The Prudent Professor

Planning and Saving for a Worry-Free Retirement from Academe

Edwin M. Bridges, Brian D. Bridges

• Publisher: Stylus Publishing
• Year: 2012
• ISBN:
  9781579225506
• Topic: Education
• Subtopic: Higher Education

This is a guide for anyone in the academy – faculty member, administrator or professional staff – at whatever point she or he may be along the career path. Whether you are a newly-minted Ph.D. landing your first job, at mid career, or even already retired and concerned about how long your money might last, Ed Bridges offers you a straightforward, easy-to-grasp, and structured way to think about money, learn how it works, understand the priorities for your stage in life, determine your objectives, and develop a personal plan most likely to achieve them.Why a book specifically for those who work in higher education? The chances are that your retirement funds are mostly invested in TIAA-CREF funds, and that the plans created by the different institutions where you have worked, or will work, impose sometimes conflicting limitations of how you can manage your retirement money. This is potentially complex terrain with which many professional financial advisors are unfamiliar. This book provides ample guidance for you to manage your retirement funds, but if you do prefer to seek professional advice, it sets out the criteria for choosing a reliable advisor, and may even be a book from which your advisor can benefit if he or she is not fully conversant with TIAA-CREF's offerings, and the quirks of academic retirement plans.What makes this book unique is that Ed Bridges shares with you his self-education about the risky business of investing and retirement planning. As he writes, "In schooling myself, I adopted the mind-set that I had used as a social scientist for the past forty-six years. I distinguished between fact and opinion and scrutinized the evidence behind every author's claims; moreover, I searched for research that might corroborate or refute these claims. In the process, I learned a great deal about the route I should have taken to retirement from the time I accepted my first academic appointment to the time I submitted my intention to retire. Join me as I relive my long journey so that you may avoid my wrong turns and succeed in reaching your ultimate destination, a worry-free retirement, despite the risks and uncertainties you will surely face when you retire."The book includes simple questionnaires and worksheets to help you determine where you stand, and think through your options.

PART ONE

Saving for Retirement

This section contains 10 chapters. When you finish reading these chapters, you will have an understanding of how to create a savings plan, set a savings goal, choose your investment vehicles, build an investment portfolio, and choose the types of investment vehicles that warrant inclusion in your portfolio. This section should be of special interest to early and mid-career professionals working in higher education institutions, as well as those nearing or in retirement who lack knowledge of investing.

Subsequent sections of the book foreshadow the consequential decisions, perils, and opportunities facing those contemplating retirement. When I began my career in higher education, my own retirement planning would have benefited greatly from knowing what lay ahead. Hopefully, by recounting my own past, I will enable professionals at any stage of their career to chart a brighter future for themselves and their families.

CHAPTER ONE

Getting There

A LOOK IN THE REARVIEW MIRROR

I see a winding road with hills and valleys behind me.

During most of my working years I was a disciplined saver for retirement. To be sure, I confined my savings to setting aside part of my salary in the 403(b) plan provided by my employers. Today that’s called putting your retirement savings on autopilot. After a few years on automatic pilot, I ratcheted up my savings 1% a year until I reached 12%. Vanguard refers to this as a SMarT program, Save More Tomorrow. No one told me to do this; it seemed like the right thing to do in view of my tendencies to spend nearly everything I earned. Financial experts advise you to create a budget and live by it. Realizing that was easier said than done, I decided to protect myself and my family against my worst urges—the urge to spend most of what I earned and sometimes more. Autopilot savings and my own SMarT program literally and figuratively saved the day.

My employers (Washington University in St. Louis, The University of Chicago, and Stanford University) also contributed a healthy proportion of my income to my 403(b) account. For 33 years they contributed 10% of my annual income. Combined with what I had been contributing, the total amount of money that went into my retirement account equaled 16%–22% of my income. I later learned that financial experts recommend 15% annually if you intend to maintain a standard of living similar to the one you enjoyed when you worked.

Although my employers and I set aside money each year for my retirement, I, like most ordinary citizens, hadn’t projected how much money I might need later and whether I was saving enough to meet the needs of me and my family. Moreover, the only things I knew about investing were the distinctions between a stock and a bond and between a load fund that charges a sales fee and one that doesn’t, a no-load fund. As you will discover, that led me to make mistakes, and some were whoppers. But before getting to these valleys in my winding road to retirement, I’d like to begin on a more positive note—the hills.

The Hills

Without a doubt the most important contributors to my final destination were the aforementioned autopilot savings plan, my SMarT program, and the generous contributions from my employers, as well as my participation at a relatively early age (30 years). Even if you know as little about investing as I did, these four factors will stand you in good stead when you come face to face with retirement. With only a limited knowledge of investing, you can build a fat nest egg due to the magic of compounding.

Parenthetically, if you are fortunate enough to start investing during an extended bear market, your nest egg will grow even more. T. Rowe Price conducted a recent study that vividly demonstrates the powerful effect of starting in a bear market versus a bull market (Mont, 2009). Investors who began investing in 1929 and 1970 (bear markets) had accumulated nearly twice as much in their retirement accounts than those who started building their nest eggs during strong bull markets (1950 and 1979). Bear markets enable investors to purchase more shares at lower prices.

In addition to the four factors I mentioned earlier, I also benefited from the investment options that my employers provided. Every one of them used Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), a nonprofit provider. TIAA-CREF offered low-cost investments, which meant that most of the money in my retirement account was working for me. At the time, I didn’t realize the importance of investment costs and could easily have wound up in investments that fattened the retirement accounts of the fund managers rather than mine.

TIAA-CREF benefited me in another way. Its retirement plan at the time consisted of only two investment options, so I wasn’t paralyzed by a huge array of good and bad choices that are increasingly typical. Moreover, I decided to invest half of my contributions in each fund (actually they were low-cost annuities, something I hadn’t noticed at the time). Without realizing it, I had developed a simple, low-cost portfolio, the type of portfolio which John Bogle, the founder of Vanguard and champion of the small investor, recommends. When spinning my preretirement roulette wheel, the odds certainly were with me.

At the end of each year TIAA-CREF mailed me a report showing how much my employer and I had contributed that year, what the balance was in each of my two funds, and how much I would receive in retirement if I continued my current contributions until age 65. Frankly, I just glanced at the report and filed it away. Occasionally, I would take note of the fact that there was much more in my stock fund than my fixed-income fund. For some inexplicable reason, I decided to equalize the amount in each fund when the amount in the stock fund was twice the amount in the bond fund. After I retired, I learned that my actions resembled rebalancing, a technique that limits your risk and increases your returns.

During the 33 years that I contributed to TIAA-CREF, I estimate that my annual internal rate of return was a little over 9%. Moreover, the return per unit of risk was quite high because the volatility of my portfolio was low to moderate due to half of it being invested in a stable-value fund like TIAA Traditional.

Before turning to the valleys, two other factors warrant mentioning. My wife and I financed the education of our four children. We were assisted by Stanford University’s tuition benefit program—half of Stanford’s tuition could be used to offset the cost of any accredited university’s tuition. To cover the rest of the tuition, as well as the room and board, we borrowed the money. I later learned that borrowing made more sense than reducing retirement savings in order to set aside money for college (Fahlund, 2006). If you cut back on saving for retirement, you sacrifice the magic of compounding. Besides, you can borrow to finance college, but you can’t borrow to finance your retirement.

Finally, our current home that we bought in 1974 with a 100% loan from Stanford University has figured prominently in financing our retirement and providing a cushion. Our 95-year-old home could star in the movie The Money Pit. Over the years we have spent substantial sums of money to remodel our historic home and the two rental cottages on our property. We considered these expenditures as investments that would provide income during retirement. They have.

The Valleys

Like so many young investors, I didn’t understand the magic of compounding and didn’t start saving for retirement until age 30. My wife and I graduated from college at the age of 20. If we had begun saving 10% of our income that year (roughly $600), continued saving that amount for only nine more years, and earned 9% until I retired at age 65, our retirement account would be nearly $186,000 greater. Starting a retirement savings program early really pays dividends. Too bad I didn’t know that at the time.

My retirement portfolio also suffered from my ignorance of investing and conservative investment philosophy. If I had created an investment portfolio using a simple rule of thumb like 100 – your age in stocks, at age 30 I would have invested 70% in stocks, rather than 50%. Over time the more aggressive investment strategy would have made a substantial difference in how much we accumulated in our 403(b) account. I don’t have the heart to calculate what might have been; it would simply be too painful.

Even though TIAA-CREF later increased its investment options, I didn’t bother to examine any of these in depth. In retrospect, I regret not looking more closely at my options. One of the added options was Social Choice, a balanced fund consisting of 60% in stocks and 40% in bonds. Fifteen years before I retired, Stanford University offered a new fund family, Vanguard. Faced with so many investment options, I didn’t bother to examine it and missed the opportunity to invest in an even better balanced fund, Vanguard Wellington, which I now own. Sometimes I think hindsight is a curse, but if others can benefit from my mistakes, my hindsight becomes your blessing.

For the “fixed” income fund in my simple portfolio, I chose TIAA Traditional, a stable-value fund as I recently discovered, instead of a bond fund. Although TIAA Traditional is an excellent fund with a guaranteed principal and interest rate plus dividends, it is subject to a number of restrictions. I invested too heavily in this fund, and it limited my ability to create a less conservative portfolio reflecting my newly acquired knowledge of investing and retirement planning.

I also regret using about 5% of my retirement portfolio to invest in narrow and risky sectors of the market—gold and technology. Yes, I was occasionally guilty of chasing the hot performers and lost money when I could have been making money following my Steady Eddy strategy. I learned firsthand the importance of having a simple investment strategy and following it even when the greed goblins whisper otherwise.

In last place on my list of regrets is my failure to establish a Simplified Employee Pension Individual Retirement Account (SEP IRA) for my self-employment income. I could have saved 10% of my consulting income over time and never missed it. Now I miss it, and it’s too late.

Conclusion

Although I reached my destination better off than most, I fully realize that my fate could have been much worse or much better. Through ignorance and inertia, I failed to capitalize fully on the opportunities that came my way. Hopefully, my look into the rearview mirror will spare you some of the pain I experienced when you look into yours.

CHAPTER TWO

How Much Do I Need to Save?

At least one-third of the faculty members in higher education do not have a good idea of how much they need to accumulate for retirement. Many college and university faculty members underestimate the amount of replacement income they will need in retirement.

—Yablonski (2006)

A sound retirement savings program should focus on adequate savings rates and early participation. These features are, if anything, more important and less risky than a program that encourages participants to chase investment returns.

—Hammond & Richardson (2009)

At some point during my late forties I asked myself, “How much money would I like to have in my retirement account when I retire?” After a long pause, I muttered something like, “One million dollars sounds about right.” Not once did I consider whether this sum represented a realistic goal or whether it would prove to be an adequate amount for me and my wife to maintain our current standard of living. Later while talking to colleagues and friends, I learned that they had not devoted much time to setting a realistic goal either. It appears that we are not alone; less than half of the workers surveyed by the Employee Benefit Research Institute had tried to calculate how much they needed to save for retirement (Ruffennach, 2009). They, like me, guessed how much they might need.

Fortunately, we have entered the information age, and we now have access to the Internet. To set a realistic savings goal for retirement, we can use the “Determine how much to save” calculator on the Vanguard website. This useful calculator takes into account your age, current retirement account balance, and monthly savings to project your balance at age 65 and monthly withdrawal amount. The projection includes the underlying assumptions and a tutorial about the value of starting early to save. In addition, the website features a chart with a suggested lifetime savings rate for different income levels ($25,000–$150,000) and ages (27–47). The assumptions built into this calculator are worth reading.

To illustrate how this calculator might be used, I created two different scenarios based on my situation at age 30, the first year I contributed to my retirement account.

Current age: 30

Current salary: $10,500

Current account balance: $0

Monthly savings: $131 (15% of salary, including the 10% contributed by my employer)

The calculator projected my balance at age 65 in today’s dollars to be $119,699 and a monthly withdrawal rate of $399, roughly 45.8% of my current salary. Retirement experts recommend a replacement rate of 75%–80%. If I assume that Social Security will replace 30% of my income, I move to the low end of the recommended range.

Not fully satisfied with the outcome, I decided to increase my monthly savings rate to $175 (20% of salary, including the 10% contributed by my employer). When I ran the new projection, I learned that my account increased to $159,903 in today’s dollars and my monthly withdrawal increased to $533. My revised monthly withdrawal rate climbed to 61% of my current salary which, when combined with Social Security, brought my replacement rate to 91%, a more satisfactory outcome. The Social Security Administration annually provides you with your projected income in retirement; you can combine this information with the results of the Vanguard calculator to obtain a somewhat more accurate estimate of your future situation.

I fou...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication
• CONTENTS
• Preface
• Introduction: A Preview of Retirement
• Part One: Saving for Retirement
• Part Two: Preretirement Considerations
• Part Three: Creating a Pension Plan
• Part Four: Remaining Solvent
• Part Five: Beyond Retirement
• Appendixes
• Investing Terms
• References
• About the Authors
• Index
• Footnote