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2016 May 2

Sabbaticals until retirement

Filed under: Uncategorized — gasstationwithoutpumps @ 22:28
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I plan to take sabbaticals every year until I retire. Here’s how that works: for each quarter I work I get one “sabbatical leave credit”.  With the permission of my department chair (as part of the Curriculum Leave Plan each year), I can cash in the credits for sabbatical leave.  What is unusual about the UC system is that I can cash in the the credits for partial pay—9 credits gets me a quarter of sabbatical leave at full pay, 6 credits a quarter at 2/3 pay, and for n≤9, n credits a quarter at n/9ths pay.  The portion of my salary not paid to me is returned to the department, who can add it to their TAS (Temporary Academic Staffing) budget, or add it to their reserves, in the unlikely event that they have enough funding to cover all the lecturers for the year.  Taking partial-pay sabbaticals is easier for the department to cope with than taking full-pay ones, as there is no extra money for hiring replacement lecturers during full-pay sabbaticals.

As of the end of this quarter, I will have 20 sabbatical leave credits, so I could take 2 quarters off at full pay, but that’s not what I plan.  Instead I plan the following strategy, taking single-quarter, partial-pay sabbaticals every year for the next 5 years, then retiring (+1 means I’m teaching, a negative number indicates a sabbatical and how many leave credits I’ll use up):

year Fall Winter Spring credits left
2015–16 +1 +1 +1 20
2016–17 –6 +1 +1 16
2017–18 –6 +1 +1 12
2018–19 –6 +1 +1 8
2019–20 –6 +1 +1 4
2020–21 +1 –5 +1 1

I don’t have to take Fall quarters each year, but that is the quarter for which my teaching is easiest to cover by someone else, at least until I get someone trained to teach the applied electronics course.

Due to a quirk in the rules for retirement compensation, there is a significant advantage to separating from the University at the end of June, and starting retirement in July (a cost-of-living adjustment for those separated from the University but not yet retired), and I need to return from each sabbatical for at least as long as the sabbatical itself, so ending up with one credit at the end of spring is optimal use of sabbatical credits, which calls for a Winter quarter sabbatical in my last year.

I have to find someone to take over the Applied Electronics course by Winter 2021,  if I’m going to retire in summer 2021. It will also be interesting to figure out what course I’ll teach in Fall 2020, since I’ll have been out of the courses I’ve been teaching every Fall for 4 years at that point, and it might be better for me to pick up a different course.

One choice I have to make when taking partial sabbaticals is whether to “buy back” service credit for my defined-benefit retirement plan.

The defined benefit is 2.5% * years of service * (HAPC – $133*12) per year after retirement for life.   When I take partial-pay sabbatical, the “years of service” also accumulates more slowly. (HAPC is Highest Average Plan Compensation, which is the average over 36 months of base salary, excluding summer salary and stipends, for the highest-paid contiguous 36 months—taking partial-pay sabbaticals does not reduce HAPC, since it reduces % time, not base salary.)

Actually, the benefit is a bit more complicated than that, as there is a continuing 25% of the benefit to my wife, if I die before her.

As I understand it, I can buy back the service credit for 18.72% of the foregone salary—at least, that’s the Plan Normal Cost in 2016 (https://atyourserviceonline.ucop.edu/ayso/html/HelpBuyback.jsp#Benefits).

The value of $1k/month for life is about $178k for someone retiring at age 66 (based on the cost of single-life annuities). Adding a 25% second-life benefit doesn’t raise the value much—maybe to $184k (25% is an unusual second life benefit, so I did not find an annuity calculator for it). More common are plans with full benefit to survivor, half benefit to survivor (2 lives treated symmetrically), or half benefit to annuity partner (lives treated asymmetrically, with no loss of benefit if partner dies, but drop in benefit if annuitant dies).

So I could buy-back 1/9 year of service for 2.08% of my annual salary, which would raise my annual income after retirement by about 0.275% of my salary.  That is a break-even time of about 91 months, substantially less than the 178 months of purchasing an annuity at age 66.  I’d have to get a 12% annual return on investment for 6 years to beat that investment, which is an unlikely return to get in the next few years.

If I’ve done my calculations right, then the service buyback is a very good investment for someone as old as me, being almost twice the return of a purchased annuity. Either I’ve done my calculations wrong (quite possible), or the leave buyback is mispriced. Since it seems that mainly senior management uses leave buyback, I can well believe that it is deliberately underpriced for old folks, as management loves giving itself perks.

For younger faculty, leave buyback might not make as much sense, since other investments are likely to grow faster than faculty salary does, and the value of the defined-benefit plan is tied to the HAPC.  Young faculty who leave UC long before retirement age get very little benefit from the defined-benefit plan, so there is higher risk associated with investing in a leave buyback.  Pre-tenure faculty should have a defined contribution plan, with the option of turning it into a defined-benefit plan when they get tenure.

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2015 November 27

Why don’t I feel rich?

Filed under: Uncategorized — gasstationwithoutpumps @ 22:03
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When I was a child “millionaire” was synonymous with “rich man” (and, yes, gender was included in the meaning), and being a millionaire meant having a million dollars. I didn’t think about it at the time, but “having a million dollars” probably meant having a net worth that large, not necessarily having that much in cash or even in liquid assets.

Now Zillow tells me that my modest 2-bedroom house that I paid off the mortgage for several years ago has a market value over $1 million.  So I must now be a millionaire.  Why don’t I feel rich?

Perhaps the difference is inflation.  But what index of inflation should we use?  In 1960, the median house price (nationwide) was $12,700, about 2.4× the average salary. So a million dollars would buy about 79 houses.  The median home price now is about  $230,000, so to be a millionaire by 1960 standards, I’d need to have about $18 million.  Of course, not everything is as expensive as housing, and using the consumer price index for inflation puts $1m 1960 dollars at about $8m today.  OK, I don’t have that much money, even if you add all my retirement savings and my son’s college fund.  So, I’m not as rich as a 1960 millionaire.

Granted, I live in one of the most expensive places to buy houses in the country in terms of  median house price/median income.  The median house price is approximately $755,000 and the median household income is $63,000–87,000 (depending whose statistics you believe) making the ratio 8.7–12 years income to buy a house. Rents are not quite as bad: the price-to-rent ratio is about 25 (that is, the price of a house is about 25 times the annual rent for the house), so people are not buying houses as rental income investments.  In this town, a million-dollar house is a 2-bedroom house in a good neighborhood, not a McMansion.

Of course, being “rich” is always a relative term—it is how well off you are compared to others you are aware of.  According to various distribution plots I’ve seen of US household income, our household income has been hovering recently at about the 80–85%ile.  That sounds to me like “upper middle class” or “comfortable”, not rich.

However, because I have paid off my mortgage and my house has appreciated so much, together with the amount I’ve saved for retirement, I’m probably in the top 1–2%ile of net worth for households in the US (I’m not really sure of that, because it is so hard to get consistent information about the wealth distribution in the US).

Of course, those retirement savings and my son’s college fund have come by being very frugal—I’ve never owned a car, I don’t take vacations most years, I buy a new bike about once every 15 years, I get a new computer about every 4 years, many of my clothes come from the thrift stores or garage sales, most of my books are used paperbacks, we don’t turn the heat on until the temperature in the house drops below 60°F, most of our furniture was bought cheaply 25–30 years ago, we only eat meat once or twice a week, and so forth. By one definition of “middle-class”—the one based on consumption rather than income, I’m solidly middle class, and only getting to that level because my wife and I eat out once a week.

Wait, that’s not quite right—we’re paying full-freight for my son’s college tuition and housing, and that combined with even very frugal living makes our spending more than the middle fifth of the population. College has gotten very expensive even at state schools, now that the state pays almost none of the cost.

So perhaps the reason I don’t feel rich is that I’m still living much the way I did when I was grad student—even though my retirement savings are now large enough that I could probably retire this year and still have enough money to last the rest of my life (unless medical insurance and medical expenses eat it all up—apparently a very common scenario these days).

 

2015 April 29

UC messes with 403B plans

Filed under: Uncategorized — gasstationwithoutpumps @ 21:21
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This week I got a letter from the University of California Retirement Savings Program saying

If you take no action: After 1 p.m., Pacific Time, on Thursday, July 2, 2015, your existing balances in any affected funds, and any future contributions currently set to be directed to any of the affected funds, will be directed to the UC Pathway Fund 2015.

What they are saying is that unless I stop them, they will take all the money that I carefully allocated in my 403B fund and dump into an untested new fund that they are creating.  The alternatives provided are to transfer the money to other UC funds, or to start paying Fidelity for a BrokerageLink account.

Why?  Well, they claim

UC is streamlining the fund menu to help RSP participants make better investment choices by reducing overlap between options and simplifying the fund-selection process. For those participants who desire more choice, the BrokerageLink® option will still be available.

Also the smaller menu allows for more efficient monitoring so that we can continue to offer high-quality funds in a range of asset classes, with expenses that are generally lower than many similar publicly traded investment options.

Quite frankly, I don’t believe them.  Not that many people are currently using the wide range of options that are available, and those of us who are chose to do so despite hassles in setting up the accounts this way.  Only those who already believed that they could make better choices than the UC managers are affected by the changes.  So it isn’t to help us make better choices—it is to take choices away from us.  So why?

  • One possibility is that the current deal they have with Fidelity to manage funds and provide access to many non-Fidelity funds was not being lucrative enough for Fidelity, and Fidelity wanted to start charging brokerage fees. That is plausible (though not very), but if this were just a matter of charging fees, then the University would have informed people with the accounts that were affected that Fidelity was about to start charging fees, but people could avoid those fees by transferring the money to UC-managed funds, rather than sweeping up the money if they weren’t stopped.  In fact, BrokerageLink® isn’t going to charge fees for Fidelity funds (beyond the management fees built into the funds), so this isn’t a bid by Fidelity to get more fees (though it is possible for them to collect rather large fees if people choose funds unwisely and it may cost me more to keep the Calvert accounts if I do it through BrokerageLink®).
  • Another possibility is that the University wanted to terminate the Fidelity deal and keep as much money in UC funds as possible.  But Fidelity is still in the loop so they aren’t terminating a Fidelity deal (though perhaps the terms have changed—neither UCOP nor Fidelity talks about the details of the arrangements they make with each other).
  • What seems most likely is that UC has recently hired a new manager for the retirement program, and randomly changing policies with no thought to the consequences is what new managers do. Sort of like dogs pissing on fire hydrants—it isn’t for the benefit of the hydrant.

Because of the botched way that they implemented this reduction in investment options (from hundreds of plans to 15 UC-managed plans) with this stop-us-if-you-can fund snatch, I’ve lost all faith in the UC Office of the Chief Investment Officer of the Regents (the official title they claim in the letter).  I no longer believe that they are investing retirement funds on my behalf, but are only interested in playing games with my money.

I suppose I should call up Fidelity Retirement Services and find out how much it would cost me (in time and in fees) to “do nothing”—that is, to set up a BrokerageLink® account with my funds in exactly the same allocation as currently and with future 403(b) contributions allocated exactly as now.  That is what UC should have done as their default option, not sweeping all funds not on their short list into one of the UC Pathway funds.

Luckily, I’m over 59.5 years old, so I can roll all my 403(b) money into traditional IRAs, and that is currently what I plan to do—not only with the plans that they are trying to shut me out of, but all the 403(b) money, including that in UC-managed funds. But I don’t know what I can do about the “defined contribution” plan (401(a))—I believe that can also be rolled over into a traditional IRA.

Switching to an IRA means that I’ll have to find some mutual funds that I trust to move the money to.  I’ll be looking for socially responsible investment funds (two of the funds they are shutting out are Calvert funds that I’d chosen years ago for socially responsible investing), for a more general stock fund (I have some money in Fidelity Magellan), and for corporate bonds (taking my money out UC bonds, because of my lack of trust in UC’s new fund manager). For socially responsible investing, I’ll probably start by looking at http://charts.ussif.org/mfpc/?, which provides statistics from Bloomberg on various socially responsible funds—then digging a bit into what the funds claim their principles are.

I don’t really have time to deal with all this hassle this quarter—I’m sure they counted on most faculty and staff not having time to think about the investment and just follow the manager’s default choice.  I wish they had made the “change nothing” choice the default, even if it meant that some of us would have been charged some fees.

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