As a university professor or professional, you receive many benefits. Not surprisingly, some of our clients were not aware of them all. Are you? To maximize these benefits requires some familiarity not only with them, but also the stipulations around them. We have highlighted some of these benefits and rules surrounding them below.
Tax Management – Retirement Savings
One of the great benefits of university systems, in general, is the ability to defer more money into retirement than the average worker. Public universities often offer the following:
ORP vs. TRS – We have more information in this article, but if you are enrolled in ORP, make enough money and have enough service years, you may be eligible for the SORP which allows you to defer even more. It is worth your time to check with your HR department.
Voluntary 403b – In addition to ORP or TRS, you can contribute up to $19,500 if you are younger than 50 years old and $26,000 into a supplemental tax deferred or Roth account if you are at least 50.
457 – This a deferred compensation plan that allows you to defer another $19,500 under 50 and $26,000 over 50 into tax deferred or Roth accounts depending on what the plan offers. In many cases, these plans can offer unlimited investment options as well. Note that if you haven’t previously contributed or contributed very little to a 457, at some schools you might be eligible for a super catch-up amount of $39,000 ($19,500 x 2) instead of $26,000 if you are within 3 years of retirement eligibility.
SEP IRA, Solo 401k – If you have any consulting income, you can contribute an additional employer amount of 25% of your net consulting income into a SEP IRA or solo 401k.
In essence, the sky’s the limit as far as deferrals are concerned, so you don’t need to worry about not having enough saved in tax-deferred or tax-free places.
About 10 years ago, Texas A&M University announced that they were going to give tenured staff the ability to retire and receive 1-2 years of pay as an incentive. Many took this benefit but the tax consequences were great for those who didn’t plan appropriately.
Our clients who received the buyout chose the pre-tax option to maximize contributions to the 403b and or 457 accounts and then had the ability to distribute that money (or do a Roth conversion) the following year at much lower tax rates.
Loans – Why pay a bank when you could pay yourself? Whether you have a mortgage, credit card debt, or any other form of loan, you could use your 403b or 457 to pay yourself instead of paying a third party. At some universities, not all, you can take a loan of up to the lesser of 50% of the account balance or $50,000 for a very low fee. You then pay yourself back the principal plus required interest via your paycheck. Note that if you leave, retire, or are terminated, you’ll owe the entire balance of the loan immediately, so it is important to plan for that potential downside.
If you are just starting out working for a public university and you have student loans, consider following the rules to have your loans forgiven. It does require working for a non-profit for 10 years, and you cannot make too much money, but it is worth exploring especially if you have a significant amount of student loan debt.
Many university systems are cutting back on benefits, but there are still some that maintain great retiree benefits. It is important to know what they are so you don’t leave anything on the table accidentally.
A big one is health insurance. In Texas, if you were employed for 10 or more years, have an active ORP or are eligible for TRS benefits, you are eligible for retiree health insurance for life. In Ohio, the system is less generous, you have to be employed for 20 years and there is no guarantee of health insurance when you retire. Still, other universities require you to be employed there for a specified number of years and reach a certain age. No matter the requirements, it is important to know what they are.
A prospective client called me having just retired with 9 years of service at a public Texas university and needed help with investing her retirement funds. My advice, consider going back to work for a public Texas university for one year to get the extra year of service to qualify for health insurance for the rest of her life.
On another note, there are some benefits that seem like obvious choices, however, you might want to review them to see how much they really benefit you.
Monthly premiums for an individual can range from $20 to $40 per month. That’s $240 to $480 annually. For a family, the range is around $750 to $1,500 annually. The average cost of a dental exam ranges from $130 to $200 without insurance. Check with your dentist to see what their non-insurance prices are and compare that to what you pay for insurance plus any required copays/deductibles. If you’re one of those people/families who doesn’t need a lot of dental work, you may save money by paying out of pocket and using your flexible spending account for reimbursement.
If you are 35 years old, according to the Social Security Administration tables you have a 26.8% probability of becoming disabled as opposed to a 12.5% probability of dying before retirement age.This suggests you’re twice as likely to become disabled before you reach retirement as to die during that time frame.
Long-term disability insurance is a major component of financial stability during your working years. Most universities and employers offer group long-term disability policies at very inexpensive rates. Our recommendation is to take full advantage of the maximum coverage you can purchase, usually 60% of your salary.
If you pay the premiums, any benefits you receive are tax-free. However, if your employer pays the premiums, those benefits are taxable income to you. If your premiums are paid by your employer, ask about the possibility of paying them yourself and your employer applying that money to premiums for another benefit.
Most employers offer a group life insurance option. Premiums are normally based on age, and they are inexpensive in the early years. However, they increase over time, usually in 5-year increments: age 25, 30, 35, 40… These increases steepen around age 45. If you are currently enrolled in a group life policy, you might want to get an outside quote for the same coverage in level term life insurance to compare.
Based on Texas A&M’s group policy as of February 2021, $500,000 of coverage at age 35 for a non-tobacco user would cost $360 annually. At age 40 it increases to $420, at 45 to $720, at 50 to $1,200, at 55 to $2,160, and at 60 the annual cost is $3,360.
Assuming you are a 35-year-old man in good health and want $500,000 of level term life insurance for 30 years (to age 65), the estimated cost per Nerdwallet is $41 per month, or $492 annually. Let’s compare the employer group coverage to the level term policy. With the group policy above, over 30 years you would pay $41,100 for insurance. With the level term policy, you would pay $14,760. That is a pretty significant savings. Term policy insurance premiums for women are generally lower so the savings would be even greater.
Understanding Your Benefits
It can be difficult trying to identify and understand all of your benefits, let alone how to get the most out of each one. If you would like more information on how to maximize your benefits and ensure your financial house is in order, give us a call 979-260-9771 or click here to schedule your free consultation today.
Post written by Natalie Pine, CFP®. She serves as Briaud Financial Advisors’ managing partner. Learn more about Natalie here.
Post written by Peggy Sherman, CFP®. She joined our team in 2007 and has expertise in Social Security and Tax Planning. Learn more about Peggy here.