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A Firm Foundation

Kristine Hayes

I WAS 24 YEARS OLD when I started working fulltime. My salary at that first job wasn’t great—I was making about $16,000 a year—but the retirement benefits were stellar. As a government employee, I was entitled to enroll in the state’s pension plan. Every month, the government contributed an amount equal to some 17% of my salary. The money was guaranteed to never earn less than 8% interest a year. Most years, the rate of return was much higher.

After a few years, I left that job to take a higher-paying position, but not before I became fully vested in the pension. Even as a 20-something-year-old, with no basic understanding of investment principles, I knew I’d likely never find another retirement asset as valuable as that pension plan.

Just after I turned 30, I was hired as a departmental manager at a small private college—a job I’ve been at for 23 years now. Similar to my first job, the salary I’m paid isn’t overly generous, but the retirement benefits are.

What does differ between the two jobs is the control I have over my retirement accounts. With my pension plan, there are no decisions for me to make regarding how my money is invested. When it comes time to withdraw the money, the only choice I’ll have is whether to take the pension as a lump sum or as lifetime monthly income. By contrast, with my current employer’s plan, I’m in total control. I decide how much of my own money to invest. I decide how the money my employer contributes is invested. And, ultimately, I’ll need to decide how best to draw the funds out.

It probably isn’t surprising that, when I first began working at the college, I chose to invest my retirement contributions conservatively. Faced with an overwhelming number of investment options and having no basic understanding of mutual funds, I picked an account with the phrase “guaranteed return” in the description. On paper, it appeared to be the account most closely resembling the pension plan from my first job.

After working at the college for a few years, I met with an advisor from TIAA, the financial firm that manages the college’s retirement plans. The advisor suggested that, at age 34, I was invested far too conservatively. While I wasn’t keen on risking my money in the stock market, we eventually arrived at a compromise. I’d invest my future contributions in a few stock mutual funds, but leave the money I’d already accumulated in the guaranteed account.

Over the next 20 years, I gained more knowledge about investing and retirement accounts. As I learned more, I questioned my decision to keep money in a low-yield guaranteed account. I became more concerned when I figured out that account was, in essence, designed to function as an annuity. Most everything I’d read about annuities was negative. I worried I’d made a huge mistake by choosing to invest in a product some people seemed to view as the equivalent of throwing money away.

These days, I fret less about my decision.

While I’ve learned to be more risk tolerant over the past three decades, my primary mindset is still one which favors safety and stability. During the Great Recession, I was comforted that my guaranteed account kept growing, while my other accounts plunged in value. Wild stock market fluctuations are easier for me to stomach knowing I can rely on one account to slowly and steadily keep increasing.

I’ve also learned more details about my guaranteed-earnings account. I’ll have a number of choices when drawing my money out, including the option of taking interest-only payments before eventually annuitizing the funds. Having the flexibility to take interest payments during the first few years of my retirement should allow me to delay tapping my pension plan and other investment accounts. If I eventually choose to switch to monthly payouts, my annuity—in conjunction with Social Security and my pension—should provide me with enough money to cover my fixed living expenses well into old age.

I’ve also discovered that being a long-term investor in the guaranteed account comes with an added bonus: The rates of return credited to the account are structured in a way that long-term investors receive higher rates of return, and higher monthly payouts, compared to investors who make all of their contributions to the account just prior to drawing their money out.

All that said, I would no doubt have done far better over the past 23 years if I’d invested heavily in stock funds from the beginning, rather than putting so much into the guaranteed account. But without that guaranteed account, I’m not sure I would’ve ever had the nerve to put any money into stocks.

Kristine Hayes is a departmental manager at a small, liberal arts college. She enjoys competitive pistol shooting and hanging out with her husband and their dogs. Check out Kristine’s earlier articles.

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