Sometimes, I reflect on former thoughts and beliefs of mine and think “boy, that was stupid.” I am trying to be a little more forgiving and realize I was doing the best I could at that time. Now that I have educated myself so much on personal finance, a lot of my beliefs from my first years of work seem silly or downright odd. One of those beliefs was that the money I paid into STRS (the pension for my profession) was like a tax and that the money wasn’t really mine. Then I picked up along the way that the money is still mine, which is the idea behind this entire post.
When I first opened my 403b with the district rep back in April of 2017, my last question was, “what happens if I stop teaching?” His reply was “you can keep your account with us, of course.” I clarified by asking “should I roll my STRS contributions into this account?” He said that “they” advise people to keep their money in the pension fund because AXA cannot guarantee that kind of growth, and plus you deplete your years of service if you withdraw your money from the pension.
So, as usual of the early investor I was, I accepted his claim.
Fast forward to November 2017 when I start binging on Choose FI and every other early retirement blog I can find. Now I am starting to think for myself and start doing some math myself. I am a math teacher after all.
I start to break down his claim “don’t withdraw the funds because you deplete your years of service” and “they can’t guarantee that kind of growth.” He meant to keep all of my STRS contributions in the fund regardless if I never taught public school again and then draw a partial pension in my older age. So what does that mean? In Ohio, you need 35 years of service and to be age 60 to get a full pension. Or you can be age 65 and get a pension of whatever the formula determines. You earn 2.2% for each year of service calculated on your Final Average Salary (FAS), meaning the average of your best five years of income. Usually, your best five years are your last five years.
35 years just isn’t in the cards for me
I had realized pretty early on there was little to no chance that I would actually last 35 years teaching in public school. During the year when the phrases “Thursday Night Fight Night” and “Throw Down Thursday” were used regularly to describe the “events” in our building, I knew my nerves would not last me to the point of being able to draw a full pension.
I also truly wonder what the pension will even look like by the time I reach retirement age. Just a few years ago, the pension underwent a huge overhaul. A big wave of teachers retired in order to retire in time to obtain the more advantageous pension benefit. The benefit went from 100% of your FAS to this new formula, which if you teach the whole 35 years, you’d get 77% of your FAS. In short, I am not counting on the pension even staying this way. Cost of Living Adjustments are frozen right now and I am very skeptical of its sustainability.
But mostly, I KNOW I cannot last in this job for 31 more years. It just isn’t going to happen.
So I did some math.
Assume that I teach for five years, the minimum I need in order to obtain teacher loan forgiveness. My Final Average Salary will be just the average of the five years I have worked and I will get 2.2% * 5 = 11% of approximately $54,307. That comes to the benefit being $5,973 each year. Now, the thing about retirement benefits is you have to be alive to get the money. Or your spouse has to be alive.
So say I live for 20 years after I start drawing the benefit at age 65. I will draw a benefit total $119,477. Say I live instead for 30 years. I will draw a benefit total of $179,215. And say I somehow make it 40 years (living to 105 years old!); my retirement benefit would total $238,954.
Obviously, I can’t live off this benefit and since I have in this scenario gone on to work some other job, I will have to develop some other strategy for retirement anyways. In this scenario I have likely contributed money to a 401(k) and have also continued to max out my Roth or Traditional IRA each year.
OK, so I would get one or two hundred thousand dollars if I just leave my money to chill in the STRS fund. That’s neat. And my financial advisor said it wouldn’t be a good idea to take the money out because they can’t guarantee “that kind of growth.” So that begs the question, how much would my own contributions be worth if I rolled them into an IRA? Certainly much less than $119,477.
Rolling contributions out of the pension and into an IRA
After five years of teaching, I am slated – based on the salary schedule and what I already know my past contributions to be – to have contributed $37,823 to STRS. So if I rolled that out – some of you have already estimated the math – it will definitely be worth more than $200,000 by the time I reach traditional retirement age. In this scenario, I am now 30 years old, which means my money has about 30 years to grow.
But wait, there is one more variable to add in. Once you teach for five years in Ohio, you are vested into the system. This means you don’t just get your contributions. You also get 50% of what your employer contributed. So that means I get 7% of my salary those five years, on top of the 14% I had already contributed. So now that $37k becomes $56,734. At an 8% yearly return, that money will grow to be $570,894 by age 60. Compare that to the $238,954 I might collect if I am one of the few people in the world to live past 100 years old. I think I’d like to have the half million instead.
It makes sense to roll my money out of STRS.
And we haven’t even begun talking about early retirement! This math proves that it would make MUCH more sense to roll over my pension contributions to an IRA. The money is then in my name and I have control over its direction and its life. I can make changes, will it to someone, do a Roth Conversion Ladder or a 72t distribution later in life. The realm of possibilities opens up once the money becomes mine. But most importantly, it will be worth multiples more. This math works for me primarily based on my age. Compound interest has a long time to work for me.
Given that 50% of all new teachers leave within their first five years of teaching, there are a lot of teachers out there who could work this into their financial plan.
Next week I will explain how I figured out the optimal number of years to work as a teacher if you don’t plan to do it forever.