Tags: calpers | pension | plan | investment | returns

Savers Need to Heed Retirement Warning Sign from Calpers

Image: Savers Need to Heed Retirement Warning Sign from Calpers
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By    |   Wednesday, 03 January 2018 09:48 AM

Riddle me this, Batman!

If you stretch your memory, you may remember this phrase used by Batman’s nemesis on the iconic TV show. He would say “Riddle me this, Batman” before sharing one of his diabolical riddles.

These days, it’s a phrase more aptly used as a challenge to someone to provide an answer to a question that has no apparent answer.

So, riddle me this, readers…

What do YOU (as private investors) and the largest pension plan in the United States (Calpers) have in common? It’s not a trick question; I promise there is a similarity and you’re not going to like it.

Calpers - or the California Public Employees' Retirement System - is arguably the largest pension plan in the country. It’s an agency in the California executive branch that manages pension and health benefits for more than 1.6 million California public employees, retirees, and their families.

Calpers has a giant responsibility with all the promises they make to school teachers, fire fighters, police and other state employees that if their people work a certain number of years they will receive a monthly pension check for the rest of their lives.

In a stunning development, last December (2016) the Wall Street Journal reported the following:

California Public Employees’ Retirement System plans to propose that their board abandon a long-held goal of achieving a 7.5% (annual rate of return) and reduce (that number) to 7.25% or 7%, to start aligning its rate of return expectations with reality.

A reduction in Calpers’ return target to 7% or 7.25% would have real-life consequences for taxpayers and cities. It would likely trigger a painful increase in yearly pension bills for the towns, counties and school districts that participate in California’s state pension plan. Any loss in expected investment earnings must be made up with significantly higher annual contributions from public employers as well as the state.

If the assumed rate of return fell to 7%, the state and school districts participating in Calpers would have to pay at least $15 billion more over the next 20 years, said spokeswoman Amy Morgan. That number doesn’t include cities and local agencies.”

Here’s what this means and it’s not good for any of us. Calpers has the best and brightest minds managing their money. Resources beyond the reach of most ordinary investors. Despite their immense intellectual and institutional firepower, they’re still being forced to reduce expected future returns.

The ripple effect through California will be brutal. There will be ramifications from the Redwoods to San Diego as municipalities are forced to kick more into the kitty because they don’t earn enough return on their money and they have made promises to so many.

And if Calpers can’t generate higher returns with all their sophistication, what does that mean for the rest of us?

It’s not good!

Here’s what Calpers announcement means for you and the answer to the riddle of what you could possibly have in common with a giant pension plan.

There are two ways for normal investors (and pension plans) to reach their financial goals. 1) to earn a higher investment rate of return or 2) to save more money each year.

Can you see where this is going?

For investors, the first option (entering higher rates of return into an online retirement calculator) is easier to fathom than the second. Saving more simply isn’t palatable to mere mortals (or municipalities). On the other hand, thinking you can squeeze a few extra points of investment return each year is much easier to digest, but much harder to achieve.

From my friends at RealInvestmentAdvice.com.

You cannot INVEST your way to your retirement goal. As the last decade should have taught you by now, the stock market is not a “get wealthy for retirement” scheme. You cannot continue to under save for your retirement hoping the stock market will make up the difference. This the same trap that pension funds across this country have fallen into and are now paying the price for.

So, that’s what you and many pension funds have in common. Neither of you is probably saving enough, both of you need to sock more away on a yearly basis because nobody, and I mean nobody wants the third option…

…Having less money in the end.

Darryl Rosen, founder of the Rose Advisory Group, is a financial advisor, CPA, educator, and author of eight books, including The Race of Your Life: How to Reach Retirement with Cash in the Bank and Fuel in the Tank! He also is a Retirement Income Certified Professional (RICP), focusing not only on the accumulation of assets, but also in helping clients best manage those assets in retirement to avoid running out of money.

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Calpers has the best and brightest minds managing their money. Resources beyond the reach of most ordinary investors. Despite their immense intellectual and institutional firepower, they’re still being forced to reduce expected future returns.
calpers, pension, plan, investment, returns
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2018-48-03
Wednesday, 03 January 2018 09:48 AM
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