7 Mistakes Teachers Are Making Every Single Year

Teachers dedicate their lives to educating others, but when it comes to their own financial and retirement planning, many are unknowingly making costly mistakes. These errors can add up to tens of thousands of dollars, forcing teachers to work longer than necessary or risk running out of money in retirement. In this article, we will discuss seven key mistakes teachers make every year and how to avoid them so you can build your wealth and retire on your terms.

1. Not Understanding Your Benefits

One of the biggest mistakes teachers make is not fully understanding their retirement benefits. Your employee benefits make up the majority of your retirement income, and failing to maximize them can cost you significantly. Let’s break down the key benefits you need to understand:

Pension Plans

Most Washington State teachers are part of either Plan 2 or Plan 3 of the Teachers' Retirement System (TRS). These plans determine how much pension income you will receive in retirement. Understanding the differences between them, including contribution rates, payout structures, and vesting requirements, is critical.

If you go through a divorce, for example, you could lose a significant portion of your pension if assets are not divided correctly. Many attorneys and judges do not fully understand pension systems, which can lead to costly financial mistakes.

Healthcare Benefits

Teachers in Washington are covered under either SEBB (School Employees Benefits Board) or PEBB (Public Employees Benefits Board).

• SEBB provides healthcare benefits while you are still working for a school district.
• PEBB becomes available after retirement and allows continued healthcare coverage, though costs may increase.

Leaving PEBB coverage for a cheaper plan might seem like a smart move, but you cannot return to PEBB once you opt out. This is a decision that requires careful consideration.

Voluntary Employee Benefits Account (VEBA)

VEBA allows teachers to roll unused sick leave into a tax-free account that can be used for medical expenses in retirement. If you choose to cash out sick leave instead of rolling it into VEBA, you will pay taxes and lose a portion of your benefits.

Deferred Compensation Plan (DCP) and 403(b) Plans

Teachers have access to both 403(b) retirement plans and DCP plans, allowing them to save additional money for retirement. These plans have independent contribution limits, meaning you can maximize both accounts to save more.

Understanding how to strategically use these accounts, including Roth vs. pre-tax contributions, can save you thousands of dollars in taxes.

Social Security

Unlike teachers in some other states, Washington teachers do contribute to Social Security. When planning your retirement, you need to calculate your pension and Social Security benefits together to determine your total income. Many teachers also misunderstand Social Security’s collection ages, leading to suboptimal claiming strategies.

2. Procrastination: Delaying Financial Planning

Many teachers put off financial planning because they are focused on paying off debt, buying a house, or saving for short-term goals. The problem is that delaying investing can cost you hundreds of thousands of dollars due to lost compound growth.

For example:

• If you invest $250/month for 30 years at a 6% return, you could accumulate $251,000.
• If you delay investing for 10 years and only invest for 20 years, your balance drops to $115,000.

That’s a $146,000 loss just by waiting 10 years!

Beyond saving, procrastination can delay retirement planning. Many teachers work years longer than necessary because they never took the time to analyze their financial situation earlier.

3. Failing to Increase Retirement Savings

Many teachers set up retirement contributions and never increase them over time. If your salary increases, but your retirement savings stay the same, you are losing valuable opportunities to build wealth.

To combat this:

• Set up automatic increases in your contributions.
• Adjust savings at least once a year when reviewing your financial situation.
• Utilize both your 403(b) and DCP to maximize savings.

Lifestyle inflation—spending more as your salary increases—can also prevent you from saving enough for retirement. Prioritizing increased savings will lead to long-term financial security.

4. Not Getting a Second Opinion on Your Finances

Many teachers rely on one financial advisor or institution for guidance, assuming they are getting the best advice. However, a second opinion can often reveal better strategies or missed opportunities.

For example, many advisors do not understand pension systems. One teacher was told she needed to work until 65 to retire comfortably. After reviewing her full benefits—including her pension—it turned out she could retire earlier and make more money in retirement than while teaching.

A financial second opinion can uncover errors and ensure you are on the best path forward.

5. Misunderstanding Taxes in Retirement

Every retirement account has different tax implications. Understanding these tax buckets can save you six figures over time:

• Pre-tax accounts (DCP, 403(b)): Taxed upon withdrawal.
• After-tax accounts (Brokerage, Savings): Gains taxed at capital gains rates.
• Roth accounts: Tax-free withdrawals in retirement.

Many teachers defer taxes too long, leading to massive required minimum distributions (RMDs) that can push them into higher tax brackets. Proactive Roth conversions and tax planning can minimize tax burdens later in life.

6. Not Utilizing Home Equity Wisely

Your home equity is a valuable asset, yet many teachers let it sit unused. There are ways to access equity strategically, such as:

• HELOC (Home Equity Line of Credit): Flexible borrowing option for emergencies or large purchases.
• Cash-Out Refinance: Allows you to tap into home equity while still benefiting from appreciation.
• Reverse Mortgage (for retirees): Can supplement income while keeping home ownership.

Using home equity wisely can provide additional financial flexibility in retirement.

7. Not Having a Financial Plan

The biggest mistake teachers make is not having a formal financial plan. A proper plan should include:

1. Retirement Income Strategy
2. Tax Planning
3. Estate Planning
4. Risk Management (Insurance, Long-Term Care)
5. Investment Strategy

Without a plan, many teachers rely on guesswork, which can lead to financial struggles later in life. Working with a financial expert can ensure that all aspects of your future are accounted for.

Frequently Asked Questions

1. When should teachers start saving for retirement? The sooner, the better! Starting early allows your investments to compound over time, building more wealth with less effort.

2. What is the best retirement account for teachers? A combination of 403(b), Deferred Compensation Plan (DCP), and Roth IRA can provide tax diversification and flexibility.

3. How do I know if I can retire early? You need to analyze your pension, Social Security, and savings to determine if your income will support your retirement goals.

4. Should I take Social Security at 62 or wait? It depends on your financial situation. Waiting can increase your benefits, but some may need early access to income.

5. What happens if I don’t use my VEBA account? Funds in VEBA can be used for healthcare expenses at any time, and they grow tax-free.

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