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Cypen & Cypen
NOVEMBER 24, 2004

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


The Center for Retirement Research at Boston College has issued another scholarly working paper. The paper finds that the trend toward earlier and earlier retirement has slowed, and, perhaps, even reversed. Many explanations are possible: elimination of mandatory retirement, cessation of the expansion of Social Security, reduction of retirement incentives within Social Security and the changing nature of the private pension system. The work explores the last issue -- how pension coverage and the type of pension affect timing of retirement. One would anticipate that pension coverage would increase the likelihood of expected and actual retirement. Workers get benefits, and those benefits enable them to retire earlier than they would have been able to without a pension. The story is more complicated, however, because the type of pension also matters. Defined benefit and defined contribution plans have different financial incentives, different ways of paying benefits and different types of risks. Provisions in many traditional defined benefit plans offer a significant subsidy for early retirement, while 401(k) plans are neutral with respect to retirement age. In defined benefit plans, the employer bears investment and interest rate risk; in 401(k) plans, the employee bears that risk. The first part of the analysis looked at expected retirement age for those working in 1992. As predicted, presence of pension wealth lowers the expected retirement age for those with pensions compared to those without. The second part of the analysis considered the effects of pensions on probability of retiring in one wave, given respondent was working in the previous wave. The conclusion that emerges from this section is that pension coverage and type are important determinants not only of expected retirement age but also of actual retirement age. Results of the third exercise, which explores the reasons for retiring earlier than planned, may be the most interesting: people covered by pensions are in the position better to plan their withdrawal from the labor force. Implications going forward are threefold. One, the shift from defined benefit to defined contribution plans will eliminate much of the incentive for early retirement. Two, the apparent decline in pension coverage will mean that a smaller part of the work force will have the pension wealth that enables people to retire. Three, the decline in pension coverage will make it more difficult for people to plan when they will be able to leave their jobs.


Updating earlier revenue procedures, Rev. Proc. 2004-64 updates optional standard mileage rates for employees, self-employed individuals or other taxpayers to use in computing deductible costs of operating an automobile for business, charitable, medical or moving expense purposes. The revenue procedure also provides rules under which the amount of ordinary necessary expenses of local travel or transportation away from home that are paid or incurred by an employee will be deemed substantiated if a payor (employer, for example) provides a mileage allowance under a reimbursement or other expense allowance arrangement to pay for the expenses. Use of a method of substantiation described in the revenue procedure is not mandatory, and a taxpayer may use actual allowable expenses if the taxpayer maintains adequate records or other sufficient evidence for proper substantiation. The standard mileage rates are summarized as follows:

Business 40.5¢ per mile (up from 37.5¢)
Medical and moving 15¢ per mile (up from 14¢)
Charitable 14¢ per mile

The rates are effective with respect to transportation expenses paid or incurred on or after January 1, 2005.


A Bloomberg news report indicates that mutual funds that buy bank loans are attracting cash at a faster pace than U.S. bond and money market funds, as investors try to keep up with rising interest rates. Funds that buy U.S. loans received more than a net $12 Billion this year, boosting assets by 55%, compared with 1.6% added to bond funds and 7.4% pulled away from money market funds. Because loans typically reset every three months, loan fund investors benefitted as the Federal Reserve raised its interest-rate target four times since June. Expectations for higher interest bonds usually cause bond yields to rise and prices to drop. The U.S. Federal Reserve recently said it would continue to boost its interest-rate target for overnight loans between banks at a “measured pace.”


A survey conducted by Money identifies six common errors that could cost a family $250,000 in the long run. Here they are

1. Not saving enough -- most respondents confessed that they had waited too long to start saving and investing (Among your retirement plan at work, your IRAs and fully taxable investments, you should be putting away at least 10% of your gross income -- 15% if you’re over 50).

2. Taking too much (or too little) risk -- a 40 year old whose portfolio is in fixed income and cash is playing it too safe; a 60 year old with the vast majority of his assets in aggressive growth stocks is playing with fire (Hold a mix of stocks or stock funds, bonds or bond funds and cash that is neither too daring nor too conservative for a person with your goals at your stage of life).

3. Over concentration -- taking too much risk often goes hand in hand with another big mistake: putting all your eggs in one basket (Never hold more than 10% of your money in a single stock or mutual fund that holds only a small number of stocks).

4. Chasing what’s hot -- wondering why we can’t make the same bundle on a stock as did all of our friends (When you soon read the list of top-performing stocks and mutual funds of 2004, don’t plow your money into names at the top).

5. Raiding retirement accounts -- nearly half of all retirement plan participants who change jobs fail to rollover their accounts (The key to managing retirement assets is convincing yourself they are absolutely hands-off).

6. Overtrading and ignoring expenses -- frequent traders earn less than buy-and-hold investors, and have dramatically higher costs (If you invest in individual stocks, trade infrequently; if you’re a fund investor, seek out portfolios with expenses that run below 1% of assets).


Foreign investors may eventually curb their desire to finance the U.S. current account deficit and diversify into other currencies or demand higher U.S. interest rates, says Federal Reserve Chairman Alan Greenspan, according to a Bloomberg News Report. Given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point. International investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing the U.S. current account deficit and rendering it increasingly less tenable. Financial markets are so large that the impact on interest rates and currency values by central bank actions has only been “moderate.” The U.S. current account deficit, the widest measure of trade because it includes investment, grew to a record $166.2 Billion in the second quarter. The federal government’s budget deficit was $412 Billion the fiscal year ended September 30, also a record.


In a reversal from the past, defined benefit plans outperformed 401(k) plans significantly from 2000 to 2002, when the bear market was at its worst, according to Watson Wyatt. In 2000, DB plans were flat, while 401(k) plans lost 4.28%. Even though both plan types lost money the following year, DB plans posted a loss of 3.82% compared to 7.30% for 401(k) plans. And 2002 was even worse for both: DB plans lost 8.43% and 401(k) plans dropped 12.26%. Watson Wyatt surmises that the different performance figures during bear market were a result of professional management of DB accounts and a result of DB plan managers’ fiduciary duty to diversify holdings. The Watson Wyatt report was summarized in


Copyright, 1996-2004, all rights reserved.

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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