3 Reasons Why Educators Fail at Retirement Savings

Posted on June 23, 2019 by Brandy Caulfield, One of Thousands of Money and Finance Coaches on Noomii.

Saving your nest egg for retirement offers a certain satisfaction, not to mention a great sense of financial security.

Educators, especially if you are freshly graduated and ready to start the workforce, might be thinking that you still have quite a few years left before you start worrying about saving for retirement. This is true. (But, I hear a ‘but’ coming here…)

But, even though you have a lot of years before you retire, what you don’t have is time to waste.

With that said, the biggest mistake educators can make when it comes to saving for retirement is not fully participating in a retirement plan program.

Here are 3 reasons why…

1. They Lose Free Money

Many educational institutions provide retirement plans. Teachers have the opportunity to contribute a certain percentage of their salary before taxes (that’s a good thing) to their plan every month.

What is more, the employer many times offers to ‘match’ or in other words contribute the same amount of money as the teacher into the account every month.

A simple example:

1. Teacher makes $2000 per paycheck before taxes.

2. Same teacher decides to contribute 5% ($100) of each paycheck to her retirement plan through her employer.

3. Employer ‘matches’ teacher’s 5% by contributing (paying) $100 into her account every paycheck.

So, instead of saving $100 per paycheck, this teacher is actually saving $200 per paycheck:

$100 teacher contribution + $100 employer contribution = $200

She is getting $100 for free from her employer every paycheck!

What, you say?! They give me free money?

Yep.

Here’s another way to look at it:

Let’s say this teacher works nine months out of the year at her institution. She would have about 20 (bi-weekly) paychecks coming to her during this time. By taking advantage of her employer’s match of 5%, she would end up with $4000 saved instead of $2000. This is not even factoring in interest earned during this time which could possibly make her total go up even more. I explain more on this below.

One thing you do need to be careful of are the fees associated with the retirement plans. Make sure you trust the financial professional at your institution (or the one who visits your institution), otherwise you may get charged more than necessary in hidden fees. If you want a quick run-down of some of the fees you might encounter, I made a revealing infograph for teachers on this very topic: Money Savvy Educators: An in-depth look into 403(b) fees.

2. They Overlook Compound Interest

Compound interest is like a good friend.

But just like all friends, if we ignore them, we lose the benefits of having the friend. No more chatting, no more shoulder to lean on, no one to go with to the game or for a cup of coffee. A good friendship is an investment that requires our attention.

The sooner you give attention to compound interest, the more money you will reap in the long run.

Now, what exactly is compound interest?

Simply put, compound interest is the money you earn on your retirement account balance, plus the interest that money earns. Yes, the money you put into your retirement account (or other investment accounts) can earn money for you without you lifting so much as a finger.

Here’s a very simple example of how compound interest works:

Teacher A starts with $1000 in her retirement account with an interest rate of 5% a year. After one year, her balance would be about $1,052. Her money would grow by $52, without adding any further deposits.

For the following year after that, the $52 will continue to earn interest, in addition to the original $1000. Without lifting a finger checking her account, she would have about $1,105 by the end of year two.

If she didn’t add another dime to her account for 10 years and just let compound interest do its magic, she would end up with about $1,648.

That’s almost $650 for doing absolutely nothing!

Hopefully, you are starting to see how beneficial contributing to a retirement account is. Compound interest really is the icing on your retirement saving’s cake.

If you’re like me, then you might prefer a visual representation of what compound interest does for you. There’s a very short and helpful video that Money magazine created:

Just go online to Money Magazine and search the title “The Magic of Compound Interest”.

One last thought, always be sure to keep in mind that the sooner you start the more you will gain when it comes to compound interest.

3. They Undervalue Peace of Mind

You want to live your best life.

So many teachers fail to realize that in order to have more well-rounded peace of mind, they need to make sure their personal finances are in order. Not having their money in order can throw their entire life off balance.

I literally cannot count the amount of times I’ve had a teacher tell me that they have little to no savings for retirement and are not contributing to a retirement account.

Some of what I hear – “I’m so stressed that I don’t have any money saved for my future” or “I’ve only got about $x amount saved and I worry because I know it’s not nearly enough” or “I know I make decent money but can’t stop living paycheck to paycheck in order to save” are statements that come from so many educators I talk to.

Ignoring or avoiding saving with a retirement plan might be considered one of the costliest mistakes an educator can make due to the loss of peace of mind. Always worrying whether you have enough saved for the future. Sometimes teachers are so money avoidant they feel overwhelmed and don’t know where to start.

The best way to gain financial peace of mind is by starting with a small conversation about the retirement program offered in your place of work with a financial professional that you trust, makes you feel comfortable, and explains money concepts to you in a simple and clear way.

Basic questions you can ask to help you get started:

· What kind of retirement plans can I choose from?

· Is there a minimum I am required to contribute each month? If yes, what is the minimum dollar or percentage amount?

· What is the match percentage (if any)?

· How long does it take to be fully vested (or in other words, how many months/years do I have to wait until I can withdrawal all the money- both mine and the matched money from my employer- if I resign/retire/etc.)?

· What types of fees will I have?

If you are not happy with your current institution’s retirement plan options, you can seek out other alternatives such as a Roth IRA.

Bonus

One final gold nugget that I want to share, concerns how you contribute to your chosen retirement plan. Make sure to automate the contribution process. Every month a set amount (5%, 7%, etc.) is automatically transferred from your checking account into your retirement account.

You will get used to that money not being readily available to spend, which is great because then every six months to a year, you will check your retirement account and jump for joy at the amount you are now saving for your future.

Final Thoughts

Taking these steps to set up an account and automate it should almost instantaneously reduce your financial stress and give you peace of mind.

No matter which retirement plan route you decide on, the moment you start, you may begin to receive the match from your employer (free money), the compound interest (more free money), and a sense of relief at having installed an amazing personal financial plan for your future (mental freedom = priceless).

P.S. If you are an educator and not sure where to start, I’m here to help. Schedule a Revelation session if you want one-on-one coaching dropping debt, maintaining a unique money plan, and reaching financial goals.

Learn more at Money Bear.

Want to find out if financial coaching is right for you? Take the Educators’ FREE Financial Forecaster Quiz and get instant results sent to your email.