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Retirement planning: the easy way

Retirement. A time to retreat from the troubles of the world to a life of rest and relaxation. Right? Well, not necessarily.


 While today’s retirees are living longer, more active lives than their predecessors, many are experiencing financial difficulty. Findings of a December 1995 study, conducted by the Employee Benefit Research Institute, show that although most working adults believe their lifestyles will improve with retirement, retirees are finding that their standard of living has actually declined.


All of this — plus uncertainty over whether Social Security will be able to make good its promises — have meant that financial experts urge everyone to begin planning their retirement almost as soon as they begin working, with the centerpiece of that planning being pension accounts.


 For most college and university employees — faculty, administrators and support staff — the most common choice they, face regarding employer-sponsored pension plans is whether to choose a defined benefit or a defined contribution plan. The choice they make depends on such disparate factors as whether they plan on staying at their institution throughout their careers and how much they are willing to see their pensions fluctuate with the stock market.


 While the majority of private colleges and universities offer defined contribution plans, most state institutions (and public institutions in the District of Columbia) offer defined benefit plans. Many state schools also invite employees to participate in Optional Retirement Plans (ORP) on a voluntary basis. Though these programs feature no employer contribution, they are an opportunity to engage in additional tax-exempt investment programs. Presently, Hawaii, South Dakota, Wisconsin, Missouri and Ohio are the only states where ORPs are not available to state university employees.


 Defined Benefit Mans


 With defined benefit plans, the employer promises to pay the employee a fixed amount of money, in monthly increments, once the worker retires. Typically, the monthly benefit check is calculated using a formula that considers the employee’s annual salary, years of service, and retirement age. Defined benefit plans generally require no employee contribution, though some institutions permit workers to augment the employer’s contribution. In most situations, the worker’s only obligation is to complete and return an enrollment card. The employer then invests the pension fund in stocks, bonds and mutual funds which they expect to grow over the years.


 Regardless of whether employees contribute to the defined benefit fund or not, the employer retains full control over how the funds are invested. If these investments go bad, it is the employer’s responsibility to pay employees what they were promised. If for some reason the employer is unable to pay, the employee is paid by the Pension Benefit Guaranty Corporation, a federally funded insurance program.


 Participants in defined benefit plans are usually eligible to receive benefits only after completing a specified vesting period (five years of service, for example), the term of which varies from employer to employer. Defined benefit plans provide a meaningful retirement benefit for longterm employees, according to Kyle Brown, a consultant with the Wyatt Consultants, a national firm that advises employers in the design of employee benefit plans. “When it comes to providing sufficient, sustainable retirement income, nothing does that like a defined benefit plan,” he says.


 For the short-term employee, however, defined benefit plans are less attractive. For instance, a professor with four different employers could conceivably participate in four separate pension plans and, upon retirement, would receive four separate pension checks. However, if she failed to meet the vesting requirements at each of her jobs, she might receive nothing.


 Perhaps recognizing the differing trends among higher-education employees, some institutions, like Georgetown University, require administrative staff participate in a separate defined benefit plan, but offer a defined contribution plan for faculty members. “For people who might not be able to afford (a retirement plan), the defined benefit plan enables them to enjoy a retirement benefit,” says Terry Watt, Georgetown’s benefits coordinator. He adds that some people are nervous about having to make investment decisions. “(With a defined benefit plan), in essence there are no investment choices to be made.” While participation in the Georgetown defined benefit plan is automatic for non-academic employees, they may participate in the university’s ORP programs on a voluntary basis.


 Defined Contribution Plans


 Defined contribution plans are a more flexible and customized form of pension plan and, by law, require no vesting period. Among educational and research institutions, the most common form of defined contribution plan is the 403(b). Similar in structure to the 401(k), available to many private sector workers, the 403(b) is exclusive to college, university, hospital, research and other qualified nonprofit institutions.


 With a defined contribution plan, the employer commits to making an annual contribution to the employee’s retirement account — the amount of which is based on a percentage of the worker’s salary. Most defined contribution plans encourage employee contributions by offering an employer match. At Spelman College, for example, employees who elect to contribute 2 percent of their salary to the defined contribution fund are matched by a 4 percent contribution made by the college. Those electing a 5 percent contribution are matched by a 6 percent contribution from Spelman. Even those who make no personal contribution get a 3 percent contribution from the college.


 By law, the maximum annual employee contribution to defined contribution accounts is $9,500. The annual combined employer/employee contribution may not exceed $30,000. Employees may increase or decrease the size of their personal contributions on an annual basis. Defined contribution plans allow each employee to select his or her own combination of investments from among an array of mutual funds, securities, fixed-interest and/or annuity funds. So individuals may design an investment portfolio according to their ability to tolerate risk and aimed at achieving their financial goals. Ultimately, the account’s size at maturity will depend upon how much was contributed over the years as well as how the investments perform.


 While it is possible to design an investment portfolio that has a modest degree of risk, in general the chances of suffering significant financial losses with a 403(b) are low.


 â€śIt is rare to find a 403(b) that has an aggressive investment option,” says Brown. “These are usually medium- to low-risk investments with medium- to low- returns.” Since 403(b) funds are deposited directly by the employer, the temptation to use the money for other purposes is eliminated. In cases of dire financial emergency individuals may take out 403(b) funds, but stiff early withdrawal penalties are designed to discourage this practice. As an alternative, some plans allow investors to borrow against the balance of their retirement accounts. Unlike traditional defined benefit plans, 403(b) accounts and all other defined contribution accounts are portable, a feature that has contributed to their popularity among college and university faculty members.


 â€śDefined contribution works well for folks who have three or four different stops along the way,” says David Shunk, vice president of Pension and Annuity Services at Teachers Insurance Annuity Association-College Retirement Equities Fund (TIAA/CREF), the nation’s largest 403(b) carrier, with more than 5,800 participating institutions and 1.8 million enrollees.


 A Guide to Customizing Your Pension Plan While the national trend is toward employee-control led retirement planning, many employees still don’t know how or when to begin planning. if you are already enrolled in a pension plan, you’re ahead of the game, but you need to make sure that the plan you’re in will sufficiently meet your future needs.


 First, assess how much annual income you’ll need to sustain the lifestyle you’re accustomed to. Financial counselors, accountants, and your employee benefits coordinator should be able to help you make this calculation. There are also brochures and free software products on the market to help you make this calculation. On average, persons retiring today will need between 60 to 80 percent of their preretirement income to maintain the same standard of living during retirement.


 Once you reach a figure, compare this with what you expect to receive from your pension plan and other retirement income sources. if there is a deficit, you’ll need to make adjustments to your pension contribution schedule. If You’re enrolled in a defined benefit plan, find out whether you can add to your employer’s contribution. If not, ask about participating in an ORP offered by your institution.


 If you’re already enrolled in a defined contribution plan, take a look at the performance of your investments. Talk to your plan counselor and find out if there is a way to rearrange the investments to get a higher yield. Most plans allow adjustments at any time. Be aware, however, that too much manipulation could erode your long-term growth potential. Also, as your salary grows, revisit your personal contribution and consider increasing the percentage. The difference in your paycheck made be nominal, but the long-term impact on your defined contribution account could be significant.


 Remember, the money you save now will make it easier for you to golf, fish, travel or relax once you. retire. Even a small monthly contribution can make a significant difference in the long term.



Household Asset Types – 1993




                           Number of    Interest         Other


                           Households   Earning Assets   Interest


                           (thousand)   at Financial     Earning


                                        Institutions      Assets




ALL                          96,468       71.1%           8.6%






    White                    82,190       74.6            9.6


    Black                    11,248       45.5            1.8


    Hispanic                  7,403       50.7            2.1








    No High School Dip.      21,025       52.7            3.0


    High School Diploma      30,637       68.4            5.5


    College (1-3 years)      22,398       75.7            8.0


    College (4+ years)       22,408       87.4           18.8




                             Regular      Stocks        Equity in


                            Checking     & Mutual         Motor


                            Account      Fund Shares    Vehicles




ALL                           45.9%       20.9%          10.8%






    White                     48.2        23.0           11.8


    Black                     29.6         6.2            3.3


    Hispanic                  33.1         6.1            6.1








    No High School Dip.       36.4         6.9            5.5


    High School Diploma       47.5        15.9           10.1


    College (1-3 years)       50.6        22.4           11.6


    College (4+ years)        47.9        39.3           16.2




                            Equity in    Equity in     Rental


                             Motor        Own          Property


                            Vehicles      Home         Equity




ALL                          85.7%       64.3%          8.4%






    White                    88.7        67.3           8.9


    Black                    64.5        45.0           4.3


    Hispanic                 74.4        41.0           5.4








    No High School Dip.      72.1        58.9           5.6


    High School Diploma      86.6        65.0           7.3


    College (1-3 years)      90.2        62.0           7.7


    College (4+ years)       92.7        70.7          13.0




                            Other     US        IRA or    Other


                            Real      Saving    Keough    Assets


                            Equity    Bonds     Plans






ALL                          9.3%      18.5%    23.1%     2.5%






    White                   10.2       19.8     25.5      2.8


    Black                    3.7       10.3      6.3      0.5


    Hispanic                 5.1        8.0      7.8      0.5








    No High School Dip.      5.6        7.5      8.6      0.7


    High School Diploma      8.3       17.6     19.4      1.4


    College (1-3 years)      9.5       21.4     22.0      2.3


    College (4+ years)      14.0       27.3     42.6      5.8


COPYRIGHT 1996 Cox, Matthews & Associates
COPYRIGHT 2004 Gale Group

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