Posts filed under 'Retirement Planning'
September 3rd, 2008
John D. Schissel, QPA, CPC
Milliman, a national actuarial firm, has released a study of the largest 100 U.S. public companies on their defined benefit plans. The results were gathered from the footnotes of companies’ annual reports from the 2007 fiscal year.
Defined benefit pension plans guarantee monthly lifetime retirement benefits based on workers compensation and service with the company. Typically these plans provide benefits for employees found at larger employers, government (municipal, state, federal and military) and organized labor. Usually the entire costs of these monthly benefits are paid by the employer.
Once again in 2007 the pension funded status improved as assets exceeded expected returns and funded status increased from 99% in 2006 to almost 106% in 2007. For the first time this century plan liabilities decreased.
For the fifth straight year asset returns have exceeded expected returns. These investment gains help employers reduce the contributions to fund plan benefits. Pension expense is expected to again decline in 2008.
The dot.com difficulties of 2001and 2002 caused major investment losses which reduced plan’s funded status, increased contributions and the balance sheet reporting of unfunded liabilities has caused fluctuations in stock values. These favorable five years have erased the shortfalls for most of these companies.
Now that the plans are generally sufficient, investment committees have begun lowering the percentage of equities and increasing fixed income securities to reduce the volatility and provide a more consistent longer term result.
Interestingly, the recent trend of freezing defined benefit plans has slowed as companies realize that a defined benefit plan is a valuable tool to attract and retain key employees in a shrinking employment market.
Tip?
Employers may use these favorable trends and the regulatory changes of the Pension Protection Act to consider whether this time-tested plan may help their companies.
September 2nd, 2008
John D. Schissel, QPA, CPC
A recent survey conducted by the Employee Benefit Research Institute indicates workers are less confident about having enough money to retire confidently. The tattered economy, the housing struggles, rising health care and the looming deficits with the Social Security and Medicare systems have shaken the view of the future.
The survey reported the largest one year drop in confidence in its 18 year history.
“The good news is that after years of false optimism, at least active workers are beginning to realize that their current level of retirement savings appears to be inadequate for living comfortably throughout their retirement years” said Jack VanDerhei, co-author and Temple professor.
Nearly half of the survey participants had total savings and investments-minus the value of their primary residence and defined benefit plans-of less than $50,000.
As the number of defined benefit pension plans (employer paid plans which provide a fixed lifetime, monthly benefit) steadily decline, the main retirement income resource has become the 401(k) plan. Typically the employer will match a portion of the amount a participant saves in the plan.Unlike the defined benefit plans which typically cover all employees, the 401(k) plans are voluntary and many employees do not save which can jeopardizes their retirement future. Up to 30% of eligible participants do not save anything.
In less than 10 years the annual contributions received by Social Security will be less than promised annual benefits. Projected solutions include greater contributions, less benefits or a combination. This will only make the financial situation more difficult for the unprepared.
There is not better time than the present to consider increasing your annual contributions to your 401k, 403b or 457 plan. Even a small increase can make a difference. It may make the difference between a stressful and truly rewarding retirement.
August 26th, 2008
Grant W. Moore, CRPC
As a young financial planner, I tend to hear the same thought repeatedly from people in their 20s. “When I get older, then I’ll start saving for retirement.” “I don’t have any extra money that I can save.” “How could a couple thousand dollars make any difference for retirement anyway?” There are numerous excuses that people can (and do) make for delaying their retirement savings.
Consider the following example. Person 1 begins contributing the maximum ($5,000) to an IRA or Roth IRA starting at age 22. They contribute this amount until age 31 and then stop altogether. Upon retirement at age 65, Person 1’s nest egg would be worth just shy of $1,000,000 assuming a relatively conservative 8% rate of return. Not bad for just 10 years of savings! Person 2, however, waits until age 31 to begin saving for retirement. In order to make up for lost time, they save the same $5,000 per year, but continue these savings until retirement at age 65. Despite an additional 25 years of savings (accounting for $125,000 additional savings than Person 1) their nest egg would have grown to just under $800,000. This example illustrates a very important lesson: compounding interest works! While I’m the first to admit that investing in your 20s is a difficult challenge, here are a few helpful tips that have worked for me in the past.
- Put “bonus” money into an investment account. My idea of bonus money is anything you receive beyond your traditional paycheck. The $600 economic stimulus check many taxpayers received this year is a great example of bonus money. Whether it’s a birthday check, an annual bonus at work, or proceeds from filing your tax return in April, this money is usually not necessary for supporting your current standard of living.
- Don’t lose out on free money! The vast majority of companies offer an employer-sponsored retirement account such as a 401(k) plan. In an effort to incentivize their employees, there is usually a matching percentage tied to these plans. For example, a company will contribute 50 cents for every $1 the employee invests into this plan, up to 6% of that employee’s salary. Said differently, if an employee contributes 6% of their salary to their company 401(k) plan, the employer will automatically contribute 3% to their account. This is a guaranteed 50% rate of return!
- Pay yourself first. It’s an old adage, but it works. Prepare a budget and determine what level of discretionary spending you are able to give up. Open an investment account with a low cost provider such as Vanguard, and invest in a broadly diversified mutual fund(s). Make arrangements so that every month a set amount is taken from your checking account and placed into this investment account. As the saying goes, “If you can’t see it, you can’t spend it!”
August 14th, 2008
Brent A. Lindell, CTFA
This is an interesting question that tends to come up more often when the market is experiencing volatility such as we’ve seen this year and the fourth quarter of 2007.
We are all probably familiar with FDIC (Federal Deposit Insurance Corporation), which insures all depositors of a member bank against loss up to a certain dollar amount. The FDIC’s approach to making depositors entirely whole makes sense in the risk-averse bank account world, but what about the world of the stock market where volatility is part of the equation?
SIPC (Securities Investor Protection Corporation) was formed by Congress in 1970 as a way to help individuals whose money, stocks or other securities are stolen by a broker or put at risk when a brokerage fails for other reasons – SIPC does not bail out investors when the value of their stock, bonds, or other investments fall or fail for any reason (ie. the volatility of the stock market).
SIPC usually gets involved when a brokerage fails and assets are missing from customer accounts. SIPC steps in by replacing these missing stocks and other securities by calculating the financial worth (e.g. the number of shares of a certain stock) of a customer’s account as of the “filing date”. SIPC first looks to see if the actual securities owned by the customers can be replaced in the right accounts. If they cannot, SIPC’s reserve funds will be used, if necessary, to purchase replacement securities up to a ceiling of $500,000 per customer held in separate capacity (e.g. joint tenant or sole owner), including a maximum of $100,000 for cash claims. Quite a few broker/dealers or custodians will purchase additional insurance. Savant actually uses a custodian that provides additional brokerage insurance (underwritten by Lloyd’s of London) in the event that SIPC limits are exhausted. This coverage provides protection of securities and cash up to an aggregate of $600 million, and is limited to a combined return to any customer from a trustee, SIPC, and Lloyd’s of $150 million, including cash of up to $1 million.
By the way, there are some assets that are ineligible for SIPC. These include commodity futures contracts, currency, and investment contracts like limited partnership that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.
August 8th, 2008
Jerry S. Korabik, CFP®, AIFA®
With all of the negative news the last several months on the sub-prime crisis and the effects it is having on financial institutions, many investors are questioning whether their 401(k) plan is safe. There are a few ways to describe safe.
Separate Trust - First, as far as your plan going under because your company has financial problems, relax, you are safe. Your 401(k) plan is a separate trust not commingled with the general assets of the company. It is set up for future benefits to be paid to you and your beneficiaries. Your company cannot touch those vested assets.
Also note: Your vested assets in the 401(k) are fully protected from creditors in the event of your or your employer’s bankruptcy.
ERISA Fidelity Bond - The Employee Retirement Income Security Act (ERISA) requires that every “fiduciary” and “every person who handles plan funds” be bonded. The bonding protects the plan against loss of assets due to “acts of fraud or dishonesty on the part of the plan officials, directly or through connivance with others.” All ERISA plans are required to have this bonding by law. Check with your plan administrator if you have reason for concern.
SIPC and other Professional Insurance - What about protection from the financial institutions that hold my investments? Financial institutions that custody your plan typically have Securities Investor Protection Corporation (SIPC) insurance and additional insurance against errors and wrongful acts, like professional liability coverages. The amount of coverage per individual account typically is covered up to several millions of dollars. This has been a hot discussion point of late with some of the problems in the financial sector. If you have cause for concern with your assets, again check with your plan administrator to get clarification on how you are protected.
Market Risk - Finally, is your plan safe from market risk? That’s a different answer entirely and the answer is “it depends.” It depends on the quality of your investment options, and whether your plan offers diversified model portfolios. The only solution for reducing market risk in your portfolio is to self-insure through proper asset allocation. You cannot eliminate market risk, but you can reduce it and sleep better at night knowing you have a globally diversified portfolio which includes the most efficient investment options available.
August 7th, 2008
Jerry S. Korabik, CFP®, AIFA®
You’ve heard the old saying, don’t put all your eggs in one basket. When you put all of your eggs in one basket, the basket can get messy if one of those eggs begins to crack. The same is true with your 401(k) plan. Most efficiently run 401(k) plans have several well-diversified investment options from different investment asset classes (stocks, bonds, real estate, commodities, etc) for you to choose from. Your plan’s investment committee, as a fiduciary, has the task of making sure they act in your best interest. Their goal should be to do the research and due diligence to come up with an efficient mix of low cost investment options that will get you the asset classes you need to build your 401(k) portfolio. Some plans even offer you diversified model portfolios to make your job a lot easier. Your job, as a participant, is to choose among the investment options and develop a mix that is suitable for your risk and return needs, investment timeframe, and long-term retirement goals. You diversify to reduce the risk of one stock or one mutual fund from “cracking” in your basket. Owning diversified mutual funds in a well balanced portfolio is one sure way to reduce the risk of failure. Why? Because properly structured mutual funds in your plan may own hundreds of stock or bond securities. The risk of one or two of these companies failing (e.g. Enron, WorldCom) does not bring down the whole portfolio.
There have been a number of research studies throughout the last few decades that explore the components of risk and return and the effect different strategies have on our investment portfolios. Your risk and your return in your 401(k) portfolio come from three major sources:
- How you diversify across different investment asset classes. In other words, what is your mix of stocks, bonds, cash, etc?
- The fund managers or the specific securities you pick. Do active fund managers repeat and if so, should we try to hunt down the winners every year? And…
- Your ability to time the market, always knowing when to buy low and sell high based on short-term research you conduct.
When all is said and done, the research has shown us that over the long run, on average well over 90% of your risk and your return comes from your diversification or your asset mix (item #1 above). Very little benefit over the long run comes from trying to market time or trying to select the right individual securities. Diversification reduces risk and enhances returns for your portfolio and takes out the guess work of trying to always be right when picking stocks.
Given the recent market turmoil, it’s a good time to give your 401(k) portfolio a checkup. Market volatility is normal and is expected when investing in the capital markets. Market volatility is not a reason to change your allocation, but it should open your eyes to refocus on your goals and how you will meet these goals. Review your current asset allocation and make sure it is the appropriate one for you to accomplish your long-term goal of retirement success.
August 6th, 2008
Jerry S. Korabik, CFP®, AIFA®
If your company offers a 401(k) plan, you want to be able to sock away as much as you can to help fund your retirement. As statistics continually show us:
- there is a lot of concern as to how much Social Security will be around for us when we retire
- not many of us are covered by traditional pensions
- we are living a lot longer than our parents and grandparents
- we need to fund our own retirement with as many tools that we can find.
401(k) plans are right there at the top of the list of the savings tools we have in front of us. The common question many of you have is “how much should I be saving each year to build up my retirement nest egg?” The common answer I would give is “it depends.” How much you save is a function of many variables: your current age, your current income and consumption needs, your expected retirement date, the structure of your current 401(k) plan at work, your plans in retirement…the list goes on.. There is no right or wrong answer, but whatever you can save, at least get going on it and sock away as much as you can right now. A recent Vanguard 2007 study shows that the average savings rate by employees in their company plan is about 7.28%. Is that enough? For some of you that might seem undoable, maybe too high. No matter what percentage of your income you can save right now, the power of compounding shows us that the earlier you start, time is in your favor. It’s easy to procrastinate when it comes to saving for retirement. Socking even a little bit away early on will pay off long term. The sooner you begin, the more likely it is your plan will succeed. Lets look at an example of how saving early allows your money to work for you automatically if done right.
Investor #1 began investing $2,000 per year in the stock market (the S&P500) from 1988 to 1997, or 10 years, and then stopped investing. 10 years later by the end of 2007, the total investment of only $20,000 grew to about $104,000. Now take Investor #2. Investor #2 decided to wait 10 years before getting started and began investing $4,000 each year in stocks from 1998 through 2007. The total investment for Investor #2 was $40,000 over that span of time. Given the fact that Investor #2 started later and the stock market conditions were a little less favorable during that window, his/her account only grew to just over $55,000 by the end of 2007. Investor #2 had to put out twice as much in contributions by trying to play catch-up, and given the stock market performance, had a lot less to show for it than the investor who started earlier. No one has a crystal ball that can predict future market conditions from year to year, or even over the next 5 years, but one thing is certain. Time and compounding of interest works over the long run. The earlier you start, even if its 1% or 2% will help your plan succeed in the long run. Also, if your company matches your contribution, that is even more incentive for you to start contributing now to make sure you max out the amount you contribute to get the full company match. Don’t leave “free money” on the table. There are also plenty of websites that offer you calculators on determining how much is right for you to save. Check with your Benefits department or your 401(k) record keeper to see if they provide those calculators for you as well. Some plans also offer the ability for you to do what’s called “Save More Tomorrow.” It’s a program that allows you to automatically raise your 401(k) contributions whenever you get a raise in the future. More money goes into your pocket and more money goes into your 401(k) automatically. Again, check with your plan administrator to see if this is available for you.
There have been many tools put in place over the last several years to make it easier for us to save for retirement. Make sure you are tapping into those tools and you will be glad you did.
June 25th, 2008
Brian P. Conroy, CFP®
Fixed income (bond) strategies alone can be a disaster in a rising cost world. Here is a quick quiz: pick one:
A) Your money will outlive you
B) You will outlive your money
C) There is no C Plan on A or you might inadvertently find yourself defaulting to B, and B stinks!
When determining your retirement nest-egg investment strategy the most critical choice of investment allocation is typically a choice between growth and preservation. Said differently, it’s often a choice between bond oriented strategies, and stock oriented strategies.
I work with retirees and I can attest to the fact that many retirees do not believe they will live as long as they are actually likely to live. The result is that many choose a very conservative “sleep better” preservation oriented bond strategy, and avoid the “eat better” growth oriented stock strategy. The result is a great and very real risk of depleting the portfolio before the end of the rainbow. They avoid the volatility of stocks, but accept the very real risk that bond returns alone will result in their running out of money if they only live an average life expectancy. Remember that 50% of retirees will live longer than the “average.” Most retirees need to balance growth and preservation due to the inevitability of inflation. This means that assets staying ahead of inflation must be part of the plan, and this means stocks will be part of the plan. Don’t shoot the messenger! You will VERY likely need to invest for both growth and preservation, and own both stocks and bonds. Yellow bananas=bonds, green bananas=stocks.
Consider adding a few years to the average life expectancy when you do your long term planning. Follow the link for a fun little illustrated calculator that will give you some perspective about your personal potential longevity.http://www.nmfn.com/tn/learnctr–lifeevents–longevity_game
June 23rd, 2008
Brian P. Conroy, CFP®
I often talk to clients about investing for the “long term.” Often the response is some version of “I’m retired, I don’t have a long term.” Or, “I can’t take the risk of stocks, I can’t wait for challenging markets to recover- I’m retired.” My response is, “don’t bet your life on a having a short one!” Sharp penciled actuaries at the IRS suggest you may very well live longer than you think. See the IRA tables to get a glimpse of how long you might live:
http://www.finance.cch.com/tools/lifeexpectables_m.asp
See table III. This is the IRS table used to calculate required IRA distributions after age 70 ½. It suggests that according to the IRS a 70 year old might have a life expectancy of in excess of 26 years. Now if you think that’s crazy, let me ask you this. Don’t you think the IRS would like you to take your IRA distribution faster, if there wasn’t a strong actuarial reason for them to suggest a smaller required distribution? If you distribute faster, they collect taxes faster!
Why do I bring this up? Because many follow a saving or investing plan that will work if they live a short life. I suggest you bet on having a long life. The consequence of being wrong means you might leave behind more money than you intended. The consequences of betting on a short life and being wrong (and investing in saving accordingly) are unthinkable. Think long term or take up smoking (just kidding). Live Long and Prosper! Next time-How to invest for a LONG retirement.
June 17th, 2008
Thomas A. Muldowney, MSFS, ChFC, CLU, CFP®, CRC, CMP®, AIF®
You have probably heard of folks who looked like the paragon of fitness…you know the type, they run in marathons, work out every day, have a treadmill with a remote hooked up to the TV with earphones so they can run, watch TV, talk on the phone, and sip cappuccinos all at the same time. They look fit and have endurance that everyone envies.
To make it more challenging, they go to the doctor for regular yearly exams and are often told that ”everything looks good…keep up the good work.”
Next, you hear that they ended up in the hospital with a heart attack or some dreaded disease…and upon check in to the hospital, the medical staff says: “we checked your cholesterol, triglycerides, HDL and LDL, looked at the HDL/LDL ratio, measured the homocysteines, lipoproteins, the apolipoprotein and the c-reactive protein. While we were testing your blood we also looked at your leptin and your adiponectin, your Alpha Fetoprotein and your Carcinoembryonic Antigens. Turns out that not one measure was out of range, however WHEN WE STACK THEM ALL TOGETHER, they indicate a strong tendency for a heart attack…and by gosh, you had a heart attack and look, NOW we can see it…you were headed for a heart attack all the time!”
Hindsight is pretty much useless. It’s kind of like saying “I’ll tell you what you did wrong just as soon as it shows up in the results!” I do not want to hear what I did that was wrong. I want someone to look at my health and my financial indicators and fast forward them into the future…then I can know what is wrong and make the necessary changes. Knowledge, in advance of a potential calamity, helps me. I can change. I want to know if something is missing. I want to know if my actions are wrong. Let me know if there are steps that I can take that will enhance my health or my finances. With just this little bit of knowledge, I have a chance to prevent the damage.
Forensic Financial Analysis is like that. Forensic Financial Analysis is like taking an X-Ray, a CAT scan, an MRI, and an exhaustive blood test, but it does this on your financial matters. If your financial goals and your financial actions work in harmony, the chances are high that you will meet your financial goals…like college funding, saving for weddings, or even your own financial autonomy (retirement).
Your plans are probably written down (they should be). You probably have also started an investment program (like 401(k) savings or IRAs). Using Forensic Financial Analysis, you can find out the difference between what steps you have taken and whether you are on track to meet the goals that you have set out for yourself. It is too often that we discover there is a disconnect between the goals that were set and the steps that were taken. These poor connections are called “Gaps.” A gap is a hole in your plan. Just like any other gap, it can be plugged. Plugging the gaps in your financial plan and your financial activities makes your investment actions more efficient and increases your chances of success.
Some people want to retire early, and everyone dislikes paying taxes. To meet their goals, (1) retire safely and 2) reduce taxes), they use Muni-bonds…looks smart because the interest is not taxable. Strangely, if they are in a mid-range tax bracket, they would actually be better off if they took taxable bonds and paid the tax…they would still have MORE after they paid the taxes than for using the Muni’s.
Or how about this, they put stock funds inside their IRA and tax-free bonds in their regular account. The problem is that gains on a stock fund are taxed at capital gains rates and the tax-free bond earns a lower interest rate. Instead they should consider putting regular bonds inside the IRA (you get a higher interest rate than with tax-free bonds, so the interest rate that you earn just went up) and the stock funds in your regular account (partially tax deferred and dividends taxed at capital gains rates). This increases the efficiency of your portfolio…all due to Forensic Financial Analysis and a simple re-arranging of your investments.
Forensic Financial Analysis should be done long before you can see the retirement event on the horizon. Since it is like an exhaustive physical, you can find out steps that can be taken to improve your financial environment long before something goes wrong or long before you find out that you’re going to end up short. Ending up short means that you’ll probably have to work a bit longer or take up more risk…possibly two undesirable activities.
Doing some Forensic Financial Analysis usually falls outside the parameters of regular financial planning, so you’ll have to do a little research to find financial advisors who can do this for you…it is well worth the asking. Look for an advisor that can help you with the intricacies of Forensic Financial Analysis.
Good luck and may all your financial endeavors be successful!
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John D. Schissel, QPA, CPC 
