Retiring from Science

How to plan a smooth career exit in a crumbling economy.

By | February 1, 2009

<figcaption> Credit: © Michael Austin</figcaption>
Credit: © Michael Austin

Financial planners hate having to tell their clients that they need to delay retirement. Yet as the global economic meltdown drags on, many researchers in both academia and industry are facing that reality.

"I wish I had better news for you," Kenneth Robinson, a financial advisor in Ohio sometimes tells his more unfortunate advisees. Older researchers whose retirement savings have been decimated by the sagging economy have a choice to make, he says. "Either they can delay their retirement, which few people like to do, or they can reduce their standard of living, which people like to do even less."

Importantly, Robinson says, working researchers should not stalk the volatile Dow Jones average to determine their next financial move. "The news will tell them nothing about what they should do next." Robinson says the better approach is to invest more time understanding their spending patterns and how best to save. "Their situation is probably unique enough that they need to come up with an individual plan to deal with it."

Just as we did last year, before the current economic downturn, The Scientist consulted income statistics, demographic data, and financial planning professionals to construct four hypothetical financial profiles representing scientists at different ages and career stages. We then asked certified financial planners with experience advising scientists to weigh in with new money management suggestions for each scenario, taking into account how the market has changed. Here's what they said.

Fourth-year postdoc at a large university

Economic status: This 32-year-old postdoc has saved $6,000 in a checking account and makes about $45,000 a year from her NIH postdoctoral fellowship. She also carries $12,000 in debt for undergraduate school loans.

The question: How to start building a nest egg in such uncertain financial times?

In the long run, the odds are very high that the market will more than heal itself in [15 years]. Panic is the enemy.

The strategy: "We always start with a 403(b)," says Mark Stinson, director of planning at Baltimore-Washington Financial Advisors, Inc. (BWFA). In a 403(b), the public education institution's answer to a 401(k), contributions go in before taxes and grow tax-deferred. "That's something you can't pass up," Stinson says. "We typically say, 'Try to put 10-15% of your income into the 403(b).'"

Though contributing 10-15% is standard advice says BWFA financial advisor Robert Wasilewski, that strategy makes even more sense while the stock market is hobbled because shares are so much cheaper in today's market. "Over the long term, it's our feeling that you can earn more in the market than you can paying off student debt," he says. Wasilewski recommends putting approximately 70% of the 403(b) contribution in stocks (depending on our postdoc's risk tolerance-the more comfortable she is with risk, the larger the percentage that goes into stocks), and the remainder goes into bonds or other income-producing securities. "The fact that the markets have been hammered so much is really a positive from her perspective," he says.

Wasilewski suggests putting the bulk of her 403(b) stocks into broad-based index funds which track the performance of markets, such as the Dow Jones or the S&P500. As soon as the postdoc builds up about $100,000 in her 403(b), Wasilewski says that she should explore further diversifying her portfolio, investing more in tech funds, health funds, or small cap growth funds.

Stinson and Wasilewki say that if the postdoc changes institutions, her 403(b) should be rolled over into an IRA-where she could invest in individual stocks rather than the mutual funds of a 403(b), and she could start on a new 403(b) or 401(k) at her new job. "Rolling it over into an IRA gives her a lot more choices," Wasilewski says.

Senior faculty member at a state university

<figcaption> Credit: © Michael Austin</figcaption>
Credit: © Michael Austin

Economic status: This 45-year-old man has been at his university for 19 years and makes $100,000 a year, but has watched his 403(b) shrink from $150,000 to $115,000 in the past year. His wife makes $125,000 a year, and they both expect a state pension at retirement. They have three children, two of whom are already attending college.

The question: He was hoping to retire in about 15 years or so. How can he recoup the money that he's lost from his 403(b) and hit his target retirement date?

The strategy: Kenneth Robinson, who runs his own financial planning company in Cleveland, Ohio, says that keeping a cool head is the key to retiring with enough money. "In the long run, the odds are very high that the market will more than heal itself in [15 years]," he says. After all, Robinson says, the professor wasn't going to touch that money for another 15 years anyway. "Panic is the enemy. Fifteen years isn't out of the question, but he shouldn't be surprised if he has to work at least a little bit longer."

Robinson says that this professor should devote new 403(b) contributions to the parts of his portfolio, namely US and foreign stocks, that were hit the hardest by sagging global markets. Though this seems counterintuitive, Robinson reiterates that those severely devalued stocks are simply better deals for the investor's dollar. "This is the opportunity to buy low in the buy-low/sell-high equation." As he gets his consumer debt under control, with about 30% of his household income in cash reserves, he should increase his 403(b) contribution.

Robinson also says that our professor should consider pairing his 403(b) with a section 457 plan, which is similar to the 403(b), but lacks the 10% penalty for making withdrawals before age 59.5. "The huge advantage to the dedicated saver is that the law does not prohibit doubling up between 403(b) plans and 457 plans," Robinson says, "if you're looking for more ways to contribute tax deferred."

Director of genetics at a large pharmaceutical company

Economic status: This 60 year-old man has been at his company for 15 years. He had $800,000 in his 401(k) and now has only $575,000. He makes $165,000 plus $29,000 in bonuses per year. He was aiming to retire in four to five years.

The question: How can he still retire in 5 years?

The strategy: According to Tom Nowak, a certified financial planner at Quantum Financial Planning in Illinois, the first step is to calculate actual expenditures, using software such as Quicken, to see if this researcher could dial back his spending in retirement. Being so close to retirement age and seeing a chunk of his 401(k) disappear is not good news. "He may have to work longer depending on what his budget is going to be," Nowak says.

Nowak and other financial planners use the "four percent rule," which estimates long-term inflation and growth rates, to approximate annual income from a retirement account for 35-40 years of retirement. Four percent of $575,000 is only about $23,000 per year, and even with additional income from social security and a pension, that puts this researcher in a pretty precarious spot.

Working part-time or consulting in a state of semi-retirement might be another option, says Nowak. "Part-time work will reduce how much people will need to draw down on their 401(k)," he says. He adds that there is no limit to the amount of work someone can do while making 401(k) withdrawals, but that there is a 50% tax on Social Security benefits for recently retired individuals that make a part-time income. Additionally, if this scientist is in good health, he should consider delaying Social Security benefits until age 70, which can result in a payout increase of 5-8% per year of delay, Nowak says. If absolutely necessary, he can consider a home equity line of credit (of $50,000 or so) as he awaits the arrival of Social Security or pension checks. "That's an easy way to get some extra money."

Senior biochemist at the national institute of standards and technology

Economic status: This 55-year-old woman has worked at the NIST for 25 years. She makes $92,000 a year, had saved about $360,000 in a government retirement plan and now has only about $250,000. Her husband is a freelance writer who has saved only $20,000 in an IRA. They own a $400,000 home and have a $200,000 mortgage.

The question: She was planning on retiring within 10 years. Is this realistic?

The strategy: Jerry Cannizzaro, president of Virginia-based Retirement Planning Service, says that the first step is to reconfigure the contributions going into her Thrift Savings Plan (TSP), the government employee's version of a 401(k). Cannizzaro suggests devoting one quarter of her TSP portfolio to the broad-based international index fund that is part of the TSP program because economies in countries such as India, China, and many in South America are emerging. "Those are the people that are going to buy the goods we already have," he says "If the international market does well, it is the place to be."

After reconfiguring her TSP allocations, Cannizzaro says, this scientist should seriously consider pre-paying her mortgage before retirement or at the latest by age 70. A mortgage payment of $24,000 per year would eat into this couple's retirement very quickly. "They should not have a mortgage when they retire," Cannizzaro says.

Cannizzaro also says that federal employees are somewhat sheltered in times of financial crisis. "They have guaranteed health benefits, and their pension is guaranteed by the government," he says. To optimize savings, he also suggests looking towards commercial long-term care insurance. The long-term care insurance offered by the government can be up to $3,800, but "90% of government employees can get better deals on commercial policies," Cannizzaro says. If his advice were followed, he estimates, this scientist could retire comfortably in 10 years and have about $96,000 per year into her golden years.

Questions to ask yourself when considering retirement:

<figcaption> Credit: © Michael Austin</figcaption>
Credit: © Michael Austin

Do I have a documented financial plan from a reputable source?

It's best to receive some help and outside perspective with financial planning.

What is it costing me to live today?

Having a firm handle on your daily expenses, from dining out to utilities, is essential to knowing how much you need in retirement.

What is my risk tolerance?

Knowing this will determine many of your detailed financial decisions regarding how much and where your retirement investments go.

Do I have a well-thought-out life plan?

Considering where income will come from in retirement is important, but so is the basic reality of how one will spend that money. Have a specific plan for what to do with yourself once your work and research end. You'll be happier for it.

What is my monthly debt payment going to be in retirement?

Cannizzaro warns not to enter retirement paying any more than 20% of one's income in bills.

What's my plan for long-term care?

Long-term care is commonly offered as part of employer insurance plans, or through commercial agencies.

Does my spouse need a survivor's annuity?

There are several programs, through state or federal pension plans that address this possibility.

Comments

Avatar of: anonymous poster

anonymous poster

Posts: 1

February 3, 2009

While I can understand the financial saving scenarios recommended for the more senior scientist, the post-doc scenario does not seem based in reality.\n\nHow can a person making 45,000/year save 10-15% of that? Is this salary before or after taxes? Does this scenario take into account cost of living? I find it hard to believe that after paying rent (we know this person cannot afford to own their lodging), utilities and food (and these are minimal expenses), that there is much left over.\nI think it is time that academia acknowledge the dismal financial future of many of their scientists.
Avatar of: anonymous poster

anonymous poster

Posts: 13

February 3, 2009

I agree with the post above regarding the postdoc and savings. Unless this person lives at home or has a spouse who makes significantly more(which doesn't seem to be the case given the loan amount), putting 10-15% in a 403(b) is just not realistic. I was a postdoc and lived well within my means (still do) and I found it very hard to invest that kind of money and still have a savings account to use in case my car broke down, unexpected medical bills....So, I am no longer a postdoc!
Avatar of: anonymous poster

anonymous poster

Posts: 1

February 3, 2009

Two points: Most of your examples include retirement income from pensions. Although people working at Universities may be eligible, most of us working at biotech companies do not have any sort of pension plan. My wife and I have worked at 7 biotech companies over the last 15 years, none of which has had a pension plan or even a 401K matching program. The article would have been better if you had at least one example of a mid-career person who is depending only on 401K & IRAs for retirement.\n\nIn the early 1990s, I was a postdoc making $18K/yr -- and managed to save more than 20% of that ($2K into an IRA each year, the rest into other savings). How? (1) No health insurance, I was young and healthy and took a risk that I wouldn't need it. (2) Having a roommate or two to share the rent really helps. (3) Minimal spending on anything non-essential. Separate your "needs" and "wants". Yes, it would have been nice to join the guys for pizza & brewskis on Friday nights, but it's a "want", not a "need". Once every few months, ok; every week, not a chance.\n\n
Avatar of: anonymous poster

anonymous poster

Posts: 1

February 16, 2009

"As soon as the postdoc builds up about $100,000 in her 403(b)"\n\nThis is the fourth-year postdoc we're talking about? This is not realistic for 99.9% of postdocs. To be frank folks, the numbers given in other examples look a bit off to me as well.\n\nIn general, if you're a postdoc for 4 years you're already falling behind.
Avatar of: BRADLEY ANDRESEN

BRADLEY ANDRESEN

Posts: 34

February 16, 2009

One scenario that was not discussed was the people that wanted to retire this year. They have seen their 403b decrease by at least 30%, which means that their monthly allotment from that fund in retirement is going to be lower than what they planned. What happens? They do not retire. Most scientists do not have a physically demanding job so putting off retirement is not that difficult (needs vs. wants as was mentioned by a previous poster), but it occupies a slot for a young scientist. Now, I am not going on the give the young a job rant; I am looking at the financial realities. Senior tenured scientists cost a university much more than a young scientist, and with decreasing state budgets and lowering funding lines from nearly all granting agencies these costs will be pushed to the institutions. This could end up being a rather large problem for institutions struggling to balance their budget.
Avatar of: anonymous poster

anonymous poster

Posts: 107

February 16, 2009

Nobody wants to mention the 800 pound gorilla in the room, which is that zillions of baby boomers are poised to retire in the next 15-20 years, sucking a lot of money out of a stock market that is already depressed. I don't see how the market will be able to recover while this is going on. If you're a boomer looking to retire on your investments, you're screwed, dude.
Avatar of: Martin Hallberg

Martin Hallberg

Posts: 9

February 16, 2009

..until the "golden years"?\n\nFirst of all try to live the life you want to have now.\n\nIf it is late in life and savings are scarce, move to a country with much lower costs of living, keeping perhaps a cheap apartment in the states. 40-50k$ a year is a lot in for example Thailand and healthcare is top-notch with a decent plan.

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