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gobipuba

Where To Put Money?

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I have a question I need some advice.

 

I have a 403b with Vanguard and I DCA into the Total Stock Market

 

I am also a teacher in indiana and am part of their teachers retirement fund and pension system. We now have the option of putting pre-tax money into the fund in excess of the 3% that was put into the fund previously. The account has the option of 5 funds including guaranteed fund that pays about 7%. It also has a SP 500 index and some others as well. You can change once a quarter your funds, but th amount that you put in with this new program is irrevocable. Should I max out into the indiana TRF or into my vanguard account? That guaranteed fund is pretty tempting. I am 34 years old. any thoughts?

 

 

 

 

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Is their an internet site that gives the specific details on this option that we could look at? A guaranteed return of 7% is hard to pass up, especially considering many feel that stocks will only average 7 -9% over the coming decade. How long is the guarantee for?

 

ScottyD

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I found some links:

 

http://www.in.gov/trf/ - Indiana State Retirement Fund

 

From the FAQ page: http://www.in.gov/trf/investments/faq.html

 

“Q: What is the Guaranteed Fund?

 

A: Until 1996, when the voters of Indiana approved a referendum permitting investment of public retirement funds in stocks as well as bonds, all the TRF funds were invested in bonds and were in a fund called the Guaranteed Fund. Member's individual Annuity Savings Accounts have also primarily been vested in this fund. The interest rate for this fund is determined by the TRF Board of Directors on an annual basis. The rate is guaranteed for one year, until the Board approves a new rate. This investment option still exists and is guaranteed under state law. Unless a member opts to move some or all of their Annuity Savings Account into the new investment options, the money in that member's account will remain in the Guaranteed Fund.”

 

If you look at the last couple of fiscal years (http://www.in.gov/trf/investments/fiscal.html), it appears that the guaranteed fund has returned b/w 8% and 7% (most recently). If you look at the financial reports, the rate on the guaranteed fund has slowly been dropping from 10% in 1993 to 6.75% presently. Not too shabby considering a lot of other guaranteed accounts are currently down around 3-4%. Per the most recent newsletter (http://www.in.gov/trf/newsletter/spring2003.pdf'>http://www.in.gov/trf/newsletter/spring2003.pdf'>http://www.in.gov/trf/newsletter/spring2003.pdf'>http://www.in.gov/trf/newsletter/spring2003.pdf), the board has decided that the fund will earn 6.75% per annum from 7/1/2003 on. There isn’t any minimum guaranteed rate, as w/ TIAA-CREF’s fixed account.

 

From the general program (http://www.in.gov/trf/pdfs/annuity.pdf), it appears that the guaranteed fund is invested in 90% bonds and 10% stocks. As an Indiana teacher, I think you should be able to get some documentation (fiscal reports, etc) as to the exact investments.

 

Note also from the newsletter (http://www.in.gov/trf/newsletter/spring2003.pdf), from “Newland’s Notes”, Bob Newland talks about the funding of the Indiana Teachers’ Retirement fund. It is a “pay-as-you-go” system, kind of like Social Security. Is this how most state retirement funds are managed? Yikes.

 

I was a little confused on who exactly is guaranteeing the assets in the guaranteed fund. Is it the state teachers’ pension fund, which as a “pay-as-you-go” system really has no assets (although appears to have a little in reserves)? It would seem to be guaranteed by the ability of the state of Indiana to make good on its pensions promises to (or make contributions for) its teachers.

 

I suppose you could also look at the S&P 500 index in the pension system as an alternative to Vanguard’s Total Market Index fund, if you want to use equities. The expenses of the S&P 500 index seem to be quite small (around 0.01% if I read correctly), compared to 0.20% for the TSM index. Since both track the stock market fairly closely, I’d opt for the fund w/ the lowest expenses. Plus, as you near retirement, you can begin to transfer whatever money you have in the stock and bond funds (if you have any) into the guaranteed fund, if you so choose. This is an option that is not available w/ the 403(b). It also appears that if you choose to annuitize the money in the Annuity Savings Account, you will get a COLA’d annuity. Again, not currently available w/ Vanguard (I think).

 

Also note that you can roll the extra money (at withdrawal, retirement, or death), which you contribute in the Annuity Savings Account, to an IRA if you don’t wish to annuitize at retirement. So, it does not appear to be totally irrevocable.

 

Hope this helped.

 

Alec

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Guest Guest_Alec

Now I see what you mean. Looking around some more, I found that irrevocable means that once you start contributing to the Annuity Savings Program, you cannot stop or change your election as long as you stay with your employer. So you cannot ever reduce your contribution %, as with a 401(k) or a 403(b), unless you change employers.

 

Question: Does increasing your contribution to the Annuity Savings Program (from the original 3%) increase your final pension, or not have any affect on the $$ amount of your final pension from the State? If you can roll over the accumulation in the Annuity Savings Program to an IRA at withdrawal, retirement, or death, wouldn’t annuitizing the accumulation increase your final pension?

 

Alec

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Guest Guest_gobipuba

Thanks for the reply,

 

My understanding is that when you retire you can roll over the annuity portion of your money into a new account. You still get your pension based on years of service and highest average salary. Or you can leave the annuity portion downstate, annuitize it for the rest of your life and your spouses, and get a higher rate of return. We figured out for a a teacher about to retire that if you average 5 % in a regular account, meaning that you would get 25000 grand a year from 500000 save up in an account, the return if you leave your money with TRF is much better. the one downside is that once you and your spouse die, the money is gone and your heirs don't get anything. If you roll it over you can pass it down, but you are left trying to get a decent rate of return with little risk. thanks again for the rplies, my sense is that i should increase my contribution

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