We’ve put to rest the false notion that, “Those who can’t do, teach.” But we do know this: Those who teach, retire -- and well.
Take the case of two teachers, a married couple, who went to see retirement planner James Ellis when they were ready to exit the teaching business. Ellis, who runs a boutique firm, Retirement Planning Associates, in Van Nuys, California, says the couple mapped out their post-career lives perfectly. “He, the husband, is not an arrogant person, but he can be a little bit smug about this,” says Ellis.
Like all public school teachers, the couple earned low salaries when they started out. Some 10 to 15 years into their careers, they were making about $50,000 each. They bought a modest house in the Southern California desert and eventually paid it off in full. They had three children, now adults with careers and children of their own. “Whenever they didn’t feel cash poor,” according to Ellis, the teachers paid into 403(b) plans, registered retirement savings accounts for teachers and school organizers. They stayed in the plans for more than 30 years each, wisely maximizing their annual contributions during the last decade of enrollment.
By the time the husband had retired, he had taken on a part-time college job in addition to his pubic school work and was earning $75,000 per year. His wife retired with a salary of $65,000. Their savings were substantial at $200,000 (his) and $150,000 (hers).
Teachers everywhere are envied for their generous pension plans. Put in your time facing the tough, often distracted, and always authority-challenging audience that kids can be, and you’ll be rewarded with nearly worry-free senior years. In this case, both of Ellis' clients were eligible for pensions immediately after dismissing their last classes six years ago, when he was 60 and she was 55. Under the California State Teachers’ Retirement System (CalSTRS), his pension was worth 70% of his former salary, while hers equaled about 56% of what she had last earned.
With all of their daily expenses covered by pension checks, the couple had no need to dip into their savings funds, which they placed in Ellis’ care. He rolled the savings into traditional IRA accounts and began investing. For the first four years, says Ellis, everything was going “great guns.” During the first five years that the money was under his management, for example, that $200,000 the husband had saved grew to surpass $400,000.
But that was before 2007 and the onset of the economic downturn. When the bottom started to fall out of the market, the former teachers watched their nest eggs shrink, returning to the same size they were in 2003. Like everyone else, they got the jitters. “Clients trust you the least when you’re losing the most,” Ellis says. “In fact, you’re sharpest when you’re losing. You forget about everything else in your life. You say to yourself, ‘Okay, this isn’t shooting fish in a barrel anymore.’ ”
Unfortunately, most clients also fear strategies that work against prevailing trends, he adds, even when taking a contrary approach is best. “You know how Buffett always says, ‘Be careful when others are greedy, be greedy when others are careful?’ Well, clients always think the opposite way.”
Ellis did his best to move the couple’s funds into safer investments, taking special advantage of corporate bonds that were trading at a substantial discount. Still, there were few safe havens to be found. By the time the dust settled after the 2007-2008 market panic, both IRAs had lost 20% of their value.
The Turnaround Year
Bruised by the markets, in 2009, Ellis and his clients were ready to embrace a conservative investing style. “It was Graham-and-Dodd type [value] investing, less chasing momentum,” he says. “We went with more dividend-producing stocks and more bonds, not bond funds."
His plan worked. In 2009, the husband’s portfolio saw a 21.26% jump in returns over 2008 and the wife’s account an 18.18 % increase.
Here’s a look at their 2009 allocations:
34% basic materials
23 % technology
19 % cash
7 % shorts
5 % health care
3 % financials
4 % service
1% consumer goods
And this is the current scenario (as of April 2010):
33% basic materials
19 % cash
16 % financials
7 % shorts
7 % health care
4.5 % technology
4 % service
4% consumer goods
Now that their portfolio is regaining some of its former momentum, the ex-teachers feel more secure. “They say they already have more money than they did when they working; they’re not saving for anything,” says Ellis. As level-headed people with simple tastes, they don't have any huge financial aspirations, and they’ve always lived as though they needed to hunker down and save, says Ellis. The attitude is paying off. “They feel like, if this were a poker game, they’d have four aces.”
If there were such thing as an airtight retirement plan, this one would come close. Alas, no savings strategy is invulnerable to life's variables. Even these sensible teachers face two frightening “What if…?” scenarios: 1) hyperinflation in the economy and 2) the possibility of bankruptcy at CalSTRS.
Although most mainstream economists don't believe that hyperinflation is a threat, there are some market watchers who theorize that our current recession could end with a run-up in prices across the board.
As for CalSTRS and its future financial solvency, the jury is still out. “I’d say [bankruptcy] is a likely scenario in the next 20 years,” says Ellis. At the very least, he says, “over the next few years, you’ll see teachers’ benefits come back immensely; they’re too rich.”
According to a recent Los Angeles Times article, the CalSTRs fund is facing pressure from poorly performing investments, growing pension obligations, and mounting pressure on state and school-district budgets:
Its ratio of expected assets to pension obligations at the beginning of the decade was 110%, meaning CalSTRS had more than enough money to pay all future pensions.
By last June 30, the ratio had fallen to 77%, below the 80% that experts consider to be the minimal secure level. Independent actuaries project that the funding ratio could plunge to 13% by 2039 and to zero in 2045, leaving the state government legally obliged to pay the entire pension bill for the next generation of retiring teachers.
Fortunately, neither teacher has to worry about health-care costs, which are fully covered by their pension plans. But Ellis warns that teachers and other public employees should pay close attention to any residency requirements connected to their benefits. He watched another public-school teacher burn through her $50,000 savings account after she was forced to pay for unexpected health-care bills that would have been covered if she hadn't left her home state. “I tried to help her as long as I could, but eventually she had to cash out and move in with family,” he says. “It was heartbreaking.”
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.