income to meet your needs and some of your wants and still have enough left over to save (and eventually invest) in order to be on the path to Financial Independence.

There are three “big rocks” that you need to focus on in terms of your spending: housing, transportation and food. While there are certainly many additional “little rocks” that can help make a difference, housing, transportation and food are the majority of most people’s spending and the areas that you want to focus on.

Housing
Americans have a love affair with the idea of a house. It’s a certified part of the “American Dream” and, when combined with expectations from those around us, often ends up being an area we overspend on. There are many blog posts you can read on this topic, so I’ll try to keep this reasonably short.

Whether to rent (an apartment or a house) or buy is a very personal decision, but don’t assume that buying is always the right answer. I grew up in a time when the conventional wisdom was that renting was “throwing your money away” and that you should try to buy a house as soon as possible because it was an “investment.” Turns out that when you look at the numbers, a house does not have a particularly good return on investment when compared with other investing opportunities. The main reason that many people believe that it does is because it’s really a “forced savings”, so it does end up being many people’s best investment because it’s really one of the few investments they consistently put money into.

This is not to say that buying a house is a bad idea, but you should buy a house because you value living in a house and not because you think it’s the right thing to do financially. For many folks, renting is actually the better option financially (but, again, that’s moot if you want to live in a house that you own). If you do decide to buy a house, it’s very helpful if you’re extremely thoughtful about doing it.

Again, conventional wisdom when I was growing up was to “buy the biggest house you could afford” and then “trade up to the biggest house you can afford when you’re able.” From a Financial Independence perspective, those are both wrong. You should buy “the smallest house that meets your needs” and try to “never trade up” by making your first home purchase your “forever” home. (The transactions costs around buying and selling a home, moving, and making improvements to the house are a huge drag on your saving and investing, especially if you do it multiple times.) The key is to identify your values and act accordingly. Since buying bigger and more expensive houses doesn’t automatically lead to more happiness and fulfillment, buy a house that meets your needs (and no more), so that you can focus your financial resources elsewhere in ways that do increase your happiness and fulfillment.

Renting (either an apartment or a house) is often the better alternative financially, allowing you to save (and invest) more as well as allowing you to be more flexible in where you live. As we’ll discuss in the transportation section, minimizing your commute (and the expenses associated with that commute) is a huge driver (no pun intended) of both financial success and happiness. Renting often gives you more flexibility on where you live, which often allows you to optimize your commute (walking, biking or public transportation). You can (and should) also do this when considering buying a house, but there is often less flexibility on location when buying instead of renting. Just like with buying, when making the decision to rent you also want to rent the smallest and least expensive place that meets your needs.

Transportation
After housing, transportation is often the biggest budget item for most people, and it’s also one of the easiest ones to spend less on. Many folks I know just assume that a car payment (and often two of them) is a given, but it really isn’t. When I was growing up, buying a used car was a bit of a gamble because used cars weren’t very reliable. But cars made much better today and, if you choose from the particularly reliable ones, buying a used car is not much of a gamble and will save you a ton of money. While some folks will even need a loan for a used purchase, it should be much smaller and you should be able to pay it off quickly.

Even better than buying a reliable used car is not buying a car at all. If you can eliminate one (or more) cars from your life, you will save a tremendous amount of money. Most people really don’t have any idea of how much their cars are costing them. This is where the location of where you live (either renting or owning) is one of the most important “rocks” to get right. If you live close to where you work (ideally where both of you work if you’re married, but at least one of you), then you walk, bike, scoot, or take public transportation to work (and also increase your health).

And if you do own a car, get a reasonably-sized one. SUVs are incredibly popular in Colorado, daily I see a single driver commuting to their job on paved and well-maintained roads. Most people would be better served by a sedan or hatchback and, on the few occasions you really need an SUV, rent one, you’ll come our way ahead financially (and, by the way, might help avert climate catastrophe). If you want to optimize even further, consider a nice used plug-in electric vehicle or fully electric vehicle (not a lot of good used fully electric yet, but there will be in the next few years). You’ll also save a ton on fuel and maintenance.

Food
There has been a lot of discussion about Avocado Toast and the Latte Effect lately. While I think this has taken up way too much bandwidth, there are some ideas here worth considering. The key again is to be intentional about how you spend money on food and drink and to align it with your values. As a simple rule of thumb, the more you eat at home, the better off financially (and typically in terms of your health) you’ll be. As a teacher, you typically don’t have the opportunity to go out for lunch when you’re working, so you have an advantage over other working professionals that bringing your lunch is pretty typical (although some folks purchase a lunch in the cafeteria – you want to make that be a rare thing).

Going out for dinner is a wonderful thing, but should be done occasionally and not three to four times a week (that includes picking up fast food). Most folks, if they align their food habits with their values, will discover that eating a nice meal at home together is not only financially wise, but provides them greater happiness and fulfillment. If you want to get together with friends, consider hosting (or attending) a pot-luck. You’ll have more quality time with your friends, spend less money, and likely eat healthier.

The amount spent on food is the third “big rock” of spending, next to housing and transportation. If you can optimize all three of them, then you’re savings rate will increase and then you’ll have money to invest and be on the path to Financial Independence.

Investing
Many people are intimidated by investing and think they can’t possibly do it right, so therefore Financial Independence is out of their reach. It turns out that investing is really the easiest of the “big rocks” to do well. Your savings rate is more important than your investment returns, and your spending rate determines your saving rate, so you have a lot of control over two of the most important factors that affect your investing.

Because you are investing for the long-term, investing is really pretty easy. The specifics can vary significantly based on your situation and your risk tolerance, and you can perhaps achieve a slightly higher return by tweaking your investments and making them more complicated. But, in general, you should invest in a broadly diversified equity index fund and forget it. (See this and this for more, or get his book.)

Your biggest decisions revolve around which type of accounts to invest in (401k/403b/457/Roth IRA, regular taxable brokerage account, etc.). In part 4 of this series we’ll go into this more in-depth but, in general, you want to maximize the amount you can put into 401k/403b/457 type tax-advantaged accounts and, if you do want to retire early, also invest in some regular taxable brokerage accounts (so that you can draw on these funds when you retire earlier than is typical). As a Colorado teacher covered by PERA, you definitely have access to the PERA 401k program (which is a good one), but you likely also have access to a 403b or a 457 plan. If you do have access to a 457 plan, especially if it’s PERA’s, that’s the one you’ll want to invest in first because you can access that money more easily before age 59.5. (More on this in part 4.)

A key area related to investing (and, it turns out, related to how much you have to spend to live on) is to think more intentionally about your taxes. While we certainly utilized tax-advantaged accounts along the way, this is one of the areas where we could’ve improved the most. By learning the rules around taxes you can optimize the use of your income and tax-advantaged accounts available to you. Much more on this in part 4.

So, those are the big rocks. Be more intentional about the lifestyle that makes you happy and fulfilled. Make spending decisions that align with your values and your goals in order to increase your savings rate, including making better decisions around housing, transportation and food. Know the tax rules and utilize tax-advantaged accounts in a way that optimizes your savings, spending and investing, and invest in broadly diversified equity index fund(s).

Is it really that simple? Yes, and no. As we’ll see when we get to the case studies, long-term planning like this relies on many, many assumptions, and those assumptions will not always be spot on. In addition, some people will argue that some of the lifestyle decisions that are needed to live beneath your means are unrealistic. So, in part 3 of this series I’ll spend a bit of time discussing the “What ifs?” and the “Yeah, buts.”

Part 1: The Concept
Part 3: The “What ifs?” and the “Yeah, buts”
Part 4: Tax optimizing/401k/403b/457/Section 125
Part 5: Case Study: Teacher Married to Another Teacher
Part 6: Case Study: Teacher Married to a Non-Teacher
Part 7: Single Teacher

Financial Independence for Colorado Teachers Part 1: The Concept

February 21, 2019 by kfisch in PERA, philosophy, retirement, Uncategorized and tagged FI_Series, PERA, retirement | 6 Comments

TL; DR: This is the first in a series of posts that will lay out a possible path for Colorado teachers to achieve Financial Independence and retire* early. This post looks at the concept of Financial Independence and discusses a little bit of the “what” and the “why”.

*Retire only if you want to, but certainly achieve a “work optional” stage of life much earlier.

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This is the first in what will be a series of posts discussing how Colorado teachers can achieve financial independence. (Actually applies to any Colorado public school employee, not just teachers, but will focus on teachers.) This post will focus on the concept of financial independence: what it is, why you might want to achieve it, and the basic outline of what it takes to get there.

There are many, many, many excellent resources online (some of which I’ll link to at the bottom of this post) that are better written, broader in scope, and more in-depth. But I decided to write this series because, as far as I know, there is not any that are devoted specifically to Financial Independence for Colorado teachers. The path to Financial Independence is different for everyone, but there are certain aspects of being a teacher in Colorado that make this an easier path and are worth exploring in detail (notably Colorado PERA and the specifics of the Colorado state tax code). My hope is that this can be a resource for Colorado educators to adapt some of the terrific information that is available elsewhere online in light of the added options that PERA and the state tax code give you.

If you’ve ever explored anything financially related online, you have probably come across the acronym FIRE, which stands for Financially Independent Retire Early. (I will include some links to resources at the bottom of this post you might want to investigate.) While the FIRE concept may seem to be pretty well defined, there are many different approaches, definitions, and opinions about exactly what it means, so let me give you my take as a frame of reference for this series of posts. (Not that you have to agree with my take, but just as a common understanding for these posts.)

It seems to me that there is often a misconception of financial independence that it’s all about money. In my view, it’s not. Money is the means but not the end. Financial independence is, at its essence, exactly that – meaning that you don’t have to be employed and earning income in order to meet your financial needs. When you “achieve FI”, that means you have enough savings and investments to live off of even if you never earn another dollar at a job. That doesn’t mean you have to retire, the ‘RE’ part of FIRE, but it means you can if you want to (or circumstances dictate that you have to). Some people refer to this as a “work optional” stage.

So if FI is not about money, what is it about? I think it’s about living your best life and the life you want to live. It’s about making the most of your limited years (time is not a renewable resource) and about maximizing the time you have to do what you want. It’s about being intentional about life and not just letting life happen to you, but taking a little bit of time to plan the life you want to lead, one that aligns with your values, and then take the steps to allow that to happen. Perhaps that doesn’t seem all that different than what most people do, plan for the future. But this is taking it one (or two) steps further than most people do and being much more granular about the financial aspects of your future in order to achieve the life you want to live.

One of the unfortunate things about American society (I’m focusing on the United States in these posts) is the lack of knowledge and open discussion about money and finances. In many families, money is a taboo subject, and most schools do little or no real financial education. As a lifelong educator, it saddens me that we don’t make an effort to really educate our students about money and finances. Not because money or wealth is important in and of itself, but because of the tremendous impact finances and financial decisions have on everyone’s life. (If I was pressed to name the two most important subjects we should teach in K-12 education, it would be Physical Education and Financial Education, as those are so important throughout everyone’s life, yet we devote very little resources to teaching them.)

That doesn’t mean society doesn’t talk about “Money” with a capital ‘M’. We are inundated with stories about making money and wealthy people, bombarded with marketing encouraging us to buy things, and often social pressures to look and dress and own the correct things to fit in. But that’s as far as it goes for most folks, we get the pitch for all these things that are “desirable”, but not the knowledge and resources to manage our financial lives in a way that matches up with our goals and our values. FI is about achieving your goals and living your values. That may include retiring early or it may not – it’s about making decisions that optimize meaning and happiness. Once you achieve FI you may still continue to work, but you’ll continue because you want to do the work, not because you need the paycheck. And if at that point in your life you are ready to do something else, you won’t be restricted from making a change because of the need for that paycheck.

I think most folks would think that my family has done really well financially along the way, and we have, but if I knew what I know now back when we were first starting our careers, we would have achieved financial independence much earlier. So this series is intended to help some of you, if you decide this is the path for you, to do it better than we did. So what does it take to get there? Future posts will go into more detail, but it generally boils down to spending less than you make, and then saving and investing the rest. It’s also about making smart lifestyle choices (living within and actually below your means), and understanding the math of things like compound interest and how your taxes work.

Below you will find links to subsequent posts in this series (as the posts are written, the links will become active), as well as links to some excellent FI(RE) bloggers and other resources that you may want to investigate if you want to go down the rabbit hole and learn much, much more about this idea.

Part 2: The Process
Part 3: The “What ifs?” and the “Yeah, buts”
Part 4: Tax optimizing/401k/403b/457/Section 125
Part 5: Case Study: Teacher Married to Another Teacher
Part 6: Case Study: Teacher Married to a Non-Teacher
Part 7: Single Teacher

Some excellent resources to learn more about FI(RE)

Playing with Fire Book (and soon to be documentary)
Mr. Money Mustache
JL Collins (and his book The Simple Path to Wealth)
Mad Fientist (and his podcast)
Go Curry Cracker
Financial Panther (particularly good resource on side hustles)
Our Next Life (and her book, Work Optional)
Afford Anything (and her podcast…)
1500 Days to Freedom
Four Pillar Freedom
Choose FI (and their podcast)
Millennial Revolution
Millionaire Educator
and many, many more

Credit Cards: Evil or Good?

July 21, 2017 by kfisch in spending, Uncategorized and tagged credit cards, spending | 1 Comment

Summary: When used wisely, credit cards are an excellent financial tool and can actually pay you to use them.

Credit cards have a bad reputation in financial circles, and for good reason. Lots of folks have used them to spend more than they can afford, and then end up paying exorbitant amounts of interest because they carry a balance. The problem, of course, is not with the credit cards themselves, but with the behavior of the person. If – and this is a big if – you have self-discipline and only buy what you truly need and can afford, then using credit cards is actually a very smart financial move. The rest of this post assumes that you can use them responsibly – if that’s not true, then stop reading now. If it is, then it turns out that the credit card companies will even pay you to use them.

There are many posts you can read that will dive into this much deeper than I will, particularly if you want to use credit cards to “travel hack.” I will just briefly describe the somewhat haphazard way I’ve gone about this to demonstrate that you don’t have to be an expert to take advantage of this (while acknowledging that it can be done better if you take the time to become an expert).

Until fairly recently we were a one credit card family. We’ve always been disciplined about our spending and we started using a credit card early on and pretty much charged everything we could simply for convenience reasons. Then credit card companies slowly started introducing “rewards” credit cards in different flavors, and we went ahead and changed our one credit card to a credit card that earned us 1% cash back that went directly into the 529 college savings plan we had started for our daughter (more on 529 plans in a future post). We still just stuck with one credit card and didn’t really see the need for more than one. Flash forward a few years and suddenly reward credit cards are everywhere, and we also happen to be financially secure, including owing no debt, so didn’t have to worry about possible impact on our credit score (if you do it right, opening multiple credit cards isn’t that much of a concern anyway).

Since some of the new reward credit cards offered more enticing deals than simply 1% back into the 529 plan, I started researching them a bit. I discovered that not only did many of them offer more than 1% cash back (at least on certain items), but they also frequently offered bonuses for signing up. At first that seemed too good to be true (I mean, really, they are going to pay me to get their credit card?), but after investigating it turns out that it was legitimate. Credit card companies make their money from merchants (who pay a fee for each transaction), and from credit card users who don’t pay off their balances each month. (Part of me feels ethically conflicted about this, so that might be a reason not to do this if you feel that same conflict strongly enough.)

For a while we were pretty content with just that one, but then in 2012 we added in a Chase Freedom Card (*referral link). This card also offers 1% back on everything, but then 5% off on categories that Chase chooses each quarter. Those categories can change from year to year, but for 2017 look like this (fourth quarter has often included Amazon):

This then became our primary card and we eventually cancelled our earlier card. While it was a bit annoying that the categories changed each quarter, it was still better because we still got the 1% on everything and then got the 5% on some things each quarter. I don’t have an easy way to tell how much we earned with this card then, but it would’ve definitely been more than with the earlier card. Especially because this was also the first time we got a “sign-up bonus” and I’m pretty sure it was $200 (it’s currently $150 after a minimum spend).

We stuck with this card for quite a while, but then in 2014 we added in a second card, the U.S. Bank Cash Plus Card. At the time we still had our checking account at US Bank (more about our switch to Ally Bank in a future post) so it was nice and convenient, plus in addition to offering 1% cash back on everything, it offered 5% cash back in two categories and 2% in one other category that you can choose each quarter. While it’s a bit of a hassle to choose those categories each quarter, it only takes a minute or two and can definitely add up. Here are the current 2% and 5% categories you can choose from:

Because we also had (pre-defined) categories for our Chase Card, each quarter I check for what those categories are and then choose complementary categories for the US Bank card. For example, I usually choose the 2% for the US Bank card to be for groceries, except for the quarter that Chase offers 5%, then I’d switch it to restaurants. For the two 5% categories, we really only take full advantage of one of them – cell phones. We have a family plan that includes myself, my wife and my daughter, but also my sister, my mother-in-law and my father-in-law. We pay the bill and then they reimburse us, so the bill is somewhat significant each month. By charging it to this credit card, we get 5% back each month on that. Because we really don’t buy that much, the other 5% category isn’t that important, but we usually choose department stores for when we occasionally buy some clothes. Over the life of this card (since July 2014), we’ve earned more than $1800 cash back. I think the sign-up bonus for this one was only $25 once we redeemed $100 in cash back, but I think that for a while it was a $25 bonus every time we redeemed at least $100 (that’s ended now). The sign-up bonus right now ups the 5% categories to 5.5%, 2% to 2.5%, and 1% to 1.5%, all for the first year, then it drops back down to the normal levels.

It was nice having two cards in case there was a problem with one, and it was nice being able to juice our cash back a bit, and of course we always paid off the balance each month. We were content for quite a while with just those two, but then I kept reading more and decided to add in a third card – the American Express Blue Cash Preferred Card (*referral link) in December of 2016. This is a card that I honestly thought we would never get because it has a $95 annual fee. With all the no-annual fee cards, why would you choose to pay a fee? Well, it turns out the cash back on this card is more than enough to cover the annual fee and still earn us more than some other cards.

First, the sign-up bonus included $150 cash back after a minimum spend, so that more than took care of the $95 annual fee the first year. If we decide it isn’t worth it, we can always cancel the card before the year is up and avoid the $95 fee for the next year. An additional sign-up bonus was 10% back on Amazon purchases for the first 6 months. We got this card right before Christmas, and we also have quite a few family birthdays in the first 5 months of the year, so we took good advantage of this. The on-going rewards include 6% back on groceries (this is where we come out ahead even with the $95 annual fee, which is why at the moment we don’t intend to cancel it), 3% back on gas and department stores, and then 1% on everything else. There is a $6,000 annual limit on the groceries, but conveniently one quarter we can use the Chase Card and get 5% back on groceries and then use the Am Ex for the other three quarters of groceries and stay within that limit. We now put restaurants for the 2% category for the US Bank card instead of groceries (although during the 3rd quarter we use Chase for restaurants because it’s 5%).

Now that we had three cards, I was feeling that was plenty. But then I needed to book an airplane flight to visit my parents this summer and ended up on a different airline than usual. When I was about to book the flights, up popped an offer for a branded credit card that would give me $100 cash back on that very flight. The rest of the benefits weren’t that great, but I went ahead and got the credit card simply to pay for that one flight. Now that the flight has been completed, I’ll cancel the credit card. (Haven’t yet just in case I need to book an emergency flight on this carrier in the next few months.)

Then, funny enough, because we got that credit card (which happened to be offered by Citi), Citi then tried to upsell us on another credit card, the Citi ThankYou Premier Card. It also has a $95 yearly annual fee, but it’s waived for the first year, and you can earn $500 in bonus points with a minimum spend, plus additional points for travel purchases.

As it so happened, we need to book several flights for later this year and those, combined with paying our annual house insurance on this card, met the minimum spend. So we got this card, put the flights and the yearly house insurance on it, and got slightly over $575 in points between the bonus and the 3% bonus on travel expenditures. The only thing I didn’t really like with this one is that if you wanted to use those points for cash back, they were only worth 50% of the value. If you booked travel through their site, they were actually worth more than 100%, but I didn’t want to deal with that going forward, so instead we converted them into $475 in Target gift cards plus $100 at Red Robin. It will take us a while, but we do eat at Red Robin and shop at Target occasionally, so again it was basically free money. We’ll keep this card until our travel is completed, then cancel before we have to pay the annual fee.

After this one I was ready to take a break for while (although still planning in about 12 months to explore options again for additional reward and sign-up bonus opportunities), but then for our next Amazon order an offer popped up to get an Amazon Credit Card. This was something I had been planning on eventually doing because it gives you 5% back on Amazon purchases (had to wait until after the 10% cash back from the Am Ex card was done), so went ahead and did it now because they also offered a bonus of $70 cash back.

Now, at this point, this may sound a bit crazy to you, but it’s all pretty straightforward. As I mentioned previously, I’m not an expert on this, and there are many blog posts that explain how you can systematically go about this to optimize your rewards (especially if you want to use them for travel). But even just doing it haphazardly like we have can easily earn you more than $1000 in bonuses, plus probably several thousand a year in cash back. (There are enough cards out there, and you can even get the same card again after not having it for a while, that you can probably keep rotating through them and continue to get bonuses for quite some time.)

This only works if you’re fairly secure financially (helps you qualify for all these cards), and if you don’t succumb to temptation and use these cards to spend money you otherwise wouldn’t. It really does end up being pretty much free money at the cost of a very small amount of time, for items you would be buying anyway. Even if you don’t want to get multiple cards at the same time, make sure the one card you do have is the optimal one for your spending habits, then periodically see if it makes sense to switch to a new one that also works for your spending and allows you to earn the bonus.

Now, what should you do with all this free money? Well, it depends on your circumstances, but most of the good options involve investing it. I’d be happy to work with you to figure out the best way to do that.

photo credit

PERA Transition Year (aka, 93/93 or 110/110)

July 16, 2017 by kfisch in PERA, retirement, Uncategorized and tagged LPS, PERA, retirement, transition year | Leave a comment

Summary: For many public school employees, a transition year is a fantastic benefit that can make a huge difference in your retirement finances. It’s definitely worth finding out if your school district offers it, under what conditions, and then investigating whether it might be right for you.

The working after retirement rules for PERA specify that retires can work up to 110 days in a calendar year for a PERA-covered employer after they retire (there’s no limit on non-PERA covered employment). While any PERA-covered employee can possibly take advantage of this, it works especially well for public school employees because our contract year naturally occurs half in one calendar year and half in the next, meaning you won’t exceed the 110-day limit in either year. Some – but not all – school districts offer this transition year benefit (sometimes referred to as 93/93 or 110/110), but often with special conditions. For example, in Littleton Public Schools you must have been continuously employed by the district for the previous 10 years in order to qualify, and the district does not pay benefits during the transition year. Check with your district to see if it’s offered and what conditions there may be. (In Douglas County Public Schools it is also working in the district the previous 10 years plus the permission of your supervisor.)

Despite this being around for a while, lots of folks are a bit unclear on the details (or unaware of it altogether), so I thought I’d use my experience as an example. I officially retired on June 1, 2017 and am now working a transition year with LPS. I currently have 29 years of teaching experience under PERA, plus I purchased 6 years of service credit, giving me 35 years of service credit that my retirement benefit is based on. Thirty-five years translates to 87.5% of my Highest Average Salary (HAS) if I choose option 1 under PERA (full benefit comes to me, but when I die the benefit stops). Since I chose option 3 (I get a reduced benefit, but when I die my spouse gets the exact same benefit until she dies), I’m getting about 91.5% of that which comes out to about 80.1% of my HAS. It’s important to understand that the factor that determines that reduction percentage changes, both according to your age and your spouse’s age and due to PERA’s current actuarial assumptions, but the changes are relatively small from year to year.

What this means is that during this transition year, I’m effectively getting 180% of the pay I would normally get, minus the amount I have to pay for my own insurance coverage. I’m adding on to my wife’s insurance (as is our daughter) so that comes out to approximately 5% of my salary, so I’m making about 175% of what I normally would. (Also, in LPS your pay for the transition year is “frozen” at what you made the previous year, so I do not receive the small cost-of-living raise I would’ve normally received.)

The other thing to keep in mind is that in addition to losing benefits, I’m “giving up” the service credit I would earn with PERA by working this transition year. I (and LPS) still contribute to PERA during this year, but I do not earn any service credit, which is effectively giving up 2.5% of my HAS. Because I’m 75% “ahead” from getting the benefit during my transition year, that’s equivalent to roughly 30 years of retirement. (Not exactly because of the time-weighted value of money, it is actually much longer than that because I can earn money by investing that 75% over those thirty years, but good enough for our purposes). So, with that back-of-the-envelope calculation, the “break-even” point is 30 years. If I live longer than that (which I have decent chance of), then theoretically not taking the transition year would work out better. In reality, because of the compounded investment returns that I can make on that 75%, it’s likely to be 40 years to break-even or perhaps a lot more, so for me the (financial) decision was pretty easy. (The fewer years of service credit you have, however, the closer you need to look at that calculation.)

There are other things to consider in addition to the “break-even” point when looking at the transition year option.

Because you have to retire from PERA and keep working for your employer, you have to know you are going to retire (and commit to it) about 16 months before you will actually stop working for your current employer. For some folks, that’s difficult to do.
As mentioned above, in many districts you’ll lose your benefits, which includes not only health, dental and vision, but things like life insurance and sick days (in LPS you get 5 sicks days for use during the transition year). So you have to figure out where you are going to get coverage (from a spouse, from LPS via COBRA where you pay the full premium, from PERACare, or on the individual market).
During the two calendar years that the transition year affects, your taxable income will increase (both your regular income and your PERA distribution are taxable), and there’s a decent chance it will move you into a higher tax bracket. (In LPS you get two “paychecks” – one from LPS, one from PERA – for a total of 14 months, 7 in each calendar year.) This is especially true in LPS if you have a lot of accrued sick days, as LPS gives you a payout on those as well, for me that’s over $9000 additional taxable dollars for 2017 (this is not PERA-includable salary). This is why many folks increase their contributions to 401k/403b/457 plans during these two years.
And it depends a lot, of course, on your personal financial circumstances and needs. There’s no one-size-fits-all when it comes to retirement planning.

So, should you take a transition year (assuming your district offers it and you’re eligible)? It depends, and if you choose to work with me we will look at this very carefully, but it’s definitely something to know about, investigate, and perhaps even make some financial decisions prior to retiring based on the knowledge that you will be receiving this benefit.