Gap, Gap, Gap. I hear so much these days about the gap. So what is the gap? Is it the infamous gap of the London Subway System (mind the gap)? The gap between your teeth where that annoying bit of dinner gets stuck? Or the gap in Grandpa’s short term memory?
No, no, and no. The Gap is the difference between what you were earning on your last day of work, and what you are receive your first day of retirement. See the distinction? You were an earner and now you are a recipient. By definition, you are receiving less than you were earning. How much less? Depends on how long you’ve been teaching, and what you have done to supplement your retirement.
CalSTRS tells us that the Gap is 50%. That’s right. According to CalSTRS, the average teacher receives 50% of their income at 60. But don’t worry they say, you can’t close the Gap, but you can make it smaller. By working more years, hoping for a pay raise and maybe a Golden Handshake. Oh, and you can open a tax-deferred account like a 403(b) or 457. But how much should you put away? They don’t know, How can they? They don’t know you. And even if they did know, (and they don’t), they don’t have the manpower to have someone explain it to you.
(BTW, one of the things I can explain to you is how to calculate how much you should be saving.)
So there you are. You sign a contract, vaguely understand you have retirement, and pick up all kinds of misinformation in the staff lounge. Finally, an older teacher and a mentor says, “You need to set up a 403(b). There’s a company that comes to our benefits fair every August. I’m sure that they can help you.” So you go and sign up for $100 a month, which is a lot for you because you only earn $2500 a month. And it doesn’t matter that the person who signed you up is no longer with the company. The company comes to school every year. You trust them and you don’t have the time or interest in dealing with it yourself.
Fast forward 10 years. A very nice woman comes to school and brings lunch. She offers to review your plan and what you are doing but you decline. You’re too busy, grades are due, you have parent conferences and besides, you’re not planning on retiring for another 20 years.
Fast forward another 10 years. This time a very nice man comes to the school and brings lunch. He offers to review your plan and what you are doing but you decline. You’re too busy, grades are due, you have parent conferences and besides, you’re not planning on retiring for another 15 years.
Jump ahead 10 more years. NOW you’re ready to talk. You only have AT MOST 5 years left and you want to know your options. So you sit down and listen. Because if truth be told you’d like to retire now at 55. This is it, the moment you’ve been waiting for. If you retire right now, earning $89,000 per year from the XYZ school district, what will you receive from CalSTRS? You will receive the magnificent sum of $3,780 per month before taxes. That’s right you’ll go from earning $8,900 a month to receiving $3,780 a month at 55. Wait, let’s not forget the 403(b). You’ve been putting away $100 a month for the last 30 years. Surely it must be worth something. And it is, it’s worth $300 a month pre-tax. And the DBS account is worth maybe another $300 a month pre-tax. Here’s the sad part, if you had just contributed an extra $25 per month each year you would have almost closed the gap. So maybe retiring at 55 wouldn’t have worked but you could have retired at 57 or 58.
So what now? Well, you have choices. They may not be what you want, but they are what you have.
1. Do nothing. Just keep going like you are. You could retire now and tighten your belt. Maybe get a part-time job and cut back on your expectations.
2. Maximize your 403(b) to $2200 per month and work 10 more years. At 65 CalSTRS will pay you $6,400 per month, your 403(b) $1,370 and the DBS account $400 per month. So now you have essentially closed the Gap and it only cost you 10 years and $220,000.
3. Go find Doc Brown and convince him to let you use his DeLorean to go back in time. Once there tell your 25-year-old self to make sure they set up a 403(b) with a company that will guarantee service, explain CalSTRS, have proper asset protection, offer tax-deferred accounts and tax-free accounts, and is an advisor, not an order taker.
Now obviously there is no DeLorean that will take you back in time. But there are advisors who will do all those things. I know because I’m one of them. And no matter how new or veteran a teacher you are, no matter how much or how little you have saved, it is ALWAYS a good time to review your financial plan. The first step is to request your CalSTRS Retirement Gap Report. This is a very powerful planning tool. We license the software from CalSTRS so the report you will receive is accurate. It takes about 20 minutes on Zoom to go over it with you. There is no obligation, no cost, and as we all know, knowledge is power.
Start here to sign up for an appointment.
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