Academic Assets

Crunching the Dollars

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By John Vineyard

To make a rough calculation of how much you might be able to accumulate in your retirement savings, let's say you are a new Ph.D. who has landed on the tenure track with a starting salary of $45,000.

For the next six years, until you come up for tenure, let's assume that you get annual raises of 4 percent, and that the college pays an amount equal to 15 percent of your salary into a retirement account. The money in the retirement account earns a return of 10 percent a year. To figure out how much you'll make during those six years, multiply your salary by the percentage raise you expect to receive; that amount equals your second-year salary. In our example, you would multiply $45,000 by 104 percent (because we project a 4-percent raise), for a second-year salary of $46,800.

Compute your salary in that way for each of the next six years, and then add all of those figures together to find out your total earnings over that period. Spreadsheet software can make this task a bit easier. In our example, your salary would grow to $54,749 after six years, and your pay stubs would amount to $298,484.

The next step is to calculate how much your pension account will grow during those years. Take the salary figures you computed for each of the first six years of your employment and multiply each year's salary by 15 percent (or whatever the percentage of your salary that your institution contributes toward your retirement). Add those numbers together, and that represents the total you will have accumulated in your retirement account.

After six years, in our example, your college will have contributed a total of $44,773 to your retirement account. Figuring out how much that amount of money will earn in the stock market, however, is complicated. The easiest way to do it is to take the figure you computed for your total pension savings to one of the many online retirement calculators provided by mutual-fund companies or by financial-advice sites like Morningstar. Plug in the numbers, and the calculators will do the math, telling you how much your pension savings are likely to grow over a given number of years. In our example, using my own calculations, I determined that your $44,773 in pension contributions would have grown to $59,800, assuming an annual return of 10 percent.

Here's how I made the calculation, in case you'd like to make it yourself, using your own salary information. I used a formula to determine how much the pension assets would earn each year. Usually your college contributes money into your retirement account at different points during the year -- some in early in the year, some in the middle, some in the end. As a result, not all of that money is going to earn a 10-percent return in any one year. My formula assumes that each annual contribution from your college earns an average return of 5 percent, while the savings already in the retirement account earns 10 percent.

So in your first year on the tenure track, the pension contributions you received from the college amounted to $6,750 (or 15 percent of your first-year salary). By the end of the year, assuming an average return of 5 percent (because all of the contributions didn't come into your account at the beginning of the year, they appreciated at different rates), your pension assets grew to $7,088. (Multiply $6,750 by 105 percent.)

In your second year on the tenure track, you start out with that $7,088 in your pension account. Let's say that it earns a return of 10 percent over the course of the year. Take that figure ($708) and add it to the original $7,088. Then add the 15-percent contribution from the college that you'll get in your second year ($7,020), and add the 5-percent return on that contribution ($351), and you'll have the total amount that your pension account is likely to grow in your second year ($15,167).

By making these calculations for each of the six years, you can generate a schedule that will help you predict how much you will have earned in salary and pension savings.

Then you win tenure. Let's be conservative and project that your salary now increases by only 3 percent a year. The college continues putting an amount equal to 15 percent of your salary into your pension account, but let's say this money earns an annual return of only 9 percent, since it's probable that you will, as you get older, move some of your retirement savings out of stocks and into bonds, a more stable, if less profitable, investment.

In year seven, just after you earned tenure, your salary would be $56,392. Using the same formulas as above, by the time you are 65 your salary would have risen to $140,984. During the intervening years, the college contributed an additional $444,109 in pension payments. The value of your retirement account would grow to $2,885,586 by age 65.

To figure out the present value of your retirement savings -- that is, how much that money is worth in today's dollars -- you'll need to do a little more work with your spreadsheet. Use a discount rate to find the present value of future earnings; that discount rate is based on the current cost of borrowing money. Take the salary you expect to earn in each employment year, increase it by the inflation rate (let's assume 2.5 percent), and then discount it by the discount rate (let's set it at 6 percent). Add up those numbers for each year and you'll get the present value of your pension savings. Using that formula, your $2,885,586 in retirement savings is worth $1.13-million in today's dollars.

You could create a spreadsheet to project your salary and pension earnings year by year for the next 30 years. If you don't want to do the math yourself, use one of the online financial calculators to do it for you. All you have to do is plug in the appropriate numbers.