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Jenn Juarez

Retirement Readiness: Planning for the first day of the rest of your life

Much has been made of the current state of the American worker as it pertains to their retirement savings. According to a recent study by the General Accountability Office, 29% of Americans 55 and older do not have any retirement savings or pension plan and those who have saved are woefully behind with 55-64 year olds averaging $104,000 in retirement assets.1

The bleak outlook can largely be attributed to a lack of education when it comes to retirement planning – and more specifically investment allocation. With a growing number of millennials feeling ill equipped to make investment related decisions – even within their own retirement plans, the numbers prove that ignorance is not bliss. 61% of millennials say they want to invest but are deterred because they don’t know how.2    These numbers alone should serve as a call to action for younger workers who are increasingly finding themselves behind the eight ball when it comes to saving for retirement. A sound, long term, roadmap to retirement can be centered on three key areas.

Develop healthy financial habits
In a society that has become increasingly driven by social media it is very easy to fall prey to a “keeping up with the Jones1” philosophy toward spending. Do you have “friends” that tweet and share every purchase and activity in their lives? Believe it or not, this subconsciously drives the temptation to spend on things we do not need or want, to impress people we don’t even like! Finding a balance and delaying gratification on purchases can single handedly make or break your financial wellbeing and it starts with making tough budgeting decisions.

Live below your means.
Try contributing an extra one or two percent to your company’s retirement plan or open up an IRA. You won’t miss the contribution and your standard of living will adjust accordingly. Seek to live below your means today to ensure a strong financial future tomorrow.

Reduce your debt.
The average American household carries a whopping $15,762 in credit card debt. According to a study this year, the average household is paying a total of $6,658 in interest per year3 – translating to lost dollars that could be pumped into retirement savings and wealth accumulation. In some situations debt, such as a mortgage or a student loan, can improve one’s financial position long term – however, credit card debt in particular carries the highest interest rates and should be paid off as quickly as possible. Try working with an independent financial planner if necessary, to consolidate debt and come up with a game plan to attack it head on.

At the end of the day there is no magic bullet that can singlehandedly solve the retirement shortfall for millions of Americans. Only you can take steps to educate yourself and make prudent, financially savvy choices in your day to day life which will translate in a significantly healthier financial standing. Don’t just hope that the retirement picture in your life becomes clearer as the day gets closer, because the opposite is true. Take measured steps to build confident savings and investment solutions for your household by starting today!

1. http://www.gao.gov/assets/680/670153.pdf
2. http://www.wealthacademyglobal.com/2-in-3-young-people-have-not-started-investing/
3. https://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/

Four Reasons to Integrate Health Savings into your Retirement Plan

Kameron Jones, Senior Advisor

As Americans look into the future and towards retirement, many understand that maintaining their health will be
an important part of their overall quality of life after they stop working. However, uncertainty around healthcare
costs – both now and in retirement – is a major financial worry among Americans preparing for retirement. So
how can you help your workers reduce financial anxiety about retirement preparedness and increase the
likelihood that they will be able to meet their healthcare costs in retirement?

Health savings accounts (HSAs) present retirement plan sponsors a unique opportunity to address both the
wealth and health of employees planning for retirement. HSAs are a popular way for individuals to save for
medical expenses while reducing their taxable income – in effect, using their HSA as a long-term investment
vehicle. And though HSAs typically are introduced to employees as part of their high deductible healthcare plans
(these are the only plan types which currently offer HSAs), many recordkeepers are beginning to offer them in an
integrated platform where that can be reviewed alongside retirement savings.

Here are four reasons to integrate HSAs into your retirement plan offering:

1. Health Savings Accounts Address Concerns About Future Costs

In today’s retirement plan marketplace, holistic approaches increasingly feature a multi-faceted
program that offers numerous features, all aimed at improving retirement readiness. While in the past it
was sufficient to offer employees a straight-forward savings vehicle and trust that they would responsibly
go about making contributions, today’s plan sponsors have seen that the introduction of sophisticated
plan design features such as automatic enrollment, automatic escalation and financial wellness
consultation go a long way towards boosting outcomes for their employees. With healthcare being such
an important factor in quality of life, we see HSAs as one more tool you can wield in improving overall plan
health.
HSAs are designed to assist individuals in paying for healthcare expenses both now and in the future.
Today, a healthy 65-year-old male retiree can expect to pay $144,000 to cover healthcare expenses
during retirement, and many studies show that we can expect health costs to rise at a rate that outpaces
inflation, meaning this number will only grow over time. As HSAs are designed to provide a savings vehicle
dedicated to covering qualified healthcare expenses, their ability to grow contributions tax-free helps
defray the effect of future cost increases.

2. Health Savings are Triple Tax-Free Now and in Retirement

HSAs are unique in that they are designed specifically for healthcare expenses yet act more like an
individual retirement account (IRA). HSAs are the only triple-tax advantaged savings vehicle of its kind.
Participants with an HSA make contributions with pre-tax income, earnings and interest grow tax-free,
and withdrawals are tax-free when used to pay for qualified medical expenses. Once in retirement, HSAs
include no minimum required distributions and no Social Security or Medicare tax on contributions.

3. HSAs Can be Easily Integrated into an Existing Plan

You may be concerned about the administrative burden of incorporating an HSA into an existing plan, but in reality it can be done with little added administrative effort. In fact, it is possible for you to reduce administrative complexities with a single platform for both defined contribution plans and HSAs (as mentioned previously, many major recordkeepers offer their own HSA programs). With one portal that handles enrollment, retirement plan management, financial wellness programs, and HSA management, participants and sponsors can enjoy the added benefits of having these additional features seamlessly incorporated into their existing accounts. To improve the overall implementation of HSAs into a plan, we also encourage plan sponsors to incorporate HSA education into the front end of employee training, alongside other educational efforts for defined contribution plans and healthcare benefits.

4. Health Savings Accounts can Boost Employee Recruiting and Retention

If American workers are as anxious about medical expenses in retirement (and financial wellness in general) as surveys indicate, then a holistic retirement plan offering can be leveraged for marketing to potential new hires. A retirement plan that alleviates an employee’s concerns about the future will help employers retain existing workers and help attract new talent. By integrating an HSA into a robust retirement plan, your company signals that it understands the challenges to retirement preparedness and is ready to offer benefits that do the most to prepare them. The HSA account also rolls over in the same way a retirement account does, even if they choose to change jobs later on, making the benefit to the employee portable.

Conclusion

With the ultimate goal of providing a holistic retirement plan that prepares participants for financial security in retirement, you may want to consider adding HSAs to your plan offering. As a unique vehicle designed to reward savers with triple-tax benefits, HSAs can be seamlessly integrated into existing retirement plans while helping employee recruitment and retention. With healthcare costs continuing to increase with each passing year, HSAs provide a welcome sense of financial preparedness for Americans planning for their retirements

About the Author, Kameron Jones
Kameron provides extensive knowledge of the provider marketplace to help reduce plan-related costs and improve plan-related services. He has assisted hundreds of mid- to large-market 401(k), 403(b), 457(b), 401(a), NQDC, Cash Balance, and DB plans. Kameron was also voted as a National Association of Plan Advisors (NAPA) top advisor under 40. Kameron graduated from the University of Pennsylvania with a Bachelor of Arts in philosophy, political science and economics and played outside linebacker on UPenn’s football team.

Timing Isn’t Everything

Over the course of a summer, it’s not unusual for the stock market to be a topic of conversation at barbeques or other social gatherings.

A neighbor or relative might ask about which investments are good at the moment. The lure of getting in at the right time or avoiding the next downturn may tempt even disciplined, long-term investors. The reality of successfully timing markets, however, isn’t as straightforward as it sounds.

Outguessing the Market is Difficult

Attempting to buy individual stocks or make tactical asset allocation changes at exactly the “right” time presents investors with substantial challenges. First and foremost, markets are fiercely competitive and adept at processing information. During 2018, a daily average of $462.8 billion in equity trading took place around the world.1   The combined effect of all this buying and selling is that available information, from economic data to investor preferences and so on, is quickly incorporated into market prices. Trying to time the market based on an article from this morning’s newspaper or a segment from financial television? It’s likely that information is already reflected in prices by the time an investor can react to it.

Dimensional recently studied the performance of actively managed mutual funds and found that even professional investors have difficulty beating the market: over the last 20 years, 77% of equity funds and 92% of fixed income funds failed to survive and outperform their benchmarks after costs. 2

Further complicating matters, for investors to have a shot at successfully timing the market, they must make the call to buy or sell stocks correctly not just once, but twice. Professor Robert Merton, a Nobel laureate, said it well in a recent interview with Dimensional:

“Timing markets is the dream of everybody. Suppose I could verify that I’m a .700 hitter in calling market turns. That’s pretty good; you’d hire me right away. But to be a good market timer, you’ve got to do it twice. What if the chances of me getting it right were independent each time? They’re not. But if they were, that’s 0.7 times 0.7. That’s less than 50-50. So, market timing is horribly difficult to do.”

Time and the Market

The S&P 500 Index has logged an incredible decade. Should this result impact investors’ allocations to equities? Exhibit 1 suggests that new market highs have not been a harbinger of negative returns to come. The S&P 500 went on to provide positive average annualized returns over one, three, and five years following new market highs.

Exhibit 1Average Annualized Returns After New Market Highs
S&P 500, January 1926–December 2018

Conclusion

Outguessing markets is more difficult than many investors might think. While favorable timing is theoretically possible, there isn’t much evidence that it can be done reliably, even by professional investors. The positive news is that investors don’t need to be able to time markets to have a good investment experience. Over time, capital markets have rewarded investors who have taken a long-term perspective and remained disciplined in the face of short-term noise. By focusing on the things they can control (like having an appropriate asset allocation, diversification, and managing expenses, turnover, and taxes) investors can better position themselves to make the most of what capital markets have to offer.

[1]. In US dollars. Source: Dimensional, using data from Bloomberg LP. Includes primary and secondary exchange trading volume globally for equities. ETFs and funds are excluded. Daily averages were computed by calculating the trading volume of each stock daily as the closing price multiplied by shares traded that day. All such trading volume is summed up and divided by 252 as an approximate number of annual trading days.
[2]. Mutual Fund Landscape 2019.

 

Summer Homework

We know you’re enjoying summer! But how’s your retirement plan doing?

Summer can serve as a preview of your retirement — long days in the sun and spending time with your loved ones. So what better
time to do a routine check-up on your retirement plan? Protect your loved ones and ensure you are keeping up to date with your
retirement plan with our summer homework assignments.

  • Update or Assign Beneficiaries
    Did you experience a major life change this year, such as marriage, divorce, birth or death? Consider updating your
    beneficiaries when you go through a major life change.
  • Review Cyber Security Best Practices
    Retirement plans are a major target for cyber attacks. Retirement plan participants often have weak passwords and can
    unknowingly fall for phishing schemes. Educate yourself on cyber security best practices to ensure you are keeping your
    information and assets safe.
  • Increase Contributions
    Raise your plan contributions once a year by an amount that’s easy to handle, on a date that’s easy to remember —for example,
    2 percent every Fourth of July. Thanks to the power of compounding (the earnings on your earnings), even small, regular
    increases in your plan contributions can make a big difference over time.
  • Revisit Asset Allocation
    Rebalance your portfolio back to the original asset allocation by selling assets that have outperformed and use the proceeds
    to those that have lagged behind. This discipline ensures you adhere to your investment strategy based on your risk
    tolerance and time horizon.
  • Remember Sunscreen!
    Wearing sunscreen reduces your risk of developing skin cancer, it keeps your skin looking younger and protects you from UVB
    rays. What other reasons do you need to wear it?

Four Ways to Increase Employee Retirement Contributions

As a retirement plan sponsor, you want your employees to save the most they can in order to reach their maximum retirement potential. A significant amount of research says that you can improve both employee participation and their saving rates. Here are four ways you can help your employees start building a confident retirement:

Boost employee participation with automatic enrollment. Choosing to automatically enroll all new employees in your retirement plan can dramatically improve your participation rates. According to the Center for Retirement Research (CRR) at Boston College, in one study of automatic enrollment, participation increased by 50 percent, with the largest gains among younger and lower-paid employees.1 While auto enrolled employees are allowed to opt out of the retirement plan, most generally stay enrolled.

Set the initial default contribution rate higher. Many companies who use auto enrollment set their default contribution rate relatively low at 3 percent, according to the CRR, which is lower than the typical employer match rate of 6 percent. Workers who might have contributed more to their savings passively accept the lower default rate, which means they’re sacrificing employer matching funds along with saving less of their own pay.

Adopt auto escalation. Plans that use auto escalation automatically increase their participants’ contribution rate every year, typically by 1 percent. Over time, that can significantly improve savings rates among workers. The CRR cites a 2013 study of Danish workers where the majority of workers who experienced automatic increases simply accepted them, and savings rates dramatically increased.

Automate investment decisions with target date investment products. Investing is complicated, and many employees don’t want to take the time to learn how to manage their portfolios. Target date strategies automatically adjust an employee’s investment allocations over time, shifting them to a more conservative asset mix as the target date (typically retirement) approaches. The ease of use of target date funds means their popularity is increasing. The CRR notes that in 2014, nearly 20 percent of all 401(k) assets were in target date funds, and about half of plan participants used target date funds.2

      1http://crr.bc.edu/wp-content/uploads/2016/08/IB_16-15.pdf
      2http://crr.bc.edu/wp-content/uploads/2017/01/IB_17-2.pdf
About the Author, Michael Viljak
Michael joined RPAG in 2002 and has over 30 years of experience in the retirement plan industry, on both the wholesale and retail levels, focusing on retirement plans ever since their inception in 1981. Michael has an interest in fiduciary-related topics and was part of the team that created RPAG’s proprietary Fiduciary Fitness Program. He also authors many of the firm’s newsletter articles, communication pieces and training modules.

Fear Nothing but Fear Itself

The famous old saying goes we have nothing to fear but fear itself.  However, today, it seems we have nothing to talk about but fear.

Statements on the current outlook for the economy and financial markets are filled with fear – “Trade War,” “Brexit Collapse,” or “Fed Failure.” Meanwhile despite these depressing headlines, the economy continues its upward trajectory. Progress is achieved in the face of fear.

The three main indicators of the macro economy – income, prices, and employment – are all showing continued gains. The nation’s income, or real gross domestic product (real GDP) rose 2.2% in the most recent quarterly report.[1] While this rate of growth is lower than the previous quarter, it is still healthy growth; well above the average growth rate over the past decade of 1.7% percent.

The price level in the overall economy is currently rising at an annual rate that policy makers of the 70s and 80s would have killed for. The Consumer Price Index (CPI) rose at annual rate of 1.9% in the most recent monthly report, better than the 2% rate the Federal Reserve has said is consistent with a healthy economy.[2]

Meanwhile, the US labor market is strong. The national unemployment rate, at 3.8%, is below what many economists consider normal.[3] Better yet, the number of job openings exceeds the number of unemployed workers.[4]

All this begs the question: What is there to be afraid of?

Economic theory and historical experience suggest there are at least two unresolved policy issues that could derail the positive economic environment; government debt and slowing international trade.

The US continues to have a relatively large amount of debt, and other major governments around the world continue to add to their outstanding debt.

Total federal government debt in the United States as percentage of GDP is at 104 %, compared to only 65% before the 2008 financial crisis.[1] In Europe, this number has risen from 60% to 92%, and in Japan it stands at 195%.[2]

Recently, a small group of economists have put forth arguments for why we should not care about the level of government debt in the United States. The so-called Modern Monetary Theory (MMT) claims those governments that borrow on their own currency can take on as much debt as they wish while inflation is low.

This group has a point, but it’s no free lunch. Classical economist David Ricardo (1772 – 1823) showed that government debt is just another form of taxation. When the public recognize taxes will be raised in the future in order to make payments of principal and interest on this debt, the current debt financing is equivalent to a tax.  That is, there is no real difference if the government taxes its citizens or borrows to finance current spending.

Therefore, it seems what the MMT proponents are arguing for is just another tax. An increase in government debt will affect the economy like any other tax. If governments continue to run budget deficits and borrow more, the economy will slow, just as it would with any new tax.

The second fearful factor is slowing trade.

In January the International Monetary Fund (IMF) cut its 2019 forecast for world economic output from 3.7% to  3.5%. This month the IMF cut it again to only 3.3%.[3] Both times the IMF analysts cited ongoing disputes over cross-border trade policy.

One of the most basic principles of economics is that trade makes everyone better off because it allows people to specialize in those activities in which they have advantages, both in skill and costs. Unfortunately, politicians often think about international trade as a contest – we must be losing if our imports exceed our exports. But the opposite is true: we benefit from trade because it allows for specialization.

These politicians want to manage trade, not open it or free it up. Not surprisingly, such a desire to control trade leads to “disputes”. While government officials are negotiating “deals”, business owners and managers hold back, waiting to see what happens. This uncertainty leads to slower growth.

More than a decade ago member governments of the World Trade Organization (WTO) launched negotiations for lower trade barriers around the globe, but nothing significant has been achieved.[1] Instead, the US and other governments have been negotiating regional trade pacts. Such agreements aren’t as beneficial as a global deal that would increase cross-border trade and help raise growth rates everywhere.

Perhaps all the “fear” talk is warranted. While the questions of government debt and trade policy remain unanswered, investors have reason to believe the economy will slow.

Corporate profits will decline in a slowing economy, but interest rates remain historically low. This means that while prices may not rise this year as much as they did last year, stocks are still a better way to protect purchasing power than bonds.

If we stay invested in stocks for the long run, we should fear nothing else – but fear itself.

Peter R. Crabb, Ph.D.

Professor of Finance and Economics

Department of Business and Economics

School of Business

Northwest Nazarene University

[email protected]

 

Dr. Crabb holds a Ph.D. in Economics from the University of Oregon and an MBA in Finance from the University of Colorado.  His research in economics and finance is published in the Journal of Business, the Journal of Microfinance, and the International Review of Economics and Finance, among others.  Dr. Crabb lives with his wife, Ann, and their four children in Canyon County, Idaho.  Dr. Crabb’s regular Financial Economics column is published by the Idaho Statesman. Previous work experience includes international trade, banking, and investments.

1 https://fred.stlouisfed.org/series/A191RL1Q225SBEA
2 https://fred.stlouisfed.org/series/CPIAUCSL
3 https://fred.stlouisfed.org/series/UNRATE
4 https://fred.stlouisfed.org/series/JTSJOL
5 https://fred.stlouisfed.org/series/GFDEGDQ188S
6 https://fred.stlouisfed.org/series/DEBTTLJPA188A, https://fred.stlouisfed.org/series/GCDODTOTLGDZSEMU
7 https://www.imf.org/en/Publications/WEO/Issues/2019/03/28/world-economic-outlook-april-2019
8 https://www.wto.org/