“Do I need an IRA?”
Maybe it is because a lot of my friends are about to hit their thirties, but I feel like I’ve been asked this question every week this summer!
Now I’m not a financial advisor, but at my past three schools none of them offered retirement accounts! So my answer is that if you are an international teacher then you most likely do need to sign up for some kind of retirement account on your own. If you don’t have US earned income you cannot open a Traditional or Roth IRA, but you can have a taxable account and still open the Vanguard Target Retirement 2050 account.
So my first question to them would be, does your school (job) offer a retirement program? If not, my second question would be, if you don’t have a retirement account, do you plan on working until the day you die? Do you have some kind of US earned income? If you have US earned income then get an IRA, if you are earning all of your money overseas make sure you have a taxable account. Check the IRS website about what counts as “compensation/income“.
My current school offers 3% retirement matching. That means I put in 3% of my total salary and my school will put in the same amount. FREE MONEY!! I can think of very few situations where I have ever received free money (hey Grandma!), so I would invest as much as I need to so that my school will give me as much as possible.
So lets say that I make $3000 a month. 3000*.03= 90. That means I need to put $90 into my account and my school will also put $90 in my account every month. Even though my school is forcing me to put the money into a separate investment account (not Vanguard), I will do it because they are matching whatever I add to the account.
From what I have read in various books and blogs, a lot of people recommend saving at least 10% of your current salary. That means that if I am making $3000*.10=300. That means I should be investing that $210 elsewhere.
This is where either a taxable account, Roth IRA, or Traditional Roth come in. Basically you should remember that with the traditional IRA = pay taxes later; Roth IRA = pay taxes now.
Most money blogs I read say to get the Roth IRA because you will most likely be in a higher tax bracket when you are older, so it is better to pay taxes now when you are in a lower bracket. However, I was not allowed to sign up for a Roth IRA because I didn’t have any US earned income because I’ve been living and working overseas.
The best part is that once I tell my school that I want them to take out the 3% every month from my paycheck, and I set the amount I want to automatically invest in my Vanguard 2050 Targeted Retirement account from my checking, then I am automatically paying myself first. I never have access to this money so I don’t spend it.
So, should you have an IRA? If you are an international teacher only earning income abroad, you probably cannot have an IRA, but unless you are investing at least 10% of your income in an employer created retirement account, then I believe you should open a taxable account through Vanguard or Fidelity.
Again, I’m not a financial advisor, nor do I have anything beyond my minor in Business Administration. I’m only an international teacher who wants to retire on a warm beach one day.
Please comment below. Does your school have a retirement account you are paying into? Does your employer offer a matching program? Do you have a taxable account, Roth, or Traditional IRA?
If you would like to read up on the subject a little more, here are some links you might like:
http://www.getrichslowly.org/blog/2007/06/07/how-to-start-a-roth-ira-and-where-to-do-it/ (This one is a little older, but it is the exact article that I read back in the day that got me started with my retirement account.)
It can be hard to decide if you’re saving too much or too little for retirement. Especially if you get a late start saving. Most of us hope to live long lives and want to save enough to support ourselves, but at the same time, we don’t want to end up saving way more for the future than necessary at the expense of our present.
Fidelity put out some simple, rule-of-thumb retirement saving goals which the New York Times summarized on their blog: http://bucks.blogs.nytimes.com/2012/09/12/suggested-retirement-savings-goals-by-age/
I like to refer back to that chart to make sure my savings rate and portfolio balance are on track. By age 30, the chart says I should have the equivalent of half my yearly salary stocked away across employee sponsored, Roth, or other retirement plans in order to be on track for my current lifestyle level in retirement. If not, I need to play a little catch up. Or, if I have way more than that saved, I might consider diverting some money toward other goals. But just like the 10% savings rate many sources recommend, these are all just guidelines.
But that brings up another question: what about Social Security? Does non-US income still count toward your Social Security calculations? (A quick and dirty Social Security benefit estimate is 40% of the average of your 35 highest paid years — or more like 30% beginning in 2037, based on projected shortfalls). Do some schools handle the withholding for you? Or do you pay both sides of the tax as though you were self-employed? Do you not pay at all? These questions might not matter for US citizens who teach internationally for just a few years, but the longer you teach abroad, the more impact it may have on your retirement.
Brie you made some very helpful points!
Firstly, thank you for linking to the NYT bucks blog; I’ve never read that before. I like how easy it is to quickly glance at that chart…even if I still need to play catch up, since I’ve been focusing mostly on my student loans.
That brings up something I think about a lot: should I continue paying huge monthly payments if that means I can’t invest as much as I should be investing towards retirement? I’ve always thought that until I start earning higher returns with my Vanguard account, I know I am paying 8.6% interest towards my student loans. At the rate I’m going I should pay off my student loans in 5 years. After that, I should have plenty of money to throw at my retirement…but what if I get too far behind in my retirement milestone?
I definitely wrote the post from the POV of someone like myself who is planning on teaching abroad long term. I don’t think anyone my age can count on receiving 100% of their estimated SS check at retirement. I think I read that 70% would be more likely. However, since I’ve been overseas, I’ve paid *nothing* toward SS because all of my income is earned overseas and I qualify for the Foreign Earned Income Exclusion. So I really need to save everything I can until I get a job at one of the few international schools that DO pay into SS. Sigh.
I think the 10% and Fidelity/NYT chart recommendations are based on the assumption that you will have supplemental income from Social Security. So if you’re not currently paying in, you may want to save a little more to be safe.
When I took a retirement planning course in college, the professor took a very conservative stance on future SS payouts — basically telling us, “Don’t bet on it!” But a projected 70-75% SS payout on 40% of earnings means you can expect a payout of about 28-30% of your average earnings. That’s a figure to tack on to saving recommendations if you share a conservative option of future SS funding or aren’t paying into the system.
As for rapid payoff of student loans — (1) keep in mind is the student loan interest deduction. As long as you qualify, you get to deduct your student loan interest (up to $2,500) from the income on your taxes. So even if it takes longer to pay back your loans, and you therefore pay more in interest, you’re getting at least SOME of that interest back on taxes.
(2) There’s also a (relatively) new government-sponsored repayment plan that allows ANYONE to make income-based payments on qualifying loans for 20 to 25 years (depending on when you took out the loan) before having any remaining balance forgiven. And in case you are laid off, years that you are unemployed count as years served too! And there was already a loan forgiveness program in place for public teachers, public servants, and employees of tax-exempt organizations that forgives balances after just 10 years of payments.
(3) Your credit score gets a boost from regular, on-time payments on student loans (though carrying a lot of student loan debt can hurt you — it’s a balancing act).
(4) And finally, while student loan debt is difficult to discharge in bankruptcy, it does go away upon death. So I don’t have to worry about unduly burdening my family should I get in an accident or get sick or something.
(Note: Most of these points apply to federally backed student loans like Stafford or Perkins loans, NOT private student loans).
All of this helped sway me to save/invest aggressively over aggressive loan payoff, especially for loans with an interest rate similar to or lower than my rate of return on investment. As long as part of my payments go toward principle each month, I’m not too worried about paying off my loans early.
Brie, I love your comprehensive comments!
I’ve basically written off SS because I don’t plan on working in the US anytime soon to pay into the system. Anything I might get from them for the 7 years I worked while in high school and college at minimum wage would just be a happy surprise.
I’m not sure how much the student loan deduction helps me since I don’t have to pay taxes unless I earn more than 80K (not happening anytime soon!).
I’ve been on the IBR plan since I graduated from grad school. They say that I don’t have to pay anything on my loans. That means it is just accruing interest, so if I do get tired of having this debt hanging over my head it would be nearly impossible for me to pay off. Also, the last time I read the fine print it said you would have to pay taxes on whatever amount was forgiven at the end of the 25 years.
Sadly, the international schools I work at don’t qualify for the teacher forgiveness deal. Sigh.
I think what it really comes down to for me is that I want to get rid of the debt now so I can forget about loan repayments and not have to worry about making career choices based on how much money I make (instead of the incredible places I could be traveling to).
I do think you have convinced me to have less liquid savings and to instead put more of that into my retirement fund!
Just make sure you reserve enough to make a quick escape back to the US if need be! (I know you will)
Yes! That is always number one on my priorities list. I also have an emergency fund for six months of basic payments in case I have to live on mom’s couch because Venezuela becomes to unstable to live in for the second half of the school year.
Let’s hope not! And that you get to keep enjoying the low cost of living and warm sun through the end of the year,