Current Pension Topics:
Right Age to Invest in Stocks

By JOEL L. FRANK

Q.: I am in my first year as a Teacher for the City Department of Education. I have three choices for my pre-tax (salary-reduction) retirement savings account: a 403(b) through the Teachers' Retirement System and a 457(b) and 401(k) through the Deferred Compensation Board of the City of New York. I am 25 years of age. Which of these do you feel is best for me?

Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net.

L.S.

A.: My plan of choice is the 457(b) because, in addition to a superior investment lineup, withdrawals made prior to age 59-1/2 are exempt from the 10-percent penalty tax which is imposed on similar withdrawals made from the 403(b) and 401(k) plans.

Having said that, at your tender age of 25 you should place all of your money in the stock market because over long periods of time (20+ years), the stock market has been more profitable than the bond or fixed-income securities market. Assume you retire in 40 years at age 65 and begin in year 2048 your distribution period. At that time only about two-thirds of your nest-egg should be in stocks, with one-third in bonds.

One way, over the next 40 years, to gradually go from a portfolio of all stocks to one comprised of stocks and bonds is to use the core investment lineup and make your own changes a few times per year. Simply sell some of your core stock-fund holdings a few times per year and with the proceeds buy bonds. I don't like this method because it takes a tremendous amount of self-discipline and research and you most likely will not stick with the plan.

In my view, the best way to go gradually from a strategically aggressive plan of investing to a conservative one is by leaving it up to the experts employed by the Deferred Compensation Plan. All members of the TRS should first max out ($15,500 for 2008) with the Deferred Compensation 457(b) Plan before contributing to either the TRS 403(b) Plan or the Deferred Compensation 401(k) Plan. The following information comes from the Deferred Compensation Plan's Web site:

Pre-Arranged Portfolios

The Deferred Compensation Plan offers 12 Pre-Arranged Portfolios for participants who prefer the ease of selecting a well-diversified and managed portfolio. The portfolios are made up of varying percentages of the Plan's core investment options: the Stable Income Fund, Bond Fund, Equity Index Fund, Mid-Cap Equity Fund, International Equity Fund, and Small-Cap Equity Fund. There is also a TIPS allocation to some of the Pre-Arranged Portfolios.

The pre-arranged portfolios help answer the question: Where should I invest my money? They offer you a mix of diversified investments and help you if you are not comfortable with creating your own portfolio or if you are looking to invest in a professionally-managed portfolio.

How Do Pre-Arranged Portfolios Work?

On a quarterly basis, the asset allocation of each pre-arranged portfolio will be adjusted, shifting to a slightly more conservative mix. This increases the likelihood that your account will last longer so that it can serve you throughout your retirement years.

When a portfolio reaches its horizon, it will roll into the Static Allocation Fund (20 percent stocks and 80 percent bonds), where it will remain for the duration of your payout.

How Do You Know Which Portfolio is Right for You?

Use either your current age or the number of years until you expect to begin distribution payments, as a guide, whichever better suits your personal circumstances.

Benefits of Selecting a Pre-Arranged Portfolio

Diversification - The pre-arranged portfolios are made up of varying percentages of the Plan's core investment options and are appropriately diversified for the time horizon specified. Studies show that most participants' portfolios are significantly under-diversified. These funds offer the simplicity of a single investment vehicle with the benefit of exposure to different asset classes and efficient allocations.

Risk Management - The pre-arranged portfolios are designed to meet certain expected rate of return requirements over time horizons, and balances the rate of return needs with the appropriate amount of risk.

Portfolio Rebalancing - The pre-arranged portfolios are automatically rebalanced to their target allocations quarterly.

Management of Your Account

After you choose a pre-arranged portfolio, that portfolio will be rebalanced quarterly to lower its equity exposure as you near your payout date. Each portfolio's investment mix at any point in time depends upon how many years are left until you begin to receive distributions from your account. For example, the further you are from your payout date, the greater the percentage of equity in the portfolio. The final portfolio, the Static Allocation Fund, will receive the proceeds of each portfolio. This portfolio is designed to be a relatively stable source of regular income during your retirement years, as well as provide capital preservation with some opportunity for growth.

*TIPS are U.S. Treasury Inflation Protected Securities ("TIPS"). The goal of TIPS is to preserve and enhance purchasing power for individuals planning for retirement. TIPS represent a distinct asset class in which both principal and interest payments adjust to track changes in the Consumer Price Index or "CPI". A fixed rate of interest is then paid on this increasing principal amount. The principal grows with inflation and the cash coupon also increases with inflation. In a diversified portfolio, an allocation to TIPS can help protect against inflation and increase the risk-adjusted returns of the portfolio. Tips will only be offered within the pre-arranged portfolios and not as a core investment option.