College professors require extensive training and often begin their career in their 30s.1 This means saving for retirement is typically delayed until then. They enjoy a unique professional feature called tenure, which provides job security after an (internal and external) evaluation of their scholarship and other academic contributions. Tenure gives them the freedom to engage in research, teaching and service to promote discoveries, curiosity and education. However, getting tenure is not an easy achievement and pre-tenure comes with many financial challenges. Special considerations must be given to help college professors at all stages navigate their complex financial life so they can focus on their families and scholarly work.
Emergency Funds and Tenure Consideration
Emergency funds can look different, depending on whether a professor has tenure or not. Pre-tenured professors should set aside a larger emergency fund in case things do not go as expected. Academic job searching is cyclical and may take a few years for an opening of a new tenure-track position. Upon reaching tenure status, professors should shift heavily toward saving more for retirement and other goals.
Confusing Retirement Plan Options
Colleges and universities typically offer 403(b), 457(b) and/or a state pension plan. Decisions on pension or non-pension plans are often irreversible. For non-pension plans such as 403(b) and 457(b), there is often a generous employer contribution that can be 10% to 15% of a professor’s salary. Some offer Roth 403(b) options that can be very beneficial during early savings years when they are in lower tax brackets.
Adding to the complexity is the option to choose from multiple custodians such as TIAA, Fidelity, Vanguard and Voya. Professors are often unsure of investment options, fees and proper asset allocation to ensure they are taking on appropriate risks based on their risk tolerance and goals. Consultants from these firms can help with initial asset allocation. However, rebalancing is not automatically provided, which often leads to a “set it and forget it, and hope for the best” mentality.
These retirement accounts often become one of the largest assets for college professors. Since comprehensive financial planning is rarely provided, it is extremely important for college professors to work with an independent financial advisor to assess their risk tolerance, get rebalancing advice and plan for financial goals. A financial advisor can also provide education and help with making decisions on withdrawal strategies when it is time to retire.
Diverse and Unique Income Streams
Typically, professors are paid based on a nine-month appointment. This provides opportunities to earn extra income through any of the following:
- Summer salary from grants
- Summer teaching
- Book deals
- Honorarium for speaking engagements
- External businesses
Tenured professors holding administrative roles likely receive additional compensation for their leadership and service. With diverse income streams that can be irregular and unpredictable, professors can treat these opportunities as bonuses. The key areas your financial advisor needs to understand include cash flow planning, tax impacts and identifying savings and investment strategies for these unique income streams to grow.
Health, Dental and Vision Insurance
Many institutions offer affordable medical, dental and vision insurance. Health Savings Account and Flexible Spending Account options are also commonly offered. Professors should work with their Human Resources representative to understand these options. For example, some offer a generous match toward a Health Savings Account, which can be a great way to save for qualified medical expenses during retirement. A Health Savings Account is the only triple-tax advantaged account: Contributions are tax-deductible, earnings grow tax-free and withdrawals are tax-free if used toward qualified medical expenses.
Group Life Insurance
Affordable life insurance is generally available for college professors. However, portability can be an issue. For professors with families who may change institutions at some point, it may be recommended that they purchase a private term-life insurance policy that they can take with them. For those with poor health history, group life insurance can be a good way to be insured since medical history is not required. The amount of life insurance may vary based on their spouse’s employment and any pension benefit their spouse might expect to receive under survivor annuity options.
Insurance for Long-Term Care
Professors in their 50s should begin to plan for long-term care needs. Whether through insurance for long-term care, health savings accounts, or self-funding, advance planning is crucial. Insurance premiums for long-term care tend to be lower for those in their 50s than at 70s and can be more expensive for women. The challenge for many professors is the lack of awareness of long-term care needs as well as benefits offered at their institution. Some institutions offer insurance for long-term care as a voluntary benefit and some offer hybrid life insurance with long-term care. Planning for future long-term care is one of the best ways to achieve peace of mind and protect assets for future generations.
College Tuition Perks and College Savings Strategies
Sending children to college is an expensive goal. Many higher education institutions used to offer generous benefits such as free tuition or discounted tuition. Today, these perks are either reduced or have been discontinued. Some professors may work for a college or university that offers such perks and did not save for their children to attend college. Years later, they might be recruited to an institution where such benefits are not available.
The opposite can also happen where professors may have saved toward college tuition with a 529 college savings account and the new institution now offers tuition benefits. With the potential penalty for non-education expense withdrawals, a decision would have to be made on what to do with the 529 account. The SECURE 2.0 Act of 2022 provides new opportunities for those who find that they have overfunded 529 accounts.
With generous retirement contributions, many likely end up with healthy pre-tax retirement balances in their 403(b) and/or 457(b) accounts. At retirement, professors must take Required Minimum Distributions (RMDs) and pay ordinary income tax on the withdrawal. The larger the account balances, the larger the RMD, and the larger the tax lability will be. These large distributions will also increase Medicare premiums. A popular recommendation is to consider Roth conversion to diffuse tax impact and keep down Medicare premiums. The challenge is for professors who have worked at the same institution for many decades, a Roth conversion is not possible while they are still employed. Those who work until their 70s or later may forego Roth conversion strategies since their income may remain high right up until their RMDs start.
As mentioned earlier, professors in lower tax brackets, especially at the start of their career, should consider contributing to a Roth IRA and a Roth 403(b) if such options are available to them. Investing in a brokerage account is an excellent way to take advantage of lower capital gain rates. Long-term tax planning is complex and requires the delicate balance of multiple factors. Working with a financial advisor early on should ensure proper tax planning to maximize long-term, tax-efficient returns of investments.
Pre-Retirement Planning Consideration
Professors often stay in the workforce longer than many other professionals.2 It is crucial to understand how Medicare, Social Security benefits, life insurance, RMDs and insurance for long-term care can impact their retirement. Institutions may offer phased retirement benefits — understanding how they fit into the larger retirement plan is crucial.
For those investing in a TIAA Traditional annuity plan, it is important to explore whether this annuity is a prudent option. A financial advisor can run projections to see whether there is enough money to last through retirement and help construct a vision of how and where the professor may want to retire.
Higher education welcomes many international scholars. These professors may wish to retire in their home country or other countries where they can continue to perform research during their emeritus tenure. Cross-border retirement planning requires extremely complex strategies for healthcare planning, tax-planning, estate planning and discussions regarding lifestyle changes.
A Financial Plan for College Professors Should Be Designed for Their Unique Career Path
A career path for college professors is unique in many ways and financial decisions can be complex.
Consider the Following:
Different Rules Apply on How Much to Save: General advice given to professionals in other fields regarding early saving and investing during graduate school and postdoctoral training is often unrealistic because of the late career start and competing goals.
Where to Live: Locations of the institution may impact whether one can buy a house or not. Some universities offer housing subsidies, partial down payment, or competitive mortgage rates, which are aimed to attract candidates to otherwise expensive locations. College professors living in university housing will find themselves needing a new home upon retirement.
Student Loans: Student loans placed on hold during graduate school often resume when other goals compete, such as purchasing a home, starting a family, building an emergency fund and paying off credit card debt.
Career Balancing Act: Having a comprehensive financial plan will allow professors to prioritize their scholarship and family.
Professors should seek to work with independent fiduciary financial advisors who have experience with higher education benefits. The advisor should have knowledge of the nuances related to the field of academia and be capable of effectively communicating advice and recommendations meant specifically for college professors.
1 Jasper McChesney and Jacqueline Bichsel, “The Aging of Tenure-Track Faculty in Higher Education: Implications for Success and Diversity” (Research Report). CUPA-HR, January 2020. Available from https://www.cupahr.org/surveys/research-briefs/