The final task in the area of investments is to establish a monitoring system to evaluate investment performance and to determine whether the fund’s investment objectives have been met. This topic is the subject of a separate monograph published by the Financial Analysts Research Foundation, and it will not be covered at any length here. However, a few comments are pertinent. (more…)

There are two traditional ways to value pension plan assets, i.e., market value and book value (cost). The actuary has always been skeptical about using market value due to the frequency of large short-term swings in security prices. In order to use market value properly, the actuary should value the liabilities at market also, which implies changing the interest rate assumption each year to meet the changing condition of the securities marketplace. This approach is, in fact, what is encouraged by FASB No. 35, which requires market value of assets to be used for disclosure purposes. There is an illusion of accuracy connected with market values because of the assumption that securities could be converted to cash at published prices. In fact, it is questionable whether any large fund could be liquidated with rapidity and if many tried to do so simultaneously, the entire securities market would collapse. (more…)

The conventional approach to pension asset management and asset allocation in retirement assumes that one pool of invested pension assets should be regarded as a single portfolio (although possibly with multiple investment managers) having a single level of risk tolerance and acting as an offset to a single pool of pension liabilities. However, the estimated magnitude of the pension liabilities is something less than precise and establishing investment objectives to meet such an uncertain target is not easy. Some corporations have met this problem by making distinctions among the liabilities and offsetting each pool of liabilities with a separate portfolio with appropriate risk and return objectives. (more…)

Cash flow planning is the process by which the flow of income necessary to sustain a given standard of living in retirement is identified and financed. It is perhaps the most critical part of retirement planning. Cash flow planning for retirees depends crucially on two factors: (1) the resource constraints a retiree faces in terms of assets and other retirement income sources and (2) the desires and needs a retiree has for spending in retirement. Both of these, in turn, depend to a great degree on when the planning is done. (more…)

There are at least two schools of thought with regard to the basic principles involved in planning for retirement spending. The first, and most common, approach poses the problem as a seemingly simple determination of the retirement income needs of a retiree relative to pre retirement income. This is typically expressed as a “replacement rate,” in which a retiree targets a given fraction of his or her pre retirement income level as an amount adequate to sustain a desired lifestyle without working. Often, a particular level of income is given as a rule of thumb (e.g., 80% of pre retirement income). (more…)

This also apparently routine topic produces its share of confusion, and we would like to dispel as much of it as we can.

We tend to think of the Transfer Payout Annuity as a transfer of funds in the same way that we think of movement of money from one bank account to another. If we choose to make the transfer over a period of ten years in relatively equal payments, then a balance will remain in the old account until the final transfer is made. A Transfer Payout Annuity is not a regular account. As with any annuity, you use a sum of money, in this case the amount you wish to transfer, to purchase a cash flow that will take place over a period often years. (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…)

Like the peculiar behavior of the dog in the night in the Sherlock Holmes story “Silver Blaze,” one of the obvious but overlooked clues about the insurance orientation of TIAA-CREF appears in the names of the accounts that are given to the various accumulation alternatives available to you. Each account is labeled an “annuity,” and each contribution is called a “premium.” To avoid confusion you should note that what TIAA-CREF labels as an “account,” you probably would call an investment choice or fund.

Stripped to the basics, your Retirement Annuity (or “Retirement Annuity”) boils down to an accumulation agreement between you and TIAA-CREF. (more…)

There are a number of strategies for managing your post retirement income sources. One idea, which I discussed earlier, is to postpone taking Social Security until you reach age 70. A five-year delay is worth about 35 percent more in monthly benefits. You may want to consider buying a five-year immediate annuity to replace the income you are electing to defer from Social Security.

If at all possible, make sure that you avoid penalties on withdrawals from your retirement plans. (more…)

One of the most important planning decisions you’ll make is how to best generate income for your retirement. Different sources of income have different characteristics and potentially different pension tax consequences. It’s very important to be wise in establishing and maintaining your post retirement cash flow. Here are the various types of income and their representative taxation: (more…)