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Retirement Scenario #1: The School Teachers


This California couple's investing plan is almost airtight -- if only the economy will play along.


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
4% misc
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
5.5% misc
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."

Future Risk

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.
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