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What steps can Millennials take to enhance their retirement security?

June 25th, 2014 No comments

The millennial generation has developed a reputation for not placing an emphasis on retirement, preferring to live for the moment. In the most recent issue of Benefits Quarterly, Milliman’s Jinnie Regli discusses several actions Millennials should consider to help them accumulate retirement savings. Here is an excerpt:

Taking retirement mobile
Millennials’ lives are fast-paced, hopping from an early morning yoga workout to nine hours of work, straight to a book club meeting, down the street to a softball doubleheader and then on to a late-night fraternity reunion happy hour. Retirement accounts are finally catching up with our mobile world. Recordkeepers and administrators have started to create mobile apps for smartphones and tablets to help keep up with busy lifestyles. For some, choosing to defer or increasing your deferrals is as easy as one quick touch of the screen or scanning a quick response (QR) code. When you have time to play with apps that shoot cartoon birds dressed like Darth Vader across the sky, then the excuse “I just don’t have time to save for retirement” simply won’t fly anymore.

Let your interest compound
You hear over and over again that the longer your contributions are invested in a retirement plan, the more time they’ll have to take advantage of compounding interest. But what does that really mean? Let’s look at three different savings approaches. For purposes of this example, let’s assume I make $30,000 every year until I retire:

• Strategy 1: I decide to save 6% of my compensation, or $1,800, in a jar every year from the ages of 25 to 65.
• Strategy 2: I don’t want all of the space in my basement taken up by jars and instead enroll in my company’s 401(k) plan, contributing 6% from the ages of 25 to 45. I receive 5% interest compounded annually.
• Strategy 3: I want a new car and can’t afford to contribute now. Twenty years later, I turn 45 and realize retirement is right around the corner and decide to contribute 6% until the age of 65. I receive 5% interest compounded annually.

Which strategy will result in higher retirement savings at the age of 65?

My initial investment ($36,000) is the same in each strategy. While Strategy 1 will guarantee my contributions will not suffer any market gains or losses, it may not be the most secure retirement savings strategy. Strategy 2 more than doubles my final account balance when compared with Strategy 3 just by giving my money an extra 20 years in the market to accumulate that compounded interest. (See the figure)

Compounding interest

To read the entire article, click here.

Reproduced from the Second Quarter issue of Benefits Quarterly, published by the International Society of Certified Employee Benefits Specialists.

Retirement readiness: How long will you live in retirement? Want to bet on it?

June 16th, 2014 No comments

Skow-KevinThe U.S. Department of Labor now offers a tool to help employees assess their paths toward providing for their retirements. Employees who use the website to input their ages, 401(k), 403(b) or IRA balances, annual contribution amounts, and years to retirement are provided a projection of the monthly income they might expect to receive in retirement. A sample result is provided in the graphic below. For more information, click here.

Retirement readiness blog_K. Skow

The calculations include adjustments for future investment earnings and inflation. Details about the assumptions used are available by clicking the “View Instructions” link.

The tool makes a simplifying assumption that may cause employees to underestimate how much they will need at retirement. It assumes each employee will survive in retirement according to an average life expectancy (roughly age 85 to 90, depending on retirement age, gender, etc.). That may be true for half of us, but what about the other half? Relying on any tool to calculate how much we can spend in retirement may cause our retirement account balances to run out sometime around our late 80s. What happens then?

401(k) and 403(b) plans were initially designed to provide supplemental income in retirement. Over the years they have become the primary retirement plan for most employers. More and more employees are relying on their employer retirement plans for retirement security. Getting good information about the adequacy of these plans is critical.

Employees should review the assumptions behind the calculations used in retirement planning. Terms like “life expectancy,” “annuity conversion,” or “average lifetime” imply the results will be sending roughly half of the tool’s users on a path to disappointment. While these plans are not designed to provide a guaranteed income at retirement, addressing the possibility of living well into one’s 90s will help employees plan for a more secure retirement.

Milliman’s PlanAhead for Retirement® tackles this dilemma by asking this question. The input can be modified if desired, but this foresight better projects the reality that employees may face. As a result of this realization, employees may modify their saving, investing, and spending patterns to better prepare them for life in retirement.

Sample results show this impact in the graphic below.

Retirement readiness blog 2_K. Skow

Retirement readiness blog 3_K. Skow

This is one of the many assumptions that need to be considered when evaluating an employee’s benefit adequacy in retirement. We will continue to explore other aspects in this series on the subject of retirement readiness.

Give your nest egg some TLC!

May 9th, 2014 No comments

Regli-JinnieAll around us, there are signs that spring is hatching. Snow piles are melting, potholes are mounting, insulated jackets have been shed, green grass is peeking through, and bird nests are popping up in the trees.

It’s important to remember that, just as a mother bird continues to nurture her unhatched eggs, your retirement accounts need a little nurturing until they’ve reached their maturity. Perhaps it’s time for a little retirement account spring cleaning!

According to this New York Times article, statistics show that, on average, people in their 20s will go through seven jobs in their lifetimes. It’s not uncommon to get wrapped up in the new and forget about the old—more specifically, your retirement account—as you move forward to new opportunities.

If you’re not sure how to access old accounts anymore, your prior employer will be able to point you in the right direction. It would be unfortunate to leave a nest egg behind only to have it eaten up by plan fees!

Here are a few things to keep in mind:

  • It’s helpful to update your contact information if you move, get a new phone number, or change your name. Some of these changes may require that you provide proof of change and it’s easier to stay on top of the changes as you go.
  • Remember to review and update your beneficiaries as you go through life changes to make sure your retirement accounts are inherited by the appropriate parties if an unfortunate incident occurs.
  • Every few years, you may want to re-evaluate your personal investment selection. The fund or portfolio you picked when you started that first job at age 22 may no longer fit your investment strategy.
  • How much do your retirement accounts cost you? Even in employer-sponsored retirement plans, participants often are responsible for paying portions of plan fees. If you have five separate accounts and each of the plans deduct $25 from your accounts each year ($125 in total) it might be wise to consolidate your accounts and only pay one $25 fee.
  • If you have a small balance, typically under $5,000, you may be automatically rolled out of the plan and into an IRA, without your consent. If your account balance is less than $1,000, your account may be automatically paid directly to you, less taxes owed. Make the first move after leaving so that finding your account doesn’t make you feel like you’re chasing your tail.
  • If nothing else, check in on your accounts at least annually. Even if you are no longer working at the company, plan design changes, fund changes, and many other decisions the company makes for its plan still affect your account and could affect your account balance.
  • While it’s still fresh on your mind, consider combining all of your prior qualified accounts into your current plan or IRA. One of the major benefits of qualified 401(k) plans is that they are portable and most retirement plans make rolling balances in or out a fairly easy process.

Just think. You work hard for your money and if you contributed to a retirement plan, that money was withheld from your take-away pay. Consolidation increases the likelihood you’ll be able to devote the attention you need to grow your retirement nest egg.

Starting to talk about retirement savings

February 26th, 2014 No comments

Hart-KevinMy friends and family all know that I work on retirement plans for a living. So occasionally they ask me questions about their retirement savings or the state of Social Security or even how much money I think they should contribute to their 401(k) plan. These questions have traditionally been few and far between. However, in light of recent developments I’m being asked these same questions much more frequently than in the past. And that’s a good thing.

On January 28, President Obama introduced his MyRA proposal during his State of the Union address. One day later, Senator Collins and Senator Nelson introduced the Retirement Savings Act of 2014 (RSA-2014). And one day after RSA-2014 was announced, Senator Harkin introduced the Universal, Secure, and Adaptable (USA) Retirement Funds Act. Along with these proposals, pundits have recently discussed ways to improve and enhance the current Social Security program. Within a span of a couple days retirement savings became a hot topic of discussion. All of the retirement savings proposals have features that can benefit Americans. And beyond that, there’s the side effect of people discussing retirement savings.

Anything that can stimulate Americans into looking at their own retirement savings and doing something to improve those savings is a step in the right direction. The government appears to be willing to make it easier for Americans to save for retirement. However, there’s only so much that they can do. It’s important that we take the next step, because ultimately it’s up to each and every one of us to do what’s necessary to make sure that our retirement savings are where they need to be. Take a look at your retirement savings. Many retirement plans have websites that allow you to run projections so that you can see estimated benefits based on different scenarios. Go to the Social Security website and learn more about your benefits. Use the tools that are out there and solve your retirement puzzle.

Let’s talk to others about this hot topic. Get the ball rolling on helping friends, family, and colleagues to begin thinking about planning for their retirements. Having retirement savings in the news won’t help any of us save a dime for retirement. But at least we’re talking about it. And that’s a good start.

Rewriting retirement readiness: Will the USA Retirement Funds Act amend your plan?

February 21st, 2014 No comments

Copeland-MiraDuring the State of the Union address on January 28, President Obama announced his directive to create “My Retirement Account” (MyRA), a personal savings vehicle. On January 29, Senators Susan Collins and Bill Nelson introduced the Retirement Security Act of 2014, which includes moderate changes to the existing legislative framework for employer-sponsored plans to entice more small employers to sponsor plans. On January 30, Senator Tom Harkin, chair of the Senate Health, Education, Labor, and Pensions Committee, unveiled the Universal, Secure, and Adaptable (USA) Retirement Funds Act. This act would provide for the creation of a kind of “super” multiple-employer plan and would ensure that almost every worker is covered by a retirement plan with both automatic enrollment and annuitized distribution features.

MyRA provides for a supplement to the current retirement system; the Retirement Security Act would modify it; the USA Retirement Funds Act would profoundly alter it. How?

The USA Retirement Funds Act would have a significant impact because all employers with 10 or more employees would be required to offer a retirement plan with automatic enrollment and a lifetime income option. If Milliman’s recordkeeping clients can be used as a representative sample, a quick look would tell us that only 2% of plans currently offer both features, which indicates the substantial majority of plans would be required to be amended if this core provision is enacted.

It’s possible that some employers would choose to terminate their current plans and participate in a USA Retirement Fund rather than amend their current plans. Though automatic enrollment has been gaining popularity since the Pension Protection Act (PPA) codified it in 2006, with approximately 40% of plans now offering it, plans that have not yet adopted automatic enrollment tend to have good reasons for not doing so—participant populations with especially high turnover, for example. Annuitized payment options, however, have been declining. According to one recent survey, only 6% of plans offer a lifetime income distribution option. Of this group, 82% report that less than 5% of participants elect it.

The USA Retirement Funds Act could indeed dramatically alter retirement preparedness statistics: requiring a retirement plan for companies with 10 or more employees would allow access to a workplace retirement plan for many American workers who currently don’t have one; automatic enrollment for all plans would increase the number of people saving for retirement; and requiring annuitized distribution options would reduce the risk of people outliving their savings.

Senator Harkin has designed some intriguing new tires to get Americans moving toward retirement readiness … but will the rubber hit the road? If it does, plan sponsors would be advised to make sure their ERISA attorney is along for the ride.

MyRA versus USA Retirement Funds

February 13th, 2014 No comments

Bleick-TimDuring the State of the Union address, President Obama said, “Let’s do more to help Americans save for retirement. Today, most workers don’t have a pension. A Social Security check often isn’t enough on its own.” He then announced plans to create a new government-backed savings account called MyRA, and he asked Congress to offer every American access to an automatic IRA on the job.

Two days later, Senator Tom Harkin, chairman of the Senate Health, Education, Labor, and Pensions Committee, introduced new legislation: the Universal, Secure, and Adaptable (USA) Retirement Funds Act of 2014. Senator Harkin says the legislation would create a new type of privately run retirement plan that combines the advantages of traditional pensions and 401(k)s.

Numerous studies have shown that Americans are not saving nearly enough for retirement—it’s not even close. So anything that helps in this regard is a good thing. Let’s compare the two proposals.

MyRA is strictly an account balance. An individual contributes after tax dollars to the fund, and the distributions are tax-free at retirement. This is the same concept as a Roth IRA. The fund is backed by U.S. Treasury securities, and the principal is guaranteed not to lose value. When the balance grows to $15,000, the individual must roll the account over to a private Roth IRA. One big stumbling block to MyRA, though, is that employers are not required to set up the mechanism to allow their employees to contribute to the account via payroll deduction. The president does intend to include this provision in his budget for employers who do not offer an employer-sponsored savings plan—a process that would require Congressional approval.

USA Retirement Funds also starts out as an account balance. During working years, it operates just like a 401(k). The principal is not guaranteed, but the funds are pooled and professionally managed. The plan shifts to a traditional pension at retirement, when the fund is converted to a lifetime income distribution with spousal death protection. Employers with more than 10 employees who do not offer a plan with automatic enrollment and a lifetime income option would be required to select a USA Retirement Fund and automatically enroll all employees at a contribution rate of 6% of pay. Employees can opt to increase, decrease, or stop contributions anytime. Employers are allowed to make additional contributions on behalf of their employees. Because it’s an account balance during working years, the plan is completely portable upon a job change.

Could these proposals make a dent in the retirement savings gap of many Americans and increase their confidence level about a secure retirement? MyRA is essentially a new way to set up a Roth IRA, which is currently underutilized. But without requiring employers to automatically enroll their employees, can it make a significant impact? The automatic enrollment feature of USA Retirement Funds can be a powerful mechanism, and some people may like the built-in lifetime income aspect. In addition, USA Retirement Funds could be appealing to small employers who would like to provide a retirement plan but have been reluctant because of the plan administration hurdles.

It’s time to move our retirement savings crisis to the forefront. Maybe MyRA or USA Retirement Funds can get it kick-started.

Establishing financial security under Shariah law

February 7th, 2014 No comments

How does Shariah law affect retirement security among Muslims? Conventional pension fund models are often forbidden under Islam’s divine law. In this article, Milliman’s Danny Quant and Safder Jaffer discuss a framework which may facilitate the financial security of Muslims while adhering to Shariah law.

Here is an excerpt:

The good news is that, even with due attention to the sensitivities behind Shariah prohibitions, there are ways to address many of the challenges. The financial services industry, for example, working in concert with Shariah authorities, has essentially overcome many of the problems associated with riba (interest) by transferring the concept of interest to profits – that is, profits are earned on investments rather than interest. Indeed, a working system compliant with Shariah law is coming into place for the accumulation phase of retirement plans, enabling money saved now to enjoy growth and earnings in the future…

Milliman has proposed that Shariah authorities approve the creation of a special-purpose financial vehicle that can be used to support retirement products of takaful and insurance companies. It addresses all the concerns of Shariah law we have discussed in terms of an annuity: riba, gharar (uncertainty), maysir (gambling), and others as well (including issues related to zakat). This financial instrument would essentially separate out the various components in the whole transaction. In many ways, it looks like a trust arrangement, but there is sufficient legal separation among the various parties to satisfy requirements of Shariah law.

There is still a need for sukuk at longer periods. There is little or no availability for sukuk with tenors longer than 20 years. A possible solution here could be wrapping sukuk around infrastructure projects such as toll roads or airports, whose income streams would then serve as proxy for payments due. In many ways, it is a matter now of what countries will be willing to step up and do it, likely one of the more moderate and stable states such as Malaysia or Indonesia, some countries in north Africa, and possibly Saudi Arabia.

This article was first published in the November 2013 edition of Middle East Insurance Review.

The importance of updating your retirement account beneficiary

December 12th, 2013 No comments

Copeland-MiraFor many retirement plan participants, a beneficiary designation might just sound like another confusing piece of retirement plan jargon, but designating a beneficiary is a relatively simple step of setting up your retirement accounts that should not be overlooked.

What is a beneficiary? Your beneficiary for your retirement account is the institution or person who will inherit your account in the event of your death. Retirement accounts typically allow for a primary beneficiary and a secondary beneficiary. A secondary (or “contingent”) beneficiary would receive the assets if your primary beneficiary has predeceased you.

For married participants, most retirement plans require that accounts be paid to spouses unless written spousal consent is obtained to designate alternates. A common arrangement for families is to designate the spouse as a primary beneficiary and the children as secondary beneficiaries. If you do this, make sure to update the designation upon the arrival of your next bundle of joy. Also, make sure to update your beneficiary designation if you get divorced.

Why is it important to take the time to designate a beneficiary for your retirement account? Because your will won’t cover it. Employer-sponsored retirement accounts, individual retirement accounts (IRAs), and life insurance proceeds are generally exempted from your will. Instead, those accounts will automatically pass to the beneficiaries you’ve named for them, even if you no longer want those individuals (i.e., a former spouse) to receive the funds. And if you forgot to update your beneficiaries after you had Shiloh, then little Vivienne and Knox won’t receive their shares of your 401(k).

If you don’t designate a beneficiary, upon your death your 401(k) account would be assigned as specified in the plan document—typically to your spouse, children, or closest surviving immediate family member—or to your estate if no qualifying relations exist. The legal process of determining who receives the funds can be time-consuming, laborious, and costly for the potential recipients and the plan administrator, and may overlook a needy dependent in an unconventional family structure. If you have a beneficiary on record, however, your account can be passed directly to that beneficiary, who may be able to access it quickly in a time of need.

Designating a beneficiary typically requires a submitted form (it may need to be notarized if you’re designating someone other than your spouse). Many plans also allow you to designate your beneficiaries online; participants in a plan whose recordkeeping is handled by Milliman, for example, can typically complete their beneficiary designations online at Millimanbenefits.com.

Retirement savings: Don’t confuse past performance and future expectations

November 26th, 2013 No comments

Regli-JinnieThe Wall Street Journal recently published an article (subscription required) that indicated individual investors are returning to investing in stocks, but that this could have negative implications for Ma and Pa’s retirement savings accounts.

Optimistic figures about the stock market, such as a 29.32% increase (as of November 26, 2013) of broad market indexes and potential for the Dow Jones to hit 20,000 this year, have been tossed around like rice at a wedding. While these numbers have encouraged the average investor to return to stock investment it’s important for retirement plan participants to keep a few things in mind.

RearViewMirror

Source: Carl Richards, The Behavior Gap.

While the short-term returns on stocks may have looked incredible on your third-quarter statements, you absolutely cannot invest based solely on short-term returns. Investors in 2008 likely saw the same incredibly high returns right before the market took a downward turn. All too often I overhear people saying, “Wow, did you see returns are up to 20% on Fund XXX, I need to sell out of Fund YYY and buy in.” Because the prices are being driven up, your hard-earned money actually buys fewer shares than if the prices were lower.

I’m not saying that our economy is building up for a fall but it’s important to keep in mind that, even while the market is doing well, you need to protect the nest egg that you’ve worked so hard to build.

Regardless of the market, the key to investing your retirement assets is diversification. Financial advisors tell us that, by spreading the investments in a retirement account across different asset categories, investment risk can be greatly reduced. By investing in a mix of stocks and bonds you are creating your own small “cushion” of protection against losses in case of market fluctuation. It’s important to remember that you’re investing for the long term, and more than likely those incredible returns will only last for a short period of time.

Can R-Bonds help you save for retirement?

November 22nd, 2013 No comments

The U.S. Department of the Treasury will begin rolling out retirement bonds (R-Bonds) starting in January 2014. These government-issued savings bonds are aimed at employees working for companies that do not offer retirement programs. In this MarketWatch article, Noel Abkemeier discusses several issues related to R-Bonds:

Noel Abkemeier, a principal and consulting actuary with Milliman, an independent actuarial and consulting firm based in Seattle, had a laundry list of questions and suggestions. Among them:

What would R-Bonds provide that couldn’t already be done with an IRA? If this is taxed the same way as a traditional IRA, does it limit deductibility of the contribution inversely to income, and with the same limits? Or is it possible to have a Roth IRA version of the bonds?

What is the advantage of qualifying for rollover? That seems to fit somewhere between no-advantage and no-big-deal.

Where are the bonds held? Are they in an electronic notional account at the Treasury Department? Are they in your desk drawer at home? Are they at a brokerage account? If at the Treasury Department, there is the ultimate in portability, although that would not mean much.

If the bonds could be purchased with the filing of your tax return, it might add a little convenience to the transaction.

Are the R-Bonds inflation adjusted? Probably not, but that could be a potential advantage, if offered.

Will contributions be limited so it doesn’t benefit the wealthy disproportionately, as usually happens? This is an issue of both tax brackets and quantity of purchases.

What maturity will these have? Will yields vary depending upon maturity chosen?

Are there any reinvestment guarantees?

Will the bonds mature for a lump-sum payout? Or will they have a coupon payout for a fixed income at some point?

It would be better if they offered “lifetime income bonds,” which effectively would be deferred income annuities. They could have a cash-refund design so the purchasers would be trading lost interest for a lifetime income guarantee, while there was no fear of losing principal. This would send a strong message on priorities by merging the accumulation and decumulation challenges of retirement planning.

What will be the yield on the bonds? Will these have low Treasury yields, which is not the best investment for a complete retirement portfolio? Or will it be higher, which means that taxpayers will be funding government debt at a higher rate than is justified? How would the yield compare with a corporate bond no-load mutual fund?