There’s a common misunderstanding when it comes to dealing with families where both income-earners are teachers and how they should save for retirement. The thought is that since they have will have multiple pensions at retirement, and even Social Security, the investing they do throughout their career doesn’t really matter that much. Their income in retirement is going to be taken care of by their pension.
But that is rarely the case.
Many teachers need income above-and-beyond their pension when they retire in order to provide the lifestyle they desire. In order to have this extra income, they need a nest-egg that needs to have been built up throughout their career.
Along with saving consistently, how do you go about allocating that portfolio? Do you allocate it according to how much risk the family wants to take? Or given the fact that there will be pensions in play, do you invest more conservatively? Or should that be more aggressively? Let’s look at each of these approaches in more detail:
Forget the pension, worry about the person.
If you meet with a financial advisor (or any professional who is helping you with your investments), one of the first things they do is to assess how much risk you want to take. This is either done using a questionnaire, a conversation, or (hopefully) a combination of the two. They seek to understand how much you would be able to see your investments drop before having an emotional reaction; how you would invest significant sums of money, and how you would adjust things if you were running out of money.
By doing this, they can assess how much risk you want to take and what portfolio might be appropriate. They then take this information and design a portfolio for your investments. It may not take into account anything else, but it fits your “risk profile”.
While professionals do this as a matter of their process, you can do this independently by using this questionnaire from Vanguard.
You have a “guaranteed” amount of income, why risk the rest?
If someone told you that they were going to pay you $60,000 every year when you retire (or whatever your pensions might add up to), would you invest aggressively with your other money? Many teachers by nature are conservative, so this thinking tends to reduce their willingness to take risks with their investments. A dual-pension household will receive an annual amount of income via their pensions, and they may only need a little bit of extra funds to supplement this income. If you can have all the money you need by not taking much risk, should that’s be the way to go?
You have a “guaranteed” amount of income, why not take some additional risk and see if you can grow a bigger nest egg?
If you had an investment account of $1,500,000 (1.5 million) and it would never go below that or go away, would you invest all your extra money super-aggressively to try and make the most money you could?
That’s how a pension works.
An account with $1,500,000 will produce about $60,000 in income per year (the dollar value of the pension used in the previous paragraph). As you’ll always receive that $60,000, why wouldn’t you want to see if you could grow your nest-egg to be the biggest it could be? You may lose some money, but if you don’t need it yet (or at all), why does it matter?
So, what’s right for you?
As a teacher-couple who’ll receive pensions in retirement, how will you invest your money? There is no right answer. In working with teachers that manage their own money, I have seen a mixture of conservative and aggressive portfolios, portfolios built on risk profiles or projected income needs in retirement, or a mixture of everything.
In your situation, all that matters is that you’re comfortable with your choice.
What are your thoughts, teachers? If you’re married to another teacher, are you counting on dual pensions to float you through retirement? Or are you saving moderately or aggressively on top of that? Please share in the comments.