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2018 February 19

Retirement planning

Filed under: Uncategorized — gasstationwithoutpumps @ 09:45
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One of the academic blogs I read recently posted a question about long-term money goals, listing their 6 main goals:

  1. Make sure that we’re ok if DH loses his job.
  2. Continue maxing out our retirement.
  3. Be ready to replace one or both of our cars. [Update:  better be just one!]
  4. Be ready for smaller emergencies and expected home maintenance.
  5. Pay 100% for the kids’ colleges.
  6. (MAYBE):  Save up enough money to move to Paradise permanently(?)

Of the 6 goals listed, I’m not interested in #3 (I have no car), and I’ve already made the other five:

  1. We have enough in savings that we would not have financial worries even if neither of us worked.
  2. I’ve been maxing out retirement savings for decades, so I could retire on my savings even if I didn’t have a defined-benefit retirement plan.
  3. I could replace my bike out of my current checking account—bikes are much cheaper than cars.
  4. I have enough non-retirement savings for replacing all the appliances in the house and for doing small remodeling projects. We’ve been doing major maintenance all along, so the only big thing coming up is replacing the water heater sometime in the next 5 years.
  5. My son will finish his BS this year and his MS in another year, and we’ll still have money in his 529 plan despite paying full tuition—I need to think about what to do about that. He’s the youngest of his generation on both sides of the family, and all of his cousins have had about as much college education as they can stand. I have too many great-nephews and great-nieces for it to make sense to make any of them beneficiaries. I could save the money for eventual grandchildren, but I fear it will be a long wait.
  6. Not only is my house in one of the most desirable neighborhoods in one of the most desirable cities in the country, but I paid off the mortgage years ago.

Retirement is not far off—I’m committed for another year of teaching, and I’ll probably do one more after that.  My most recent plan (see Sabbaticals until retirement) had me working until June 2021, and I considered working until the group health insurance would no longer cover my son (2024), but the 30-hour grading weekends are very hard for me to deal with this year, and I don’t see them getting easier. I could use up my sabbatical credit a year earlier and retire in June 2020.  I’m afraid that my Applied Electronics course would simply disappear at that point, though, and I really would like for there to be at least the seed of a market for my book.

I plan this year to make an estimate of how much our family spends each year, so I can see whether we’ll be living on just the defined-benefit pension or will have to dip into retirement savings when I retire. Since my pension will be 2.5% * years of service * highest-3-year-average-gross-pay *85.7%(for 100% survivor benefit), I’ll be getting about 70% of my current gross pay. Because I won’t be putting any of that into retirement savings or the defined-benefit plan, the taxable pay will be about 80% of the current, and so the take-home should be also. I think that comes to about what we spend in a year, but I’m not sure—when you are consistently spending less than take-home pay, even after maxing out retirement savings, there is not much incentive to keep track.

I also need to figure out whether it makes financial sense to “buy back” the service credit for the times I took sabbatical at 2/3 pay instead of full pay. The computation gets complicated, because it trades off cash now for an annuity in the future, and annuity pricing is pretty murky, being based on weird assumptions about the future of investments and the chance of dying. My wife and I will also need to decide whether to opt for 100% survivor benefit or get more per month with a reduced survivor benefit—she’s convinced I’ll outlive her (based on parent and grandparent ages at death), and we do have enough savings that even the minimum 25% survivor benefit would not put her in financial difficulty.

My wife has suggested a few things to do with our retirement savings:

  • Give more to charity (especially local theater and music groups, but also increasing our charitable giving to Planned Parenthood, 2nd Harvest Foodbank, Southern Poverty Law Center, ACLU, …). I need to figure out whether a donor-advised fund is the best way to do this, as I’ll no longer have payroll deduction as an automatic mechanism.  Some of the donations are also not tax-deductible, so I need a mechanism for keeping track of that also.
  • Travel more. We have done very little travel for the past couple of decades, in part because of work demands, in part because we have very different tastes in travel.  I think that we can resolve the differences in taste (I mainly have to give up on some of my frugality), and we can arrange some separate trips (I’ve not done a bike tour in decades, and she’ll want an opera tour).
  • Go to more theater and concerts.  We go to almost all the local theater, so this would mean long public transit trips, or travel to theater festivals.  I think I can convince her to make the long trip to Ashland for the Oregon Shakespeare Festival, particularly if we go with the Santa Cruz Shakespeare bus group—we can’t do that group trip this year, because it is scheduled when both of us have job commitments.  I have no interest in concerts, being not very musical to begin with and going deaf on top of that, but I’d be glad to subsidize some of her concert and opera excursions.
  • Replace our furniture, most of which is either grad-student specials (futon sofas with worn-out covers) or cherrywood antiques that I bought 34 years ago.  My wife prefers light modern furniture (1950s styles), which I don’t care for, so we’ve rarely agreed on a furniture purchase. I think that our custom-built armoire for storing towels is the last piece of furniture we both really liked—maybe we need to commission more new pieces, rather than trying to find stuff that already exists.  Custom furniture can burn through money fast!
  • Take community college courses and do volunteer work (those are more ways of using time than of using money).

I’m also thinking that I should get the house remodeled for ADA compliance before I retire. With any luck, we’ll never need ramps and grab bars, but it is better to put them in without needing them than to need them and have to wait months for construction work without them.

Other things we’ve thought about but not to the point of having even vague plans:

  • eat out more. I’d like to, but my wife finds once a week about right for her—that may change when she retires and needs more incentive to leave the house.
  • remodel the kitchen.  The laminate countertops are wearing out (they’re 40–50 years old) and my wife would prefer lighter colors for the cabinetry, but there is not a lot we can do about the shape of the kitchen, which is long and narrow, so a corridor kitchen layout is all that is possible.
  • sell off a lot of our books, to make room for new ones—we ran out of bookshelf space years ago, and the boxes and piles of books are beginning to make it hard to move around.  There are a few more walls we could add shelves to, but retirement would be a good time to start weeding the collection (particularly since I have another 40 shelf feet or so of books that would come home from my office).  Selling books is harder now that the great used bookstore Logos has closed (on the flip side, we’re also buying fewer books without their stock to browse).
  • exercise more deliberately. Right now we both rely entirely on our human-powered transportation for exercise, but if we stop going to work our exercise levels will plummet.  I’ve been thinking that I’d like to run a marathon sometime in my life, which would mean soon after I retire.  It’d probably take me about 3 years of training to build up the fitness—I’ve never run more than 15k in my life, and that was when I was 16.  I haven’t done any running (other than when I’m late for class or a meeting) in decades.

One of my biggest retirement planning concerns is figuring out how to keep myself physically, mentally, and socially active.  Almost all my activity revolves around my job in one way or another, and I don’t see any of the hobbies I’ve had in the past 3 decades growing to fill that space.  My summer and fall will be spent, in part, on looking for activities that will hold my interest for the next five years.

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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.

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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