ASEE PRISM - October 2000
Teaching Toolbox
Engineering a Rich Retirement

Many TIAA-CREF funds offer great returns.  The trick is figuring out how much someone your age-and with your financial goals-should take.

By Kerry Hannon

illustration by Susan FarringtonYOUR DREAM: To retire at age 55, maintain your same standard of living, and have enough money to go where you want to go, when you want to go. Understood. But even if you're financially savvy, planning for your retirement can be mind-numbing. It's a crap-shoot in many ways.

There's a reasonably good chance that you will live another 20 or 30 years in retirement, and no one is about to hand you that shimmering crystal ball that can tell you just how much all that good living is going to cost you. You can accomplish your goals, but you will need to figure out how you can save enough money to give you in retirement an after-tax annual income of around 80 percent of what you will be taking in during the last year of your full employment.

With 77 million baby boomers approaching retirement, the new rules of retirement are becoming a reality. We're living longer, are in better health, and we're spending more in the so-called golden years than ever before. To retire comfortably, you'll need a sharp strategy today. Unfortunately, few of us take the time to really focus on what that means from a financial perspective. A savvy retirement program includes personal savings, Social Security, and a workplace savings program. Most Americans should save, on average, 10 percent of their take-home pay each year for a financially secure retirement. Easier said than done, no doubt. And the fact is that typically Americans retire in their early 60s, but live into their 80s.

Chances are your employer-related retirement savings are with TIAA-CREF, the Teachers Insurance and Annuity Association and the College Retirement and Equities Fund. They provide retirement plans at more than 9,000 colleges, universities, schools, research centers, medical centers, and nonprofit organizations across the country. And the best news is that TIAA-CREF, with more than $290 billion in assets under management, does offer you some interesting opportunities to save for your retirement. This is probably your only choice, so work with it. You have a smorgasbord of investments to choose amongst from domestic stock funds to global equity funds, social choice funds, bonds, money market funds, real estate funds and annuities.

Don't let your eyes glaze over. And don't ask your colleagues for advice--think it through yourself. No two people need the same mix of investments.

Picking Winners

While the rates of return are no guarantee of future results, the choices available to you have, for the most part, been winners. The money market fund was returning 5.66 percent for the year through August 1, while bond funds were a tad lower at 4.65 percent. The growth and income fund was up more than 10 percent, and the International Equity fund had soared a whopping 38.39 percent. And top financial planner Ron Roge of Bohemia, New York, lists the TIAA-CREF Growth Equity fund, up 26.69 percent over the past year (through July), and the TIAA-CREF Growth and Income Fund, up 10.05 percent over the same period, as two of his top domestic stock fund picks.

But with all these choices, how do you decide? The key is asset allocation. In other words, how you divvy up funds among different asset classes, rather than what investments you pick within each class. Your choices include stocks--which include four different equity accounts ranging from international to domestic to broadly diversified and indexed funds; fixed income bond funds; real estate funds; and guaranteed funds. The risk you take falls as you move through the categories, with guaranteed investments promising to preserve your principal and provide a minimal return.

Here's the hardest part for savers to get their heads around. Investing in stock mutual funds--domestic or international-- might seem risky, and if you follow the charts day-to-day you will nod your head in agreement. But hang on: over every 20-year period since 1931 stocks have outperformed interest-paying investments like bonds. So wild swings need to be taken with a grain of salt. True, as retirement nears you should shift more of your money into some fixed-income investments, but don't abandon stocks. You'll need the growth to protect you from the impact of inflation.

Personalized Portfolioillustration by Susan Farrington

In general, if you don't need the money for at least ten years, you should opt for an aggressive portfolio that might be 60 percent in growth stock funds, 15 percent in international stock funds, and 25 percent in aggressive growth stock funds. If you will need the money in five years or less, you might consider having 60 percent of your retirement money in growth stock funds, 20 percent in high yield bond funds, 10 percent in corporate bond funds and 10 percent in a money market fund. A conservative investor who needs to live on the investment income or needs the money soon might allocate 40 percent in growth stock funds, 20 percent in a corporate bond fund, 20 percent in a high yield bond fund, and 20 percent in a money market fund.

A handy way to figure how much of your retirement portfolio should be invested in stocks and stock funds is to take 120 minus your age. So if you're 40, 80 percent of your retirement cache should be invested in stocks. Sounds high, but in today's world, it's realistic. The old theory used to be 100 minus your age, but with longer life expectancies, the oomph of the stockgrowth is a vital ingredient to a comfortable retirement.

To understand where your money is going, it pays to know some relevant terms. Aggressive-growth stock funds are mutual funds that invest in stocks of small or fast-growing companies. Corporate bonds are bonds issued by corporations. They are riskier that U.S. Treasury bonds, issued by the federal government, but to compensate investors for the higher risk, they pay higher interest.

Growth stock funds are mutual funds that invest in stocks of established companies that have a record of regular earnings growth and dividends. High-yield bonds--also called junk bonds--have a higher rate of default than investment-grade bonds, and so they pay higher interest. Money market funds invest in short-term debt and try to keep prices at $1 a share. They are not insured by the Federal Deposit Insurance Corporation.

Need more information to feel that you're up to speed? Anyone who has a retirement plan with TIAA-CREF can maximize the value of their account just by logging on to, says Dallas Salisbury, president and CEO of the Employee Benefits Research Institute, a nonprofit organization based in Washington, D.C.

Salisbury is right--the Web site has tremendous tools. There's a regular newsletter posted and a trove of retirement planning worksheets and calculators on the site. The tutorial topics range from how retirement plans work, to how to build a retirement portfolio, to explaining asset allocation. There are charts that track the performance of the various investment options over time, and an interactive graphing program that will allow you to customize performance graphs for all TIAA-CREF Mutual funds, except the money market fund.

Each weekday, net asset values are posted between 6:00 p.m. and 7:00 p.m. eastern standard time. You can also get net asset values by calling (800) 842-2252. You will need a pin number and Social Security number to get current values for your TIAA-CREF mutual fund account.

Keep in mind that every investment choice involves a mix of potential return and possible risk. To make decisions, you need to determine how much risk you can tolerate for a bigger bang down the road. If you are mired in the decision about just how aggressive or conservative you are, you might consider calling the TIAA-CREF Counseling Center at (800) 842-2776. Remember, though, that no portfolio is risk-free. Systematic, steady investing is the key.

Bottom line: If retiring in style is your goal, plan to keep a chunk of your retirement savings in growth investments. That said, reflect on your personal situation, and do your homework. If you outlive your savings, you flunk.

 Kerry Hannon is a freelance writer in Washington, D.C.

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