In our experience working with the university community, we’ve noticed six retirement-related mistakes that higher-education professionals often make. It’s best to address these mistakes now, rather than after you leave the university’s safety net of salary and valuable benefits.

Many universities offer exceptional employee benefits, rivaled only by the largest private companies. These benefits may include a guaranteed salary, employer-sponsored retirement plan, health insurance, disability insurance, life insurance, and sick days or paid leave. If you are retiring in the next five to 10 years, you could spend the next 20 to 30 years in the land of retirement, which can resemble self-employment. As you prepare to retire, consider taking action now so you don’t fall into the following traps:

Trap #1: Lacking a Healthy Cash Account Balance

When you’re retired, a banker may not give you the same consideration for a loan as you received when you were a salaried university employee. When you have a regular paycheck, you may offer little to no risk to a banker. But if you aren’t employed and don’t receive a large enough income after you retire, banks could perceive you as a higher risk, making it far more difficult to get a loan.

Now, while you’re still employed, is the time to accumulate as much cash as possible in your bank account, negotiate a line of credit, and consider refinancing your home if it makes sense.

Don’t make the mistake of assuming that your employer-sponsored retirement account or IRA is a cash source. They are much too expensive. For every dollar you need, you will have to withdraw around $1.40 to pay Uncle Sam his share. Remember, the bank cannot accept your retirement plan as collateral for a loan, no matter what the amount.

A self-employed (retired) person must have money in the bank to pay short-term obligations for daily living expenses. The benefits of cash shouldn’t only be measured against the bank’s interest rate, but also in terms of the opportunity cost.

One hypothetical example involves a professor who had a goal of selling his house in Chicago and moving to the East Coast. His mortgage had 10 years remaining. He planned to retire in three years and was paying $3,000 to $4,000 per month on his mortgage. Because he planned on selling the house in a few years, this professor was able to refinance the loan at a much lower monthly payment. He could then take the difference between the original payment and the new, lower payment and put it in the bank. He paid about $28,000 in federal income taxes the previous year and could reduce his tax bill by putting $20,000 a year into his retirement account as another way of building up cash. 

Trap #2: Losing Your Benefits

Replacing the benefits and income provided by the university becomes a primary objective for many people when they reach retirement. Most university professionals have three major assets:

• Their retirement account, which could consist of $1 million or more
• Their home
• Their group life insurance program

Many have other assets like a second house, a cottage, a side business, or a farm. Ninety-nine percent of university professionals have the three assets listed above. Incredibly, most ignore group life insurance. They think about health insurance, disability insurance, Medicare, or even Social Security when they’re approaching retirement. But rarely do they think about life insurance.

Remember to Replace Your Life Insurance Before You Retire

It is unwise to have $1 million of group life insurance on the day you retire, only to have it disappear the next day. Even before state and federal income taxes, you just lost $1 million of the total assets that you may have committed to your family. Take precautions. Either extend your coverage within the benefit program or secure your own private policy to retain that $1 million of life insurance.

Oddly enough, a professor can have a $2 million retirement account that has taken 40 years to accumulate and a $1 million life insurance policy that took her about a half-hour to accumulate. (All she had to do is apply and pay the first quarterly premium, and she has $1 million of life insurance.) An additional perk is that a life insurance death benefit is generally income tax free.

Professors who are on the verge of retirement can take specific steps to help avoid the risks associated with losing their university benefits. First, they should have a vision and plan of what they want to accomplish in retirement. Then assess what part of these goals will be supported by the employee benefits they have in place. Because the university’s benefits stop the day after retirement, consider replacing some of them before retiring.

Trap #3: Lacking Tax Balance

Tax planning is an essential part of financial success. Most investors focus on achieving a higher return on their portfolio or a higher interest rate at the bank. It’s easy to forget that lowering your tax bill can also impact your bottom line.

Many higher-education professionals have most of their retirement savings in the pre-tax bucket.  Universities provide very generous defined contribution plans.  The university faculty member contributes a percentage of their salaries in these plans, and the university typically contributes a percentage of salary to this retirement account as well. These contributions compound tax-deferred. When that money is withdrawn, it will be subject to state and federal income taxes. It is common to see about 90 percent of someone’s retirement savings in a retirement account and about 10 percent in a bank account or personal mutual fund outside of the university retirement plan.

Therefore, in retirement, academic professionals don’t have much flexibility to manage taxes. If the family needs $50,000 a year to cover living expenses, most of it will come out of a retirement plan, and income taxes will be assessed. If a retiree needs additional funds to cover medical bills resulting from a health issue or another emergency or opportunity, withdrawing another $10,000 or $15,000 may put them in a higher marginal income tax bracket, making it more costly to withdraw that money.

If retirees diversified their savings among taxable and tax-free accounts, they could withdraw $10,000 or $15,000 out of a bank account or a tax-free bucket, like a Roth IRA, to lower the tax impact. We commonly see university professionals who have a disproportionate amount of their assets in income tax-deferred accounts.

Throughout their careers, many university employees defer all they can to a tax-deferred retirement account. Most remain unaware that withdrawals during retirement could cause their tax bracket to adjust and ultimately lower their income. That’s the trap.

If you’re in a similar position today and you plan on working another five years, consider bypassing the deduction for additional contributions into the retirement plan. Stick with the mandatory, and contribute excess savings into your university’s Roth plan.

Trap #4: Losing Control of Your Retirement Savings

There has been much consternation about guaranteed pensions disappearing at universities. Many large corporations still offer pensions in which a retired executive receives a predetermined amount per month at retirement, and the liability for that payment is on the corporation.

More than 20 years ago, universities required their employees to annuitize their retirement account balance with TIAA-CREF. Over time, employees pushed back on this requirement because it limited their estate planning options. Many higher-education professionals didn’t have the option of leaving the money to their children or grandchildren upon death.

Now, university employees have more choices and flexibility regarding how to retain and draw from the assets in their retirement savings account. In most instances, we find that it makes little to no sense to annuitize the money in your retirement plan. If someone would like to buy into an annuity, we suggest annuitizing only a small part of the portfolio because once you annuitize these assets, you can’t un-annuitize them.  

Trap #5: Taking Unintended Risks

As employees start the process of transitioning into retirement, they may unintentionally take on additional risk.  Many transactions take place during this transition, but the key is orchestrating the many moving parts effectively.

For example, consider a hypothetical scenario involving a female professor at a major university who had a retirement account with a balance that was close to $1.5 million. Her spouse had already retired and she was working on transitioning into retirement. Her portfolio was almost entirely invested in U.S. stocks, and it was all in her custodian’s stock fund, which was much too volatile for a professor who was transitioning into retirement. Her advisor recommended that she sell half of it because she would soon need to withdraw money from the portfolio for her living expenses. She sold half of the stock and within two years, the market plummeted. Because she was no longer concentrated in one fund, the decline in her portfolio was minimized.

Trap #6: The Rollover

Rolling over your retirement account means withdrawing the money from an employer-sponsored retirement account and within 60 days depositing all the funds into an IRA. The major benefit — if it’s done properly — is that the money transfers from the retirement account to the IRA without tax consequences. Another benefit of a rollover is that an IRA can be self-directed. The person who owns the IRA has more flexibility in how the money is invested and can use a bank savings account to invest very conservatively or buy shares of an individual stock for an aggressive approach. Neither of those options is available in a university retirement account.

What’s the trap? Many times, a broker, banker, or insurance agent will contact a university employee who is nearing retirement and suggest a rollover. It is important to find out how the agent receives compensation because many work on commission and may suggest moving the money from the retirement account (where they can’t earn commissions) to an IRA at the bank or at the brokerage firm. They then invest it in products that earn them commissions.

That’s not inherently bad, but it’s unnecessary. We’re not aware of a university that forces employees to take money out of a retirement account upon retirement. The university retirement plan will continue to hold those assets. However, be aware of the asset protection rules. The IRS considers a retirement plan a safe haven from creditors. IRAs, in many cases, are not. If a retiree gets in a terrible car accident and is sued and loses the lawsuit, an IRA asset could be seized or used to pay the claim. That won’t happen if the money is in an employer retirement account.

Brokers, bankers, and insurance agents naturally want you to pay for the advice they provide. But you can take your time and leave your money in the university’s plan, which likely offers a negotiated low fee through well-known providers. 

Plan for Your Future

Have you had an “aha” moment yet? Perhaps you now realize one or more of these traps could adversely impact the plans you have in place for yourself and your family upon your retirement. Our goal is to help ensure you are avoiding these six traps and to help you identify and review your unique situation as it relates to retirement planning, investment planning, and estate planning. Please call us at 800-431-9740 or schedule a no-obligation appointment to speak with one of our retirement planning specialists.