Higher Ed Story: A Professor (and CFP®) Offers Savings Advice to Higher Ed Participants
by Inga Chira, Professor and CFP®
Some of us work in academia because we like teaching, others are here because they want to change the world or have summers off. We range from tenure-track professors to instructors and adjuncts and from highly paid administrators to not so highly paid ones. However, at the end of the day (or better said, our lives) we will all have to/want to retire. The earlier we start the process of thinking and planning for retirement, financially, the better off we will be. Here are a few things I believe are important to understand, be aware of, and focus on when it comes to higher education retirement.
1. Understand the retirement system at your school.
After getting very familiar with the benefits at 3 different universities/states for my own life and working with clients from about 20 different colleges, I know one thing: the retirement benefits vary widely. They vary between states, between schools, and even between you and your best friend who started working at the same school 5 years ago. You cannot carry prior knowledge into your new workplace. One of the worst things you can do is try to cut corners and ask your colleagues what to do about your retirement choices when they are not intimately familiar with the current retirement benefits or with your life plan.
Here is what I mean: in 2014, Oregon State (where I used to work at the time) changed their whole retirement system, which resulted in a new tier of benefits. One of the biggest choices employees needed to make upon hire was the one time irreversible decision of whether to opt into a defined benefit (pension) retirement plan or a defined contribution (employer funded) optional retirement plan. If you were hired before 2014 and planned to leave before tenure, it did not matter much which plan you chose. There is no need for details, let’s just say I spent many hours on this calculation. However, if you were hired in 2014, the situation changed. If you did not understand the system and or if you asked your buddy who was hired the year before and as a result made the suboptimal choice, you were looking at about $10k-$15k less in your account five years later. That’s a lot of money.
I understand that this is not an easy choice, especially for someone who is not familiar with the terminology and calculations but you can spend a few hours and try to figure it out. Or, if that is too much, you can always hire someone who for about $500 can do this analysis for you, run though all the possible scenarios and tell you which option makes more sense. That $500 could have gotten you a return of about $10,000 and that is not something you can find every day. In many cases, by the time my clients get to me, they already made a choice I cannot reverse. Lesson of the day: being proactive pays, research before you choose, and make sure the advice you are getting applies to you.
2. Understand your pension, if there is one.
Some states and schools are still offering a traditional defined benefits pension. It may be the only choice available or it may be a choice available to you along with other retirement options. You need to understand a few things about this pension. You need to know how it is calculated, when you can get it, how much you will get and what will you get (if anything) if you decide to leave at different points in your life (before tenure, immediately after tenure, in 10, 15, 20 years, etc.). Some people hang on to their pension job rather than taking a better paying job somewhere else because the pension is supposed to be a great benefit. But without understanding how it works, how do you know it is what you want or need? Vesting in the system and leaving immediately will not make you reach your savings goals. Staying in CALPERS for 30 years will make you very comfortable, especially if you move to a state other than California when you retire. The more informed you are about the pension benefits, the better financial decisions you can make, so please, find that 30 page pension brochure and figure out what’s going on with your pension.
3. Take the 403(b)/457/401(k) seriously.
I have observed that if there is a pension, many employees pretend like they are set and completely ignore the supplemental plans. But unless you did a calculation and know what to expect from the pension and how that number compares to your living needs X number of years down the road, you really don’t know if the pension is even enough. Here is a hint: It usually is not, many people will need to supplement it with other retirement sources.
Understanding the investment choices within those plans is even more important. I am currently working on a paper looking at the 403(b) accounts of professors at a large US school. What I see makes me depressed. Please don’t be the person who chose the JP Morgan large cap fund for 1.11% when the Vanguard fund that has the same investment strategy is available and costs 0.05%. That’s a huge difference over the next 20 or 30 years.
How else can we screw up out 403(b) investment choices? Here are 2 mistakes I see all the time. #1- do not bother at all; let the default option become your choice. This may not be the end of the world if your default option is decent but it is really sad when the default option is a money market account that returned exactly 0% over the last 5 years and is costing you 0.25% (I just worked with someone who was in that situation). #2-don’t take the time to build a good portfolio of retirement funds that actually make sense together, are somehow diversified, and are not a complete rip off. Remember that examples a few paragraphs back where a $500 fee could make you $10k? That was good but here, it gets even better. The difference between the JP Morgan small cap and the Vanguard small cap funds may result in an extra $640k in additional savings over your lifetime (I did my own calculation based on the fees, my age, my 403(b) contribution and an 8% average return). That’s a huge difference.
4. And please, just have a plan.
Sometimes, you need a plan even though you think you have no intention of leaving your job. Incorporating the possibility of leaving your job into your retirement projections, calculations, and choices will make you better off. Most higher education employees do not stay at their 1st job. Even if you plan on staying in your 1st job, things happen. I took my first tenure track job with the conviction I will be there until tenure. Two years later, I was gone due to family circumstances I could not predict, circumstances that had nothing to do with my job. Map out the different options, figure out how much your retirement would be under different scenarios, and make the most informed choice you can with the information you have available. Planning your life is probably financially superior to floating through life and hoping for the best.
Inga Chira, Ph.D., CFP®, teaches finance and financial planning at California State University, in Southern California. She has previously worked at Oregon State University, Florida Atlantic University, and Jacksonville University. When not teaching, Inga helps academics (and others) plan their financial lives through her financial planning firm Attainable Wealth. You can contact her at: inga(at)attainablewealthfp.com