Whenever a new client comes to my office, I always ask them to bring any relevant account statements, tax returns, etc. We discuss each one and make a list of assets and debits. From there, we can start to really get a picture of the financial portfolio of the client.
I think that sometimes it is hard for many people, including educators, to understand that their pension has a current value beyond just the monthly payout in retirement. This is something that I am frequently asked about by educators, so I hope this post helps explain it.
Let me give you an example. Let's say that you are set to retire after 30 years, and the last two years you made $65,000 each year. In Georgia, your pension payout would be $3,250 ($39,000 annual) a month with a 1.5% cost of living adjustment every 6 months. Since this is essentially an annuity, let's estimate that you will live for 40 years. Factoring in 480 payments, the $3,250 to start,the 1.5% increase every six months, and the TRS return of 4.5%, you would need to purchase an annuity for $1,159,396 today. Yes, that is more than $1 million.
Now that we have the value of the annuity, let's look at the other assets - a little 403(b) of $175,000 plus a paid for house of $250,000. Without knowing it, you have a net worth of $1,584,396. See the chart below (click it to enlarge).
Now that we have valued your pension and totaled your assets, you can start to see why your 403(b) being invested is a smart move. The pension portion is considered "fixed income," thus it is very stable and predictable. The real estate portion (your house) does not generate income, but it is also a substantial asset that has a significant value.
Your 403(b) - which you should rollover to an IRA - is actually your least valuable asset, and it is one which it should be used to complement your pension. By leaving it invested in equities and slowly drawing it down, you allow the 403(b) to weather any moves in the market and to continue to gain in value for our future use.
You can read in many books about moving your assets to fixed income as you approach retirement, but this is generally meant for 401(k) participants. Since the vast majority of your assets (your pension) is already considered fixed income, you are looking at only 11% of your assets being invested in equities. This is well within a range of acceptability.
Keep investing, keep asking questions, and keep wanting to learn more about your financial future.
I think that sometimes it is hard for many people, including educators, to understand that their pension has a current value beyond just the monthly payout in retirement. This is something that I am frequently asked about by educators, so I hope this post helps explain it.
Let me give you an example. Let's say that you are set to retire after 30 years, and the last two years you made $65,000 each year. In Georgia, your pension payout would be $3,250 ($39,000 annual) a month with a 1.5% cost of living adjustment every 6 months. Since this is essentially an annuity, let's estimate that you will live for 40 years. Factoring in 480 payments, the $3,250 to start,the 1.5% increase every six months, and the TRS return of 4.5%, you would need to purchase an annuity for $1,159,396 today. Yes, that is more than $1 million.
Now that we have the value of the annuity, let's look at the other assets - a little 403(b) of $175,000 plus a paid for house of $250,000. Without knowing it, you have a net worth of $1,584,396. See the chart below (click it to enlarge).
Your 403(b) - which you should rollover to an IRA - is actually your least valuable asset, and it is one which it should be used to complement your pension. By leaving it invested in equities and slowly drawing it down, you allow the 403(b) to weather any moves in the market and to continue to gain in value for our future use.
You can read in many books about moving your assets to fixed income as you approach retirement, but this is generally meant for 401(k) participants. Since the vast majority of your assets (your pension) is already considered fixed income, you are looking at only 11% of your assets being invested in equities. This is well within a range of acceptability.
Keep investing, keep asking questions, and keep wanting to learn more about your financial future.
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