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5 Common College Professor Pitfalls in Retirement

With the intensive role of teaching, writing, researching, meeting with students, and managing their personal affairs, many professors lack adequate financial planning resources to manage and maximize their retirement nest egg.  While there are many areas of retirement planning that may be overlooked, there are five common pitfalls that professors face that may derail their lesson plan for retirement.

Pitfall #1 - Contributing Solely to the Pre-Tax Portion of Your Retirement Plan

Most retirement plans offered to faculty and administration in academia require mandatory pre-tax contributions.  For example, the New Jersey Alternate Benefit Plan requires a mandatory 5% annual contribution for all retirement plan participants.  Additionally, if a professor would like to contribute funds in amounts in excess of the mandatory contribution, he or she will usually defer these contributions into yet another pre-tax plan (i.e., a 403(b) plan).

If this crucial pre-tax contribution requirement is overlooked, problems may arise when a successful professor retires only to face the shocking realization that their retirement paycheck is subject to the highest ordinary income tax rates, therefore yielding a much lower payout than anticipated.  To avoid this common pitfall, professors should be mindful of this implication when determining where to contribute retirement funds.  It may make sense to consider contributing a portion to taxable accounts (subject to more favorable capital gain tax rates if positions are held for over one year) or Roth accounts (tax free distributions) for potentially greater tax preferential rates for distributions.

Professors who retire with a healthy dose of tax deferred, taxable (post-tax), and tax-free accounts have the flexibility to better manage their retirement distributions and increase their capacity to keep tax brackets low.  The pre-tax only retirement contribution pitfall can be avoided through a proper analysis to determine how to best allocate between pre-tax and taxable/Roth accounts to save for retirement.


Pitfall #2 - Failing to Truly Diversify

Many professors will gravitate towards investing in companies prevalent in the media and it is not uncommon to see an abnormally high concentration of their retirement accounts invested in large US companies.  Although investing in US large companies may not be a bad way to invest, if a professor only holds an index fund tracking the S&P 500, they are limiting themselves to one country and 505 stocks or companies.  Historically speaking, all asset classes, including large companies, can experience prolonged periods of underperformance.  For instance, the period between the years 2000-2009, which became known as the “Lost Decade”, suffered a negative annualized rate of return for large US companies.

To enhance diversification, a professor may not want to simply mirror the S&P 500 index and narrowly limit investments to US large companies.  Instead, a more globally diversified index, such as the MSCI ACWI Investable Market Index (IMI), may be more appropriate as this index maintains exposure to 49+ countries and over 9,000+ stocks.  International exposure outside of the US expands the universe of investment opportunities and assists in avoiding this common pitfall in retirement planning.

Pitfall #3 - Not Understanding Liquidity Restrictions Around Fixed Annuities or Traditional Accounts

A common conservative investment option in public academia retirement plans is the traditional or fixed annuity.  These annuities pay a guaranteed rate of interest in exchange for liquidity of your money invested in these accounts.  If a professor does not intend to withdraw a continual, structured income stream from these investments upon retirement, he or she may be surprised to discover that these accounts have restrictions, which typically result in limited accessibility over a period of 5, 7, or 10 years depending upon the plan.

To avoid this pitfall, it is critically important to determine what percentage of these investments make sense for your overall financial plan.  If you do not strategically plan the timing of your withdrawals, you may find yourself not maintaining the desired amount of flexibility or growth with your retirement paycheck.

Pitfall #4 - Underestimating the Cost of Health Insurance

If an academic is fortunate enough to retire with state retiree health benefit plan eligibility, Medicare will become the primary form of insurance and the state retire health benefit will become secondary.  Unfortunately, both plans may not cover medical expenses related to dental, vision, and hearing exams and procedures. If professors are not aware of the limitations on coverage, it may result in additional costs, which may be out-of-pocket expenses or premiums for supplemental healthcare plans.

Another often overlooked medical cost is long-term care.  Medicare Part A will not cover long-term care costs (custodial care) past 100 days.  Long term care (assisted living, home health care, etc.) can pose the biggest threat to a retirement portfolio as these often sudden and unexpected costs may result in withdrawals of retirement assets at inopportune times, thereby compromising your retirement portfolio’s performance in the market.

Furthermore, many high earning professors in retirement may be subject to Medicare surcharges (i.e., IRMAA) during their retirement years, which may result in hundreds of additional dollars a month in extra expenses. These IRMAA surcharges are assessed two years in arrears from your tax returns and careful planning needs to be implemented to keep income down and subsequently IRMAA surcharges.  All health insurance costs and surcharges should be identified in advance to uncover any unpleasant surprises.

Pitfall #5 - Not Having a Financial Plan

Harvard performed a well-known study on the importance of having written goals and plans.  In short, those that had written goals and plans far exceeded their net worth expectations.  The same can be said about your retirement plan.

A financial plan provides a roadmap and focus on your goals and values.  A comprehensive and personalized plan is an essential strategy to organize and simplify your financial life.  The most successful professors are the ones that implement a professional financial plan to optimize both their financial and non-financial goals.

While there may be hidden dangers in retirement planning, professors should be cognizant of these five most common pitfalls and plan well in advance before they retire.  Make sure to talk to an independent financial advisor who specializes in professor wealth planning to determine how to best plan for your future.

If you would like to see a sample lesson plan to ace your retirement, please email me at or call our firm at 929-427-0347.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

Large cap stocks are usually less volatile than small and mid-cap stocks.

Fixed annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.