September 3rd, 2008 04:51pm
John Schissel
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 09:30am
John Schissel
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 29th, 2008 07:37am
Grant Moore
Grant W. Moore, CRPC
The notion of retirement used to conjure up images of the daily round of golf and traveling to exotic countries. The 21st century, however, appears to break this mold. While retirees will certainly reserve leisure time for their favorite activities and travel opportunities, many retirees will continue to work in some capacity.
Since 21st century retirees are faced with the daunting task of funding a 30+ year retirement, the financial benefits of part-time work are typically very important. Receiving a paycheck during the first stages of retirement allows individuals to withdraw less of their nest egg during the early years of retirement. While the financial impact of part-time employment is obvious, working retirees also find the following intangible benefits to be equally important.
Balance: Most individuals who have worked their whole lives typically feel a sense of boredom during retirement. By finding a part-time job that is truly enjoyable, retirees are able to strike a balance in their lives. Part-time work allows these individuals to be productive while also reserving time to travel and pursue hobbies which may have been neglected during their working years.
Personal Interaction: Retirees typically feel a sense of loss when they leave their jobs since many of their friendships have been formed at work. Part-time employment provides these individuals with the personal interaction and continued friendships that most individuals find important.
Dream Job: Retirement allows individuals to pursue their “dream jobs” which previously may not have been financially feasible when trying to support a family. Many people look for ways to turn their hobbies into jobs, such as working at a golf course. This dream job concept provides retirees with a sense of structure in their lives while also allowing them to work in a job that they find enjoyable.
Mental Activity: Most individuals see part-time work as an opportunity to stay mentally sharp. After being challenged by projects and deadlines their entire adult lives, the mental challenges that part-time employment brings is often beneficial for retirees.
While retirement is clearly a time to enjoy life after a long working career, the importance of part-time employment should not be overlooked. The intangible benefits associated with part-time employment can be as valuable as the paychecks retirees receive. Finding a job that you truly enjoy while spending quality time with friends and family can lead to a very fulfilling retirement.
August 27th, 2008 07:58am
Grant Moore
Grant W. Moore, CRPC
In 2005, the U.S. registered a negative consumer savings rate – a statistic not seen since the Great Depression. The past few years have not fared much better. With our current “I want it now” attitude, it is no wonder that credit cards have become a source of funding among consumers today. For those individuals who decide to tighten their belt and reduce spending, one simple question arises: Should I pay off my credit card or fund my 401(k)? In order to better answer this question, let’s look at the numbers.
The average interest rate on a typical credit card today is approximately 14%. Said differently, any amount put towards paying off your credit card debt is essentially a 14% guaranteed rate of return. A 401(k) plan, however, generally has a match tied to your contribution. Assuming a typical employer matching rate of 50 cents for every dollar (up to a certain limit), this match equates to a 50% rate of return. Sounds like this decision is a no-brainer, right? Wrong!
The key concept that is often overlooked is that the 14% interest rate tied to this credit card balance is compounded annually. In contrast, the 50% employer match to a 401(k) is a one-time contribution.
For example, assume you have $250 a month of “extra money” and a $5,000 credit card balance with a 14 percent rate. You decide to make the minimum payments of $125 per month towards this credit card and invest the remainder into your 401(k) plan. Since 401(k) plan contributions are generally made on a pre-tax basis, you would actually be able to save $167 per month into this plan (assuming a 25% tax rate). After 55 months of payments, the credit card debt would be completely erased. In addition, your 401(k) balance would have grown to approximately $17,200 assuming an 8% rate of return and 50% employer match.
If instead you decide to use the entire $250 per month to first pay off your credit card, this balance would be erased in just 23 months. Once this debt is paid off, you decide to invest all of your “extra money” into your 401(k) plan. By the end of the same 55 month period, your 401(k) balance would have grown to approximately $18,500, given the same set of assumptions. This example illustrates the detrimental effect that compounding credit card interest has on one’s financial future.
From a financial standpoint, it makes sense to pay off your credit card before funding a 401(k). Be disciplined and you can overcome your outstanding credit card debt.
August 26th, 2008 01:44pm
Grant Moore
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 22nd, 2008 07:53am
Scott K. Laue
Scott K. Laue, J.D., CRPS
It’s August and for many our vacations are behind us, and it’s time to turn our attention to going back to school. Whether you have a child who’s going off to college, one in high school, or you are a big kid yourself, it’s really important to add healthy credit usage to the list of essential life skills.
For many college bound students it may be the first time away from home, the first tine they are forced to pick up after themselves or do their own laundry. It’s also a moment when many parents decide to give their child a credit card for the first time, or co-sign for one. You can also rest assured that there is no shortage of sign-up opportunities as credit card companies are a staple on campuses across the country. You want to make sure your child learns to use credit safely and responsibility. After all, this is the first step on the road toward building a healthy credit score that could someday lead to buying a car or a house. By covering a few credit basics you help to ensure she starts out on the right path – and perhaps is less likely to make costly mistakes.
Beginning credit customers may need some guidance; they might not realize for instance that bills not paid in full result in something called “finance charges” and credit is best used as a valued resource, not a way of life (Spring Break in Cancun typically does not count as an emergency). It’s easy to lose sight of the fact that this is real money which will result in actual bills, especially when you haven’t yet had the experience of paying down a credit card balance month after month for purchases you made so long ago you forgot what they were, but seemed important at the time.
Part of learning how to handle credit should also be awareness of cash advance policies and annual fees. A comparison between cards based on rates, fees, and possible rewards is essential before opening any accounts. Many cards that offer rewards such as airline miles, cash back, or discounts might be useful for some students.
Children always learn by example so if your credit use is healthy you’ve given your student a great model to follow. Remember though that some mistakes are the best teachers so if your child does make some minor credit slip-ups in the beginning, it’s better now, especially while you’re still in the picture and the amounts are hopefully small. Treat it as a learning opportunity.
August 20th, 2008 07:55am
Scott K. Laue
Scott K. Laue, J.D., CRPS
As we all gear up to help our kids with their Reading, Writing & Arithmetic, it’s too bad that list doesn’t also include personal finances. Most kids learn the basics of money and making change in grammar school, but probably won’t learn how to manage money unless they choose finance as a career path. That means it is up to all of us to see that our children reach adulthood prepared to face life’s fiscal challenges.
The best and earliest tool parents have for teaching financial responsibility is the allowance. Even very young children should have discretionary funds to spend as they see fit. Saving, decision-making, planning, sharing, charity, and responsibility are just some of the lessons that can be taught through an allowance.
An allowance is not money a child earns for doing chores. Children should have age-appropriate tasks they are expected to do without pay simply because they are members of the family. The amount of the allowance depends on the child’s age and the parent’s income. It should be adequate to meet the child’s needs but not necessarily every want. Perhaps the most important benefit of an allowance is learning to develop independent thought. Expect children to do some unexpected things with their money, but allow them to make their own mistakes. The important thing is not to rescue them with more money but to help them work through their own solutions.
I suggest the following tips for teaching financial responsibility:
- Teach philanthropy at an early age. A portion of a child’s allowance, say 10%, should be allocated to a charity of their choosing. They should be encouraged to participate in canned good, clothing or toy drives, as well as helping to respond to natural disasters.
- Teach saving at an early age. It’s important to put something aside for the future. – savings isn’t for leftover money. The allocation for charity and savings should be made before any discretionary spending takes place. Again, 10% is a worthy goal. The experience of going to the bank, setting up a saving account and handing over the money can be fun as well as educational.
- Encourage an entrepreneurial sprit. If children have a special goal, encourage them to find ways to earn the necessary funds. Don’t create unnecessary jobs just so they can meet the goal – that’s the same as giving them the money. Let them find a job and make an offer or suggest the tried and true Lemonade stand concept.
- Never reward good behavior with tangible gifts. Goodness is its own reward. Paying for good behavior leaves parents open for juvenile blackmail. Parents don’t want to hear, “I’ll stop crying if you take me to the toy store.”
- Don’t try to compensate your children for your own deprivation as a child. There are some purchases that signify changes of lifestyle and quality as rites of passage. Allow your children the pleasure and pride that making those purchases for themselves can bring.
Our school systems do a good job with the Reading, Writing & Arithmetic but it’s unfortunate that personal finances don’t receive the same attention – that’s where we as parents can help fill the void. Take an active role in teaching fiscal responsibility starting at an early age and lead by example.
August 18th, 2008 08:07am
Scott K. Laue
Scott K. Laue, J.D., CRPS
As we all ponder the financial success of the Beijing Olympic Games and wonder what the financial impact might be if Chicago is successful in its bid for the 2016 Olympics, thoughts might turn to the individual athletes and the true meaning of winning the GOLD. Setting aside the emotional reward of an athlete’s (and his/her families) commitment and dedication as well as the tremendous value of endorsements received by the likes of Michael Phelps, the actual value of the medals themselves is less than “sterling”.
While varying in design from one Olympic game to another, the medals themselves are consistent in terms of size and content. The medals for the Champion and the runner-up are made of pure silver. Contrary to what most believe, the Champion’s gold medal is not made of solid gold, but is constructed of solid silver covered with a heavy plating of gold weighing not less than six grams. The bronze medals are comprised of copper, zinc, tin, and a very small amount of silver. In addition, all medals from the Beijing Olympic Games will have an inlaid Olympic logo made of Chinese jade, which makes them the most expensive Olympic medals in history.
While it’s difficult to put a price on Chinese jade these days, at current silver and gold prices the actual metal value of an Olympic gold medal is approximately $300. Obviously commodity pricing doesn’t reveal the true market value of an Olympic medal – that’s a matter of supply and demand. For example in 2005, an Olympic gold medal winner auctioned off her medal to raise money for a Polish Children’s hospital raising $101,500. I just checked eBay and found no gold medals available for sale but I did locate a 1976 Montreal Olympics 2nd place Boxing Silver Medal with a current bid of $1,726. The winning boxer was not identified nor am I sure what one does with someone else’s Olympic Medal.
While one of the most exciting and historic events at the Olympic Games is the medal ceremony, winners shouldn’t plan on retiring based on the intrinsic value of their well deserved accomplishment.
August 15th, 2008 10:32am
Brent Lindell
Brent A. Lindell, CTFA
You hear about them every once in a while: the lady that worked an ordinary job and her estate left over $4 Million dollars to her favorite charity. How did she get there? Was she the recipient of a sizeable inheritance? How could she accumulate such a large chunk of money? Today’s environment finds many people struggling with personal financial issues. How about the other side of the coin: what traits can you develop to put yourself (and your family) in good financial heath?
- Know exactly where your money goes. This is about budgeting and the fact that it’s not the big purchases that sneak up on you. It’s the every day occurrences that you don’t think about much like eating lunch out every day. Get a notebook and keep track of your everyday spending for two months. Once you get a firm grasp on how much you’re spending, set yourself up a weekly allowance and hold yourself to a new and improved budget.
- Know what you want your money to do. Set a goal (like retirement). Put a value on the goal (what you’d like to be able to spend in retirement). Then, set a timeline on when you want to get there. Last, put a plan into play (I need to put this amount aside monthly to get to where I want to be.
- Don’t carry credit card debt or if you do, have a plan to pay it down. We all know the story. If you have debt at 18% interest, you’ve got to get out of it as fast as possible or it will dig you a very deep hole.
- Invest in your job skills. If something happens to your present job, prepare to look “outside of the box” to get another position. If you have the chance to broaden your skill set in your present job – take it. It is all about marketability.
- Don’t expand your lifestyle as fast as your salary. As you progress through your career and have a rising income, take small steps with your spending habits. You don’t have to get a new car just because your neighbor did. By keeping this thought at the forefront – you can be quite adept at lower cost of living.
- Avoid pricey diversions. You just have to have that new ski-boat that actually hits the water twice a year and needs to be stored, winterized, and insured. Think about your purchase long and hard before you take the plunge. Maybe set a one-month time frame to mull it over and make sure it’s really the right decision.
- Give back. Directly help others less fortunate. There is nothing that hits home and tells you how lucky you truly are than giving your time to people in need.
Life is a balancing act. The balance is where you find in yourself the ability to enjoy your family and your friends while keeping an eye on the road ahead. I do not necessarily advocate becoming the cheapest of the cheapskates; just keep looking for that sweet spot by keeping one foot on the path I’ve outlined above.
August 14th, 2008 04:44pm
Brent Lindell
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.
Next Posts
Previous Posts
John D. Schissel, QPA, CPC 
