• October 30, 2014

Take the Match

Are you out to get rich quick? Then I'm afraid you've gone about it all wrong. You're in higher education. Nobody gets rich in higher education.

That's not true, actually. Some in higher education do get rich — and I'm not just talking about biotech patent-holders or university presidents. I read a story a few years ago about a couple, both professors, who lived long lives, had no children, and left a legacy of several million dollars to their campus. The couple must have been incredible savers, said an astonished spokesman. The campus had no idea the bequest was coming.

But such stories are found more often in the sweet misty dreams of development officers than in reality. If you wanted to get rich quickly, you wouldn't have become a lab technician, a sociologist of art, or a historian of the Ottoman Empire. The hallowed groves of academe do not generally attract those who care, first and foremost, about wealth accumulation, which is one reason why Republicans have a negligible presence in higher education in contrast to their distribution among, say, CEO's of manufacturing companies.

To the psychology adjunct who teaches on three different campuses, I need not press the point about the limits of academic wages, but even the holders of endowed chairs over at the law school do not care primarily about money, or they would have gone into corporate practice instead of opting to teach.

Let's face it: We in academe are oblivious as to how to get rich quickly. I therefore feel obliged to divulge, here and now, my secret of how to obtain humongous riches. A better writer would wait a column or two and build up some suspense, but I'm just going to let it all out in one spectacular rush.

There are two ways to get rich. The first is to get other people to work for you while you establish a near-total market share. That worked well for John D. Rockefeller, Henry Ford, and Bill Gates. The second way is to produce videos and books about how to get rich — usually that entails real-estate flipping or arcane stock-picking methods — and then sell them through infomercials and seminars. No one will get rich from your surefire techniques, admittedly, but the infomercials and seminars are like printing money.

That's it. That is the sum total of world knowledge of how to amass hoards of treasure. (Pillaging, looting, meth dealing, and hedge-fund fraud are options, too, but I screened for safety and legality.)

The philosophy underlying this column is entirely different. It is not at all about getting rich quick. It is about seeking security slowly.

This column will presume that you are not motivated by a desire for maximization of profit so much as comfort and peace of mind. It hews to the conviction that financial intelligence is not necessarily related to moral intelligence — sorry, Benjamin Franklin — but that financial intelligence is infinitely preferable to its alternative, financial stupidity. Financial competence, like cooking, is a skill well worth cultivating and developing, a source of pleasure as well as nourishment.

Unfortunately, all too many people, academics included, experience paralysis when confronted with financial planning. Whether bewildered by the number of choices, beset with confusion, or fearful of error, they fail to attend to their financial futures adequately. But that is self-defeating and needless. If you obtained a Ph.D. in analytical chemistry, you can grasp asset allocation. If you defended a master's thesis on the genocide in Darfur, you can master expense ratios. You can do this: Professor Pennywise is certain.

So where to begin, then?

As I explained in my first column (The Chronicle, December 19), this is both a dangerous economic moment and an excellent time to get your finances in order.

Here is where to start: Take the match.

If your institution offers a retirement-savings plan, it is most likely a 403(b), the nonprofit equivalent of a 401(k). Pay no attention to those numbers and letters. They matter not a whit. What matters — and a simple call to your institution's human-resources office will clarify this — is whether your employer offers a tax-advantaged retirement plan with a match. If it does and you qualify but are not yet on board, then sign up today. Immediately. You'd be a fool not to.

Let's say you are a starting professor of English making $38,000 a year. (So much for getting rich quick.) But if your employer has a 6-percent match, and you consent to set aside 6 percent of your income toward your retirement, the college will match that amount. That's right. By putting aside $190 a month — a mere $43.85 a week — you will amass $2,280 annually. That will be matched by another $2,280 from your employer, adding up to $4,560 in your retirement account. Taking the match is like getting a 6-percent raise.

That's not all. After a decade, the total contributed by you and your employer will reach $45,600. Assuming an annual rate of return of 5 percent — the actual rate will vary depending on the cash, bond, or stock investments you select — the balance will reach $59,007. Not bad, especially since your own individual contribution was just $22,800 over the course of that decade.

Keep that up another 25 years and your holdings would total $437,669, with your own input totaling only $79,800. Compound interest and employer matches are beautiful things, aren't they? (In real life, moreover, pay increases will raise your salary to a lot more than $38,000 a year by the end of your career, augmenting substantially the basis from which your 6-percent input and match are computed.)

To top it off, the $2,280 deducted from your salary every year is considered pretax income by the IRS. Only at the end of your long, illustrious career as a Milton scholar will your disbursements be taxable, as you draw down the account. So you won't feel $190 of pain every month. Your tax withholding will be reduced, softening the hit to your take-home pay. What's more, you'll owe Uncle Sam less every April than your gross salary would indicate.

A side note to those already enrolled in a plan: Good job. It might be worth a call, though, to be sure your contributions are sufficient to receive the full match; if not, you're walking away from money. Think, too, about contributing above the match, to at least 10 percent of your income. The tax benefits will apply still, and you will have a better retirement, especially if recent market declines concern you. (In 2009, you may contribute up to $16,500 total — or $22,000 for those 50 or over.)

By the way, if you're an administrator and your institution does not automatically enroll all new employees in tax-advantaged retirement accounts, why not? Studies show that most people will stay in a plan if automatically enrolled, whereas many will not sign up at all if it requires initiative on their part. Be a hero. Make the change happen. You will feel benevolent. Everyone will love you.

If you are a university employee not yet participating in a tax-advantaged retirement plan, rush over to HR. Fill out the forms. No excuses. Questions will inevitably arise, like how to invest the money. If that's intimidating, just allocate it all to cash — a money-market fund, say — until the economy stabilizes or you understand investing better. Simply by saving, you will be ahead of most people.

You should also think about building up emergency savings, wiping out your credit-card debt, and paying down student loans. But, first, take the match. In one fell swoop, you get a raise, a tax deferral, and a velvet cushion for your dotage. You're on the way to achieving security slowly.

Can you think of a better way to start the new year?

 

Professor Pennywise is the pseudonym of a professor in the humanities at a major public university in the Midwest who is merely a frugal academic, not a financial professional. Questions and suggestions for future columns may be sent to professorpennywise@yahoo.com.

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