Teacher Has No Debts but Could Use a Crash Course in Investing

Yvonne Hibbing could teach a course on saving, but the 35-year-old needs a primer on how to invest.

Hibbing, who teaches physical education to seventh- and eighth-graders at Mayfield Middle School in Lakewood, has no credit card debt and paid off her car loan early. She’s also socked away a tidy $77,000 on her salary of $59,500.

But Hibbing is earning a paltry 5% on her conservatively invested retirement savings--a return that could undermine the cheerful instructor’s primary financial goal, which is to retire by age 55.

Hibbing loves her job, but when planning retirement parties recently for several colleagues who were ending careers in their 50s, she realized that spending days in the sun ordering her 13-year-old charges to do push-ups was a young person’s game. Besides, she figures that 30 years of dealing with the quirks and challenges of teenagers will have her primed for retirement.

“I like the kids and I enjoy what I’m doing,” she said. “I can see myself teaching until I’m 55, but I don’t think I’ll be able to last until I’m 60.”

By following a prudent course, Hibbing has made a good start on reaching her goal, said Manhattan Beach financial planner Tim Wallender.

In addition to steering clear of debt, Hibbing has kept a close lid on expenses. Rent on her Long Beach apartment is a modest $650, for example. She’s also found a way to make lengthy summer vacations fit within her budget.

“I go to Oregon and Montana, where I camp and fish for salmon with friends,” Hibbing said. “We’ll go in an RV and do some sightseeing and exploring along the way.”

In addition, Hibbing is in line for a significant pension. As a public school teacher, she is part of the State Teachers Retirement System and would receive about half her current income if she quits at 55. If she continues until she’s 60, that proportion would increase to about 70%.

To bolster that pension, Hibbing began tucking away retirement money at age 25--sooner than most.

“I have to thank the teachers who urged me to put money into our retirement plan when I started teaching 10 years ago,” she said. “They said that I wouldn’t miss the money if I didn’t have it in the first place, and it was true.”

Moderate Risks With Retirement Investments

Hibbing invests $6,000 annually in her 403(b) deferred compensation plan, which is available to teachers and employees of some tax-exempt organizations.

The plan allows Hibbing to invest pretax money and watch it grow tax-free, until she pulls the money out at retirement.

Hibbing has accumulated more than $64,000 in her 403(b). In addition, she has socked away more than $13,000 in savings, checking and individual retirement accounts.

She recently got a $5,000 boost in pay--to $59,500 a year--and she plans to use the raise to increase her investments, though she’s unsure where to put it.

Wallender applauds much of Hibbing’s efforts, but some areas require more attention. She was unsure, for example, how her retirement savings were invested and she has been leery about plunging into the stock market.

After making some inquiries, Hibbing learned that her 403(b) funds are invested in a pool of corporate and government bonds through a tax-sheltered annuity run by Paul Revere Insurance Group.

The investment, which is split between two accounts, was recommended by a planner several years ago and currently earns about 5% a year.

“That choice is pretty conservative for someone with a time horizon of 20 years,” Wallender noted. “I think you could easily take on an investment with at least some moderate risk.”

He suggested a portfolio that is at least 60% invested in stocks.

The goal, Wallender said, is to increase her return 2 to 4 percentage points annually, a range he believes is attainable for someone with a lengthy time horizon.

In Hibbing’s case, earning a higher return could mean the difference between retiring at 55 and staying in the classroom until age 60.

For example, with a 5% annual return, Hibbing’s 403(b) will be worth $368,000 in 20 years if she continues putting away $6,000 annually. If she boosts the return to 7%, that amount grows to $493,000. At 9%, it soars to $665,000.

If her assets earn a 9% return and she continues investing as she does until age 55, Hibbing’s assets and pension would generate retirement income of about 76% of her current pay--a level Hibbing believes would be enough for her to live on. This factors in a 4% inflation rate and 35 years of retirement.

Be Careful With Tax-Deferred Annuities

The problem, of course, is that in the current state of the stock market, the kind of juicy double-digit returns American savers had become accustomed to may not be as easy to come by in the next few years.

The benchmark Standard & Poor’s 500 index, for instance, lost 9% last year and is off more than 7% this year.

Still, Hibbing needs to assume that stronger markets eventually will return. In the meantime, she needs to persuade her school district to offer a better menu of investment options for its employees’ 403(b) savings, Wallender said. Many teachers are becoming more proactive about their 403(b) choices, and he urged Hibbing to join that movement.

Ideally, he’d like to see the district offer some low-cost mutual funds--such as those offered by Vanguard--which typically come with much lower expenses than the annuities that seem to dominate district offerings. “You need to be careful when dealing with tax-sheltered annuities because the costs can be very high, which cuts into your return,” Wallender noted. “The average expense in those investments is about 2.4%, which is a lot higher than many mutual funds.”

Hibbing’s annuity, for example, at one point had surrender charges of as much as 7%, depending on when she cashes out of her investment. The rate, which declines over time, is now 4%.

Though Wallender balked at having Hibbing swallow the surrender charge before investigating her plan’s other options, he urged her to stop directing $6,000 of new money each year into the annuity.

Of Hibbing’s current choices within the district’s 403(b) plan, Wallender recommended the USAA Growth and Income fund (five-year average annual return: 11.7%). Wallender said Hibbing should consider investing her raise in this blue-chip stock fund, up to the maximum allowable yearly 403(b) contribution ($10,500 or 20% of her income.)

As for funds outside her 403(b), Wallender encouraged Hibbing to continue making an annual $2,000 contribution to her Roth IRA. He also recommended Hibbing reduce her emergency cash reserves from $9,000 to about $6,000, investing the surplus in a stock mutual fund. His recommendation: Vanguard LifeStrategy Growth fund, which earned an annualized 9.1% over the last five years.

For Hibbing, the bottom line is that she can reach her retirement goals--as long as she succeeds in finding a higher rate of return for her investments.

“You’ve got a good pension, and it really helped that you started early,” Wallender told Hibbing. “You’ve put yourself in a good position.”

*

Graham Witherall is a regular contributor to The Times.

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This Week’s Make-Over

* Subject: Yvonne Hibbing, 35

* Income: $59,500

* Goal: Retire by age 55

Current Portfolio

* Retirement accounts: $64,000 in tax-sheltered annuities in a 403(b) account, invested in bonds; $2,000 in a Roth IRA, invested in Vanguard Wellington Income fund

* Cash and savings accounts: $2,000 certificate of deposit earning 7%; $6,000 in a bank savings account; $3,000 in a checking account

Recommendations

* Move 403(b) funds to a more aggressive investment

* Use a recent raise to increase retirement savings

* Prepare a will

* Keep a $6,000 emergency fund and invest the remaining cash in Vanguard LifeStrategy Growth fund.

Meet the Planner

Tim Wallender is a fee-only certified financial planner. He is president of Strategic Index Money Management-Wallender & Associates, which has offices in Manhattan Beach and La Quinta.