"Money Management" is not exactly an "academic skill," it is however, just as appropriate (and valuable) for individuals in academia to be "skilled" at it as it is for individuals in any other profession — given the levels of remuneration in academia, maybe more so! Either way, the purpose of this workshop is not to show how to balance a checkbook or budget (limited) financial resources. Neither is it to preach about the responsible use of "plastic money", though in the face of >1.3 x106 personal bankruptcies in 1997, the vast majority of which were caused in part or whole by credit card debt (for a modest sum you can request a credit check from, Equifax 1-800-685-1111: Experian [fka TRW] 1-888-397-3742; Trans Union 1-800-888-4213) there are clearly a significant number of individuals who could benefit from such as sermon.
The purpose of this workshop is very simple. It is to point out that the next few years, potentially more so than the rest of your life, will probably determine when and under what conditions you will retire. Thinking about retirement at this stage in your lives may not seem too relevant or important. That's several decades away! But that is exactly the reason why your actions now can have such a disproportionate influence on your financial situation that far into the future. The following example should provide some perspective:
What you anticipate your retirement situation will be and what it actually turns out to be, may be two very different things. A recent (1998) poll by the Pew Foundation (Philadelphia, PA) found that 50% of pre-retirees polled expected their quality of life to be as good or better after retirement (and the younger they were the more optimistic their outlook was), but 60% of the retirees polled said their lives were merely a continuation of life before retirement or were worse. Part, at least, of the explanation for this comes from another 1998 poll that showed that:
More recent surveys (10/99) showed that many Americans believe that playing the lottery is the best way to gain wealth rather than saving over the long term. The Consumer Federation of America and Primerica reported that 40 percent of households earning $35,000 or less saw winning the lottery or a sweepstakes as the means toward a $500,000 nest egg. By contrast, only 30 percent felt this could be achieved by saving and investing during their working years. "Despite the economic boom of recent years, one-half of American households have accumulated less than $1,000 in net financial assets and modest or no wealth," the groups said.
Probably the smallest overall percent contribution. Not much you can do about this. Social Security pay roll deductions are mandatory and fixed. As you've probably heard, the S.S. system is in some difficulty as, proportionately, a decreasing number of workers are paying for an increasing number of retirees and the situation is, or will be, aggravated by the upcoming wave of so-called "Baby Boomers" who are expected to overwhelm the S.S. system in the near future. Consequently, it is calculated that, without any changes being made, benefits will have to be cut by at least 25% by the year 2029 (after which, most of you will be retiring). The numbers change with each projection but the general outlook remains the same — gloomy. So, whatever S.S. benefits are currently, they are certainly going to be different, probably less, by the time you retire.
Another reason for the projected shortfall is that the S.S. system is currently required to invest your payments in government obligations that over the past few years have returned an average of 2.3%. As of now, one solution has been to phase in a progressively later age at which you can collect full S.S. benefits. Currently, the retirement age at which you can receive full benefits is 65. That age will gradually increase until those born in 1960 or later will have to reach age 67 before they are eligible to receive full benefits. Another solution under discussion is to allow you to invest a certain percentage of your S.S. payments in the private market — I would think that even someone with zero investing skills could do better than 2.3%! Yet another solution is to increase payroll taxes. Yet another is to cap cost of living allowances (COLA's) that are designed to keep retirees benefits equal to or ahead of inflation.
The point of the above is that S.S. benefits are, at best, inadequate to retire comfortably on and, at worst, may not even exist when it gets to be your turn. It is therefore, something that's there but not something you can do a lot about (unless you attempt to influence legislation that affects S.S. and the benefits that you will/will not receive). Over the next year the Social Security System will mail out to all taxpayers an "Estimated Statement of Earnings and Benefits". It will be of very little help in terms of providing much information on the benefits you can expect receive when you retire (since you will have paid in very little and, in proportion to the amount that you will eventually pay in, it will be almost insignificant) but I'm confident you will not be quoted an amount that will impress you or that you will want to try to live on. On average, S.S. is almost certainly going to provide the smallest proportion of your total retirement income – in most cases less than 20%!
While you may not have a choice in terms of the employment-based retirement plan to which you contribute, you would be well advised to be knowledgeable about how it works. If you go into an academic career you will probably be eligible to contribute to TIAA / CREF — the Teachers Insurance and Annuity Association / College Retirement Equity Fund — the biggest (>$200 billion in assets) retirement plan in the country (world?), established originally for educators but now open to many other classes of individuals. TIAA / CREF is not only the biggest pension fund in the country but according to Money magazine (Jan., '98) it may also be the best. Depending on the generosity of your employer, he makes monthly contributions to TIAA / CREF — a certain percentage of your salary. May be as high as 16% (the highest I've heard of) or considerably lower. At Tulane, the employer's contribution is 8% but if you, personally, contribute another 2% then Tulane will match it to make a total of 12%. There's a lesson there — anytime your employer will match all or a part of your contribution, take it, to the maximum amount allowable. Whether it's TIAA / CREF, a 401k plan, a 403b plan, whatever. Take it. Your employer is giving money away!
Nowadays, employers are inclined to provide options for employer-sponsored pension plans, i.e. where you want the money to be invested. TIAA / CREF provides several options but your employer may also allow you to contribute to another plan(s) that is (are) managed by some other financial or investment company. Again, for example, here at Tulane, we have the option of contributing to a 403b account (or a Supplemental Retirement Account, SRA) with Fidelity Investments (the biggest of the financial investment companies) or TIAA/CREF. The choices for your contributions usually boil down to putting your money in conservative, risk-free but not high paying investments versus putting it in something aggressive with the potential for a high return but also the potential for loss of principal. This basically is also the choice between TIAA and CREF — an oversimplification but adequate for this discussion. Money paid to TIAA is invested in secure, relatively low paying but guaranteed instruments that have a known, predictable rate of return, e.g. bonds. CREF is invested in more risky, volatile but potentially high paying instruments, e.g. common stocks. While I will not recommend any particular strategy, I will tell you what my own experience has been. Nobody told me anything years back so when I first started, for lack of a better idea, I had 50% of my contributions put in TIAA and 50% put in CREF. Since I never changed, I can now look at the balance in each account and see how the conservative vs the more aggressive approach has "paid off". There is now 2.3 times as much money in my CREF account than in my TIAA account! In any given year the return from TIAA may have been greater than from CREF and, in fact, some years the CREF account actually lost money but over the long time period that these accounts have been active, the stock account has outperformed, by a significant amount (2.3 x), the fixed annuity account. This seems to be almost a rule — that over long time periods (5-10 years?) the stock market has always outperformed just about every other form of investment. Therefore, if I knew then what I know now, I'd put all of my money in an aggressive stock market fund - but you need to make the choice for yourself. Again, the main purpose of this workshop is to make you aware that decisions made now can and will have an enormous impact on your financial well-being many, many years from now so it's worth (literally) spending a little time educating yourselves.
The first two sources of retirement income are somewhat fixed, i.e. the S.S. check you receive will be determined by your salary over the years (something you unfortunately, don't have as much control over as you would like). An employment-based pension plan and the amount you have invested in it is largely up to your employer though there may be a voluntary component to it. Largely, however, it too is dependent on your salary. The third component however, is totally within your control — personal savings and assets and can have a large influence and could conceivably constitute the largest proportion of your overall retirement income. The options available to you for these personal investments are (in approximate order of increasing return):
To find the interest rate that results in your money doubling, divide 72 by the number of years involved, e.g. if you want your money to double in 9 years it will need to earn 8%; or, a rate of 10% will result in your money doubling every 7.2 years, etc. Thus, if you "want to be a millionaire" when you retire 40 years from now, you could invest just over $31,000 now in something with an APR of 9% or you could start a more modest program of systematic investment that extends over the entire 40 year-period but which produces the same end result.
There is a multitude of investment books. Here are a few:
I am not recommending any or all of these books. Some I haven't even seen. Stop by the bookstore and check out the "Personal Investment" section.
Just about any financial institution, mutual fund company, etc., will be happy to shower you with advice, e.g. www.fidelity.com (the largest of the mutual fund companies); www.vanguard.com; www.janus.com. Most mutual fund companies have very well-developed web sites that provide all manner of information, 'personal investing' pages and downloadable software for financial planning.
There is, of course, a wealth of information on financial matters of every conceivable kind on the Internet. If you have ever thought of investing in the stock market there is at least one site that allows you to do so without risking any real money www.etrade.com. The company (E*Trade) has a game (the E*trade Game) in which they "give" you $100,000 of play money at the beginning of every month and allow you to buy, sell, trade, etc. (anything you would do with real money and real stocks) for the month. The two individuals who end the month with the best returns get $1,000 each in real money. The winners usually are the ones with at least a million or two — shows you what's possible, though you probably wouldn't do what it takes to get that kind of return if you were using your own, real money. Of course, if you want to invest your own, real money, E*Trade will be happy to oblige, as will a number of other online trading companies (e.g. www.tradingdirect.com; www.ameritrade.com). However, "day trading" is definitely NOT recommended (<13% of those doing it make money and many "lose their shirts").
I know of at least two graduate students who used to research the stock market and, routinely, invested a small percentage of their stipends in the stock market. Don't know how they did but I imagine that by the time they retire they'll be quite good at it and will probably have made significant amounts of money doing it. While these two individuals acted independently, investment clubs are becoming increasingly popular, e.g. the once famous but now somewhat discredited Beardstown Ladies Investment Group. Similar groups have formed in New Orleans and Metairie, with varying degrees of success. I also know one faculty member who "plays the market" (sounds a little like "plays the horses" and can have the same results — unless you do your research). As of 11/99 he was showing a 22% return but, with the current market and the way it's performed for the past several years, this kind of return is only average or even below average. Most blue chip or indexed funds will have done as well (and will have required no effort and minimal research).
None of the above should be construed as a recommendation(s) either for or against any particular investment strategy. Its purpose is merely an attempt to raise awareness levels at a time when you are in the best position, temporally though probably not financially, to determine the timing and the quality of your eventual retirement. It should also be stressed that desirable as long-term investments may be, there are immediate financial needs that have to be met and should not be neglected, i.e. it is (or should be) obvious that first and foremost your own needs (and those of your family) have to be provided for. To do this, it is usually recommended that between 3 and 6 months of living expenses should, ideally, be available for emergencies, between-job expenses, etc. Of this, probably approximately 25% should be readily accessible (i.e. bank accounts, money market accounts, short term CDs, treasury bills, etc.). The remainder (75%) may not be immediately available but should be available for a serious crisis. The optimum situation is one in which you establish a well-balanced portfolio that accommodates both short term needs while accumulating long term wealth and that will take care of anticipated future needs as well as supplement traditional sources of retirement income that come from Social Security and employment-based pension plans.
The rule of thumb that is used in financial planning is that it will take about 80% of your current earnings to maintain the same lifestyle after retirement as before. Personally, I was hoping for something considerably better – most people would. However, if you come to that decision late in your career there's usually not a lot you can do about making it happen. Think about it!
P.S. I am by no means an expert. Don't take my word for any of the above. It wouldn't take a lot of effort to be better informed than I am. There are other forms of investment available that are not mentioned, e.g. insurance annuities. It is suggested that, before investing any of your money, you educate yourself. As noted above, literature is available from any number of sources – books, investment companies, the Internet, etc. You might also consider taking a course – "Investments for Beginners" or whatever it's called – most colleges and universities offer such courses through their adult education divisions. Also, most financial companies periodically offer free seminars, in hopes of getting to manage your finances for you (check the financial page of your local paper).
Sign into the School of Science and Engineering's TulaneGrad to get your own personalized information about your program!
School of Science and Engineering, 201 Lindy Boggs Center, New Orleans, LA 70118 504-865-5764 email@example.com