There is an old adage that says “numbers don’t lie.” So when it comes to figuring out how much money do you need to retire, you need to understand basic math, a few retirement concepts, and some financial retirement concepts. This is where you may wish you had paid more attention to your high school math teacher. (more…)

Once the investment objectives are set, the next decision involves distribution of the plan’s assets. This process is twofold: selecting the types of assets to be used and then determining the amount to be invested in each type.

In the United States, the preponderance of pension plans is invested in familiar financial assets such as bonds, stocks, and cash equivalents. However, investment is growing in other types of financial instruments, such as guaranteed investment contracts, private placements, venture capital investments and options. (more…)

Issues around retirement income planning are the most obvious. The traditional “three-legged stool” of retirement income planning—Social Security, pension income benefit, and income from personal savings and investments—is increasingly unsteady. Social Security faces a funding crisis in the first half of the twenty-first century because soon there may not be enough workers paying into the system to support those receiving its benefits. Social Security income lifts more than one in three older persons out of poverty—more than 60% of them women. It is by far the single most important contributor to financial security in old age in America. (more…)

In December 2002, the U.S. Treasury Department issued some long-awaited guidance to employers about cash balance plans. These proposed regulations, issued under Internal Revenue Code Section 411 (b)(1)(H), prohibit age discrimination employment in benefit accruals and are fairly comprehensive in nature. Although a public hearing on the regulations was held in April 2003, the rules are not yet final as this article goes to press.

In essence, the regulations generally indicate that a company cannot directly or indirectly affect a participant’s benefit accrual based on age. (more…)

For Early Retirement Incentive Plans within a defined pension plan, the most common incentive is the addition of age or service credits in calculating pension benefits. Typically, “5 and 5”—adding five years to age and/or five years to length of service—is offered. Other incentives may reduce or eliminate the penalty for early retirement, provide cash supplements until an employee is eligible for Social Security (in the main, at age 62, though some plans bridge payments to age 65), provision of life insurance, outplacement assistance, and less often, retiree health benefits (Hewitt Associates 1997). (more…)

Employer-sponsored defined benefit pension plans in which the benefit is defined by account value rather than monthly lifetime retirement income. Cash balance plans are often referred to as “hybrids” because they have some of the characteristics of traditional “defined benefit” (DB) pension plans and some of the characteristics of “defined contribution” (DC) plans, such as 401(k). In general, traditional defined benefit plans promise qualified employees an income benefit for life (or some other period) starting at “normal retirement age,” without regard to how much (or little) the employer must contribute to the plan to fund the benefit. Defined contribution plans, on the other hand, promise only how much the employer will contribute to a qualified employee’s account from time to time until the employee retires but they make no promises with regard to investment earnings or results, let alone a monthly income benefit for life. (more…)

We have alluded to the Transfer Payout Annuity from time to time, and now it gets the attention it clearly deserves. The Transfer Payout Annuity is literally an annuity, and it represents the mechanism by which funds are transferred from a TIAA accumulation to either one of the other investment choices in the TIAA-CREF family or as a taxable distribution after age 59 1/2 to the participant. (more…)

Once the cash flows to be financed are determined, whether via a detailed version of the determination of planned expenditures or the simpler “rule of thumb approach,” the question of how each $1 of assets will be turned into an income flow must be addressed. How much income will each dollar generate, and for how long? This is the basic issue of longevity risk (the risk that a person will live either beyond, or not until, their “life expectancy”). This source of uncertainty presents perhaps the most significant challenge for cash flow planning in retirement. (more…)

The majority of firms offering Early Retirement Incentive Plans use a combination of years of age and service to define those eligible for a window plan offer. Or they may have a “magic number” that can be reached by different combinations of age and service. For example, if the number is 75, then a person aged 55 with 20 years of service and another aged 60 with 15 years of service would both be eligible. (more…)

There is a variation of the traditional defined benefit plan called a cash balance defined benefit plan. This hybrid plan contains elements of both a defined benefit plan and a 401(k) plan. Instead of a guaranteed benefit, each year the company sets aside a dollar amount attributed to your individual retirement account and applies either a fixed or a variable rate of interest to the deposit. The value of this account then becomes your retirement plan after you vest, which is in five years. (more…)