Planning for the future ought to be high among young faculty?s priorities

By Bridget Murray
Monitor staff

Louis Penner, PhD, wishes he?d given more thought to retirement planning when he joined the psychology faculty at the University of South Florida (USF) in the early 1970s.

He signed onto the state retirement plan and forgot about it. Years later, as retirement drew closer, Penner took stock of his finances and regretted not saving more as a younger man. While his university offers faculty numerous ways to set aside tax-sheltered dollars for retirement, Penner didn?t fully consider these options?and take advantage of them?until late in his career.

Investing for retirement often ranks low among faculty priorities, particularly for younger faculty, says Penner. Like him, many faculty wake up to retirement planning?and the numerous investment opportunities their universities offer?late in the game. Penner warns against making that mistake.

'If you consider all your options and start saving early on, your golden years can be more comfortable, even start sooner,' says Penner. It?s never too late to investigate and shore up your present plan, he says.

Knowing the terrain

It?s best to start seriously saving at least 10 to 20 years before retiring, says Bruce Fretz, PhD, a retired psychology professor and former associate vice president of academic affairs at the University of Maryland (UMD). To retire comfortably, faculty need at least 65 percent to 75 percent of their current salary, many experts agree, though some retirement specialists peg that percentage as high as 70 percent to 90 percent.

And that means you can?t start building the necessary amount just five or six years before retirement, says Fretz, who has researched retirement issues for the federal government. Without planning ahead, you?ll likely keep working well into your senior years, he says. Making the right investment decision requires a thorough understanding of your investment options, he suggests. That begins with understanding the two mainstays of university retirement plans, of which faculty are required to pick one:

?Defined benefit plan?Through this option, the employer contributes to a state kitty that pays faculty when they retire. The plan is best for long-time faculty who earn high salaries. It bases professors? benefits on length of service and average salary during the last several years of employment. Faculty typically become vested in the plan?able to collect their portion with interest?after five to 10 years. However, if they move to another institution before being vested, they lose out on the benefit.

? Defined contribution plan?Under this plan, the faculty and employer pay into a faculty member?s chosen investment fund each month. The employee usually collects the investment return at age 60 or older. The plan is free of a vesting period. Less binding than the defined benefit plan, it offers portability: An employee can move between different universities and still keep his or her former employers? contributions. Perhaps the best known of this type of plan is TIAA-Cref. Others include Lincoln National Life, Aetna and the Variable Annuity Life Insurance Company (VALIC).

Picking a plan

New faculty who are deciding between a defined benefit and defined contribution plan should consider their career stage and likelihood of moving, says Emanuel Donchin, PhD, former chair of the psychology department at the University of Illinois, Urbana?Champaign.

Benefit plans offer security but aren?t friendly to young faculty on the move, he says. Contribution plans offer portability but involve some stock market risk. And for many faculty, portability is a big draw, according to a recent study (available on TIAA-Cref?s World Wide Web site at http://www.tiaa-cref.org/).

The 1997 study found that of 580 faculty at North Carolina (NC) State University, 393 are on contribution plans and 187 are on the state benefit plan. Economics and business management professor Robert Clark, PhD, and several of his NC State colleagues conducted the study. Most faculty who chose contribution plans are young. Many were previously enrolled in the plan at other universities.

Private schools usually offer contribution plans. And, realizing their attractiveness to the young and mobile, public institutions increasingly offer them in addition to a state benefit plan, says Eugene Rice, PhD, director of the Forum on Faculty Roles and Rewards at the American Association of Higher Education.

State universities also realize that locking faculty into a state plan makes it harder to bring in junior faculty at lower salaries. And that?s a drain on their budget, says Rice.

The University of Illinois and Ohio State University are among the latest public institutions to add contribution plans to their retirement offerings.

State plans have their benefits too, though, particularly for long-time faculty whose benefits grow with years of service. Case in point: Bruce Fretz chose the UMD state plan because he knew he?d be there his whole career. Plus UMD hired Fretz in the 1960s, so his plan includes a cost-of-living adjustment?an added bonus that was dropped from most state plans during the 1970s and 1980s. Having retired from UMD at age 55, Fretz lives comfortably in Florida, skis, travels frequently and serves as a member of APA?s Council of Representatives.

Seeking information

Retirement planning doesn?t stop at just choosing your main plan, says Clark at NC State. There?s the business of deciding how much money to put aside if you?re on a contribution plan. There?s also the option to save additional retirement money in other tax-sheltered investments, a choice that retirement officials highly recommend. Many institutions offer faculty additional investment opportunities that include mutual funds, individual retirement annuities and 403(b) and 401(k) plans.

The University of Florida, for example, offers a tax-sheltered annuity program through 14 different companies. (Penner has now researched and tapped the program.) Some universities even help faculty pay their children?s college tuition, which frees up more dollars for retirement.

With the exception of senior faculty, most faculty simply aren?t aware of all the retirement choices and how to find out about them, Clark says. He offers the following advice:

?Use your university?s benefits office?Most human resources and benefits divisions offer pamphlets and publications on retirement plans. Many universities also post their plans on the web.

? Visit retirement plans? web sites?The TIAA-Cref site, for example, offers profiles of its various funds, contact information for its offices, retirement studies and a dictionary of financial terminology.

? Call retirement representatives at your university or retirement plan?They can answer the questions that pamphlets and web sites can?t.

? Attend retirement seminars/workshops?Donchin is dismayed to see only people in their 50s walking out of retirement workshops at the University of Illinois. The workshops are meant for faculty of all ages.

? Consult your financial advisor?Ask your accountant or financial planner about your retirement finances.

The more information faculty have, the easier it is to decide about investments, says Donchin.

'And the people who make the most informed investment decisions put themselves in the best position for retirement,' says Donchin.

Further reading on saving for retirement

Check out these resources for further information:

? 'Retirement Security: Understanding and Planning Your Financial Future' by David M. Walker (John Wiley & Sons, 1996)

? 'Moneysense: A Commonsense Road to Financial Security and Early Retirement' by Patrick Bohan (Nova Kroshka Books, 1997)

? 'The Sun Still Shone: Professors Talk About Retirement' by Lorraine T. Dorfman (University of Iowa Press, 1997)

? A retirement section of the web site for the American Association of Retired Persons (AARP): http://www.aarp.org/programs/retire/home.html.