• April 19, 2014

Retirement: Are You Saving Too Little or Too Much?

If you're a new Ph.D. in your first tenure-track job, it's fair to say that the last thing you want to spend precious time thinking about is your retirement. Even if you're a mid-career academic, it may seem too far off to contemplate.

So don't think about retiring, but do think about how much money you want to set aside for the eventual day when your title changes to professor emeritus.

The question of how much to save for retirement should puzzle anyone who ponders it. Every economic and demographic trend of the past 30 years has tended to increase the range of uncertainties for prospective retirees. The standard answer is to accumulate enough so that you can assure yourself of a comfortable standard of living over the course of a very long retirement, without ever teaching another class or grading another paper. We'll call this sum "the golden enchilada."

The trouble is this computation contains so many imponderables. Will the period of retirement be five years or 40? How much work will you feel like doing during that unknown number of years? What will it cost to keep you fed, housed, and healthy? What rates of return will your investments actually deliver? How much financial cushion will you need to feel safe? What will pending changes in the tax laws do to your plans? We'll look at some of these issues in detail in future columns.

Here's the ideal: Look for an accumulation that would throw off as much total return (i.e., income plus appreciation) as you would need (after taxes and inflation) to live on forever. Having that much would mean that even if they find a cure for aging 20 years from now you could still live off your retirement nest egg indefinitely. If you're close to retirement now, it's easy to compute what such a sum might be -- just base it on your current cost of living.

How Many Beans?

As an example, we'll start with the average salary of a full professor at a research institution, or about $87,000 in 1999-2000, according to the latest salary survey of the American Association of University Professors. Let's set that amount as your final salary before retirement. If your retirement fund earns a total return of 7 percent, you would need roughly $1.2-million in order to throw off $87,000 a year forever. Even the baby boomers won't live forever, but in finance forever is a reasonable approximation for living a very long time. If that 7 percent return is after inflation, then the purchasing power of the $1.2-million holds up forever.

Is there any hope of amassing such a sum? Let's consider that, using the long-term history of stock returns of around 11 percent and the current inflation rate of around 2.5 percent. Using 7 percent to approximate what your retirement funds could earn after inflation, the academic superstar who makes $160,000 would need $2.3-million to duplicate that income level; the adjunct professor making $30,000 would need to accumulate about $430,000. (It's probably best to ignore Social Security for long-term cases -- whatever you get will just provide a slight comfort margin to your main savings plans.)

If we use the typical university contribution toward retirement of 10 percent of salary, running a projection based on the typical professor's full-time career suggests a pretty good chance of reaching the golden enchilada. If you went to work in 2000 as an assistant professor making $30,000, and worked for 40 years, getting steady raises to a final salary of $87,000, an 11-percent growth rate would produce $1.28 million (today's money). On the other hand, a late-bloomer starting at age 35 who teaches for 30 years gets to $581,000 at 65. If the late bloomer buckles down and contributes 15 percent a year instead of 10 percent, he accumulates $872,000 after 30 years. Given the power of compound interest, working more years increases the accumulation quite rapidly.

Counting the Beans

To review your own situation, a number of retirement savings calculators are available on the Web. A quick Internet search for "retirement savings calculators" produced over 100 different hits. Many of these calculators are marketing tools, but of course you're not obliged to fork over your money just because you try one out. Among the best-known mutual fund names, such calculators can be found at Fidelity.com, Vanguard.com, and troweprice.com. The limitations of these calculators are considerable, because of the sensitivity of the outcome to small changes in the initial assumptions. But forcing yourself to answer all of the questions is well worth your while. And you can reexamine and replay the scenarios every few years to see if you're still on track.

Now what about the fundamental question -- how much do you need to accumulate? A lot of financial advice touts the figure of 70 percent of final working income at retirement as what you'll need. Try to avoid such one-size-fits-all advice. Just what is it about retiring that is going to save money? Will you travel less? Eat less? Wear less? In fact, many academics adopt a more active lifestyle after leaving work. The demographers say that not only are we living longer but that the number of healthy years is also increasing, so with all those hours suddenly freed up from grading papers and serving on committees, you may actually spend more.

Start with the assumption that you will need 100 percent as much as you did before retirement. While it's true that some expenses associated with middle age often go away with time -- child care, college tuition -- they don't go away as a result of retirement. For most people, such expenses decline well before retirement, so they don't become a source of funds upon retirement. In short, don't count on lower expenses after you retire unless you can specifically identify which significant costs will drop away and are confident that no new significant needs will arise.

Too Many Beans?

But perhaps you don't need such a mountain of financial security. If you live as long as the new demographics suggest, you'll probably be healthy enough to earn some of your own support during those many years. Who says you owe your heirs such a princely sum, anyway? What about those trips to the South Pacific? What about giving more to charitable agencies or cultural projects, and having some real input as to how it's used while you're alive? What about doing the things you really want to do while you're young enough to be involved? These are strong arguments against focusing only on the golden enchilada.

While much financial advice is presented mainly as a game of how to minimize taxes, the real goal is to maximize your life, not to foil the Internal Revenue Service. Having more than the golden enchilada in retirement funds may well be too much. With the long period of stock-market gains since the 1950's, some academics now near retirement have more in those 403(b) plans than they will ever spend. And many will come to wonder what else they could have done with the money.

So with the possibilities ranging from having not nearly enough to having far more than you need, you face a wide range of uncertainty about the future. The first weapon against this uncertainty is a good savings plan applied over many years; the second is to scrap the notion of an idle retirement and develop some scheme that combines your interests in a new way with producing some cash flow. Everything urges us toward this new approach -- it's better for your mental and physical vigor to stay in the marketplace. You really will have something to contribute at this stage whether you realize it now or not.

New technology is bringing people a longer and more active old age. The actuarial tables on which most retirement plans are built are out of date. And academics tend to live longer and healthier lives than average. Staying in the work force alleviates some of the uncertainty over how much you'll need, since it gives more years to let prior savings grow. So discard the notion of not earning anything after retirement.

Recognize that having adequate retirement savings depends as much on the choices you make before retirement as on the actual number of dollars you have at 65 or 70. There's no better time than now to broaden the question of "How much do I need to retire?" and think about the larger context of the rest of your life. This takes planning, whether it means becoming a consultant, converting a passion into a business, or pursuing some other future. Just as your pension is yours to manage, your career is limited only by your own imagination.

John Vineyard, C.F.A., formerly an investment officer at Cornell University, left academe in 1992 to become president of Sunlake Investment Management, an investment counseling firm in Ithaca, N.Y. He has no plans to retire.

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