Investment Plans

On these pages will be some ideas on getting started in a solid, investment plan. Getting started is probably the hardest part.

Here are some suggestions. These suggestions are a summary of what could be a consensus of what most successful investors would likely suggest.

First, some background. Years ago, when teachers and nurses were very poorly paid, the Federal government passed a law that allowed teachers and nurses to invest their money without paying taxes on the money that they invested. That means that the government, in effect, pays about 30% of the investment for you. This provision is commonly called 403(b) because that is the section of the Tax Code where it is located. Taxes are paid only when the money is taken out at retirement time.

Because teachers can use the 403(b) provision, all teachers should take advantage of it. Why not have the government pay part of your retirement plan?

Tax deferred money can be invested in many different places.

Most credit unions and banks offer Deferred Compensation plans. Teachers can ask their school district to deduct money from their pay and then have it deposited into the credit union or bank. The Orange County SchoolsFirst Federal Credit Union, for example, is currently paying about 6% annually on their plan for teachers. I know a couple who started a plan in 1985, added about $500 a month for about five years then stopped adding any more when the balance reached $25,000. Because of the power of compounding interest, it has now grown to over $90,000 and pays about $500 a month. The advantages to this plan are that there are no fees or commissions charged and the credit union makes no profit. This is a good example of the value of starting early. The bank or the credit union will be happy to show teachers how to apply for this plan and you don't have to talk to a salesman. Highly recommended, but may be hard to find.

Insurance sales people will usually recommend Tax Sheltered Annuities, or TSA's. The plans they usually recommend are either Fixed or Variable Annuities. After the teachers have paid into the plan for a number of years the insurance company will return a certain amount after a number of years. Although the return is usually quite low, these plans are quite safe. If the insurance company becomes bankrupt or goes out of business, most states have an insurance commission that will guarantee up to about $100,000 of the money invested. The biggest disadvantage to these plans is that most of them have high fees and sales commissions to be paid in addition to the profit that the insurance company is entitled to. Teachers should investigate how much they are losing if they do not invest directly by themselves. The amounts of money they lose by not doing it themselves, but instead use an insurance agent to set up their plan, can cost them hundreds of thousands of dollars. For some startling examples, see the page on Compounding . These kinds of plans definitely are not recommended.

One way to avoid the high cost of investing into an annuity is by using TIAA-CREF, a well established company that specializes in retirement plans for educators. Unfortunetely, K-12 teachers cannot invest directly with them into their 403(b) plans. TIAA-CREF can only accept teachers who roll over their investments from another 403(b) plan. For more information on how to do this, please go to The Best Plan.

There is a good article by a financial planner giving advice on how to get out of an expensive annuity at Annuities.

TSA money can also be invested directly into Mutual Funds by teachers without the need of an insurance salesman or an insurance company. Mutual Fund investments are probably the best investment for the long term. Because the stock market goes up and down, there could be a problem if the investor should need the money when the market is down, but over all 10 year periods since 1802, the stock market has never been less at the end than it was when it started. Since 1802, the stock market has returned 7.2% annually. In more recent times, from 1982 to 1997, it has returned 16.7%. There are, however, no government guarantees that these returns will continue. But as one fund manager has said, "A savings bank gives you a guarantee that it will pay four percent or 4½ percent. But it gives you another guarantee, too; it won't pay five percent. We give no guarantees, no floors, no ceilings."

Investing directly into mutual funds does require a little bit of time and a couple of phone calls but it will save a teacher hundreds of thousands of dollars over the life of their plan. A good rule of thumb for teachers to remember: If you have someone else set up a program for you, they will be taking money from you that you could keep for yourself. Over a period of time, the difference could be truly significant. A good mutual fund in a good plan is undoubtedly the best long-term investment for teachers using a 403(b) plan. The Do It Yourself approach will pay huge dividends at retirement time.

Go on to learn about automatic investing