The Biggest Scam for Teachers: Bitcoin, Gamestop or the 403(b)?
Critical Investing Advice for Teachers
THE INVISIBLE SCAM
Financially scamming people is revolting. It’s even worse when its being done to teachers who are often paid poorly already.
So are Bitcoin ($BTC) and GameStop ($GME) good investments for teachers or ways to scam them from their hard earned money? I promise to answer this later in the article but first teachers need to know about the scam in plain sight that happens right in front of them.
That scam is that most of the 403(b) plan wealth management services offered to teachers. You may think calling it a scam is too strong of a work and maybe you are right. After all, they aren’t engaging in fraud but they are selling a very expensive product to teachers who are often uninformed about the nuances of investing.
These plans are incredibly profitable for the firms that sell them and you can tell just by observing the well-dressed, sleazy salesmen that come to your school to pawn them off on you.
Did you know that some of these salesmen get recurring commissions for as long as the teachers are enrolled in their 403(b) plans?
Keep in mind that these fine folks are not fiduciaries, which means they are not required by law to act in your best interests. Rather, because they are acting in their own best interests to acquire a commission, they want to lock you into the most expensive plans possible.
The scam is the obscenely high fees they charge which can be as high as two percent. That’s two percent compounding for the lifetime of your account. Consider that interest rates are so low that, in comparison, these companies are making windfall profits. Index funds, which I will talk about below, have a track record of better performance over time and fees as low as 0.015%! That means the 403(b) plans can be over 100 times more expensive!
DISCLAIMER: I cannot speak for every plan available to teachers from around the country but I can say that every single one that I have seen is too expensive especially when compared with the options I will suggest below.
Don’t take my word for it. John Oliver did an excellent segment on these high fee retirement plans that you should definitely check out for a more in depth look.
Teachers should definitely invest as much as they can. God knows how little most teachers are paid. Pensions, to the extent that teachers have them, are getting shakier and are under attack by politicians. Saving up your own nest egg for retirement is vital to have some sort of cushion but you can’t let some wealth management fund get a huge $200,000 chunk of your retirement money.
Unless your employer is matching your contributions to a 403(b) there is very little reason to enroll in one. The only reason you could do so is if you have maxed out all the other alternatives for tax sheltered accounts. I know few teachers who have that kind of money so for most of us its just a bad deal.
What you should do is max out an IRA retirement account. You can open one up with several institutions but its probably wiser to use one of the big three because they have the cheap funds that I will discuss below. They are Vanguard, Fidelity or Schwab. The maximum contribution amount every year is $6,000. If you have more money to invest then you can open an HSA or 529 plan to save money for a child’s education. Only after you have exhausted these options should you look into a 403(b).
There are two types of IRAs, the traditional and the ROTH which you can read up on and decide which is right for you, though if you want to save money on taxes like the 403(b) then you should go with the traditional.
BUT I DONT KNOW HOW TO INVEST
Neither do I!
That’s the beauty of all this. With a little set up you can have your investments managed for less than 1% of the cost of a 403(b) plan. That’s more than a 99% discount. The simplest way to do this is to invest in an index fund.
Warren Buffet, one of the richest men in the world, won a million dollar bet with a wealth manager that index funds would outperform actively managed funds over ten years.
That expensive two percent fee isn’t even worth it!
Each of the brokers I recommended above have dozens of funds that you can choose to automatically invest in monthly. The most popular are funds that track the the S&P 500 and the Nasdaq. Once you set it up, you will automatically be dollar cost averaging which greatly limits your risk and maximizes your returns over 25 to 30 years until your retire.
You don’t have to actively manage your money and you don’t have to pay and arm and a leg to have someone do it for you. For as little as an hour of work setting this up you can save over $200,000 over the course of 30 years of investing!
BUT I ALREADY HAVE A 403(b)
No problem! Once you have chosen a broker you can search for “[BROKERS NAME] 403(b) to IRA rollover” and they will have instructions on how to transfer the funds to your new account without paying any taxes or penalties.
But if you don’t want to do that then just open up an IRA and stop contributing to the 403(b).
If you are finding this article useful consider checking out my “How to Escape Teaching” e-book with over sixty pages of advice and research on how to break into another more satisfying career.
WHAT ABOUT GAMESTOP AND BITCOIN
As I promised, let me talk about these two because there’s a lot of buzz around them.
As for GameStop, the first thing to note is that this is unlikely to be a long term investment and that it is more of a trade. What’s going on now is a little complicated and very risky. However, what is life without a little risk? Investing no more than two percent of your investment portfolio in risky speculative stuff like $GME seems like a prudent way to go. Yes, if you YOLO all your money you could be rich but you could more than likely become poor fast. That’s not prudent.
If you set up an IRA with one of the big three I mentioned, then you can make another account with the same firm for trading more short term stocks like GameStop. The biggest benefit is that all your investments are in one place.
As for Bitcoin I have always been skeptical of it as a highly volatile asset whose value is based on essentially nothing but buyer sentiment. Recently, however, there has been a lot of institutional adoption and many of those who now own Bitcoin are big banks, hedge funds, asset managers and companies like Square and Microstrategy. There are also easier ways to buy bitcoin from apps like Coinbase to even Paypal.
Despite how volatile Bitcoin can be I have decided to accumulate up to five percent of my portfolio in cryptocurrency and keep it for several years. If it really gets going then great. If not, I (hopefully) will not have lost much.
If you have any questions or if there’s another topic you would like to me write about please let me know with a comment below.
DISCLAIMER: I am not affiliated with any of the companies listed above and I was not paid by any person or company to promote or sell anything. The above is not financial advice and only for information purposes. Do your our research and get professional advice from a fiduciary. If you are not sure the person you are dealing with is one, then ask them point blank. It is illegal to lie about this.