Reader Case Study: High School Teacher and New Homeowner… at age 27!
Aurelia is a high school teacher at a public school in Boston who recently bought her first condo and is thrilled to be a homeowner at the age of 27! Tempering that enthusiasm, however, are her new competing financial demands of house maintenance costs, retirement, saving for Invisalign braces and paying off her student loans. Aurelia has a zest for life and a love for her students, but her salary doesn’t quite match that enthusiasm. She’d like our help determining how to prioritize her financial goals while still living a robust life filled with friends, travel and hobbies. Let’s head to Boston to dive into Aurelia’s questions!
What’s a Reader Case Study?
Case Studies address financial and life dilemmas that readers of Frugalwoods send in requesting advice. Then, we (that’d be me and YOU, dear reader) read through their situation and provide advice, encouragement, insight and feedback in the comments section.
For an example, check out the last case study. Case Studies are updated by participants (at the end of the post) several months after the Case is featured. Visit this page for links to all updated Case Studies.
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The Goal Of Reader Case Studies
Reader Case Studies highlight a diverse range of financial situations, ages, ethnicities, locations, goals, careers, incomes, family compositions and more!
The Case Study series began in 2016 and, to date, there’ve been 95 Case Studies. I’ve featured folks with annual incomes ranging from $17k to $200k+ and net worths ranging from -$300k to $2.9M+.
I’ve featured single, married, partnered, divorced, child-filled and child-free households. I’ve featured gay, straight, queer, bisexual and polyamorous people. I’ve featured women, non-binary folks and men. I’ve featured transgender and cisgender people. I’ve had cat people and dog people. I’ve featured folks from the US, Australia, Canada, England, South Africa, Spain, Finland, the Netherlands, Germany and France. I’ve featured people with PhDs and people with high school diplomas. I’ve featured people in their early 20’s and people in their late 60’s. I’ve featured folks who live on farms and folks who live in New York City.
Reader Case Study Guidelines
I probably don’t need to say the following because you all are the kindest, most polite commenters on the internet, but please note that Frugalwoods is a judgement-free zone where we endeavor to help one another, not condemn.
There’s no room for rudeness here. The goal is to create a supportive environment where we all acknowledge we’re human, we’re flawed, but we choose to be here together, workshopping our money and our lives with positive, proactive suggestions and ideas.
And a disclaimer that I am not a trained financial professional and I encourage people not to make serious financial decisions based solely on what one person on the internet advises.
I encourage everyone to do their own research to determine the best course of action for their finances. I am not a financial advisor and I am not your financial advisor.
With that I’ll let Aurelia, today’s Case Study subject, take it from here!
Hi Frugalwoods! I’m Aurelia and I’m 27 (where does the time go?), born and now living (forever!) in Boston, MA. My parents dragged me to suburbia when I was young but I’m a city girl at heart and have been back in the city since college. I’m happily single and have a wonderful job teaching history to newcomer immigrants in an urban high school while co-running an outdoors club for the kids. When I’m not at work I’m usually at the ballet, reading, playing video games, hiking and camping, bouncing, or going out (especially eating out) with friends. My parents live less than 30 minutes away and I spend as much time with them as I can, since my sibling lives in Florida. I just became a home (condo) owner this past June – something I thought would never happen, especially at a young age – and I’m absolutely loving it!
What feels most pressing right now? What brings you to submit a Case Study?
I was NOT imagining I would become a homeowner and certainly not at 27! To make a long story as brief as possible: I was idly perusing real estate listings in my neighborhood (don’t all millennials do this?) and an income-restricted unit in a large building I’ve always liked came up. After reading over the requirements, I realized this would be the only time I would be eligible to buy in this income bracket AND in my neighborhood, which I would have been priced out of otherwise, as the rent is too damn high. After talking it over with my parents to check if I was crazy to even consider it, I pulled the trigger and ended up being the only offer. And here I stand before you, a homeowner… who now must figure out her next steps (again)! I am now ahead of all of my friends and feel like I’ve skipped a few steps in how I understood life’s progression to be.
Even before buying my condo, I had a few different goals I was juggling – retirement, travel, saving for a 2nd masters to increase my income (which I have since shelved, as I think there are better options), paying off my student loans, and saving for Invisalign – and not particularly well. Now enter a house and…you can see how I’m a bit stressed trying to figure out what to do first and what needs to wait! I’ve landed on getting rid of my student loan debt as quickly as possible, but there are some questions I want input on with regards to work and retirement.
What’s the best part of your current lifestyle/routine?
Even though I spent a lot of my childhood in rural/suburban areas, it’s fair to say that I’m a city girl at heart. The ease of being able to go anywhere and do anything, try different cuisines, and enjoy fun and interesting places (inside and outside) makes me very happy. I also have an intense need to be outside, and Boston/New England is perfect for that! I have a nice palette of hobbies and activities to choose from and friends who live nearby that I can do them with (or by myself, if I want). Professionally, work can be “messy” sometimes (if you know, you know) but I am at the point in my teaching career where I’m only working 40 hours a week and can happily leave work at work. I won’t deny that teaching, especially this specific population, can be emotionally draining sometimes, so I’m happy that I live alone now and have some mellower hobbies I can recharge with. I also love the community spirit of my building and my neighborhood.
What’s the worst part of your current lifestyle/routine?
Work can be draining sometimes and the pandemic years were rough in my school, not just because of the pandemic. As a result, I don’t get as much face time with my 9-5 friends during the school year as I want (being this tired might also just be…getting older?). Teaching is also not terribly lucrative, and while we won a massive salary increase in our contract, things are tight financially.
I have always tried to live as frugally as possible while having a full and happy life, but adding the expenses of homeownership is making things even tighter.
At the same time, there aren’t a lot of opportunities to earn more money at work and the few available are: a) too much time/responsibility relative to the compensation offered; or b) threaten my work-life balance or work happiness.
I find that the more people I must work with, the unhappier I am. I am so not interested in work politics. I also have to be careful managing my health and energy levels because I have some chronic illnesses that can spiral into serious sickness if I overextend myself. Still, my position exists in very few places and the team I work with is wonderful.
Where Aurelia Wants to be in 10 Years:
- Free (or close to free) of non-mortgage debt
- Paid for Invisalign
- Paid for one of my big “projects” (finishing the loft in my condo or going on a large trip)
- More money saved for emergencies and retirement
More of what I’m doing now, although with more traveling (currently nothing, previously 1-2 long weekend-style domestic trips).
- I would really love to visit Central and South America where all my students are from.
- I’m currently single but I imagine in the next 10 years I may meet a partner and incur expenses related to that.
- Due to health issues, I would have a difficult time having biological children. I have not ruled out adopting or fostering, but my condo is not big enough and I would not do it by myself. I can see myself as the aunt who spoils her nieces/nephews rotten with fun trips/events in the city with nice meals afterwards…
- Still teaching because the work is intellectually stimulating and the kids are great, but looking to maximize earnings without compromising my values.
- I don’t want to be an administrator having seen how much mine works (plus I would need to go back to school for that).
- Next year I will apply to be a new teacher mentor for a salary bump (I applied for a vacation position and didn’t get it, which was discouraging).
- I thought about a second MA, which I found online for a reasonable price, but I can’t justify that upfront expense right now and honestly… I don’t want to go back to being a student, as much as I loved it.
- Side note: I already have my Master of Arts in Teaching English as a Second Language and a BA in History with a minor in dance!
- I don’t think there is much else out there that suits my skillset and my lifestyle goals/dreams at the same salary point.
- The pandemic taught me the hard way that remote work is not satisfying for me (hybrid, maybe).
|Item||Gross Income||Deductions & Amount||Net Income|
|Income, paid in 24 checks September – June (so it’s biweekly, but kind of not)||$5,872||medicare: $85, PPO: $326, 457: $100, vision: $6, dental: $43, pension: $646, state taxes: $296, federal taxes: $508.05, union dues: $87||$3,805|
|note: December is a little bit higher because we have a premium holiday, and I get roughly $100/month from my club (but I try not to count it since it’s unpredictable!)|
|Monthly subtotal:||$3,805 + $100-$150 club|
|Annual total:||$45,660 (just salary)|
|Item||Outstanding loan balance||Interest Rate||Loan Period and Terms||Equity||Purchase price and year|
|Primary mortgage on my condo||$317,000||2.75%||30-year fixed-rate mortgage||~$20k (not including secondary mortgage)||$362k, purchased June 2022|
|Secondary mortgage on my condo||$23,500||0.00%||30 years…sort of||n/a||$0, this was the downpayment assistance from my city when I bought my condo. The secondary mortgage is paid off in full, interest-free, upon refinance or fully paying off the mortgage. I would be a fool to refinance 2.75%, so…|
|Item||Outstanding loan balance||Interest Rate||Loan Period/Payoff Terms/Your monthly required payment|
|Federal student loans||$73,000||5.20%||I’m on an income-based repayment plan for Public Service Loan Forgiveness (PSLF). I am almost halfway through my 10-year requirement and will see forgiveness (with no tax bomb) in late 2028. I am eligible for $10k in loan forgiveness if it passes, but it would not change my monthly payments right now.|
|Private student loans||$45,000||4.98%||Paid biweekly to sneak extra payments in. Payoff is 2041, but I want to be free ASAP!|
|Item||Amount||Notes||Interest/type of securities held/Stock ticker||Name of bank/brokerage||Expense Ratio|
|Pension||$25,100 (what I have put in)||This is the total of what I’ve put in so far to my MTRS contributions.
How do I factor pension value into retirement? If I max out my pension (at 58, eligible to retire at 60) I get 80% of my last few years’ income in retirement.
|Mandatory 11% contribution from every paycheck||MTRS (the MA state teachers’ retirement system)||n/a|
|Roth IRA||$15,700||I started this when I was 19!||Target 2060 retirement fund (although I will realistically retire in 2055)||Vanguard||0.08%|
|Checking Account||$7,500||Checking account||Charles Schwab||n/a|
|457 (employer plan)||$1,400||This is my non-pension employer plan. I didn’t enroll in it until I earned PTS (tenure) out of a silly fear that I’d be fired.
For now I put $50/month in since my tax bracket is on the bubble re: if Roth or non-Roth contributions make sense. I don’t have a good sense of what my taxes will look like now that I’m a homeowner (!!) It’s also really annoying to request changes in contributions so I want to make sure I have more money on hand. I can also contribute to this post-tax.
|Target 2060 retirement fund||Empower||0.07%|
|Mortgage||$1,346||Principal, interest, taxes. My property taxes are $30/month. Thank you city owner occupancy deduction!|
|Private Student Loan||$413||Typically 2 biweekly payments of 155, sometimes 3 if it’s a 3 paycheck month. I’m sending an extra $50/payment to get out of debt faster!|
|Savings: No August Salary||$400||I get 3 paychecks in late June that are meant to cover July, August, and early September…clearly not enough money. I’ve decided to eliminate uncertainty by saving money in advance just for salary replacement.|
|Groceries||$250||This includes household/cleaning supplies and alcohol (I live next to a certain fine craft cider taproom/brewery). I exclusively shop at Market Basket (rarely sneaking into Trader Joe’s for snacks), but sometimes I use Amazon Fresh as I live in a food desert.|
|HOA Fee||$167||Hot water, common spaces, landscaping, typical HOA things|
|Savings: Homeowner Fund||$150||In my Homebuyer 101 class we were told to save 1% of our home’s value each year to go towards improvement and maintenance costs. Money is very irregular for me in the summer so I don’t know how much a month this looks like this year, but by this 1% calculation it should be $300/month. I am a little ahead so it’s about 200/month. I have an unfinished loft that I want to build sooner rather than later and my appliances are wonderful but older, so I want to be ready when those times come.
goal is 3600 each year, current balance 2k
|Boston Ballet||$100||Paid in May, averaged monthly. 2 orchestra seats to every show + $20 volunteer dues (I give tours, among other things!). I basically live at the Opera House when the ballet is in season and see most shows 4-5 times (and get to hang out with the dancers!). I also receive perks like additional free tickets, attending company class and special performances for free. I get to treat a variety of special people in my life (they pay for meals in return). I’ve been a subscriber for 8 years now and I’ve received multiple seat upgrades – if I pause my subscription I would lose my seats.|
|Friend Dates||$100||Averaged to account for the academic calendar (more free time during breaks), but a slush fund for things I do with my friends. I count meals out with friends toward this amount. This summer I used library passes to go with friends to many museums for free, but some were only discounted.|
|LinkPass||$90||Unlimited bus, train and ferry. No employer transit benefits but can be deducted from taxes. 🙁|
|Savings: Invisalign||$87||I need to start saving for this as my teeth are crowded and getting worse. I have shopped around and the lowest quote (dental school) have quoted the work at $5.5k over a year (monthly payments). All consults agree that the work needs to be done within the next 5 years (by 2026). Dental insurance covers 0%. Unfortunately no discount for paying everything up front, but I would like to save at least 1/2 of the amount before beginning the treatment.
Goal is $2,250 by May 2024
|Trampoline / Dance Classes||$85||Unlimited bounce + cheer classes that more than pays for itself. Very important to my physical and mental health and can’t do it at home! Plus I get passes to bring friends so we can do something fun at a low cost.|
|Electric||$50||Despite the brutal heat wave this past summer, my electric costs are pretty consistent.|
|Doctor Visits||$50||copays and urgent care averaged – higher than usual due to a recent MRI|
|Family Vacation||$50||My parents expect me to pay 1/3 of the family vacation.|
|Christmas||$50||Averaged over the past 2 years. Includes a tree, presents for friends/family, holiday expenses (baking for coworkers), any travel and donations to community orgs who help folks in need of a meal. I go frugal for people’s birthdays so Christmas is my once a year thing.|
|Savings: Laptop Fund||$50||Saving for a new laptop. 100/600|
|Medicine||$35||sometimes higher depending on the illness of the month|
|Gas||$30||Averaged. Still haven’t turned my heat on because big windows = big sun!|
|Contact Lenses||$30||Curse astigmatism!|
|Dining Out||$30||When I eat out by myself, either full meals or getting treats at a coffee shop. Pre-pandemic this was higher but I try to cook more. Usually dip into this when I’m too sick to cook and want a meal. This is an easy place to cut down (sometimes you just need Dunks)|
|Furniture / Home Goods||$20||This is hard to quantify since I made some big ticket purchases that I will not be making again (as YNAB reminds me, my average is high!): this includes a couch I got for FREE minus the cost of moving it, a TV, a washer machine, and a new drying rack (sadly not free). I think I’m done for now…|
|Outdoorsy Things||$20||Averaged; if I hike with friends, covers gas expenses or any meals/snacks we need to get. This could be higher if I get new gear, but I’m all set for now.|
|Haircut||$20||2x/year for a curly cut, can’t go any longer between|
|HBO MAX||$16||Don’t tell anybody that my mom has my HBO password…!|
|Final Fantasy XIV Subscription||$13||I play regularly with my friends.|
|NYT Academic Subscription||$12|
|Amazon Prime||$12||I’d rather not, but I a) live in a food and store desert and b) keep my mother happy with Prime Video. I order enough things that the monthly cost is lower than what I would pay in shipping.|
|YNAB||$6||Sharing a family plan with a friend!|
|Donations||$5||Averaged, annual donation to work scholarship.|
|Clothing||$5||The last time I bought clothes was last February? I bought myself a very nice ski bib…|
|Federal Student Loan||$0||Currently paused. When payments resume I need to request a recalculated monthly payment, but only after I file my taxes to see if this is a benefit or a burden.
(will be around $250/month starting in June 2023)
|Savings: Travel Fund||$0||Saving to see a dear friend graduate in VA this spring, using a mix of points and cash. After this, saving for a trip to Canada to see another friend.
(fund gets topped up as spent, @ 350)
|Savings: Video Game Fund||$0||This has been much higher than usual since 2022 was a great year for game, and I had gone years without buying any. I either wait for deep sales, go to the library first, or I buy used at a local retro store (and get a 10% teacher discount)! 2023 looks quieter so I will probably buy 1-2 games and be done for a bit.
(fund is 65, replenished when spent, had been spending 40/mo last year)
|Cell Phone||$0||My mom complains about the phone bill but refuses to take my money? (Don’t worry, I’ve already suggested an MVNO.)|
|Gardening||$0||On hold right now as I cross my fingers and wait for a community plot. Typically $5-10/month averaged otherwise for soil and local seedlings.|
|Monthly subtotal:||$3,802||includes invisalign and homeowner savings, but not upcoming student loan restart in june 2023|
|Annual total:||45,624||$3 under!|
Credit Card Strategy
|Card Name||Rewards Type?||Bank/card company|
|Chase Freedom Unlimited||Travel/Cash Back||Chase Bank|
|CapitalOne QuickSilver||Cash Back||CapitalOne|
|Citizens Bank MasterCard||nothing (I got it as an AU at 16 to build credit and learn good habits)||Citizens Bank|
Aurelia’s Questions For You:
Pre-tax or Roth contributions?
- For lowering my taxable income (PSLF), it probably makes sense to go heavy on pre-tax retirement contributions, but I only have 5 more years of PSLF (Public Service Loan Forgiveness).
- Lowering taxable income is beneficial in general, but at my income I almost definitely can’t get into the 12% bracket (nor will I see a higher one, at least not for a while).
- What’s a gal to do?
- How should I think about my pension in the context of planning my other saving for retirement?
- I’m in MTRS (the Massachusetts state teachers’ retirement system)
- If I max out my pension (at age 58, eligible to retire at 60) I get 80% of my last few years’ income in retirement.
- Since I’m in this pension system, I won’t receive any Social Security
- How do I prioritize a myriad of savings/debt-purging goals? To recap, my goals are:
- Paying off student loans
- Saving for retirement
- Paying for Invisalign braces out-of-pocket
- Saving for homeowner projects/repairs
- Travel, much later
- Am I missing something I haven’t thought about? I’m also worried about my parents:
- My parents have little retirement savings and will probably have to work until the day they die. They are in their late 50s and both have multiple chronic health conditions that impair their quality of life.
- They have a mortgage on a single family home in metro Boston that they could easily sell for 3-4x the price they paid and, after paying off the mortgage, have some money to live on in addition to Social Security. They could move somewhere with a lower cost of living and be fine, but I’d like for my parents to be close.
- Is it worth putting off retirement contributions altogether to get out of debt faster?
- I’ve taken enough personal finance classes to know that the answer is probably a staunch NO (time value of money, baby!), but the complications of having a pension and the interest in opening up cash flow make me hesitate for a microsecond…
Thank you so much for any insight you can offer, Liz and the Frugalwoods Community!
Liz Frugalwoods’ Recommendations
I love Aurelia’s love of life! She has so many interests, hobbies and passions and her enthusiasm exudes from her writing. I had a smile on my face the whole time I read about everything she’s curated in her life. Her Case Study also raises the sad specter that we do not pay our teachers enough in this country. Nowhere near enough. If I were Queen of the World, I would pay all teachers an investment banker salary because they deserve it! Sadly, no one will elect me Queen of the World (much as I’ve tried… ). Given my inability to increase Aurelia’s salary, let’s do what’s within our control and dig into her questions!
Aurelia’s Questions #1 and #2: How should I think about my pension in the context of planning my other saving for retirement? And, should I make pre-tax or Roth contributions?
The answer here depends on whether or not Aurelia thinks she will remain working in MA public schools until she retires. If she does, she’s got a great deal here. 80% of her salary annually in perpetuity is fantastic! As her current salary, she couldn’t afford to live on 80% of it, but her salary will increase over the years and her expenses will decrease as she pays off her student loans and eventually her mortgage.
→The major caveat is the health of her pension system.
While I feel more confident about the viability of a state pension system, such as Aurelia’s, there remains an inherent risk of default in any pension system. Since the MA Teacher’s Retirement System Independent Auditor’s Report on Pension Plan Schedules is publicly available as a PDF, I read it (well, some of it). I honestly don’t think you guys realize how thrilling my job is…
In an audit, an outside auditor looks at the books of an organization or entity (in this case, Aurelia’s pension system) and provides their opinion on how that organization/entity is doing financially. The auditor in this case was charged with making assessments such as: Is this pension system likely to default? How likely? How healthy is this pension in light of the number of living pensioners? And more! Let’s see what they found!
The MA Teacher’s Retirement System Independent Auditor’s Report on Pension Plan Schedules For Fiscal Year 2021: a fun read-along with Liz!
We begin by looking at page 7 in order to better understand the parameters of this pension system:
These requirements provide for superannuation retirement allowance benefits up to a maximum of 80% of a member’s highest three-year average annual rate of regular compensation. For employees hired after April 1, 2012, retirement allowances are calculated on the basis of the last five years or any five consecutive years, whichever is greater in terms of compensation… Members become vested after ten years of creditable service. A superannuation retirement allowance may be received upon the completion of 20 years of creditable service or upon reaching the age of 55 with ten years of service. Normal retirement for most employees occurs at age 65. Most employees who joined the system after April 1, 2012 cannot retire prior to age 60.
This is super useful info! I assume Aurelia was hired after April 1, 2012, which means these new provisions apply to her. To recap (in plain-er English):
- She’ll get 80% of either her last 5 years of salary OR any consecutive 5 years throughout her career–whichever has the bigger salary. This is nice to know because it means she could potentially scale down her responsibilities as she nears retirement since she doesn’t have to have her highest earning years at the end of her career (as is the case with many pensions).
- She’ll be vested after 10 years, so she’ll definitely want to stay working in the system for a minimum of 10 years.
- She likely cannot retire prior to age 60 if she wants to receive the full 80%-of-salary benefit.
Next, let’s examine the health of the pension system by going to page 9:
Note that these numbers are written in thousands, which means the totals are actually billions. I agree, this is very confusing, but apparently it’s standard auditing procedure. No wonder people are confused! Here’s what the auditors report about Aurelia’s pension system:
The collective net pension liability on June 30, 2021 was as follows (amounts in thousands):
Total pension liability……………………………… $59,795,000
Less: Plan fiduciary net position…………………… $37,088,124
Net pension liability………………………………… $22,706,876
Plan fiduciary net position as a percentage of total pension liability………………………… 62.03%
What we’re looking at here is:
- How much money the auditors estimate will need to be paid out of the pension system in the future, called “Total pension liability” ($59.8 billion)
- How much the pension has in assets, called “Plan fiduciary net position” ($37 billion)
- The difference between how much the pension owes and how much the pension has, called “Net pension liability” ($22.7 billion)
The bottom line is that the pension is 62% funded. For context, 100% funded would be the best and 0% funded would be the worst. But, a 62% funded rate is not bad. Not awesome, but not terrible. So how do we know if Aurelia will get her full pension? We can’t know this. However…
→The real way to judge the likelihood of Aurelia’s pension being there for her is through the lens of the political landscape of the state/entity that controls her pension.
Reason being? This pension is backed by the full faith and credit of the commonwealth of Massachusetts. So the question you have to grapple with is: how likely are MA state legislators to allow the state teachers’ pension to go into default? Are they likely to bail it out if need be? Or are they likely to allow teachers to not receive their pensions? In some states, that’s tantamount to political suicide. In other states… not so much. It’s also important to remember that, in the event of a budget crisis, it’s very unlikely Aurelia would receive NONE of her pension–it’s much more likely she’d receive a partial percentage.
Here’s what I mean by that:
A 62% funded rate in a conservative state is much more precarious than a 62% funded rate in a liberal, progressive state like Massachusetts.
So how will the pension get fully funded? If I had to guess, I’d say that at some point in the future, there’ll be a grand political bargain in the state wherein the state bails out the teacher’s pension because it would be politically disastrous not to (assuming the prevailing political winds haven’t drastically changed).
However, this is an unscientific assessment because there’s no way to know what the future holds. That being said, you have to do something to help yourself plan for the future. If I had to make a prediction right now, I’d say Aurelia’s pension is likely to be reasonably close to what’s currently promised
My Recommendation to Aurelia:
Since Aurelia’s financial future depends heavily on her pension, I suggest she read and understand the annual Audit report on her pension (just as we did above).
→If you don’t understand your pension, talk with your union rep as it’s their job to make sure you understand it.
This goes for everyone reading this who has a pension. There is someone (either in your union or your HR department) whose literal JOB is to ensure you understand your pension benefits. Do not take “I dunno” as an answer.
Bottom Line on the Pension:
If Aurelia thinks she will remain a MA public school teacher, then I think the only thing she can do is assume her pension will be there for her. That being said, Aurelia is very wise to invest in other retirement vehicles too since, as she noted, she’s not eligible for Social Security and the pension will only be 80% of her salary (in the best case scenario).
Aurelia’s Other Retirement Investing Vehicles
In addition to her pension, Aurelia has two other retirement vehicles available to her:
- A 457 (through her employer)
- A Roth IRA
The reason to invest for your retirement—as opposed to just saving cash for it—is threefold:
- There are tax advantages to utilizing retirement accounts
- There are grave disadvantages to cash (opportunity cost and it doesn’t keep up with inflation)
- There are advantages to investments (namely, their anticipated rate of return)
Wait, What’s a Roth IRA Again?
IRA stands for “Individual Retirement Account” and there are two different primary types of IRAs: Roth and Traditional. The difference between the two is in how they’re taxed.
- A Roth IRA is a retirement account that’s post-tax:
- That means you pay taxes on the money you put into a Roth IRA, but you don’t pay taxes when you withdraw the money in retirement.
- A Traditional IRA is a retirement account that’s pre-tax:
- That means you don’t pay taxes on money you put into an IRA, but you do pay taxes when you withdraw the money in retirement.
- A person can have both a Roth and a traditional IRA, but their combined annual contribution to both can’t exceed this $6,500 ($7,500 for ages 50+) limit.
A Roth typically makes the most sense if your income is on the low end because in that case, your tax rate is low and so it doesn’t matter that you’re paying taxes on your contributions. To address her question, given Aurelia’s relatively low income, Roth contributions probably still makes the most sense for her.
What’s a 457b?
- 457bs are deferred compensation plans available to certain government (and specified non-government) employees
- You can put a maximum of $22,500 into a 457b each year (as of 2023)
- The money you put into a 457b plan is tax-deferred
- Any earnings on the money in your 457b are tax-deferred
One thing to note about a 457b is that it’s “deferred compensation,” which makes you a creditor of whoever runs the plan. In Aurelia’s case, that’s the commonwealth of MA. In light of that, there is an argument here for NOT using the 457b since her pension is also through the commonwealth of MA. What that means is that, if the state were to default, Aurelia would lose both her pension and her 457b. As I noted above, however, I find that very unlikely.
I’m not trying to scare her, but I do want her to be aware that–unlike with a 401k or an IRA (which is your money free and clear)–a 457b is technically an IOU from your employer stating, “I will give you this money in the future.” In practice, deferred compensation is usually quite secure, especially when it is publicly sponsored (as Aurelia’s is). But, it’s a nuance to be aware of.
→All that being said, if it were me, I would probably focus on increasing my contributions to the 457b because it’s more flexible than an IRA.
In 457b plans, you are allowed to withdraw money penalty-free before age 59.5, after you leave the employer who sponsors the plan. Hence, if a person planned to retire earlier than age 59.5, there’d be a real advantage to having a 457b versus an IRA. Note that you do pay taxes on your withdrawals, but this is usually fine because–presumably–by the time you’re withdrawing the money you’re retired and thus, your income is lower as is your tax rate.
→Question for Aurelia: Does your employer match 457b contributions?
If so, you will absolutely, 100% want to contribute enough to qualify for the full employer match.
Roth IRA vs. 457b: Final Smackdown
In a perfect world, Aurelia would have a high enough income to max out both her IRA and her 457b (which would be a total of $29k per year). In reality, she doesn’t. So which one should she focus on? To help us out I made a handy, and also dandy, Smackdown Chart:
|You’re in control of where this is invested (which brokerage) and what it’s invested in (which funds). This enables you to select funds that are: diversified, have low fees, and appropriately matched to your risk tolerance.||That means you have to manage it and select your investments yourself.|
|It’s 100% your money. It’s not through an employer, so you control it fully.||There’s no opportunity for an employer match.|
|You don’t pay taxes when you withdraw the money in retirement.||You pay taxes on the money you put in.|
|The annual contribution limit is low (only $6,500 in 2023 if you’re under age 50)|
|You can’t withdraw money without a penalty before you’re age 59.5|
|The annual contribution limit is high ($22,500 in 2023 if you’re under age 50)|
|You can withdraw money penalty-free at any age after you leave the employer who sponsors the plan|
|Taxes depend on whether or not the plan is a Roth|
|Your employer might match your contributions. If they do, you should contribute at least enough to qualify for the match.||It’s technically an IOU from your employer and not “your” money until you withdraw it|
|You don’t have to manage the investments yourself.||You do not control where this is invested–your employer does. Hence, you might be stuck in higher-fee, lower-performing funds and there’s nothing you can do about it|
For more on the difference between her two options, I suggest Aurelia check out this Investopedia article: Roth IRA or 457 Retirement Plan?
Aurelia’s Question #3: How do I prioritize a myriad of savings/debt-purging goals? To recap, my goals are:
- Paying off student loans
- Saving for retirement
- Paying for Invisalign braces out-of-pocket
- Saving for homeowner projects/repairs
- Travel, much later
Federal Student Loans: do not pay these off early. Continue to make payments that count towards PSLF and look forward to having them forgiven in another five years.
Private Student Loans: these are a bit trickier since they don’t qualify for any forgiveness programs. However, it’s still going to make the most sense to pay these off according to the required schedule–and not any sooner.
Retirement: as outlined above, Aurelia has a pension to look forward to. However, since she won’t receive Social Security, she should plan to supplement her pension via her Roth IRA and her 457b. The earlier you start investing for retirement, the more you’ll have in the end. As her salary increases, she should increase her contributions to these plans.
Paying for Invisalign braces out-of-pocket: Aurelia already has a system for this whereby she’s saving $87/month. I commend her for her extremely organized and forward-thinking savings accounts and plans. Keep on keeping on!
Saving for homeowner projects/repairs: here again, Aurelia is very wise to have monthly savings set aside for home repairs. She’s not currently in a financial position to do optional home projects (such as finishing the loft she mentioned), but she does need to have money set aside in case of emergency repairs. A few thoughts:
- Since Aurelia is in a condo with an HOA, I encourage her to examine what her potential repair cost exposure actually is.
- What is she responsible for fixing versus the HOA?
- How high could her repair costs potentially be?
It’s a very different financial story if you own a home and might need to replace the roof versus owning a condo and needing to replace the oven.
- Additionally regarding the HOA, Aurelia should investigate its reserves. Just as we analyzed the health of her pension system, she should do the same for her HOA. The reason you want to know this is to understand whether or not you might potentially be on the hook for a major assessment in the future.
- Back to the roof example–if the building’s roof has to be replaced next year, does the HOA have a large enough reserve to fund it? Or would they levy a $40k assessment on each owner?
Travel, much later: as these other priorities become fully funded/paid off, Aurelia can divert savings into a travel fund. Jet off an enjoy! Since Aurelia is so organized and responsible, I suggest she get serious about travel rewards credit cards since careful management of those can = free flights and hotels.
Aurelia didn’t ask about how to increase her income, but, she happens to be in a profession with a very straightforward and publicly available schedule for salary increases. As you can probably guess: YES, I READ IT! And you can too. Courtesy of the Boston Teacher’s Union, I found this great PDF on teacher salary schedules and am thrilled to report that Aurelia has a number of opportunities for increases!
From the Boston Teacher’s Union:What this shows is that earning credit hours on top of a Masters degree = a salary increase. M+15 means a Masters plus 15 additional credit hours + your number of years of service (in the lefthand column) = your salary. So if a teacher had three years of service, a Masters degree and 15 additional credit hours, her salary would be $84,564.
→What I don’t know from this document is how it differs by school and by position (if at all).
This is something for Aurelia to ask her union rep. I also don’t know if Aurelia is in a Boston public school or a surrounding town’s school, which would likely have a different salary schedule.
If I’m reading this correctly, Aurelia doesn’t have to actually get another Master’s (or a PhD), she just has to take credit hours. This is advantageous because that should be a lot cheaper and easier than enrolling in another Master’s program.
Another element for her to research: it often doesn’t matter where you obtain these credit hours. For example, Aurelia could go to Harvard for her continuing ed (and pay a ton of money) OR find a far less expensive online graduate school. Additionally, some districts will pay for a certain number of credit hours every year. Aurelia should ensure she’s utilizing all employer-provided opportunities since every credit hour counts towards a salary increase!
Of course, Aurelia needs to do her own research and confirm all of this with her district. But, it looks like it should be a great route to increasing her salary! And with an increased salary comes… an increased pension!
Of course the other side of the equation are Aurelia’s expenses. However, even if she trimmed to the bone, her take-home pay would still be just $45k. She can certainly reduce discretionary categories if she chooses to, but I suggest she put more effort into the salary increase project since that’ll yield greater dividends.
Aurelia’s Question #5: Is it worth putting off retirement contributions altogether to get out of debt faster?
NOPE NOPE NOPE NOPE NOPE NOPE NOPE. The reason being: Aurelia needs to prioritize investing for retirement so that she’s able to take advantage of many decades of compounding interest. If she were to pay her student loans off tomorrow, she’d be locking in a return at the interest rate of her private loans (4.98%), which is lower than the historical average return from the stock market (~7%). Don’t do this!
Review all pension plan materials and ensure you fully understand your pension and any changes to it in the coming years.
- Determine if your employer matches 457b contributions. If they do, contribute at least enough to qualify for the match.
- Continue to invest for retirement and try to put more into your 457b each year. If you’re able to reach the max contribution limit, put money into your Roth IRA as well. If you’re able to max out both each year, take yourself out to dinner to celebrate!
- Do not pay off your student loans ahead of time. Continue paying them off as required.
- Do not sacrifice retirement contributions in order to pay off the student loans faster.
- Investigate the credit-hours-for-salary-increase possibilities through your district. If the above schedule is correct, start taking credit hours as soon as possible. Find out if your employer or union will pay for any credit hours.
- Continue to save for the Invisalign braces as you have been.
- Asses your actual cost exposures in your condo. What are you responsible for repairing vs. the HOA?
- Analyze the reserves of the HOA to determine whether or not a costly assessment is likely.
- Continue living your wonderful life and keep us posted!
Ok Frugalwoods nation, what advice do you have for Aurelia? We’ll both reply to comments, so please feel free to ask questions!
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