Sunday, May 18, 2008
The TRS Passport Funds - What Should You Do?
Congratulations, you have survived the school year to see the 5% pay increase in your salary. Now what should you do with it? This is as a good time as any to restructure your 403b contributions (TDA) to account for the updated choices. As many of you know the Teachers Retirement System (TRS) has upgraded their TDA choices and switching options starting July 1, 2008. While I still think they didn't go far enough, it is a start.
The TRS has renamed the six options the "Passport Funds", you can select them as of now. Why that name? I couldn't even guess why. However, here are the options.
Diversified Equity Fund: - This fund invests mostly in US common stock and is loosely based upon the Wilshere 5000 index. This fund was previously known as Variable "A".
Stable Value Fund: - This fund invests in fixed income vehicles such as bonds, treasuries, and Guaranteed Investment Contracts (GIC's). This fund was previously known as Variable "B".
Fixed Fund: - This fund allows for a risk-free guaranteed income of 8.25% and the next adjustment will be July 1, 2009. The guaranteed return on the fund cannot go below 7.0%.
International Equity Fund: - This fund invests in developed countries outside the United States, areas such as Western Europe, Japan, Canada, Australia, and Korea. Apparently, there is little exposure to the emerging markets such as China, India, Brazil, and Russia.
Socially Responsive Fund: - This fund will not invest in companies that have a significant business in alcohol, tobacco, gambling, nuclear power, and weapons. How about oil companies who cause global warming?
Inflation Protection Fund: - This fund may have been misnamed. At first glance it seems to suggest a fund made up primarily of TIPS (inflation adjusted Treasuries) with low risk. However, it appears that the fund will also have a variety of investment vehicles such as commodities, real estate, mutual funds, etc. This makes this fund riskier than it seems. That means this fund can give you returns at a greater risk than the document suggests. Only time will tell if this fund will meet it's stated objectives.
In addition to the increase investment choices, there is more flexibility in how quickly you can change your investment mix. previously, it took twelve months to get your money out of one investment choice to another. Under the new TRS program, you have a choice of getting your money out of an investment choice in as little as three months. The time periods are 3, 6, 9, and 12 months.
The question is how much should you invest in the TDA and which investment choices? I cannot speak for anybody but me. However, I will try to give you some suggested portfolio mixes based on age and my rationale why.
Minimum TDA Contribution Rate:
The minimum amount of your salary you should put into your TDA is 10%. Remember, on the average. for every dollar you put into a TDA you save $0.35 in taxes. The more you put away, the more you accumulate, tax-deferred. Meaning your TDA grows much faster because the TDA is only taxed after you start receiving the money. For the newer teachers, every time you get a raise and or a step increase, add 1% to your TDA contribution. It is painless and increases your retirement savings. You can do your own calculations here.
20's and 30's: - 75% stock and 25% fixed
In most other retirement programs I would recommend 100% stocks. However, the 8.25% guaranteed income makes that unnecessary. This high return in a low inflation environment is equal to stock returns in an average year, without the risk! You will find nowhere else were you get a 8.25% return these days. I would take the stock portfolio section and divide it into the three funds. Diversified Equity (25%), International Equity (25%), and Inflation Protection Fund (25%). For the people who want to save the world then add the Socially Responsive Fund into the stock mix.
40's: - 60% stock and 40% fixed
Again, the fixed portion is higher because of the guaranteed 8.25% return. The stock mix should stay the same as for the 20's and 30's age group. That means 20% in each of the three stock funds.
50's: - Conservative 75%: Fixed , 25% Stocks Moderate 60% Fixed, 40% Stocks
Since the time horizon is much shorter for this age group, it is important that you have a safe return. Remember, at this time in your career you will be looking at a pension in your future (maybe at 55) so that you don't need to take on the additional risk in your investments. For the stock mix I would recommend that 15% be put into diversified stocks and 10% in international stocks. At this point I see no reason to put money into the Inflation Protection Fund.
60's and older: - Conservative: 100% Fixed Moderate 75% Fixed, 25% Stocks
I know that 100% fixed is highly conservative. However, here again getting a guaranteed 8.25% in a low inflation environment is a no-brainer where short term stock fluctuations can put quite a dent into a person's retirement funds. Until the fixed rate falls to a competitive number with bond funds (averaging 2-4% at present), it makes little sense not to take advantage of the fixed income fund. For the less conservative, keep following the stock mix that you did in your 50's.
Every teacher's needs are different. However, if you intend to retire as a teacher, it is important that you prepare for your retirement. These are only suggestions on how to allocate and the amount you should invest in your TDA. Good luck, and save hard.
By the way just some historical data to help you determine where to put your money.
Average return in the last ten years:
Fixed = 8.25%, Variable "A" =- 4.95%, and Variable "B" = 4.59%