Month: October 2018

Retirement Roundup: The tax move every retiree should make right now

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A digest of timely information and insight about finance, investing, and retirement.

Every retiree should make this tax move right now, according to a new warning from the IRS | Time-Money
The IRS has a message for retirees: make sure you’re paying enough federal income tax. The Tax Cuts and Jobs Act of last December changed the income tax calculations for most filers, and employees aren’t the only ones who need to double check they’re withholding the right amount. On average, most retirees will likely see a decrease in tax liability and owe slightly less, although it varies by individual. Retirees who receive monthly pension income or annuity checks may well need to increase or lower the amount of taxes they pay. The easiest way to simplify your tax payments and get back to enjoying retirement is to use the IRS’ online withholding calculator, which incorporates the new tax law rule changes.

A new strategy for managing health costs in retirement | PlanAdviser
Health care cost projections illustrate how managing medical conditions through simple, positive lifestyle choices can result in measurable savings for health expenses in retirement, according to a new report from Healthy Capital in collaboration with the Insured Retirement Institute. In addition, the report explains how utilizing annuities to provide guaranteed income helps address Americans’ concern for affording health care in retirement. A case study details how utilizing the savings through condition management can fund staggered annuities and create a lifetime income stream.

Yes, you should pay off your mortgage before retiring | Washington Post
Four reasons why it makes sense—with one caveat: You shouldn’t empty out your savings to pay off your mortgage. That is not a wise financial move. You don’t want to end up house rich and cash poor, meaning all your money is locked into the equity in your home.

Americans think 61 is the ideal age to retire; is it? | CNBC
Americans think the ideal age to retire is 61. Unfortunately, it may be wise to wait longer. In a recent survey from financial website Bankrate, 10 certified financial planners from different parts of the country said that 63 is a more realistic age for retirement, and many experts believe you should wait until you’re at least 70.

Three easy ways to boost retirement, emergency savings by 30% | Forbes
No, the lottery isn’t the answer, nor is thinking positive thoughts. If you want to save more, you have to spend less. Stay home more. It’s that simple. Just go out to eat and drink less. It really adds up. The latest bankrate.com survey lays it out: Nearly four out of 10 Americans polled go out three times a week to eat or for coffee or drinks. They spend more than $2,400 on restaurant meals and takeout meals alone.

Why these teachers’ retirement plans aren’t making the grade | CNBCHere’s what you need to know about 403(b) plans for public school workers. Other deferred compensation plans for public employees such as 401(k)s or 457 plans may be available to teachers in public schools. Find out if you have access, and see how the costs compare to your 403(b).

Asset Class In-Depth: Real Estate

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Colorado PERA’s asset management focuses on maximizing risk-adjusted investment performance from the broad universe of investable assets. All PERA investment decisions are governed by a Board-adopted investment philosophy and set of beliefs, including the Real Estate asset class. (See PERA’s Statement of Investment Policy for details.)

PERA separates its Investment Department by specific asset classes: Equities, Fixed Income, Private Equity, Opportunity Fund, and Real Estate (additional information on asset allocation can be found in a prior PERA on the Issues post, “Asset Liability Study Plots Course for Future”).

The Real Estate program’s objective is to generate diversified investment returns as well as to provide a steady stream of income in the form of rents to assist in the cash-flow needs PERA has when paying monthly retirement benefits.

Currently, the Board’s strategic target to Real Estate is 8.5 percent, with a range of 5 – 12 percent. Assets at the end of 2017 totaled $4.2 billion (8.6 percent) of the entire $49 billion portfolio.

PERA was an early institutional investor in Real Estate. The first Real Estate investment PERA made was made in 1984. Over the last 30 years, PERA’s investments in Real Estate have evolved and range from being a sole owner of a property to investing alongside other institutional investors in properties around the globe.

The Real Estate asset class, while offering diversification for the entire investment portfolio, is broadly diversified by property type as well as geographic location. Property types broadly include industrial, multifamily, office, and retail. PERA has Real Estate investments around the world in countries diverse as Australia, India, and China. PERA’s Real Estate investments are 97.4 percent domestic and 2.6 percent outside of the U.S.

Unlike public equities (stocks) and fixed income (bonds) where the price of the investment is publicly known, PERA’s Real Estate portfolio investments are not traded on a public exchange. The PERA Real Estate portfolio’s investments are appraised annually and independently audited before being included in the total return information published in the Comprehensive Annual Financial Report.

The PERA Board receives information on each Real Estate fund investment made and has the ability to access property-level information as desired. This information, while not publicly available, allows Trustees to have detailed information on the holdings within the portfolio. Fund disclosures made to the Board by staff include a fund overview, investment strategy, a summary of key investment personnel, historical investment performance, and fees. In addition, Trustees may request additional information, as available.

For more information on the PERA investment program see these PERA on the Issues posts:

What is a Policy Benchmark?

Asset Class In-Depth: Private Equity

Asset Class In-Depth: Fixed Income

Asset Class In-Depth: Equities

A Brief Look at PERA’s Opportunity Fund

Denver Business Journal interview with Ron Baker

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As Ron Baker begins his new role as Colorado PERA’s seventh Executive Director, the 24-year veteran of the organization sat down with the Denver Business Journal to chat about what’s next for Colorado’s largest public pension fund. With the passage of Senate Bill 200 during the 2018 Colorado legislative session, PERA’s financial profile—as well as the state’s—is now on more stable long-term footing. But keeping the pension fund on its most productive path is an ongoing challenge, and Baker used his discussion with the DBJ to summarize what was accomplished with SB 200, what challenges lie ahead, and how he plans to lead the organization through its next phase.

Read Baker’s interview with the DBJ here.

Despite Changes in Accounting Standards, PERA Remains On Track

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In 2012, the Governmental Accounting Standards Board (GASB) introduced revised requirements for public pension plans (GASB 67) and employers affiliated with those public pension plans (GASB 68) that significantly changed how public pension assets and liabilities were to be measured and disclosed for accounting and financial reporting (rather than funding) purposes.

Prior to 2012, the assets and liabilities determined for funding purposes typically were appropriate also to be used for accounting and financial reporting requirements under GASB 25 for most public pension plans. But as a result of the 2012 revisions, public pension plans – including PERA – now report two different measures of funded status: the first, based on the actuarial methods and assumptions under the pension funding policy adopted by the PERA Board and the second, based on the revised accounting and financial reporting requirements under GASB 67. PERA and PERA employers first began reporting under GASB 67 in 2014 and GASB 68 in 2015, respectively.

The revised GASB statements relate to accounting and financial reporting issues only—how pension costs and obligations are measured and disclosed in audited external financial reports. While in the past there has been a close relationship between how governments fund pensions and how they account and report information, the guidance under GASB 67 and GASB 68 established a decided shift from the former funding-based approach to an accounting-based approach. This shift was designed to improve the usefulness of reported pension information and increase the transparency, consistency, and comparability of pension information across governments.

(To learn more about the changes to accounting rules, visit PERA’s GASB guidance section.)

Under GASB 67:

the rate used to discount projected benefit payments to their present value will be based on a single rate that reflects (a) the long-term expected rate of return on plan investments as long as the plan net position is projected under specific conditions to be sufficient to pay pensions of current employees and retirees and the pension plan assets are expected to be invested using a strategy to achieve that return; and (b) a yield or index rate on tax-exempt 20-year, AA-or-higher rated municipal bonds to the extent that the conditions for use of the long-term expected rate of return are not met.

In 2017, PERA determined the plan’s liabilities using a discount rate of 7.25 percent as set by the PERA Board for funding purposes—applicable to all five division trust funds, but also determined the plan’s liabilities using a blended discount rate considering the 7.25 percent assumption and a municipal bond rate, in part, [as required under GASB 67 provisions (a) and (b) above] for financial reporting purposes—applicable to three of the five division trust funds. For example, this resulted in a 59.4 percent funded status for the School Division and 57.5 percent funded status for the State Division determined for funding purposes and a 44.0 percent and 43.2 percent funded status, respectively, determined under GASB 67, for accounting and financial reporting purposes.

In dollar amounts, unfunded liabilities for the first calculation total $28.8 billion and for the second, $54.6 billion; a difference of $25.8 billion.

So what’s the “real” number? Senate Bill 18-200 reduced PERA’s liabilities, no matter which reporting basis is used. Prior to SB 200, liabilities determined for funding purposes were $32.2 billion and projected to increase another $1.4 billion. With the implementation of SB 200, funding liabilities declined $3.4 billion to $28.8 billion and are projected to be eliminated within a 30-year period.

Real-Return Investments for Inflation Protection

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The U.S. economy is humming along, despite international trade tensions and a relatively flat Treasury yield curve. As economic growth continues amid uncertainty, investors could be looking to diversify their portfolios and protect against potential inflation.

Inflation Amid Economic Uncertainty

At its annual symposium in Jackson Hole, Wyoming, on August 24, 2018, Federal Reserve (Fed) Chairman Jerome Powell indicated the central bank expects U.S. economic growth to continue at a pace at which gradual interest rate hikes would remain appropriate. While the central bank does not foresee a surge in inflation beyond current levels, Powell also pledged the Fed would adjust monetary policy responses as needed should the pace of inflation threaten economic stability.

The ambivalent tone the Fed set in August has not been clarified by a definitive market outlook over the past few months. The U.S. dollar has been strong enough to keep prices from ballooning, but could fall in the face of trade tensions, thereby escalating inflation. The bond market anticipates economic slowing, while the stock market has reached, and wavered at, all-time highs. Concurrently, the labor market is expected to remain strong, reflecting greater expansion.

On September 18, 10-year Treasury yields broke higher than 3 percent for the first time since May. Despite that boost, the yield curve remains near its flattest levels in over a decade — a signal that bond investors are not so optimistic about the macroeconomic outlook. Concerns of a potential economic downturn are stoked by expectations of the Fed raising rates by another 0.25 percent in 2018. That move could tighten, and potentially invert, the yield curve by lifting 2-year yields near or above current 10-year yields. Inverted yield curves have historically preceded recessions.

Meanwhile, there are signs the economy is on a path of increased inflation. Recent economic data show labor wages are rising, unemployment is at 49-year lows, and consumer confidence is at 18-year highs. With growing consumer confidence, some companies have indicated plans to increase prices on their core products to spur profits while covering the rising costs of raw materials. These are markers of economic growth and contributing factors to higher inflation, which fueled the Fed to raise interest rates on September 26.

The question remains how much further the economy can expand, and how quickly. All eyes are now on the December Federal Open Market Committee (FOMC) meeting, when the Fed is expected to raise its funds rate for the fourth time this year. Hiking interest rates by a quarter of a percentage point would maintain the central bank’s course of slow and steady response to sustained growth. If inflation increases more rapidly, the Fed may respond in kind with steeper or more frequent rate hikes. Conversely, if inflation cools, the Fed may respond with fewer rate hikes. For now, analysts are predicting the Fed will hike rates two to four times through 2019 in an effort to temper inflation.

Investment Diversification for Hedging Against Inflation

The impacts of inflation – reduced purchasing power of each dollar and resulting consumer price sensitivity – are further amplified in an economic environment underpinned by macroeconomic uncertainties such as international conflict or trade disputes.

So how can investors find protection from inflation? A diversified portfolio is an essential foundation for hedging against volatility in markets, and some instruments may be particularly beneficial to a portfolio in an inflationary environment.

Treasury Inflation Protection Securities, or TIPS, are government-issued bonds that guarantee a return above the inflation rate. TIPS pay a fixed interest rate semi-annually on a fluctuating principal amount that is adjusted with inflation as measured by changes in the Consumer Price Index. As inflation increases, the bondholder is paid the fixed interest rate on an increasing principal. In the case of deflation, the bondholder is paid the fixed interest rate on a decreasing principal, but with the safeguard of the security’s original principal being the minimum payout at maturity. TIPS can offer investors an interest income stream and tax benefits with capital preservation while contributing to a portfolio’s defensive capacity in volatile and inflationary environments.

Private real estate investments can strengthen in periods of economic growth, and may offer opportunity for rental income. Real Estate Investment Trusts (REITs) are another option for investors looking for real estate exposure without the large capital commitments or liquidity risks of direct real estate investments. REITs offer publicly traded shares of companies that own commercial real estate such as hotels, apartments, hospitals, offices and warehouses. Many REITs offer competitive dividends that can outpace inflation to secure a steady flow of returns.

Commodities encompass a broad range of raw materials and agricultural products, and their values usually increase with inflation as rising demand increases the price of commodities used to produce goods and services. While shocks in supply and demand may increase the price volatility of consumable commodities, such as oil and coffee, precious metals such as gold can offer investors relative stability, while still hedging against inflation. Gold has demonstrated an indirect correlation to the value of the U.S. dollar, often rising when the dollar falls, offering additional inflation protection. Commodities that have low correlation with cash or other equities can provide great diversification benefits during market turmoil. Furthermore, investors can access commodities markets through financial derivative instruments, such as futures contracts, eliminating the burden of holding physical assets.

Traditional natural resource equity investments include those in natural resource management industries such as mining, energy production, and agriculture. As global needs and technologies evolve, differentiated resource investments in clean and renewable technologies have emerged. When demand for infrastructure, repair and commodities rise, so do the prices of resources and the costs of their production. The correlation of natural resource equities with commodities can offer insights into economic trends while providing returns that keep pace with growth rather than being diminished by inflation.

TIPS, REITS, commodities and natural resource equities are examples of assets investors might choose over holding cash in order to hedge against inflation and diversify a portfolio. Some funds offer exposure to these assets through mutual funds or 401(k) savings plans which can give options for inflation protection to individuals saving for retirement. Members of Colorado PERA who participate in its defined contribution plan, including the 401(k) and 457(b) plans, have the option of investing in the PERAdvantage Real Return Fund, which invests in the real return asset sub-classes mentioned in this article.

Retirement Roundup: Don’t get spooked by spending in retirement

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A digest of timely information and insight about finance, investing, and retirement.

Don’t get spooked by spending in retirement | U.S. News & World Report

Of all the spooky things haunting retirees, running out of money seems to top the list. In fact, nearly two-thirds (63 percent) fear running out of money in retirement more than death, according to the Generations Ahead Study by Allianz Life. But hoarding assets can prevent people from enjoying retirement. And this fear of overspending might be one of the primary drivers of a growing, but lesser-known trend in which people are actually living too frugally in retirement.

What putting retirement plans on hold means for your Medicare | CNBC

If you’re at least 65 and still punching the clock at work, odds are that you have two benefit enrollment periods to worry about this year. That’s because in addition to signing up for next year’s workplace health benefits, older workers must also make sure to coordinate their coverage with their eligibility for Medicare. The ordeal is a confusing one for the growing population of older workers. By 2024 there will be about 13 million individuals age 65 and older in the workforce, according to the Bureau of Labor Statistics.

US retirement system still ranks low, but slightly improved | PlanSponsor

Getting better, but still needs improvement. Those are the findings from Melbourne Mercer Global Pension Index (MMGPI), an Australia-based financial consultant. Measuring 34 pension systems, the index shows that the Netherlands and Denmark (with scores of 80.3 and 80.2, respectively) both offer A-Grade world-class retirement income systems with good benefits. However, common across all results was the growing tension between adequacy and sustainability.

Americans need to double their retirement savings | CNBC

More people are saving for retirement today and they’re starting to do so younger. Still, they’re not putting nearly enough away, according to a new report from the Stanford Center on Longevity. People should save between 10 percent and 17 percent of their income if they plan to retire at 65 (even if they start at 25), the researchers write. Most people aren’t meeting that goal. Family members aged 25 to 64 are saving a median of only about 6 percent to 8 percent of their income.

Guaranteed income preferred over lump sums | PlanSponsor

What would you do? Fifty-three percent of Americans say they would prefer guaranteed lifetime income of $660 a month over a $120,000 lump sum payment, the LIMRA Secure Retirement Institute (LIMRA SRI) learned in a survey. When asked why they would take the guaranteed income, 57 percent said they expect to live a long life and 46 percent said it was because it would give them peace of mind.

10 scams that will ruin your retirement | Kiplinger

Scams can hit anyone at any age, but falling victim to fraud is especially painful for retirees, many of whom are counting on the fixed income from their nest eggs and Social Security benefits to last through retirement. According to Federal Trade Commission data, retirement-age fraud victims tend to lose more money to scams than younger victims. The median fraud loss was $500 for victims in their 60s, $621 for victims in their 70s, and $1,092 for victims 80 and over. More than 107,000 Americans ages 60 to 69 reported being victims of fraud last year, the highest total of any age range tracked by the FTC.

Federal legislation introduced to repeal Windfall Elimination Provision

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On September 28, Representatives Kevin Brady (R-TX) and Richard Neal (D-MA), respectively the Chairman and Ranking Member of the House Ways and Means Committee, introduced legislation that would repeal Social Security’s Windfall Elimination Provision, or WEP, and replace it with a new, more fair formula to ensure that Social Security benefits are based on actual work history.

The WEP is a federal reduction to an earned Social Security benefit that affects many retirees who receive a retirement benefit from an employer who did not withhold Social Security taxes, such as firefighters, police officers, teachers and other public servants, including many PERA members and retirees.

H.R. 6933, the Equal Treatment of Public Servants Act of 2018, is part of continued efforts at the federal level to ensure that public servants who also earn a pension are treated fairly when it comes to Social Security.

According to a press release from the House Ways and Means Committee, the legislation is intended to “facilitate further discussion and analysis” after ongoing conversations with stakeholders about how many public employees are treated unfairly when it comes to calculating Social Security benefits using the Windfall Elimination Provision.

The Ways and Means Committee is encouraging affected stakeholders to send feedback to WEP.feedback@mail.house.gov.

Additional information, including any future action on the legislation, can be found here.

Read the Social Security Administration Chief Actuary’s letter to the Ways and Means Committee bill sponsor Rep. Kevin Brady.

Policies and practice shape oversight and involvement of Trustees in PERA investments

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PERA Trustees play an important role in the administrative oversight of PERA, including the investment and management of its $49 billion portfolio. PERA invests on behalf of its membership with the sole purpose of generating returns on member and employer contributions. These returns are then used to pay retirement benefits.

While only the Colorado General Assembly has the authority to make changes to the PERA benefit and contribution structure, the Board has oversight of PERA’s investment program. Specifically, Trustees have the responsibility to set the strategic asset allocation of the PERA funds, which guides PERA’s investment decisions. Trustees also have a responsibility to exercise oversight of staff’s implementation of their strategic asset allocation to ensure that investments are serving the best interests of PERA members and retirees.

The fiduciary duty of each Trustee along with the Board’s Governance Manual provide a framework and starting point for these investment functions. The Trustees have established specific rules of governance to ensure that their decisions and oversight meet that responsibility to members and benefit recipients.

As the Governance Manual explains, the Board’s role includes:

  • Approving and reviewing statements of investment policy and philosophy;
  • Ensuring strategies are in place to achieve investment goals and objectives; and
  • Approving internal or external investment management, new investment mandates, and necessary corporate governance or shareholder rights actions.

It is worth noting that no Trustee has any role or say in making specific investment decisions or selecting specific investments. The Board has delegated investment decision making (in the context of their strategic asset allocation) to PERA staff.

The Board’s Statement of Investment Policy further outlines how the PERA portfolio is managed. The objective of the investment program is to maximize long-term returns while at the same time mitigating risk.

Operationally, the Board has a standing Investment Committee that is charged with the following duties as specified in the Governance Manual:

  • Recommend to the Board written statement(s) of investment policy and philosophy for the trusts, and any amendments thereto;
  • Recommend to the Board strategies to achieve the investment goals and objectives of PERA for the trusts;
  • Recommend to the Board new investment mandates;
  • Recommend to the Board the use of internal or external management for the investment mandates; and
  • Advise the Board on any other investment matters and make recommendations for Board action when necessary.

At least annually, the Investment Committee reviews PERA’s compliance with the written statements of investment policy as well as the internal and external investment management strategies and the cost effectiveness of the investment program.

In assisting them in these actions, the Trustees have access to world-class consulting firms as well as the expertise of a professional staff. Trustees are required to obtain the necessary education while in service to the PERA membership. These educational requirements are contained in the Governance Manual as the Board Education Policy and may be found on pages 28-1 – 28-5.

Earlier in October, PERA released a statement designed to clarify the role of Trustees related to the investment program.

For more information on how the Board works and a case study on how the long-term investment rate of return is set, see Understanding the role of Trustees.

Retirement Roundup: Health care costs will take a big chunk out of retirement savings

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A digest of timely information and insight about finance, investing, and retirement.

Health care costs will take a big chunk out of retirement savings | PlanSponsor
HealthView Services’ 2018 Retirement Healthcare Costs Data Report shows overall in-retirement health care inflation declining to a projected 4.22 percent compared to the 5.47 percent in last year’s Data Report. This change is primarily driven by a slower rate of increase in expected drug costs. The Retirement Healthcare Cost Index reveals the impact of expected health care costs on retirement budgets: A healthy 66-year-old couple retiring today will need 48 percent of their lifetime Social Security benefits to address total lifetime health care expenses, while a 45-year-old couple will need 63 percent.

Five retirement pitfalls you’ll want to avoid | Forbes
Five retirement pitfalls reflect the results of more than 1,000 retiree interviews and observations of retirees defaulting to a retirement lifestyle lacking excitement, positive challenges, contribution in significant ways, personal growth, and, ultimately, fulfillment. Those who understand the circumstances, situations and events they may encounter in retirement have a better chance of avoiding the snags and of feeling fulfilled in the third chapter of their life.

Clueless about what to save for retirement? You’re in good company | Motley Fool
We’re told time and time again about the importance of saving for retirement, especially because Social Security alone won’t be enough to pay the bills. The problem, however, is nailing down just how much money to accumulate. After all, there’s no magic number that guarantees financial security in retirement, and while it stands to reason that you’re better off saving $3 million than $300,000, there’s clearly a pretty sizable gap in between. In fact, 60 percent of Americans say they really have no idea how much to save for retirement, according to data from TD Ameritrade. But some general guidelines could help.

How to sabotage your retirement | Investopedia
According to the Federal Reserve, less than 40 percent of non-retired adults believe their retirement savings are on track. But none of the remaining 60 percent likely set out to sabotage their retirement. Unfortunately, it’s all too easy to make the wrong financial moves when preparing for retirement.

Two ways to defray this retirement risk: How to choose what’s right for you | CNBC
Here’s one retirement risk that you can’t quite save for: The possibility that you’ll need long-term care either at home or at a professional facility. Individuals who are now at retirement’s doorstep can expect to live and plan for another two decades of life. Perhaps the biggest threat looming for these individuals is the possibility that they may require long-term care as they age — and that they’ll be unable to pay for it.

Understanding Social Security for the public sector: The government pension offset | Forbes
Fair or not, those working in the public sector are treated differently than private-sector employees by the Social Security system, primarily through two rules that may reduce their Social Security benefits – the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO).