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September 29, 2012 Comments Off on Financial Tips for Coaching Families

Financial Tips for Coaching Families

In my experiences working with coaching families I have developed a unique understanding to the challenges these families face.  Below is a list of tips all coaching families should be aware of. 

In most circumstances, coaches should choose to enroll in the Optional Retirement Plan instead of the Pension, also known as the Teachers Retirement System.  Pensions typically have a longer vesting schedule which means you must be employed by the school for a specific period of time, sometimes as long as ten years, in order to receive the university’s contributions to your retirement plan.

As of 2011, it is hard to advise clients to purchase a new home when they move.  The one thing you need to increase your chances of making money from housing is time which is the one unknown as a college coach.  The housing market has many issues to resolve before housing prices can fully appreciate as they have in the past.  When you include the sales commission of 6% plus the potential risk that you carry as a homeowner, it would be very difficult to make significant money over the next few years.

Always put the monthly bills in the name of the non-coaching spouse.  In the event that a bill goes unpaid or there is a discrepancy with a previous payment, any problems with your credit will be contained.  One credit discrepancy can cost you hundreds every month on your mortgage and utilizing this method gives you the option of applying for credit without the credit issues.

Be aware that any money deposited into the TIAA Traditional investment has unique distribution rules.  In most cases, this portion of your retirement can only be taken in 10% increments meaning it will take ten years to withdraw this money.  This investment is essentially a higher yielding bond issued by TIAA CREF so it carries risk similar to a typical bond fund.  I always advise my clients to avoid the Traditional investment.

When changing jobs voluntarily, you will want to ensure that you a not taking a “silent pay cut.”  It is possible to receive a higher income a lower standard of living due to variations between the two locations in contribution rates, taxes, health care and transportation costs, and housing, to name a few.  Always find out the retirement contribution rates, vesting schedule, whether the new employer contributes to social security, state and local tax rates, utility rates, and house values.  Having this information will allow you to make a more well-informed decision.

If your summer camp money is not paid through the university but instead is included as self-employed income, be aware that you have the ability to contribute 25% of that income ($49,ooo max) into a SEP IRA as a pre-tax retirement contribution.  Utilizing this vehicle allows you to save for retirement while simultaneously reducing your tax liability.  Also be aware that any expenses you incur may be deductible as a business expense which you should discuss with your accountant.

Understanding Your University Retirement Benefits

If you’ve ever enrolled in a university retirement system, you may have been overwhelmed by the choices and restrictions associated with these plans.  In many cases, employees must make their elections within a month of their hiring and while these decisions can dramatically affect your long term financial plan, most do not take the time to fully understand the benefits made available to them. 

First and foremost, all plans differ between institutions.  Plan options, contribution rates and limits, vesting schedules, and investment choices are among the factors that vary widely between schools.  It is important to fully understand the options made available to you prior to making any decisions regarding your elections.  Remember that the Human Resources department is always available to answer any questions you may have. 

Plan Options:  There are two primary categories of retirement plans: pensions and optional retirement plans.  For an in-depth review of these options, please visit our Pension vs. ORP article.  Voluntary options may also include a 403(b) plan (also known as a Supplemental Retirement Annuity or SRA) and public institutions may also have a 457 plan, also known as a deferred compensation plan.  Each of these plans is administered by an investment firm such as TIAA CREF or VALIC, to name two, and you will want to understand the differences between the providers prior to making your elections. 

Contributions:  The contributions to your retirement accounts can be divided between mandatory and voluntary contributions.  The IRS limits the amount of voluntary contributions, but any contributions made by the employee as a condition of employment are excluded from these limits.  Mandatory contributions can be made into either 401(a) or 403(b) accounts, depending on how the plan is set up.  Voluntary contributions are typically made into 403(b) plans with a limit in 2011 of $16,500/year or $22,000 if over age fifty.  Since 457 plans are not technically retirement contributions but instead deferred compensation, it has an additional limit of $16,500 or $22,000 if over age fifty.   

Vesting Schedules:  Vesting schedules pertain to how long you must be employed in order to receive employer contributions to your retirement plan.  Pension plans typically have more restrictive vesting schedules than optional retirement plans with many having schedules of ten years.  Vesting schedules can be “graded” or “cliff” schedules.  In a graded scale, an employee may receive 20% per year for five years while cliff schedules go from 0% to 100% on a specific date.  It is important to coordinate your expected tenure with the vesting schedules made available to you to ensure you do not leave any money on the table. 

Investment Choices:  Investment choices vary widely among plan providers.  Since you do not have control over how your money is invested within a pension plan, this is only a concern for optional and supplemental plans.  You will want to check the choices made available to you prior to making your decision and you can check the performance of the fund on independent websites such as Morningstar.  The investment choices are often what differentiate good providers from bad ones.  High fees and habitual underperformance can derail your financial plan.

Pension vs. Optional Retirement Plan

If you have ever changed jobs as a university employee then you should be familiar with the choice of enrolling in the pension or the optional retirement plan.  This is an important decision with lifelong ramifications and should be discussed with your advisor prior to making the irrevocable decision.  In order to determine which is right for you, it is important to understand the differences between the two options.

The primary difference between the two is who carries the risk.  In the pension plan the risk is assumed by the university while in the optional retirement plan you assume the risk.  Pension plans have a defined benefit in the form of lifelong income during retirement based on your salary and years of service.  Optional retirement plans have a defined contribution and your retirement income is based on the performance of your retirement assets.

The retirement income benefit of the pension plan is often determined by you three highest year’s salaries, your number of years of service and a multiplier.  This multiplier differs from school to school and differentiates high quality plans from low quality ones.  Be aware of what your school’s multiplier is before making an informed decision and be aware that the multiplier can always change.  The formula is illustrated as:

3 Highest Year’s Salary X Number of Years of Service X Multiplier, or

$ 200,000 X 10 X 2.25% = $ 45,000 Annual Retirement Income

In theory, if you manage your investments wisely then you should be able to generate a higher retirement income using the ORP.  This is because the assumed rate of return on the pension plan is below the long term average of a well diversified portfolio.  With that said, if your investments do not perform well there is the possibility of a lower retirement income so be sure to discuss the risks with your advisor.

Another difference to consider is the vesting schedule or the minimum number of years you must be employed in order to receive the employer contributions to the retirement plan.  Pension plans often have a longer vesting schedule then the ORP so if you are uncertain as to how long you may be employed you may be best served to enroll in the ORP.  Vesting schedules can be as short as two years and as long as ten and can be graded (i.e. 20% per year ) or cliff (0% to 100% at set date.)

Choosing between the pension and the ORP usually pertains to mandatory retirement contributions.  Contributions may be made by employer, employee, or both.  The contribution rate is often stated as a percentage of your income and is subject to certain limits.  It has become common place for the ORP to have a smaller net contribution with a small percentage retained by the pension plan to help cover expenses.

Choosing between these two retirement options can make a significant difference in your long term financial picture.  Be sure to discuss your particular circumstance with your advisor to understand your options before making your election.

For more information on understanding your retirement option, please contact Scenic Wealth Management.