October 11, 2009, 3:52 pm The Washington Post reports today (”Steep Losses Pose Crisis for Pensions”) on the sorry state of funding in state and local employee pensions, focusing on the impact of recent poor stock returns. While a poor investment climate certainly hasn’t helped, it’s not the biggest reason public employee funds are in bad shape. A bigger reason the plans are underfunded is that, in effect, we told them they can be. State and local pension plans use different and far less demanding accounting rules than do corporate pensions, even though public employee benefits are guaranteed by law while corporate pension benefits are not.
The key issue is how to “discount” future benefit obligations to the present, which tells us how much plans must have on hand today to fund their future liabilities. A high discount rate lowers the present value of a future obligation, while a low discount rate implies a higher present value.
Corporate pension plans must discount their future benefit liabilities at the low interest rates earned by high-quality corporate bonds, while public pension plans are allowed to use the much higher expected return on their assets, which include a high proportion of stocks and, more recently, hedge funds and private equity. The effects can be startling.
For simplicity, imagine a pension plan that owed a lump sum of $1 million 15 years from now. Discounting at a 6.25 percent interest rate—which is typical for corporate bonds today, although higher than several years ago—the present value of that obligation would be approximately $403,000. That is, the pension would require current assets worth at least $403,000 to consider itself “fully funded.”
Using an 8 percent return, which is not uncommon for public pension funds, the present value of that $1 million future obligation would be only $315,000. Plans that have investments worth at least $315,000 would consider themselves fully funded and, in some cases, use this status to justify increasing benefits.
Defenders of current actuarial practice argue that public pension funds are different, since governments can’t go bankrupt—a proposition that may well be tested soon—and because they can always raise taxes to fund deficits. The latter may be true, but surely the point of pension accounting is to give taxpayers some idea of the contingent liabilities hanging over them—which current methods do not.
Moreover, there is a good case that public pension funds should use lower discount rates than corporate pensions because public pension benefits are a safer asset for the beneficiary and thus a more binding obligation on the pension plan. Corporate pension benefits are not fully guaranteed if the sponsor goes bankrupt, while in most states accrued public pension benefits are treated as a binding obligation. In many states these benefits are guaranteed in state constitutions.
If these pension obligations are as binding as state government bonds, it makes sense to discount them at the same rates. Nationally, the yield on a state government bond with a maturity of 15 years averages around 3 percent. Discounted at that rate, a $1 million future obligation requires $642,000 in assets today—over twice as much as the funds themselves would consider necessary.
Moreover, while public pensions discount their future obligations at the “expected return” on their investments, this doesn’t mean we can actually expect those assets to meet their goals. The reason is that funds take as the expected return the average return on the asset classes they hold, and the average return is always higher than the median or typical return. Imagine that a public pension fund invested $315,000 in assets with an expected return of 8 percent and a standard deviation of returns of 13 percent. Using a Monte Carlo simulation we can check how often this portfolio is likely to exceed $1,000,000 in 15 years time. The answer is a little over 40 percent, meaning that there’s an almost 60 percent likelihood that even a “fully funded” public pension plan won’t be able to meet its obligations.
Allowing public pension funds to discount their benefit obligations at the expected return on their investments doesn’t just lower the amount of funding they must undertake, it also encourages them to take more risk with their investments. Were a fund to hold only safe investments like Treasury bonds it could discount its benefits only at a low interest rate. But the riskier the investments they make the higher discount rate they can use. It’s easy to see where this leads. For instance, the expected return on the Profunds “Ultrabull,” which doubles the returns on the S&P 500 would be, well, double the expected return on the S&P 500—or around 20 percent per year. This would solve plans’ funding problems on paper, but it’s hard to believe this is the most sensible investment strategy to take.
Accounting is a boring subject and so it’s not surprising that it doesn’t get much attention in the press or by lawmakers. But it’s hugely important.
Article by Andrew Biggs
Thursday, October 22, 2009
Tuesday, October 20, 2009
Welcome to "Life Cycle Planning" 101
Financial planning means something different to everyone. For some, it's about getting by month to month on their paycheck, for others it's about watching how their stock portfolio performs each day.
Unfortunately, few of us feel completely prepared to meet our ongoing financial obligations and objectives. Worries about money have become one of the greatest anxieties of our day - witness the dramatic rise in financial-related publications, radio and television shows, and websites.
Because each person's situation, lifestyle, and goals are so different, there is no single turnkey solution for successful money management. However, we can identify several steps that successful people take in pursuing their financial goals. We call these steps "Life Cycle Planning" because each step can be tied to the attainment of certain life-defining events that almost everyone goes through.
Development of Human Capital
Human capital refers a person's ability to turn their skills and abilities into a livelihood. The development of these skills and abilities helps us maximize our income potential in a competitive marketplace.
In our early years, usually between age 18 and 25, we set ourselves on a course that largely defines our human capital potential. Each of us makes an investment in human capital, whether we realize it or not. For some this is an investment of time, gaining experience and skills on the job. For others it is an investment in trade school or college.
It should also be noted that, although our greatest focus on human capital development generally takes place in our early years, this is an investment we should continue to make and assess throughout our working careers. Your ability to earn income, now and in the future, is the most valuable asset you own.
Expense Management and Budgeting
Once your "human capital" investment begins to pay dividends in the way of regular income, you must begin to develop and apply management skills to your newfound earnings.
Without managing your expenses, your wants and needs will invariably outpace your ability to earn. By implementing some form of budgeting, you can begin to set your sights on saving and meeting your longer-term financial objectives.
A beginning budget can be as simple as setting aside a predetermined percentage of your earnings each month for saving, spending what is left until it is gone, then spending nothing more until next month. A more sophisticated budget takes into account irregular and flexible expenses, emergency expenditures, establishment of a "rainy day" fund, as well as saving and investing.
Ensuring Adequate Liquidity
As your budget begins to pay off in a healthy savings account, you might begin to wonder how best to apply your limited savings to your unlimited needs and wants.
Without exception, the first financial need you should meet is to have an emergency fund. An emergency fund allows us to cover unexpected short-term needs using cash instead of leveraging your future earnings through costly loans. As a general rule of thumb, your emergency fund should be adequate to maintain your standard of living for six months.
Ample Insurance Protection
A major disability, the loss of a family breadwinner, a fire in your home, a family member's major medical problem or need for skilled nursing care ... the most dramatic emergencies can seldom be paid for completely using personal savings.
Although such tragedies can create devastating individual financial hardship, the financial risk of such events can be shared by very large groups of families and individuals through insurance.
Life insurance, disability income insurance, property and casualty (P&C) insurance, long-term-care insurance, and major medical insurance all have a place in your "Life Cycle Planning."
Long-Term Funding Objectives
Once you've accumulated sufficient funds to cover your emergency needs and purchased protection against financial risks, you can begin saving for your long-term goals in earnest. We can help you design a plan to pursue your retirement objectives that fits with your personal financial goals, risk tolerance, and time horizon.
For information on how PFS helps their clients achieve their objectives-Dana Schulz can be reached at 1-888-640-4770.
Unfortunately, few of us feel completely prepared to meet our ongoing financial obligations and objectives. Worries about money have become one of the greatest anxieties of our day - witness the dramatic rise in financial-related publications, radio and television shows, and websites.
Because each person's situation, lifestyle, and goals are so different, there is no single turnkey solution for successful money management. However, we can identify several steps that successful people take in pursuing their financial goals. We call these steps "Life Cycle Planning" because each step can be tied to the attainment of certain life-defining events that almost everyone goes through.
Development of Human Capital
Human capital refers a person's ability to turn their skills and abilities into a livelihood. The development of these skills and abilities helps us maximize our income potential in a competitive marketplace.
In our early years, usually between age 18 and 25, we set ourselves on a course that largely defines our human capital potential. Each of us makes an investment in human capital, whether we realize it or not. For some this is an investment of time, gaining experience and skills on the job. For others it is an investment in trade school or college.
It should also be noted that, although our greatest focus on human capital development generally takes place in our early years, this is an investment we should continue to make and assess throughout our working careers. Your ability to earn income, now and in the future, is the most valuable asset you own.
Expense Management and Budgeting
Once your "human capital" investment begins to pay dividends in the way of regular income, you must begin to develop and apply management skills to your newfound earnings.
Without managing your expenses, your wants and needs will invariably outpace your ability to earn. By implementing some form of budgeting, you can begin to set your sights on saving and meeting your longer-term financial objectives.
A beginning budget can be as simple as setting aside a predetermined percentage of your earnings each month for saving, spending what is left until it is gone, then spending nothing more until next month. A more sophisticated budget takes into account irregular and flexible expenses, emergency expenditures, establishment of a "rainy day" fund, as well as saving and investing.
Ensuring Adequate Liquidity
As your budget begins to pay off in a healthy savings account, you might begin to wonder how best to apply your limited savings to your unlimited needs and wants.
Without exception, the first financial need you should meet is to have an emergency fund. An emergency fund allows us to cover unexpected short-term needs using cash instead of leveraging your future earnings through costly loans. As a general rule of thumb, your emergency fund should be adequate to maintain your standard of living for six months.
Ample Insurance Protection
A major disability, the loss of a family breadwinner, a fire in your home, a family member's major medical problem or need for skilled nursing care ... the most dramatic emergencies can seldom be paid for completely using personal savings.
Although such tragedies can create devastating individual financial hardship, the financial risk of such events can be shared by very large groups of families and individuals through insurance.
Life insurance, disability income insurance, property and casualty (P&C) insurance, long-term-care insurance, and major medical insurance all have a place in your "Life Cycle Planning."
Long-Term Funding Objectives
Once you've accumulated sufficient funds to cover your emergency needs and purchased protection against financial risks, you can begin saving for your long-term goals in earnest. We can help you design a plan to pursue your retirement objectives that fits with your personal financial goals, risk tolerance, and time horizon.
For information on how PFS helps their clients achieve their objectives-Dana Schulz can be reached at 1-888-640-4770.
Tuesday, September 29, 2009
Insurance Is Too Important For A Last-minute Decision
Health care insurance and other benefits cost employees thousands of dollars a year -- on average about 30% of their total compensation.
But many employees wait until the last minute to make selections, do precious little research and make big mistakes that cost them in multiple ways. Two examples: paying more upfront for benefits they may not need; and making poor decisions that show up when a health or other emergency arises.
The 2010 open enrollment season at workplaces nationwide is ramping up as fall arrives.
Given what's at stake, experts say workers should pledge this time around to make better selections. There's a lot of ground to make up: Only 6% of consumers feel completely prepared to deal with health care costs, according to the Deloitte Center for Health Solutions. And most employees spend 30 minutes or less choosing their health plans, according to Cigna.
"People don't put a lot of thought into enrolling in their plans," Cigna spokesman Joseph Mondy says. "Typically, people spend like half an hour deciding. Compare that to how many hours you agonize before you buy a TV."
Some tips to get the most out of your employee plan:
Don't wait until the last minute
Enroll, and do so on time. Don't assume that you'll be automatically enrolled in the plan you chose last year.
"We have this whole month to review things, and we wait until the night before we have to make the decision to open the booklet," says Lenny Sanicola, an employee benefit specialist with WorldatWork, an association of human resources professionals.
His recommendations: Sift through materials early; discuss plans with family members; make a list of questions; and attend your company's face-to-face meetings. If you don't get the answers you need, go to your human relations officer or supervisor. Understand what you're signing up for and what your out-of-pocket expenses are going to be.
"As you get into the 2010 decision-making, there are fewer simple decisions," says Cigna's chief learning officer Karen Kocher.
Include others in decisions. Family members may think that taking advantage of legal coverage, a pet insurance option or flexible-spending account make sense, even if you don't. Those opinions should matter.
Check eligibility requirements
Before you make a decision to jump to your spouse's plan in this rocky economy, make sure you'll be able to return to your employer's plan if you waive enrollment now and your spouse loses his or her job later.
Also, determine whether your adult children are still eligible or newly eligible for your family plan.
"Eligibility is where people can really get tripped up," says Michelle Connor, a senior benefit consultant at CBIZ Employee Services.
Employees should also realize that companies are auditing to ensure former spouses or unqualified adult children are not lingering on family plans. Don't be surprised if your human resources office suddenly requests your offspring's college schedule.
Think about health coverage costs
The single most important question when choosing any health insurance plan is, "What is my annual liability?" Connor says.
Add likely out-of-pocket costs to the premiums being deducted from your paycheck. When you determine likely out-of-pocket costs, put that amount in a pretax flexible-spending account.
Kocher says employees must understand their needs and the available options: "The absolute best fit will not only get you the best coverage, it will also assure your out-of-pocket costs are minimized."
Mondy says websites can often be go-to places for prescription-price comparisons and, increasingly, for cost-and-quality comparisons of medical professionals.
"Find out all the programs your company offers. You may be pleasantly surprised," he says.
One program many people don't take advantage of: flexible-spending accounts.
"One of the things that scares people about an FSA is the use-it-or-lose-it provision, but you can always run out and buy a whole season's supply of cold and flu medication or a new pair of eyeglasses" at the end of the year to use money in the account, says Ken McDonnell, program director for the Employee Benefit Research Institute.
Consider life, disability insurance
If your age or health make it expensive to get private life insurance, your employer can be a good place for that because it's usually less expensive and requires little or no medical underwriting, says Barry Petruzzi, vice president of group benefits for Guardian Life Insurance Company of America. He says employees can use an online calculator to determine whether they should buy more insurance than an employer already provides for free.
Connor also recommends buying short-term disability insurance "every day and twice on Sunday" because it ensures your paycheck.
She says six out of 10 employees will be on disability at some time during their careers, and most will be on short-term disability.
Pregnancy, for example, falls under short-term disability. She says even the group she calls "the young infallibles" are exposed to plenty of risk of short-term injury from sports and auto accidents.
Educate yourself about investments
Jane White, president of Retirement Solutions of Madison, N.J., says employees need 10 times their final year's salary for a retirement nest egg, so save accordingly.
To do that in the best way, says WorldatWork's Sanicola, employees should take advantage of financial seminars and online tools offered by companies, and keep an eye on investing fees.
If you can afford to contribute enough to your 401(k) or other such plan that's eligible for a company match, do it.
"Your net pay won't go down 6% if you contribute 6%, because you're using pretax money," Sanicola says.
Also, if your company provides its match in company stock, divest out of it as quickly as possible, White says. A diversified portfolio is insurance against losses if your company stumbles and the stock price plummets.
Get and stay healthy
Some employers and insurance companies offer financial incentives to employees who use gyms or attend smoking-cessation programs.
Ask if your employer provides any reimbursements. If they do, make lifestyle changes to take advantage.
Copyright 2009 Gannett Company, Inc.All Rights Reserved USA TODAY
September 25, 2009 Friday FIRST EDITION
SECTION: MONEY; Pg. 3B
BYLINE: Kathryn Canavan Special for USA TODAY
But many employees wait until the last minute to make selections, do precious little research and make big mistakes that cost them in multiple ways. Two examples: paying more upfront for benefits they may not need; and making poor decisions that show up when a health or other emergency arises.
The 2010 open enrollment season at workplaces nationwide is ramping up as fall arrives.
Given what's at stake, experts say workers should pledge this time around to make better selections. There's a lot of ground to make up: Only 6% of consumers feel completely prepared to deal with health care costs, according to the Deloitte Center for Health Solutions. And most employees spend 30 minutes or less choosing their health plans, according to Cigna.
"People don't put a lot of thought into enrolling in their plans," Cigna spokesman Joseph Mondy says. "Typically, people spend like half an hour deciding. Compare that to how many hours you agonize before you buy a TV."
Some tips to get the most out of your employee plan:
Don't wait until the last minute
Enroll, and do so on time. Don't assume that you'll be automatically enrolled in the plan you chose last year.
"We have this whole month to review things, and we wait until the night before we have to make the decision to open the booklet," says Lenny Sanicola, an employee benefit specialist with WorldatWork, an association of human resources professionals.
His recommendations: Sift through materials early; discuss plans with family members; make a list of questions; and attend your company's face-to-face meetings. If you don't get the answers you need, go to your human relations officer or supervisor. Understand what you're signing up for and what your out-of-pocket expenses are going to be.
"As you get into the 2010 decision-making, there are fewer simple decisions," says Cigna's chief learning officer Karen Kocher.
Include others in decisions. Family members may think that taking advantage of legal coverage, a pet insurance option or flexible-spending account make sense, even if you don't. Those opinions should matter.
Check eligibility requirements
Before you make a decision to jump to your spouse's plan in this rocky economy, make sure you'll be able to return to your employer's plan if you waive enrollment now and your spouse loses his or her job later.
Also, determine whether your adult children are still eligible or newly eligible for your family plan.
"Eligibility is where people can really get tripped up," says Michelle Connor, a senior benefit consultant at CBIZ Employee Services.
Employees should also realize that companies are auditing to ensure former spouses or unqualified adult children are not lingering on family plans. Don't be surprised if your human resources office suddenly requests your offspring's college schedule.
Think about health coverage costs
The single most important question when choosing any health insurance plan is, "What is my annual liability?" Connor says.
Add likely out-of-pocket costs to the premiums being deducted from your paycheck. When you determine likely out-of-pocket costs, put that amount in a pretax flexible-spending account.
Kocher says employees must understand their needs and the available options: "The absolute best fit will not only get you the best coverage, it will also assure your out-of-pocket costs are minimized."
Mondy says websites can often be go-to places for prescription-price comparisons and, increasingly, for cost-and-quality comparisons of medical professionals.
"Find out all the programs your company offers. You may be pleasantly surprised," he says.
One program many people don't take advantage of: flexible-spending accounts.
"One of the things that scares people about an FSA is the use-it-or-lose-it provision, but you can always run out and buy a whole season's supply of cold and flu medication or a new pair of eyeglasses" at the end of the year to use money in the account, says Ken McDonnell, program director for the Employee Benefit Research Institute.
Consider life, disability insurance
If your age or health make it expensive to get private life insurance, your employer can be a good place for that because it's usually less expensive and requires little or no medical underwriting, says Barry Petruzzi, vice president of group benefits for Guardian Life Insurance Company of America. He says employees can use an online calculator to determine whether they should buy more insurance than an employer already provides for free.
Connor also recommends buying short-term disability insurance "every day and twice on Sunday" because it ensures your paycheck.
She says six out of 10 employees will be on disability at some time during their careers, and most will be on short-term disability.
Pregnancy, for example, falls under short-term disability. She says even the group she calls "the young infallibles" are exposed to plenty of risk of short-term injury from sports and auto accidents.
Educate yourself about investments
Jane White, president of Retirement Solutions of Madison, N.J., says employees need 10 times their final year's salary for a retirement nest egg, so save accordingly.
To do that in the best way, says WorldatWork's Sanicola, employees should take advantage of financial seminars and online tools offered by companies, and keep an eye on investing fees.
If you can afford to contribute enough to your 401(k) or other such plan that's eligible for a company match, do it.
"Your net pay won't go down 6% if you contribute 6%, because you're using pretax money," Sanicola says.
Also, if your company provides its match in company stock, divest out of it as quickly as possible, White says. A diversified portfolio is insurance against losses if your company stumbles and the stock price plummets.
Get and stay healthy
Some employers and insurance companies offer financial incentives to employees who use gyms or attend smoking-cessation programs.
Ask if your employer provides any reimbursements. If they do, make lifestyle changes to take advantage.
Copyright 2009 Gannett Company, Inc.All Rights Reserved USA TODAY
September 25, 2009 Friday FIRST EDITION
SECTION: MONEY; Pg. 3B
BYLINE: Kathryn Canavan Special for USA TODAY
Thursday, September 24, 2009
American Airlines cutting retiree health benefits for 65+
Since the recent news about American Airlines eliminating their medicare benefits for their retirees who are over 65, I have been very concerned for those who are caught in this ugly mess. But I am reminded of the numerous clients who went through this very same experience last year with several large companies right here in the Dallas area. Not to mention names, but several companies felt that it was necessary to lower some costs by lowering some benefits for people that had devoted their entire lives to working for that company, only to find out that you really don't matter that much after all.
Here's the silver lining that most of these AA retirees don't understand. When you lose your group coverage, it's a "qualifying event". That means that you can sign up for another Medicare Supplement without having to qualify based on your medical history. If you are undergoing treatment for a current illness or a chronic condition does not matter, they have to accept you into a new plan that is authorized in your zip code.
In the Dallas/Ft. Worth area, most of out clients find that the premiums are more affordable than they thought and more often than not, they have better coverage because they no longer have deductibles or co-pays that they have to pay. You decide which doctors you want to see, not a HMO network, and your care continues on uninterrupted.
So the moral of the story is...you have options! Don't fret! Just make sure you apply for your new plan within 60 days to take advantage of guaranteed enrollment.
Call for information specific to your age and location!
214-608-8933
Here's the silver lining that most of these AA retirees don't understand. When you lose your group coverage, it's a "qualifying event". That means that you can sign up for another Medicare Supplement without having to qualify based on your medical history. If you are undergoing treatment for a current illness or a chronic condition does not matter, they have to accept you into a new plan that is authorized in your zip code.
In the Dallas/Ft. Worth area, most of out clients find that the premiums are more affordable than they thought and more often than not, they have better coverage because they no longer have deductibles or co-pays that they have to pay. You decide which doctors you want to see, not a HMO network, and your care continues on uninterrupted.
So the moral of the story is...you have options! Don't fret! Just make sure you apply for your new plan within 60 days to take advantage of guaranteed enrollment.
Call for information specific to your age and location!
214-608-8933
Wednesday, September 23, 2009
What is Income Planning anyway?
You hear buzz words used over and over again and everyone assumes that everyone else knows what it means. In the world of financial strategies, income planning means understanding how much your paycheck will be when you actually retire. You work your whole life and you know how you are going to be compensated..well for the most part.
The same goes with retirement. Would you take a job without knowing what your compensation was going to be? Would you quit your current job without having another one lined up? Depends on the day I guess, but you get my point.
Don't get too close to retirement without knowing your exit strategy.
If you are going to retire on January 1st of 2010, then you should know what your January 15th income will be. If you don't then you don't have a plan!!
It's easy, you just have to make the effort. You'll spend hours and hours planning a vacation or a party, but people don't make their financial planning a priority until it's too late to have a real impact on their retirement.
More planning now means less stress later!
The same goes with retirement. Would you take a job without knowing what your compensation was going to be? Would you quit your current job without having another one lined up? Depends on the day I guess, but you get my point.
Don't get too close to retirement without knowing your exit strategy.
If you are going to retire on January 1st of 2010, then you should know what your January 15th income will be. If you don't then you don't have a plan!!
It's easy, you just have to make the effort. You'll spend hours and hours planning a vacation or a party, but people don't make their financial planning a priority until it's too late to have a real impact on their retirement.
More planning now means less stress later!
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