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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.

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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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Roboticus Aquarius
Roboticus Aquarius
5 months ago

A pension is a wonderful thing to have, but for those of us without that opportunity (or who’ve lost it along the way), it’s all about saving early.

Olin
Olin
5 months ago

Not all of us are fortunate to have picked the right employer to work for. My company 401K match was in their stock, I had no choice. Could not move it to other funds offered in the 401K. Eventually, the company filed bankruptcy and I lost all the company matched funds.

There is no guarantee of a pension 30+ years down the road, unless you work for the government, and if you don’t, you better learn how to invest for your own future.

kristinehayes2014
kristinehayes2014
5 months ago
Reply to  Olin

That’s a very unfortunate situation you were put in. In my 30 years of employment I’ve only worked for three different institutions. One was a government entity and two were private employers. Two of those three employers (including the government job) offered excellent retirement benefits. The one job I had that didn’t provide exceptional benefits I stayed at for a little over a year. I’ve always prioritized benefits over wages. I think it’s helped me in two ways. First, I’ve always lived off of a modest salary which means I know I can live, happily, without a lot of money. Second, I’ve accumulated a relatively large sum of retirement benefits.

That said, the pension plan I’m covered under is no longer offered to current employees (and hasn’t been since the late 90’s). The retirement and benefits package that I have at my current employer is also no longer offered (and hasn’t been since 2006). I feel incredibly fortunate that I got vested into both systems when I did. The option to retire early wouldn’t even be on my plate if I hadn’t been employed where I was, when I was, early in my working life.

Gene Simmons
Gene Simmons
5 months ago

In my 20s, I also worked in government. I invested my meager savings in small cap mutual funds and real estate. I did well enough to pay for graduate school. It was pure dumb luck!

When I started in academia in the late 1990s, I worried about the stock market bubble and invested everything in a money market fund. I remember the folks at the benefits fair thinking I was crazy. Two years later, following the dotbomb fiasco, they though it was genius. In 2002, I invested my accumulated funds in TIAA Traditional and continued to allocate 100% to the guaranteed fund.

For the next 10 years, it seemed the smartest move one could make. I still have an investment guide from 2012 and the TIAA Traditional returns beat almost every fund over the prior 10 years by quite a lot. However, the last eight years have reversed all that and it is now lagging all but the most conservative investments. Hindsight is 20/20, but I have no regrets. Sleeping well at night and spending my time on worthwhile endeavors is worth more than worrying about my portfolio.

At this point, I am debt free and the kids are in the process of becoming independent. Between TIAA and Social Security, we should have enough to provide a comfortable retirement. I can also now afford to invest aggressively with a very strong base to fall back on. I know – The way I did it was completely backwards from what most people recommend, which is to invest aggressively when young and become more conservative as you get older. But I also learned something else, saving is more important than how you invest.

Last edited 5 months ago by Gene Simmons
kristinehayes2014
kristinehayes2014
5 months ago
Reply to  Gene Simmons

Thanks for sharing your story! I love reading about people’s financial success stories. Stories like yours keep me inspired.

As I mentioned in my article, I used to think maybe I was crazy for keeping a portion of my retirement funds in the TIAA Traditional account. As I’ve gotten older, I’ve learned to appreciate what those funds have given me: a feeling of security.

And I couldn’t agree with you more about the major lesson you learned: saving is more important than how you invest. The one regret I have is not saving more when I was younger. I relied far too heavily on believing the contributions my employer made to my retirement accounts would be adequate to get me through retirement.

Thanks again for sharing your story.

parkslope
parkslope
5 months ago

As recently retired academics, my wife and I have a substantial amount of our retirement nest egg in TIAA funds. Like you, we are conservative and for most of our careers we had 50% in equities and 50% in TIAA’s traditional annuity. We did increase our equity allocations to 60% in the 10 years prior to retirement. Also like you, we appreciate the fact that it has a guaranteed return of 3%, but has usually earned more and, provides a payout bonus for long-term investors. Unlike the notorious variable annuties, the TIAA annuity has no fees and varies only in annual crediting rates and options for retirement payouts. For the time being we are simply taking RMD payouts but may eventually switch to monthly payouts.

Last edited 5 months ago by parkslope
kristinehayes2014
kristinehayes2014
5 months ago
Reply to  parkslope

It’s great to hear from someone who also has money in the TIAA Traditional account. I haven’t met many people who do. The closer I get to retirement, the more I realize how I appreciate having access to ‘fixed’ investments like my pension and TIAA Traditional account. I realized that ever since I started working, my ‘budgeting’ process has been quite simple. Every month, I pay my fixed expenses out of my salary and then live off whatever remains. I see getting monthly pension and annuity benefits as allowing me to continue to live much this same way in retirement.

R Quinn
R Quinn
5 months ago

If you had stayed with that first employer, you would be sitting pretty with a pension. I managed pension plans for nearly fifty years and even generous state plans never came close to 17% But with a 8% return I’m guessing we are not talking about a traditional pension plan in any case.

kristinehayes2014
kristinehayes2014
5 months ago
Reply to  R Quinn

“Overly generous” is a term often applied to the state pension plan I’m a part of. A lot of the “Tier 1” retirees end up getting a monthly retirement benefit that’s actually higher than the wages they were earning while working. Needless to say, “Tier 1” went away shortly after I became vested as the state figured out it wasn’t a sustainable plan.

Guest
Guest
5 months ago

Thanks very much for sharing your story. When I graduated from college (almost 40 yrs ago) my first job was with a financial services company. I was fortunate that young to work with bright investment folks who ingrained in me the understanding of the power of compounding. Of course I understood the general concept of it but it quickly clicked with me and from then on I plowed all the $$ I could into various equity funds. By starting that early I’ve been very blessed. We will fund our kids Roth IRAs annually (if eligible) into equity funds when they finish college.

kristinehayes2014
kristinehayes2014
5 months ago
Reply to  Guest

It sounds like you’ve done very well financially, thanks to some early encouragement by your co-workers. I wish more employers would share the importance of investing early and often with their employees. I see too many people today–many of whom are getting close to retirement age–who have no understanding of what investments they have, or how much money they might need, in retirement.

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