I am a money mentor, not a financial planner. While I can provide good, general information, your situation is specific to you. Always do your own research or speak with a fee-only financial planner about your personal circumstances.
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A Four-fifty What?
I’m a personal finance geek. I actually LOVE blogs and books and podcasts about budgeting and savings and planning for retirement. So I kind of freaked out when my sister asked if I’d ever heard of a 457 and I hadn’t. (She’s my little sister, and LOVES it when she knows more than I do – which of course, is quite rare! 😉 )
After looking into it, I realized that 1) it was a real thing, not a hoax, and 2) it could seriously change a teacher’s financial life.
So what is a 457(b)?
It’s a deferred-compensation plan. Yep. I know. That helps exactly not at all, doesn’t it? Ok, here’s the Cliff Notes version. You choose to have a portion of your money put aside before you ever see it. It comes out of your paycheck like taxes or insurance payments, and you just see a line item on your pay stub telling you that it got deducted. (Yeah, I know. So far, it sounds WAY less than enticing. But it gets SO much better.) Then it is put into an account for you, much like a retirement account. You can choose to take this account and draw from it whenever you leave that employer – here’s where it gets good – EVEN if you are not at retirement age.
Um, what’s the point?
So I imagine that you might be thinking, “Um, you want me to get excited about not getting my pay until years later? I could put it in a savings account of my own and at least have control of it. You’re not the brightest knife in the drawer, are you, Jill?”
But WAIT!!!!! This is important. They take this money out pre-tax and when you withdraw it, it will be taxed at your tax rate at that point. This means two very important things are happening. First, that money is going to grow tax-free until you need it. So you will be making money on what you would have otherwise already paid out in taxes. Sounding a little bit better? Second, when you withdraw it, it will be taxes at your current (at that point in time) tax rate, which could be significantly lower if you are no longer working.
So you say it can help me leave teaching?
So let’s say you want options.
Maybe you are ssssooooo close to retirement, but need a few hundred extra dollars a month to make it work.
Maybe you have already decided you don’t want to go back to teaching this fall, but you want a little extra cash cushion in case you don’t find a job right away.
Maybe you are thinking about having kids and you’d like to be able to take a couple of years off. Or you want to have another kid, but you don’t think you could afford the childcare for two (or more).
Maybe you’ve always wanted to start your own business and you’re thinking you might want a couple of years away from teaching to try that.
Or maybe you have always dreamed of just taking some time off and living overseas or traveling around the country in an RV while homeschooling your kids, (That idea absolutely makes my hair curl, but different strokes for different folks, you know?) or after the kids are gone to college (much less-terror inducing for me).
If the rest of your financial house is in order, a 457 could be a tool to get you to any of those dreams.
What a 457 allows you to do, is not collect your pay now, but collect it at any time in the future after you have left your current employer.
Show me the money
The 2022 limit is $20,500 per year, but people over 50 who have not maxed out their contributions can put in an extra $6500/year, for a total of $27,000/year. I realize that most of us can’t spare $27,000 a year (or even $20,500), but remember, this money is pre-tax. That means it’s still going to make a dent in your paycheck. However, the dent will be about 20-25% less that what’s going into your account. Depending on your particular tax situation, you could deposit $1000 into your account, and only see your take-home pay drop by $800.
And you don’t have to put the entire amount it. You could put $4000/year in. Over several years, that could add up to enough to allow you to take some time away from teaching or even to retire earlier than you thought.
What’s the catch?
This is the big one. You have to be a government employee (like a public school teacher, firefighter, or police officer) AND your employer has to offer the plan. Not all of them do. However, if your spouse is government employee, the 457 could apply to them, too.
Also, the employee has to actually leave the job at which they have the 457 account. It can’t be a leave of absence.
But here is the big issue, and why I recommend you do your own research or talk to a professional. Whatever money you put into a 457b and take out is money that isn’t available for retirement later. Given the state of teaching at the moment and how many teachers’ mental health is declining, that might not be your primary concern. But whatever choice you make, I want you to have thought through both short and long-term issues.
How the 457 (b) worked for us
When we realized we were really going to go all in on this crazy adventure and move to Norway, we started re-evaluating our finances. One part of that was for me to go back to work full time and stash my salary in savings. We opened a savings account with Huntington Bank (which honestly was a great bank to work with) and my salary was direct deposited in it to remove all temptation. We didn’t even have a check book because we didn’t want to be tempted to use that money without a really valid reason. It worked fine, but of course all of that money was taxed before it went into the account.
When we found out about the 457, I started investigating it hard core. I was all about it. However, my employer didn’t offer it as an option, even though it was one of the largest school districts in the state. However, my husband worked for the state government and upon some further checking, we found out he was eligible. It was quite a pain to get set up, and it took us several months. However, because we were living off of only one salary anyway, once he got the paperwork done, we chucked about 80% of his pay in the 457 and just lived off of my salary instead. That allowed us to put the maximum amount away before we moved. By my figures, that gave us an extra $6K or more than we would have had if we continued with the original set up.
How it could work for you
Let’s say you are wanting to leave teaching for a few years – or forever. You have dreams of moving overseas or starting a small business or staying home with the kids. Saving money in a 457 account could help you in a couple of ways.
First, it allows you to save more since you are saving pre-tax dollars. Unlike a 401K or the retirement account, you can receive the money at any time after leaving your employer. (Remember, you have to actually resign, not just take a leave of absence.)
Second, if you do leave teaching, your income will most likely go down. So when you pay taxes on it, you will pay a lower rate. Third, you get to decide when to withdraw the money. For example, if you start a small business, and you start making enough income that you don’t need to withdraw it, you don’t have to. It can continue to grow tax-free until you DO need it.
This is ABSOLUTE BASIC information on a subject I had never really been familiar with. I have checked all this information with my accountant for accuracy, but I am NOT an accountant, and I could have missed something or messed something up. So – disclaimer alert – definitely consult your own accountant or tax professional before you jump into a 457.
If you were trying to swim across a lake with an anchor, and you weren’t sure you’d make it, what’s the first thing you would do? Drop the anchor, right?
Yet in personal finance, we often carry around a huge anchor for not just years, but decades. Sometimes we don’t even realize we’re carrying it because everyone else in our lives has always carried anchors, too. What’s that anchor?
Debt.
Yes. For many people, debt is an anchor that will absolutely prevent them from getting to where they want to go financially. Why? Because we spend a ton of money making payments. Think of every payment you have now or have had in your life. How much money would you have to work with every month if you didn’t have those payments to make?
“OK, Jill,” you say. “Sounds great. But if I knew how to do it, I probably would have already done it.” Yes, it’s easy to say, but not easy to do. But then again, teaching isn’t easy either, is it? And you’re KILLIN’ that! So I know you can do things that are tough. I know you’re not a quitter. And I know this is worth the effort.
Again, these are not my ideas, they were formulated by Dave Ramsey. But this is my personal take on the system he used.
Kill debt with emotion, not logic
In getting rid of debt, like most things in life, your emotion matters more than logic. So we’re going to put your debts in an order that will give you some quick wins and really allow you to see some fast progress. Make a list of your debts – credit cards, car loans, student loans, medical bills, loans from family and friends, payday loans, EVERYTHING except the house. Include the name of the debt, the total amount, and the minimum payment you have to make each month. Then put them in order from the smallest amount owed to the largest amount owed.
Dumping the Debt – smallest to largest
Once you have your $1000 emergency fund (for more on saving $1000, click here) and your list of debts, you continue paying minimum payments on all of your debts. But stop EVERYTHING else. Stop the money that goes into your retirement. Stop buying new clothes. And stop eating out. Get rid of everything that is not absolutely essential.
At the end of the pay period or month, you scrape up all that extra money you have and put it toward the first (smallest) debt on the list. With any luck, you’ll knock this one out right away. When you’ve paid off your first debt, you take that monthly payment and you put it toward the second debt on your list, along with ANY extra money you can find. (Check the couch cushions one more time. Raid the cup holder in your car!) Now you are making a bigger payment on that second debt each month, and it should disappear pretty quickly. You repeat this process until you have worked your way through every debt.
That “until” could be a big one. Like 2-3 years big. Two to three years that might feel like 2-3 decades. But what would it mean to you to have NO payments? NO car payment. NO credit card bills. NO student loan. What would your life look like if you paid your mortgage, utilities bills and were DONE? I’ll bet for most of us, it would be a lot different. A lot more joyful. A lot less stressful.
Would it be worth it to sacrifice – REALLY sacrifice for a while to give yourself options? To give yourself freedom?
Again, for those in the back – It’s emotion, not logic!
If you are a math geek, you are saying to yourself, “Lowest payoff to highest? NO WAY! If you put it in the order of lowest interest to highest,you’re going to save all that money you’re paying on high interest loans and you’ll pay it off so much faster.” Well, that’s a great theory, but it’s kind of like all those theories your education professors taught you that just flat don’t work in actual life.
Remember, paying off debt is not about the numbers. It is not about the logic. If it were, no one would ever get into debt. It’s totally against all logic to spend money you don’t have to buy things you almost never actually need! This is about emotion. And whatever extra interest you pay will be more than offset by your intensity as you start paying off debt and really feeling like this thing could actually happen.
In this case, the interest isn’t your problem. The principle is. Bad spending habits and spending more than you earn are. The interest is just a symptom.
So I’m going to ask you one more time, would it be worth it to sacrifice – REALLY sacrifice for a while to give yourself the option to continue teaching or do something else, like stay home with the kids or start a business. To give yourself the peace of mind that comes with knowing you have money in the bank to pay all of your bills? To sleep soundly without worrying that one small emergency will bring your entire financial house of cards tumbling down around you? If so, get that $1000 saved, and get your list made, and get on your way.
In the last post, I gave you an overview of Dave Ramsey’s 7 baby steps to financial success. Over the next several weeks, I’m going to break each one of those steps in more detail. Remember, this is not my stuff, it’s Dave’s. This is just my take on it. Step 1 is save $1000, but it should really be divided into step 1A and step 1B.
Step 1 A: STOP using credit cards
Stop borrowing money at all. If you have debt, it is because at some point in your life, you were spending more than you were earning, and that led to trouble. It might not be your fault, but the result is the same. And we’ve got to deal with it. Maybe you are still doing it. If so, nothing else can help you. Before you do anything else, you’ve got to stop spending money you don’t have.
There are a lot of ways to do this. Most people can get their spending in line by doing a budget. Yeah, it’s about as fun as a pap smear (well, not quite THAT bad), but it works. You’d be amazed by the number of people who swear that doing a budget is as good as getting a raise. They suddenly have to pay attention to where their money is going.
Online apps
And there are tools that make it a lot more appealing. Ramsey solutions developed “Every Dollar” and online budgeting app. I’m old, so I’ve always just done mine in excel, but I’ve tried Every Dollar and it’s super user-friendly. There are a lot of other ones out there, but Every Dollar is the only one I have personally tried. If you’d like to know other options, check out this list.
The ugly truth
With all that said, I have never been successful doing a budget. I hate it, and I generally end up ignoring it. However actually sitting down and figuring out guidelines is essential. So even if you make it and then ignore it (like I do) I still recommed giving it a go. The big thing is that you need to know how much you’re spending and keep it under control. If you cut up your credit cards and don’t have a realistid idea of how much money you need at the end of the pay period for food and gas, you’re going to be in a world of hurt.
Step 1B: Put $1000 in savings as fast as you possibly can
DO NOT TOUCH that money unless there is a serious emergency. And no, a great sale isn’t an emergency! If you already have $1000 or more saved up for emergencies, you can go ahead a skip on down a bit. If not, this is important stuff. Now, if you don’t have even $1000 you could use for an emergency, DO NOT beat yourself up. According to a CNBC article from January, 2018, you are not alone. Only 39% of families could cover a $1000 emergency. So this is normal in America. But normal isn’t always fun. If worrying about money keeps you up at night, this is an indispensible step in your journey.
Why does Dave recommend saving before putting a single dollar (beyond minimum payments) toward debt? Because if you want to get your finances in real order, this ain’t no sprint. It’s a marathon. And if you don’t warm up and stretch out before a marathon, you gonna hurt something. Well, this is that warm up to help you keep from getting messed up on the way.
But I want to pay off debt, why delay?
Nothing is going to make it harder to actually get out of debt than, well, life. You know how it works, right? You’re chugging along toward a goal and then something comes along and stops your progress. You have to take 3 steps back and it’s so discouraging that you never get that momentum back.
Here’s how it works with money: You swear to yourself you are going to stop using the credit cards and pay the off. “NO. MORE. DEBT.” You say to yourself. And everything is just fine until (dramatic music – dun, dun, dun!) – a child gets sick and there’s an unexpected trip to urgent care. OR the water heater goes out. OR gas prices spike and you’re paying twice as much for gas as you thought you were. OR grandma dies and you have travel expenses for her funeral. OR _________________ (fill in any of a godzillion possible emergencies here).
You’re paying off debt and every penny is going to extra payments. There is nothing in the bank, so you whip out the credit card. STOP RIGHT THERE. I thought you weren’t going to use the credit card any more. I thought you said “NO. MORE. DEBT.”
Well, $1000 in the bank will take care of about 85% of those emergencies. (That’s a statistic I totally made up, but it’s based on personal experience.)
How fast do you think you could save $1000? Could you sell something? Have a yard sale? Do a little tutoring or teach summer school? Totally give up eating out until you have $1K in the bank?
This might seem impossible, but it creates the base for absolutely everything that happens to you financially. This is the reason. Our goal is to get you out of debt, right? If you have absolutely no savings you’re going to keep going further into debt every time an emergency happens. And THAT is going to do a huge number on your belief that you can actually do this.
So just save the $1K and be done with it. Then move on to step 2: Eliminating ALL debt.
