Even with secure pensions, some retired educators have financial concerns

By Greg Saitz

Trips to visit her grandkids and jaunts back to Pensacola, Florida to spend time with her hometown friends.

Or going out to eat with other friends closer to home and taking vacations with them. But 11 and a half years after retiring, Levester does hardly any of those things.

Her pension covers her monthly bills—mortgage, insurance, health care premiums, and others—but there’s not much left after that.

Payments from an annuity she purchased while raising two children (her husband died while the kids were in high school) ended in 2007.

To make matters worse, 73-year-old Levester has been watching the last of her non-pension savings, invested in mutual funds, drop as the financial crisis pushes the stock market lower and lower.

The situation has her worried. Although she’s glad her pension is guaranteed, Levester said it just doesn’t go far enough.

“My savings are dwindling every day,” she says. “I have to turn down a lot of invitations. But I like to read and I like to watch TV, so that keeps me occupied.
“I hear some of my friends are depressed, but I try to keep on the bright side that things will work out. I am going to eek it out somehow.”

The financial meltdown, ensuing government intervention, and parallel stock market swoon have caused lots of hand-wringing for untold thousands of retirees who are nervously watching their nest eggs. An annual retirement confidence survey conducted by the Employee Benefit Research Institute earlier this year found 54 percent of retirees are more concerned about their financial future than they were right after retirement. And that was before the most recent turmoil.

 The government estimates that since the summer of 2007, investors have lost $2 trillion from retirement accounts such as 401(k)s and pension plans.

Many retired NEA members share the same concerns. But they have one thing going for them many others in their golden years don’t: a pension, or defined benefit plan, that assures them a lifetime of payments no matter what happens on Wall Street.

Mark Cortazzo, a certified financial planner and senior partner at the financial planning firm Macro Consulting Group in Parsippany, New Jersey asserts that a $30,000 annual pension is equivalent to an investor collecting 5 percent interest on $600,000 in bonds.

“It is an extremely strong safety net and risk minimizer within a portfolio,” states Cortazzo, whose clientele of mostly retirees or near-retirees includes teachers and superintendents. “If that’s enough to cover your needs, and the rest of your portfolio is there to address and cover your wants, then it’s a completely different ball game, and not taking a vacation this year is very different than not being able to afford your house this year.

“What happens to people who don’t have this sustainable, guaranteed lifetime income is they can, in pursuit of their wants, end up not being able to afford their needs because they had more money invested in the stock market than they should have, because they were trying to go after much bigger returns.”

Nancy McKenzie, a senior pension specialist with the NEA, says Alaska is the only state in the country where teachers are responsible for their own retirement accounts—what is called a defined contribution plan. The system applies only to teachers who started in 2006 or later.

Educators elsewhere all have the option of choosing a defined benefit plan—a pension—as their primary retirement plan, McKenzie says. A new NEA study found that more than 93 percent of its members are in a pension plan.

McKenzie recently attended a meeting of the National Council on Teacher Retirement, an organization aimed at safeguarding the integrity of public retirement systems. While there, she ran into lots of NEA members who are trustees of public pension funds.

“They were all saying, ‘Oh, thank goodness we have a defined benefit plan, and they invest for the long term, and they’re diversified, and people don’t need to worry about what’s happening in the markets short-term,’” McKenzie says.

In addition to providing peace of mind, it turns out pension plans offer another advantage over 401(k)-type programs: better investment returns. A study by the Center for Retirement Research at Boston College found that between 1988 and 2004, defined benefit plans outperformed 401(k) plans by 1 percentage point.

 The study’s authors found a majority of 401(k) participants were not diversified at all in terms of stocks and bonds. That meant they faced the risk of winding up with inadequate retirement income or being exposed to large swings in the value of their portfolio.

Pensions are run by professional money managers, and McKenzie says the new NEA survey found 34 percent of pension plans reviewed were funded at 90 percent or more. On average, the plans had an 85-percent funded ratio.

“[Pension plans] survived the market crash of 1987, and they survived the tech bubble bursting,” she notes. “Is the current economic situation going to put pressure on public employers and state governments? Yes. Are they going to look to make changes to retirement benefits going forward? Some may. But I think the NEA and its members will resist those changes.”

One change retired teachers’ aide Florence Reynolds wouldn’t mind seeing is a cost-of-living adjustment for her pension. She spent 26 years as an education support professional in the Smithfield, Rhode Island public schools and retired in 1995, 11 years before the plan began offering COLAs. So with inflation, every year that goes by means Reynolds’ pension pays for less and less.

“I’m able to pay my bills,” says Reynolds, 76. “I’ve managed to keep up with everyday expenses. But if I want to do anything extra, there isn’t any money there.”

She also collects a pension her late husband earned. He had to retire early from his job as a steamfitter and died in 1996, a year after she retired. Although it was hard for her, Reynolds sold the home in Smithfield where she lived for 43 years and raised six children, and used the money to buy a condominium in Warwick, about a half-hour away. Not having a mortgage helps, but there are monthly condo fees, she says.

To earn extra income for activities, Reynolds works several months a year for H&R Block as a tax preparer. She says the extra $8,000 or $10,000 allows her to travel some and do other things. Her most recent trip was to Tunisia, but lately the tours are getting too expensive. It would be nice, Reynolds says, if she didn’t have to work at all, but she realizes other people are worse off than she is.

“I can’t say I haven’t enjoyed my retirement,” she asserts. “You just have to learn to do things a little bit differently.”

Although the change regarding cost of living adjustments in Reynolds’ town came too late for her, McKenzie, the NEA’s pension specialist, says most pension plans used by educators do provide some sort of increase. Sixty-four plans McKenzie tracks automatically provide a fixed or floating rate adjustment. Others plans aren’t automatically adjusted but are increased on an ad hoc basis, often requiring approval from a state legislature or other body, notes McKenzie.

No defined contribution plans provide cost-of-living adjustments, she laments. Put another way, McKenzie says, “Whatever is in your plan when you terminate employment, that’s it.”

Retired Richmond, Virginia teachers Eddie and Cecelia Cooper are glad they’ve got the guarantee of their pensions. But Eddie Cooper, who spent 35 years teaching (mostly history in middle school), wishes he had a little bit more, especially in these times.

 To make matters worse, the married couple has been worried about the safety of an annuity they have with a subsidiary of American International Group, the life insurer rescued in September by an $85 billion government bailout. “We were up all night when we heard about AIG,” remembers Cecelia Cooper, a middle school art teacher for 33 years who worked part time several more years before retiring in 2000.

The Coopers say that because of their concerns about finances, they started cutting back in 2007. Dinners at restaurants every weekend night and picking up take out have been scaled back to just one meal out per week. (“So I had to learn to cook,” Cecelia Cooper jokes.) Car trips to see their families in Norfolk, Virginia, Maryland, and Washington, D.C. were limited by 2008 gas prices. In addition, they cut back on plans to remodel their home: The kitchen was done, but two bathrooms received just some cosmetic touchups.

Cecelia Cooper, 65, also cut back on attending dog shows and taking dog agility training with her three Hungarian Viszlas: Luna, Venus, and Mars.
“I really miss that,” she says, noting that although she has the money to get back into it, “I’m rethinking fun. You shouldn’t have to do that in retirement.”

Eddie Cooper, 68, spends lots of time watching sports on TV, rooting for the Washington Redskins during football season. He splurged in February to buy a 32-inch flat screen television (when they were on sale after the Super Bowl) to replace a model they’d had since 1978. Still, 12 years into his retirement, he says, “There were a lot of things we were able to do at one time that we can’t do anymore.”

One big item is helping family. Eddie Cooper says four of his seven siblings have died, leaving behind children. He used to be able to send his nieces and nephews money now and then, but he says he’s had to cut back on that as well.

“We never thought in our golden years we would be on this strict a budget,” Cecelia Cooper says. “It was just fun, fun, fun and then the economy changed and you go, ‘Whoa.’ It’s still fun, but I’m much more hesitant now.”

She puts it in perspective by remembering something her mother used to tell her: “You have your needs, your wants can wait.” “Now,” Cecelia Cooper says, “I know what she means.”

Are there any low-risk investment options?

Mark Cortazzo has spent a lot of time lately listening to worried clients. “The biggest concern I hear is people concerned about running out of money,” says Cortazzo, a senior partner at the financial planning firm Macro Consulting Group in Parsippany, New Jersey.

His firm, which has about $350 million in assets under management, deals mostly with retirees or people nearing retirement. He offers a couple of suggestions for investors who may have assets outside a pension and are looking for low-risk investments.

For those who may have four or five years before they need to touch their money and know they should be invested in stocks but are afraid of the downside risks, Cortazzo says structured notes may be the way to go.

These investments are FDIC-insured (just like a bank account or CD), but instead of paying interest, the structured notes provide the return on a stock index or several indexes, he says. At the end of a set time period, investors receive 100 percent of the change in those indexes. If the market goes down during that period, an investor still gets back their entire principal.

Another option is variable annuities, which are basically insurance products that provide a guaranteed payment. Money in these also can be invested in stocks or bonds, offering the chance for better returns. (Like structured notes, if the market tanks, you’re still guaranteed a certain payout.) Variable annuities do, however, often come with significant commissions and expenses.

Investors also need to be careful about stiff penalties for pulling money out of annuities early. But Cortazzo says there are some annuities that either are completely liquid or have a holding period of just a few years. Investors should make sure they understand all the intricacies and possible charges related to annuities before buying one.