10 Things An Educator Needs In A Financial Advisor
The title of this article sounds generic when you read it at face value, but when I write “financial advisor”, I mean it in very specific terms. If an educator were to work with any advisor, they may find limited value. A typical advisor is not plugged in to the political on goings of TRS, how district contracts are being negotiated and adjusted for budget constraints, what educator lingo means (e.g. 6-6-6 period) and how it can affect a financial plan, and most importantly, what an emotional roller-coaster the current environment has been. What an educator needs is an advisor with these ten things:
1. Empathic listener – the recent and proposed changes to TRS have caused educators to question the stability of their situation. What they thought was a secure job with a secure retirement pension is now moving away from that. Tenured educators worry about losing their jobs and not having the promised pension available when they come to retire. All this leads to emotional conversations, one where a good listener is needed and someone who is aware of what is being discussed. Only an advisor who has studied these issues and is educated on these topics can do this effectively.
2. Awareness of how TRS could change in the future – TRS seems to be in the crosshairs of many politicians, and a reduction in current pension options is frequently discussed in the media. Senate bills regarding TRS and health care benefits are being proposed at an alarming rate and if an advisor is not aware of these, then how can they show you what affect current proposals will have on your plan? Even if these bills aren’t yet law, it pays to be proactive and understand what impact any change has on your financial plan.
3. Understanding what changes can be made now to manage for potential changes – Making changes to your current plan requires an understanding of what may change in the future. Should your savings habits change if your pension has the potential to change? How will your retirement picture be different if you don’t save and your pension changes? Showing the impact of any proposed changes to one’s retirement picture is important, not only in highlighting any potential planning opportunities, but also for quieting the worry of not knowing.
4. Pension upgrades are valuable: your advisor needs to know what a “2.2 upgrade” means – As an educator who may be interviewing current advisors, if they do not know what the 2.2 upgrade is, then you may want to question their knowledge with planning for educators. This upgrade to your TRS pension can make a large difference to your total pension benefits, and you can upgrade through a variety of options. If you think your best option is to send TRS a check for this upgrade cost, you may be spending too much money. Make sure an advisor knows that you can upgrade post-retirement through an annuity reduction and from a 403(b) contribution before working with them. If not, how many other specific-educator opportunities will they miss?
5. Educator-specific tax-breaks – Once a year at tax filing time, the IRS looks to the educating community and gives them an appreciative wink. That wink is worth $250 per educator in income tax reduction by way of the Educator Expenses Deduction. Make sure to take this every year, and make sure your advisor is including this in any tax projections he or she may be doing.
6. Having some skin in the game – One thing that would be an advantage is if your advisor was previously a teacher or is married to a teacher, so they feel the same pain you do should pension changes be made. My wife is a teacher in the Tier 1 TRS pension system. Any changes that are made affect us personally as a family. As a Certified Financial Planner practitioner, I am constantly evaluating our situation to see if there is anything we should be doing differently. If I find anything that works, I bring this to the table with our current educator-clients. Having an advisor who gives recommendations is fantastic, but knowing that these recommendations have been researched and carried out by their family brings an extra level of influence to them.
7. Knowledge of catch-up rules – Many educators are aware that they can contribute to a 403(b) like private sector employees can to a 401(k). There is the standard contribution if you are under 50, and then a catch-up for the over 50’s. Advisors should know their are two other main rules, and if they don’t, keep looking for another advisor. If you have worked in a district for over 15 years, then you are eligible to contribute an extra $3,000 to your 403(b) account. This can be made before the age of 50, so if you are 40 and have worked in the same district for 15 years, then you aren’t limited to the standard contribution but can put in an extra $3,000. If you work in jobs that are covered by 403(b) and 457 plans, then you must work with an advisor who understands that your contribution limits near retirement can be double what they would be with just a 403(b).
8. Is my 403(b) the best plan? – Work with an advisor who can tell you if the plan you are using has the best fund options, is the most cost-effective, and allows you the most flexibility. As you have a choice as to what company to use for your 403(b), shouldn’t they know which one to direct you to?
9. Understand how teacher contracts work – TRS can be paid by the employee or the district, your pay may be frozen for three years, you may be in the 6% catch-up system, or your union may be negotiating a new contract. All these things have different impacts on a financial plan, so it makes sense to work with an advisor who understands these options and how they will affect your situation.
10. Comprehending terminology can make-or-break a conversation – “I would like to understand if I should upgrade my pension now to the 2.2 option, or if I should wait until I’m in the 6-6-6 period? I know I have the 3:1 forgiveness option so if I wait it gets cheaper, but I’m not sure what to do. What would you suggest?” If you get a blank stare from across the table, it may be time to look for another advisor. If you are also looking for someone to explain what these statements and questions mean, then it would make sense to work with someone who can explain the concepts to you, and then discuss what options make sense in your situation.
Many educators think their situation does not warrant the guidance of a financial advisor. I believe that to be incorrect as with a changing pension system and an array of savings options, educators need specific guidance. This guidance cannot be delivered effectively from an advisor who has not studied the education system or who is not reading about the updates on a regular basis. You deserve to work with an advisor who knows these issues, and even one who will be affected by the same things that will affect you.