Avoid These Common Missteps for a Confident Retirement – After decades of providing financial advisory services to university professionals, we’ve identified six key challenges that can make the transition into retirement more difficult. While you’re still employed, you have a financial safety net—your salary and benefits. In retirement, however, missteps can prove costly.
As you prepare for retirement, think about it as more than leaving your position. You’re shifting from the employee structure of a large institution to navigating finances independently. For years, your employer provided a valuable benefits package that rivals many large private companies, including a steady salary, retirement and health benefits, life insurance, and sick leave.
You’ve spent decades dedicating yourself to teaching, research, and mentoring. But as you prepare to step away, these benefits will end. If you’re between 65 and 70, you could spend the next 20 to 30 years effectively “self-employed”— a reality that requires preparation.
Here are some immediate steps to consider:
- Build a cash reserve in your bank account.
- Consider establishing a line of credit.
- Determine if refinancing your home makes sense with today’s rates.
Imagine yourself as the owner of “You, Inc.” You are a self-proprietor whose business is navigating your own retirement. Now, consider some of the most common reasons small businesses like yours fail: lack of cash and poor planning. Although you may have plenty of money in your retirement accounts, you may not realize the tax consequences of withdrawing from your nest egg. For every dollar you need, you’ll have to withdraw slightly more to cover taxes (the exact amount depends on your tax bracket). Remember, the bank cannot accept your retirement plan as collateral for a loan, no matter the amount. That brings us to the first of our six challenges:
Challenge #1: Cash Flow Constraints
Retired professors who once enjoyed tenure and disability insurance may find themselves without a financial backup when unexpected expenses arise. Maintaining enough cash on hand is critical. Cash reserves don’t just cover emergencies—they provide flexibility to meet new needs without relying heavily on retirement withdrawals, which are subject to taxes.
Don’t get trapped!
How important is having cash flow in retirement? Not having it could lead to these potential financial traps:
- You need to keep working just to have access to cash.
- You don’t have enough cash on hand to weather an emergency.
- You can’t capitalize on desired opportunities in retirement, like moving to be near loved ones.
- You feel strained and worried about having money for everyday expenses.
Challenge #2: Replacing Benefits
The comprehensive benefits package you enjoy as a university employee likely includes health and life insurance, which may be harder to replicate on your own. Most professors approaching retirement focus on health and disability coverage but often overlook group life insurance, which they lose upon retirement. This lapse can leave an unexpected gap, since retirement accounts are taxable when withdrawn, unlike life insurance benefits, which are typically tax-free.
Typically, university professionals have three major assets:
- Their retirement account, which could amount to $1 million or more
- Their home
- Their group life insurance program
It’s common for pre-retirees to worry about health insurance, disability insurance, Medicare, and even Social Security when they plan for retirement. However, they often forget about the group life insurance benefit until it’s too late. If you have such a benefit, take time to learn how you can extend this valuable benefit once you retire.
Don’t get trapped!
Without a plan to replace your benefits in retirement, you could experience these potential financial traps:
- You may face higher premiums or be unable to secure coverage if you have health issues.
- Your family could have to cover unexpected expenses, like funeral costs, out of their pockets.
- You couldn’t access your policy’s cash value during retirement, which could help you manage cash flow or handle an emergency.
- You may not have funds to support the people who still depend on you, like your spouse, children, or elderly parents.
Financial Advisor Evaluation Checklist
Our Financial Advisor Evaluation Checklist outlines the questions you should ask any advisor or firm you’re considering hiring. Using the Checklist, you can make side-by-side comparisons of potential firms designed to help you feel confident in taking the next step.
Challenge #3: Balancing Tax Strategy
While many professionals aim for a higher return or focus on deferring taxes in retirement accounts, relying too heavily on pre-tax assets can be limiting. Many university employees have accumulated substantial balances in tax-deferred accounts. While these contributions lower their taxable income in the year they are made, those taxes come due in retirement, when it’s time to start withdrawing those funds.
In our experience, university professionals frequently keep about 90% of their retirement savings in a tax-deferred account, and about 10% in a bank or mutual funds outside of the university retirement plan. When they retire, they don’t have much flexibility. For example, if a family needs $200,000 per year to live, those funds would most likely come from their pre-tax retirement accounts, perhaps with some coming from Social Security and any pension income, although pensions are increasingly rare.
Let’s say a former university employee needs additional funds to pay for a medical procedure, a change in residence, or some other emergency or opportunity. Withdrawing more from their tax-deferred account could put them in a higher marginal income tax bracket. That means it’s more expensive to withdraw that money than from a different source!
If the individual took the money from a bank account, they would not face additional taxes. The same would be true if they had money in a tax-free bucket, like a Roth account.
Your retirement account may have Roth options you can consider, giving you the flexibility to withdraw funds without additional tax impact. This type of diversification could be helpful to you in the future.
Don’t get trapped!
Without a balanced tax strategy, you could fall into these potential financial traps when you retire:
- Any withdrawals from tax-deferred accounts will be subject to tax at your ordinary income rate.
- The nest egg you thought would cover you in retirement may not last as long if you’re paying income tax on your withdrawals.
- Withdrawing more from tax-deferred accounts to cover large expenses could push you into a higher tax bracket.
Challenge #4: Maintaining Control of Assets
Many universities no longer offer defined benefit pensions, which guaranteed lifetime income. Instead, they offer defined contribution plans, in which today’s retirees have more options for retaining control over their savings. But that control requires caution. With the interest rate environment changing and volatility attached to the equity markets, many university professionals are looking for more safety in their portfolios as they approach retirement.
One option some retirees explore is using annuities to help ensure a baseline of income. However, it’s often wise to consider annuitizing only a portion of your retirement assets, preserving flexibility for future needs. Once you annuitize, you can’t un-annuitize, so it’s important to consider the potential risks before you decide. Your financial advisor can help you decide whether an annuity makes sense for your situation and can recommend how much you should annuitize if you take this route.
Don’t get trapped!
If you choose to annuitize all your university retirement assets, you could face these possible financial traps:
- You reduce your liquidity, which could put you in a cash flow bind if you need to access more than just your monthly annuity payment. Once you annuitize, you cannot access your retirement savings as a lump sum.
- You lose the ability to control how your retirement funds are invested.
- You may experience lower potential returns and high fees.
- Because fixed annuities may not keep up with inflation, you may lose purchasing power over time.
Challenge #5: Managing Investment Risk
When was the last time you revisited your asset allocation and considered how much risk is appropriate for your portfolio? If it’s been a while, you may be surprised to find you have more exposure to risk than you need. Investing for retirement isn’t a “set it and forget it” exercise. When you were younger, you may have chosen to invest aggressively to help build your wealth more quickly, but now that you’re older, you may be more interested in preserving the wealth you’ve accumulated. We believe many university employees may unintentionally carry more risk in their retirement accounts than they intend, especially if they haven’t reviewed allocations in years.
Academic professionals know the importance of research and using evidence to help support important hypotheses. At Savant, our evidence-based investment approach uses similar principles. Unlike some investors and money managers, we rely on empirical results to help balance after-tax returns with an appropriate level of risk. Such a diversified and balanced approach is designed to help protect against market volatility, ensuring your nest egg aligns with your retirement timeline and income goals.
Diversification may not seem intuitive to you as an investor, and that may be because – for many university employees – their experience is a story of concentration. You may, for example, have specialized education and skills, have worked in one job for one university, and live in one place. Your concentration may have helped you build your wealth over a lifetime, but diversification can help you preserve it.
Even if you own several mutual funds or annuity products within your 403(b) plan, if you made these selections a long time ago, you may have more stock exposure than you need.
Don’t get trapped!
Failure to pay attention to investment risks could lead to these potential financial traps:
- Without proper diversification, you could risk potentially lower returns.
- A market tumble could wipe out a disproportionate amount of your assets, leaving you to try to rebuild from your losses.
- You may be exposing yourself to more risk than is necessary for potentially higher returns over time.
Challenge #6: The Rollover Decision
Rolling over your 403(b) into an IRA can offer greater flexibility, but it’s essential to understand the costs involved. Some brokers or advisors might suggest a rollover as a default action to gain new business, but often, university plans provide excellent investment choices and low fees.
Additionally, employer-sponsored retirement accounts often have stronger creditor protection than IRAs. Always compare fees, assess any added security benefits, and think critically about the pros and cons of moving your money. Some retired professors find keeping a portion of their retirement assets in the university’s plan provides stability while allowing them the flexibility to manage other assets in an IRA.
Retirement from a university requires new strategies and careful planning. Understanding and addressing these common pitfalls now can help your financial future remain as fulfilling and stable as your academic career.
Don’t get trapped!
Deciding to roll over your 403(b) could have negative consequences, depending on your situation. Avoid these potential financial traps:
- Depending on state law and the type of IRA you use, you could lose creditor protection in a rollover.
- You could pay higher fees for an IRA outside of your university benefits. Remember, you don’t have to move your assets away from the university!
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.