Kelly from Mailbag here. Welcome to the first article in our new content series, HerMoney Mailbag, creatively named after “the Mailbag segment” in the HerMoney podcast. If you’re not subscribed to the podcast yet, here’s where we can fix that. In the meantime, for context, in the Mailbag segment of the podcast, I ask HerMoney’s CEO Jean Chatzky, who hosts the show, our listeners’ questions and then she answers them off the top of her head. Seriously. It’s not scripted (and you can tell because I’m not scripted either—unfortunately).
Sometimes the questions we receive are pretty complex—and when Jean sees my eyes crossing, we know it’s time to write it out for people to reference, like this one below from Episode 139:
Q: I’m a 43-year-old former high school English teacher of 13 years … I have $89,300 in the State Teachers Retirement System, which is essentially an annuity, as I understand it. I’m wondering what your thoughts are about what I should do with the money in the annuity? I have the option to leave it there until age 65, at which point my yearly annual benefit is just under $26,000. I believe that benefit lasts as long as I am alive. I also have the option of rolling over the $89,300 into a traditional IRA. I would love to hear your thoughts on this. Also, in case it changes anything, I have no human dependents (but I do have a dog!). — Michelle
A: Well, we love our dogs and we love our fur babies as much as we love our human dependents—sometimes more. Here’s how I look at this—and if you’ve been listening to the show recently, you know that I like the idea of having some sort of a paycheck in retirement to at least cover your fixed costs. Social Security does that for people, but it doesn’t cover everything. It only covers about 40% of what we need. And so as we get closer to retirement, one of the things that we want to look at is: How do we close that gap? How do we come up with the rest of the money that we’re going to need in our retirement, and how do we do it consistently? I took a look at that $89,000 that you’ve got in the teachers pension plan, and, you’re right—if it works like most teachers pension plans do, then it will last as long as you do. And so the question is: Is rolling it over more beneficial than just leaving it in the plan? I did some quick and dirty math for you:
I took the $89,000 and assumed that you rolled it into an IRA, where you invested it in a diverse portfolio and got a return of 8% a year. If you made no additional contributions to that account in 22 years, by the time you’re 65, you’ll have about $560,000. Now, we know applying what’s called the 4% rule that usually you can withdraw 4% of the money you’ve got in a retirement account every year and be pretty comfortable that that money will last you 30 years, which would bring you to age 95. At a 4% withdrawal rate, you’d have about $22,000 a year. Now, that’s not as much as you would have if you stuck with the annuity.
Yes, the money in the retirement account might continue to grow, but then again you might not get the full 8% rate that I computed on that growth to begin with.
We also know that the rule’s not perfect. We know that in years where the market tumbles you need to take out a little bit less in order to make sure that the money will last as long as you do. Bottom line: If this were my money in this scenario, I’d stick with the annuity, and I would do it knowing that you’ve got plenty of growth in other places to carry you along. — Jean