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I BEGAN MY CAREER at a small startup biotech company, only to realize the place had too much office politics, plus not enough credit was given for new discoveries. That was at odds with what I wanted, which was to be a research scientist focused on the basic principles underlying diseases.
Fortunately, I was offered a tenure-track academic position at a large medical school in Houston. I never looked back. Indeed, I consider myself one of the fortunate few who woke early each and every day to pursue their life’s passion.
Amid this career switch, a quirk of fate led to a fortuitous financial commitment. The university was part of the Texas educational system. Texas had—and still has—some unique and arcane rules. For instance, it remains against the law to carry wire cutters, thanks to a mid-19th century law aimed at reducing cattle rustling.
Some of these unique laws also extend to retirement savings within a state-funded organization. When I sat down with human resources during my first week at the new job, I was told I had to commit to a retirement pathway and I needed to make that decision before I got my first paycheck. The pathway chosen was irrevocable.
I’d never previously given retirement a second thought.
While the starting salaries for faculty were low, the school’s benefits were substantial. The default retirement choice was automatic enrollment in a program where 6.65% of my base salary was automatically shunted to TIAA-CREF, a leading manager of teacher retirement funds. Alternatively, I could opt out and instead fund a self-directed 403(b) that included investments from numerous different financial firms.
TIAA-CREF embraced a magic formula that was dependent on years of service, but where you could potentially receive some 80% of your final salary. Retirement benefits also included health care at the regular employee subsidized rate. Basically, the TIAA-CREF option I was offered was an annuity with golden bells and whistles.
Nearly 90% of incoming faculty took the TIAA-CREF option. The school made it quick and easy to enroll.
Meanwhile, the self-directed plan was presented as the poor stepchild. The plan also had the 6.65% required pretax investment. The school would kick in an additional 8.5% to combat market uncertainty. This represented an immediate investment gain equal to approximately 125%. The self-directed plan also included the same benefits package for post-retirement health care.
I found the mandatory investment and employer contribution appealing. The catch with the self-directed plan was that it held enormous market risk. But, hey, it was my dream job. What’s a little risk when you enjoy what you do?
I did a quick back-of-the-envelope calculation. Throw the savings into a portfolio with a 90% stock-10% bond asset allocation. Assume a 25-year career with 3% average annual salary growth. Factor in a conservative 7% annual Dow Jones Industrial Average increase. Take the final savings and apply a 4% withdrawal rate upon retirement.
I truly thought my brain would explode. My quick estimate produced only 65% of salary at retirement, well below the 80% offered by the TIAA-CREF option, plus there were tons of risks to consider. Increases in salary weren’t guaranteed, percent from my employer could change at the whim of politicians, and market performance is never certain. And who knows if I could even survive in the academic world for 25 years?
I now understood why most people chose the TIAA-CREF option. But when it came time to sign on the dotted line, I still chose the self-directed plan. It was the second-best financial decision I’ve ever made. In case you’re wondering, my best financial decision was to marry—and stay married to—someone with money values compatible with mine.
For me, the deciding factor was that the TIAA-CREF option essentially represented an annuity, and an annuity meant that there was no pot of gold to pass to my heirs. On top of that, the annuity was limited if I didn’t meet the school’s magic formula for years of service. The 403(b), on the other hand, was something that was tangible as a legacy. While the pot might not be as full of gold at the end of the rainbow, it would still have my name engraved on the container.
At the time, I didn’t know enough to pick sectors or specific asset classes, so I simply invested in a large-cap value stock fund that nearly mimicked the broad market. I kept investing in this manner through thick and thin. Indeed, I vividly remember the 2008-09 meltdown, when friends bailed out of stocks, and into bonds and cash. I had read that someone with a long time horizon should just sit tight. I convinced myself that my contributions were purchasing shares at fire-sale prices. Admittedly, it took way more convincing on some days than others.
You know what they say: Time in the market beats timing the market. When my salary increased, my savings also automatically increased. It wasn’t sexy, and at times it wasn’t pretty. I lost lots of sleep some years, although in hindsight it also allowed me to define my risk tolerance. Yes, I did alter fund allocations along the way, mostly because the university would periodically change the lineup of investment options. At every change, I tried to lower fund expense ratios, although unfortunately management fees never dropped below 1%.
I just retired at age 62, which is relatively young for an academic. My friends ask me how I could possibly retire early, especially after a career in academia. I could say that I got lucky with a generally robust stock market. But instead, I tell them that life’s outcomes are an accumulation of making the right choices at the right time. Luck and consistency pair well together. You just have to stick to the plan.
Jeffrey K. Actor, PhD, was a professor at a major medical school in Houston for more than 25 years, serving as an academic researcher with interests in how immune responses function to fight pathogenic diseases. Jeff’s retirement goals are to write short science fiction stories, volunteer in the community and spend time in his garden. Check out his earlier articles.
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A variation on the efficient market hypothesis might be that no insurance company will sell a policy or annuity contract for less than it takes to guarantee a profit. Of course, from time to time they end up being wrong, as life changes, and then they try to get out of those policies and contracts, as has happened with long term care policies over the last 30 years.
For this reason, choosing to manage something yourself, including risk, when you can pays off more often than not.
I would also add that 1% management fees (sometimes undisclosed) in a 401k, section 529, etc. is actually on the good side, reflecting that Jeff was in one of the biggest and best retirement plans in the country. Check out these management fees! People don’t talk about it much, but that doesn’t make it less true. Of course, when you leave your employer, you can usually roll your 401k into a no fee IRA and eliminate these fees going forward, a great reason for considering this.
Steve, Great comments. And, yes. The first thing I did was roll over the funds into a self-directed Vanguard IRA. Rebalanced it too!
The answer looks simple.
“The school would kick in an additional 8.5%”
This is free money!
But then you also got lucky. The stock market has done great in our lifetimes, especially since the 2008 dip.
Indeed, luck was my friend!
In case further information would help, here is my TIAA use case:
I was grateful in my teaching career to have access to TIAA-CREF (renamed in 2016 just TIAA). TIAA’s expense ratios were among the lowest in the industry. We were offered a 403(b) and eventually also a Roth 403(b), only with TIAA.
We could contribute to its annuity (TIAA Traditional) or to its mutual fund investments (the former CREF), or to a combination. Regardless of what we chose, the school provided a more than 1:1 match for our mandated 5% contribution, and we could in addition make up to the available maximum of unmatched supplemental contributions. Wanting more flexible withdrawal options, I invested nothing in the annuity, only in various CREF funds.
Upon retirement in 2021, beginning the decumulation phase, I could have annuitized with TIAA some or all of the balance. I chose instead to roll the funds over to Vanguard: the 403(b) to a traditional IRA, and the Roth 403(b) to the Roth IRA I had opened many years before at Vanguard. Compared to TIAA, Vanguard has not only lower fees but also specific investment choices that better match the asset classes I want.
To provide some guaranteed income in addition to Social Security, instead of an annuity with TIAA I chose to purchase two types of annuities with other companies: a QLAC (qualified longevity annuity contract, i.e., a deferred annuity, using part of my Vanguard tIRA) and a SPIA (single premium immediate annuity, using cash). With those along with portfolio withdrawals, I’ve been happy so far with all the decisions.
Great comment. It seems like different policies lead to different choices, with each person needing to decide what is best in their particular case. I’m glad to hear it worked out for you!
I would opt for the 403b as I would not trust any insurance company and surely the fees are substantial. I would opt for total control of my investment choices and leave the money to heirs instead of any annuity. No one trusts insurance companies; why should you?
While I cannot vouch one way or another about trusting insurance companies, your comment about using the path that reduces fees is a certainly a valid point.
Thanks for your story, Jeffrey.
I faced a similar dilemma with my first academic paycheck: sign up for the state retirement system or opt instead for a TIAA-CREF 403b plan. The choice was irrevocable, our HR rep did not understand the T-CREF plan, and I did not know the meaning of “vesting”. I chose the 403b, knowing that I might not stay at the job for long.
In retrospect, the state plan would have been superior though less portable. Still, I had several excellent investment choices with T-CREF and (had I annuitized) earned enough from it to more than replace my salary at retirement three decades later.
Once into my new job, I asked the HR rep when I would receive T-CREF statements. That would happen, I learned, upon clearing the two year vesting period. In reality, T-CREF had no vesting and my funds were incorrectly (and I’d like to think, inadvertently) going into the account of another person in a different state. Unscrambling that was difficult and I’ve always wondered what possibly the other person could have been thinking about receiving two years of extra contributions.
Good comments. Looking at this from a different perspective, I’ve read that individuals with guaranteed incomes, such as those received regularly from an annuity, tend to be happier about spending their funds. But, when younger, that aspect simply doesn’t enter into the calculations to determine which type of plan to pick.
Thanks for the interesting article Jeffrey. So many of us start our careers at a tender age and have to make choices on retirement savings that we aren’t ready to make. When I got into management I made sure we met with all our new hires and explained the retirement and 401k programs, investment options, and value of time in the market. Some of the new grads were very knowledgeable, but many were not. I’m impressed you figured this out at the start.
I also know very smart academics who just assumed the TIAA option was the best. They are now retired with annuities, but many worked well into their mid to late 60s, some by choice but others by necessity. The difference between these plans and commercial 401k style plans is interesting and perplexing.
Rick, The initial offerings to us were complex, and it likely was easier for most to chose the plan that was most easily explained by the HR personnel. In hindsight, I was lucky to dig a little deeper to see whar I was getting into.
I think it is important to note that TIAA-CREF offers a variety of retirement plans that are developed in conjunction with organizational benefit managers. The TIAA plans at the three academic organizations I worked at differed from each other (primarily in CREF fund choices and fund fees) but yours is the first I have heard of that only allowed employees to contribute to the TIAA annuity plan. In fact, CREF stands for College Retirement Equities Fund. All three of the insitutions I worked at allowed employees total freedom in allocating contributions between the TIAA annuity and CREF equity and bond funds.
It is also worth noting that TIAA traditional annuity offers retirees a variety of options that range from annuitizing all of one’s money over a period as short as 10 years to only taking annual RMDs which maximizes the amount one is likely to leave to beneficiaries.
As I have written previously my father had a TIAA-CREF account, and when he died my sister who was the executor had significant difficulties getting the balance(?) transferred to a mutual fund company. If I remember right most companies were hesitant to deal with his money, but I don’t know why. My sister finally transferred the money to Fidelity.
Thanks. Points well taken!
I have to say that for a young guy who hadn’t yet even thought about retirement you did a pretty thorough analysis of your choices. Your story brought to mind a tax client of mine. In the early 60’s he got a job at an engineering company. Shortly after starting the company offered the employees the choice of $10k in either cash or company stock. Most everyone took the cash, my client took the stock. The company was very successful, my client retired a rich man. The choices we make when young often ripple through our entire life.
Dan – Yes. The choices ripple throughout our lives. Whether it be financial choices, or any other of life’s decisions we make.