Quantcast
WJBD - Investments

WJBD Radio

Images

 

Pension Plans & Derisking

Pension Plans & Derisking

 

Corporations are transferring pension liabilities to third parties. Where does this leave retirees?

 

Provided by MidAmerica Financial Resources

 

A new phrase has made its way into the contemporary financial jargon: derisking. Anyone with assets in an old-school pension plan should know what that phrase signifies.

  

The derisking trend began in 2012. In that year, Ford Motor Co. made a controversial offer to its retirees and ex-employees: it asked them if they wanted to take their pensions as lump sums rather than monthly payments. Basically, Ford realized it could someday owe these former workers more than its pension plan could pay out. The move was clearly motivated by the bottom line, and other corporations quickly imitated it.1

    

If you work for a major employer that sponsors a pension plan, you may soon face this choice if you haven’t already. By handing over longstanding pension liabilities to a third party (i.e., a major insurance company), the pension plan sponsor unloads a risky financial obligation.

  

In theory, retired employees tended this kind of offer gain added flexibility when it comes to their pension: a lot of money now, or monthly payments from the insurer for years to come. Does the lump sum constitute a sweet deal for the retiree? Not necessarily.

 

If you are offered a lump sum pension payment, should you accept it? Making this kind of pension decision is akin to deciding when to claim Social Security – you’ve got to look at many variables beforehand. Whatever choice you make will likely be irrevocable.2

 

What’s the case for rejecting a lump sum offer? You can express it in three words: lifetime income stream. Do you really want to forego decades of scheduled pension payments to take (potentially) less money now? You could possibly create an income stream off of the lump sum, of course – but why go through the rigmarole of that if you’re already getting monthly checks to begin with?

   

As American longevity is increasing, you may spend 20, 30, or even 40 years retired. If you are risk-averse and healthy, turning down decades of consistent income may have little appeal. Moreover, if you are female you have a decent chance of living into your nineties – and an income stream intended to last as long as you do sounds pretty nice, doesn’t it? If you are single or your spouse has very little in the way of assets, this too reinforces the argument for keeping the payment stream in place.

 

Also, maybe you just like the way things are going. If you don’t want the responsibility that goes with reinvesting a huge sum of money, you aren’t alone.

 

What’s the argument for taking a lump sum? Sometimes a salaried retiree is in poor health or facing a money problem. If this is your situation, then it may make sense to claim more of your pension dollars now.

 

On the other hand, you may elect to take the lump sum out of opportunity. You may base your choice on timing rather than time.  

 

If you want to build more retirement savings, taking the lump sum might be instrumental. Pension payments are rarely inflation-adjusted; maybe you would like to invest your pension money so it can potentially grow and compound for more years before being withdrawn. Maybe your spouse gets significant pension income, or you are so affluent that the pension income you get is nice but not necessary; if so, perhaps you want to redirect that lump sum toward some other financial objective. Maybe you don’t want regular income payments this year or next because that money would put you into a higher tax bracket.3

 

The key is to avoid taking possession of the lump sum yourself. If you do that, your former employer has to withhold 20% of the lump sum (per IRS regulations) and you risk a taxable event. Instead, you may want to arrange a direct rollover, or trustee-to-trustee transfer, of the assets to avoid withholding and a huge tax bill. Through this move, the funds can be transferred to an IRA for reinvestment. In most cases, you need to leave your job (i.e., retire) before you can roll money out of a pension plan.4

    

Consult a financial professional about your options. If you do feel you should take the lump sum, talk to someone before you make your move. If the move makes sense, that professional may offer to help you invest the money in a way that makes sense for your near-term and long-term objectives, your risk tolerance, your estate and your income taxes. If you feel monthly payments from the usual joint-and-survivor pension might be the better choice, ask if some model scenarios might be might presented for you. 

     

MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com.

www.mid-america.us

  

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.  A lifetime income stream is based on the claims paying ability of the issuer.      

    

Citations.

1 - tinyurl.com/nucxdss [11/23/14]

2 - forbes.com/sites/mikehelveston/2014/04/10/the-big-pension-decision-should-you-choose-a-lump-sum-or-monthly-annuity-payments/ [4/10/14]

3 - consumerreports.org/cro/2014/03/best-pension-payout-option/index.htm [3/14]

4 - nerdwallet.com/blog/investing/2014/rollover-ira/ [9/7/14]

 


Investing Internationally

Investing Internationally

 

An intriguing idea even when U.S. benchmarks are beating foreign ones.

 

Provided by MidAmerica Financial Resources

 

If domestic stocks are performing ably, why invest elsewhere? When the S&P 500 is returning double digits, it may seem unnecessary to include shares from foreign companies in your portfolio. While it may not be necessary, it could be a savvy move.

 

Markets go through different cycles. Foreign equity markets have lagged ours recently. The U.S. has looked like the proverbial “best house in a bad neighborhood.” When the emerging markets are hot, however, they can outperform the S&P 500 dramatically. During those periods, investments offering exposure to those markets carry the potential to yield more than investments merely tracking the S&P. Even when the U.S. stock market is flat or down, overseas markets may be up.  

 

Outside of America, there are some companies with great potential. We hardly have a monopoly on innovations and fresh ideas, and sometimes overseas firms rise to set the pace for a particular industry. Or, a foreign firm may be able to adapt and market an idea from our shores with amazing success in Asia or Europe.

 

Emerging markets are still capable of rapid growth. As examples, consider the BRICS: Brazil, Russia, India, China and South Africa. The economies of all five of these countries expanded by 40% or more from 2003-13. China’s annual gross domestic product grew 164% over that period and India’s annual GDP roughly doubled. Growth from China alone now represents 15% of the world’s GDP.1

 

At some point, this kind of growth has to moderate. In Russia and Brazil, it definitely has – but the International Monetary Fund still projects China’s 2016 GDP at 6.3% and India’s 2016 GDP at 6.5%. That is more than twice our present pace of economic expansion. China’s economy has grown by at least 6% annually since 1983 – a run unequaled in modern economic history.1,2

 

International investing affords opportunities for diversification. Just as a portfolio can be too concentrated in one or two asset classes or sectors, investing entirely in domestic companies may be limiting when the U.S. stock market cools. During those times, exposure to overseas markets may help to improve an investor’s return.

   

Make no mistake, there are significant risks to investing internationally. Many emerging markets are far less stable than ours and wild swings may occur. Not only that, what happens in one stock market now tends to affect many others – there is much more of a “ripple effect” today than in decades past. Along those lines, a major market shock from a geopolitical event may affect overseas markets more profoundly than our own.3

 

Liquidity is another issue. Some foreign stock markets look a little “Mom and Pop” compared to Wall Street, having thinner volume, shorter trading days and a much lower number of listed firms. Investors can also be left wanting for information. While American corporations disclose many facts, foreign firms may be less compelled to do so by a particular country’s laws.3

 

Exchange rates come into play. A strong dollar eats into the return from international investing; a weak one can help boost the return. Also, keep in mind that foreign firms trade and issue dividends in the currencies of their respective nations or economic zones, not the dollar. This means that an investor has to exchange investment dividends (and proceeds) into dollars.3

 

Fees for overseas investing may be higher, too, as it may cost a little more for a U.S.-based brokerage firm to do business on other continents. Some investors may even encounter withholding taxes on dividends, or premiums for buying certain types of shares.3 

 

You may already be invested internationally. As larger firms based in America do significant business abroad, a portfolio that only encompasses “domestic” shares may actually have a degree of exposure to overseas markets. The “headwinds” (and “tailwinds”) from foreign markets can affect these share prices, and certainly the overseas business operations of these American-based companies. 

 

Weigh both the opportunity & the risks of international investing before you proceed. Talk with your financial professional about the possible merits and demerits of this approach.

     

MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com.

www.mid-america.us

  

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.  International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods. Past performance cannot guarantee future results.

 

     

Citations.

1 - bloomberg.com/bw/articles/2014-07-21/brics-summit-a-show-of-economic-might-is-nothing-to-fear [7/21/14]

2 - bloomberg.com/news/articles/2015-02-09/bric-becomes-i-with-india-set-to-outperform-first-time-since-99 [2/9/15]

3 - sec.gov/investor/pubs/ininvest.htm [3/6/15]

 





Welcome to Our New Website

Same WJBD but with more content than ever before. We will have more features up and running in no time.


Follow Us At

 
 

This Site logo