Archive for the ‘Pensions’ Category

Protection, Benefits & Accountability: Smart Planning for Start Ups and Small Business

Monday, August 6th, 2012


Protection, Benefits & Accountability may not be at the forefront of new and small business owners’ minds, but they should be.

 

Often ignored and/or glossed over by startups, these components are an essential part of basic business planning and can make the difference between success growth and failure.

 

You know the old adage: No one plans to fail, they just fail to plan. Use this overview to kick start your protection, benefit and accountability planning:

 

Equity Protection

 

New businesses often start with no consideration for the “What Ifs”.  What if my partner wants/needs to quit the business unexpectedly? What if my partner becomes incapacitated? What if my partner suddenly dies? A lack of planning for unforeseen circumstances such as these can literally ruin a business overnight.

 

In the case of unexpected death, when one partner passes away within a 50/50 ownership agreement, the deceased partner’s heirs would then become entitled to the deceased’s 50% share. Would this be an acceptable arrangement to you as a surviving partner? Typically, this would not be an acceptable arrangement. The last thing a start up business should have to bear is paying out to someone who is not contributing to the business, in this case, heir(s).

 

This is why smart planning also includes Buy Sell Agreements. Buy/Sells are like prenups for business – legal documents which site a buyout price for remaining partner(s) in the event of a departure/disability/death of another partner. They are typically funded by purchasing life and/or disability insurance to cover the predetermined agreed to buyout amounts.

 

►Examine all potential exit reasons thoroughly and be prepared for them.

 

Property and Liability Protection

 

Equally important to insuring buildings, equipment, and product lines, new businesses should make sure they properly protect themselves from lawsuits. People generally embrace adequate property protection but they rarely lend the same credence to liability protection – this goes for individuals too.

 

Unfortunately, in our litigious society, liability protection is something that must not be ignored because situations like these can arise quickly without warning and ultimately have a tremendous impact on your business.

 

A simple example of this type of situation could happen if an employee gets into an accident during working hours. Your company could be found liable – though the accident is no fault of your company – simply because of the employee’s affiliation with your company.

 

Industry statistics provide that businesses will bear the most financial burdens from liability issues versus the costs of property replacement.

 

►Seek the right amount of liability protection needed to fully protect your business.

 

Retirement Planning

 

Most people have heard of the terms: 401(k), IRA, SIMPLE, SEP, and Profit Sharing. For new business start ups, the real question is which one is best for your business?

 

Many plans are specifically designed to appeal to certain demographics. A SIMPLE Plan, for example, is by design targeted to small businesses interested in offering a plan but without the IRS compliance headaches of a 401(k).

 

Depending on the wants and needs of the owners and employees, each plan has a specific list of attributes and drawbacks. It is also tough to think about retirement when you’re just starting a business, but that is exactly when retirement planning should be done.

 

►Engage in retirement planning at the onset of your journey.

 

Health Coverage

 

As a new business owner, you now have health insurance considerations to keep in mind. Some new businesses opt to not provide coverage for the employees. However, highly qualified employees often require this benefit in order to consider working for an employer – do not overlook the possibility.

 

Cash Options – Employers can opt to give a cash stipend to employees in lieu of health insurance to be used as they see fit. While this is often a great option for young and healthy employees, it can prove problematic for a potential employee who may not be able to qualify for individually underwritten plans.

 

Group Health Plans – Starting a group health insurance program is the other alternative: group health plans guarantee coverage for all in the group regardless of underlying health conditions. However, it is equally important to understand that insurers can rate the entire group above the standard cost range depending on the underlying conditions of members within the group. Group coverage also requires a certain percentage of eligible employees participate in order for the group to be issued and operated.

 

If you choose to go the group health plan route, the different types of coverage should then be explored: HMO, PPO, Point of Service, Indemnity. Considerations for, optional dental, long-term disability, short-term disability and long-term care should also be made.

 

►Select a health plan which best serves your company objectives first.

 

Books, Banking, Tax & Law

 

Technology makes accounting, banking and tax transactions easier to record, budget and track today. Knowing what to look out for and ask about on the other hand, can easily remain under the radar.

 

If you opt for using accounting and payroll services, consistent examination of your records is still a necessity. Regardless of who does your books; your business will bear the liability of errors in reporting, depletion of funds, penalties, etc.

 

Choosing an accommodating bank is imperative: Will they process credit cards for you? Provide a line of credit when you need it? Are they fee crazy? Are they the type of bank known for working with new and small businesses?

 

Pending the legal structure and nature of your business, all potential tax liabilities should be examined at the state, local, and federal levels before you open your doors.

 

►Always be aware of how your company records are being booked and tracked.

 

New business owners that can check off these considerations in confidence are heading in the right direction. For those who cannot, do not back burner them – timing can be the difference between success and failure. Seek the professional help you need and build a solid foundation.

 

Additional Reading:

 

Start Up 101 Article Index Inc.com

 

Get a Buy Sell Agreement! Forbes.com

 

5 Tips for Buying Business Insurance Small Business Administration

 

Small Business Healthcare Tax Credit  IRS Newsroom

 

Basic Business Structures Entrepreneur.com

 

Small Business Accounting Library Business Week

 

2012 Business Software Reviews Top Ten Reviews.com

 

Kurt Rusch CLU, ChFC

Questions always welcome!

 

 

 

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Posted in Budgets, Business Liability, Healthcare, Money Management, Pensions, Planning, Protection, Retirement, Small Business, Start Ups, Tax | No Comments »

Why Most American Workers Do NOT Participate in 401(k) s

Saturday, March 10th, 2012


67 percent of Americans workers aged 21-64 with access to employer-sponsored 401(k)’s do not participate in the pre-tax retirement plan.

 

I was absolutely floored when I read this stat published by the Employee Benefit Research Institute. There had to be a typo in there somewhere. (I double checked; there wasn’t.) Virtually then, more than two thirds of the working population (with access), don’t do 401(k)’s?

 

Know Thy “K”

 

While I often resist approaching this subject at the risk of “beating a dead horse”, it is now crystal clear; the horse is nowhere near the end of its days. Next question: Why isn’t the majority of the working population taking advantage of this benefit?

 

After much consideration, my ventured guess is this: employees opt out because there is a lack of true understanding for the machinations of 401(k) plans, benefits of participation, and costs. Of these, perceived cost may be the biggest stumbling block.

 

Deductions & Reductions

 

Deductions taken from your pay check will reduce your take home pay, but it will not reduce it in the dollar for dollar manner many assume. Because these employee contributions are made on a pretax basis, any amount contributed to the plan will reduce your taxable income. Therefore, every dollar contributed to a 401(k) will result in a reduction in take home pay of 72 cents for an employee in the 28% Federal Income Tax bracket: $1.00 – $ .28 = $ .72. Think about how that multiplies.

 

Many states will also compute their income taxes based on this adjusted figure. In Illinois, if you are in a 28% Federal Tax bracket and the 5% State Tax bracket, the true cost of your dollar contribution would be 67 cents. ($1.00 – $ .28 – $ .05 = $ .67.) Federal Tax Credits available to lower income people may reduce these relative costs even further.

 

Market Ease

 

I also believe many people opt out because they don’t understand the markets, how to invest, or much of anything having to do with finances. While that used to be a somewhat valid excuse, modern day benefit management methods are proving otherwise.

 

Investment programs have become much more automated than they used to be. Most plans now offer portfolio programs professionally managed to selected specifications. For example,  the direction of your plan can be focused on the actual target date you have in mind to begin withdrawing funds when you retire.

 

Current benefit management systems take the task of portfolio construction out of your hands and into those of professionals who balance risk and reward within the elected set of demographics. The days of having to select individual market accounts and balancing them yourself are over.

 

Deferred Advantage

 

In addition to paycheck reductions and managed assistance, another major benefit of 401(k) plans is tax deferrals.

 

All growth in these products is deferred until they are withdrawn from the account. Therefore, if you contribute $3000 per year for thirty years, a total contribution of $90,000 would have been made. If the account balance is $500,000 after this time, none of the additional $410,000 would have been taxed as it was growing.

 

Keep in mind these funds will become federally taxable as ordinary income in retirement. State treatment of retirement income varies; Illinois does not tax retirement income from 401(k)’s.

 

Bonus Benefit

 

Because most people are in a higher tax bracket while working than they are in retirement, 401(k) participation is even more beneficial.

 

Contributions for participants who fall into this norm will: allow deductions from taxable income at a relatively higher tax rate and have receipt in retirement at a relatively lower tax rate. Ultimately, you’ll be paying less tax on the income you earned.

 

One Final Nay

 

Take advantage of employer match plans! (I.e. When employers offer matching contributions to your fund when you elect to participate.) Not taking advantage of this is literally passing up free money. Opt in now and cash in later!

 

Kurt Rusch  CLU, ChFC

 

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Defined Benefit VS. Defined Contribution

Wednesday, February 1st, 2012


In speaking with a client recently, I was asked to describe the difference between Defined Benefit Plans and Defined Contributions Plans. I was a bit taken a back because I assumed these were commonly understood concepts.

 

Investigating further, I discovered my assumption was wrong. The differences between Defined Benefit Plans and Defined Contribution Plans are not very well comprehended – even among many astute financial people.

 

Defined Benefit Plans

 

DBP’s are typically thought of as “old school” pension plans. When you enroll in these plans, the employer makes a promise to make specific payments based on formulas with variables such as number of years with the company, wages, age at retirement etc.

 

Companies will then fund these plans according to their own formula. Some companies have 100% company contributions to fund these plans while others will require employee contributions.

 

One of the main differences between these plans and Defined Contribution Plans is that the burden of investment return is with the employer. Any shortfall in the contractually promised benefit must be made up by additional contributions in a defined benefit plan. Contrarily, any surplus can be utilized to reduce future contributions to meet these obligations. These plans are becoming less and less prevalent as employers look to avoid the extra liability of making up contributions if investment returns lag.

 

Defined Contribution Plans

 

DCP’s are the plans with growing popularity. An example of these types of plans would be: SIMPLE, 401(k), 403(b), and Section 457 plans. Employees are able to set aside a portion of their pay on a before tax basis. In some cases the employer will have a matching contribution that will be added in addition to the employer contribution.

 

The employee contributions are always 100% vested if that employee leaves employment. The employer contribution usually has a vesting schedule where a portion of the employer contribution will be forfeited by the employee if their years of service are not sufficient.

 

Other Comparisons

 

Defined Benefit Plans typically promise a lifetime of contractual income once you enter retirement. Defined Contribution Plans offer no such promises. Once your funds are depleted, your income stream is over. On the other hand, Defined Contribution plans will generally have a beneficiary designation where any remaining funds in the account can be passed to a beneficiary upon death.

 

Defined Benefit Plans provide choices as to how you prefer your lifetime income would be paid out. For example, you could receive the highest payout if you select a lifetime option with no provision for spousal continuation. You can also typically select a lesser amount with the remainder paid to a spouse if they survive you. These plans have no provision for leaving unused assets to non-spouse beneficiaries.

 

Retirees can select payment options as they see fit with Defined Contribution Plans. People can choose to take as little as is required by the IRS minimum distribution requirements all the way up to redeeming the entire account. Defined Contribution Plans offer the opportunity to pass assets along to beneficiaries for any unused balances.

 

Take Away

 

The biggest difference between DBP’s and DCP’s lies in the responsibility for investment return. In a Defined Contribution Plan, the onus of return lies with the employee. If their returns are not sufficient, it is up to them to increase their contribution rate or have fewer funds available at retirement.

 

Minding today’s terminology is half the battle.

 

Kurt Rusch  CLU, ChFC

 

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Retirement Planning: New Year, New Rules

Saturday, January 21st, 2012

 

A plethora of legislative change became effective on the first of the year. Some of these changes will affect individuals planning for retirement as well as those already retired.

Here, is the short list:

 

1. Social Security checks will be getting larger. Recipients can expect to see their gross check increase by 3.6% with only small increases in their Medicare Premiums.

 

2. Standard Medicare Part B coverage will increase to $99.90 for 2012. This is an increase of $3.50 per month. For Part B enrollees who signed up in 2010 or 2011 and were charged an initial premium of $110.50 or $115.40, their premiums will decrease to the standard $99.90.

 

High Income recipients will continue to pay a higher portion of their Part B premiums with their rates being anywhere from $40.00 to $219.80 per month higher than the standard rate. (High Income Recipients are defined as: an individual with Adjusted Gross Income over $85,000 or couples with Adjusted Gross Income over $170,000.)

 

3. The Part D donut hole gap is shrinking. The biggest complaint about the Medicare Part D is the fear of hitting the donut hole where coverage is limited severely versus coverage prior to and after the hole.

 

Previously, drugs were discounted by 50% for brand name and 7% for generics while in the donut hole. These percentages are rising to reflect a 50% discount for brand name and 14% for generics in 2012. Eventually the donut hole is scheduled to be phased out.

 

4. Income subject to Social Security Taxes will increase. For 2012, Social Security will be incurred on earned income of up to $110,100, up from $106,800 in 2011. However, at least for January and February, Social Security withholding rates for the employee will continue to be 4.2%.

 

5. 401(k), 403(b) and Federal Government Thrift Plan contribution limits will increase. The 2012 limit will be $17,000, up from $16,500. The catch up provision available for employees 50 and older remains $5500.

 

6. IRA contribution limits will remain the same but the threshold for income to make these deductible contributions will increase. Contributions of up to $5000 or $6000 if aged 50 and older, will be fully deductible if the modified adjusted gross income is under $58,000 for individuals or $92,000 for couples.

 

A phase out occurs between $58,000 and $68,000 for individuals and $92,000 and $112,000 for couples where only a portion of a contribution will be deductible. For individuals without a retirement plan at work, the income limits are set at under $173,000 for full contribution to fully phased out at $183,000.

 

7. Roth IRA income limits will also remain the same with contributions of up to $5000 or $6000 for aged 50 and older. However, these will also see an increase in the income limits that will be able to participate. Individuals with adjusted gross incomes of up to $110,000 will be able to fully contribute to a Roth for 2012.

 

There will also be a phase out of the amount of contributions that can be made until no contribution can be made if income exceeds $125,000. For couples, the thresholds are income under $173,000 and phased out until income reaches $183,000 where a Roth IRA will not be a viable option.

 

8. Qualifying income limits for the Saver’s Credit will increase for 2012. This credit which can amount up to $1000 for individuals and $2000 for couples, will now be available to individual taxpayers with an AGI under $28,750, for Heads of Household with an AGI under $43,125, and for couples with an AGI under $57,500. The credit will apply to contributions to retirement plans whether individual or employer based.

 

This overview may provide changes which could affect your planning for this year and beyond. The uncertainty of anyone’s future, combined with changing laws and financial environments, dictates the need for dedicated and diligent review.

 

Kurt Rusch CLU, ChFC

 

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Proactive Retirement Planning

Tuesday, October 18th, 2011

 

I just read an article entitled, “5 Biggest Planning Retirement Mistakes”. The problem with titles like these in general is they are negative, and many times, as misleading as they are disheartening.

 

Proactive retirement planning on the other hand, is a different workhorse (pardon the pun) altogether. It should be ongoing and positive, starting over the course of your working years and cultivated throughout your retirement years. It also involves deliberate consideration beyond the lone act of making regular payments to employee contribution plans.

 

What type of proactive things should you be doing to plan for a life of leisure? Consider these 5 things now (even if you’re still working):

 

1.      VALUATION  

 

Project your current retirement programs forward to see how big of a lump sum you will have when you reach retirement and begin systematic liquidation.  While this may seem a monumental undertaking with market upheavals and historic lows in fixed income options, getting to that number will provide the baseline figure you need to work with.

 

If you tend to be risk averse, project your account balances into the future by using rates of return that could be obtained using less volatile investment choices. The worst case scenario here is that things change and you receive a higher rate of return netting a larger sum of distributable retirement funds.

 

On the other side of the coin, the market tends to be a lot more dependable over long periods of time than generally assumed. Utilizing these returns has not historically been as risky as you may think.  A volatile market is, in reality, a friend to those systematically investing via retirement plans at work and independently because: fixed amounts invested on a regular basis will always purchase more when the markets are at their lows and less when they are at their highs. This system allows you to buy low without ever having to consciously make investment decisions.

 

2.      DISRUPTION   

 

No one can possibly plan for every “what if?” in life, but addressing the types of disruptions to retirement income streams which may occur is essential.

 

Case in point; what would you do if Social Security changed drastically by the time you were counting on receiving it? Currently, with no modifications or adjustments, the Social Security Administration projects that by 2036 the Social Security Trust Fund will only be able to pay 75% of their obligations.  Would you be able to handle this decrease? Or any other type of unplanned reductions? If not, have you considered what you can do to make up possible shortfalls?

 

If you begin making up the gap sooner rather than later, the amount that would need to be set aside on a regular basis would be comparatively small. Conversely, if this gap is left unaddressed, the magnitude of future contributions could be daunting. Remember: Compound interest (really) is the Eighth Wonder of the World.

 

3.      VISUALIZATION 

 

Envision (literally) your retirement and what you (actually) want it to look like. While there are numerous statistics and figures utilized in planning, the best way to assure that you are planning for YOUR retirement is to personalize it.

 

Some people may think this silly but if you’ve never really taken a moment to think about how you’d like to see yourself in this future, you may be surprised what comes to mind. Are you planning on traveling a lot? Are you planning on working? If so, what is the magnitude of your commitment to work? What do you envision your living situation as being?

 

These kinds of questions and many more will affect the dynamics of your retirement plan. For example, if extensive travel is part of your plan, you must put more money aside than someone without these ambitions. On the other hand, if you plan on working, that may decrease the amount that must be set aside to meet expenses in retirement.

 

Housing will also greatly affect your financial situation. Many people “downsize” in retirement. Downsizing can often free up funds that can be invested to subsidize other plans already in place. These are just a few examples to consider.

 

4.      SAFEGUARDING

 

Have you safeguarded your plan for longevity?

 

If a husband and wife have plans in place as a couple in retirement, will they still be okay if one of them was no longer around? Upon passing, a surviving spouse will receive the higher of the two spouses’ Social Security payment. Would you be able to live the retirement lifestyle you envisioned without the aid of dual Social Security payments? Beyond Social Security, pension options must also be reviewed closely.

 

Pensions generally have irrevocable options that must be elected at the time of retirement. A sample of the array of these types of elections would include a single life option for the pensioner. This option would yield the highest monthly payment because it would continue only for the life of the pensioner. There would be no continuation of payment to a surviving spouse if the pensioner predeceased him/her.

 

At the other end of the spectrum, is a spousal option paying the surviving spouse 100% of the pensioner’s payment at the time of the pensioner’s death. This option would yield the lowest monthly payment to the recipient because essentially this pension plan is buying life insurance on the pensioner to be used to continue payments in the event of predeceasing their spouse. Examination of these costs should be made to see if the pensioner would be better off financially to receive the higher single life pension payment in combination with a taking out a private life policy to provide for the surviving spouse. This would also provide the flexibility to drop the policy or change beneficiaries to children in the event of the spouse predeceasing the pensioner.

 

5.      INCAPACITY   

 

Have you addressed the possibility of incapacity? While this is a very distasteful subject to broach, statistics indicate that up to 75% of couples will have at least one spouse needing some sort of long term care within their lifetimes. Given the state of rising healthcare costs, this situation can devastate a retirement plan very, very quickly.

 

Those who elect not to address the subject make a default decision to self-insure. This works out well only if you remain healthy without the need for support services. It is also a risky choice to make for the time period in your life when your options for financially rectifying an error in planning will be drastically limited.

 

Chicago nursing home costs currently run about $200 per day. For those who assume that this will be handled by Medicare, you are mostly incorrect. Medicare only covers follow up treatment after release from a hospital. There is no provision for convalescent care (long term daily living) from Medicare.

 

Coverage for long term care is available through Medicaid but to qualify, your assets must be liquidated and spent down. This radically limits your future choices. Home health care is also not covered by Medicaid. Many of the better nursing facilities may also refuse admittance to people   already on Medicaid. The last thing your loved ones need to face at a time like that is the challenge  of finding a geographically desirable and decent facility to take you in.

 

Valuation, Disruption, Visualization, Safeguarding and Incapacity are all key factors in planning for life after work. Safe, secure and solid navigation of this terrain should be done with the assistance of a licensed professional.

 

Kurt Rusch  CLU, ChFC

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Pension Plans: Who’s Funding Who?

Wednesday, September 7th, 2011

 

According to studies by the Government Accountability Office (GAO), a growing number of DFP’s (Defined Benefit Plans, better known as pension plans) are funding their obligations by purchasing Hedge Funds and Private Equity Funds. While the prevalence of this usage funding is constituted in larger pension funds, their usage is not forbidden in smaller plans.

 

So, you might be thinking, “Thanks for the tidbit Kurt, who cares?” I’ll tell you exactly ‘who’: anyone. This affects any and every person who has a pension plan.

 

Hedge & Private Equity Funds

 

Stories of hedge fund disasters are regular features on the news, the most notable of which involved the former head of NASDAQ, Bernie Madoff. This is not to say that every Hedge Fund and Private Equity Fund are being run fraudulently, because the vast majority are ethical and well run. However, the valuation issues stemming from the lack of a regular market for these issues, combined with the challenge of transparency further magnifies their unpredictable nature.

 

Due to the rapid increase in the usage of these types of investments, (60% of large pension plans used hedge funds in 2010 compared to only 11% which used them in 2001), further scrutiny of their attributes is necessary. Private Equity Funds, which typically provide working capital for expansion, product development and restructuring to other entities, were utilized by 92% of large pension funds in 2010, up from 71% in 2001. This is a trend that shows no signs of reversing anytime soon.

 

Equally prevalent in the news these days are the horror stories regarding underfunded pension plans. Scads of separatist managed plans for fire, police and even now, teachers, are coming to light as being incapable of living up to the payout demands promised to their populations. And that is, scary – very scary.

 

The lack of transparency and illiquid nature makes overseeing these kinds of investments also more laborious (and perhaps neglected?) versus the management of stocks, bonds, cash and other easily valued asset portfolios in kind. Hedge Funds and Private Equity Funds often fly under the radar.

 

Diversify, Diversify, Diversify!

 

Today, perhaps more than ever before, alternative pension planning is imperative. We need to plan for the possibility that full pensions may not be received as expected whether due to fund performance, mismanagement or any other unforeseen factors. Alternatively, look to the following: 1) Additional funding to an IRA, Roth IRA, annuity or any other tax qualified product. 2) Investing additional funds in stocks, bonds, mutual funds, CD’s, etc.

 

There is safety in diversification. If you count on your pension 100% and it is no longer there or not to the extent expected, you will have serious problems. If, on the other hand, there are problems with your pension but you have done alternative planning with provisional investments in other asset classes, the impact will be lessened.

 

Kurt Rusch CLU, ChFC

 

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The Top 2 Things You Can Do To Battle Market Fatigue

Monday, August 22nd, 2011

 

You need only turn on the TV, radio, or skim a newspaper to realize we are right in the middle of some challenging economic times. The BIG question is what can we do when our individual abilities to change the quagmire we’re stuck in is minimal? Here is the shortlist.

 

#1 Look at your personal situation and choose the best plan of action

 

If you are trying to accumulate funds for retirement, do you really want to retreat to the safety of CD’s or money market funds when returns are struggling to yield 1% on your money? Yes, you would at least have a guaranteed return of your money but at these rates, even the slow but sure tortoise would give up the race.

 

Historically, the market is a very predictable and much higher yielding place to be. That being said, the number one prerequisite of market investing will be your ability to weather the volatility that is inherent in equity investments. Simply put: don’t be a jack rabbit about it.

 

Investors who cycle through euphoria and misery only to jump in and out of the market typically do so at precisely the wrong times. The scenario plays out something like this:

When the market is doing well, investors feel renewed confidence it is the place to be. They plunge wholeheartedly in, at a point that reflects a price that is much higher after two years of outstanding returns. The market may or may not continue on its upturn for a while. However, at some point, the market will sour and begin a hasty retreat. These same people who got in at or near the top begin to panic. They decide they can no longer stomach the volatility and opt out after the market has been in a free fall for some time.

 

This is a recipe for disaster and one reason why we see such a roller coaster of reports in the news each day. If you lack the fortitude to invest in the market and weather the vacillations, don’t jump in and out – stay out. Buying high and selling low is not the way to go.

 

#2 Consider alternative strategies for investing in the market

 

An example of a strategy that may take some of the trepidation out of investing in the market is using the strategy of dollar cost averaging. This is already inherent in payroll deduction retirement plans. Since the funds are invested on an ongoing and regular basis, investors will automatically get the benefit of purchasing more of the investment when prices are low and less when they are high.

 

This same strategy would work in investing non-qualified money. Instead of investing it all at once, take the sum to be invested and invest a certain portion each month over a period of time instead of plunging it all in at once. This way, if the market does go down, you will be able to capture a lot more shares or units at the lower price.

 

Kurt Rusch CLU, ChFC

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Economic Rebounding: Use the Rule of 72

Thursday, March 17th, 2011

 

The economy is slowing turning around, albeit much slower than most of us would like to see. Rebounding from devalued investment, savings and/or retirement accounts  continues to be a challenge. Learning The Rule of 72 is one of the best tools you can embrace for help in putting a rebound plan together.

 

Simply put, The Rule of 72 is a quick and easy formula that will give you the number of years it will take to double your money. Using a simple interest rate of 1%, which varies above and below the current bank rates being paid on savings accounts, it would take you approximately 72 years to double your money using the Rule of 72: 72 divided by the rate of return; 1%. Accordingly, a 2% return rate would double your money in 36 years.

 

A Googled search du jour on CDs, provides for the current average interest rate somewhere between 1.06% for one year CDs on the low end, leveling off at 1.86% for three year CDs. At 1.86%, it will take 38.7 years to double your money. FYI: IRA CD returns were even less.

 

Discover and Capital One are currently offering a ten year CD at 3% for minimums of $2,500 and $5,000 respectively. It will take 24 years to double your money in this case. Conversely, an invested mix of stocks and bonds with a hypothetical return of 6% would cut that time period in half to 12 years: 72/6 = 12. It is a simple formula to wrap your head around.

 

The chart to the right (double click to enlarge) further illustrates the relationship between the hypothetical rates of return and the number of years it takes to double an initial investment with  all earnings reinvested.

 

While CD rates are fixed and may be insured by the FDIC, they offer relatively low returns. On the other hand, stocks and bonds tend to offer higher rates of return, but come with higher risks of loss. Similarly, fund yields and returns may fluctuate and fund shares are not insured. Still, you may be risking the possibility of NOT reaching your goals if you strictly stick to low yielding investments such as CDs.

 

Consider further, the current annual rate of inflation; 2.11% last month. Economic rebounding is slowed when inflation rates are higher than invested rates of return. The Rule of 72 may provide that a mix of investment vehicles tailored to your own return thresholds and timing needs could be the best plan to work toward.

 

Kurt Rusch, CLU, ChFC

 

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Retirement Confidence Survey

Tuesday, March 8th, 2011

 

Up three percentage points up from an all time low in 2009, the percentage of American workers who feel “very confident” that they will have enough money for a comfortable retirement is 16%.

Not to play Devil’s Advocate, but we really need to rephrase that: 84% of the American workforce doesn’t think they’re going to have enough money to retire comfortably.


When the Employee Benefit Research Institute (EBRI) sent out a press release on the 20th Annual Retirement Confidence Survey last week, the headline read “New Research from EBRI”: Between 4–14% More U.S. Households “At Risk” of Running Short of Money in Retirement Due to 2008–2009 Recession.

 

Choosing their copy wisely, EBRI notes that: the likelihood of becoming “at risk” because of the economic crisis depends to a large extent on the size of the retirement account balances the household had in 401(k)-type plans and/or individual retirement accounts, as well as their relative exposure to fluctuations in the housing market.

 

No matter how you slice it, way more than the majority of us working folk have little confidence life will be grand after we stop working. This is not a good thing. Further workforce results provide:

Covering Basic Expenses 29% are very confident they will be able to cover their basic needs

Unaware of  Goals 46% don’t know how much money they will need to retire comfortably

Not Enough Savings 54% say the total value of their savings and investments excluding their home and any defined benefit plans is currently less than $25,000

No Savings At All 27% say they have less than $1,000 in savings (up from 20% in 2009)

 

In 2010, 33% workers were polled as saying they expect to retire after the age of 65. For workers who fall into some of the categories above, the amount of money they will need to save from unpreparedness and unawareness will be overwhelming to say the least. But what of the people who did/do have good plans in place? How much will these workers need to save to recoup their losses from the economic crisis?

 

“Early Boomer households, will generally need to save between 1 and 4 percent of compensation  more each year between now and retirement age”,  provides EBRI. (These amounts will vary to the personal and market profile of each worker.) While another 1-4% may not sound that bad, it may become quite challenging in a climate of increased taxes, higher employee benefit deductions and every changing inflation rates.

 

When it comes to providing for retirement, overall confidence may not be high, but it is changeable. Decide what you would like to have, try out some online tools such as, retirement calculators, to get a feel for your  goals and sit down with a professional advisor to construct the best plan for you.

 

Kurt Rusch  CLU, ChFC

 

 

 

 

 

 

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