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Ultimate Resource For Retirees And Retirement Planning (#GotBitcoin)

We can’t tell the difference between needs and wants and are unable to delay gratification. From the lofty perch of old age, and after a lifetime of thrift, I declare that I am qualified to comment on how not to waste money. Ultimate Resource For Retirees And Retirement Planning (#GotBitcoin)

We’ve all heard the reports: Most Americans live paycheck to paycheck, a large number can’t come up with $400 for an emergency, and there’s no money to save for retirement and other goals.


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Most of that data comes from surveys where people are, in effect, saying they don’t have enough income. My curmudgeonly reaction: Stores, fitness centers and entertainment venues are packed with shoppers, many of them buying unnecessary goods and services.

If three-quarters of Americans are living paycheck to paycheck, how can they afford to spend like this? It’s a funny thing: I have yet to see Warren or Bill in one of the many local spas.

Most Americans live like no other people on earth. We have more and bigger stuff: Larger houses, bigger vehicles, more shoes. And, in my not so humble opinion, we can’t tell the difference between needs and wants, between necessities and desires—and we sure can’t defer gratification. These 16 Money Wasters

All this leads me to one conclusion: We’re unable to control our spending or manage our money. Here are 16 things that this 75-year-old considers big money wasters:

These 16 Money Wasters:

1. Tattoos. They’re an admitted obsession of mine. What will they look like when you’re my age? From what I’ve heard, a good tattoo artist charges $200 an hour.

2. Vacations. Hey, everyone needs a break. But you don’t need to go into tuition-level debt to have a good time. Your kids will survive if they never visit the Magic Kingdom.

3. College. Picking a college involves many factors. Affordability is one that’s often overlooked. If the cost of the school you choose will land you in debt, you’d better have a plan for paying it off. Don’t mortgage your future, just so you can have a prestigious decal on your car window.

4. Restaurants. Eating out, or buying $4 designer coffee, is expensive and—wait for it—it’s also a luxury. Skip that daily $4 coffee and after 30 years you’ll have more than $121,000, assuming a 0.5% monthly return.

5. Opportunities Lost. We do it every day by failing to grab the employer match on our 401(k) plan, not investing in a tax-free Roth IRA, failing to fund a flexible spending account to pay medical costs with pretax dollars, and withholding too much from our paycheck, so we’re essentially making an interest-free loan to the IRS.

6. Transportation. You don’t “need” an SUV or $40,000-plus pickup truck to get from A to B. My four kids grew up riding in our 1972 Duster. Now they, too, all have trucks or SUVs.

7. Credit Cards. When people say they live paycheck to paycheck, does that include purchases put on credit cards that aren’t paid off that month? In that case, they’re spending more than their paycheck—and what they buy will cost them the purchase price, plus a hefty interest rate.

8. Lottery. The lowest-income groups spend the most on lottery tickets, wasting hundreds of dollars a year—about the same as that $400 emergency fund they don’t have. Not to worry: 60% of millennials think winning the lottery is part of a wise retirement strategy.

9. Clothing. My new condo has two bedrooms and three walk-in closets, two of them larger than the bathroom in my old 1929 house. The average adult spends $161 a month on clothing. We are obsessed with keeping up with the latest fashions and ensuring nobody sees us in the same clothes twice.

10. Shoes. Surveys suggest the average American woman owns more than 25 pairs of shoes, which they admit they don’t need. So why buy so many pairs? It seems shopping and wearing trendy stuff makes us feel good.

11. Tchotchkes And Stuff. Clean out a house after many years—which my wife and I just did—and you often hear the words, “Where did we get that?” Though relatively inexpensive per item, tchotchkes and similar stuff cost money—and it all adds up.

12. Failing To Look Ahead. Henry Ford said, “Thinking is the hardest work there is, which is the probable reason why so few engage in it.” I still marvel that people spend so little time thinking about retirement. After working 30 to 40 years, they reach retirement with no plan and are shocked they can’t live on Social Security alone. Planning for retirement early in your career is essential for financial security—and it isn’t that hard.

13. No Backup Plan. I like to think ahead about “what ifs” and how I’ll deal with them. In my head, I have backups for the backups. I recently took out a large mortgage to buy a condo. Now I’m thinking, “What if I can’t sell the house to cover the mortgage? What if I must do some upgrades to sell the house?” I temporarily stopped reinvesting my tax-free bond interest, so I can build up more cash—just in case.

14. Holidays. Somehow, every December, financial caution goes out the window and we pay for it the following year. But my pet peeve are those inflatable characters on lawns that cost hundreds of dollars. Talk about blowing money.

15. Toys. One study shows that U.S. parents spend $6,500 on toys during a child’s upbringing. The spending is even higher for millennials, who favor “smart” toys—toys that do the thinking for the child. There’s something wrong with this picture. Hey, I’ll challenge anyone to a contest dropping clothespins into a milk bottle.

16. Haircuts. The average haircut reportedly costs $28.30 in a barber shop. Many men pay a lot more. Nowadays, nearly a third prefer a “salon.” I pay $12 at my local barber. But I’m still annoyed: My hair is disappearing, but the price is inching up.


Updated: 8-20-2021

Quirks In A U.S. Treaty With Malta-Based Pensions Turn Into A Tax Play

An offshore tax shelter promises rich Americans they can avoid lots of capital-gains taxes by setting up pension plans in Malta—and maybe some can.

Have you heard of Malta Pension Plans? They’re offshore tax shelters that are hot with some wealthy Americans.

As usual with tax shelters, the promoters promise they’ll slash tax bills by making clever use of legal quirks. That puts them in a somewhat gray area, meaning the tax savings could bring legal risks.

Malta has caught the attention of advisers due to quirks in a 2011 tax treaty between the U.S. and the small, sunny island that sits at a historic crossroads in the Mediterranean Sea.

Advocates say Malta plans can dramatically lower U.S. taxes on the sale of highly appreciated assets like cryptocurrency, stock or real estate. Instead of paying a top federal rate of 23.8% on capital gains—or 43.4% if a Biden administration proposal is enacted—U.S. investors can fund a Malta pension with such assets, sell them, and soon withdraw large chunks of the money tax-free if the saver is age 50 or older.

Predictably, Malta pensions have also caught the eye of the Internal Revenue Service. In July, the agency put them on its “Dirty Dozen” list of tax scams to avoid. However, the IRS said only that it may challenge some Maltese pensions—not that all plans are abusive, or that it will challenge them.

California attorney and Malta-plan advocate Jeffrey Verdon has posted a YouTube video extolling these strategies as a “unique opportunity” for high-income taxpayers. The video says these pensions are like “a supercharged cross-border Roth IRA” that offer high earners benefits they typically can’t get from Roth IRAs under U.S. rules.

Mr. Verdon declined to comment on Malta pensions.

Cross-border specialists concur that the U.S-Malta treaty’s language provides unusual tax benefits. They caution that the Treasury Department may have overlooked them when it negotiated the treaty, and the loopholes may not last.

“Malta exempts pension payments received by its own residents, so the treaty requires the U.S. to exempt certain payments from U.S. tax,” says Jeffrey Rubinger, an international tax lawyer in Miami.

Did U.S. officials mean to allow Americans to set up Maltese pensions mainly to avoid U.S. taxes? “It’s unlikely this outcome was intended,” he says.

Here’s a simplified example of how Malta pensions work under the plain language of the treaty, based on a blog post by Mr. Rubinger.

Say that Jane is a 49-year-old U.S. resident with highly appreciated cryptocurrency holdings and shares of a startup about to go public. These assets have a cost basis—i.e. the starting point for measuring taxable capital gains—of $10 million.

After the IPO, the assets could have a total value of $100 million. Under current law, the top rate on these gains would be 23.8%, or about $21 million.

As part of her retirement planning, Jane contributes these assets to a Maltese pension account, which is allowed to receive large contributions of appreciated assets. (Assets in the plan don’t have to be in Malta; they can be held at a U.S. institution and invested by U.S. managers.) Jane then sells both assets and has $100 million in her pension account.

Under Malta rules, Jane needs enough assets to provide her with a pension payout of “sufficient retirement income,” but meeting that threshold isn’t hard. She’ll owe tax to Uncle Sam at ordinary-income rates on part of this payout. But she doesn’t have to withdraw right away, and the assets can grow tax-free.

‘Does the law really intend to allow people to avoid all these taxes?’
— Scott Diamond, Roxbury Consultants

Now comes the tax magic: Based on the Maltese criteria, Jane has more than enough money saved for her pension, and she can take large withdrawals of excess funds as lump-sum payments once she turns 50—even on assets that had a lot of untaxed appreciation going into the plan.

These payouts are free of both Malta and U.S. tax under the treaty language, say advocates.

The Maltese rules allow the first tax-free lump sum to be about 30% of the assets, or $30 million for Jane. The next tax-free lump sum, about half the remainder, can come out in the fourth year.

If the assets have grown to $85 million by that point, Jane could likely take another tax-free payout of $40 million or more.

As a result, Jane could withdraw $70 million or more, tax free, within five years of setting up her plan—saving her about $17 million of U.S. tax. She can take further tax-free withdrawals annually after that.

This strategy comes with caveats. Richard LeVine, an international tax lawyer with Withers Bergman, says that to be free of U.S. tax, the payouts under the U.S.-Malta treaty must also comply with the treaty’s overall conception of a pension.

“To qualify for the tax-free treatment, a plan has to operate mainly as a pension—or the IRS could argue it’s not one,” he says.

Improper moves could include making large withdrawals too fast, or putting too much of one’s net worth into a plan—judgment calls that depend on a taxpayer’s circumstances.

In addition to an IRS crackdown, the Treasury Department could seek changes to the Malta treaty. Congress could also move to limit benefits, says Mr. LeVine.

Scott Diamond, a Los Angeles-area adviser who heads Roxbury Consultants, has a simpler reason for not allowing clients to have Malta pensions.

“My struggle has been the smell test. Does the law really intend to allow people to avoid all these taxes?” he says.

Still, Malta plans aren’t totally out of bounds. Andrew Mitchel, an international tax lawyer in Centerbrook, Conn., who also hasn’t recommended Malta plans to his clients, says he can understand their appeal.

“Someone who has $200 million in bitcoin or IPO shares may not mind spending $2 million on legal fees to see if they can avoid a lot of taxes,” he says.


Updated: 9-4-2021

Main Street Pensions Take Wall Street Gamble By Investing Borrowed Money

Municipalities have assumed about $10 billion in debt this year to shore up retirement obligations.

Many U.S. towns and cities are years behind on their pension obligations. Now some are effectively planning to borrow money and put it into stocks and other investments in a bid to catch up.

State and local governments have borrowed about $10 billion for pension funding this year through the end of August, more than in any of the previous 15 full calendar years, according to an analysis of Bloomberg data by Municipal Market Analytics.

The number of individual municipalities borrowing for pensions soared to 72 from a 15-year average of 25.

Among those considering what is known as pension obligation borrowing is Norwich, a city in southeastern Connecticut with a population of 40,000.

Its yearly payment toward its old pension debts has climbed to $11 million in 2022—four times the annual retirement contribution for current workers and 8% of the city’s budget.

The city will vote in November on whether to sell $145 million in 25-year bonds to cover the pensions of retired police officers, firefighters, city workers and school employees.


Ultimate Resource For Retirees And Retirement Planning (#GotBitcoin)


Norwich’s rating from Moody’s Investors Service is in line with the median for U.S. cities, and officials expect to pay about 3% in interest. Norwich’s pension consultant, Milliman, projects investment returns of 6.25%.

Comptroller Josh Pothier said that spread helped him overcome his initial hesitation. “It’s pretty scary; it’s kind of like buying on margin,” he said he thought to himself. “But we’ve had a long run of interest rates being extraordinarily low,” he added.

Milliman forecasts that Norwich would save $43 million in today’s dollars over the next 30 years.

Over the past few decades, state and local governments across the country have fallen hundreds of billions of dollars behind on savings needed to pay public employees’ future promised pension benefits. Officials have been trying to catch up by cutting expenses from annual budgets and making aggressive investment bets.

With big pension payments looming and Covid-19-era federal stimulus pushing municipal borrowing costs to record lows, local officials are taking a gamble: that their retirement plans can earn more in investment income on bond money than they pay in interest.

Here is how a pension obligation bond works: A city or county issues a bond for all or a portion of its missed pension payments and dumps the proceeds into its pension coffers to be invested. If the returns on pension investments are higher than the bond rate, the additional investment income will translate into lower pension contributions for the city or county over time.

(The $10 billion in pension borrowing captured by the Municipal Market Analytics analysis also included some money used directly for pension benefits, rather than being invested, and at least one borrower directed some bond proceeds to other uses.)

Pension obligation bonds can backfire. If investments don’t perform as expected and returns fall below the bond interest rate, the city can end up paying even more than if it hadn’t borrowed.

Norwich is one of many smaller municipalities venturing into pension borrowing. This summer local governments issued 24 pension obligation bonds with an average size of $112 million, according to data from ICE Data Services.

That compares with 11 deals with an average size of $284 million during the same period last year.

The Government Finance Officers Association, a trade group, in February reaffirmed its recommendation against the practice.

“Absolutely nothing has changed,” said Emily Brock, director of the group’s federal liaison center. “It’s still not a good choice.”

In 2009, Boston College’s Center for Retirement Research examined pension obligation bonds issued since 1986 and found that most of the borrowers had lost money because their pension-fund investments returned less than the amount of interest they were paying. A 2014 update found those losses had reversed and returns were exceeding borrowing costs by 1.5 percentage points.

By swapping out their pension liability for bond debt, local pension borrowers give up the budgetary flexibility to skip a retirement payment in an acute crisis.

Pension obligation bonds have contributed to the chapter 9 bankruptcies of Detroit, Stockton, Calif., and San Bernardino, Calif. Chicago three years ago considered, and then scrapped, plans for a big pension borrowing deal.

Other local officials are starting to educate themselves about the deals. More than 200 people attended the webinar “How to Explain Pension Obligation Bonds to Your Governing Board,” hosted by the law firm Orrick, Herrington & Sutcliffe last month.

For investors, the bonds can be more of a mixed bag. A pension obligation bond approved by Houston voters in 2017 earned praise from analysts because the city paired it with benefit cuts.

Howard Cure, director of municipal bond research at Evercore Wealth Management, said that though he occasionally purchases the securities, the decision to issue them raises red flags. “I have a lot more questions about how an entity is governed if they’re using this tactic,” Mr. Cure said.

Updated: 9-7-2021

Democrats Aim To Push Firms Into Auto-Sign-Up Retirement Plans

House Democrats proposed requiring companies to automatically enroll workers for IRAs or 401(k)-type retirement plans under a provision tucked into draft legislation enacting the bulk of President Joe Biden’s economic plan.

The proposal addresses a problem that has been exacerbated by the coronavirus pandemic: Americans haven’t saved enough for retirement. Nearly half of people aged 55 or older have nothing saved for after they stop working, according to a 2019 U.S. Government Accountability Office report.

The draft legislation, unveiled by the House Ways and Means Committee on Tuesday, would direct 6% of each employee’s pay into a retirement savings plan, gradually escalating to 10%, unless they took action to opt out or change their contribution rate.

The idea is a pet cause of House Ways and Means Chairman Richard Neal and his Republican counterpart Kevin Brady, who jointly introduced legislation last year to bolster retirement savings through automatic contributions.

It has also been promoted in research by behavioral economists showing the importance of nudging people toward savings by setting defaults.

The legislation also would allow low-income Americans who don’t make enough to pay taxes to take advantage of the “savers credit,” a tax credit available to low- and middle-income Americans to partially offset retirement contributions. The credit would become refundable under tax law.

Automatic enrollment would cost the U.S. Treasury $22.7 billion over 10 years as more Americans take advantage of tax savings from retirement plans. The entire retirement provision, including the changes to the savers credit, would cost $46.8 billion over the period, according to an estimate by Congress’s Joint Committee on Taxation.

Companies that fail to comply with the new rules would face an excise tax of $10 per employee per day.

The retirement proposal was one of a slew of draft measures released by the House Ways and Means Committee Tuesday, part of work under way by panels in both chambers of Congress to assemble legislative text for what’s currently planned as a $3.5 trillion tax-and-spending package.

Americans Say They’re Now Less Likely To Work Far Into Their 60s

Americans say it’s increasingly unlikely that they’ll work deep into their 60s, according to new data from the New York Federal Reserve.

The share of respondents expecting to work past the age of 62 dropped to 50.1% in the New York Fed’s July labor-market survey, from 51.9% a year earlier — the lowest on record in a study that’s been conducted since 2014.

The numbers saying they’re likely to be employed when they’re older than 67 also dropped, to 32.4% from 34.1%.

The data reinforces other research pointing to a wave of early retirements triggered by the pandemic.

More than 1 million older workers have left the labor market since March 2020. Some Americans have been rethinking their priorities after the trauma of Covid-19 — with a bigger nest egg to fall back on, thanks to exuberant financial markets. For others the withdrawal may be involuntary, driven by a lack of employment prospects.

It’s adding up to a dramatic shift in a labor market where job growth has been dominated by older workers over the last two decades.

Job Poachers Beware

As many older Americans eye the exit, they’re also holding tighter to the jobs they have.

The so-called “reservation wage’ — the lowest salary that respondents would be willing to accept to switch to a new job — rose sharply for workers age 45 and over, according to the New York Fed report. It increased by some 11% in the year through July — roughly double the rate of inflation.

Updated: 10-1-2021

Murder Victim’s Son Can Get Money From 401(k) Linked To Killers

The son of a man murdered by a Colombian guerrilla group can obtain money from a 401(k) account connected to the perpetrators, a Massachusetts federal judge ruled, deciding a novel legal question involving federal benefits and anti-terrorism laws.

Fidelity Investments can turn over 401(k) assets to the victim’s son under the Terrorism Risk Insurance Act of 2002 without violating the federal law protecting retirement plan assets from being used for other purposes, Judge Indira Talwani of the U.S. District Court for the District of Massachusetts held Thursday.

The TRIA begins with a “notwithstanding” opening clause, signaling that it’s intended to override any conflicting federal statutes, including the Employee Retirement Income Security Act, Talwani said.

“Where the clear and broad language of TRIA signals Congress’s intent to override conflicting statutory provisions, the court concludes that ERISA’s anti-alienation provision does not prevent” Antonio Caballero “from executing on the attached assets,” she said.

The lawsuit is an attempt by Caballero to execute a judgment against Fuerzas Armadas Revolucionarias de Colombia and Norte de Valle Cartel for the kidnapping, torture, and murder of his father.

He asked Fidelity to turn over about $200,000 that it held in connection with these defendants, and Fidelity sought a court ruling on whether it could turn over money held in a 401(k) account without violating ERISA’s anti-alienation rule.

Talwani ruled that Fidelity could distribute the money to Caballero, but only under the same terms that the owner of the 401(k) account would have been able to access the money.

Doherty Law Offices LLC and Zumpano Patricios represents Caballero. Dechert LLP represents Fidelity.

The case is Caballero v. Fuerzas Armadas Revolucionarias de Colombia, 2021 BL 373566, D. Mass., No. 1:21-cv-11393, 9/30/21.

Updated: 10-7-2021

Companies Decide the Time Is Right To Offload Pensions To Insurers

The roaring stock market means plans are fully funded, and by yearend the deals may total $30 billion.

Many Americans who still have a traditional pension—the kind that pays a regular income no matter what the market does—could soon have a different company paying their benefits.

U.S. companies owe current and future retirees and their beneficiaries more than $3 trillion, and many have been trying to exit the retirement business for years. Right now they have a golden opportunity to buy their way out.

It’s called a pension risk transfer, or PRT: By buying a financial product called an annuity, a company can essentially place the assets of a plan and the responsibility for paying for it into the hands of a life insurance company. The insurer makes money if it can earn more from investing the assets than it has to pay out.

(Another risk-transfer option is to offer to pay benefits in a lump sum; in that case, the risk of ensuring the money lasts is taken on by the pensioner rather than another company.) These deals with insurers aren’t new, but record high markets are making them especially attractive to employers.

That’s because investment gains have helped many pensions get close to full funding, meaning they hold enough assets to satisfy their obligations to current and future retirees. If a company transfers a plan that’s not fully funded, it has to pay to cover the shortfall. There’s a very small amount to make up right now.

The 100 largest corporate pensions were funded at 97.1% in August, according to the consultant Milliman Inc., and they could creep as high as 102% by the end of the year under optimistic projections. A year ago, pensions were less than 87% funded.

The window to strike a pension deal could close quickly. If the markets start to fade, an employer would need to pay more to top off its plan before handing it over. Conversely, if a plan’s investments do well enough to surpass 100% funding, the sponsoring company has less incentive to exit as it could face a tax bill.

And it doesn’t benefit from having excess cash sitting idle in the fund. “There’s a bit of an inflection point for sponsors as they reach full funding,” says Matt McDaniel, a pension consultant with Mercer, which advises companies on their benefit plans.

There have already been a handful of jumbo pension deals this year, including a $4.9 billion transaction by Lockheed Martin Corp. and insurer Athene Holding Ltd. and a $5.2 billion accord between Prudential Financial Inc. and HP Inc. By yearend, insurance broker Willis Towers Watson Plc expects more than $30 billion worth of transactions, which could make 2021 the busiest year since 2012.

Companies have been eager to shed the plans for several reasons. The simplest one is risk: A pension is a liability that sits on an employer’s balance sheet for a very long time, and it has to be paid even if business is slow and markets are down.

Most companies now prefer to fund 401(k) plans, which put the burden of managing retirement assets on the employee.

Additionally, low interest rates and bond yields mean that companies could struggle in the future to earn high enough returns to fund their obligations, even as the plans remain costly to maintain.

Providers are required to pay premiums to the federally backed Pension Benefit Guaranty Corp., which insures the trillions of dollars of obligations the plans carry.

Many life insurance companies like pension assets because they can balance the obligations against other products in their portfolios. For example, pension payments are made as long as a participant lives, while a life insurance policy is paid out only upon death. The insurer can hedge the risk of people living longer than expected against that of customers dying too soon.

Insurance companies backed by private equity have also jumped into the business. Apollo Global Management Inc. is the largest shareholder in Athene, which is taking on the Lockheed Martin plan. Athene’s retirement assets have provided Apollo with a big pool of long-term capital it can invest and on which it’s earned lucrative fees. In March, Athene and Apollo announced a plan to merge.

Pension plan participants might wonder how their benefits change after a risk-transfer deal goes through. Most things will seem quite similar: Payments will still arrive monthly and in the same amounts; Prudential Financial says it matches previous payments down to the penny.

The big difference is in how these plans are supervised. Rather than being insured by the PBGC, which pays benefits up to a limit when a plan fails, they’re monitored by the state regulators who oversee insurance companies. Each state also has a guaranty association that can provide some protection if an insurance company collapses.

Joshua Gotbaum, who served as the director of the PBGC during the Obama administration, told a federal panel in 2013 that there was no real difference between a plan backed by the PBGC and one managed by an insurer.

James Szostek, a vice president for the American Council of Life Insurers, says life insurers have “decades of experience managing long-term obligations” as well as being subject to regulatory oversight.

Even so, retiree advocates say the shift can be a source of consternation for pension participants. “The reaction whenever there’s change is concern,” says Norman Stein, a law professor at Drexel University and a senior policy adviser to the Pension Rights Center. In a stroke, people go from relying on the company they worked for over a career to an insurer they may have never given a thought to.

Stein says some of the regulations around PRT transactions and the protections for workers and retirees after a switch can be murky. He says the shift can be particularly worrying in the case of insurers backed by private equity firms, which have a reputation for risk-taking investments.

Sean Brennan, executive vice president of pension risk transfer at Athene, says insurers are a safer bet than many employer-run plans “with a bunch of equity and interest rate risk.”

Since Prudential brokered two giant pension deals nine years ago, life insurers have expanded aggressively. There are now 19 life insurers willing to strike PRT deals, and more are expected to enter the fray, Mercer’s McDaniel says.

“Competition is certainly there,” says Melissa Moore, senior vice president for U.S. pensions at MetLife Inc. That’s helped bring down the main cost of a transfer, which is buying the annuity. “Annuity pricing is currently exceptional, and the annuity market is bustling as a result,” says Steve Keating, managing director at BCG Pension Risk Consultants/BCG Penbridge, which helps employers manage their retirement costs.

A recent study commissioned by MetLife found that 93% of 250 plan sponsors surveyed intend to divest all of their obligations, up from 76% in 2019. Companies can choose to fully divest the plans or reduce the scope of pensions on their balance sheets without removing them entirely.

But plenty of businesses are looking to get out for good, according to Yanela Frias, president of Prudential’s group insurance business. “The reality is that an insurance company is much better positioned to manage this liability than a car manufacturer or a telephone company,” Frias says. “We do this for a living.”

BOTTOM LINE – U.S. employers have been trying for years to get the cost of funding employees’ retirement off their books, and insurance companies are ready to make them a deal.

Updated: 10-10-2021

Here’s How Much Those Lottery Tickets Could Cost You In Retirement

For one lucky lottery player, retirement planning just got a whole lot easier.

Last Monday’s $699.8 million Powerball jackpot—the seventh-biggest in U.S. lottery history, according to—went to a lone winner, who purchased the ticket in California.

Even if the holder takes the $496 million cash prize over the full jackpot amount spread out over 29 years in an annuity, he or she should have ample income for a potentially long retirement.

A chance at that kind of money can be hard to pass up, even if the odds of winning a Powerball jackpot are 1 in 292.2 million. For Mega Millions, another multistate lottery whose jackpots often end up in the hundreds of millions,the odds are even worse at 1 in 302.5 million. Still, as Monday’s drawing proves, someone has to win eventually.

“We actually do have one client who won the lottery, so it does happen,” said Kevin Barlow, managing director at Miracle Mile Advisors. “But in general, the value of the lottery is in dreaming about winning, not in actually having a high likelihood of winning. And unfortunately, it’s often the people who have less money to lose who play the lottery.”

With lottery jackpots climbing higher in recent years, even the most disciplined savers can be tempted to take a shot. What’s more, lottery games are expanding and becoming more expensive to play.

In August, Powerball added a Monday drawing to its weekly schedule of Wednesdays and Saturdays. Mega Millions, which holds drawings Tuesdays and Fridays, might follow suit.

But players should remember that each $2 ticket is almost guaranteed to lose, and over time, they could be building a small fortune by redirecting that money to retirement savings accounts, financial advisors say. Before Monday, Powerball players had gone a record 40 consecutive drawings without a grand-prize winner.

Barlow said the seemingly small expenditures that become part of everyday life, like playing the lottery, smoking cigarettes, or visiting a coffee shop each morning, add up to significant sums over time.

By consistently investing that money in an S&P 500 index fund, for example, savers could enjoy sizable gains over 30 to 40 years, resulting in a higher standard of living in retirement, he said.

A lottery player purchasing one ticket for each of the week’s five major drawings spends $520 a year, or $15,600 over 30 years. If those funds were invested instead, after 30 years, the saver would have about $90,000, based on the S&P 500’s average annualized return of almost 10%.

Similarly, smokers who drop the habit and invest the money can be richly rewarded. The average price of a pack of cigarettes in the U.S. in March was $7.22, according to the Campaign for Tobacco-Free Kids. Smoking one pack a day amounts to about $2,635 a year in average spending, or $79,000 over 30 years. If that money were invested in the S&P 500 instead, it would grow to about $459,000, based on historical returns.

“For people who truly are addicted to things like the lottery or cigarettes, it adds up to a pretty big number over time,” Barlow said. “It’s very hard to visualize how a small amount of spending in your 20s, whether it’s on vices or other goods and experiences, is actually a large amount of money in your 50s and 60s, because compound interest can create a lot of wealth over time.”

Barlow said it’s OK for people to play the lottery “within reason,” buying an occasional ticket when jackpots are high, so long as they’re also addressing their financial priorities, including saving for retirement.

Charles Rotblut, vice president at the American Association of Individual Investors, said the only time it makes mathematical sense to play the lottery is when the Powerball jackpot reaches $490.7 million or the Mega Millions jackpot hits $530.5 million.

At those levels and higher, the expected return per ticket exceeds the $2 cost, according to Rotblut’s calculations, so the “expected value” per ticket justifies a purchase.

“Even if the expected value is positive, what’s really driving that is the massive jackpot,” Rotblut said. “So, even though from an odds basis you’re getting more potential value from this ticket than you’re paying for it, at the end of the day, you’re still facing very extreme odds.”

Despite those long odds, when reached before Monday’s big drawing, Rotblut said he planned to plunk down two bucks in pursuit of the big prize.

“I’ll probably buy a single ticket, and that’s it,” he said.

Updated: 10-12-2021

Connecticut Leads U.S. With $545,000 Average Retirement Savings

Hedge fund hub Connecticut is home to the fattest retirement accounts in the U.S.

Residents there have socked away an average of about $545,000 in retirement savings, according to a report from financial advisory Personal Capital. New Jersey came in second at $514,000.

More than 400 private investment funds have offices in Connecticut, including Ray Dalio’s Bridgewater Associates and Steven Cohen’s Point72 Asset Management. And, along with New Jersey, the states are among a handful with the highest ratio of millionaires per capita.

As for New York, it’s near the bottom of the list — ranked 40th with an average balance of $382,000.

The Personal Capital report analyzed 2.8 million user accounts.


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Updated: 10-20-2021

An Ohio Pension Manager Risks Running Out of Retirement Money. His Answer: Take More Risks

Farouki Majeed and other retirement-system officials are turning to private equity, private loans and real estate to plug gaps in their ‘leaking bucket’.

The graying of the American worker is a math problem for Farouki Majeed. It is his job to invest his way out.

Mr. Majeed is the investment chief for an $18 billion Ohio school pension that provides retirement benefits to more than 80,000 retired librarians, bus drivers, cafeteria workers and other former employees.

The problem is that this fund pays out more in pension checks every year than its current workers and employers contribute. That gap helps explain why it is billions short of what it needs to cover its future retirement promises.

“The bucket is leaking,” he said.

The solution for Mr. Majeed—as well as other pension managers across the country—is to take on more investment risk. His fund and many other retirement systems are loading up on illiquid assets such as private equity, private loans to companies and real estate.

So-called “alternative” investments now comprise 24% of public pension fund portfolios, according to the most recent data from the Boston College Center for Retirement Research. That is up from 8% in 2001. During that time, the amount invested in more traditional stocks and bonds dropped to 71% from 89%. At Mr. Majeed’s fund, alternatives were 32% of his portfolio at the end of July, compared with 13% in fiscal 2001.

This strategy is paying off in Ohio and across the U.S. The median investment return for all public pension systems tracked by the Wilshire Trust Universe Comparison Service surged to nearly 27% for the one-year period ending in June.

That was the best result since 1986. Mr. Majeed’s retirement system posted the same 27% return, which was its strongest-ever performance based on records dating back to 1994. His private-equity assets jumped nearly 46%.

These types of blockbuster gains aren’t expected to last for long, however. Analysts expect public pension-fund returns to dip over the next decade, which will make it harder to deal with the core problem facing all funds: They don’t have enough cash to cover the promises they made to retirees.

That gap narrowed in recent years but is still $740 billion for state retirement systems, according to a fiscal 2021 estimate from Pew Charitable Trusts.

Digging Out Of A Deep Hole

This public-pension predicament is the result of decades of underfunding, benefit overpromises, unrealistic demands from public-employee unions, government austerity measures and three recessions that left many retirement systems with deep funding holes.

Not even the 11-year bull market that ended with the pandemic or a quick U.S. recovery in 2021 was enough to help pensions dig out of their funding deficits completely.

Demographics didn’t help, either. Extended lifespans caused costs to soar. Rich early-retirement arrangements and a wave of retirees world-wide also left fewer active workers to contribute, widening the difference between the amount owed to retirees and assets on hand.

Low interest rates made the pension-funding problem even more difficult to solve because they changed long-held assumptions about where a public system could place its money. Pension funds pay benefits to retirees through a combination of investment gains and contributions from employers and workers.

To ensure enough is saved, plans adopt long-term annual return assumptions to project how much of their costs will be paid from earnings. Those assumptions are currently around 7% for most funds.

There was a time when it was possible to hit that target—or higher—just by buying and holding investment-grade bonds. Not anymore.

The ultra low interest rates imposed by central banks to stimulate growth following the 2008-09 financial crisis made that nearly impossible, and losing even a few percentage points of bond yield hindered the goal of posting steady returns.

Pension officials and government leaders were left with a vexing decision. They could close their funding gaps by reducing benefits for existing workers, cutting back public services and raising taxes to pay for the bulging obligations.

Or, since those are all difficult political choices and courts tend to block any efforts to cut benefits, they could take more investment risk. Many are choosing that option, adding dollops of real estate and private-equity investments to the once-standard bet of bonds and stocks.

This shift could pay off, as it did in 2021. Gains from private-equity investments were a big driver of historic returns for many public systems in the 2021 fiscal year.

The performance helped improve the aggregate funded ratio for state pension plans, or the level of assets relative to the amount needed to meet projected liabilities, to 85.5% for the year through June, Wilshire said. That was an increase of 15.4 percentage points.

These bets, however, carry potential pitfalls if the market should fall. Illiquid assets such as private equity typically lock up money for years or decades and are much more difficult to sell during downturns, heightening the risk of a cash emergency.

Alternative assets have tripped up cities, counties and states in the past; Orange County famously filed for bankruptcy in 1994 after losses of more than $1.7 billion on risky derivatives that went sour.

The heightened focus on alternative bets could also result in heftier management fees. Funds pay about two-and-one-half percentage points in fees on alternative assets, nearly five times what they pay to invest in public markets, according to research from retired investment consultant Richard Ennis.

Some funds, as a result, are avoiding alternative assets altogether. One of the nation’s best-performing funds, the Tampa Firefighters and Police Officers Pension Fund, limits its investments to publicly traded stocks and bonds. It earned 32% in the year ending June 30.

‘It’s Going To Be Very Tough’

It took some convincing for Mr. Majeed, who is 68 years old, to alter the investment mix of the School Employees Retirement System of Ohio after he became its chief investment officer.

When he arrived in 2012, there was a plan under way to invest 15% of the fund’s money in another type of alternative asset: hedge funds. He said he thought such funds produced lackluster returns and were too expensive.

Changing that strategy would require a feat of public pension diplomacy: Convincing board members to roll back their hedge-fund plan and then sell them on new investments in infrastructure projects such as airports, pipelines and roads—all under the unforgiving spotlight of public meetings.

“It’s a tough room to walk into as a CIO,” said fund trustee James Rossler Jr., an Ohio school system treasurer.

It wasn’t Mr. Majeed’s first experience with politicians and fractious boards. He grew up in Sri Lanka as the son of a prominent Sri Lanka Parliament member, and his initial investment job there was for the National Development Bank of Sri Lanka. He had to evaluate the feasibility of factories and tourism projects.

He came to the U.S. in 1987 with his wife, got an M.B.A. from Rutgers University and quickly migrated to the world of public pensions with jobs in Minneapolis, Ohio, California and Abu Dhabi.

In Orange County, Calif., Mr. Majeed helped convince the board of the Orange County Employees Retirement System to reduce its reliance on bonds and put more money into equities—a challenge heightened by the county’s 1994 bankruptcy, which happened before he arrived.

His 2012 move to Ohio wasn’t Mr. Majeed’s first exposure to that state’s pension politics, either; he previously was the deputy director of investments for another of the state’s retirement systems in the early 2000s.

This time around, however, he was in charge. He said he spent several months presenting the board with data on how existing hedge-fund investments had lagged behind expectations and then tallied up how much the fund paid in fees for these bets.

“It was not a pretty picture at that point,” he said, “and these documents are public.”

Trustees listened. They reduced the hedge-fund target to 10% and moved 5% into the real-estate portfolio where it could be invested in infrastructure, as Mr. Majeed wanted.

What cemented the board’s trust is that portfolio then earned annualized returns of 12.4% over the next five years—more than double the return of hedge funds over that period.

The board in February 2020 signed off on another request from Mr. Majeed to put 5% of assets in a new type of alternative investment: private loans made to companies.

“Back when I first got on the board, if you would have told me we were going to look at credit, I would have told you there was no way that was going to happen,” Mr. Rossler said.

The private-loan bet paid off spectacularly the following month when desperate companies turned to private lenders amid market chaos sparked by the Covid-19 pandemic.

Mr. Majeed said he added loans to an airline company, an aircraft engine manufacturer and an early-childhood education company impacted by the widespread shutdowns.

For the year ended June 30, the newly minted loan portfolio returned nearly 18%, with more than 7% of that coming in cash the fund could use to pay benefits. The system’s total annualized return over 10 years rose to 9.15%, well above its 7% target.

Those gains closed the yawning gap between assets on hand and promises made to retirees, but not completely. Mr. Majeed estimates the fund has 74% of what it needs to meet future pension obligations, up from 63% when he arrived.

Mr. Majeed is now eligible to draw a pension himself, but he said he finds his job too absorbing to consider retirement just yet. What he knows is that the pressures forcing a cutthroat search for higher returns will make his job—and that of whoever comes next—exponentially harder.

“I think it’s going to be very tough.”

Updated: 11-6-2021

You’ll Be Able To Put More Money In Your 401(K) Next Year

Americans 50 or older can defer $27,000 to their 401(k) plans in 2022.

Americans will be able to save more in their workplace retirement accounts in 2022, the Internal Revenue Service said on Thursday.

As part of the changes, employees will be able to contribute $20,500 to their 401(k), 403(b), the federal government’s Thrift Savings Plan and most 457 plans in 2022, up from $19,500 in 2021.

The catch-up contribution for workers who are age 50 and older will remain unchanged, at an additional $6,500, so in 2022, an employee participating in one of these workplace plans who is at least 50 years old can defer $27,000 to their account.

The income thresholds for qualifying deductible contributions to traditional IRAs also increased. Americans can always contribute to traditional IRAs, but must meet income limits in order to deduct their contributions for calculating their adjusted gross income if they participate in a workplace retirement savings plan. The income ranges also increased to claim the Saver’s Credit.

In 2022, the income ranges are:
– For single taxpayers, $68,000 to $78,000, up from $66,000 to $76,000

– For couples who are married filing jointly and if both spouses are participating in a workplace retirement plan, $109,000 to $129,000; for the spousal IRA contributions, where one spouse is covered by a workplace plan but the other is not and they are married filing jointly, $204,000 to $214,000.

– For couples who are married filing separately, the range remains at $0 to $10,000.
The contribution limits for IRAs also remained unchanged, at $6,000 with an additional $1,000 for catch-up contributions.

The contribution limits for IRAs also remained unchanged, at $6,000 with an additional $1,000 for catch-up contributions for savers age 50 and older.

The thresholds for Roth IRAs have also increased. Unlike traditional IRAs, workers must meet these thresholds in order to contribute to a Roth IRA.

In 2022, the ranges will be $129,000 to $144,000 for singles and heads of household; $204,000 to $214,000 for married couples filing jointly; and $0 to $10,000 for married couples filing separately.

For the Saver’s Credit, available to low- and moderate-income workers who save for retirement, the limits are: $34,000 for single individuals, $51,000 for heads of household, and $68,000 for married couples filing jointly.

Updated: 11-7-2021

Newly Flush With Cash, Retirement Funds Struggle To Find Appealing Investments

Long-underfunded pension systems share bittersweet challenge with other investors that see hazards in many asset classes.

State and local pension funds are reaping a historic windfall thanks to billions of dollars in record market gains and surplus tax revenues. Now they need to decide what to do with the money.

It is a bittersweet dilemma that the chronically underfunded retirement systems share with many household and institutional investors around the country. Just when they finally have cash to play around with, every investment opportunity seems perilous.

Leave the money in stocks, and a pension fund becomes more vulnerable to the type of losses suffered in the 2008-09 financial crisis. Move the money into bonds for safekeeping, and the fund risks losing even minimal gains to inflation.

Seek out alternative assets to help diversify and drive up returns, and the fund enters a crowded competition for private equity and real estate where it can take years for money to be put to work.


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Pension funds and other institutional investors lost 0.06% for the quarter that ended Sept. 30, according to Wilshire Trust Universe Comparison Service data released last week, their first negative return since the early days of the pandemic.

After a year of stimulus-fueled economic gains on the heels of a decadelong bull market, it is hard to find bargains anywhere. That means investment chiefs are choosing where to park their unprecedented windfall in an increasingly volatile and unpredictable world.

“There are things going on that I’ve never seen, ever—people leaving the labor market, office buildings being vacant, ships in the middle of the ocean with cargo,” said Angela Miller-May, chief investment officer for the $55 billion Illinois Municipal Retirement Fund. “Even if you’ve had years and years of investment experience, you’ve never experienced anything like this.”

Ms. Miller-May’s fund swelled by more than $10 billion over the past fiscal year, between market gains and contributions from the towns, cities, school districts and other governments it serves.

The fund has bought close to $1 billion worth of bonds and, since a board decision to increase alternative investments in December, allocated an additional $1.54 billion to private equity and real estate, Ms. Miller-May said. She said about $140 million of that money has been put to work so far.


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Around the country, pension managers are competing to reinvest blockbuster gains from the 2021 fiscal year, which injected around $800 billion into state retirement systems alone, according to an estimate by the Pew Charitable Trusts.

The funds, which serve police, teachers and other public workers, still have hundreds of billions of dollars less than needed to cover promised benefits. Even so, they grew more in the 12 months ended June 30 than in any of the past 30 years.

Some pension funds are also getting injections of cash from 2021 state tax collections supercharged by federal stimulus programs.

California transferred an extra $2.31 billion to its teachers’ and public workers’ pension funds after stock gains and the economic recovery bolstered income tax collections, according to budget documents.

Connecticut Treasurer Shawn Wooden is transferring an additional $1.62 billion to that state’s teachers’ and workers’ pension funds in accordance with a mandate that excess revenue be used to pay down debt.

This year New Jersey is making the full pension payment recommended by its actuaries for the first time since 1996, plus an extra half-billion dollars, funneling a total of $6.9 billion to the state’s deeply underfunded retirement plan, the New Jersey treasurer’s office said.

Asked how the money would be used, a spokeswoman for the state’s division of investment said it “will continue to move forward toward the previously established allocation targets.” The $101 billion fund’s private equity, private credit, real estate and real assets portfolios each contained between $1 billion and $3 billion less than the goal amount as of Aug. 31, records show.

New Jersey’s investment division said this fall that it intended to start reinvesting gains from one of its private-equity investments as a way to deploy capital into the asset class more quickly after the fund earned nearly 48% on its private-equity portfolio for the year ended June 30.

Some funds are branching out into new assets. In May, the Jacksonville, Fla., Police and Fire Pension Fund approved the first investment in a recently created $200 million private credit portfolio, a $100 million allocation to Ares Management Corp. The Houston Firefighters’ Relief and Retirement Fund in October bought $25 million worth of bitcoin and ether.

One of the most common moves pension funds are making amid the current windfall, however, isn’t an investment at all.

Instead, retirement systems from South Carolina to Idaho are surveying the market landscape and lowering their investment-return projections at a pace never seen before, said Keith Brainard, research director of the National Association of State Retirement Administrators.

Pension funds have been slowly rolling back those targets for years as a decadeslong drop in bond rates has driven down the amount they can earn on safe fixed-income investments. Several pension officials also said the pandemic-prompted federal funding and market intervention early last year accelerated stock-market gains that otherwise would have unfolded more slowly, reducing expectations for the coming decade.

“There are a lot of questions as to whether the returns are front-loaded and whether they can be sustained,” said Kevin Olineck, director of the Oregon Public Employees Retirement System, which lowered projections to 6.9% from 7.2% last month.

Such reductions aren’t popular with employers and workers, who end up having to pay more into their pension fund to make up the difference, so last year’s windfall makes now a good time to pull the trigger.

Oregon’s move will cost employees and employers about half as much as it otherwise would as a result of the recent gains, Mr. Olineck estimated, assuming no major losses through the end of the fiscal year.


Retirees Spend A Lot Of Time And Money To Buy Their ‘Forever Home.’ Then They Sell It


Updated: 11-15-2021

Prepare To Live On $33,000 A Year If You Retire With A $1 Million Portfolio

The so-called safe withdrawal rate should shrink to 3.3% from 4%, according to a Morningstar report.

A rule of thumb for how much U.S. retirees can “safely” withdraw each year without fear of outliving their savings just got a haircut.

People retiring in the next few decades should only count on withdrawing 3.3% of their savings a year, down from the well-established number of 4%, when planning to live about 30 years past retirement, according to a Morningstar Inc. report published last week.

For someone with a $1 million portfolio, that’s a slide from $40,000 a year to $33,000. With pensions a perk of the past and Social Security benefits at risk of being cut, there’s not much of a safety net for people who run out of their own savings.

While people retiring in the past 15 years or so had a tailwind, today’s retirees face headwinds. “Current conditions demand greater forethought and planning than in the past, when lower valuations and loftier yields paved the way to higher future returns,” the report said.

Morningstar Investment Management’s 30-year inflation-adjusted return forecast for U.S. large-cap stocks is 2.74%. The forecast for investment-grade bonds is -0.11%.

The 4% rule came from a 1994 study that looked at every rolling 30-year period since 1926. It found that retirees with portfolios made up of 50% stocks and 50% bonds could tap an annual amount equal to 4% of their original pot of money, adjusted for inflation, without risk of outliving their money.

Now, 3.3% — which Morningstar said is conservative — is less of a suggestion than a starting point. Most financial planners recommend retirees take a flexible approach, maybe taking out more after the market had a good year and less when the market’s down.

That tends to lead to people spending down most of their money before they die. Sticking to a fixed-percentage withdrawal can leave more for heirs, the report found.

“The key to all of this is that for most retirees it’s a little bit of a mosaic,” said Christine Benz, Morningstar’s director of personal finance. To get a higher safe withdrawal rate, “maybe you delay claiming Social Security for two years, maybe you don’t take a full inflation adjustment every year,” she said.

As well, retirees will want to be strategic about which accounts they withdraw money from each year, since “if portfolio returns are lower, managing for taxes will be more meaningful,” said Benz.



Updated: 11-19-2021

Should You Join Your Spouse In Retirement?

The decision to retire when a spouse does is getting more complicated as couples face inflation headwinds and differing views on spending.

If you’re in your 60s, it may feel like everyone you know is retiring. The number of older workers who quit amid the pandemic shot up, reversing a decades-long trend of lower retirement rates among Americans 55 and older.

But what if your spouse is part of that everyone-you-know cohort? Before you decide whether to join the retirement ranks too, consider the following:

The financial equation is no longer as straightforward as “We’ve saved x” and “We expect to need y” for the next fill-in-the-blank number of years. Low interest rates and greater than expected inflation are moving the goalposts.

The old rule-of-thumb about withdrawing 4% a year in retirement is no longer applicable, and some say 3% is more appropriate. That means you and your spouse may need about 25% more than previously thought.

Inflation headwinds aside, just coming up with an answer to how much a couple expects to need in retirement can be difficult, even for those who have been married for years.

One spouse may have a costly one-off purchase in mind, an expensive hobby, or children or grandchildren from a previous marriage that he or she wants to help financially.

Discussions about that, along with things like anticipated travel and potential relocation, are imperative when calculating future spending.

Wives contemplating retirement should keep in mind that they often have lower lifetime earnings than their husbands because they’ve generally been paid less, do more unpaid caregiving and have accumulated fewer hours of paid work.

That translates into lower retirement wealth overall. Women generally have less money in employer-sponsored retirement plans or pension plans, and receive Social Security benefits that are just 80% of what men receive, on average. (Spouses can elect to receive benefits based on their own earnings or to split their spouse’s benefits.)

It’s also important to think about whether a spouse’s recent retirement was voluntary or involuntary. The answer could have emotional implications as well as financial ones for the couple to consider.

For instance, research shows a forced retirement can increase the risk of depression in women. If it wasn’t by choice, there may be the need to claim Social Security benefits earlier, ultimately decreasing overall total benefits.

Spouses who are much younger than typical retirement ages may want to continue working. One study shows that retiring before an age deemed acceptable by cultural norms can put someone at a higher risk for worse health outcomes. But working well past a traditional retirement age generally doesn’t provide any health benefits.

Working spouses whose retired partners have health issues face a conundrum. They can either quit to be a caregiver, or may feel more pressure to keep working to pay for health-care costs.

They should consider their own health, whether the couple has long-term care coverage and the amount of assistance a sick spouse needs.

Finally, think about the state of your relationship. If partners are close, share hobbies and want more time together, it may make sense to enjoy retirement simultaneously. Still, relationship expert and psychologist David Richo advises that partners in a happy relationship get no more than 25% of their needs from each other. Not working could disrupt that balance – making retirement a lot less enjoyable.


Updated: 11-22-2021

Pension Cash Dwindles, Risking Liquidity Crunch

Cash allocations have dropped to a seven-year low, with pensions seeking greater returns in private markets.

Bigger private-market bets, inflation fears and a surge of retirees are putting public retirement funds at risk of a cash crunch that would force them to sell assets at losses to pay pension checks.

Cash allocations have dropped to a seven-year low at the funds that manage more than $4.5 trillion in retirement savings for America’s teachers, police and firefighters.

Public pension funds, which have increasingly turned to illiquid private markets to drive up returns, are now aiming to keep about 0.8% of their holdings in cash, according to data from the Boston College Center for Retirement Research.

These funds are managing a juggling act faced by many institutional and household investors who want to put their money to work but also want easy access to it in a pinch.

“The first report I look at every day is our cash report,” said Jonathan Grabel, investment chief of the $75 billion Los Angeles County Employees Retirement Association, which aims to keep 1% of its assets in cash. “We have plenty of liquidity across the portfolio, but you never know when and if markets are going to seize up.”

Mr. Grabel’s fund in May reduced its target allocation to investment-grade bonds to 12% from 19% and increased the amount it wants to keep in private equity, infrastructure, and illiquid credit to a combined 29% from 16%. The fund’s long-term expected annual return of 7% is the average for state and local government retirement funds, according to the National Association of State Retirement Administrators.

The $496 billion California Public Employees’ Retirement System, despite aiming for a slightly more conservative 6.8%, still plans to invest more in private markets, borrow against up to 5% of the fund, and keep less cash on hand, to meet that target, under a plan the board approved this month.

Meanwhile, smaller pension funds serving school employees in Ohio, city workers in Illinois and other public employees across the country are putting more of their money into real estate, private equity or private debt.

Public pension funds have hundreds of billions of dollars less on hand than the amount they will need to cover promised benefits after two decades of underfunding, unrealistic demands from public-employee unions, and losses during the 2007-2009 financial crisis.

Over the same period, their cash-flow margins have thinned as retirees have multiplied relative to the number of current workers. In Connecticut, for example, more than a quarter of the state workforce are eligible to retire between June 2020 and June 2022, Boston Consulting Group found.

Public pension funds have historically been able to access cash when equity markets faltered by selling bonds. But over the past two decades, fixed income portfolios shrank to 24% of assets from 33%, according to the Boston College data, as falling rates turned bonds into a drag on returns. Now inflation threatens to further erode the value of fixed-income investments.

But assets that promise rapid growth—from common stocks to complex alternative investments—also carry the risk of losses when sold into rocky markets or before maturity.

After the Pennsylvania Public School Employees’ Retirement System last year decided to shrink its private equity allocation, in part to increase liquidity, consultants warned that selling assets early would mean accepting an average discount of 15% of net asset value.

Some growth strategies can also require sudden diversions of cash in the form of capital calls and margin calls, often at inconvenient times.

When markets cratered in 2008, some of the biggest U.S. pension funds sold stocks to raise cash and fund capital calls from private-equity firms. In the aftermath many, including Calpers and the California State Teachers’ Retirement System reviewed their allocations to alternatives.

A Calpers spokesman said the fund has improved liquidity management since the financial crisis and as a result was able to take advantage of low prices during the market dislocation in March 2020 at the start of the Covid-19 pandemic.

Calpers staff said at a meeting earlier this month that the fund uses a dashboard to closely monitor liquidity, which is a measure of how easily holdings can be converted to cash without losses.

The retirement fund, which is the nation’s largest, eliminated its target of holding 1% of its assets in cash as part of the new asset allocation approved this month, which takes effect July 1, 2022.

Finding a strategy that can accomplish what bonds once did, providing yield in good times and accessible cash in bad, is “not a problem with an easy solution,” said Ash Williams, who recently retired as executive director and chief investment officer of the State Board of Administration, which manages investments for the Florida Retirement System.

“Everybody’s wrestling with this same thing,” he said.


Updated: 11-24-2021

Counting Calories Helps Your Retirement Account, Too

A healthy diet is one of the most effective ways to protect retirement savings.

Before those celebrating Thanksgiving reach for a second slice of pecan pie, they should consider this: A 55-year-old woman with Type 2 diabetes will pay an average of $3,470 more a year in medical-related expenses, or close to $160,000 in total, than if she didn’t have the disease.

A one-time indulgence on a holiday certainly won’t result in diabetes, but it’s a good reminder that making the right food choices over time can have just as much of an impact on retirement savings as market forces and investment decisions.

Minimizing the costs of aging is equally as, if not more than, important as maximizing retirement income.

Type 2 diabetes (along with its precursor, pre-diabetes) are prime examples since they’re largely preventable by eating right and staying active.

Those who suffer from them get hit financially because they don’t necessarily shorten life expectancy; they allow people to live but with expensive health-related conditions — often incurring out-of-pocket costs that may not be covered by Medicare or insurance companies.

One study of Medicare beneficiaries showed that prescription medicine is the biggest driver of additional out-of-pocket costs for heart disease, diabetes and high blood pressure. Those with diabetes are also more likely to require costly organ transplants or long-term care, which Medicare doesn’t cover.

Many people ask me for financial advice when it’s nearly too late. A 53-year-old colleague admitted she had no retirement savings and asked what she could do. Telling her to save 50% of her earnings to adequately supplement Social Security seemed cruel and unrealistic. So, I pivoted. I concentrated my tips on how she could reduce expenses as she gets older.

The most direct and cheapest is to avoid the preventable diseases that will drain your wallet. Let’s call it downsizing.

Another important and easy way to minimize health-related costs is to take your medicine. Only about 50% of U.S. adults who suffer from a chronic condition take their medications as prescribed.

While some may not take medicine because it’s too expensive, skipping it can often wind up being far more costly following emergency-room visits and other avoidable medical expenses.

Sadly, most retirement advisers don’t usually focus on how dietary and other lifestyle changes can help to avoid costly chronic conditions. And medical professionals don’t talk about financial issues enough. Daniel Levitin, a neuroscientist and aging expert, wrote a bestselling book last year called “Successful Aging,” but he hardly mentioned money. I realized that the books I write about money barely mention health. We’re both wrong.

More than half of baby boomers now say they’re worried they won’t be able to cover medical expenses in retirement. They should remember that rethinking their meal choices at Thanksgiving and beyond could go a long way toward making their retirement more comfortable.


Updated: 11-27-2021

How To Explain The Increased Percentage Of Retired People?

Fewer people are ‘unretiring,’ but that will likely change.

This stuff about older workers is driving me crazy. I thought we had a narrative, and then we got some new information.

Our basic story has been that older workers, like all workers, were hurt by the pandemic and ensuing recession. Their experience was a little worse than that of prime-age workers, but not as bad as that of younger workers.

Some older workers returned to the labor force as the economy improved, but a large number remained “not in the labor force.”

Interestingly, we have not seen any uptick in self-reported retirement (see Figure 1). Month-to-month transitions from employment to retirement and from not-in-the-labor-force (NILF) to retirement have both been flat, and transitions from unemployment to retirement have, if anything, declined from pre-pandemic levels.


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OK. Then along comes the Dallas Fed exploration of the decline in the ratio of employment to population, showing that 1.0 percentage points of the 3.2-percentage-point decline can be explained by higher retirements (see Table 1). They calculated that 0.4 percentage points can be attributed to the aging of the population and the additional retirements account for 0.6 percentage points or 1.5 million workers.


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Suddenly, we have an uptick of 1.5 million retirees, as shown in Figure 2. It’s really a funny phenomenon, however, since the hot labor market of 2018 and 2019 caused many older workers to delay retirement, resulting in a ratio of retirees to population below what 2017 retirement rates would have predicted for the aging population.

Nevertheless, it’s still really annoying since we had not seen an increase in people moving into retirement.

If people are not moving into retirement, how can the ratio of retirees to population tick up? Fortunately, a piece by the Kansas City Fed provides an answer.

Similarly, the line covering retired workers who have started to look for work but are not yet employed also held steady. The really interesting pattern is that the red line — those moving from retirement to work — dropped sharply with the onset of the pandemic and has remained low.

That is, the COVID-19 uptick was driven not by an increase in the number of employed people transitioning into retirement, but by a decline in the number “unretiring” — that is rejoining the labor force.

Will the “unretiring rate” pick up? Two factors suggest it will. First, the retirement -to-employment rate did not plummet during the Great Recession, which suggests the drop in early 2020 reflected health concerns related to the pandemic.

As the health risk recedes, more people may come out of retirement to work. Second, the increase in the share retired included 1.2 million people under age 68, who are likely quite capable of work.

I wish that I had figured this out, but as an old Fed person I’m delighted our central bank is on the case.

Updated: 11-30-2021

Billions Of Lost Retirement Dollars Are Getting Harder To Find

The demise of a public database and struggles to obtain government information crimp efforts to unite plan participants with unclaimed benefits.

People hunting for old retirement plans are facing new obstacles.

Fraud concerns have prompted one federal agency, the Pension Benefit Guaranty Corp., to take down a public database that previously helped retirement-plan participants track down their benefits, a PBGC spokesperson said in a statement to MarketWatch.

Many people searching for lost retirement money have also lately had trouble obtaining key information that the Social Security Administration typically provides about private retirement benefits, according to pension counselors who assist plan participants.

The new challenges come at a time when the pandemic is expected to exacerbate the longstanding problem of retirement plan sponsors losing track of their participants. COVID-related job loss, combined with failing businesses struggling to keep updated participant records, may lead to more “missing” participants—those whom plan sponsors can’t locate when it comes time to claim benefits, according to a May report from the Government Accountability Office.

The pandemic-related problems and diminished access to retirement-plan search tools mean that workers may struggle to locate their retirement money when they need it most, says Jennifer Anders-Gable, managing attorney at the Western States Pension Assistance Project, a pension counseling organization.

Regulators and lawmakers in recent years have increasingly focused on connecting workers with unclaimed retirement money. The Labor Department’s Employee Benefits Security Administration, which oversees private retirement plans, has pushed plan sponsors to maintain accurate participant records.

The government agency’s enforcement efforts in fiscal year 2021 helped defined-benefit pension plan participants collect more than $1.5 billion worth of benefits owed to them, up from about $327 million in fiscal 2017.

Several bills introduced in Congress this year call for the creation of a retirement savings “lost and found,” an online plan registry where pension and 401(k) participants could search for their plans.
‘We need an for pension plans’

Job-hopping, corporate name changes, mergers, plan terminations and other factors contribute to workers and retirement plans losing track of each other, experts say.

There is more than $1.3 trillion in “forgotten” 401(k) accounts participants have left behind when leaving an employer, estimates Capitalize, a financial technology company focused on retirement-account rollovers.

“We need an for pension plans” to help connect the dots, says Tom Reeder, former PBGC director and board member of the Pension Rights Center, a nonprofit consumer group.

Although plan administrators are obligated to keep up-to-date participant records, some pension plans have records with obvious data flaws—such as “John Doe” placeholder names—or simply delete names of unresponsive participants, according to the Labor Department.

The pandemic and diminished access to retirement-plan search tools mean that workers may struggle to locate their retirement money when they need it most.

The now-defunct PBGC public database was a critical part of the solution, pension counselors say. For people trying to locate lost plans, “a lot of times, the only way to track down the benefit is by going to the PBGC,” says Anna-Marie Tabor, director and managing attorney at the Pension Action Center at the University of Massachusetts Boston.

The database included benefits and accounts from terminated plans, and participants could do a quick search to find out whether retirement money was being held for them.

PBGC removed the database from its website in 2020 “to prevent bad actors from using the information to facilitate fraudulent activity,” the PBGC spokesperson said.

The agency “is not aware of specific instances of fraud” originating from the database, and there was no security breach involving the online tool, the spokesperson said. Plan participants looking for unclaimed benefits can still call the PBGC for help at 1-800-326-5678.

The demise of the search tool raises questions about legislative efforts to create a more comprehensive, searchable online plan registry.

The Retirement Savings Lost and Found Act introduced earlier this year by Massachusetts Democratic Senator Elizabeth Warren and Montana Republican Senator Steve Daines, for example, calls for the PBGC to manage an online searchable database that would help individuals find contact information for their retirement plan administrator.

Asked about the fraud concerns raised by the PBGC, a Daines aide said that the online registry envisioned by the Retirement Savings Lost and Found Act “probably needs to be moved from PBGC” to another agency—potentially the Treasury Department.

“Cybersecurity threats are on the rise, and not everyone is as prepared as Treasury,” the aide said.

The struggle to obtain critical plan information from the Social Security Administration

Pension counselors who assist plan participants in roughly a dozen states, meanwhile, say that many of their clients have lately struggled to obtain critical plan information that’s typically provided by the Social Security Administration.

The agency sends notices to people who may be entitled to retirement benefits from a private employer, listing the plan name, administrator’s address, value of the account and other details. The notice is generally sent automatically to those claiming Social Security benefits and upon request to others searching for their plan details.

“That form in and of itself is extremely helpful” in some lost pension cases, yet clients since early last year have struggled to get their hands on it, Anders-Gable says. Some clients have faced long delays in receiving the notice or got no response to their request for the information, pension counselors say.

A July report by the Social Security Inspector General examining the agency’s mail processing during the pandemic found that about half of Social Security field office managers reported they were overwhelmed by mail duties, and roughly 20% said they were unable to keep up with the mail.

The agency doesn’t have comprehensive policies or management information for mail processing, and without that information, it “cannot know how much unprocessed mail it has, what is in the mail, or how old the mail is,” the report said.

A spokesperson for Social Security says the agency continued its regular mailing and responses to individual requests for the private retirement benefit notice during the pandemic. The agency didn’t respond to a request for comment about the Inspector General’s report.

People hunting for lost retirement money still have access to several resources that may help. In addition to calling the PBGC, plan participants can contact the Department of Labor at 866-444-3272 or At, a Pension Rights Center site, participants can connect with pension counseling projects covering about 30 states that provide free assistance tracking down benefits.


Updated: 12-2-2021

I’m 53, My Wife Is 54. Our $1.4 Million Retirement Nest Egg Is 100% In Equities And Crypto. What Should I Do Now For Retirement?

Dear MW,

I read your articles on retirement each week, and am looking for advice not on whether I can retire now, but what I should be thinking about and doing differently over the next decade before retirement.

Background:I am 53 years old, married (wife is 54) and we have a combined income of $220,000. We have two children, one that is going into their final semester of college and the youngest who is entering their junior year in college.

Both will finish college with zero debt and already have Roth IRAs set up in their names. Our home is worth $450,000 with just under four years to pay off the mortgage, and we have one $20,000 car loan and zero credit card debt. We have $1.3 million in an IRA, and $125,000 in 401(k) plans.

I have a pension that will start paying out in 14 months of $800/month. We save a combined $3,000 per month with 60% of that going into traditional tax deferred (401(k), IRA) and 40% going into a Roth. Currently our taxable accounts are $1.3 million and our Roth accounts total $125,000.

We are invested 100% into equities and crypto, with around $1.1 million in FAANG stocks, $125,000 in mutual funds, and $200,000 in Bitcoin (cost basis on crypto is $50,000). The Social Security estimator puts us at roughly $3,000 a month in benefits if we each take it at 62.

We are trying to be aggressive with our investing and debt reduction and while we make $220,000, we live on roughly $145,000 (backing out monthly savings, mortgage payment and college costs) or roughly $12,000 per month.

Up until about two years ago we were invested completely into broad market mutual funds with a very low cost basis (the Warren Buffet recommended approach) but I feel a more hands-on investing focus is both satisfying and necessary for one’s largest asset.

We have had an investment adviser in the past, and never felt like they earned their 0.75-1.25% fee to manage our investments. We would like to retire by 62 at the latest, and leaving the workforce at 59-1/2 sounds even better.

As we enter the final years of our careers, what should we be doing differently? What should we keep the same? And when do you think we should retire?

Dear Reader,

Thanks so much for reaching out. It sounds like you have definitely kept retirement at the forefront of your financial planning and it will absolutely pay off in the future!

The first thing I noticed about your letter was your asset allocation. I always say people near and even in retirement should have a healthy mix of equities in their retirement portfolios because retirement could last decades and that money needs to last.

At the same time, however, you do need to have some sort of protection in your asset allocation. With one unfortunate shift down in the markets, your account balance could quickly and suddenly drop — and nobody wants that. It could take more time to recover, which is not ideal if your goal is to retire in less than 10 years.

“Given your age, equity may be important for growth, but the desire to retire early may offset this,” said Kristian Finfrock, a financial adviser and founder of Retirement Income Strategies.

Take for example the FAANG stocks. “Everything FAANG has been working well, but we can move into a period where their growth becomes muted,” said Thom Rindahl, a certified financial planner at TruWest Wealth Management Services. A diversified portfolio may not ramp up your portfolio balance as quickly, but it also won’t put it in as much of harm’s way.

“I definitely believe in a diversified portfolio of asset types and management styles,” Rindahl said. “You get the best risk-adjusted returns this way. It’s not what you make, but rather what you keep.”

Another priority: healthcare. If you both intend to retire before 65, where will you get health insurance? Medicare doesn’t become available to you until age 65, and private insurance can be expensive.

If you have access to a Health Savings Account, which are available to people with high deductible health plans, take advantage of it — they offer triple the tax benefits (contributions, growth and distributions are tax-free if used for qualifying health expenses) and you can wait until retirement to start withdrawing the money.

As for Social Security — you may want to delay it. When to claim Social Security relies on numerous factors: need for that income, life expectancy and how much more you can get if you were to delay, for example.

Your benefits are reduced for every month before your Full Retirement Age, and they’re also increased for every month after FRA until age 70. “I would probably wait unless there is some extenuating circumstance,” Rindahl said.

There are plenty of claiming strategies as well, especially for married couples. For example, you might want to consider delaying just the benefit of the highest wage earner to at least Full Retirement Age or beyond, that way if in the event that person dies, the surviving spouse will have a higher benefit to depend on (as opposed to a reduced one later in life), Finfrock said.

You may also want to pay off the house between now and retirement. Mortgages aren’t inherently bad debt, and plenty of people go into retirement still paying off a mortgage, but if you have the assets and you can make that a top goal before leaving the workforce, why not?

If you decide not to pay off the mortgage quicker, that’s okay — bringing debt into retirement is completely acceptable so long as those repayments fit into your overall larger financial picture.

Try to keep your savings rate the same as well. If you do pay off the house, increase that savings rate, Rindahl said. Also, as your retirement date gets closer, think long and hard about what you plan to do during this next chapter.

Sometimes people are in such a rush to get to retirement that they don’t plan for it properly, and they end up bored or lonely.

During this time, you should also be thinking about what you’ll likely spend in retirement — Will you relocate? Take on expensive new hobbies or extravagant trips? All of this will affect how much you need to save for or spend in your older age.

Finally: distribution strategies. Think carefully about how you want to withdraw your hard-earned dollars. Typically, the sequence is taxable sources first, followed by tax-deferred sources and then Roth and other tax-free options, Finfrock said.

But there are also benefits to reversing that order — if you’re retiring before age 65, Rindahl suggests using Roth money first to keep your income lower, which will also help in terms of paying for health insurance under the Affordable Care Act.

Updated: 12-6-2021

Hungary To Boost Pensions More Than Planned In 2022, Orban Says

Hungary will boost pensions more than planned next year, Prime Minister Viktor Orban told lawmakers on Monday.

State pensions will rise 5% instead of the previously planned 3% as higher-than-expected inflation is seen to last through 2022. It’s also a year when Orban hopes to clinch yet another re-election in general ballot slated to take place in the spring.

The central bank said last week it expects prices to rise between 4.7% and 5.1% next year, above the initial forecast of inflation staying below 4%.

This hike is on top of the previously announced pension increases that amount to 1.2% of the country’s gross domestic product and are part of a large spending package.

Updated: 12-11-2021

Seniors Benefit From Virtual Assisted Living

Fay, a 51-year old mother of twins manages a full-time job as an X-ray technician and, as she sardonically describes, spends “oodles of her free time” helping her aging parents.

Sandwiched between caring for both young and old, she describes her routine, “When I am not at the hospital, taking care of my own house, taking the boys to practice or to SAT prep, or to whatever else they do, I am helping my folks.”

Rolling her eyes, she looks away and remarks, “On my day off I would take one or both of them grocery shopping. It was an all-day affair.”

Online grocery shopping became a lifeline to many during the pandemic. Estimates suggest that online grocery shopping increased five times faster than forecast before COVID-19.

Acosta Shopper Community Survey recently reported that 23% of respondents said they plan to increase their online grocery shopping over the next year. Another nearly two-thirds (64%) plan to continue shopping online at levels adopted during the pandemic.

Trends in online grocery shopping would not ordinarily intersect with discussions of senior housing. Online grocery buying, however, is indicative of the services and technologies adopted during the pandemic that are likely to change the decision calculus of older adults and their families when considering senior housing.

The pandemic made Fay’s former shopping routine impossible. She did not want to expose her parents or herself to possible infection. She signed up online with her local grocery store and arranged for home delivery.

“It became so easy that I signed up my family too,” Fay says. “That little change saved me nearly a full day of my life wandering up and down store aisles.”

As the pandemic unfolded, MIT AgeLab research showed increasing interest and adoption of online services as well as technology. Younger and older adults reported that during the pandemic the use of video chat, smart speakers, door cameras, and tablets became more attractive.

High-tech increasingly was filling a gap where high-touch was not always possible. Recent trends in online grocery shopping indicate what many might have guessed, as the pandemic ebbs, apps are not being deleted from phones, devices are not being packed back into boxes, and shopping for exciting purchases such as towels and tuna fish are best done online.

People like Fay and her parents effectively hacked an entirely new option to senior housing — virtual assisted living. Nearly everything from online groceries, to delivery of household staples and medications, reduced, if not eliminated, the travel and time demands on family caregivers.

Smart technologies once considered novelties provided a means not just to stay in contact, but to check in on how mom and dad were doing as well as to ensure their security by ‘seeing’ who might be at their door.

Older adults also discovered that this new virtual assisted lifestyle not only reduces demands on adult children, but promises the possibility to extend the capacity to remain in the home they love.

The implications for the senior housing industry are both immediate and longer term. The discussion, let alone the decision, to move to senior living can now be delayed by many.

While showing modest improvement, senior housing resident numbers, down since the pandemic, are likely to experience a sluggish recovery not necessarily due to continued pandemic fears, but due to tech-enabled services that families and older adults see as an alternative to moving.

The average age of assisted living residents has been increasing long before COVID-19 — average new resident age is now in the mid-80s. Virtual assisted living is likely to further delay entering senior housing thereby further increasing the average age of new residents.

With increased resident age often comes additional functional challenges and disease acuity — exacerbating the impact of the industry’s staffing crisis and making operations more complex and costly.

While virtual assisted living does greatly increase the competitive advantage of home over senior housing, there is a bright spot for investors and operators. Today’s model of senior housing is predicated on experience, care, and place.

The convergence of technology, consumer behavior, and pandemic effects have put senior housing investors and operators at a strategic crossroads.

Just as the grocery business has discovered that it must serve its customer in both the store aisle as well as the customer’s front porch, the senior housing industry must decide if they will continue to base their value proposition only on the delivery of experience and care in their home, or wherever the consumer and their families choose to call home.

Updated: 1-2-2022

Many Retirees Have A Big Problem. It Isn’t What You Think

Anxiety about inflation, longevity and children’s inheritances can lead relatively well-off older savers to scrimp when they shouldn’t.

With inflation causing stress in all age groups, here are some reassuring words for retired people concerned by warnings that they should only be tapping 3% instead of 4% of their portfolios: Keep calm and spend on.

Of course, this doesn’t apply to a lot of retirees, but the sort of person who worries about appropriate withdrawal rates is probably diligently saving for retirement, or already has.

A bigger problem, according to financial advisers, is that too many of their clients don’t actually spend enough of the money they have squirreled away. They’re so paralyzed by the risk of depleting their savings, they scrimp more than they need to.

It’s a good reminder of how retirement planning depends on emotional factors that are separate from the risks associated with, say, inflation or lower bond returns. A lot more goes into estimating how long you’ll live or how much you want to leave to your children than algorithms and actuarial tables.

First, it’s helpful to think of any suggested withdrawal rate — 3% or 4% — as purely a starting point. Personal situations and preferences will dictate whether the amount should be higher or lower.

Also, remember that most models detailing what a “safe” amount to spend in retirement is assume the same fixed amount of portfolio withdrawals every year. Few people actually live like that.

It’s also useful to consider the percentage of assets that are guaranteed, such as Social Security benefits and annuities, when calculating an appropriate spending amount in retirement.

A study by David Blanchett, head of retirement research at investment management firm PGIM, showed that guaranteed income had the biggest impact on optimal withdrawal rates compared with other variables such as projected portfolio returns.

So go ahead and remodel your kitchen, or whatever else you had hoped to do in retirement, such as travel, when the pandemic passes.

Milo Benningfield, a certified financial planner in San Francisco, says that he had clients before Covid-19 who put off traveling because they were worried about spending too much early on, but then had health issues and never took their dream vacations. The pandemic has only made those missed opportunities more obvious.

Another certified planner, Jeremy Portnoff, in Irvine, California, says he has a client whom he has to remind to spend money. “There is a mental shift that happens once the paycheck ends, and for many anxiety sets in and they go into preservation mode,” Portnoff says.

The passage of time, which allows for more comfort with being retired, along with reminders of how portfolios have been allocated to withstand different scenarios, can help.

Sometimes using an online mortality rate calculator can clear out some of the psychological thoughts around longevity, like thinking you’ll die close to when your parents did. The American Academy of Actuaries and Society of Actuaries have one available called the Longevity Illustrator that can be used for couples, too.

For those who continue to worry about outliving their savings, purchasing a low-cost annuity may be a better solution than continuing to withdraw paltry sums from portfolios.

A similar approach can work for long-term care costs. Rather than living too meagerly out of fear of unknown, exorbitant health expenses down the road, those who are single with no potential relatives to assist with care may want to consider purchasing a long-term care policy.

But many are suspect of the policies or recoil at their high premiums. Another option is to set up a separate account that could be used to fund a certain period of time for care. Studies show the average time needed for long-term care is about three years. (Women tend to need 3.7 years, while men require 2.2 years.)

Finally, sometimes the reason for overly conservative retirement spending is the desire to leave money to children or grandchildren.

That’s benevolent, but it’s usually more productive to figure out why that’s a priority, and to set specific amounts and for whom, rather than having abstract goals to make sure family members are “taken care of.” Try taking care of yourself first.


Updated: 1-21-2022

How To Retire Now-Ish: A Guide To Inflation, Rising Rates, And More

Strong markets have swelled account balances, but changing conditions make it a good time to revisit your plan.

After years of watching strong markets swell portfolios, many recent and would-be retirees are in a nice spot—on paper. But it may be an awkward and anxious moment emotionally.

The assets that sent account balances to such heights—particularly a handful of big U.S. technology stocks—now look expensive by many measures and have been showing some weakness this year.

At the same time, reducing your exposure to stocks feels dangerous with inflation running at the highest rate in decades, eating away the modest returns of more conservative investments. And with the rise in interest rates seen by many as just getting started, bond funds look vulnerable to losses.

“There is definitely a lot more strain now for retirees,” says Wade Pfau, a professor at the American College of Financial Services in King of Prussia, Pa., which trains financial planners and advisers. “We are outside of all the historical situations that we have been talking about for retirement.”

After months of predictions that inflation would be transitory, the Federal Reserve’s recent sharp pivot to being concerned about it may be the start of an unmooring of interest rates from historically low levels. While annual yields on 10-year U.S. Treasury bonds are hovering near a two-year high at about 1.86%, that’s far from the 6% average back in the early 1960s.

Bond prices fall as rates rise, so even the safest fixed-income investment may be in for a relatively rocky ride. Higher interest rates will also mean higher yields from bond funds—and they’ll eventually show up as higher rates in certificates of deposit and money-market funds as well. But the hit to bond funds is immediate.

A subpar performance for stocks could have big repercussions for recent retirees. “We have had a tremendous run in the stock market,” says David Blanchett, head of retirement research for PGIM, the investment management group of Prudential Financial.

These gains may have encouraged people to retire. “The problem is after markets have done well, they tend to do poorly.” He sees “a very good possibility” of a market correction in the near future “or just lower-than-average historical returns.”

It’s not all grim. Investor portfolios have grown bigger and faster than most people would have anticipated, making retirement more feasible. (There’s been a larger-than-expected bump in baby boomer retirements, which is likely due to Covid disruptions and health risks as well as asset gains.)

Also, the average U.S. homeowner gained $57,000 in equity by 2021’s third quarter from the previous year, according to CoreLogic data. So for most people this isn’t a time to radically shift gears on a retirement plan.

But it’s a good time to reassess portfolios and assumptions about spending in retirement. New retirees and near-retirees can sometimes be a little complacent about how much risk they can tolerate.

They’re old enough to have lived through a few market cycles and tend to be more comfortable with equity risk, says Christine Benz, Morningstar Inc.’s director for personal finance. “They start thinking they don’t ever need to de-risk, because you know the market is volatile, but then it comes back,” she says.

But the situation in retirement is different. While those still working can ride out volatility as they add money to their savings, those who are hit with a string of stock market losses early in retirement can see their portfolio permanently hobbled, especially if they’ve been taking withdrawals. Even if markets rebound, the gains come on a diminished pot of savings.

“As you start drawing down money in retirement, it becomes less of an intellectual exercise and a real challenge,” Benz says. “Because if you don’t have enough liquid assets to draw upon then, your only choice is to tap depreciating assets.”

One way to address this risk is to scale back spending assumptions, at least initially. The so-called 4% rule, a longtime rough guide for how to draw down cash in retirement, may be too aggressive at the moment.

The idea was to take 4% of your assets out in your first year, then take the same dollar amount, plus an increase to match inflation, in subsequent years.

Studies had shown that a retirement nest egg would very likely last a lifetime at that rate. “That was based on 30 years of all the different markets going back to the 1920s,” says Pfau, the professor at the American College of Financial Services.

“But interest rates are now lower than they ever were at the start of retirement historically; market valuations are as high as they ever were in that history.” Many retirement experts have whittled down the 4% rule to 3% or 3.5%.

You can add protection by using a “bucket” strategy, where you think of your savings as split into different buckets based on how soon you’ll need to access the cash.

The far-off buckets can be allocated more aggressively, while money to cover expenses coming up in the next year or two goes into short-term bonds or cash. That way you’ll avoid selling stocks when the market is down, Pfau says.

There’s a chance that you’ll lose money on bonds as well, but Benz thinks investors should keep that in perspective. “Thinking about the magnitude of losses you’re likely to experience in high-quality bonds, even in a rising rate environment, it’s going to be much less than the loss you would have in the equity portion of your portfolio,” she says.

Increase in Social Security benefit for each year of delay after full-retirement age: 8%

One way to ensure that you won’t outlive your money, and to get built-in inflation protection, is to delay claiming Social Security until the age of 70 if you can afford to. This doesn’t necessarily mean you have to work that long.

People should be willing to spend retirement assets to delay taking Social Security, says William Bernstein, co-founder of investment management firm Efficient Frontier Advisors.

For every year past full retirement age, which is 67 for anyone born in 1960 or later, your benefit goes up by 8%. Social Security comes with cost-of-living adjustments, which also apply to the years you delay. “The Social Security trick goes a long way toward immunizing you to living to 100,” Bernstein says.

Tweaks also can be made to a portfolio to offset inflation. One of the best: buying I bonds, which are U.S. government-issued bonds with a rate—currently 7.12%—that resets twice a year based on inflation.

An individual can buy only $10,000 per year, but they can purchase an additional $5,000 using their federal income tax refund.

Other classic inflation hedges include Treasury inflation-protected securities (TIPS), which are also available through funds and real estate.

To diversify, retirees may want to add foreign stocks. “We’ve had fat years for investing in U.S. vs. foreign stocks, but foreign stocks’ expected returns are higher, because they are cheaper,???????????? says Bernstein.

He figures that 30% of a stock portfolio could be in foreign holdings. PGIM’s Blanchett also likes the idea of making sure retirees own stocks beyond the usual large-cap U.S. stocks and suggests a stake in small-cap stocks as well.

The idea isn’t to yank all your money out of the S&P 500—that kind of market timing is almost impossible to get right—but to ensure that you aren’t overloaded in assets that have done so well for so long. “Retirees need to be careful to not use the past 10 or 15 years as a lens for how to position themselves going forward,” Benz says.

Updated: 1-23-2022

Companies’ U.S. Pension Plans Are More Overfunded Than They Have Been In Years

Further increases in 2022 could spur CFOs to revise their pension strategies.

Companies’ U.S. pension plans are more overfunded than they have been in years amid strong equity markets.

Those surpluses will likely go up further if long-term corporate bond yields continue to rise, as many of these plans use those yields to value their liabilities. That could prompt finance chiefs to revise their pension strategies.

An estimated 40 of the largest 100 U.S. pension plans were funded at 100% or more in 2021, the most since 2007, and up from 16 in 2020 and 13 in 2019, according to data from advisory firm Willis Towers Watson PLC.

The 40 plans, all of them defined-benefit plans that promise fixed payouts to retirees, were overfunded by a total of $45.49 billion last year, up from $22.58 billion among the overfunded 16 plans in 2020, Willis Towers said.

Long-term corporate bond yields, also known as discount rates in the pension world, increased to 2.76% at the end of 2021 from 2.32% at the end of 2020, according to asset manager Mercer LLC’s calculation of what it calls typical discount rates for pensions.

The move up in those yields came amid higher inflation and expectations the Federal Reserve would start moving away from its pandemic stimulus and near-zero policy rate.

Discount rates are forecast to continue their upward climb this year, which would push up funding levels even more, as the Federal Reserve signals its intention to raise interest rates.

Higher interest rates mean companies need to set aside less in the way of assets to fully fund pension obligations because the present value of future payments shrinks.

Funding levels of corporate pension plans have soared since the early stages of the coronavirus pandemic in the spring of 2020, when they fell compared with the prior-year period. Defined-benefit plans had an aggregated funding status of 96% at the end of 2021, up from 88% a year earlier, according to WTW’s review of 361 Fortune 1000 companies.

Funding levels in excess of 100% allow companies to further reduce financial risks stemming from their pension obligations—for example, by purchasing annuities, terminating their plan or switching to more conservative investments such as fixed-income securities. An increase in funding also provides breathing room for plans that are below 100%.

However, overfunded pensions could become underfunded again if market declines reduce pension asset values, corporate advisers said. Roughly 60% of Fortune 1000 companies’ defined-benefit plans remain in deficit, Willis Towers data showed.

Truist Financial Corp. , a Charlotte, N.C.-based bank holding company, is allocating more funds to fixed-income assets such as U.S. corporate bonds and U.S. Treasurys to reduce risks in its plans, Chief Financial Officer Daryl Bible said. “The more investments you have that are earning, it basically lowers the cost of adding to the pension,” he said.

The company, which was created when BB&T Corp. and SunTrust Banks Inc. merged in 2019, combined two sets of defined-benefit plans. Truist’s plans were funded at 133.8% in 2020, up from 132.2% in 2019, according to consulting firm Milliman Inc.

Truist’s projected pension liabilities were $10.35 billion at the end of 2020, compared with a combined $6.07 billion in 2019, it said.

The company’s plans cover about 106,800 people, including current employees and retirees. They continue to admit new members, which is contrary to many other defined-benefit plans that are closed to new entrants.

Many companies in recent decades have moved new hires to 401(k) plans because of the continuing obligations that defined-benefit plans carry.

Companies can benefit from funding their plan beyond 100%. A pension surplus can provide protection from future market volatility, which could drag down the funding level, and allow companies to continue offering pension benefits to employees without having to make contributions, said Beth Ashmore, a managing director at WTW.

“There still is some value in having a little bit more surplus on the balance sheet,” Ms. Ashmore said.

Media and education company Graham Holdings Co. ’s pension plan had $3.2 billion in pension assets and about $1.1 billion in pension liabilities as of Sept. 30.

The Arlington, Va.-based company is assessing its options for using its surplus pension assets, such as transferring assets from a plan closed to new entrants to a qualified replacement plan—a different type of defined-contribution plan—CFO Wallace Cooney said last month on a call with analysts and investors.

That would reduce the company’s cash spending on retirement benefits, Mr. Cooney said.

“There simply are not that many playbooks out there for exactly how to best manage our overfunded pension,” Mr. Cooney said on the call. A spokeswoman for the company declined to comment further.


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Companies shouldn’t push a plan’s funding far beyond 100% and make riskier investments that could cause a funding shortage—for example, in certain equities, real estate and other assets, said Matt McDaniel, a partner at Mercer.

“If you go from 110% funded to 90% funded, that becomes pretty painful and you’ve got to start putting cash back in,” Mr. McDaniel said.

Under U.S. law, companies whose plans are more than 120% funded under federal calculations are allowed to use the excess funds for other purposes, such as retiree health benefits.

Funding levels for federal funding requirement purposes are calculated differently from those in financial statements.

Some businesses also use their surplus to provide additional pension benefits instead of severance-related payments, said Paul Rangecroft, who heads up the wealth solutions practice at professional-services firm Aon PLC.

Executives generally avoid cashing out a portion of their pension surplus after terminating a plan because assets that don’t go toward participants’ benefits are subject to a 50% excise tax as well as federal and state income taxes, Ms. Ashmore said.

Companies with well-funded plans in recent months have increased their efforts to reduce investment risks associated with them.

For example, plan sponsors are increasingly shifting their pension obligations into annuities, which they purchase from an insurer for all or some of their employees with vested benefits.

Annuitizations shrink a plan’s assets and liabilities and simultaneously strengthen a company’s balance sheet by removing the pension obligation.

U.S. businesses spent an estimated $37 billion on annuitizations in 2021, up from $26.8 billion the previous year, Mercer data showed. The figure represents the pension assets transferred to cover the annuity.

Meritor Inc., a Troy, Mich.-based auto-parts maker, plans to annuitize its U.K. plan, which is overfunded at about 130%, in the next 12 to 24 months, CFO Carl Anderson said. It would then look to do a similar deal involving its U.S. plan—which is funded at about 92%—possibly in four to five years, he said.

The company’s U.S. and U.K. plans were roughly 70% funded as of 2011. Meritor boosted them through contributions and investments, Mr. Anderson said.

“We’ve come a long way, really, since the financial crisis,” he said.


Updated: 1-24-2022

New Jersey And New York Ranked As The Worst U.S. States To Retire In

New Jersey is the worst U.S. state to retire in, according to a new ranking, with Mississippi and New York rounding out the bottom of the list.

The biggest factor in the ranking was that New Jersey and New York were the two least affordable U.S. states to live in, according to the survey released Monday by personal-finance website WalletHub. The two states scored higher on quality of life and healthcare.

The best state to retire was Florida, which ranked fourth for affordability and fifth for quality of life, although healthcare ranked 27th. Virginia, Colorado, Delaware and Minnesota rounded out the top five states to retire, boasting high affordability ratings.

WalletHub compared the 50 states across affordability, quality of life and healthcare, using 47 metrics like tax-friendliness, risk of social isolation, elderly friendly labor market, life expectancy and health-care facilities per capita. The site then calculated each state’s weighted average to give the state a score out of 100.

New York, which ranked 7th in the country for healthcare and 12th for quality of life, received a score of 42.5. New Jersey received a score of 40.3.

New Jersey Governor Phil Murphy, who won a second term in a narrow margin in November, has acknowledged the state’s high cost of living and property taxes, which are the highest in the nation.

“We are not going to be the low-cost state to live or work in,” he told Bloomberg News in October, explaining that he’s more focused on quality of life and high-skilled workers. “If your business model includes high value-added, highly skilled workforce, we’re on your list.”


Updated: 2-14-2022

There’s No Perfect Way To Inflation-Proof Your Investments

There are pros and cons to almost every product or investment claiming to protect your nest egg from inflation.

With inflation at a four-decade high, many investors are trying to figure out how to protect their retirement nest eggs. But figuring out exactly how to inflation-proof your portfolio isn’t an easy task.

The need to stave off the threat of inflation stems from the fact that rising prices generally reduce the purchasing power of assets. For people on a fixed income in retirement, inflation means their retirement dollars might not go as far.

Among the options to counteract inflation are to add inflation-protected bonds to your holdings. Another approach is to defer claiming Social Security, to obtain a bigger inflation-adjusted retirement income.

There are other investment options, as well, but some are expensive. Others are volatile and had inconsistent performance during past inflationary periods.

“There’s no good answer,” said William Bernstein, an independent financial adviser based in Eastford, Conn.

There are pros and cons to almost every option. Here’s what to consider.

Social Security

One straightforward way to boost inflation-protected retirement income is to delay claiming Social Security benefits. Retirees would then need to spend more from their investment portfolios to support themselves, but with the S&P 500 up 76% including dividends since March 31, 2020, it isn’t a bad time to sell some stocks, said Christine Benz, personal finance director at Morningstar, Inc.

Retirees can start these benefits any time between ages 62 and 70, but for every month of delay, the payment increases. Benefits are also adjusted annually to reflect increases in the Labor Department’s CPI-W, a measure of inflation affecting blue-collar workers.

For example, someone born after Jan. 1, 1960, who is entitled to $2,025 a month at age 62 would receive $3,587 before cost-of-living adjustments by holding off on claiming until age 70.

With a 5% inflation adjustment, the benefit available at age 70 would be about $5,300, according to Bill Reichenstein, head of research at, which sells Social Security claiming advice.

Cost-of-living increases start at age 62, whether you claim or delay, and continue for as long as you live. Based on the rise in third-quarter inflation, the increase for 2022 was 5.9%, the largest since 1982, according to Social Security Administration data.

Still, not everyone should delay Social Security. A person who postpones benefits until age 70 instead of 62 would have to live to 80½ years old to come out ahead, Dr. Reichenstein said.

I Bonds

When it comes to investments that aim to keep pace with inflation, “I bonds are the best of all,” Mr. Bernstein said.

Investors in these inflation-protected U.S. savings bonds are guaranteed to recover their principal plus inflation over 30 years.

They offer a fixed rate for up to 30 years, plus an inflation rate that adjusts semiannually and tracks the Labor Department’s CPI-U, a measure of urban inflation.

You can buy them directly from the U.S. government at

Today, the yield on a regular U.S. 30-year Treasury bond is 2.24%. The I bonds’ initial annualized yield is 7.12%. With its fixed rate currently zero, I bonds won’t beat inflation.

But since yields on conventional Treasury bonds are now negative when inflation is taken into account, I bonds have a clear advantage, said Mark Iwry, a nonresident senior fellow at the Brookings Institution who oversaw national retirement policy at the U.S. Treasury Department during the Clinton and Obama administrations.

A downside to I bonds is that each investor can purchase only up to $10,000 a year. An investor can buy up to an extra $5,000 if they elect to receive their federal income tax refund in I bonds, Mr. Iwry said.

Holders of I bonds are barred from cashing them in for the first 12 months and lose three months’ interest if they redeem within the first five years.


When inflation exceeds expectations, prices of ordinary bonds typically get hammered. That is when Treasury inflation-protected securities, or TIPS, tend to do well.

Backed by the U.S. government, TIPS are bonds with principal and coupon payments that adjust to keep pace with the consumer-price index.

The bond market currently expects inflation over the next decade to average about 2.46%. That is the difference between the minus 0.51% inflation-adjusted yield on the 10-year TIPS and the 1.95% nominal yield on a regular 10-year Treasury note.

If the CPI averages more than 2.46% over that time, TIPS will deliver a higher total return than Treasurys. If inflation is below 2.46%, the conventional Treasury will outperform.

With TIPS yields negative today, buyers would lose money on bonds they hold to maturity. That makes TIPS “a very costly method of inflation insurance,” said Campbell Harvey, a professor at Duke University’s Fuqua School of Business.

Last year, TIPS returned nearly 6% as inflation jumped, according to Vanguard Group.

This year, however, rising interest rates are creating problems for bond prices, which presents another risk factor for TIPS. Even if inflation is rising, a sharp decline in bond prices would also hurt TIPS.

You can buy TIPS through, brokers or TIPS funds. Morningstar’s Ms. Benz suggests putting 10% to 20% of your fixed-income portfolio into TIPS.

Stocks And Commodities

In a 2021 study, Prof. Harvey and four co-authors looked at eight periods over the past century in which U.S. inflation was 5% or higher for at least six months and found that the inflation-adjusted return on stocks averaged minus 7% annualized.

Based on his research, Prof. Harvey suggests shifting money from the worst-performing sectors during inflation, which include consumer durable stocks such as auto makers, and into the energy and natural-resource stocks that tend to fare best.

Historical data in the study suggests that real-estate investment trusts, or REITs, may do well since landlords in the past have often been able to raise rents to keep pace with inflation.

Another potential asset is commodities, given that prices of metals, oil and agricultural products “tend to hold their value or even outperform in inflationary surges,” Prof. Harvey said.

Investors typically purchase them via funds that buy commodities’ futures.

Because commodities can have big performance swings, Amy Arnott, a portfolio strategist at Morningstar, recommends capping exposure at 3% or less of a portfolio. With prices up sharply this year, investors risk buying “at a high point in the cycle,” she added.

What about gold? It has kept up with inflation, but only over very long periods, such as the past century, Prof. Harvey said. Over the shorter horizons that investors face, it hasn’t been reliable due to its high volatility, he said.


Updated: 2-28-2022

Inflation Raises Expenses For Pension Funds

Cost-of-living increases are rising significantly for the first time in years, adding to retirement system liabilities.

Rising inflation is driving up expenses for many large U.S. pension funds that have promised retirees cost-of-living raises.

About half of states link pension benefits for some or all of their retired workers to changes in the consumer-price index, according to the National Association of State Retirement Administrators.

With inflation reaching 7% in December, some retirement funds are now looking at increasing pension checks by 3% or more for the first time in a decade. At others, board members or state officials are approving one-time cost-of-living raises.

“It’s a hot topic,” said Keith Brainard, the association’s research director. “A cost-of-living adjustment can be an expensive plan provision.”

Pension funds are confronting a challenge shared by institutions and household savers alike: Just as expectations for public market investment returns are dimming, everyday costs are going up.

This year, many retirement systems will book a loss on cost-of-living adjustments, rather than the annual windfall they have been seeing for years when those inflation-linked increases came in below expectations.

The $28 billion Los Angeles Fire and Police Pension System, for example, got an unexpected gain of $264 million last year when cost-of-living adjustments for pensioners came in well below the actuaries’ assumption of 2.75%.

This year, with the fund’s cost-of-living adjustment likely to approach 7% for many beneficiaries, the system is likely to pay out tens of millions dollars more than anticipated. Pensions range from 50% to 90% of final salary.

Pension funds “have been used to coming in ahead; now all of a sudden they’re going to be behind,” said Joe Newton, pension market leader with Gabriel, Roeder, Smith & Co., an actuarial and benefits consulting firm. Russia’s attack on Ukraine is further stoking inflation concerns.

In the roughly 30,000-person town of Windsor, Conn., an $84 million local pension fund is paying out about $410,000 a month in pension benefits to its roughly 250 retirees this year, said Finance Director James Bourke.

About $63,000 of that is due to cost-of-living increases made over the years, with $5,000 coming from this year’s cost-of-living increase of 1.3%.

Next year, the cost-of-living increase will rise to 5.9%, tacking on about $25,000 a month. The pension fund has taken several measures over the past decade that help keep costs down, Mr. Bourke said, including closing the plan to new hires and increasing worker contributions.

Inflation also can add to pension costs down the road if it drives up workers’ final salaries, which are used to calculate their pensions.

To be sure, cost-of-living increases are only one component of the pension obligations many funds face, and some states limit costs by approving payouts on a one-time basis.

More than 430,000 beneficiaries of the Teacher Retirement System of Texas received up to $2,400 from the state’s general fund in January after the Texas legislature approved the measure.

‘[Pension funds] have been used to coming in ahead; now all of a sudden they’re going to be behind.’
— Joe Newton, Gabriel, Roeder, Smith & Co. pension market leader

But many other state pensions offer yearly increases of up to 2% or 3%, sometimes more, according to a National Association of State Retirement Administrators survey of plans’ cost-of-living provisions.

Those raises can add up, particularly if they compound, meaning that one year’s increase becomes part of the base on which the next year’s increase is calculated.

Indeed, since the 2007-09 financial crisis, more than 30 state pension systems have modified cost-of-living adjustments in an effort to reduce costs, the National Association of State Retirement Administrators survey shows.

State pension funds still have $740 billion less than they need to cover future benefit promises, according to a fiscal 2021 estimate from Pew Charitable Trusts, even after a decade of stock gains has swelled public pension coffers.

Funding shortfalls have led public officials to invest retirement savings in illiquid private markets and weighed down some states’ and cities’ creditworthiness in the eyes of ratings firms, driving up their borrowing costs.


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Some pension funds that lowered or eliminated cost-of-living increases in an effort to control expenses are now experiencing pushback.

Retired Cincinnati teacher Elizabeth Jones hasn’t received a cost-of-living increase since 2017 after the State Teachers Retirement System of Ohio suspended the increases in the face of a funding shortfall.

She is now running for a seat on the board on a platform that includes restoring annual cost-of-living increases.

“Everyone’s bills are going up, grocery bills, gas, you name it,” said Ms. Jones, the president of the retiree chapter of Cincinnati Federation of Teachers and a former high school English teacher and guidance counselor.

As of June 30, the pension fund had about $90 billion in assets and $105 billion in liabilities. Teachers retiring over the past year had an average annual pension of $55,476 and an average age of 62, according to the fund.

Board members are expected to vote in March on proposals for one-time or two-time cost-of-living adjustments for some retirees, a spokesman said.

The retirement system’s actuary, Cheiron, advised members to proceed with caution, according to a board publication. The firm projects that a one-time 2% cost-of-living increase would cost the fund roughly $1 billion.

Updated: 3-23-2022

The ‘Great Retirement’ Disconnect That Puzzles U.S. Economists

Millions of Americans retired sooner than they anticipated because of Covid-19, but applications for Social Security benefits are roughly flat. What gives?

The pandemic pushed millions of older Americans out of the labor force. It should have spawned a surge in Social Security benefits applications — but it hasn’t. Perhaps because they aren’t retired.

The disconnect has economists wondering how many of these baby boomers might come back to the workforce — a key question when job openings have remained near record levels for months now.

The retired share of the population is now substantially higher than before Covid-19, according to a Federal Reserve analysis.

About 2.6 million older workers retired above ordinary trends since the start of the pandemic two years ago, based on estimates by Miguel Faria e Castro, an economist at the Federal Reserve Bank of St. Louis.

Under the U.S.’s federal retirement program, eligible workers receive a percentage of their pre-retirement income in monthly payments from the government. Workers can start receiving Social Security payments at age 62, with full benefits coming at age 66 or 67 depending on their date of birth.

Despite the surge in baby boomers saying in surveys they retired, applications for Social Security benefits have been fairly flat, based on calculations by the Boston College Center for Retirement Research. Around 0.1% of the U.S. population 55 and older have applied each month, which is consistent with what was happening before the pandemic.

The lack of Social Security filings is a bit of a mystery for Laura Quinby, a senior research economist at the Center for Retirement Research. Older Americans often feel the need to apply for benefits in person, so the closure of the Social Security Administration’s local offices during the pandemic might have dissuaded some from applying.

Others might be waiting to reach their late 60s to be eligible for full benefits, Quinby said. Thanks to the Covid-era boom in stock and real estate values, individuals who own assets and have savings can afford to delay applying.

The surge in assets made this an “opportune time for some workers to step out of the labor force and stay out of the labor force,” said Lowell R. Ricketts, data scientist for the Institute for Economic Equity at the St. Louis Fed.

“But we’re still expecting a steady, steady trend that some might want to come back,” he said, especially with the advent of remote and hybrid work, which may lure seniors back to the job market.

Unlike in other developed countries, retirement isn’t necessarily a permanent shift in the U.S. Before Covid, it wasn’t uncommon that Americans would “un-retire,” out of financial hardship or personal choice. It’s too early to tell whether the pandemic has changed that dynamic permanently or not.

The Social Security Administration’s Office of the Chief Actuary suggested older people may have “retired” from one job and continued working in another. That would explain why they’re not applying for benefits.

And people under 62 wouldn’t qualify for Social Security anyway. Among them is Hope Cabot, 61, who left her teaching job in Roswell, Georgia, in December.

The stress of caring for a mother and of having to teach virtually pushed her to retire sooner than she anticipated. She plans to be a substitute teacher to stay busy and bring in some extra cash to help keep up with high inflation, she said.

“During the pandemic, it was crazy,” she said. “I was not planning on retiring until the end of this year or the end of next year.”

So far Bureau of Labor Statistics data on labor participation show that some baby boomers have come back, while many are remaining on the sidelines.

It’s possible that Covid-19 has led to a reckoning for a generation that reached retirement age when a global pandemic hit their age group disproportionally and threatened life as we knew it. It makes it even more difficult to predict if and when they might look for a job again.

“Just as is the case with younger workers who have seen opportunities to think differently about their lives, people in this demographic are thinking, ‘What do I really want to do with my life,’” said Doug Dickson, who chairs the Encore Boston Network, which helps older workers find a job or volunteer opportunities.

“Are they really retired or are they just defaulting to that language because it’s the easiest way to characterize it?”


Updated: 3-28-2022

America’s Retirement Crisis Is a Financial Crisis Too

Without significant reforms, state budgets could be overwhelmed within a decade. A better system is urgently needed.

America is facing a retirement crisis. Most experts agree that a significant portion of the population will lack the resources to live comfortably after they stop working. This, in turn, will place an increasing burden on the country’s social safety net.

Exactly how big is the problem? Put it this way: Under reasonable assumptions, it could overwhelm state budgets across the country.

Once upon a time, as recently as the late 19th century, Americans typically worked until they died — which they could expect to happen, on average, before age 65. With the exception of the rare military pension, the old and infirm relied on charity or extended families for support.

That all changed amid the rapid industrialization and rising prosperity of the 20th century. Life expectancy for those who reached working age shot upward: As of 2018, it was almost 77 for men and 82 for women.

Companies, which increasingly dominated the economy, proved unwilling to employ older workers, whom they saw as less productive. For an increasing number of people, a period of idleness became possible, even inevitable.

The government recognized the new reality by establishing Social Security in 1935. The program initially started paying benefits at age 65, which became the official retirement threshold.

Yet it was never intended to provide more than a bare minimum income. To maintain a decent standard of living, people (or their employers) had to do something they had rarely done before: set aside enough money for life after work.

Therein lies the origin of America’s retirement crisis. The U.S. has never properly considered how people will make up the difference between Social Security and a financially secure old age.

This week, the House is expected to consider legislation that will expand automatic enrollment in employee retirement plans and make it easier for small businesses to offer certain benefits. But a more fundamental rethink is in order.

The size of the problem will depend on a few variables: how much the population of retirees grows, how much money they need to be comfortable, and how much they manage to save. Consider each in turn.

The U.S. will have a lot more retirees in coming decades, thanks partly to the aging of the baby-boom generation. The Census Bureau forecasts that by 2030, there will be more than 73 million people aged 65 and over, comprising about 21% of the country’s total population. That’s up from 49 million, or about 15%, in 2016.


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What they need to retire depends largely on what they earn while working. On average, people require about 75% of their pre-retirement income to ensure a comfortable old age.

That said, most people aren’t average: The well-off might be fine with as little as half their annual earnings, while poorer workers might need 100% – or more, to cover rising health-care costs.

So will they have enough? The Center for Retirement Research at Boston College — which has been studying financial preparedness for more than a decade — estimates that about half of working-age households are “at risk,” meaning they’re on track to fall more than 10% short of the income they’ll need to retire comfortably.

In dollar terms, that amounts to a retirement-savings shortfall of about $7 trillion. And that assumes no future cuts in Social Security benefits.

Granted, people can reduce the shortfall by working beyond the age of 65, the cutoff that the center uses for its calculation. Many already do: As of December, about a third of people aged 65 to 69 were employed. But there are limits.

It’s much harder for, say, a truck driver to work until 70 than it is for a college professor. And even if half of all workers kept going past 65, the share of the population “at risk” would fall only to about a third. That’s still a terrible outcome for one of world’s richest nations.

The lack of savings is more than a humanitarian crisis. It’s also a fiscal disaster in the making. The more people reach retirement with inadequate resources, the more they will rely on welfare programs such as Medicaid, food stamps and Supplemental Security Income.

One study estimates that by 2030, seniors will require an added $7 billion in public assistance annually in the state of New Jersey alone. That’s almost a fifth of the current state budget. And New Jersey doesn’t have an outsized senior population. The situation in other states could easily be worse.

What to do? People can work only so long, and they’re not going to die sooner. This leaves one solution: Get them to save more.

The next editorials in this series will explore why they aren’t naturally inclined to do so, why today’s patchwork of options — including 401(k) plans and individual retirement accounts — isn’t helping, and how to design a better system.

Updated: 4-11-2022

Everything Costs More, And That’s Disrupting Retirement For Many

Rising inflation and wages prompt older workers to put off, exit retirement.

Signs are mounting that high inflation is helping propel more people—including retirees—back into the labor force, economists say.

That could be good for the economy overall, as a growing workforce boosts the economy’s growth prospects, and it could ease staffing shortages that have pushed up wages and added to price pressures.

But for many people, including those relying on pensions or limited savings, rising prices are an unwelcome development forcing them back onto the job market.

“We’re beginning to see the migration of the older cohort who expected to live on fixed income in a low interest-rate and low inflation environment,” said Joseph Brusuelas, chief economist at RSM US LLP. “That has not materialized; therefore they have to come back to the labor force to create the conditions so they can retire.”

“Really what you’re dealing with is an inflationary shock that has elicited a change in behavior,” he added.

The share of people age over 55 either working or looking for a job—their labor-force participation rate—rose to 38.9% in March from 38.4% in October, according to the Labor Department.

More than 480,000 people in that age group entered the labor force during the past six months, according to the three-month moving average, which smooths out volatility. That was more than the 180,000 who entered the labor force in the six months before the pandemic struck.

The job market improved for workers of all ages during the past six months, with the three-month moving average for the overall labor force rising by 2.5 million, raising the national participation rate to 62.4% in March from 61.7% in October.

Analysts say a number of factors are prompting more people of all ages to go out and look for jobs: Covid-19 vaccinations, school and daycare reopenings, more remote and flexible work opportunities, an end to pandemic-era government support and rising wages.

But they say another key factor is the recent jump in year-over-year inflation, to nearly 8% in February from just over 5% last summer, as measured by the Labor Department’s consumer-price index. The department is set to release on Tuesday its CPI report for March.

Roughly 2.6 million Americans retired earlier than expected between February 2020 and October 2021, according to estimates from Federal Reserve Bank of St. Louis senior economist Miguel Faria-e-Castro. Now many are returning to work at rates not seen since March 2020, according to jobs site Indeed.

The rise in prices is a strong motivator for older people to either postpone retirement or reverse it, some of them say.

Former paralegal Lisa Purcell, 57 years old, has been retired for health reasons for over two decades, and, despite her concerns about catching Covid-19, she said she is considering looking for a job because of rising inflation.

She said she and her husband, 53, a retired energy-industry engineer, are on a very tight budget until she qualifies for Social Security benefits.


Updated: 4-29-2022

Popular Retirement Funds Are Getting Hammered As Tech Stocks Plunge

Many of the largest 401(k) funds are down 13% or more this year.

Anyone who dares peek at their 401(k) can see the carnage: Many popular funds in workplace retirement savings plans are down more than 13% so far this year. Some are even in, or approaching, bear market territory.

Many of the retirement funds are, unsurprisingly, growth-oriented and heavy on on mega-cap tech stocks such as Inc., which plunged 14% Friday after the e-commerce giant reported a quarterly loss and said it may lose money again in the current period.

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The epic bull run in mega-cap tech that began in March 2020 led many funds to become ever more concentrated in a handful of companies. The T. Rowe Price Blue Chip Growth fund, for example, held more than 46% of the fund in five stocks as of March 31 — Microsoft Corp. (11.6%), Amazon (10.9%), Alphabet Inc. (10.2%), Apple Inc. (8.7%) and Meta Platforms Inc. (5%) — and more than 60% of assets in the top 10 stocks. The fund is now down more than 25% for the year.

Fidelity Contrafund, another big 401(k) plan favorite, held about 33% of the fund in its top five holdings as of Feb. 28, with Amazon its top stock, at 8%. Contrafund is now down more than 20% year-to-date.

The S&P 500 has lost more than 13% so far this year. While the recent volatility is gut-wrenching for many people nearing or in retirement, it’s an opportunity for millennial investors, said financial planner Thomas Kopelman, the 27-year-old co-founder of AllStreetWealth.

“For young people, the market going down is okay since you aren’t going to be using this money for a very long time,” Kopelman said. “So get the money in, and stop waiting for the perfect time to buy the dip.”

Updated: 5-6-2022

How Is My 401(k) Doing? Every One Of The Largest Funds Is Down This Year

The biggest 401(k)s have all lost ground this year, with all but 12 posting double-digit declines.

Retirement funds are getting pounded by the turbulent U.S. stock market.

There are no positive returns so far this year among a list of the 100 largest 401(k) funds provided by data firm BrightScope, and all but 12 have posted double-digit losses.

The ones that have done the best, suffering single-digit declines, are value-oriented or income-focused strategies, which weren’t whacked as hard by the recent slump in U.S. tech stocks.

Surging inflation and fears that the Federal Reserve won’t be able to tame it without triggering a recession have sent stocks tumbling this year, particularly the richly valued, mega-cap tech stocks that swelled portfolios during the long bull market.

The prospect of rising interest rates has also hurt bonds, and high inflation makes holding cash a tricky proposition.

In this tough market, single-digit losses lead the pack among large retirement funds. The best performer? The Vanguard Equity Income Fund (VEIRX), down 1.6% as of May 6. The lone index fund on the list, the Vanguard Value Index (VVIAX), follows it with a 3.1% loss. Fidelity Low-Priced Stock Stock (FLKSX) is in third place, down 6% so far this year.



The income and value-oriented funds on the list aren’t nearly as concentrated in a handful of stocks as many pure growth funds have been, which has damaged their returns as popular holdings like Inc. and Meta Platforms Inc. have plunged.

(The big tech stocks that some of the funds do own, such as Microsoft Corp. and Alphabet Inc. aren’t down as much).

While the Vanguard Growth Index has more than 50% of its assets in its top 10 holdings, the Vanguard Value Index has 21% and the leading value-oriented funds in 401(k)s have top-10 concentrations that max out around 32%.

This diversification has helped dampen the losses for funds with a value bent, which look for stocks that are temporarily underpriced relative to their long-term prospects.

The funds often own stocks in more defensive sectors like healthcare and consumer staples, as well as financials, which is one of the few sectors that could benefit from rising interest rates. The Vanguard Growth Index (VIGAX) is down more than 23% so far this year.

Updated: 5-10-2022

Pensions’ Bad Year Poised To Get Worse

Funds that manage retirement savings for teachers, firefighters and other public workers returned a median minus 4.01% in the first quarter.

State and local government retirement funds started the year with their worst quarterly returns since the beginning of the pandemic. Things have only gone downhill since.

Losses across both stock and bond markets delivered a double blow to the funds that manage more than $4.5 trillion in retirement savings for America’s teachers, firefighters and other public workers.

These retirement plans returned a median minus 4.01% in the first quarter, according to data from the Wilshire Trust Universe Comparison Service expected to be released Tuesday. Recent losses have further eroded their holdings.

“It’s a tough period,” said Jay Bowen, manager of the Tampa Firefighters and Police Officers Pension Fund. “Nobody is immune.”

The simultaneous declines in stocks and bonds are inflicting pain on household and institutional investors alike in 2022. The S&P 500 has returned minus 13.5% year to date through Friday, while the Bloomberg U.S. Aggregate bond index—largely U.S. Treasurys, highly rated corporate bonds and mortgage-backed securities—returned minus 10.5%.

Pension funds maintain huge portfolios of stocks, bonds and other assets, wielding significant power on Wall Street, where their purchases and sales can shift prices and investment managers vie for their business. Their losses can raise costs for governments and workers, squeeze municipal budgets and drive up taxes.

At the Tampa fund, one of the nation’s best performing, Mr. Bowen is sitting tight waiting for long-term opportunities, such as investment-grade bonds with coupons of at least 6% or promising stocks whose prices have fallen enough to make them a bargain.

“The companies that have been unfairly punished, that have the strong balance sheets, that have free [after-expenses] cash flow, that have dividends,” he said. “Particularly in this environment, we like finding companies that not only have a strong record of raising their dividends but that have relatively attractive dividends.”

Pension plans’ lackluster performance puts the retirement funds’ median return for the nine months ended March 31 at 0.82%, said Robert J. Waid, managing director at Wilshire.

That likely means higher retirement costs for many state and local government employers and employees who must help make up the difference when these funds, which predominantly have a June 30 fiscal year-end date, don’t meet their returns targets of around 7%.

The North Carolina Retirement Systems, among the nation’s better-funded retirement plans, with an investment-return target of 6.5%, has returned an estimated minus 5.5% through May 6 in its fiscal year, which runs from July 1 to June 30.

“We have a lot of counties and cities that are struggling right now with inflationary costs, and every time the plan doesn’t perform, they have to put in more money,” said North Carolina Treasurer Dale Folwell. “At the local level, they have nowhere to go but property taxes.”

Quarterly public pension returns last dipped into negative territory in the beginning of 2020, when they endured their worst quarter on record, returning a median minus 13.2% after the onset of the Covid-19 pandemic sent markets into turmoil.

But a federal stimulus effort soon helped propel retirement funds to seven straight quarters of gains, including their best quarter on record. Now some fund managers worry this downturn could be more sustained.

Central bank efforts to rein in inflation have dragged down returns on stocks and bonds over 2022. Many funds scrambled to react to Russia’s invasion of Ukraine in February, either marking down assets or selling them at a loss in response to public pressure. Oil and gas stocks, along with commodities, provided one bright spot.

Stocks drive returns at public pension funds. They have just over half of their assets in domestic stocks, according to Wilshire, and another nearly 7% in international equities. Retirement funds with assets of more than $1 billion have 38% of assets in domestic stocks and nearly 10% in international ones.

“You’ve got higher inflation, you’ve got the war in Ukraine, the supply chain,” Mr. Waid said. “The market’s really nervous about what shoe is going to fall next.”

Pension plans with assets greater than $1 billion returned a median minus 3.1% in the first quarter. Those plans tend to field bigger staffs and attract more sophisticated investment professionals.

But additional losses may be in store for those retirement funds. Larger funds allocate more money to alternative investments, such as private equity, which typically report returns one or more months behind.

“It’s difficult to tell whether that [slightly better median return] was due to the lag in performance,” Mr. Waid said. “Did they actually generate alpha?”

Updated: 5-23-2022

The Stock Market’s Drop Is Hitting Many 401(k)s Harder This Time

Target-date funds, a popular retirement-savings option, are more heavily invested in stocks than investors might think.

Millions of workers and retirees are more exposed to the stock-market slide than they might expect.

Many Americans spent the past decade putting more of their retirement money into target-date funds, a type of set-it-and-forget-it investment product pitched as an easy way to invest in a diversified portfolio of stocks and bonds.

The product works by shifting from stocks to bonds over time, giving an investor a more conservative mix as retirement age draws nearer.

But many of these funds are shifting into bonds more slowly than they did a decade ago after managers loaded up on stocks.

Portfolios for the youngest workers now invest 92% of contributions in stocks, up from 85% a decade ago, with some top-selling target-date funds nearing 100% in stocks at the outset of an investor’s working life, according to Morningstar Inc.

Midcareer workers had the biggest rise in stock-market exposure, with portfolios for 45-year-olds now holding 82% in stocks, up from 69% a decade ago—and far more aggressive than the traditional 60/40 portfolio.

At retirement age, the median exposure is now 46%, up from 43% in 2011. These figures are based on the median exposure at various ages among the dozens of target-date funds Morningstar follows.

For more than a decade, the strategy was a boon for investors. Stocks surged and so did retirement balances. But now, with the S&P 500 on Friday closing about 19% below its peak, the strategy is facing a test.

“It will be interesting to see if investors are able to stick with the greater volatility in these portfolios or if they start selling, which could cause them to miss out on a rebound,” said Megan Pacholok, an analyst who follows target-date funds at Morningstar.

She expressed particular concern for older investors given they don’t have as much time to make up for market declines.

“If you are 30 years old and saving for retirement you have time to go through a longer bear market and recover, but for retirees, it may be a different story,” Ms. Pacholok said.

The target-date investment mix is critical to the success of millions of Americans, not just today’s retirees. These funds hold about 40% of total assets in 401(k)-style plans Vanguard Group administers, up from 12% in 2010. They attract 60% of new contributions to 401(k) plans.

Some fund managers began shifting into more stocks several years ago. They have said this strategy should help investors build more wealth for retirement, because stocks have historically returned more than bonds over long periods. Notably, bonds have recently provided little help against stock performance.

“Equities have been on a tear since the 2007-09 global financial crisis,” Ms. Pacholok said. “Strong markets have consistently punished investors for rebalancing out of equities.”

Fund managers cite a different motivation: their faith in data that shows target-date-fund savers tend to leave their investments alone during good times and bad.

Researchers at Vanguard—the largest target-date-fund provider, with about $1 trillion in such funds—have seen a decline in trading in the 401(k) plans it administers. In 2020, 10% of participants with Vanguard 401(k) accounts made trades, down from 20% in 2004.

Through the end of April, 3.3% of the 4.7 million individuals who hold 401(k) accounts at Vanguard have traded. Target-date investors are even less likely to touch their accounts.

In total, 0.9% of savers in target-date funds made trades, a figure that increases slightly to 1.2% for people ages 55 to 65. The rate of trading is roughly unchanged from a year ago, according to Vanguard.

The lesson some fund managers took from this investor resilience is that they could plan for the long term.

“People aren’t making emotionally driven, often ill-advised decisions” in response to market volatility, said Dave Stinnett, head of strategic retirement consulting at Vanguard.

In 2021, Vanguard gave retirees in its 401(k) target-date funds the option to stick with a 50% stock allocation throughout retirement, rather than taper gradually to 30%, provided their employer chooses to offer the feature.

Over the past two years, T. Rowe Price, the third-largest target-date-fund provider, raised the equity allocations in its target-date-fund series: T. Rowe Price Retirement and T. Rowe Price Target.

The company’s Retirement series now invests 98% of contributions from the youngest workers in stocks, up from 90% previously. Workers 20 years from retirement hold 95% in stocks instead of 85%. Many retirees also have more in stocks. For example, 70-year-olds hold 51% in stocks, up from 46%.

Wyatt Lee, head of T. Rowe Price’s target-date strategies, said the decision was partly driven by data indicating individuals aren’t saving enough for retirement and need the extra returns they can get by holding a higher proportion of their savings in stocks over long periods.

The firm also believes stocks can help protect against the risks posed by inflation and longevity, he said.

So far, investors haven’t shown any signs of being uncomfortable with T. Rowe Price’s decision. In the first quarter of 2022, the firm said 0.4% of its target-date-fund investors have traded.

When the coronavirus crisis hit in the first quarter of 2020, before T. Rowe Price phased-in its higher equity allocations, 1.5% of its Retirement fund investors initiated trades.

“We saw that we could increase exposure to stocks without many participants moving their money out of the funds,” Mr. Lee said.

BlackRock Inc. , the largest asset manager in the world, raised the equity exposure in its LifePath target-date series almost a decade ago. The company’s asset-allocation model had always started with 99% in stocks for the youngest investors, said Nick Nefouse, head of retirement solutions and target-date funds.

The firm mainly boosted exposure to stocks for midcareer workers. Portfolios for 40-year-olds now hold 95% in stocks, up from 80% previously.

BlackRock made the change in response to research from the University of Michigan showing that working Americans on average earn more than BlackRock had initially estimated, giving them the capacity to handle more risk, Mr. Nefouse said.

Since adopting the change, he said, BlackRock hasn’t experienced an increase in outflows from the funds during periods of market turbulence.

Updated: 6-26-2022

Pension Funds Plunge Into Riskier Bets—Just As Markets Are Struggling

More public pension plans than ever are using leverage, investing borrowed money in an effort to earn higher returns and close big funding gaps.

U.S. public pension funds don’t have nearly enough money to pay for all their obligations to future retirees. A growing number are adopting a risky solution: investing borrowed money.

As both stock and bond markets struggle, it’s a precarious gamble.

More than 100 state, city, county and other governments borrowed for their pension funds last year, twice the highest number that did so in any prior year, according to a Municipal Market Analytics analysis of Bloomberg data.

Nearly $13 billion of these pension obligation bonds were sold last year, which is more than in the prior five years combined.

The Teacher Retirement System of Texas, the U.S.’s fifth-largest public pension fund, began leveraging its investment portfolio in 2019. Next month, the largest U.S. public-worker fund, the roughly $440 billion California Public Employees’ Retirement System, known as Calpers, will add leverage for the first time in its 90-year history.

While most pension funds still avoid investing borrowed money, the use of leverage is spreading faster than ever. Just four years ago, none of the five largest pension funds used leverage.

Investing with borrowed money can juice returns when markets are rising, but make losses more severe in a down market. This year’s steep slump in financial markets will test the funds’ strategy.

It’s too soon to tell how the magnified bets are playing out in the current market, as funds won’t report second-quarter returns until later in the summer.

In the first quarter, public pension funds as a whole returned a median minus 4%, according to data from the Wilshire Trust Universe Comparison Service released last month. A portfolio of 60% stocks and 40% bonds—not what funds use—returned minus 5.55% in the quarter, Wilshire said.

While leverage could pay off if markets rebound, the losses it risks could affect not just the pension funds but also the state and local governments that stand behind them—and ordinary citizens.

When public pension funds’ investment returns fall short, governments are primarily responsible for taking up the slack, pressuring them to find the money by cutting other spending or by raising revenue from steps such as increasing taxes.

Public pension funds are “operating more like hedge funds in some cases,” said Joseph Brusuelas, chief economist at accounting firm RSM. “They’re treading on very risky footing doing things like this.”

Pension funds historically invested very conservatively, favoring relatively low-yielding fixed-income investments. Calpers had all its money in bonds until 1967.

Funds suffered significant losses in the 2000-02 dot-com bust and the 2008 financial crisis. Those setbacks, coupled with years of insufficiently funded benefit promises, left the funds as a whole well over a trillion dollars short of the asset level they ought to have.

The level is dictated by a formula that includes their obligations and their targeted investment returns.

In some cases, workers’ unions have secured sizable payouts for retirees that can keep pension funds paying out full or significant benefits to their members for many years.

Public-sector retirement plans tend to carry higher and more unpredictable costs because they offer defined benefits. While private employers have generally shifted to defined-contribution plans with payouts based on market returns, state and local governments still largely offer their employees pension checks calculated based on salaries and years of service.

Even the longest equity bull market in history—a roughly 11-year run through early 2020 in which the S&P 500’s 18% annual return more than tripled its historic average—didn’t close the gap between pension funds’ obligations and assets.

In 2021, public pension plans had an average of just $0.75 for every dollar they expected to owe retirees in future benefits, according to data from the nonprofit Center for Retirement Research at Boston College.

The funds can try to fill the gap by the politically difficult task of demanding more in yearly contributions from governments and from workers themselves, a move that often meets with pushback from public-employee unions.

Or they can adopt a potentially higher-yielding—but riskier—investment strategy.

Pension funds that access leverage typically do so in one of two ways. Large funds sometimes purchase complex derivatives such as futures contracts linked to U.S. Treasury bonds, betting the value will rise or fall.

The effect is to bet on assets without actually buying them, thereby increasing the amount of money being invested without holding additional assets.

A city, state or county might also sell municipal bonds and deposit the proceeds into its pension fund to be invested alongside other assets there.

Governments that issue these pension obligation bonds say they expect investment returns on the proceeds to outpace their interest costs and help their pension funds grow more quickly.

Pension funds that use derivatives as a way to add leverage say this is less risky than other investment strategies they might adopt to seek higher returns.

The use of leverage by the $200 billion Teacher Retirement System of Texas—through repurchase agreements, futures and other derivatives—added 1.43% to its returns over two years coming into 2022, according to a presentation by the fund.

Jase Auby, its chief investment officer, said using leverage allowed the fund to diversify its asset mix in a way that relies less on stocks but is still projected to hit the fund’s return targets.

“A carefully considered use of leverage is a way to add balance to the portfolio, i.e., reduce the reliance of the portfolio on the equity markets,” Mr. Auby said.

The board of Calpers voted last November to add up to 5% leverage beginning in July. The fund could turn to a derivatives-based approach similar to the Texas teacher fund, according to people familiar with the matter.

The Calpers staff pitched the leverage plan as a way to meet its return target with a little less money in stocks and more in bonds than would be needed if it didn’t use leverage.

With leverage, the fund could hit a 6.8% target return and allocate 2 percentage points less to stocks and seven points more to bonds than in an unleveraged portfolio projected to hit the same target, according to projections by Calpers staff.

Compared to an unleveraged portfolio, the leveraged one that is projected to earn 6.8% would carry a lower the risk of losses in certain scenarios, such as if stocks crashed and bonds rallied, Calpers staff found.

“With the use of leverage, we can reduce the equity exposure just a smidge and increase the fixed-income exposure,” Calpers’ managing investment director Sterling Gunn told the board in November.

Still, a staff presentation noted that the use of leverage also “could result in higher losses in certain market conditions.”

One large fund, the Pennsylvania Public School Employees’ Retirement System, adopted leverage well ahead of others, in 2012. Leverage has often increased its gains in periods when returns were positive.

But when Covid-19 shut down much of the economy in early 2020, the fund’s use of leverage worsened its first-quarter return to minus 8.21% from what otherwise would have been minus 7.03%, according to a review by Aon PLC, which consults on risk and employee benefits in addition to its insurance business.

The fund’s five-year annualized return at the end of 2020—5.6%—trailed the 6.9% national average for major state and local government pensions, according to Center for Retirement Research data.

Its preliminary investment return for the 2022 first quarter was 1.14% and significantly outperformed the average of large public pension funds, which Aon said was mainly due to its use of alternative investments such as private equity, not to leverage.

Staff at the Pennsylvania fund have said publicly that leverage helps them earn higher returns with less reliance on stocks.

Some pension funds that embrace leverage point to its widespread use in Canada. There, retirement plans borrow amounts equivalent to 15% to 20% of their assets, according to Jason Mercer, a senior analyst with Moody’s Investors Service.

Canada’s pension funds are better equipped for the leverage risk because of higher funding levels, lower return targets and more-robust employee contributions, said Clive Lipshitz of Tradewind Interstate Advisors, an adviser to investment managers.

Still, when the $420 billion Caisse de dépôt et placement du Québec underperformed peers during the financial crisis, its chief executive placed part of the blame on leverage.

Adding leverage is just the most recent move by some U.S. public pension funds to increase investment risk in hopes of higher returns.

Over the past two decades, some also have reduced their holdings of both government and investment-grade corporate bonds, which historically hold or even gain value during stock downturns.

Funds have dipped more heavily into private-market investments. They have ramped up alternative investments, such as hedge funds, real estate, private-debt funds that make unrated loans, and private-equity funds that buy, overhaul and sell companies.

State and local pension funds now have about a quarter of their roughly $5 trillion of holdings parked in such assets, according to Center for Retirement Research and Federal Reserve data.

A record $480 billion in public-worker retirement money is invested in private equity, up 60% from 2018, according to an analysis of data from the Fed and analytics company Preqin.

Alternative investments such as private equity tend to carry substantially higher fees and sink alongside stocks in times of market distress. Private-equity funds also typically lock up money for a decade, so gains and losses are hard to gauge in real time.

Meanwhile, U.S. public pension funds reduced their fixed-income holdings to 22% of assets in 2021 from 29% in 2009—and 33% in 2002—according to the Center for Retirement Research.

On the whole, funds plan to continue dialing up risk. A survey of institutional asset managers by investment bank and data provider Natixis found that more than two-thirds plan to use investments such as private equity, private debt and hedge funds as a replacement for fixed income to “generate yield.”

In 2017, just over half said they planned to.

Even absent any leveraged bets, the ramp-up in alternative investments is increasing the potential for higher market losses at pension funds in a given year, according to a 2021 report by Moody’s.

For some cities and school districts, losses in a single year could potentially amount to a quarter of revenue, Moody’s found.

Courts tend to protect pension promises, prohibiting cuts to retirees’ checks and often barring changes to the rules on how much current workers must set aside toward their eventual pensions.

That throws the burden of filling pension-fund gaps primarily on state, city and local governments, some of which have already endured years of spending cuts to cover pension payments.

The risks of leverage especially worry one Calpers pensioner. In 33 years working for the city of Pasadena, Calif., Steve Mermell has watched its budget squeezed by rising amounts it has had to contribute to Calpers.

When the Calpers board began discussing a plan to use leverage two years ago, Mr. Mermell met with officials of the fund and wrote a letter imploring it to reconsider because of the risks. The plan moved forward.

Mr. Mermell retired as Pasadena’s city manager last year and knows better than most how borrowing to juice returns can backfire. Pasadena has struggled for decades with costs from a local pension plan it once offered to its police and firefighters.

In 1999, to manage the rising cost of that plan’s inflation-linked benefits, Pasadena borrowed $102 million through municipal bonds and put the proceeds toward its pension obligations.

The idea was that the pension fund could start earning market returns on a larger amount of money immediately, while the city gradually paid off the bond debt.

Instead, the Sept. 11 attacks and dot-com collapse triggered big stock losses in 2001 and 2002, obliterating some of the borrowed money. Meanwhile, the city faced bond payments at initial interest rates above 6%.

To plug the hole, Pasadena issued another pension-obligation bond in 2004, for $40 million. Four years later, the stock market cratered again.

The local police and fire pension plan has been closed for nearly 50 years. Pension recipients have dwindled to fewer than 180. But the city still owes about $135 million in bond debt on the plan. Payments on it are expected to be about $6 million in 2022.

“It’s like going to the ATM in Vegas and then going to the roulette wheel and it comes up red and you go back to the ATM,” Mr. Mermell said.

The types of leverage employed by the Texas teacher fund and likely to be used by Calpers are simpler to terminate than a 30-year municipal bond.

But they carry the same kind of risk: In a down market, losses can be larger than if the fund had stuck to investing money it had on hand. In both cases, there is also a cost associated with the borrowing itself.

Ever since Pasadena closed its local pension plan, all of its public workers’ pensions have been managed by Calpers. The city’s annual contributions to Calpers have doubled since 2015, to about $70 million last year, more than the city spends on transportation.

‘With pensions, you either pay now or pay more later,” Mr. Mermell said. “If you take on a strategy of increasing your risk exposure but you bet the wrong way, you’re really going to get hurt.”

Updated: 7-22-2022

Public Pensions Face Worst Funding Decline Since Great Recession

* Funding Ratio To Drop To 77.9%, Losing Half Of 2021 Gains
* Calpers, The Biggest Pension, Lost 6.1% In Latest Fiscal Year

US public pension funds are on pace for their deepest financial setback since the Great Recession as turmoil in global markets this year threaten to leave taxpayers and government workers on the hook.

Steep stock and bond losses are set to leave state and local pensions this year with enough to cover 77.9% of all the benefits that have been promised, down from 84.8% in 2021, according to the New York-based nonprofit Equable Institute.

That reflects almost a half trillion dollar increase in the gap between assets and what’s owed to retirees. The biggest US fund, the California Public Employees’ Retirement System, said this week it lost 6.1%, its worst performance since 2009.

Public funds lost about 10.4% on average in 2022, according to Equable Institute, as surging inflation and growing fears of a recession hammered the bond market and drove stocks to their steepest quarterly decline since the first wave of Covid-19 in early 2020.

The losses pared about half of the outsized 25% gain funds saw on average last year as monetary stimulus helped markets rally during the pandemic.

“The threat to states is not the investment losses,” said Equable executive director Anthony Randazzo. “The threat is the contribution rates that are going to have to go up because of the investment losses.”

When pensions miss their assumed annual return targets — about 7% on average — states and local governments have to increase funding or cut costs by raising employee contributions or freezing cost-of-living increases.

To dampen the impact of market gyrations, most government pensions phase in additional contributions when returns fall short of targets.

Randazzo estimates that payroll contributions, currently around 30%, will climb to 35% in the next five to eight years.

The unfunded liability of public pensions had fallen to $933 billion in 2021 from $1.7 trillion a year earlier, according to Equable Institute. It’s projected to climb back to $1.4 trillion in 2022.


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Wilshire Associates, a consultant to pension funds, earlier this month said losses in the second quarter left state retirement systems with assets sufficient to cover 70.1% of promised benefits, down from 81.4% the quarter prior.

Public pensions, which count on annual gains to cover benefits promised to retirees, have increased their allocations to riskier investments in stocks, private equity and high-yield bonds to meet long-term targets.

A land war in Europe, inflation, tightening monetary policy and fear of recession of have led to widespread losses in some of those markets. Private equity now makes up more than 10% of state pension portfolios, according to Equable Institute.

The Public Employee Retirement System of Idaho lost 9.5% for the fiscal year ending June 30, the fourth-worst return in its history. The San Francisco Employees’ Retirement System — which was 112% funded in 2021 — fared comparatively well, losing a more modest 2.8%.

There is a silver lining, says Jean-Pierre Aubry, the associate director of state and local research at the Center for Retirement Research at Boston College. State and local governments have slowed liability growth by about half since 2000 by boosting contribution payments and narrowing benefits.

“This type of market of volatility results in higher contribution rates,” Aubry said. “But it doesn’t put the pension funds’ overall finances at real risk or the benefits being paid at any real risk.”

Updated: 8-9-2022

Market Rout Sends State And City Pension Funds To Worst Year Since 2009

Simultaneous declines in stocks and bonds hammered the funds in the year ended in June, adding to pressure on government finances.

Public pension plans lost a median 7.9% in the year ended June 30, according to Wilshire Trust Universe Comparison Service data released Tuesday, their worst annual performance since 2009 and a fresh sign of the chronic financial stress facing governments and retirement savers.

Much of the damage occurred in April, May and June, when global markets came under intense pressure driven by concerns about inflation, high stock valuations and a broad retreat from speculative investments including cryptocurrencies.

Funds that manage the retirement savings of teachers, firefighters and police officers returned a median minus 8.9% for that three-month period, their worst quarterly performance since the early months of the global pandemic.

“It was a really, really bad quarter for investing, there’s no way around it,” said Michael Rush, a senior vice president at Wilshire.

The results underscore the pain felt by many investors in a year characterized by a rare combination: simultaneous sharp declines in both stocks, which are understood to be risky, and bonds, which aren’t and accordingly are often purchased by investment managers as hedges.


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That one-two punch has pummeled household and institutional investors alike as the Federal Reserve has pushed short-term interest rates higher to rein in inflation.

For state and local governments around the country, the losses will mean higher annual retirement contributions in the coming years, forcing many public officials to raise taxes or other revenues or to cut services.

Public pension funds have hundreds of billions of dollars less on hand than they will need to cover future benefit promises. A record run in stocks afforded them a decade of relative breathing room.

But even after a blockbuster median return of nearly 27% last year, many retirement systems remained underfunded with the growth in expected benefit costs outpacing the growth in assets.

That shortfall, along with aggressive annual return targets of about 7%, have led pension funds to embrace investment risk, with a median equity allocation of 57% as of June 30, according to the Wilshire data.

A larger equity allocation increases funds’ exposure to stock-market moves; a rally in stock and bond prices in recent weeks stands to ease some of the pain of the past year.

Larger public pension funds fared better than smaller ones over the past year, with those managing more than $1 billion returning a median minus 6.6% and plans over $5 billion returning a median minus 5.1%, the data showed.

Bigger plans tend to attract more experienced investment professionals and keep less money in stocks. But likely the biggest reason for their comparatively narrower losses is that these plans keep a fifth or more of their money in so-called alternative assets such as private equity and report returns on those assets on a one-quarter lag.

An example is the minus 6.1% return reported by the nation’s largest pension fund, the California Public Employees’ Retirement System for the year ended June 30.

That number reflects a 21.3% return on private equity and a 24.1% return on real estate, both of which cover the 12 months ended March 31 and don’t include losses in the second quarter of 2022.

The Los Angeles County Employees Retirement Association reported a return of 0.1% for the year ended June 30, while the School Employees Retirement System of Ohio returned minus 0.5%.

The California State Teachers’ Retirement System the nation’s second-largest pension fund, returned minus 1.3%.

Some funds benefited from their holdings of assets expected to fare well amid inflation. For the 12-month period ended June 30, the Los Angeles County fund earned 3.2% on publicly traded infrastructure investments and 17.3% on publicly traded natural-resources and commodity investments.

Pension investment managers are reminding their governing boards to focus on long-term returns, which in recent years have been good until 2022.

“One year is like the pace of a mile in a marathon,” Christopher Ailman, investment chief of the California teachers fund, said at a board meeting last month. “Last year was so positive, it gave us such a nice lead, we could be flat another year and still have a 7% three-year return.”


Updated: 11-7-2022

CEO of Australia’s Top Pension ‘Terrified’ of Global Cash Grabs


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The head of AustralianSuper Pty, the country’s biggest pension fund, warned against governments looking to tap trillions of dollars of retirement savings as economic crises mount.

“I’m terrified governments around the world will say ‘we’ve got an economic trauma, tap the money’,” Chief Executive Officer Paul Schroder told the AFR Super & Wealth Summit in Sydney on Tuesday. “It’s easy politics, horrible financial thinking, terrible for society.”

Schroder, whose fund oversees A$261 billion ($169 billion) of assets, said there was a risk that governments saw pension funds as having the money to fix some of their toughest problems. In Australia, law makers have previously suggested that first-home buyers use their retirement funds to help buy increasingly unaffordable houses.

Despite Schroder’s warning, he said the fund was supportive of last month’s proposal by the Australian government to partner with the country’s A$3.3 trillion pension industry and other institutional investors to build more affordable rental housing.

“Every indication, all of that has been through a fiscally responsible, sensible dialog,” he said.


Updated: 4-17-2023

Many Older Americans Haven’t Saved Anything For Retirement

A new survey finds 27% of people aged 59 and older have no money set aside for their later years.

More than a quarter of Americans have no money saved for retirement.

That’s according to a new survey from personal finance site Credit Karma, which found older respondents are even less prepared by some measures than their younger counterparts.

Nearly one in five people aged 59 and older said they didn’t have a retirement account and 27% of respondents said they haven’t set anything aside for their later years. That compared to a quarter of Gen X respondents.

For those aging Americans who do have retirement accounts, persistent inflation has thwarted their plans, worsening the $7 trillion retirement-savings shortfall.

Among baby boomers who are employed and saving for retirement, 17% said they’ve decreased their contributions to their retirement accounts as a result of inflation. Another 5% of respondents aged 59 and older said they can’t afford to contribute to their retirement account at all.

Gen Z is more optimistic, with more than half saying they dream of gaining financial independence and retiring early, better known as the FIRE movement. However, many Americans don’t have the financial resources to make early retirement a reality.

More than 30% of respondents said their net worth is $0 or less, meaning they have more debts than assets. That’s especially true for younger generations, with 41% of Gen Z and 38% of millennials saying they have zero or negative net worth. For people aged 59 and over, that number was 21%.


Updated: 4-26-2023

Bitcoin Could Be ‘Great’ Investment For IRA or 401K Plans

Retirement accounts offer tax-free crypto investing forever and provide an effective way to lower overall portfolio risk, said ForUsAll CEO David Ramirez.

David Ramirez, CEO of 401(k) provider ForUsAll, said Wednesday at the Consensus 2023 Festival that an individual retirement account (IRA) or a 401(k) are a “great place” to invest in bitcoin (BTC).

Ramirez, who shared the stage with John Haar, managing director of private client services at Swan Bitcoin, stated two reasons for putting BTC into retirement accounts such as an IRA and 401(k).

The first was “tax-free crypto investing forever with Roth dollars,” stated Ramirez, referring to Roth IRAs, but “more than that it can be an effective way of lowering overall portfolio risk” because IRAs are tax-deferred, which allows people to have “better writeouts” for market highs and lows.

Ramirez indicated that confidence in Social Security to provide capital for retirement is low. “It’s our responsibility to save for our retirement. We ought to have the freedom of choice to invest how we see fit to get there,” he added.


Updated: 5-12-2023

US Retirement Savings Shortfall Will Cost $1.3 Trillion

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A new analysis says states and the federal government will be on the hook for a massive bill as more Americans age out of the workforce.

America’s retirement crisis could cost federal and state governments an estimated $1.3 trillion by 2040, according to a new analysis.

Inadequate retirement savings will result in higher public assistance costs, decreased tax revenue, lower household spending and a decline in standards of living, according to a report done for the Pew Charitable Trusts.

The anticipated costs — $964 billion for the federal government and $334 billion for states between 2021 and 2040 — are “relatively shocking,” John Scott, director of Pew’s retirement savings project, said during a presentation on Thursday.

The shortfall is being driven in part by demographics, with the share of households including someone 65 or older that has less than $75,000 in annual income — a level the report said indicated financial vulnerability — expected to jump 43% to 33 million by 2040.

The report found that minor increases in savings habits by those “vulnerable” households could alleviate the anticipated strain to federal and state budgets. Saving an extra $140 a month, or about $1,685 annually, over 30 years, the retirement savings gap and additional taxpayer burden could be eliminated, according to the analysis.

The research assumed an inflation-adjusted return of 5% on assets that shifted from a more aggressive to a more conservative portfolio over three decades.

The study pointed to the growth of state-sponsored automated retirement savings accounts, which have been adopted in 12 states, as a way to help as many as 56 million private-sector employees without employer-sponsored retirement savings plans.

Such auto-IRA programs usually automatically enroll employees, who can then opt out.

Unlike many retirement savings programs at large private companies, auto-IRAs are Roth accounts, funded with a small percentage of a worker’s after-tax paycheck.

Users aren’t able to lower their taxable income by contributing to retirement savings on a pre-tax basis, as workers can in 401(k) plans, and there are no matching contributions from employers.


Updated: 5-19-2023

When Naming A Trustee For Your Estate, Ask Yourself These Four Questions

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Do you pick a friend? A family member? A professional? The right choice can make all the difference for your heirs.

Estate planning can be complicated, and naming a trustee is one of the trickiest parts.

If you choose a friend or family member, the person must be trustworthy and up to the task. If you choose a professional, there can be cost and other considerations.

Trusts often are used for estates that have significant assets, a complicated financial situation, or when there are minor children, or children or grandchildren with special needs involved.

Trusts allow individuals to exercise greater control over how and when their money is disbursed to heirs, even long after they are deceased—rather than leaving money outright to a beneficiary in a will.

Whether you have a living trust—which outlines your wishes for your estate, helps avoid probate and becomes irrevocable after your death—or a trust within a will, picking a trustee is one of the most important decisions you can make because of the power that person holds.

With That In Mind, Here Are Four Questions To Consider:

Does A Potential Trustee Have The Financial Know-How?

When choosing a trustee, people generally factor in age, the relationship and how close the person is to the eventual heirs, especially if minors are involved. But sometimes little is known about a potential trustee’s money-management skills.

Find out, estate-planning attorneys say. Trustees are responsible for making financial decisions related to the assets held in trust. Responsibilities can include investing the money held in the trust or hiring a professional for that purpose.

A trustee could also be responsible for running business interests held in the trust or managing other assets held in trust, such as an apartment building.

Candidates should be willing to serve in the role in a continuing capacity and be able to handle what could be complicated financial duties.

It could a six-month to yearlong commitment if all the trustee needs to do is liquidate assets for the benefit of adult children, says Patrick Simasko, an elder law and estate planning attorney with Simasko Law in Mount Clemens, Mich.

But the responsibilities could go on for years, especially if minor children are involved or there are complicated financial situations such as grandchild who will inherit money years down the road, he says.

Parents often decide to name their oldest child as trustee. But a younger sibling might have a more solid financial background. Simasko offers the example of a couple who wanted to name as trustee the oldest son who is in the military and travels around the world.

Instead, Simasko recommended their younger daughter, who lived locally, as she would be more available to perform duties such as meet with a real-estate agent and go to the bank to get accounts switched over to her as trustee. “Pick the one that is the best for the job,” he says.

Also consider whether the candidate seems prepared if there are large amounts of money in the trust, says Diedre Braverman, principal attorney with Braverman Law Group in Boulder, Colo.

A 20-something with few personal assets, for example, isn’t likely to have the experience necessary to evaluate financial professionals that might need to be hired.

A good trustee should be comfortable supervising and working with financial professionals, which can include attorneys, accountants, financial advisers and property managers, Braverman says.

Should I Consider Co-Trustees?

Sometimes people are willing to overlook a lack of experience or a weak skill set because the trustee candidate they have in mind has a good relationship with the heirs, or is particularly close to the family, which can be helpful when making monetary decisions.

In those cases, it can be especially helpful to have a co-trustee, possibly a professional trustee, such as a bank or trust company.

Two people acting as co-trustees have to act unanimously, which can be advisable for check-and-balance purposes. A co-trustee can also be advisable for accountability purposes when one trustee is a solo practitioner such as a family attorney or accountant.

Having a co-trustee, however, can be difficult in cases where the parties don’t work well together. “If you pick two sisters who can’t be in the same room, it is a nightmare to administer the trust,” Simasko says.

In that case, it might be better to pick an impartial trustee, even if it means hiring a professional. Appointing a “trust protector,” someone to supervise the trustee, might also be an option to help guard against misuse of funds, he says.

When Should I Consider Hiring A Professional?

There can be many reasons to hire a professional trustee such as a bank or trust company, or a private professional trustee that offers their services full-time. In some cases, a trust can last for about 100 years, or for three generations.

Banks or trust companies are in a better position to be able to provide continuity and adjust to changes, says Laurie Israel, a solo practitioner in Plainfield, Mass., who frequently reviews trusts.

Additionally, Israel says, many trusts provide interest and dividends for the surviving spouse, while the remainder of the trust assets go to the ultimate beneficiaries.

Often, these marital trusts provide ongoing discretionary principal payments for the health, education, maintenance and support for the surviving spouse, which can conflict with the interests of the ultimate beneficiaries.

The latter might want to emphasize preservation and growth of capital. This is the type of conflict that may be best handled by a professional trustee, Israel says.

Another reason to hire a professional is when family conflicts are likely to arise. Simasko offers the example of a heroin addict who incessantly bugged his aunt, the trustee, for money.

In situations like this, using a professional can help preserve family relationships while ensuring that distributions are made appropriately, Simasko says. “It’s easier for the professional to say no,” he says.

Which Type Of Professional Should I Choose?

Using a bank is generally better for large trusts—around $5 million and higher. Having dedicated trust administration can offer peace of mind that the estate will be handled appropriately for a long time.

Trust companies or private professional fiduciaries may be more appropriate for trusts in the $1 million to $5 million range, Braverman says.

Most banks and trust companies generally charge between 0.5% and 2% of the overall value of the trust they are administering, for services such as filing an annual tax return, detailed accounting of everything that goes in and out of the trust, communicating with beneficiaries and investing, Braverman says.

Alternatively, banks and trust companies might charge a minimum fee of typically between $2,500 and $5,000 to cover their administrative costs.

For reasons that include cost, a private professional fiduciary could be a better option for smaller estates. These professionals typically charge an hourly rate, which can be around $150 an hour, and investment-management expenses—charged by a third party—are paid for from the trust, Braverman says.

Before choosing a professional trustee, find out how easy they are to reach by phone, Israel says. “You want to find people who you can work with who are accessible.”


Updated: 5-23-2023

Retiring In Paradise Has Its Financial Problems. Make These Moves First

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Pulling off a move overseas requires navigating taxes, banking and estate planning.

Retiring abroad requires a lot of planning and often a good accountant.

When people dream of jetting off to the French countryside or a tropical island to begin a new chapter in retirement, tax and banking policies don’t usually feature prominently in the fantasy.

But pulling off a move overseas in retirement requires navigating financial rules in both the U.S. and one’s new home. Mistakes are easy to make and can be costly, financial advisers with international clients say.

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Some Americans living abroad inadvertently run afoul of the Internal Revenue Service and get hit with penalties and interest.

Others are cut off by their U.S. banks and brokerage firms. Retirees also can run into trouble accessing or paying for healthcare.

“Expats have to be motivated and persistent problem solvers,” said Jonathan Lachowitz, chairman of American Citizens Abroad, a nonprofit focused on tax and other issues that Americans living abroad face.

He recommends joining expat groups and online forums to find people who have already made the move. Banking, immigration and tax policies can change frequently, so double check everything you hear, said Lachowitz, who also is the founder of White Lighthouse Investment Management of Lexington, Mass., and Lausanne, Switzerland.

Here’s What To Research Before Retiring Abroad:

Bank And Retirement Accounts

Americans who retire abroad should generally keep most of their money in the U.S., advisers said.

That way they can continue to take advantage of individual retirement accounts and 401(k)s, which offer tax advantages, Lachowitz said.

Some U.S. banks and brokerage firms drop customers with foreign addresses, so call your financial institutions and ask about their policies. If you have to move your money, do so before leaving the U.S.

When opening a bank account in the country you are relocating to, compare fees for wire transfers and ATM transactions.

Before leaving the U.S., shop for credit cards without foreign transaction fees, which can amount to about 2% of a transaction’s value.

Make sure you are getting competitive currency-conversion rates. Services including Wise and Moneycorp currently have low markups, Lachowitz said.

When abroad, he often uses a debit card from Charles Schwab, which offers competitive exchange rates and refunds his ATM fees.


Your income is subject to U.S. income tax regardless of where you live. If you don’t file a U.S. tax return, you could face penalties and interest, and even criminal prosecution.

Expats may owe tax to both the U.S. and the country they live in.

Consider a retired couple who sells stock for a $100,000 profit. Assuming the couple’s new home country has a 10% capital-gains tax rate, they would pay $10,000 to that government.

They can then claim a $10,000 tax credit on their U.S. tax return. But since the U.S. has a top statutory long-term capital-gains tax rate of 20%, even with the credit they could still owe the IRS another $10,000.

Tax treaties the U.S. has with more than 60 countries might not completely protect expats from taxes that can arise as a result of differences between their new home country’s tax system and that of the U.S.

For example, some treaties protect the tax-free status of Roth retirement accounts while other treaties don’t, said David Kuenzi, an adviser at Creative Planning International.

Most expats also have to submit a report of Foreign Bank and Financial Accounts, or FBAR, to the Treasury Department. This is required in years in which the cumulative balance of your foreign financial accounts exceeds $10,000 at any time during the year.

The penalties for willfully failing to do so can be the greater of $100,000 or half of the account value for every year you failed to file.

Individuals with more than $200,000 and couples with more than $400,000 in foreign financial assets on the last day of the year—or with more than a respective $300,000 or $600,000 at any time during the year—must report them to the IRS with Form 8938.

To owe no state income tax, you must “break your domicile,” said Kuenzi, which means showing you have no intention to return to that state. Clients often sell their homes and cancel their driver’s licenses and voter registrations to satisfy the requirement, he said.

You May Need To Rewrite Your Will

Make plans to have a new will and estate plan that conforms to laws of your new home, Kuenzi said.

Under U.S. tax laws, individuals with an estate that exceeds $12.92 million (or $25.84 million for couples) are liable for U.S. estate tax above those thresholds, even if they live in another country.

But most other countries impose an inheritance tax instead, and at far lower levels.

In France, for example, each child can receive from a parent about $108,000 tax-free. Above that, they pay an inheritance tax of up to 45%, depending on the amount.

Inheritance tax is due even if your money is held in U.S.-based accounts and your heirs live in the U.S., said Kuenzi. Many European countries don’t recognize U.S. trusts.

The Cost Of Healthcare

Medicare doesn’t generally cover services outside the U.S., so those moving abroad must secure health insurance elsewhere.

Many countries with public healthcare systems let expatriates join after a waiting period for little to no cost.

Some countries with public healthcare systems also have private hospitals. To help cover private services, Adam Bates, an insurance broker who specializes in international policies, recommends an international health insurance policy.

He often advises clients aged 65 and older who move overseas to pay premiums for Medicare, too. Otherwise, they may get hit with hefty penalties and face monthslong coverage gaps if they return to the U.S. and want to enroll.


Updated: 5-26-2023

We Should All Be Living Our Best RV Lives

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But it’s getting more and more expensive.

The Highway To Heaven

This is the scene at Gilbert Towers today as I prepare for my road trip for this coming three-day weekend: I’m stowing my Bugatti RZ in the belly of my Volkner Performance S motorhome:

Ha ha, no it isn’t. I wouldn’t choose either as my ride. First, everyone knows that sportscars should be red, yellow, eyeball-torturing orange or racing green. Second, chocolate brown? On a recreational vehicle that can cost as much as €3 million ($3.2 million)? Really??

Some 12 million Americans will hit the highways this Memorial Day weekend in their RVs, notes Chris Bryant. A surge of pandemic-driven demand — with consumers willing to pay more than recommended retail prices to gain the freedom of the open road — has emptied out dealer lots.

The average price of a Winnebago, for example, has doubled since 2019 to almost $200,000. But with RV shipments to dealers declining 52% in the first four months of this year, according to the RV Industry Association, the bubble is bursting, Chris writes.

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“A sales pullback was inevitable in this cyclical industry — many people who wanted an RV now have one — yet the level of retail buyer caution appears to have caught the industry by surprise,” Chris writes.

“If the industry’s production discipline continues, very limited inventories may prevent prices falling as much as RV fans might hope.”


Updated: 6-2-2023

Retirement-Savings Changes You Should Know About For 2023-24

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The Secure 2.0 Act has all sorts of provisions that take effect between now and 2027. Here’s when they kick in.

The Secure 2.0 Act, passed in December, contains more than 90 provisions affecting retirement-savings plans, such as individual retirement accounts and 401(k) workplace plans.

Only some changes are effective this year. Others will take effect in years 2024 through 2027. In 2025, for example, limits on catch-up contributions to 401(k)s and Simple IRAs will be increased.

In 2026, ABLE plans, a tax-advantaged plan for disabled people, will raise the age of disability onset to 46 from 26. In 2027, a new program for low-income individuals called Saver’s Match, will offer a match by the Federal government of 50% of contributions to an IRA or 401(k) up to $2,000 a year.

Still other changes won’t apply for as long as a decade.

“There are so many parts to the law, and the effective dates are all over the board,” says Sarah Brenner, director of retirement education at Ed Slott & Co., a tax consulting firm in Rockville Centre, N.Y. “So it’s important to know what you can do right now.”

This Year

Here Are Some Of The Key Changes For 2023:

The age for taking the mandated annual withdrawals known as required minimum distributions, or RMDs, is raised to 73 from 72 (or 70½ before the original Secure Act in 2020).

Those who were subject to RMDs under the previous rules must continue to follow their existing schedules. In 2033, the age for taking RMDs will rise to 75 from 73.

The penalty for missed RMDs is reduced from 50% to 25% and even 10% if corrected in a “timely” manner. The window for correction is two years from the end of the year in which the RMD should have been taken.

In addition, you can request a waiver of any penalty at all from the Internal Revenue Service by taking the RMD now and filing Form 5329 with a reasonable-cause explanation.

A statute of limitations is now created, limiting the period in which the IRS can impose a penalty: three years for missed RMDs and six years from the tax-filing deadline of the year in which an excess contribution was made. Previously there was no statute of limitations.

Roth (after tax) contributions can be made to SEP and Simple IRAs, which are retirement plans for small businesses. Only employers make contributions with SEPs, while with Simples, both employees and employers make contributions. Until now, contributions to SEP and Simple IRAs had to be pretax.

Employer matching contributions to a Roth account can, at an employee’s option, be made as a Roth. Previously they had to be made on a pretax basis. The employee, however, pays the income tax on this amount.

Additional exceptions now exist to the 10% early distribution penalty for withdrawals from a retirement plan before age 59½. These include terminal illness, net income attributable to excess contributions and distributions in the event of a qualified disaster, up to $22,000.

A one-time-only $50,000 qualified charitable distribution to a charitable gift annuity, a charitable remainder unitrust or a charitable remainder annuity trust is allowed. Previously no benefits were permitted when making a qualified charitable distribution.

Next Year

Many More Changes Are In Store For Next Year. They Include:

The $1,000 catch-up contribution to IRAs and 401(k)s for those age 50 and older will be indexed for inflation.

Qualified charitable distributions will also be indexed for inflation.

Beneficiaries of “529” education-savings accounts can roll over up to $35,000 of leftover funds to a Roth IRA in the name of the 529 beneficiary. These rollovers are subject to Roth IRA annual contribution limits, and the 529 must have been in place for at least 15 years.

Roth 401(k) contributions will no longer be subject to RMDs during the owner’s lifetime, since the money has already been taxed when contributed. This will bring Roth workplace plans in line with laws governing Roth IRAs, whereby plan dollars are excluded from RMD calculations.

Employer matching contributions may be made on student-loan payments, just like they are made on 401(k)s. Each payment you make on a student loan can therefore be matched according to the terms of the plan.

Further exceptions to the 10% early distribution penalty: expenses stemming from a financial emergency, up to $1,000 a year, and payments for victims of domestic abuse, up to $10,000 indexed for inflation.


Updated: 6-4-2023

Why Employees Should Have An IRA Separate From Their Work 401(k)

Doubling up retirement plans adds some complexity, but it could be worth it.

Employer-sponsored retirement plans such as 401(k)s are often an effective way for working people to save, particularly those who prefer not to manage a long-term investment strategy.

But for many employees, it’s worth “doubling up” on their retirement strategy—creating an individual retirement plan, or IRA, in tandem with participation in an employer plan.

It is true that having an IRA alongside a company plan would add complexity to someone’s financial life, but there are a number of potential future benefits. For one thing, IRAs open a wider range of investment choices than those typically found in company plans.

And, depending on the account, they could enable a saver to defer taxes on significantly more income—or stash away money that might be tax-free when withdrawn in retirement.

Moreover, for higher-income people, a key advantage might be the ability to just save more, says Christine Benz, director of personal finance at research firm Morningstar.

“Just maxing out annual 401(k) contributions might not create a stream of income in retirement that is a decent percentage of their working income,” she says.

For People Considering The Double-Up Approach, Here Are Some Considerations:

1. Saving More While Working

Employer-sponsored plans enable participants to have money automatically deducted from each paycheck and invested in the plan, which is intended to simplify the process and increase the odds that someone will accumulate a reasonable amount of savings.

Employers may match part or all of the participant contribution.

However, the Internal Revenue Service limits annual employee contributions. This year the limit is $22,500 for someone under 50. If that under-50 participant could afford to lock up additional dollars in an IRA, that would increase the total saved by as much as another $6,500 a year.

(For those 50 or over, the annual IRA contribution limit is $7,500. For a 401(k), plan participants 50 and older can contribute up to $30,000 a year.)

Contributing the maximum allowed to both an employer plan and an IRA would accelerate someone’s pace of saving and might make a real difference in retirement, says Benz.

2. Lowering The Tax Bill Later

IRAs come in various forms, and it is important to understand the numerous IRS rules governing them, says Rob Williams, managing director of financial planning at Charles Schwab.

Among those are how much someone can contribute each year, whether withdrawals are taxable and whether people at certain income levels qualify to create and contribute to some types of accounts.

One commonly used account is a traditional IRA, similar to a 401(k) in that an investor is contributing before-tax income and may be able to take a deduction for the contribution.

Another popular choice, a Roth IRA, allows a person to contribute after-tax income while getting no deduction.

A key difference between types of accounts is that under IRS rules, people with 401(k)s and traditional IRAs must begin taking the annual withdrawals known as required minimum distributions at a certain age, currently after turning 73.

Money taken out is taxable at someone’s ordinary income rate, and the tax liability can be sizable for anyone with a large sum in an account. Roth IRAs, by contrast, don’t have required minimum distributions for the person who creates the account.

In recent years, more employers also have begun offering Roth 401(k)s. These are similar in many ways to Roth IRAs, with contributions made in after-tax dollars. And beginning next year, Roth 401(k) accounts won’t have any required minimum distributions.

Some employers who offer 401(k) and Roth 401(k) accounts allow plan participants to contribute to both simultaneously—but total contributions can’t exceed $22,500 for people under 50 or $30,000 for someone 50 or older.

For someone who creates a Roth IRA, meanwhile, not only is there no required distribution, but as long as that person follows IRS rules, withdrawals may be tax-free. That makes a Roth IRA a potentially valuable tool for limiting the overall tax bite.

“That’s the account you want to load up on,” says Ed Slott, an adviser in Rockville Centre, N.Y.

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3. Wider choices

To limit costs, employer plans typically provide around 20 or fewer investment choices. They infrequently offer low-cost, exchange-traded funds or ESG funds—the “do good” investments that focus on environmental, social and corporate-governance factors.

An IRA would allow someone to invest in many more types of tradable securities.

But if you create one, it is important to consider your overall allocations when making changes to either your 401(k) or your IRA, says Jeremy Strickler, portfolio manager at Williams Wealth Management in Greenville, S.C.

For example: If someone wanted to have no more than 60% of total retirement savings in equities, that person would need to take care not to make changes in either account that would lift the overall equity allocation significantly above 60%.

4. Lowering Overall Investment Costs

A recent Morningstar report found that fees charged to participants in employer plans vary markedly, because large plans realize better economies of scale. At such plans, annual fees as a percentage of assets typically total around 0.40 percentage point, less than half those of smaller plans.

As a result, workers at smaller companies may save as much as 9% less by retirement.

Some plans provide low-cost choices such as passive stock-index funds, says Morningstar’s Benz. But identifying such choices requires a participant to scrutinize plan literature and compare fees of the various options.

If a plan poses high expenses, someone might be better off contributing just enough to get the maximum company match and investing additional money in low-cost ETFs in a tandem IRA.

“Especially for investors who don’t have the wherewithal to invest a lot and want to get the most bang for their buck, that is one of the best reasons to consider an IRA alongside a 401(k),” says Benz.


Updated: 6-15-2023

Older Americans Robbed Of $20 Billion A Year by People They Know

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Nearly three-quarters of financial exploitation is done by family, friends or caregivers.

Financial exploitation costs older Americans $28.3 billion annually, with nearly three-quarters of that stolen by people the victim knows, such as family, friends or caregivers, according to a new report released Thursday.

Quantifying the cost of elder financial exploitation — defined as “the illegal or improper use of an older adult’s funds, property, or assets” by the Financial Crimes Enforcement Network — is a challenge. That’s partly because so much of it goes unreported, according to the study from AARP, done with the National Opinion Research Center at the University of Chicago.

In an estimated 88% of cases where the person knows the individual exploiting them, the victim doesn’t report the crime, the study found. That may be because they don’t want to implicate or bring shame on caregivers or family members, or may feel shame themselves.

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Elder Scammers Are Often Known By The Victim

The Bulk Of Financial Exploitation Is Done By Friends, Family Members Or Caregivers

The rate of financial exploitation has more than doubled since mid-March of 2020, exacerbated by the social isolation of the pandemic, according to a separate 2022 study by the AARP Public Policy Institute.

The losses add to a retirement-savings crisis in America, one that a recent report for the Pew Charitable Trusts said could cost federal and state governments an estimated $1.3 trillion by 2040.

The vast majority of older victims don’t get their money back, and the losses come at a time of life when many Americans may be unable to make it up by working longer — if they’re still working at all.

The costs can ripple out to family, who may contribute more money to a loved one’s care, as well as to taxpayers who foot a bigger bill for services to assist victims, the report noted.

AARP said its methodology improves on previous approaches in part by using three respected data sets — from the Consumer Sentinel Network reports compiled by the Federal Trade Commission, the Internet Crime Complaint Center at the Federal Bureau of Investigation and the suspicious activities reports on financial exploitation that financial companies make to the Department of the Treasury.

The report, which studied exploitation of Americans over 60, accounted for possible duplication among data sets and used “a more nuanced methodology that corrects for underreporting rates based on the perpetrator’s relationship to the victim.”

It cited a study published in the Journal of Applied Gerontology in 2020 that found that when exploitation was done by a known person, just 12.5% of cases were reported. Cases where the victim knew the perpetrator have higher average losses — $50,000, compared with $17,000 for strangers.


Updated: 6-25-2023

Why High-Powered People Are Working In Their 80s

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They joke that retirement is boring, but some acknowledge a deeper fear of becoming irrelevant if they quit.

The first thing to know about people who shun retirement to work past age 80 is that they are probably busier, and possibly cooler, than you.

One said an interview would have to wait because he was traveling to France for the 24 Hours of Le Mans. Another said he would be free after hitting a research deadline and organizing his Harvard Business School class’s 65th reunion.

A third, available on shorter notice, emailed a physical description before meeting: “In the spirit of YOLO, I have blue hair and tattoos.”

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Growing numbers of 80-somethings are deciding that if days are finite, they are better spent on the job than in retirement.

Harrison Ford, 80, is releasing his latest “Indiana Jones” movie, Jane Goodall, 89, is still protecting chimps, Smokey Robinson, 83, is still touring, and 80-year-old Joe Biden is still governing (and seeking re-election), so why not keep going too?

Biden’s decision to seek a second term in the White House, which would keep him in office until age 86, has renewed a conversation about how effectively people can work in their ninth decade.

Roughly 650,000 Americans over 80 were working last year, according to the Census Bureau, about 18% more than a decade earlier.

Some people have been pressed back into duty by inflation and stock-market volatility, while the fading pandemic made others who took a break feel more comfortable clocking in again. Many cite a simpler reason to keep working—they just want to.

Nearly half log full-time hours. Though some run a cash register or pump gas to stave off boredom, 80-somethings are more common in professional, managerial and financial roles than in service jobs, federal data show.

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These workers joke about getting bored on the golf course or being pushed out of the house by a spouse who won’t tolerate idleness. Beneath the wisecracks is a sense of purpose that refuses to fade. They just can’t quit their careers.

Daniel Jaffe, founding partner of Jaffe Family Law Group in Los Angeles, says he loves traveling to conferences, schmoozing in bars and collecting accolades and press clippings, many of which he displays in his office.

If he stopped practicing full time, he worries that the invitations and attention would vanish fast.

“It really is out of sight, out of mind,” the 85-year-old says of his field.

Jaffe’s specialty is divorces of the rich and famous. He still relishes the challenge of the job: preventing exes from hating each other, or being hated by their children.

He has few pastimes, none of which replace the rush of a big case. Plus many of his contemporaries with whom he might hang out after hanging it up are dead.

Basically, he says he missed his window to retire, so he keeps working.

More To Come

Workers over 80 are a sliver of the overall U.S. labor force and a rarity in the highest echelons of business.

In the S&P 500, 1.6% of board members are at least 80, up from 1.3% a decade ago, according to Equilar, which tracks corporate leadership trends.

Two chief executives in the index are older than 80, Berkshire Hathaway’s Warren Buffett, 92, and Teledyne Technologies’ Robert Mehrabian, 81, who returned as CEO in 2021 when a younger executive retired.

Signs point toward growing ranks, however. Although many companies set mandatory retirement ages for directors, it is common to grant waivers to those with vital institutional knowledge, an Equilar spokesman noted.

The Bureau of Labor Statistics projects that workforce participation among people 75 and older will climb to 11.7% by 2030 from 8.9% in 2020. The participation rate for every other age group is expected to decline.

In raw numbers, there will be almost twice as many 75-plus workers than there were in 2020, according to the forecast. A key growth driver, BLS notes, is that everyone in the baby boomer generation will be at least 65 in 2030.

“That’s significant,” Society for Human Resource Management CEO Johnny C. Taylor Jr. says. The demographic shift is prompting neuroscientists, employment consultants and others to rethink how older workers can stay in the workforce with meaningful jobs.

Data released last week by the Census Bureau shows that America’s population is older than ever. As the birthrate falls and hundred-year lifespans become more common, forcing people to earn income for longer, the solution to companies’ labor shortages could be silver and gray, Taylor adds.

Andree Carlson, 82, dyes her grays blue and sets her tattooed arms to the task of kneading dough at 6 a.m., five days a week, in a supermarket bakery in Georgia.

She was shopping in the store a year and a half ago, wearing a shirt with the logo of a different bakery where she worked at the time, when a manager approached and asked if she was interested in changing jobs.

Carlson could hardly believe she was being recruited—“You know I’m old, right?” she recalls saying—but she’s come to realize that a grandma who makes killer biscuits and takes the early shift without complaint is a hot commodity.

She doesn’t need the money, she says. More than a paycheck, she craves the satisfaction of being relied on.

“I work with other older people like me, and I think most of them are working for the same reasons I do,” she says. “We like having somewhere to go, something that needs to be done, and everybody likes to feel needed.”

Insider Status

Picture a serial technology entrepreneur whose latest venture is a cybersecurity startup spun out of a data-storage firm. No matter how good your mind might be at suppressing stereotypes, it probably didn’t conjure an image of 87-year-old Marjorie Zingle.

“I love to go into a meeting and surprise everybody,” says the CEO of Calgary, Alberta-based DataHive and its new spinoff, DataHiveSecure.

That happens less frequently these days, not because 80-plus, female tech executives are more common but because she has become well known in cloud computing.

The field still fascinates her and, as a widow, she says she is uninterested in retiring without a companion.

Really, though, she keeps working and creating companies to show those who have doubted her through the decades that they are wrong.

“I’ve proved it over and over, and I can’t stop,” she says.

At a certain point, longevity becomes so embedded in a person’s identity that it is hard to imagine making a clean break.

Stephen Greyser, still writing Harvard Business School case studies at 88, has amassed plenty of real awards. None is more precious than the unofficial “Cal Ripken of HBS” cup that students presented to him several years ago, in reference to the Hall of Fame baseball player who holds the record for consecutive games played.

Greyser, a professor emeritus who has written more than 300 case studies, figures he won’t break the record, which stands at more than 500. That’s not his motivation.

His research involves forming relationships with powerful people, learning the inner workings of complex organizations and sometimes being privy to information he can’t publish.

He isn’t ready to let go of the thrill.

“It’s the collegiality, the collaboration and the pleasure of being on the inside,” he says.


Updated: 6-27-2023

How Do They Compare: Bitcoin IRA vs. Traditional IRA

When it comes to retirement planning, there are a variety of investment options available to help individuals save for their golden years.

When it comes to retirement planning, there are a variety of investment options available to help individuals save for their golden years. Since 1974, a traditional IRA has been a popular option. A relatively new type of IRA option is a Bitcoin IRA or crypto IRA.

While both of these investment vehicles have the goal of helping individuals prepare for retirement, they differ significantly in how they work and the potential risks and rewards associated with each option.

History Of The IRA

IRAs provide a tax-advantaged retirement account that allows individuals to contribute pre-tax dollars up to certain limits. The money in a traditional IRA is invested in a range of financial assets, such as stocks, bonds and mutual funds, that grows tax-free until it is withdrawn and then taxed as income.

Individuals can typically choose from various investment options to suit their risk tolerance and goals.

Like traditional IRAs, Bitcoin IRAs offer tax-advantaged status, but they differ in several key ways. For example, unlike traditional IRAs, which are typically held with a financial institution such as a bank or brokerage, Bitcoin IRAs are held by a specialized custodian authorized to store digital assets.

Key Benefits Of A Traditional IRA

A Traditional Individual Retirement Account (Ira) Is A Type Of Retirement Savings Account That Offers Several Benefits, Including:

* Tax-deferred contributions: One of the main advantages of traditional IRAs is contributions are tax-deductible. The money you contribute to the account is deducted from your taxable income, reducing your tax bill.

* Tax-deferred growth: Another benefit of traditional IRAs is that investment gains are tax-deferred. You won’t owe any taxes on the money until you withdraw it in retirement.

* Flexible contributions: As of 2023, the annual IRA contribution limits are $6,500 or your taxable income, whichever is lower. You can make contributions at any time during the year, and you can also make contributions for the previous year up until the tax-filing deadline.

* Diversified investment options: Traditional IRAs offer a wide range of investment options, including stocks, bonds, mutual funds and more. This allows you to diversify your portfolio and tailor your investments to your retirement goals.

* Spousal contributions: If you are married, you can contribute to a traditional IRA for your non-working spouse, which can help increase your retirement savings.

* Required minimum distributions (RMDs): While not technically a benefit, RMDs are an important aspect of traditional IRAs. Once you reach age 72, you will be required to take minimum distributions from your IRA each year.

Key Benefits Of A Bitcoin IRA

The benefits of a Bitcoin IRA could help you safeguard your future with the power of the most secure computer network in the world.

* Diversification: Investing in Bitcoin through a Bitcoin IRA can add diversification to your retirement portfolio by adding an alternative asset class with a lower correlation to traditional stocks and bonds.

* Potential For Higher Returns: Historically, Bitcoin has provided higher returns than many traditional investments.

* Tax Advantages: Like traditional IRAs, Bitcoin IRAs offer tax advantages such as potential tax deductions on contributions and tax-deferred growth on earnings until withdrawals are made.

* Control: With a self-directed IRA, you can control your investment decisions and choose when to buy and sell Bitcoin.

* Security: Many Bitcoin IRA providers offer institutional-grade, secure storage solutions to safeguard your digital assets.

Investing in a traditional IRA or a Bitcoin IRA requires a low-time preference because these investments are designed to provide long-term financial security and stability.

IRAs have certain restrictions and penalties to ensure that the funds are used for their intended purpose — retirement.

Bitcoin IRAs adhere to and are subject to the same yearly contribution limits, rules and withdrawal penalties as traditional IRAs. If an individual withdraws funds from their Bitcoin IRA before they reach the age of 59 ½, they may be subject to a 10% early withdrawal penalty in addition to any applicable taxes.

In both cases, having a low-time preference allows investors to benefit from the compounding effect of returns over time. By investing for the long term and allowing the investments to grow and mature, investors can achieve greater financial security and stability in the future.

Digital Scarcity

As the world becomes increasingly digital, Bitcoin’s potential as a decentralized currency for secure, peer-to-peer transactions is becoming more apparent. The finite supply of Bitcoin is a crucial factor behind its potential for long-term success.

This scarcity property makes Bitcoin a valuable asset to the loss of purchasing power from an underlying currency and can increase in value over the long term.

Bitcoin can be volatile in the short term due to its limited supply, high demand and the influence of market speculation, news events and investor sentiment.

However, since its inception in 2009, it has seen a steady upward trend in value, with occasional dips and crashes. Despite these short-term setbacks, the overall trajectory of Bitcoin’s value has been one of consistent growth.

Bitcoin’s decentralized nature and lack of government or institutional control appeal to investors who value privacy, security and autonomy.

While short-term volatility can be challenging to navigate, its long-term potential as a valuable, scarce and secure asset makes it an attractive option for many investors.

Ultimately, the choice between a traditional IRA and a Bitcoin IRA will depend on an individual’s investment goals, risk tolerance and overall financial situation.

A traditional IRA may be the best choice for individuals looking to invest in your typical basket of stocks, mutual funds and bonds. However, for those willing to take on more short-term risk for the potential of high returns, a Bitcoin IRA may be the most viable option.


Updated: 7-4-2023

America’s Retirees Are Investing More Like 30-Year-Olds

At Vanguard, one-fifth of taxable brokerage account investors aged 85 or older have nearly all their money in stocks.

Older Americans keep rolling the dice in the stock market, ignoring the conventional wisdom to protect their nest eggs by shifting more of their investments to bonds.


Nearly half of Vanguard 401(k) investors actively managing their money and over age 55 held more than 70% of their portfolios in stocks. In 2011, 38% did so.

At Fidelity Investments, nearly four in 10 investors ages 65 to 69 hold about two-thirds or more of their portfolios in stocks.

And it isn’t just baby boomers. In taxable brokerage accounts at Vanguard, one-fifth of investors 85 or older have nearly all their money in stocks, up from 16% in 2012. The same is true of almost a quarter of those ages 75 to 84.

Having significant exposure to stocks later in life can be risky, advisers and economists say, if only because if the market were to tumble, retirees needing cash might have no choice but to sell their shares at bargain prices.

Many changes over the past half-century have contributed to older Americans’ reliance on stocks, including the 1978 tax-law change that ushered in the 401(k) and several decades where stocks have bested bonds.

During financial or economic crises—including in 1987, 2001, 2008 and 2020—the Federal Reserve or Congress often stepped in to support the economy.

“The spirit of the times is ‘Don’t worry about the markets crashing. They will come back up and set new highs,’” said Robert Shiller, a Nobel Prize-winning economist at Yale University.

Catching Up

Ultimate Resource For Retirees And Retirement Planning

Toby Bloom, 63, tried investing 60% of his retirement savings in stocks and 40% in bonds. But five years ago, the Albuquerque, N.M., resident realized his returns weren’t high enough to achieve his goal of retiring by 2026 with at least $40,000.

So he moved 80% of his money into dividend-paying and other stocks in his IRA, which now holds $21,000.

“I am not going to make any money for retirement by being overly stodgy and conservative,” said Bloom, an insurance agent.

Stan Galperin, 80, started trading stocks a few years after retiring from a career running video rental and grocery stores in southern New Jersey.

In 2013, he moved to The Villages, a sprawling retirement community in Florida, and co-founded an investment club. He sold the bonds that had comprised 40% of his portfolio and began trading stocks.

“Interest rates were so low it didn’t pay to hold bonds,” said Galperin. But now, with rates higher, he has moved more of his portfolio into money-market accounts and continues to trade stocks.

Many older investors remain bullish on stocks for one simple reason: returns.

Since 1982, the S&P 500 has returned 10.1% a year, on average. That is significantly more than the index’s long-term average annual return of 7.4% a year since 1928, according to Dow Jones Market Data.

Lack Of Options

Ultimate Resource For Retirees And Retirement Planning

Wayne Winquist, 72, a Fitchburg, Wis., retiree with 98% of his portfolio in stocks, said he is staying in stocks because he sees no good alternatives.

“I don’t like cash and I don’t like bonds,” Winquist said. “Both are losers’ games when it comes to inflation.”

Winquist invests 70% of his $3 million portfolio in stocks that pay dividends. He also trades options, pocketing payments for giving others the right to buy his shares for a set price if the stock rises above that level.

He and his wife mainly live on Social Security benefits. Last year, he said they used some of the $150,000 they earned in dividends to buy more stock.

A church elder who writes an investing blog, he also used a large chunk of that money for charitable giving.

The former information-technology executive began investing in his employer’s 401(k) plan in the early 1980s. In 1995, he hired a broker to manage a $20,000 windfall from stock options.

By 2001, Winquist had lost $7,500 of that money after two of the broker’s picks went out of business.

“I became skeptical of the experts,” he said.

In 2001, Winquist fired his broker and began buying shares in technology companies. He says years of investing have taught him to screen out market selloffs. “The long-term slope of the market is upward.”

As the beneficiaries of high stock-market returns, baby boomers tend to report a greater willingness to take financial risks than those who lived through the Great Depression, according to research by Ulrike Malmendier, a professor of economics and finance at the University of California, Berkeley, and Stefan Nagel, a professor of finance at the University of Chicago.

“It’s what we have lived through personally that emotionally wires our brains for risk-taking,” Malmendier said.

In contrast to younger Americans, boomers are also more likely to take a do-it-yourself approach to managing their money.

Among baby boomers with 401(k) accounts at Fidelity Investments, 53% pick their own investments, compared with 42% in Generation X and 25% of millennials.

For three decades, Marty Modrowski, 59, of Toledo, Ohio, has picked his own investments.

The software consultant made his first stock purchase in college when he spent $550 to buy beaten-down shares of Bank of America during the 1987 stock-market crash.

Modrowski said he made a costly mistake in 2008 when he sold some of his stocks as the market plummeted, leaving fewer shares in his portfolio when a recovery began in 2009.

“What does it even mean to take risk off the table as you age?” he said, adding that due to inflation, bonds and cash are risky too. “Nothing is totally safe.”

Modrowski plans to work full-time for at least five more years. He currently has nearly 80% of his portfolio in stocks.

“In my lifetime, there have been so many crises, from the Mexican debt crisis to the failures of Long-Term Capital Management and Lehman Brothers. It always seems that everything turns out all right,” said Modrowski.


Updated: 7-15-2023

We All Need Purpose When We Wake Up In The Morning: Finding Meaning In Retirement Leads To Happiness And Health

Ultimate Resource For Retirees And Retirement Planning

The concept of purpose is sure having a moment.

Talk to Carl Landau, age 66, and you’ll quickly find out that he likes a good (and bad) joke and a laugh. An entrepreneur since the age of 26, he retired in 2019 when he sold his live-events and trade-show business Niche Media.

It didn’t take long for him to “unretire” by starting Pickleball Media, a lower-key business built around the podcast “I Used to be Somebody” and the book “Pickleball for Dummies,” which he co-authored. (In case you were wondering, he really likes pickleball.)

Landau recently reflected on what he has learned during his three years of unretirement in a thoughtful LinkedIn post. One lesson in particular stands out: the importance of purpose.

“The one universal thread that rings true (and I know it might sound obvious) is we all need purpose when we wake up in the morning to get out of bed.

It doesn’t matter what that purpose is, whether it’s spending time with a grandchild, starting a new company, volunteering for a cause you are passionate about or playing a sport like pickleball.

You’ve got to have that drive. And for extra credit, if you create a diverse set of passions, all the better.”

A similar sentiment highlighting purpose informs a series of reports on retirement by Age Wave, the demographic consulting firm, and the financial-services company Edward Jones. Purpose is one of the four pillars of retirement, along with health, family and finances.

“Retirees with purpose are happier, healthier, more active, and more socially engaged,” notes the latest Age Wave report, “Resilient Choices: Trade-Offs, Adjustments, and Course Corrections to Thrive in Retirement.” “They even live longer.”

The concept of purpose is sure having a moment. In essence, purpose is what makes life worth living, one’s reasons for getting up in the morning. Purpose is also about being engaged in activities bigger than your own needs and wants.

“If you’re not serving, you’re not living a purposeful life,” says Richard Leider, author of several best-selling books on purpose, including “Who Do You Want to Be When You Grow Old?:

The Path of Purposeful Aging.” “Serving doesn’t mean you have to be Mother Teresa, or Gandhi, or sign up for a cause. But you have to have a reason to get up in the morning beyond your own self-absorption.”

Several factors account for the current explosion of interest in purpose. Among them: The pandemic pushed many people, including older adults, to reevaluate their lives and how they spend their time; scientific researchers have uncovered intriguing connections between waking up with a sense of purpose and improved physical and mental well-being (and vice versa); and the knowledge that living with purpose leans against the debilitating effects of loneliness and social isolation that “represent profound threats to our health and well-being,” warns Dr. Vivek H. Murthy, the U.S. surgeon general.

“A sense of meaning positively contributes to health because it motivates greater self-regulation in pursuing goals — including health goals,” notes the recent public health publication “The Surgeon General’s Advisory on Our Epidemic of Loneliness and Isolation.”

“Furthermore, evidence suggests that individuals with higher purpose and perceived emotional and practical support from their social networks are more likely to engage in health-promoting behaviors, such as the use of preventive healthcare services.”

Another major influence behind the embrace of purpose is the grassroots movement reimagining the retirement years. Older workers are better educated and living longer than previous generations (on average), especially people with postsecondary education and white-collar careers.

Fewer older workers nearing retirement are thinking about the next stage of their lives as full-time leisure and increasingly as a time for additional explorations and challenges, as well as for fun.

The search for purpose is about finding meaning in a portfolio of activities during the retirement years.

Take the experience of Ross McGlasson, age 85. Like many people his age, he can look back on a full life and long career. He and his wife, Martha, had 60 years together, three kids, six grandchildren, five dogs and a house on a lake.

He spent a dozen years in the Navy before taking a job at AT&T T, -0.73%. Five years later, he left the telecommunications company for IBM IBM, -0.46%, and the rest of his career was at the computer giant. He finally said goodbye to work in 2002 following a health scare.

He and his wife deliberately built purpose into the retirement years by contributing their time, expertise and money to the Rotary Club, their church and other community-minded organizations. “We had a lot of purpose,” he says.

While the importance of living with purpose doesn’t change, what gives life meaning can evolve with the passage of time and different circumstances. Eighteen months ago, his wife died from leukemia.

When she got sick two years before her death, they sold their lakefront home and moved into a continuing-care community in Excelsior, Minn. McGlasson became his wife’s primary caregiver.

He is now thinking about bringing greater purpose back into his life, but he also knows he doesn’t have the same energy he had in early retirement, and he often has to decline the kind of engagements he and his late wife welcomed.

“Now I am in the process of rethinking my purpose, not that the old ones are irrelevant, but I have new perspectives that make me rethink them,” he says. “What should my purpose be?”

While talking about what he’s doing these days, McGlasson seems curious and, yes, purposeful. There is his family, of course, with children and grandchildren living nearby. He is also busy in his continuing-care community.

He asks residents lots of questions. He organizes TED-style talks at the facility, and he’s working on a one-day university event.

“I am struggling to make sure what I am doing is purposeful,” he says. “I make a lot of mistakes, but I do the best that I can.”

There is no shortage of resources to help older adults research and contemplate their purpose.

Leider has authored and co-authored several books on purpose. Joe Casey in “Win the Retirement Game: How to Outsmart the 9 Forces Trying to Steal Your Joy” focuses on purpose in planning for retirement.

The Greater Good Science Center at the University of California, Berkeley, offers various tools for uncovering purpose. A rich resource to tap is CoGenerate, a nonprofit organization that brings together older and younger generations to collaborate on solutions to pressing societal challenges.

The transition to retirement is one of life’s biggest adjustments. Building the search for purpose into retirement planning can improve the quality of life in the next phase. It can also benefit the wider society.


Updated: 7-16-2023

High-Earning Retirement Savers Are Losing Some of Their 401(k) Tax Break

Catch-up contributions will have to be done after taxes for those who make more than $145,000.

Millions of high-earning Americans are slated to lose a popular tax deduction starting next year.

Savers ages 50 and older can make catch-up contributions in their 401(k) accounts each year, with eligible workers allowed to put an extra $7,500 into their accounts, for a total of $30,000, this year.

Starting next year, those catch-up funds will be funneled only into after-tax Roth accounts for those who earned more than $145,000 the previous year. The change is part of a set of new rules Congress passed in December.

In 2022, 16% of eligible participants took advantage of catch-ups, according to Vanguard Group.

This change means many workers will pay taxes on their catch-up money up front during high-earning years, rather than in retirement when they may be in a lower tax bracket.

It stands to reshape how many Americans save for retirement and create financial and estate-planning strategies.

Making catch-up contributions with pretax money has been a boon for high earners. For example, someone in a 35% bracket would receive a $2,625 tax deduction for a $7,500 catch-up contribution, while someone in the 22% bracket would deduct $1,650.

While some Americans will pay more in taxes under the new rules, financial advisers say there will be a benefit to getting near-retirees to put more money into a Roth, where money grows and can be withdrawn tax-free.

The changes don’t apply to IRAs, which allow a catch-up contribution in 2023 of $1,000 for savers 50 and over on top of the $6,500 annual limit.

“The Roth is such a powerful savings tool that I try to have at least some dollars going into that bucket for all my clients, regardless of tax bracket,” said Cristina Guglielmetti, a financial adviser in Brooklyn, N.Y.

Benefits of Roth

Retirees with nest eggs in traditional accounts must pay ordinary income tax when they withdraw the money. In Roth accounts, workers can build a pot of tax-free money to spend in years in which tapping other accounts would push them into a higher tax bracket or force them to pay higher Medicare premiums.

Many assume they will be in a lower tax bracket in retirement, but that isn’t always the case, said Ed Slott, an adviser who specializes in retirement accounts.

Because high earners often amass large balances in traditional 401(k)s and individual retirement accounts, many find themselves in the same or a higher tax bracket when the Internal Revenue Service requires them to start pulling money out of those accounts at age 73.

The new requirement for catch-up contributions is a “gift to high earners” who might otherwise overlook the benefits of tax-free growth, he said.

Because Roths grow tax-free, they are better options for big savers than taxable brokerage accounts, which require owners to pay taxes annually on dividends, interest and realized capital gains, advisers say. Roths also have big advantages for heirs, who receive tax-free income.

Both Roth and traditional accounts must be liquidated over 10 years by most nonspouse beneficiaries.

Companies Call For A Delay

Though the change is set to kick in Jan. 1, some companies and plan providers say they need more time to meet the logistical challenges of identifying who earned more than $145,000 the previous year and retooling payroll and other systems to ensure their catch-ups go into a Roth.

More than 200 employers, 401(k) record-keepers, and payroll providers recently sent a letter to Congress requesting a two-year delay. Signed by companies including Delta Air Lines, Anheuser-Busch, and Fidelity

Investments, which administers 24,800 corporate retirement accounts for employers, the letter says many won’t be able to change their systems in time to meet the deadline.

“For many of these plans, unless this requirement is delayed…their only means of compliance will be to eliminate all catch-up contributions for 2024,” the letter said.

Sharon Lukacs, executive director of the New York State Deferred Compensation Board, said the state’s $31 billion deferred compensation plan allows the 2,236 local employers using the plan to decide whether to offer a Roth.

Currently, 1,200 have opted against doing so, in some cases because their payroll systems couldn’t handle Roth contributions.

So far, 150 of the 1,200 have agreed to add a Roth by Jan. 1, she said.

Currently, 30% of Fidelity’s 24,800 401(k) clients lack a Roth feature, said Dave Gray, head of workplace retirement offerings and platforms at the Boston-based company.

Unless those employers adopt a Roth option before the new law goes into effect, they will have to eliminate catch-up contributions for all of their workers, Gray said.

Payroll providers, employers and 401(k) record-keepers are working to meet the deadline, but are waiting for guidance from regulators on questions including whether they must seek permission from high earners to put their catch-up contributions into a Roth or can do so automatically, Gray said.

If the guidance comes late in the year, companies might not have enough time to adjust their systems, he said.

Some retirement savings plans, including those for state employees in South Dakota and Idaho, can’t add a Roth unless their state legislatures pass laws, said Matthew Petersen, executive director of the National Association of Government Defined Contribution Administrators, which has 250 members. Some employers must negotiate with unions to add a Roth, he said.

A spokesperson for the Treasury Department said it plans to issue guidance in the near future but declined to comment on the request for a delay.

A Fix From Congress

Another question hanging over catch-up contributions resulted from a drafting error in the retirement bill that Congress passed late last year, which many lawyers specializing in retirement plans interpret as prohibiting catch-up contributions for all workers starting in 2024.

In a May 23 letter to the Treasury Department and IRS, lawmakers including Sen. Mike Crapo (R., Idaho) and Rep. Richard Neal (D., Mass.) said Congress intends to “introduce technical corrections legislation” to fix that problem.

“Congress did not intend to disallow catch-up contributions,” the letter said.


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