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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…)
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…)
Although practices may differ with respect to the involvement of the corporate sponsor in objective setting and asset allocation retirement, selection of investment managers is rarely delegated. In terms of dollars of assets, most funds are managed by investment managers outside of the corporation, inasmuch as few companies have the internal expert staff needed to perform this function. Moreover, corporate management may prefer to delegate the fiduciary responsibility for investment, and some companies believe that having outside managers reduces some of the problems with respect to pensions in labor negotiations. (more…)
These strategies can help recover lost income and/or assets following one or more of the life events described above. These strategies can also be used by late savers to make up for lost time and to prepare for a comfortable retirement.
Increase Contributions to Tax-Deferred Retirement Savings Plans. The 2001 tax law increased annual contribution limits for IRAs and employer 401(k), 403(b), and Section 457 plans, at least through 2010. Just a 1% increase in the amount of pay diverted to savings can result in thousands of additional dollars at retirement. Americans contributed an average of $3,514 to 401(k) plans in 2001 (Opdyke and Higgins 2002). The maximum plan contribution limits are $12,000 in 2003, $13,000 in 2004, $14,000 in 2005, $15,000 in 2006, and higher amounts adjusted for inflation thereafter. (more…)
Once your Average Indexed Monthly Earnings (AIME) is calculated, the Social Security Administration applies a percentage, called a Replacement Rate, to arrive at your monthly social security statement of benefits amount. The average Replacement Rate is 40 percent. However, the rate tends to be higher for low-income workers and lower for higher income workers. In this progressive way, lower-paid workers—who in theory would have less opportunity to save—get proportionally more of their incomes replaced by Social Security. (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…)
Retirement savings last longer when invested assets are withdrawn tax-efficiently. Generally, this means tapping taxable accounts or tax-exempt investments first, followed by retirement accounts made with after-tax dollars, and then accounts funded with before-tax dollars. Withdrawals from Roth IRAs contribution should be made last because they have no minimum withdrawal age and earnings grow tax-free. (more…)
Increasingly, many financially desperate households have found that the encumbrances of consumer credit have pushed them to the precipice of bankruptcy and into the tangled web of debt consolidation companies. Not all “nonprofit” debt management companies serve the consumers’ interest, and many are created merely to benefit the business founders. As a result, these companies must be selected with caution due to the large numbers of “upfront” fees that are required. In addition, most nonprofit enterprises receive a substantial amount of their operating expenses from the financial services industry and actually are created to serve the interest of creditors. (more…)
In the late 1980s, the U.S. Department of Labor’s Bureau of Labor Statistics (BLS), the government agency that calculates the Consumer Price Index, was directed by Congress to calculate an experimental Consumer Price Index for the Elderly (CPI E). This experimental index for Americans 62 years old and older is based on existing data, re-weighted to reflect expenditure patterns in the older population. A comparison with published CPIs found that older adults experienced a higher rate of inflation from 1983 through 1999 than the rates reported for either the CPI W or the CPI U. However, it is important to remember that the Consumer Price Index for the Elderly is an experimental index and is not regularly published by the BLS. (more…)