• Leyder "Aiden" Murillo, MBA

Mistakes are Costly: Financial Planning for Teachers



Financial planning has advanced past just investing assets. Everyone, especially teachers & educators, has complexities and uniqueness in their financial lives.


The "old model" restricted comprehensive planning to a wealthy few with high levels of manageable assets or a prohibitive minimum salary level. For many, their first engagement with a financial advisor is when they need to create a retirement income plan or if they are on track to reach their financial goals.


A Financial Plan Has Many Topics
A Financial Plan Has Many Topics

The new fee-only model allows financial advisors with experience and knowledge to assist across the landscape of financial life. Whether the financial plan is comprehensive or partial, the landscape has become much more resourceful in handling different complexities. The above chart shows the varying topics within an intricate, comprehensive plan. Some financial advisors even provide the service option for creating a partial financial plan with fewer topics – pay for what you need, flexibility. A new generation with very different goals is taking advantage of all the elements to create plans that work for them based on their unique needs.

  • Retire early, create a spouse "work optional," or work part-time

  • Save for a kids' college

  • Enjoy life now – and save for the future

  • Invest in a second home or rental property

  • Find resourceful ways to reduce taxes

This generation has created high income and realizes they do not have to wait another 20 or 30 years to have the lifestyle they truly want. They understand that financial planning is all about tools, tactics, and strategies that are deployed in tandem to help them keep more of what they make and actively grow their wealth. They also understand that working with a professional and valuing their insights is critical to their financial life.


It's about understanding the options, making the right choices for a highly individual path forward, and solving problems. Remember working together as a team is better than being a lone wolf.


Cash Flow Planning is the Foundation

Creating a budget is thrown around, and sometimes staying consistent with it is the most challenging task and doesn't work. The secret to budgeting is the change of expectation. It's about making the right choices to keep spending in check, with almost a scarcity mindset. It is about current expenses and works best over a short-term time horizon. Cash flow planning looks at both the short-term and the long-term. It is a tool to help you make decisions that will help you achieve future goals.


The process helps you identify future income and expenses and plan for big-ticket items. Think about how a business must plan for its costs if it needs or wants to expand, then use the income from expansion. The result becomes part of your financial plan and dictates changes across your financial plan. Think of the domino effect; if one thing changes, it can alter many different variables after the fact. Understanding and detailing your flows keep your investments on pace. It ensures realistic expectations about return opportunities and gets you thinking big picture, including minimizing taxes and protecting your assets. Yes, everything relates to a financial plan.


Saving for Kids' Education

If you haven't started one yet – the sooner you get saving, the better. Start saving the moment you decide you want to become a parent. The time horizon is your friend because using the funds is long-term if thinking about college. But it is never too late to start funding a child's education. They grow tax-free so that you can build a nest egg for education spending. You can fund a 529 plan with up to $16,000 per year and still qualify for the annual gift tax exclusion – but you can also fund five years at once if you're behind and want to catch up. A 529 plan isn't just for college – K-12 qualifies too. However, K-12 may be short to medium-term time horizons that require a different level of investing strategies.


Risk Management

Life insurance is critical to keeping your family's lifestyle and goals on track. In addition, it can play a crucial role in estate planning. For most people, a term life policy offers the ability to replace your salary during your prime earning years cost-effectively. While for others, a whole life policy offers the ability to provide benefits for longevity and can provide a cash value in addition to the benefit. However, a whole life policy is more expensive. The rule of thumb is the policy should be 5-10 times your annual pre-tax income.


It may also be time to consider an umbrella liability policy to protect your assets over and above your existing coverage. But as your income increase – or if you own a secondary property that you rent out – you want to be sure you minimize risk. An umbrella policy can provide the coverage you need, but it's essential to factor in the cost.


Retirement Savings

Maxing out retirement savings, if possible, is the best way to lower your taxable income and increase your available investment pool for the future. If you qualify for a teacher or educator's pension through your employer, it is just a fraction of your investment pool. But also realize that as a public employee, you may be part of the close to one million teachers not to receive any Social Security and therefore do not have enough for retirement.


It's Not a Rainy Day Fund – It's a Sunny Day Fund

An emergency fund of 3-6 months of expenses in an accessible account is a solid place to start. But once you've achieved that, are you maxing out your 403(b) or 457(b) and saving for specific goals on the side? What do you do with excess income?


It's all about your time horizon. While your emergency fund is in cash, your taxable investment is goal specific. A vital component that is a hybrid between retirement planning and having an emergency fund is a Roth IRA, as it plays a vital role for teachers or educators. Unfortunately, many retired teachers are struggling after being retired. So having an account that you invest in for opportunities can make sense. It can allow for growth, possibility, and above all – optionality. Having more options is better than having no options at all and having the feeling of being in a corner.


Tax Planning Keeps Your Income in Play

All the tactics we addressed above have one thing in common: tax planning. The theory behind effective tax planning is two-fold:

  • Reduce taxes this year

  • Reduce lifetime taxes

Tax planning touches every part of your financial life, and it is a series of tactical maneuvers combined with proactive actions. It's thinking through the impact of every move with a tax lens. Because what you make is ultimately defined by what you keep.


The Bottom Line

Financial planning can help you make the right choices to achieve your goals, but selecting the right partner is essential. It's not about the asset you bring nor the income you bring. It is about the attitude and having the right expectations. Fee-only planners can work with you to create the customized plan you need.

 

This work is powered by Seven Group under the Terms of Service and may be a derivative of the original. More information can be found here.


The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.


This content not reviewed by FINRA


 

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