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Cypen & Cypen
February 4, 2016

Stephen H. Cypen, Esq., Editor

1. MUNNELL TESTIFIES BEFORE SENATE FINANCE COMMITTEE: Alicia H. Munnell, Center for Retirement Research at Boston College, recently testified before the U.S. Senate Finance Committee on “Helping Americans Prepare for Retirement: Increasing Access, Participation and Coverage in Retirement Savings Plans.” In her statement, entitled Expanding Retirement Saving, Dr. Munnell emphasized the importance of “The Savings & Investment Bipartisan Tax Working Group Report.” She emphasized the importance of the Working Group’s recommendations to broaden coverage, encourage retirement saving by lower paid workers. Munnell also argues we are facing an enormous retirement income challenge, and, therefore need even bolder changes. Her testimony proceeded as follows.  The first section describes the retirement landscape, where more than half of working age households are at risk of inadequate retirement income. The second section discusses the extent to which the Working Group’s proposals, which focus on the coverage gap and contributions by lower paid workers would ameliorate the situation. The third section recommends some broader solutions: 1) make 401(k) plans automatic and reduce leakage; and 2) enact national auto-IRA legislation. The final section concludes that the Senate Finance Committee could make an enormous contribution to heading off the coming crisis. Briefly, the Center for Retirement Research at Boston College has developed a National Retirement Risk Index (NRRI), which relies on data from the Federal Reserve’s Survey of Consumer Finances. The NRRI compares projected replacement rates for working households ages 30-59 to target replacement rates that permit them to enjoy the same consumption in each period before and after retirement.  The Index measures the percentage of all households that fall more than 10% below target. The most recent NRRI results show that about half of all households are at risk, up from about 30% in 1983. So the problem is widespread and is getting worse over time. Why do we have such a serious retirement income problem today when recent generations have retired in relative comfort? The reason is that baby boomers and those who follow, will face a much different retirement landscape than their parents. The problem is twofold: 1) households will need more retirement income; and 2) they will receive less support from the traditional sources of Social Security and employer sponsored plans.  And today, as in the past, half of private sector workers do not participate in any type of retirement plan at a given point in time. It ain’t gonna be pretty.  

2. BE HONEST -- ARE YOU SAVING ENOUGH FOR RETIREMENT?: The linked ninety second video entitled “Be honest: Are you saving enough for retirement?” is a friendly reminder of the options available to those retired or planning to retire in the near future. Click here to watch:

3. MOODY’S INVESTORS SERVICE AGAIN WARNS THAT NEW JERSEY COURT RULINGS COULD BURDEN RETIREMENT SYSTEM WITH NEW PENSION LIABILITIES: Recently reported that Moody's released a report on the extraordinary decisions and challenges facing the Garden State. Moody’s estimates that the public pension system's $55 billion unfunded liability ($113 billion if measured under different accounting standards) would increase by a third if state and local governments are forced to restore retirees' cost-of-living increases. About $40 billion of the $55 billion (or $80.5 billion of $113 billion) in pension debt belongs to the state, which pays retirement benefits for state workers, teachers and some law enforcement. A group of state workers sued the state, arguing a 2011 pension law struck to shore up the system, in part, by freezing their benefits until it is in better shape, violated their rights to their benefits. That change cut the state's liability by $17.5 billion in 2009. The state portion of the unfunded liability would increase from $40 billion to about $53 billion, and the system would fall from 51% funded to 44%, if the court strikes the freeze down (see C & C Newsletter for June 11, 2015, Item 1 and C & C Newsletter for June 25, 2015, Item 2). The heightened burden, combined with an increase in benefit costs, would hurt the state’s pension fund cash flows, funded status and state's ability to reach structural budget balance. If the state paid the full actuarial required contribution each year, which it does not, instead of $4.4 billion this year, it would owe $5.7 billion. And if the new costs were folded into the governor's current commitment to increase contributions into the system by one-tenth of the amount recommended by actuaries each year, the state would owe $2.3 billion next year, $1 billion more than it is kicking in this year. Then, the state's pension funds, two of which are estimated to go broke by 2027, will do so sooner.

4.  NINE INVESTING STATS THAT WILL BLOW YOU AWAY: And they have nothing to do with hurricanes. The Motley Fool says sometimes it just takes a number or two to deliver a life changing realization. Here are nine sets of investing numbers and statistics that could make a big impression on you:

  • You may be more prepared for retirement than you think.Say, you have only $75,000 socked away for retirement, and you are already 45. You have a lot more saving and investing to do in order to build a comfortable retirement. But, you are still above average. Fifty-three percent of American workers have saved less than $25,000 for retirement (excluding the value of their home), and 35% have less than $1,000 saved. We join with The Motley Fool and saying a hardy “yikes.” 
  • You can probably amass much more money than you think.If you have 30 years until retirement and you can sock away $8,000 per year that grows by an annual average of 8%, you can accumulate close to $1 million. You have only 20 years until retirement and can sock away $10,000 a year growing at 8% annually, you will end up with close to $500,000. 
  • It is kind of easy to outperform most managed stock mutual funds. An inexpensive, broad market index fund is likely to outperform most managed stock mutual funds. For example, the S&P 500 outperformed about 80% of large cap stock funds over the decade concluding at the end of June, 2015. 
  • Dividends can turbocharge your investing. A study of Russell 3000 companies dating back to 1992 found dividend payers returned about four percentage points more per year, than the average non-payers, when weighted equally. Between 1927 and the end of 2012, reinvested dividend income made up 42% of large cap returns, 36% of mid cap returns and 31% of small cap stock returns. 
  • Day trading or excessively active trading can wreck your returns. The most active traders reaped the lowest returns. Indeed, between 1992 and 2006, 80% of active traders lost money, and only 1% of them could be called predictably profitable. 
  • Inflation can cut your purchasing power in half. Over the long haul, inflation has averaged about 3% annually. That number may not seem bad, but over 20 years it is enough to give $100,000 the purchasing power of just $54,000. 
  • Do not count on your home as an investment. Think of your home as a comfortable place to live, but not necessarily a great investment. A Nobel-prize-winning economist’s data suggest that housing prices have grown at a compound annual rate of just 0.3% over the past century (inflation-adjusted), while S&P 500 has averaged roughly 6.5%. 
  • Stocks rose 1,100-fold over the last 70 years. Over the last 70 years, the S&P 500 advanced 1,100-fold, which is enough to turn a single modest $1,000 investment into more than a million dollars. Consider that statement in light of the many double-digit market crashes, recessions, and even the Great Depression. The lesson: over the long haul, stock markets tend to rise, not just in a straight line. 
  • You can slash your tax rate nearly in half by being a long-term investor. The capital gains rate on short term investments (those held a year or less) is the same as your income tax, which is 25% for most people and 28% for higher earners. On long-term capital gains, though (from assets held for more than a year), most people will face a tax hit of just 15%.

Put these statistics together, and the conclusion is clear. Have a retirement plan where you save diligently and invest effectively, perhaps in index funds, dividend paying stocks, or both. Beware the erosive power of inflation and steer clear of day trading. Enjoy your house, but do not plan on it making you rich, and be tax smart by aiming to invest for the long term. Not so foolish.

5. THANK YOU, GASB:  School districts in California have begun reporting their pension debt. Elk Grove Unified, the state’s fifth largest school district, listed a pension debt of $414.6 million using GASB 68 criteria. So, what is the big deal? The big deal is that the year before, Elk Grove had ZERO pension debt! Thank you, GASB.

6. PLAN LEAKAGE: A STUDY ON THE PSYCHOLOGY BEHIND LEAKAGE OF RETIREMENT PLAN ASSETS: In the excitement of landing a new job, many workers do not take the time to consider what they should do with the defined contribution retirement plan savings they accumulated at their last job according to a research brief by Defined Contribution Institutional Investment Association. Ideally, those savings should stay in the retirement savings system and move with the employee to their new employer’s plan or remain in the prior employer’s plan. Unfortunately, many workers liquidate or “cash out” their DC accounts, unwittingly compromising their ability to create an adequate income in retirement. Other workers in the midst of a job transition decide to move their retirement assets to the new employer’s plan, and, without assistance from their new employer, find the process confusing and difficult. According to a study by the Federal Reserve Board, $0.40 of every dollar contributed to the DC accounts of savers under age 55 eventually “leaks” out of the retirement system before retirement. This phenomenon, often referred to as plan leakage, has a disproportionate incidence in those workers least prepared for retirement: of those who cashed out their DC retirement accounts upon a change in employment, 41% had less than $25,000 in household retirement savings. A recent survey of 5,000 retirement plan participants sheds light on leakage patterns, as well as on the thought process of job changers who are confronted with the challenge of “rolling in” retirement savings from a former employer. A noticeable percentage of survey respondents cashed out savings at least once, with younger generations more likely to do so. Specifically, almost one fourth of Baby Boomers “cashed out” retirement savings at least once when changing jobs, while one third of Millennials and GenXers did so. About 75% of the cash outs involved accounts with assets of less than $20,000, suggesting that small amounts of savings might be considered not worth the effort required to roll over these assets to the new employer’s DC plan. A worrisome trend is that Millennials are increasingly using cash outs for non-emergency spending. Forty-two percent of Millennials reported spending retirement plan cash outs on non-emergency items such as weddings and cars, while less than 25% of GenXer respondents used the cash out for such non-emergency purposes. Cash outs occur at all income levels. Even among the highest income level (those earning over $150,000 annually), 33% reported they have cashed out at least one account during their career. However, cash outs occur more frequently among those with lower wealth levels. More than 40% of workers with a modest level of wealth (defined as those with less than $25,000 in household retirement savings) cashed out at least once in their working lifetime compared to only 23% of workers with more than $150,000 in retirement savings. Millennials differ from older generations in their feelings towards cash outs. Of those Millennials that cashed out, only 36% reported regret for this decision, while almost half of the older generations reported so. One could surmise this may be because Millennials are too far away from retirement to see how this decision could impact their financial future. Approximately half of survey respondents reported leaving their retirement assets in their former employer’s plan, a finding consistent across generational groups. Only about 20% of all generations expressed a well-thought-out reason for leaving their money in the previous employer plan, such as preferring the prior plan’s investment menu or customer service. On the other hand, barriers such as not knowing how to roll over assets, not having time to do so, or not prioritizing the issue were each mentioned by about 20% of all generations as reasons for not moving retirement assets to their new employer’s plan. This suggests that there is an opportunity for employers to educate new and existing employees about the ability to consolidate prior retirement plan assets into their new plan in an effort to enhance their retirement preparedness. When asked about their intentions for their current retirement plan, 20% of Millennials reported a plan to cash them out before retirement, while only 7% of the Baby Boomer respondents reported such a plan. The results from this survey confirm that plan leakage remains an issue that ultimately is undermining the critical public policy goal of preserving assets for retirement savings. In investigating the phenomenon by generational groups, participants’ perceptions of the rollover process, and the reasons for the resulting decision-making, Millennials are reported to be at higher risk for leakage than the older generations. In addition, the majority of Millennials do not regret their decision to cash out. Lastly, according to the survey responses, obstacles such as the length and complexity of the roll-over process are barriers to the rollover decision. Further, responses suggest that eliminating the barriers present in the roll-over process would be a viable solution to plugging the leak from retirement plans.

7. WHY RETIREES NEED TO STOP WRITING CHECKS TO CHARITIES: Retirees are now allowed to make a charitable donation by transferring money directly to a qualified nonprofit organization from their IRAs under the Consolidated Appropriations Act of 2016, according to Forbes (via The donations will be counted toward their required minimum distributions for the year, and the withdrawals will be deducted from their taxable income. Another words, the move could lower retirees' adjusted gross income and enable them to avoid having a bigger portion of their Social Security benefits taxed and bigger Medicare Part B & D premiums, among other things. Such a deal.

8. THE MAN AND HIS DOG: Our Newsletter generally does not publish public service announcements, but the poignant video supporting organ donations is in a class by itself. Feel free to skip the opening announcement, and go directly to the message. We bet you watch it more than once.

9. SO YOU THINK YOU KNOW EVERYTHING: There are 293 ways to make change for a dollar.

10. TODAY IN HISTORY: In 1824, J.W. Goodrich introduced rubber galoshes to the public.

11. KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources.

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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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