Assuming Social Security

Posted September 2, 2010 by Klein Decisions
Categories: Retirement Strategy Ideas
Tags: , , , , ,

On December 1 of this year, the White House-appointed National Commission on Fiscal Responsibility will deliver to the Administration a set of recommendations, or endorsements, that will be aimed at addressing the nation’s long term fiscal problems—made up in no small part by the projected instability of Social Security during the next 15-20 years.

Currently Social Security is actually over funded and is being used to cover other government programs in deficit. But that will change in 2014, according to Social Security officials, when the program will pay out more in benefits than it collects in taxes. Commission recommendations are likely to run the familiar gamut from decreasing benefit payouts in some way to raising taxes so as to sustain current payout and retirement dates as they are now. Likely a combination of the two will emerge as realistic approaches for the Administration to consider.

A July 8, 2010 Retire Well post discussed the only-slight impact in a strategy suggestion of excluding expected Social Security calculations from an individual’s retirement expectations. But it didn’t suggest that Social Security should in any way not be included. It should.

And its inclusion in a suggested retirement strategy needs to be dynamic and adjust itself  “real-time” according to an individual’s desire to work deeper into his or her retirement years, or not. For example, if a Social Security future values calculation is determined based on the normal retirement age (these vary, by year of birth), then it needs to be adjusted up or down depending on that person’s inclination to retire early or later.

Note the following example, using an individual whose current age is 55.

Retirement Date Age Percent of  Social Security at Normal Retirement Age (66-67)
12/01/2017 62-earliest possible 81%
12/01/2019 64 94%
12/01/2021 67 109%
12/01/2027 73 132%*

* Delayed Social Security credits extend only 48 months beyond normal retirement age.

Between the earliest dates this individual can begin to receive benefits, and the latest date for which delayed credits are accrued (48 months) a 51 percentage point variance exists. And a retirement solutions tool, for it to have any validity, must incorporate these varying percentages in delivering a retirement strategy that will, if adopted, give someone enough money to live on through all of his or her retirement years. Klein Decisions K4 Plan Goals does just that.

Take another example.

Using a Klein Decisions K4 Plan Goals analysis where the individual is a male, age 48, and success is defined as having enough money to last through all of retirement:

Retirement Age: Most Important Least Important
% Chance of Success 75% 85%
Savings Rate 3% to 7% 3% to 4%
Retirement Age 67 70
Income Replacement % 84% 90%
Risk in “Bad” Market* (s) 13% vs. (c) 15% (s) 8% vs. (c) 15%

* By age and portfolio, defined as how much of account balance the individual is willing to risk in a poor market year. A poor year is calculated to occur 2% of the time, or a one in fifty chance each year that market performance will affect the balance by the maximum exposure percentage, in this case 15% for each current (c)versus suggested (s) scenario.

The most telling fact here is that the individual who is willing to work longer will have a distinctly better chance of success. Those “extra” three years of income and deferrals make a significant difference.

But also here, calculated in real time as the user weights priorities from least to most important, the Social Security credit is factored in to the final result and explains in part why a large increase in salary deferral is not necessary.  Where retirement age is most important, deferrals must more than double in order to retire at age 67, not 62, or the presumed ideal retirement age for this retirement plan participant.

That is the value of Klein Decisions K4 Plan Goals: it includes all of the important components, and none that are irrelevant, when delivering a retirement strategy:

  • Savings Rate;
  • Investment Risk;
  • Retirement Age; and
  • Retirement Income Replacement;

Klein Decisions K4 Plan Goals also “self-adjusts” as the online experience is underway and the individual is making trade-off choices—in other words, it is a solution, not a rote calculation.

Comments: Be the first to comment

Success and Satisfaction

Posted August 23, 2010 by Klein Decisions
Categories: Uncategorized
Tags: , , , , , , ,

In a very distinct way, Klein Decisions K4 Plan Goals (PG) uses two concepts to create a retirement strategy for individuals in employer sponsored retirement plans. Success and satisfaction, when viewed together, will reveal, often dramatically, what savings and investment changes are needed to achieve the best possible retirement.

In other words, a successful retirement. Most of us know what successful means, and as with most concepts its meaning changes or is altered depending on context. PG uses a simple yet sensible and completely appropriate definition: a successful retirement is one where you’ll have enough money to live on until the day you pass away. How much money you may have remaining, after death, is not relevant. (Your heirs may not share this view, however).

It’s not relevant because for most of us retirement means that we no longer work full time and do not depend on a full time job for income. Whether we have, or choose to have, a part time job is not important. We want to plan for a successful retirement. And since the whole concept of retirement planning is difficult, mostly beyond our capacities, and calls for time and knowledge we do not have—because of these we need definitions of important terms to be as simple and as understandable as possible.

So PG will give you an asset allocation strategy to get you to a 75% chance of a successful retirement; or an 80% or 85%. How the percentage is established is a function of what the plan desires, working in conjunction with the various service and support tools available to it. For most future retirees, a 75% chance of having a successful retirement would offer reassurance and comfort. The value of such an assessment is understanding what success means—that the money won’t run out.

The same is true when it comes to satisfaction. For PG, satisfaction means getting an individual as close as possible to his or her ideal preference among these four retirement variables: savings rate, investment portfolio, retirement age, and retirement income.

If PG does not know anything about a participant’s preferences, it equally weights the factors above—and that is a very legitimate way to construct a strategy. But PG also offers participants, on their own, the ability to reweight these variables. If my reweighting results in a preferential order as follows, from most to least—income, risk, savings, retirement age—then I will have created my own distinct strategy. If I’m honest then I’ll be satisfied with the resulting suggested strategy; after all, it’s mine; I constructed it.

I am satisfied with my new strategy and am much more likely to implement it. If I took the time to reweight these very important variables then I’m very likely to take the last step and implement the solution.

Reaching or exceeding a minimum level of success while creating as much satisfaction with the strategy as possible—these are what separate PG from other one dimensional retirement tools. Success: I’ll have enough money to live on throughout my entire retirement. Satisfaction: I’ve developed a strategy that I’m happy with or that suits me as best as possible.

That’s what Klein Decisions K4 Plan Goals delivers.

Comments: Be the first to comment

Distribution Decisions

Posted July 29, 2010 by Klein Decisions
Categories: Uncategorized
Tags: , , , , , , ,

Planning for retirement focuses predominantly on the accumulation phase, that portion of time each of us with a retirement account spends managing it (or not) depending on our levels of interest, concern, and knowledge. We don’t have a lifetime to make these decisions, but we do typically have a much longer accumulation stage than we do in a payout status—that is, when we are retired and receiving benefits.

This is not a revelation, but with the consistent decrease in defined-benefit plans over the last 20 or so years, the investment burden—accumulation decisions—has fallen on each of us. And we handle those decisions with the resources available to us.

When it comes retirement time, we have several important decisions to make—chiefly, how do we receive our benefits or, more broadly, how do we convert our accumulated dollars to “income.”

Payout annuities are currently a retirement industry hot topic. Providers are growing—each trying to get shelf space, so to speak—and the sponsor and consultant communities are trying to determine whether or to what extent to offer them. Do you insert them into your accumulation options so you have an investment vehicle that possesses some of the characteristics of a defined benefit plan; or do you make them available at retirement as a lump-sum or partial sum option? What’s happening in essence is that the retirement industry—meaning those who sell, service, consult, or offer retirement plans—is trying to “figure out” distribution annuities as an organic part of the overall self-directed retirement plan.

These are not new discussions, but their intensity began to pick up after the market disaster in 2008. If your retirement date coincided with the equity collapse, then you were in deep trouble (you still are, actually) and, the argument goes, if some of your accumulation assets were in guaranteed payout annuities then you would be significantly better off, and that is true.

At least three varieties of payout annuities exist. A “traditional” annuity is available for purchase at retirement; it will distribute benefits according to the option you choose, and those are often numerous and confusing—thus the need for a set of decision making analytics that actually mimic the way individuals make all sorts of  life decisions (see below). Then there is the concept of  “laddering” annuities, where annuities are selected to payout in a given period, usually short-term, and then another terminal annuity follows it. Finally, target funds are constructed (very much in their infancy) where a nexus with an annuity exists; in theory, a participant benefits from the upside growth, if any, in the target fund, but also has a guaranteed “high-water-mark” payout should the fund’s value drop. There is no shortage of available options.

Which gets to a behavioral finance question, which has been around for a long time: do you cede “control” of  your retirement accumulations to an annuity that will provide for specific payouts at defined times, or do you take a lump sum so that you can establish—presumably with some sort of outside help—your own, unique payout. It wasn’t so many years ago that it was axiomatic that you should “always” take a lump sum.

Other than market performance, why the sudden shift in thinking? According to Alessandro Previteroy, UCLA Anderson School of Management, market performance is the only reason, or the only significant one. In a paper (May 2010) titled “Stock Market Returns and Annuitization,” Previteroy documents what he calls “a strong negative relationship between stock market returns and annuitization.” He further concludes that “positive stock market returns decrease the likelihood of employees choosing an annuity over a lump sum, and vice versa. More precisely, only recent market performance drives annuitization with almost no weight assigned to returns two years before the decision date.”

Last, quantitatively, Previteroy states that, in his study of 103,000 retirees, “an increase of one standard deviation in the average stock market return decreases the likelihood to annuitize by about 6 percentage points.”

Using Previteroy’s two-year conclusion, the market wreckage of 2008 may be on the wane as a factor in anyone deciding whether to annuitize or not. If you accept Previteroy’s findings—and intuitively they make sense—then payout annuities, whether rooted in a plan or as a prominent option at distribution, may be more a trend rather than a consistent necessity that requires so much attention

Either way, what is still driving the payout choice is what all of us do during accumulation—it’s the decisions we are making now, with our money, as we move headlong toward retirement.

K4 Plan Goals is accumulation focused. But just as with the market in general, it is “taking up” the payout decisions in anticipation of new products and new plan configurations.  Among all of its other attributes, K4 Plan Goals will always look at, and consider, how individuals make decisions, and at the best “environment” for making those decisions.

Accumulation or payout: K4 Plan Goals possesses the utility to help individuals make the best, most personalized decisions possible.

Comments: Be the first to comment

The Long Run

Posted July 23, 2010 by Klein Decisions
Categories: Uncategorized
Tags: , , , , , , , ,

“But this ‘long run’ is a misleading guide to current affairs. In the long run we are all dead.”

Keynes’ quote has been often repeated to illustrate any number of points, chiefly that waiting out an experience, or not taking action in the moment, is harmful because the action or event will happen no matter when we address it, so why not now? Keynes is talking about the eventuality of virtually all economic “events.” These are large cyclical movements and changes that can—and it is apparent Keynes thought should—be influenced by government policy—or intervention, depending on your politics.

It might help us if we superimposed Keynes’ belief on our actions. That’s because, on a less grandiose scale, most of us think about our lives and the daily situations and problems we encounter as something we’ll tend to when “the time comes.” Not today or tomorrow, but when the time comes. Of course another word we use to describe that is procrastination.

How do we think about a years-off event, like retirement, when we have bills to pay and things we want to buy—now?

I know I have a tiny leak in my bathroom plumbing—so tiny, in fact, that I can put a paper cup under it and it takes weeks to fill up. The leak is tiny now so fixing it is relatively easy and inexpensive; easier still is to let it go.

All of a sudden, seemingly, the time comes and the small fissure grows to a much larger opening and water is pouring out of the pipe and we can’t stop it without calling the plumber. We waited too long and now we have to pay for it, literally.

If this kind of thinking is consistently true, how do any of us ever get around to planning for retirement—at least those of us who are under fifty? Retirement seems as though it is simply a theoretical concept. It’s not real. It’s too far in the distance. It falls outside of the “live for the moment” ethos, the I’ll-tend-to-it-when-the-time-comes-philosophy we live by.

Something needs to initiate retirement planning, especially at the earlier ages. Whatever it is needs to be consistent and compelling. Advisors can and do help in a major way. Plan sponsors, many of them, are engaged in any number of ways to help jump start the retirement planning activity.

Klein Decisions K4 Plan Goals is a retirement solutions tool. It is designed to motivate and compel retirement plan participants to take action, to begin their retirement planning—and not just begin it, but annually re-engage with it.

It’s true that the Klein online solution is elegant and simple and can produce results without the user having to input any data. The user can add data but only is required to make a decision between what is more important around these variables: salary deferral, portfolio, retirement age and retirement income. It is a robust and necessary tool.

What enhances the online tool is not its particular features, but what precedes the use, if at all, of the tool itself: an annual paper-based On Track report. It’s not a GAP report: those mostly tell us how much we’re going to suffer in retirement and so we truly disengage.

K4 Plan Goals shows participants their chances of retirement success and goes the extra step of providing a recommended strategy. It’s just paper. It’s just graphs and numbers, although extremely clear and easy to follow. But it is the paper part of K4 Plan Goals that really causes all the other acts to follow.

It is important that participants engage in their retirement plans. But before you can make the proverbial horse drink the water, you have to get the horse to the trough. The On Track report, if delivered consistently, will cause participants to take action.

The On Track report is anathema to the long run. Its aim is to compel action now, today, on something that will, in the long run, be staring us down from a very close perspective.

In the long run we’ll all be retired, so let’s act now to deal with how that retirement will look.

Comments: Be the first to comment

Fifteen Percent of What?

Posted July 16, 2010 by Klein Decisions
Categories: Uncategorized
Tags: , , , ,

Despite what Mark Twain said about statistics, numbers don’t lie. They can be manipulated; they can be chosen selectively; they can, often, be used to support or refute the same argument. But no matter the context, or how we cast them, numbers are numbers: they really don’t lie, and 6 will always be 6.

The glue, so to speak, that holds numbers together is that we use percentages to compare them. Ten percent of $2,000 is less than ten percent of $22,000. On a percentage basis, though, they are equal. That’s not so difficult to compute in our heads, but what’s 18% of $162,000?

Much of the news we consume daily, especially when it is business related, is expressed in percentages. There is the cost of living percentage, the annual rate of the increase or decrease in gross domestic output, the trade deficit. Then there is the non-economic news: changes in crime rate year over year, the percent chance of rain today. By the way, and this is the point here, what really is the difference between a 25% chance of rain or a 15% chance? Fifteen percent of what?

To the point above—about the ways in which numbers can be “adjusted” and the fact that our news is chock full of percentages—take, for example, the following quote from InflationData.com.

“Our Inflation data [reference to chart at end of text] is calculated to two decimal places while the government only calculates to one decimal place. Therefore, while being based on the government’s index our data provides a “finer” view.  January and February 2005 is a perfect example, according to the government statistics both months had an inflation rate of 3%. In January however, our data shows it as 2.97% and February shows as 3.01%. Therefore instead of the inflation rate being ‘flat’ it is actually rising slightly. In another example we see August 2003 and September with the Government saying the rates were 2.2% and 2.3% respectively. This would lead us to believe that inflation rose .1% during that period.  In actuality however, it rose from 2.16% to 2.32% or a .16% increase, substantially more than .1%!”

This is nearly as granular as anyone would wish. But what does it mean? Unless it’s your job to work and “run” the numbers, your job to create and define data, then what does it mean?

The closer the numbers and percentages get to our daily lives the more relevant they become—the more we need to understand the numbers.  I need to know what exactly is 18% of $162,000. Sure, I can reach for my calculator, but if I’m in the middle of a protracted exercise, or I’m not fully present, I want someone to tell me that number, especially if I’m engaged in something as crucial as retirement planning.

In many, if not most, cases when I engage in any form of retirement planning inevitably I will run into numbers and, mostly, percentages—I will need to save X percent of my pay in order to receive Y percent replacement income in retirement.

If I am engaged in retirement planning—if I have various tools and calculators in front of me—I’m going to be “asked” to think in terms of percentages. A great example: how much of your retirement accumulation could you afford to lose in a year in a bad (however defined) market? Would that be 10 percent, 12 percent, 20? Most of us don’t know how to answer that question because most tools being used do not take that one small, but extremely valuable, step of converting the percentage to a dollar amount. If I have a $50,000 dollar retirement account and I’m being asked if I can stand to lose 13% or a $6,500 dollar worth of loss in a bad year, well, I can understand that. Maybe I can live with it.

If my account balance is $522,000 and I run a 13% or $80, 860 dollar risk of loss I can most definitely understand that. Which is why the retirement planning and guidance tools we use must go the extra mile and convert percentages into numbers, where possible, that have meaning for us. In this case, the percentage risk didn’t change, but the real number did and it clearly has meaning, and maybe I can live with that, too, or not.

The numbers don’t lie: that’s why we need someone, some tool, to tell us what they are.

That’s why we need K4 Plan Goals.

Comments: Be the first to comment

« Older Entries