Posts Tagged ‘Planning’

Static Planning: The Need for Review

Friday, October 21st, 2011

 

In a perfect world planning would be easy. You would figure out how much of a resource you would need at a specific time and allocate assets either in a lump sum or systematically over time until this goal was reached. The account would grow steadily over time until the mark was reached – perfect indeed and static.

 

Enter my ism for today: static planning.  Something static doesn’t move; static planning is planning that doesn’t take into consideration market gyrations and changes in business. Static scenarios and the real world do not resemble each other much. Reality dictates that different times call for different assumptions and actions.

 

Here are two real world situations which at different times would have greatly skewed static planning assumptions and results:

 

MORTGAGE LOANS

The average interest rate on a 30 year fixed rate mortgage on October 19, 1981 was 18.45%.  The interest rate on that same 30 year fixed rate mortgage on October 13, 2011 was 4.12%.

 

The difference in these two figures is staggering. Where it would have taken regular monthly mortgage payments of $1,544 to pay off the mortgage under the previous figures, that payment would only require principal and interest payments of $484 per month currently to retire the same $100,000 balance over thirty years. Staggering!

 

MARKET INVESTMENTS

 

Market investments are far from a steady growing figure. For example, so far in 2011, the first four months of the year saw the S & P 500 average increase by 9.1%. Subsequently, that same average fell 18.6% through October 3rd. In the following nine days, the market rallied to 11.5% providing a return total of -1.1% for the year as of 10/14/2011.

 

Volatility like this is certainly not for the faint of heart. That being said, short term bank interest rates of less than 1% hardly seem the place to park assets in hopes of reaching long term goals.

 

MORAL OF THE STORY

 

These are but two examples of the need to revisit plans to see if they are still living up to wants and needs. While everyone is bullish in a good market (just ask them) reality indicates that many people are not anywhere near the risk takers they thought they were. Typical investors have a difficult time allocating enough resources to meet long term goals utilizing low fixed rate products.

 

This is precisely why all types of financial considerations, mortgages, retirement plans, investment strategies and the like, should be regularly reviewed. Advisors are trained to assess different economic environments and tailor them to investor profiles. Can you walk the walk or do you have commitment issues? Matching goals with disposition and financial change requires trained and routine review.

 

Kurt Rusch  CLU,ChFC

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