From the monthly archives:

October 2009

Pension Systems See Shortfalls in Future

by Michael Myers on October 13, 2009

Retirees dependent on pension systems for income to maintain their standard of living may be disappointed, according to an analysis by  Pricewaterhouse Coopers reported in the Washington Post.  The trade-offs of high investment returns with high risk are discussed. Excerpts below.

Individuals whose employer pension is based on a defined benefit plan may want to plan to supplement their retirement income from other sources. The choice of how to save and invest is more complex than ever. These are challenging times for investors and future retirees.

Link: Steep Losses Pose Crisis for Pensions – Washington Post

The financial crisis has blown a hole in the rosy forecasts of pension funds that cover teachers, police officers and other government employees, casting into doubt as never before whether these public systems will be able to keep their promises to future generations of retirees.

The upheaval on Wall Street has deluged public pension systems with losses that government officials and consultants increasingly say are insurmountable unless pension managers fundamentally rethink how they pay out benefits or make money or both.

Within 15 years, public systems on average will have less half the money they need to pay pension benefits, according to an analysis by Pricewaterhouse Coopers. Other analysts say funding levels could hit that low within a decade. [click to continue…]

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More Underfunded Pension Plans Looming

by Michael Myers on October 11, 2009

Many employers with defined benefit plans will be unable to make the required contributions to their pension plans, according to a consulting firm analysis. The employers are asking for funding relief from government regulators to help them lower funding requirements. Excerpts below.

If your employer contributes to a defined benefit plan for your retirement, you may not get what you expect. You might need to consider an alternate plan for saving for retirement.

Link: U.S. Employers Face Huge Pension Funding Tabs Without Relief, Watson Wyatt Analysis Finds

Despite recent increases in asset values and regulatory relief from the Internal Revenue Service (IRS), U.S. employers will be required to contribute $89 billion into their defined benefit (DB) plans in 2010 and more than $146 billion in 2011 unless they receive funding relief from the federal government, according to an analysis by Watson Wyatt, a leading global consulting firm.

“The combination of a deep recession and new pension law has landed employers in extraordinary circumstances, and they need temporary funding relief to lessen the enormous pension contributions required in the next few years,” said Mark Warshawsky, director of retirement research at Watson Wyatt, who testified on these points at an October 1 House Ways and Means Committee hearing. [click to continue…]

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Accumulating Wealth for Retirement

by Michael Myers on October 9, 2009

In this blog post by John Michael Greer, the importance of long-term investing in real assets becomes evident . Excerpts below.

Link: The Archdruid Report: The Metastasis of Money.

If economists took a wider view of the history of their discipline than they generally do, they might have noticed that what most of them consider a fundamental feature of all economies worth studying – the centrality of money – is actually a unique feature of an economic era defined by cheap abundant energy. Since the fossil fuels that made that era possible are being extracted at a pace many times the rate at which new supplies are being discovered, current assumptions about the role of money in society may be in for a series of unexpected revisions.

In an ironic way, this process of revision may be fostered by the antics of the world’s industrial nations as they try to forestall the Great Recession by spending money they don’t have. The economic crisis that gripped the world in 2008 was primarily driven by a drastic mismatch between money and wealth. When the price of a rundown suburban house zoomed from $75,000 to $575,000, for example, the change marked a distortion in the yardstick rather than any actual increase in the wealth being measured. That distortion caused every economic decision based on it – for example, a buyer’s willingness to go over his head into debt to buy the house, or a bank’s willingness to lend money on the basis of imaginary equity – to suffer similar distortions. Now that the yardsticks have snapped back to something like their proper length, the results of the distortion have to be cleared out of the economy if the amount of money in the system is once again to reflect the actual amount of wealth.

Yet this is exactly what governments and businesses are doing their level best to forestall. Governments are scrambling to prop up economic activity at a pace the real wealth of their societies can no longer support; banks and businesses are doing everything in their power to divert attention from the fact that a great many of the financial assets propping up their balance sheets were never worth anything in the first place and now, if possible, are worth even less. Both are doing so by the simple expedient of spending money they don’t have. As government deficits worldwide spin out of control and the total notional value of the world’s derivatives market climbs steadily above one quadrillion dollars, the decoupling of money from wealth is even more extreme than it was at the height of the real estate bubble.

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Retirement Investors Continue To Believe In Stock Market Returns

by Michael Myers on October 1, 2009

Is it denial or reality? Apparently the stock market rebound has convinced many investors that the financial crisis was a temporary setback. The results of a survey are described below.

If these investors continue to maintain a buy-and-hold mindset, with no downside protection, they could suffer significant losses again if the amazing 2009 rally is hit by a substantial correction.

Link: Investors Brushing off Key Lessons from Financial Crisis: Business Wire Business News: AZ – MSN Money.

Old Habits Die Hard: Surveyed investors have made no adjustments to their visions of a comfortable retirement…

78% of investors expect their standard of living in retirement to be the same or better than it is now 80% believe they have planned for the future and are confident they will have a secure retirement …and once again are depending on strong stock returns to fund these retirement dreams

Nearly half of investors (48%) continue to rely on equities as the foundation of their retirement portfolios 74% say it is likely the stock market “will bounce back and restore” any portfolio losses Overall, respondents believe a 9% annual mean return is a reasonable expectation for retirement planning Investors counting on a “healthy” retirement

77% of all respondents expect to have “better than average health” throughout retirement 61% have never accounted for health care costs in their retirement planning Investors admit they don’t know enough and are looking to advisors for help

72% want to know more about generating sustainable retirement income More than half (55%) agree that it’s more important than ever to work with a financial advisor Despite the most tumultuous year for investors since the Great Depression, Americans appear unfazed and continue to have high hopes for retirement, according to the results of research released here today by Allianz Global Investors, a leading global investment management firm. But they may need a more realistic approach to retirement planning and investing if their expectations are to be met.

A key finding of the survey is that as stocks have regained their vigor, so has typical American optimism. Although investors say they lost an average 30% of their retirement savings at the bottom, they are nonetheless overwhelmingly positive about the outlook for their retirements. A large majority (71%) of those surveyed believe the situation will turn around and they will have a great retirement. And nearly 80% say they are at least somewhat confident they’ll have the money they need when they want to retire. Furthermore, more than 60% believe that the market dislocation is a “temporary downturn and things will eventually go back to normal.” This refusal to learn from the experience may lead to problems down the line.

“Despite this refreshing optimism, tremendous damage has been done and Americans now have a lot less accumulated for retirement than they did even a few short years ago,” said Brian Gaffney, CEO of Allianz Global Investors Distributors. “Our survey reveals a need for all of us to honestly reassess our vision of retirement and to develop realistic and sustainable retirement savings models. It’s important that we take to heart the lessons learned during this financial crisis and make small changes now to improve our likelihood for a secure retirement in the future.”

The survey was conducted online by Harris Interactive within the United States between July 27 and August 10, 2009, among a nationwide cross section of 1,013 pre-retired household financial decision makers aged 30 or older with at least $250,000 in investable assets. Respondents for this survey were selected from among those who have agreed to participate in Harris Interactive surveys. The data have been weighted to reflect the composition of the U.S. adult population. Because the sample is based on those who agreed to participate in the Harris Interactive panel, no estimates of theoretical sampling error can be calculated.

One Year Later: Lesson (Not) Learned #1 – Stock Market Turnaround to Fund My Retirement Dreams

Despite their “up-close” encounters with market volatility, investors remain confident that the equity markets will soon get back to normal, providing them with the money they need to retire as planned – and this confidence may be keeping them from taking necessary steps to meet their goals.

Nearly half of all investors surveyed (48%) are relying on stocks as the foundation of their retirement portfolios, and approximately four in ten Baby Boomers (43%) and mature Americans (40%) who are quickly approaching retirement say that the stock market is the foundation of their portfolios. Surprisingly, 21% of mature investors – who are primarily over 65 years old – say they have 91-100% of their employer-sponsored plans invested in stocks.

“The traditional approach to retirement planning that is heavily weighted to stocks may expose investors to increased volatility, making it potentially more difficult to cover basic spending,” said Mr. Gaffney. “Investors need to establish a floor for minimum, ‘must-have’ retirement expenses, and then anchor that part of their portfolios with a conservative strategy designed to prevent irrecoverable losses. That will increase the likelihood of enjoying the full benefit of other investments for their ‘want-to-haves.’ Without that anchor, however, baseline needs like day-to-day expenses and healthcare may be at risk.”

Given this reliance primarily on equities to fund their retirement dreams, it’s no surprise that investors’ high hopes are underpinned by some optimistic assumptions about the equity markets. According to the survey, investors are counting on a rebound: 74% think it’s likely that the “stock market will bounce back and restore any losses” in their portfolios.

One Year Later:Lesson (Not) Learned #2 – Reversion to the Same Old Mean

Human behavior is hard to change. Despite massive declines in wealth over the past year, investors continue to rely on conventional investment and retirement planning assumptions. The mean expected average annual rate of return investors use in planning for retirement is 9% and a large majority (81%) is confident they’ll get their expected rate of return with their current asset allocation.

Investors continue to hold fast to conventional wisdom about retirement planning. Seventy percent believe that “buy and hold” is the path to success and more than half (56%) say that historical performance is a reliable predictor of future success. Despite the failure of many traditional strategies to withstand the crisis, nearly half of investors (48%) think that a 60/40 stock-to-bond split is the model portfolio allocation.

“While it’s highly unusual for all major asset classes to fall at once, severe tail events – those improbable events that cause significant adverse portfolio effects – occur more frequently than many people realize,” said Mr. Gaffney. “We believe that now is the time, while the downturn is still front of mind, for investors to take a closer look at their asset allocation and to consider alternative assets like commodities and Treasury Inflation-Protected Securities or TIPS that, unlike stocks and bonds, positively correlate with inflation and help lower overall portfolio risk.”

One Year Later:Lesson (Not) Learned #3 – Inflation Is Not a Risk, and Cash and Stocks Protect Against That, Anyway

Whatever fears investors have about meeting their retirement goals are tied closely to market performance, with investors ranking the financial markets as the biggest threat to a secure retirement. Indeed, they identify the impact of the economic crisis as an area they should know more about.

The threat of inflation, however, is much lower on the list of concerns for investors. Only 9% of investors rank inflation as the #1 factor threatening their retirement and perhaps more significant, there is an apparent lack of understanding about this risk on the part of investors. In fact, while 73% of investors say they factor inflation into their retirement planning, 45% of those surveyed couldn’t even venture a guess about an inflation rate for planning purposes.

Eighty percent of investors report taking actions to protect their portfolios against inflation, with saving more money being the number one action (43%), followed closely by investing in stocks or stock funds (39%). The vast majority of investors have overlooked “real return” assets like commodities and TIPS, which are only used in 12% and 9% of retirement portfolios, respectively.

“Inflation may be the single biggest risk to sustaining a reasonable lifestyle in retirement,” said Mr. Gaffney. “While there is a widespread belief that stocks are an adequate hedge against inflation, that has not always been the case. We believe the best way to protect against unexpected upticks in inflation is by maintaining exposure to real return assets such as TIPS, real estate and commodities.”

One Year Later:Lesson (Not) Learned #4 – Saving for a “Healthy” Retirement

With health care reform dominating the dialogue in Washington, it is more important than ever for investors to factor these costs into their retirement plans. However, the survey reveals that investors haven’t fully considered the impact of health care costs on their retirements. While 64% of investors say covering health care costs is a “must-have” in their retirement vision, 61% have never accounted for them in their retirement planning – including 62% of Baby Boomers who are on the fringe of retirement. Defying statistical possibility, a large majority ? 77% — of all respondents expect to have “better than average health” throughout retirement.

“It’s tough to confront the possibility of deteriorating health, let alone how to pay for it,” Mr. Gaffney said. “But reform notwithstanding, health care costs are likely to remain considerable for most retirees, as Americans enjoy ever longer and more active retirements. Ignoring these expenses in a retirement plan is like buying a beach house without storm insurance. Eventually, you’re probably going to take a hit, and the consequences might be devastating.”

And…One Year Later:Lesson LEARNED #1 – Investors Want to Learn More, Value Professional Help

Encouragingly, despite their high level of confidence and general optimism, investors want to learn more about a wide variety of issues related to retirement planning and are looking to financial advisors for help.

Seventy-two percent would like to learn more about the best ways to generate income in retirement, 71% said they should know more about anticipating health care costs in retirement, and 62% want help ensuring they don’t outlive their assets. Overall, more than half (55%) agree that it’s more important than ever to work with a financial advisor.

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