Dropout Factories - NYT

As absolutely boring as it sounds, I try to read many, many editorials from various sources - The Wall Street Journal (right), The New York Times (left), Bloomberg (right), USA Today (left), etc. Most usually cover business, the economy, politics, etc., but I am always interested in the various views on education as well (down on the right hand side of blog, you will notice a feed of education related stories from USA Today).

Anyway, I came across the editorial below in The New York Times, and I wanted to share it with my readers. There is a short quote that I have included below, but please click the link to read the entire article (it is pretty short actually).

Dropout Factories - The New York Times - "According to Robert Balfanz, of Johns Hopkins University’s Everyone Graduates Center, just 12 percent of the nation’s 20,000 high schools account for half of the country’s dropouts and almost three-quarters of its minority dropouts. By focusing on these high schools — and the lower schools that feed them — the country stands a good chance of keeping in school millions of students who would otherwise drop out."

The Countdown - End of Year (and Retirement)

If all the educators that read this blog are like my wife, she has been on The Countdown for a couple of weeks now. She actually just has 3 days left "with kids" including today, so the finish line is just a step or two away. I hope you are just as close or within a couple of weeks at the most.

Anyway, I have received a few questions about impending retirements, and the questions have run the gamut from pension to social security to life insurance. One of the main things to remember here is to talk to the various agencies involved (and a advisor if you wish). I can give some basic steps to take, but these are serious issues.

I would suggest making an appointment with TRS and Social Security to discuss the options you have. One important item to remember is that once you make a choice on how you want your pension paid, it is binding.

For most people, the best option will be a joint payment with retiree and spouse retaining the same payment (with COLA increases) for whomever lives the longest. This is important especially if a non-educator spouse is involved (unless they have substantial retirement assets).

One reader had a very good question that I wanted to share. Essentially, I was asked about taking the highest payout option for your pension and getting a life insurance policy with the extra benefit. I know this sounds like a great option, but I promise it is not 99% of the time. The issue here is that the pension grows about 3% per year every year. This is no small amount especially when you think that today's 50 year olds have a good chance of reaching at least 90 years of age. To give you an idea of the numbers we are talking about here, let's look at a hypothetical situation.

If an educator retires at 54 years of age, 30 years in the system, and has an annual salary of $66,666, we will guess that they live to be 95 years old (41 years of monthly pension payments). In year one, they should receive a $3,333.33 monthly pension (40,000 annual pension). In year 10 the benefit should have grown to about be $4,489 a month. In year 20, the monthly benefit has climbed to $6,045. In year 30, the benefit will be about $8,142 a month. Finally, in year 41 the last monthly payment made would have been for $11,131. This is almost 3.5 times as much as the first monthly payment!

Here is the kicker, if the retiree died in year 15, and the spouse continued to live the next 26 years, the pension benefit is gone. Zero, nada, zilch. The last monthly benefit would have been about $5,209, and it is now GONE. It would need to be a BIG life insurance policy to even begin to replace the income, and then the future payments are not guaranteed (by state law) like your pension.

By the way, for those wondering how much money would have been paid out over this retiree's life (to age 95), the answer is $5,530,540.55. Also, if the retiree had wanted to try to fund this option alone, they would have needed $1,214,370.46 on day one and made a steady 4.5% every single year. These are big numbers, and that is why I have continued to say that your pension is your biggest asset.

I know times are tough, and many retirees are thinking that if they choose the high option payout and save the couple of hundred dollars a month, in the end, they will be better. I completely disagree. There are few cases where it works, but you will never know unless you talk with TRS and an advisor. TRS will give you the breakdowns and answer some questions for you, but they will not give you advice on which option to take. An advisor will hopefully point out all of the benefits and not just be trying to sell you some product.

It is really sort of late to be having this discussion for those retiring this year, but I will try to remember to bring it up earlier next school year. Sorry to not have been thinking ahead that far to poke and prod everyone. For those retiring in a year or two, now is the time to start planning!

As I have said before in this blog, the more information you have, the better (and easier) your decision will be.

As for Social Security, hopefully Obama and Congress will eliminate the Windfall Elimination Provision (WEP), but with the current crunch on Social Security and national debt, don't bet on it this year.

Finally, life insurance is a big topic. How much? Why have it? The main reason to have at least a basic policy ($50,000 to me is basic policy) is to help those that you leave behind help pay for any final expenses and at least have something for a "transition" period. Beyond that, it is really a discussion to have with an advisor since your debts, income needs, etc. will play a part.

I hope this helps those that are looking for some guidance, and I cannot stress enough how important it is to find out about your benefits and options.

Now, let the countdowns continue, and I wish you all a great summer!

Did You Contribute to TRS Between 1987 and 1990?

One of my clients who also happens to be a retired educator brought something to my attention that I had never heard of regarding TRS. First, a little background though...

If you look at your paycheck, your contributions to TRS are obviously automatically withheld, but they are also "pre-tax" which means that you do not pay federal or state taxes on these contributions. When you start receiving your pension though, you start paying up... trust me.

Here's where it is a bit weird... Between July 1, 1987 and January 1, 1990, any contributions to TRS were "pre-tax" for federal, but you did pay state income tax on those contributions. In 1990 and after, contributions for federal and state are pre-tax.

In your TRS retirement packet, there could be a page telling you to read the important information that discusses this issue. The following is from my client's letter that was in the retirement packet:

"As of January 1, 1990, your contributions to TRS became sheltered from Georgia income tax. However, your contributions from July 1, 1987 to January 1, 1990 were sheltered from federal taxes but were subject to state income tax. Therefore, in order to establish the same basis for state and federal income tax purposes, Georgia revenue law allows your contributions of $X,XXX.XX for this period to be used as a recovery adjustment when filing your next year's Georgia income tax return."

While my client had hoped that the amount meant a refund of this entire amount, it unfortunately does not. When your taxes are completed, the "state distribution" should be reduced for ONE YEAR by this amount. Thus if your letter said you contributed $5,000, you could possibly save about $300 on your Georgia state income taxes. Remember, this is a ONE time recovery adjustment after you have retired and only in the amount the letter specifies. The variable here is the senior tax exemption in Georgia. If you are not paying taxes because of this exemption, you may not really receive much benefit, if any.

As with anything tax related, it is important to discuss this with your accountant or tax preparer. If you have already retired and did not take the adjustment, try to find your paperwork or contact TRS for a replacement. It may or may not benefit you, but if it does, even a couple of hundred is better than nothing.

This will not be a huge amount of money no matter what, but in the end, every little bit helps.

Wrapping Up the Legislative Session for TRS

Well, I posted my last blog on April 30 explaining that one of the items I was working on dealt with possible legislation that would make changes for TRS. It would have been nice for TRS to have already posted that all bills that would have made major changes had died in committee, but I think they posted the PDF on May 1.

In any event, some of the proposed changes that would have benefited a great number of educators and other state employees died in committee. Just a sad reality of the current economic times. All proposed bills that could have had a financial impact died in committee.

The bad thing about these changes are that they are what are called "fiscal" bills that can only be brought up in the first year of the two year elective cycle. When they are introduced, they must be put through an "actuarial study" between the 1st and 2nd sessions (under Georgia law). Without an actuarial study, there is no chance the bill will be passed and enacted in the second year. I must admit that I was not aware of this process, but I guess we learn something new every day.

The problem now is that any legislation that could possibly help the educators of Georgia like these bills would have cannot be brought before the legislature until after the inauguration of the next group of legislators in 2011. Can you say "frustrating?"

Well, the next step is to know and understand the next group of legislators that are elected. Press them to introduce legislation, request an actuarial study, pass the bill in year 2, and finally have it signed into law by our next governor. It is a large task, but hopefully, as the economy improves the state will see the benefits of making a few changes.

Want to read more about the various bills covering TRS? Click this link to go to the TRS website and the PDF that they released.