Retiring in a Time of Economic Uncertainty

Stop ignoring those TIAA-CREF statements and take control of your retirement.
By Carole H. Murphy

About 25 percent of faculty working in the United States will reportedly consider retiring in the next five to seven years.1 As one of this 25 percent, I have been researching what I need to know to retire. What I found initially was a lot of misinformation. As my financial adviser told me, “Many media outlets and talk programs assume everyone’s situation is identical. The recommendations offered from such programs are often anecdotal. By this I mean that everyone needs a size 9 shoe regardless of whether it fits or not.”2 To complicate matters, the world has changed over the past year, causing those of us thinking about retirement to be very apprehensive. Still, through much research and careful evaluation—accompanied by some good advice—I developed a strategy that works for me and may help other faculty members.

The first thing I did was review my retirement and wealth-accumulation plans. The following were my major concerns:

  • Do I have enough money to retire?
  • Should I continue to invest? I don’t like the feeling of throwing
    good money after bad, and I had already lost too much in
    the market.
  • Do I have enough money to meet my needs if I retire now?
  • What should I do about other financial obligations? I’m being sandwiched between taking care of a parent and taking care of my children.
  • How do I address my debts?

Next I called my financial adviser. After I consulted him, I set out on my own to find out as much as I could to help me make informed decisions about retirement. Here is what I discovered.

Transition Planning

When you decide to retire, you need to plan for the next stage of your life. In addition to working with an investment and portfolio professional, as I did, you need to ask yourself and others questions about retirement goals. Do not, however, rely solely on information from colleagues. As my financial adviser notes, each retirement situation is unique, and your case may differ from that of others. You will definitely want to contact a representative of your retirement plan to receive guidance about what can and cannot be achieved toward your goals, especially in relation to social security. In addition, you will need to review your retirement savings thoroughly, including any 401(k), IRA, or Roth IRA savings plans you may have as well as any holdings of taxable accounts, such as stocks, bonds, CDs, mutual funds, and personal interest-bearing savings. Any current or previous pension plans and social security benefits should also be reviewed to determine their current and future value. Below I describe information I compiled from my financial services consultant, the Social Security Administration, the AARP, a university human resources officer, and representatives from the Texas state retirement system. I selected a specific state as an example because I wanted to describe an actual retirement system. State systems may, however, vary, and the information from Texas is meant as a general guideline.

Most retirees and baby boomers say that their number one concern is outliving their assets and incomes. People do not want to be short of income, especially during retirement, which can last twenty-five to thirty years. Research shows that few baby boomers—those born between 1946 and 1964—are covered by defined-benefit pension plans. Such plans provide guaranteed annual pensions based on a formula that typically includes salary and years of service. Most baby boomers preparing for retirement will therefore need to rely on their personal savings, investments, and income from any defined-contribution plans they may have. In defined-contribution plans, employers deposit a set dollar amount (usually based on a percentage of annual salary) into tax-deferred funds that generate retirement income. The need to depend on personal savings and investments makes planning difficult, since from month to month you do not know how much income you can count on. The recent downturn in the economy makes matters even more complicated.

A recent survey cited in the literature of my financial adviser reports that women and men differ in what they want from their retirement finances. Women value a “steady stream of income and guarantees of principal,” while men focus on “survivor benefits and an estate for heirs.” In addition, men want to hit a home run with their investments even though retirement may be approaching quickly.

An investment account with living-benefit features, such as the “guaranteed minimum accumulation benefit” or the “guaranteed minimum income benefit,” addresses both concerns. When you retire, the game changes from accumulation to preservation and income. You should talk with your financial adviser and your attorney about the following instruments and measures, which may help to secure your assets and protect your financial legacy for your children or heirs. Consider including them in your plan as appropriate:

  • A durable power of attorney. This document directs who handles your finances if you are unable to make decisions.
  • A well-constructed will that gives instructions and names an executor and a guardian (if you have minor children). A “living will” describes measures you want taken to prolong your life if necessary.
  • A health-care proxy to assign someone to make medical decisions for you if you become unable to do so yourself.
  • A living or “revocable” trust to help avoid probate.
  • An “incentive trust” to link an inheritance to a certain age or goal.
  • Retirement accounts, such as 401(k) and IRA assets, which can be passed on and kept tax-deferred to avoid the probate process.
  • Homes and life insurance policies, which can be big assets when considering net worth for estate-tax purposes.

Financial Services Consultant

Taking time now to discuss your retirement aspirations and plans can help you make better decisions for the future. Questions that my financial adviser recommends you ask yourself include the following:

  • When do you plan to stop working? In two-career households, will both partners stop working at the same time?
  • Do you expect to spend more or less money during retirement?
  • Do you envision traveling or spending more time at home?
  • Have you developed an investment plan to help support the retirement lifestyle you desire?

My adviser suggests that baby-boomer faculty consider retiring early, drawing retirement benefits, and consulting or taking another job. Doing so can increase your monthly cash flow and supplement income from investment accounts, which may have declined in recent years, while allowing you to continue to use your expertise and stay mentally active. It can also give you the opportunity to do something different with your life.

Faculty who prefer to retire older and not work after retirement will need to allow time for retirement plans to recover from recent investment declines. Those eligible for social security retirement benefits may want to elect not to receive them in order to qualify for delayed retirement credits. That can increase the benefit for the retired worker up to 8 percent for each year benefits are delayed.

My adviser refers to debt as the modern-day form of slavery, because the borrower is slave to the lender. It is important that you eliminate any debt that siphons off money from your accumulation of funds. Entering retirement debt free should be your goal.

Social Security Administration

There are two ways to obtain valuable resources about the programs of the Social Security Administration. You can visit the agency’s Web site at www.socialsecurity.gov or call 800-772-1213. I liked talking to a representative by telephone; I found her very helpful. She asked several questions that I had not thought about and corrected some misconceptions I had regarding when I could begin collecting my social security benefits.

Many people have misperceptions about the rules for continuing employment while receiving social security. A person can keep working and still receive social security retirement benefits. Your earnings in (and after) the month you reach your full retirement age will not affect your social security benefits. However, your benefits will be reduced if your earnings exceed certain limits. I recommend that you consult two excellent brochures, available free of cost. They explain issues such as beginning and delaying your benefits, achieving retirement security for surviving spouses, determining how working may affect your benefits, assessing income taxes on benefits, safeguarding your social security, boosting your retirement savings, and protecting you and your family in case of illness. What You Need to Know When You Get Retirement or Survivors Benefits is available from the Social Security Administration, and Social Security and Your Retirement is published by American Express Financial Advisors.

Other Resources

The AARP has a number of services available for faculty who are over age fifty-five. Visit the AARP’s Web site at www.aarp.org or contact the AARP Membership Center by mail at 3200 East Carson Street, Lakewood, CA 90712; by telephone at 800-424-3410; or by e-mail at member@aarp.org.

Joann Westbrook, the employee benefits officer at my institution, the University of Missouri, St. Louis, suggests that employees thinking about retirement consider the following points:

  • The earlier you can plan for your retirement, the better. Most of us worry about our financial situation, but that is only one factor we need to consider. Others include our health and psychological and legal matters.
  • If you want to maintain your current standard of living in retirement, you will need to receive 70 to 75 percent of your active employment income.
  • Do not wait until retirement to anticipate expenses. Keep in mind the emergencies that can occur.
  • While working, we are around people. If you do not have a life outside work, retirement can become very lonely, even depressing. You may need to broaden your contacts, perhaps through church or social clubs.
  • Statistics show that most married women will spend at least thirteen years as widows. The level of poverty is greatest among single retired women.

State Retirement Systems

The way different states manage the retirement systems for their public employees varies, and each state plan has unique characteristics. Some states, like Missouri and Texas, have more than one system that correlates to an employee’s service at a state or public college or university. You must consider whether the state in which you reside or have taxable income has a plan that offers favorable state income-tax or other benefits that are available only in that state’s plan. To obtain information about a state retirement system, you should contact your state retirement system directly. The earlier you can do this, the better.

Faculty who have worked in more than one state during their careers may be able to improve their benefits package by combining their total years of service into one state system. Often, states will allow former employees to return to the state, work for the equivalent of one year’s service, and then “buy back” retirement from the postsecondary institution where the employee has worked. This scenario can be accomplished by taking six months’ leave of absence or a sabbatical and applying the leave or sabbatical time toward the retirement plan of the state in which one eventually wishes to receive benefits.

Independent Plans

TIAA-CREF provides retirement plans at more than fifteen thousand colleges, universities, schools, research centers, medical organizations, and other nonprofit institutions. If you have one of those plans or another independent plan, you should find a representative in your area knowledgeable about retirement planning who can help you set up the best plan to meet your individual needs.

Retirement Calculators

Several programs on the Web can help you calculate your retirement. I personally found the College Savings Plan Calculator by the InCharge Education Foundation informative. Although it is designed specifically to assist with college savings, it can also give you an idea of where you are financially. It is available at www.mindyourfinances.com/calculators/college-savings.

Path Ahead

Americans are waking up to the reality that each of us is responsible for preparing for retirement. You can no longer rely on social security as a safety net.

We have all heard the investment axiom, “buy low, sell high.” Today’s environment is what buying low feels like. Few investors who are trying to do it themselves get it right. It isn’t fun and can be frightening.

At a time when many faculty members are reaching retirement age, I hope this article will help those of you who are considering retirement to avoid financial pitfalls, especially as you work to fill any gaps you may have between your dreams and your retirement. What you need to do now is sit back and dream about what you want in retirement and when you want to start enjoying it. Have fun exploring all the possibilities the next part of your life holds for you.

Footnotes

1. This statistic comes from “Indicators and Associated Intentions to Retire for Four-Year Institution Faculty,” a 2006 unpublished doctoral dissertation by D. A. Bain of the University of Missouri, St. Louis. Back to text

2. My adviser is Steven Colson of Executive Financial Services. He is a chartered financial consultant. The word “chartered” is important; it signifies that an analyst has met certain standards of experience, knowledge, and conduct as determined by the CFA (Chartered Financial Analyst) Institute. Back to text

Carole H. Murphy is professor in the Division of Educational Leadership and Policy Studies at the University of Missouri, St. Louis. Her e-mail address is carole@umsl.edu.

 


Comments

This article is very helpful but is missing one important piece of the puzzle, health care coverage. Given the current crisis in health care, having coverage has been a major concern for faculty planning to retire. For those waiting until they are Medicare eligible, there are still issues of supplemental coverage as well as dental and eye care not included in Medicare. It would be essential to include this in planning for retirement.
 
S. B.


On the important issue of health care in retirement, readers may be interested in my co-authored article entitled “Retirees at Risk: The Precarious Promise of Post-Employment Health Benefits,” which is available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1445583
 
This article examines the increasingly troubled state of employer-provided health benefits for retirees, focusing on the extensive litigation regarding the erosion and/or termination of these benefits. The article then turns to alternative approaches that retirees might consider, including continuation coverage from their former employer, individually obtained health insurance, and health savings accounts. Finding serious problems with each of these approaches, the article analyzes recent legislative proposals to extend Medicare to early retirees.
 
R.L.K.

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