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

PERA: It’s Even Better Than You Think

pera

Most Colorado (public school) educators know that Colorado PERA is a “good” retirement program, especially compared to Social Security, but often they don’t know just how good it is. Fully exploring this topic is beyond the scope of this blog post, but let me briefly hit some of the highlights.

As part of SB 14-214, the the state of Colorado commissioned three independent studies of Colorado PERA, two of which are particularly relevant to this discussion. The Milliman Retirement Benefits Study, released in January of 2015, looked at how Colorado PERA’s benefits fit into the larger picture of total compensation, and was designed to evaluate the value of PERA compared to other retirement packages offered by other states and by private companies. The executive summary states,

The state’s total retirement compensation package is equivalent to 15.7% of pay (15.4% defined benefit and 0.3% retiree health), relative to the market median of 14.7% (combined sources: defined contribution, defined benefit, social security, and retiree health)

Basically, this says that as part of a total compensation package, Colorado PERA is just above the median benefit paid by states and private companies.

The second study, the Gabriel, Roeder, Smith & Company Plan Design Study is a bit more in-depth and relevant to this discussion. The purpose of this study was to compare Colorado PERA’s plan design and, specifically, the costs and effectiveness of PERA, as compared to other retirement plans offered in the public and private sectors (including the one that affects the most people, Social Security). Again, from the executive summary,

This study found that the current PERA Hybrid Plan is more efficient and uses dollars more effectively than the other types of plans in use today.

When the study was presented to the State of Colorado’s Legislative Audit Committee, GRS officials told members,

Colorado’s largest public employee pension system is the most efficient and effective a state could have.

Those are important pieces of background to know, especially when the legislature is in session and various bills are offered regarding PERA. But I want to point out some specific features of Colorado PERA that are particularly relevant to you from an investment and financial planning perspective.

Colorado PERA represents over 500,000 members which provides some significant advantages to you in terms of economies of scale and in terms of investment returns. Because PERA is so large, it is able to both invest at low cost and to invest in areas that are not available to you as an individual investor. Because they are a large, institutional investor, they are able to negotiate investment fees that are lower than what you can typically achieve on your own. They can also invest in areas such as real estate and private equity that are not available to you as an individual investor. Both of these help PERA achieve higher returns (at the same level of risk) than most individual investors.

Perhaps even more importantly, however, is the fact that PERA is the ultimate long-term investor. As an individual, you have a “life-cycle” to your investments. Typically as you get older and then eventually when you are retired, conventional wisdom indicates that you should get more conservative with your investments because you don’t have time to “recover” from a market downturn. But because PERA pools money from over 500,000 members, and because they are essentially investing in perpetuity, in many ways PERA can invest like each one of those investors is an unchanging 35-year old.

While PERA does have to deal with cash flow issues in order to pay benefits, and they certainly have to manage risk and particularly be concerned with sequence-of-returns risk, overall they can truly invest for the long term. Which means that even as you get older, PERA doesn’t have to adjust its investments based on your age, they continue to invest as if you were 35. This allows them to stay fully invested for the long-term at an appropriate level of risk that will generate good long-term returns.

In addition, once you do retire and start drawing your PERA benefits, those benefits are guaranteed for life, including a 2% annual increase to help cover inflation. (Note: that 2% applies to those hired before 2007, and can temporarily decrease following calendar years that PERA investments lose money, which does happen, but not that frequently. For those hired after 2007, it could also be 2%, but it’s a bit more complicated.) Let’s use a specific example to put that into perspective.

The median PERA retiree earns about $35,000 per year in benefits. There’s a rule-of-thumb in financial planning circles called the 4% rule which says that, based on historical results, people can typically withdraw 4% of their investment balance each year to live on and still expect their money to last until they die. While not perfect, the 4% rule is pretty robust, which means that the $35,000 per year in our example equates to about $875,000 in savings. Many career educators will likely qualify for a much higher benefit, maybe $55,000 a year or more, which equates to $1.375 million in savings.

Now, this is a very rough equivalency, as an investment balance using the 4% withdrawal rule has a decent chance of actually growing over time, which means you could leave a healthy inheritance, while your pension income ends when you die (or when your beneficiary dies if you take Option 2 or 3). But I think it still gives you a rough idea of the incredible value of your PERA pension. It really does allow teachers to become millionaires by the time they retire (and multi-millionaires if you invest your own savings wisely).

There’s one other important aspect of this that I think many Colorado educators may not notice. Because this pension income is guaranteed, in many ways you can think of your PERA pension as the fixed income (bonds) portion of your portfolio. This means you can invest your other retirement savings (401k/403b/457 – I’ll write a post soon on retirement savings plans) more aggressively than folks who don’t have a pension plan like PERA, which can ultimately generate a lot of increased wealth and therefore financial security. (I will write a post soon on investment “risk” and how “aggressive” investments are not necessarily more risky for the long-term investor.)

This is one of the main reasons why I think it’s unfortunate that many Colorado educators don’t really start thinking about PERA until they are close to retirement. In reality, the fact that you have PERA as your retirement plan should affect your financial planning from the first day you begin PERA-covered employment. (This is also one of the reasons I decided to start Fisch Financial – after talking with colleagues over the years about PERA, I realized how little many of them have thought about how PERA should affect their financial planning.)

So, how good is PERA? It’s great in-and-of-itself, but it also allows you to be more successful with the rest of your investments as well. Please consider incorporating the affordances that your PERA benefit allows you in the rest of your financial planning.