Hello, and welcome to the Life By Design podcast, brought to you by Strategic. Hello, and welcome back to the Life By Design podcast.

This week, I'm joined by Mike McGraw, senior advisor and partner here at Strategic. Glad to be here.

Yeah. It's gonna be good to have you, and I'm real excited today.

Uh, this is something that hits home for me as I know it does for you. Uh, we're gonna kind of talk about retirement benefits for teachers and New York State Pension and kind of all of that, and what teachers should be looking out for.

Yeah. Yeah.

And so, Mike, kind of maybe give us a little background on why this is important to you, and, and maybe how you know about it. Sure.

So I used to be a teacher in my previous life, taught for 5 years in New York State, so I was part of the retirement system. My wife is a teacher, and, um, a l- few other family members are also teachers here in New York State, so, um, it is something I have a lot of fam- familiarity with, and, uh, it can get confusing and a lot of intricacies, so I'm very- happy and excited to be talking about it.

Yeah, and I'm hoping today too, you know, for, for me, my wife works in the school system too. She's, she's not a teacher but she's in- Mm-hmm.

she's in like the administrative side. Yeah.

And so, you know, just hearing about this and understanding a little bit, this is as much for me as it is for the listeners, uh, so I get to know, uh, what I should be telling her when I go home today, so. Of course, of course.

Um, but yeah, let's, let's get started and like, what's something, uh, vital that teachers need to understand about their retirement benefits, maybe earlier or mid-career? Sure.

So I think to start, a big difference in, let's say a state employee or a teacher for their retirement planning is this pension or de- defined benefit plan. Mm-hmm.

Not just state employees but even large companies, they offered these defined benefit plans where it's essentially a promise to provide a sh- steady stream of income in retirement for employees. Mm-hmm.

Well, that shift started in probably the late 80s, early 90s, where companies realized it was quite costly to them, and so they shift to a defined contribution plan, which is what most private employers offer now, which the most common is a 401K plan- Hmm. where employees kind of have the onus to save their own money for retirement versus the defined benefit plan of the company or employer promising a series of payments upon retirement.

So, um, that shift was, was kind of eye-opening to most of the private industry, but fortunately for state employees and teachers, it is still, um, one of their primary sources of retirement planning. And so, the intricacies involved in it are, can get complicated.

Hmm. And so that's why us as financial advisors are here to help those who are in that industry.

Yeah, and I think one of the things I kind of wanted to bring up today, cause i- it comes up in my life, you know, my, my mom was a, a teacher as well, is, Oh, I, I have state benefits, like I'm, I'm good, I'm all set, like I'm g- I'm good for life. And I think there's a little nuance to that.

Uh, it's not just a, uh, one size fits all for everyone. Sure is, yeah.

So that, that's maybe something that most folks need to be educated on, where they, they're used to the compensation that they're receiving while they're still working, and hopefully that increases each year, um, up until they're ready to retire. And then when it does come time to retire, they don't maintain that same salary/compensation in retirement.

Yeah. There is a calculation, um, within the pension benefit that, um, they should be aware of so that they can plan a- on what their, that stream of income's gonna look like when they do decide to, um, hang it up and, and enter that next phase of their life.

Yeah, and is like, I know there's some options out there for like supplemental savings, you know, like one of the things, uh, we were approached, my wife was approached with was like a 403B, right? Sure.

And I think we've talked about this, you and I, about how, sure, that sounds great, but maybe depending on your life, you, you may not have enough money to- Sure. also add into that, or you think that your pension is covering you.

Sure, yeah. So that, that is a defined contribution plan that has been added to a- as a benefit to teachers or state employees where they can save some of their own money, um, put that away for retirement that will give them, as you said, a supplemental source of income in retirement.

But again, depending on their life circumstance, it's not all that different from when we talk to younger clients about save- starting to save early. Mm-hmm.

Uh, most likely in the first however many years that they're working in the state system, uh, they might have a little bit extra, uh, discretionary income that they can put away as opposed to spending every penny that they earn. Yeah.

Um, but once life events happen- Yeah. marriage, children, that's where a budget could get a little bit more limited and they might not have that extra income to save.

So having that conversation to begin saving in this 403B account early in their teaching careers. Hmm.

They can always stop if they feel it's not part of their budget anymore due to any of these life events, but it is gonna just give them another option when it does come time to retire, and that's one thing, no matter what industry folks work in, having options when it comes to retirement income is- is gonna give you so much more flexibility versus just saying, Nope. I'm, I have my pension- I'm gonna rely on it, and I'm gonna be good.

Yeah. Uh, some, some people look at Social Security in a similar vein where- Yeah.

um, not all that, they're not all that different, um, but it, it's very important to at least have a conversation with someone like us here at Strategic to at least go through those options- Yeah. play through scenarios, and figure out what's best for them.

Yeah. And, uh, you know, there was a lot in there about getting it early before my life events happen, and kids, and m- marriage, uh, you know, and all this.

But what, what does, like, catch-up contributions look like for, like, 50 plus? Like, I can still It's not too late.

You know, I can still make some contributions. Let's say my kids are out of the house, I'm- Sure.

I'm catchin back up. I've got all this extra discretionary income now because I don't have to feed 4 teenagers anymore.

But- Of course. You know, I'm over 50.

Like, what's my catch-up look like? Yeah.

Of course. So as with any defined contribution plan such as the 401, upon turning the age 50 you do have that ability to save more than what the maximums are set by the IRS every year.

Um, so that certainly Most likely you'll be in a scenario where now you do have some of that additional income, um, because most teachers are on a, a what's called a step scale where every year they do get a small increase in their pay. Mm-hmm.

So in their 50s more than likely is going to be their highest earning years, so that's where you could have that next conversation. Hopefully they started early- Yeah.

maybe had to pause due to the life events, and now we're in a, they're in a position where, Okay, w- our kids are out of college, we now have a l- some, some more income that we can save, and there is that I- if they hit the maximum, which is approximately $23,000 a year, they are afforded another $7,000, $7,500 where they can put away additionally to c- a- as you said, it's a catch-up. Catch-up.

more additional savings. Sure.

Yeah, and that's where partnering with an advisor is extremely helpful and to, to know what your options are. Yeah.

Uh, most likely it will be in a Roth IRA- Mm-hmm. um, or a traditional IRA.

There are income, or there limits and income limits to how much you can save and if you're able to save based on how much you're earning, um, but if you do fall in those, those ranges, certainly having m- again flexibility, that, that- Yeah. that's e- very important when, especially in, in, um, state employees or teachers where they know they're gonna have the pension but then maybe they have a, a vision of their retirement lifestyle being a little bit more lavish and wanting to do more.

And in that case, they may need that additional savings and, and, uh, vehicles to, to have for supplemental income for those situations. Mm.

So, you know, between, like, for instance, traditional IRA and Roth IRA, the, uh, the difference between them is when the taxes are, are taken out, right? You got it.

You got it. So one is taxes are taken out now, and then you, when you retire you don't pay taxes again.

Sure. Yep.

And the other is y- they, you don't pay taxes now and they take em out when you retire. Right on.

As you, as you, uh, take out your distributions. So how does 403fall into that too?

Yeah. I think that's good question, and we are seeing a little bit of an evolution on your options when you enter into Um, there's also what's called the 457- Mm.

Yeah. which is not all that different from a four oh 3 B.

But especially in New York state, it's part of the New York state deferred compensation plan. that allows you again more flexibility you have maybe a traditional option and a Roth option where you're not subject to those smaller limits of a Roth You have maybe a traditional option and a Roth option where you're not subject to those smaller limits of a Roth IRA or a traditional IRA, and you do have the ability to save more if, again, if you're able to.

Yeah, r- yeah, right. Uh, when we- especially when we talk about those catch-up years, though, um, and it's important for folks to know that there is flexibility.

Um, a lot of it sometimes for teachers does depend on the school district. Mm-hmm.

And what they agree to offer to, to their employees and the teachers, um, that's, again, wh- why we, we play as a, as a financial advisor an important role in making sure they understand and they're doing- Yeah. the, what's best for them based on their goals, based on their vision.

So, you know, generally, what percentage of salaries do teachers usually contribute and, like, how does that translate to their income- Sure. during pension?

No, I think, yeah, this is a good- good moment to talk about the tiered system- Yeah. in the retirement system for both New York State employees and teachers.

Uh, so depending on when you enter into the system, so essentially the year that you were hired, um, you are in a tier. So it's been around forever, um, and between about 1920 and 1970, uh, it was just one system.

So, this is dating back to the, the New York State I know the New York State Teachers Retirement System was brought out in the early 1920s. Mm-hmm.

So, so everybody who entered into the system received the same benefit upon retirement, same rules, same everything. Now, in the early 70s, they shifted it, must be because they realized that maybe it was too good of a benefit?

Mm-hmm. And so, um, the tier 4 is really where it was, I think, from the early 80s up until the late 2000s, you were, if you entered into the retirement system at that point in time, you were in tier 4, um, and then they established tier five and now tier 6.

Mm-hmm. So, what all that means essentially is, it controls when you can receive what, what they call their f- the full benefit.

Mm. So, there are ways to earn a partial benefit, but if you want to earn your full benefit, it is based on your age at retirement and how many years of service you have into the system.

So, the big ones are 55 and 30, so if you attain the age of 55 and you have 30 years into the system, you can retire with full benefits. Okay.

Right, right. So if you enter into, uh, the retirement system, you, you're looking at you have to work til 62 until you can get the full benefit.

As we all know, when we're working, in our working years, if you look at your pay stub, you see a Social Security tax. Right, yeah.

So that was essentially the, the Teachers Retirement System and the, uh, State Retirement System saying, We need to make some adjustments. We're p- essentially paying into the Social Security system for a promise that when we turn a certain age, we will receive- Yeah.

that back in a form of monthly payments. form of monthly payments.

pension system with the state is very similar. So I'll go back to this tier 4, because it's the widest range and the most common for folks that maybe are retiring today.

You paid 3 percent of your salary into the system for ten years. After the ten years were over, you're not paying anything else into the system.

And when you do go to retire, you collect that pension, which lasts for the rest of your life. they up that for tier 5 to three and a half percent and they changed it.

It's not ten years, it's your entire time in the system. So you're paying that three and a half percent of your salary your entire career.

Tier 6 lowered it back to 3 percent but they now have a range between three and six percent so that's based on your income level so I think might not have the exact numbers but I think if you're making forty five thousand or less you're paying 3 percent and if you're making I think a hundred thousand or more you're paying 6 percent and that is your entire career So as you can imagine, not all that, again, different from social security where the social security system said, we got to make some changes or else we're going to run out of money. So that was essentially the teacher's retirement system and the state retirement system saying we need to make some adjustments.

And so you can do the comparison and say that people that are entering it now, it's a little bit different. Yeah, right.

Especially when you're looking at some of that supplemental as Pension system with the State is very similar. So, I'll go back to this tier 4, cause it's the, the widest range and the most common, um, for folks that maybe are retiring today.

Um, you paid 3% of your salary into the system for 10 years. After the 10 years were over, you're not paying anything else into the system, and when you do go to retire, you collect that pension- Okay.

which lasts for the rest of your life. Mm-hmm.

Career, yeah. So you're paying that 3.5% of your salary your entire career.

Tier 6, lowered it back to 3%, but they now have a range between 3 and 6%. Okay.

And that is your entire career. So as you can imagine, not all that, again, different from Social Security where the Social Security system said, We gotta make some changes or else we're gonna run out of money.

And so you can do the comparison and say that people that are entering it now, i- i- it's a little bit different. Yeah.

A- and- Right, especially when you're looking at some of that supplemental as well- Right. and your income.

Exactly. All right.

Well, thanks, Mike. I think that was a really good primer for- Great.

for vehicles, for retirement, for teachers, and, you know, we're gonna have Mike back on to dive a little bit deeper. So thank you.

You're welcome. This podcast is for educational and informational purposes only.