U of I profs have own pension ideas
SPRINGFIELD – Gov. Pat Quinn’s proposal to restructure state pensions has gotten a lot of attention since he introduced it in April, but it’s not the only plan on the table.
Two University of Illinois professors have suggested an approach they believe would save the state half of the money it contributes to SURS – the State Universities Retirement System.
Jeffrey Brown, a finance professor and director of the Center for Business and Public Policy, wrote a plan along with Professor Robert Rich, director of the Institute of Government and Public Affairs. It would create a hybrid 401(k)-style, defined-contribution system combined with a defined-benefit plan.
Still, no plan can eliminate the $85 billion in debt the state owes the systems; proposals can only reduce the cost of future benefits.
The professors’ plan makes three major changes for tier 1 SURS employees, those hired before Jan. 1, 2011.
Two-thirds of SURS members retire using a calculation called the “money purpose option.” It’s a complex formula that factors in the amount of money an employee has contributed, the amount the state is supposed to have contributed, the member’s age at retirement and the “effective rate of interest.”
It’s that rate of what contributions are assumed to earn that the professors would target and tie to a 10-year U.S. Treasury bond rate or other external financial index.
Since 1973, the system has assumed interest rates between 6.5 percent and 10 percent, resulting in retirement payments that Brown says are “a huge and hidden taxpayer subsidy to pensioners.”
The second and third major changes for SURS tier 1 employees, under the Brown/Rich plan, involve who pays for the pensions. The proposal calls for partially redistributing the state’s funding burden to employees and the universities themselves.
Universities and colleges would contribute increasingly larger percentages of payroll and the contribution by SURS members would increase gradually from the current 8 percent of pay to 11 percent of pay.
The plan’s other major element would create a dual 401(k)-style defined-contribution plan in concert with a reduced defined-benefit plan which employees hired after Jan. 1, 2011 could not retire with full benefits until age 67, would receive lower cost-of-living increases during retirement, wouldn’t have those increases compounded and would have a cap on the amount of pensionable salary.
U of I professors offer alternative for university retirement plan – The State Journal
How the professors’ plan could save the state money:
–The state’s normal cost for State University Retirement System pensions is roughly 13 percent of payroll. In fiscal 2011, the state paid $463 million.
–Shifting part of the normal cost to employees and universities and colleges through increased contributions would knock off at least 5 percentage points.
–Adjusting the “effective rate of interest” would save 2 percentage points.
***
Gov. Pat Quinn’s proposal to restructure state pensions has gotten a lot of attention since he introduced it in April, but it’s not the only plan on the table. Two University of Illinois professors have suggested an approach they believe would save the state half the money it contributes to the State Universities Retirement System for current employees.
Jeffrey Brown, a U of I finance professor and director of the Center for Business and Public Policy, wrote a plan along with Robert Rich, director of the Institute of Government and Public Affairs, that would create a hybrid 401(k)-style, defined-contribution system combined with a defined-benefit plan.
Brown estimates their plan would cut in half what the state spends each year on SURS’ “normal cost” — the amount the state spends to cover accrued benefits for active employees. That amount was $463 million in fiscal 2011, according to the Commission on Government Forecasting and Accountability.
No one has projected what the long-term savings could be.
Quinn estimated his plan would save the state at least $65 billion over all five state-funded systems. Regardless, no plan can eliminate the $85 billion in debt the state already owes the systems; proposals can only reduce the cost of future benefits.
6.5-10% interest
The professors’ plan makes three major changes for tier 1 SURS employees, those hired before Jan. 1, 2011. Currently, employees who are in a defined-benefit plan (they have the option today to choose either a defined-benefit and a defined-contribution plan), have two ways to calculate their retirement:
–The traditional way is that a SURS employee receives 2.2 percent of final average salary for each year of service in the system. Members can retire at age 60 with eight years of service or age 62 with five years of service. The final average salary is the average of their salary during the four years in which their salary was the highest.
The math is relatively simple. If a SURS employee retires at age 62 with 30 years of service and a final average salary of $100,000, his or her pension will start at $66,000 a year.
–But two-thirds of SURS members retire using a calculation called the “money purpose option,” It results in a higher pension than the traditional formula and is available to members who entered the system before July 1, 2005.
This complex formula factors in the amount of money a SURS participant has contributed, the amount of money the state is supposed to have contributed, the member’s age at retirement and the “effective rate of interest” — a rate the systems assume such contributions are earning, as set by the state comptroller. The SURS board formrely set the rate.
It is that interest rate that Brown set his sights on in order to reduce the pension costs of tier 1 employees. Since 1973, SURS or the comptroller has assumed interest rates between 6.5 percent and 10 percent, amounts Brown believes are “a huge and hidden taxpayer subsidy to pensioners.”
“They take your contributions, they act as if the state has actually matched the contributions and then they gross it up and credit it with an annual rate of return,” Brown said. “I don’t know about you, but to get what essentially is a risk-free return of 8 or 10 percent is way above any appropriate risk-adjusted measure that anybody else can get in the marketplace.”
No legal challenge
Brown’s proposal does not touch the 3 percent compounded annual interest retirees receive or raise the retirement age, as would Quinn’s proposal. Brown said those would be the first two things he would do if he thought either would be constitutional.
That puts him at odds with Quinn and Senate President John Cullerton, D-Chicago. Both believe the courts will allow the state to offer employees a choice between Quinn’s plan or keeping current benefits, but without counting pay raises toward pensions or receiving a health-care subsidy upon retirement.
“Why would they bother to go through all this and include something in the plan that is almost sure to be struck down by the courts?” Brown asked.
Since the effective rate of interest is already tinkered with every year, tying it to a 10-year U.S. Treasury bond rate or some other external financial index would be constitutional, Brown said.
“…[G]oing forward, it would make that money-purchase option become increasingly relevant over time,” Brown said. “People would just be back on the basic formula.”
The Teachers Retirement System, the state’s largest pension system, has far fewer members opting for its money-purchase option.
TRS’s money-purchase option “usually benefits members with exceptionally long careers or long periods of inactive status,” according to the TRS member guide.
At the end of fiscal 2011, TRS had nearly 91,000 members receiving pensions. The benefits of only about 11,000 were being calculated under the money-purchase option, according to TRS spokesman Dave Urbanek.
None of the state’s other pension systems – the State Employees, Judges and General Assembly retirement systems – have money-purchase options.
Shared sacrifice
The second and third major changes for SURS tier 1 employees, under the Brown/Rich plan, involve who pays for the pensions. The proposal calls for partially redistributing the state’s funding burden to employees and the universities themselves.
– Universities and colleges would take on part of the employer share, with the percentage of payroll they contribute rising by a percentage point each year until the targeted rate is reached.
“The ability of colleges and universities to undertake this burden is contingent upon the state committing to maintaining at least the current level of state appropriations,” Rich and Brown wrote.
All of the burden should not be shifted to the universities, they wrote, and the state should continue contributing 6.2 percent of university and college payrolls into SURS.
“This is the amount the state would be required under federal law to pay in FICA taxes to support Social Security had the state not opted out of that system,” they wrote.
–The contribution by SURS members would increase gradually from the current 8 percent of pay to 11 percent of pay.
“In the spirit of shared sacrifice and shared responsibility, SURS participants should be asked to pay more,” Brown and Rich wrote.
The plan’s other major element would create a dual 401(k)-style defined-contribution plan that, in concert with a reduced defined-benefit plan, would make SURS participants more financially secure and save the state money.
Tier 2 employees
The reduced benefits provided to tier 2 employees — those hired after Jan. 1, 2011 — have prompted many new university and college employees to opt for an already-existing defined-contribution plan within SURS, Brown and Rich wrote. Under the educators’ plan, tier 2 employees could not retire with full benefits until age 67, would receive lower cost-of-living increases during retirement, wouldn’t have those increases compounded, and would have a cap on the amount of pensionable salary.
SURS employees do not receive Social Security, so those who opt for the defined-contribution plan instead of tier 2 benefits would have virtually no safety net in a complete economic collapse.
“Few pension experts would recommend a 100 percent DC retirement system for employees who do not participate in the U.S. Social Security System,” Brown and Rich wrote.
Their proposal calls for a dual system where employees receive a defined-benefit pension through the following formula:
–They would receive 1.5 percent of their final average salary for each year of service instead of 2.2 percent.
–Savings from the lower multiplier would be shifted to a defined-contribution plan in which each employee would automatically be enrolled.
–A small contribution would be automatically made, along with a 50 percent match of each percent a SURS member contributes, up to 4 percent.
“The hybrid system would increase overall participant confidence that the system will be funded,” Brown and Rich wrote. “While members of the General Assembly can choose to underfund defined benefit plans … no third-party defined contribution vendor will accept IOUs in lieu of real retirement plan contributions.”
Few employees would automatically be enrolled in the hybrid system. Tier 1 and 2 employees could voluntarily join the new plan.
Live option?
Unions and lawmakers involved in the ongoing pension talks did not return calls attempting to gauge whether Brown and Rich’s pension ideas are in the mix of ideas under consideration.
Brown, who served as a senior economist in the White House Council of Economic Advisers from 2001 to 2002, said state lawmakers are aware of their idea, but he has only heard secondhand information about whether they’re interested in incorporating it.
“I keep being told the idea of a hybrid is a live option,” Brown said. “I think everybody who has a role to play in this has read it and been briefed on it by someone. … I think the idea has clearly entered into the debate. There’s no evidence from any of the legislative proposals being put forward that we’ve actually had an impact.”
The lack of a defined-contribution element to Gov. Pat Quinn’s plan makes it a “missed opportunity,” he said.
“We’re dealing with more than one problem here. One is we’ve got the unfunded liability. Two is we’ve got to reduce costs and redistribute the costs. Third, the tier 2 system that’s in place … is really putting us at a competitive disadvantage because of the way they’ve structured it,” Brown said.
The two professors’ approach is a way “to save the state a heck of a lot of money but also allows universities to compete for the talent that we’re trying to compete for,” he said. “That issue seems to be completely ignored in the governor’s proposal.”
Pair of professors propose alternative state pension plan
Gov. Pat Quinn’s proposal to restructure state pensions has gotten a lot of attention since he introduced it in April, but it’s not the only plan on the table. Two University of Illinois professors have suggested an approach they believe would save the state half the money it contributes to the State Universities Retirement System for current employees.
Jeffrey Brown, a U of I finance professor and director of the Center for Business and Public Policy, wrote a plan along with Robert Rich, director of the Institute of Government and Public Affairs, that would create a hybrid 401(k)-style, defined-contribution system combined with a defined-benefit plan.
Brown estimates their plan would cut in half what the state spends each year on SURS’ “normal cost” – the amount the state spends to cover accrued benefits for active employees. That amount was $463 million in fiscal 2011, according to the Commission on Government Forecasting and Accountability.
No one has projected the possible long-term savings.
Quinn estimated his plan would save the state at least $65 billion over all five state-funded systems. Regardless, no plan can eliminate the $85 billion in debt the state already owes the systems; proposals can only reduce the cost of future benefits.
Interest rates
The professors’ plan makes three major changes for tier 1 SURS employees, those hired before Jan. 1, 2011. Currently, employees who are in a defined-benefit plan (they have the option today to choose either a defined-benefit and a defined-contribution plan), have two ways to calculate their retirement:
- The traditional way is that a SURS employee receives 2.2 percent of final average salary for each year of service in the system. Members can retire at age 60 with eight years of service or age 62 with five years of service. The final average salary is the average of the four years in which their salary was the highest.
The math is relatively simple. If a SURS employee retires at age 62 with 30 years of service and a final average salary of $100,000, his or her pension will start at $66,000 a year.
- But two-thirds of SURS members retire using a calculation called the “money purpose option,” It results in a higher pension than the traditional formula and is available to members who entered the system before July 1, 2005.
This complex formula factors in the amount of money a SURS participant has contributed, the amount of money the state is supposed to have contributed, the member’s age at retirement and the “effective rate of interest” – a rate the systems assume such contributions are earning, as set by the state comptroller. The SURS board formrely set the rate.
It is that interest rate that Brown set his sights on in order to reduce the pension costs of tier 1 employees. Since 1973, SURS or the comptroller has assumed interest rates between 6.5 percent and 10 percent, amounts Brown believes are “a huge and hidden taxpayer subsidy to pensioners.”
“They take your contributions, they act as if the state has actually matched the contributions and then they gross it up and credit it with an annual rate of return,” Brown said. “I don’t know about you, but to get what essentially is a risk-free return of 8 or 10 percent is way above any appropriate risk-adjusted measure that anybody else can get in the marketplace.”
No legal challenge
Brown’s proposal does not touch the 3 percent compounded annual interest retirees receive, nor does it raise the retirement age, as would Quinn’s proposal. Brown said those would be the first two things he would do if he thought either would be constitutional.
That puts him at odds with Quinn and Senate President John Cullerton, D-Chicago. Both believe the courts will allow the state to offer employees a choice between Quinn’s plan or keeping current benefits, but without counting pay raises toward pensions or receiving a health care subsidy upon retirement.
“Why would they bother to go through all this and include something in the plan that is almost sure to be struck down by the courts?” Brown asked.
Since the effective rate of interest is already tinkered with every year, tying it to a 10-year U.S. Treasury bond rate or some other external financial index would be constitutional, Brown said.
“Going forward, it would make that money-purchase option become increasingly relevant over time,” Brown said. “People would just be back on the basic formula.”
The Teachers Retirement System, the state’s largest pension system, has far fewer members opting for its money-purchase option.
TRS’s money-purchase option “usually benefits members with exceptionally long careers or long periods of inactive status,” according to the TRS member guide.
At the end of fiscal 2011, TRS had nearly 91,000 members receiving pensions. The benefits of only about 11,000 were being calculated under the money-purchase option, according to TRS spokesman Dave Urbanek.
Shared sacrifice
The second and third major changes for SURS tier 1 employees, under the Brown/Rich plan, involve who pays for the pensions. The proposal calls for partially redistributing the state’s funding burden to employees and the universities themselves.
- Universities and colleges would take on part of the employer share, with the percentage of payroll they contribute rising by a percentage point each year until the targeted rate is reached.
“The ability of colleges and universities to undertake this burden is contingent upon the state committing to maintaining at least the current level of state appropriations,” Rich and Brown wrote.
All of the burden should not be shifted to the universities, they wrote, and the state should continue contributing 6.2 percent of university and college payrolls into SURS.
“This is the amount the state would be required under federal law to pay in FICA taxes to support Social Security had the state not opted out of that system,” they wrote.
- The contribution by SURS members would increase gradually from the current 8 percent of pay to 11 percent of pay.
“In the spirit of shared sacrifice and shared responsibility, SURS participants should be asked to pay more,” Brown and Rich wrote.
The plan’s other major element would create a dual 401(k)-style defined-contribution plan that, in concert with a reduced defined-benefit plan, would make SURS participants more financially secure and save the state money.
Tier 2 employees
The reduced benefits provided to tier 2 employees – those hired after Jan. 1, 2011 – have prompted many university and college employees to opt for an existing defined-contribution plan within SURS, Brown and Rich wrote. Under the educators’ plan, tier 2 employees could not retire with full benefits until age 67, would receive lower cost-of-living increases during retirement, wouldn’t have those increases compounded, and would have a cap on the amount of pensionable salary.
SURS employees do not receive Social Security, so those who opt for the defined-contribution plan instead of tier 2 benefits would have virtually no safety net in an economic collapse.
“Few pension experts would recommend a 100 percent DC retirement system for employees who do not participate in the U.S. Social Security System,” Brown and Rich wrote.
Their proposal calls for a dual system where employees receive a defined-benefit pension through the following formula:
- They would receive 1.5 percent of their final average salary for each year of service instead of 2.2 percent.
- Savings from the lower multiplier would be shifted to a defined-contribution plan in which each employee would automatically be enrolled.
- A small contribution would be automatically made, along with a 50 percent match of each percent a SURS member contributes, up to 4 percent.
“The hybrid system would increase overall participant confidence that the system will be funded,” Brown and Rich wrote. “While members of the General Assembly can choose to underfund defined benefit plans … no third-party defined contribution vendor will accept IOUs in lieu of real retirement plan contributions.”
Few employees would automatically be enrolled in the hybrid system. Tier 1 and 2 employees could voluntarily join the new plan.
Live option?
Unions and lawmakers involved in the ongoing pension talks did not return calls attempting to gauge whether Brown and Rich’s pension ideas are in the mix of ideas under consideration.
Brown, who served as a senior economist in the White House Council of Economic Advisers from 2001 to 2002, said state lawmakers are aware of their idea, but he has heard only secondhand information about whether they’re interested in incorporating it.
“I keep being told the idea of a hybrid is a live option,” Brown said. “I think everybody who has a role to play in this has read it and been briefed on it by someone. … I think the idea has clearly entered into the debate. There’s no evidence from any of the legislative proposals being put forward that we’ve actually had an impact.”
The lack of a defined-contribution element to Quinn’s plan makes it a “missed opportunity,” he said.
“We’re dealing with more than one problem here. One is we’ve got the unfunded liability. Two is we’ve got to reduce costs and redistribute the costs. Third, the tier 2 system that’s in place … is really putting us at a competitive disadvantage because of the way they’ve structured it,” Brown said.
The two professors’ approach is a way “to save the state a heck of a lot of money but also allows universities to compete for the talent that we’re trying to compete for,” he said. “That issue seems to be completely ignored in the governor’s proposal.”
U of I professors offer alternative for university retirement plan – Galesburg Register
SPRINGFIELD — Gov. Pat Quinn’s proposal to restructure state pensions has gotten a lot of attention since he introduced it in April, but it’s not the only plan on the table. Two University of Illinois professors have suggested an approach they believe would save the state half the money it contributes to the State Universities Retirement System for current employees.
Jeffrey Brown, a U of I finance professor and director of the Center for Business and Public Policy, wrote a plan along with Robert Rich, director of the Institute of Government and Public Affairs, that would create a hybrid 401(k)-style, defined-contribution system combined with a defined-benefit plan.
Brown estimates their plan would cut in half what the state spends each year on SURS’ “normal cost” — the amount the state spends to cover accrued benefits for active employees. That amount was $463 million in fiscal 2011, according to the Commission on Government Forecasting and Accountability.
No one has projected what the long-term savings could be.
Quinn estimated his plan would save the state at least $65 billion over all five state-funded systems. Regardless, no plan can eliminate the $85 billion in debt the state already owes the systems; proposals can only reduce the cost of future benefits.
6.5-10% interest
The professors’ plan makes three major changes for tier 1 SURS employees, those hired before Jan. 1, 2011. Currently, employees who are in a defined-benefit plan (they have the option today to choose either a defined-benefit and a defined-contribution plan), have two ways to calculate their retirement:
–The traditional way is that a SURS employee receives 2.2 percent of final average salary for each year of service in the system. Members can retire at age 60 with eight years of service or age 62 with five years of service. The final average salary is the average of their salary during the four years in which their salary was the highest.
The math is relatively simple. If a SURS employee retires at age 62 with 30 years of service and a final average salary of $100,000, his or her pension will start at $66,000 a year.
–But two-thirds of SURS members retire using a calculation called the “money purpose option,” It results in a higher pension than the traditional formula and is available to members who entered the system before July 1, 2005.
This complex formula factors in the amount of money a SURS participant has contributed, the amount of money the state is supposed to have contributed, the member’s age at retirement and the “effective rate of interest” — a rate the systems assume such contributions are earning, as set by the state comptroller. The SURS board formrely set the rate.
It is that interest rate that Brown set his sights on in order to reduce the pension costs of tier 1 employees. Since 1973, SURS or the comptroller has assumed interest rates between 6.5 percent and 10 percent, amounts Brown believes are “a huge and hidden taxpayer subsidy to pensioners.”
“They take your contributions, they act as if the state has actually matched the contributions and then they gross it up and credit it with an annual rate of return,” Brown said. “I don’t know about you, but to get what essentially is a risk-free return of 8 or 10 percent is way above any appropriate risk-adjusted measure that anybody else can get in the marketplace.”
No legal challenge
Brown’s proposal does not touch the 3 percent compounded annual interest retirees receive or raise the retirement age, as would Quinn’s proposal. Brown said those would be the first two things he would do if he thought either would be constitutional.
That puts him at odds with Quinn and Senate President John Cullerton, D-Chicago. Both believe the courts will allow the state to offer employees a choice between Quinn’s plan or keeping current benefits, but without counting pay raises toward pensions or receiving a health-care subsidy upon retirement.
“Why would they bother to go through all this and include something in the plan that is almost sure to be struck down by the courts?” Brown asked.
Since the effective rate of interest is already tinkered with every year, tying it to a 10-year U.S. Treasury bond rate or some other external financial index would be constitutional, Brown said.
“…[G]oing forward, it would make that money-purchase option become increasingly relevant over time,” Brown said. “People would just be back on the basic formula.”
The Teachers Retirement System, the state’s largest pension system, has far fewer members opting for its money-purchase option.
TRS’s money-purchase option “usually benefits members with exceptionally long careers or long periods of inactive status,” according to the TRS member guide.
At the end of fiscal 2011, TRS had nearly 91,000 members receiving pensions. The benefits of only about 11,000 were being calculated under the money-purchase option, according to TRS spokesman Dave Urbanek.
Shared sacrifice
The second and third major changes for SURS tier 1 employees, under the Brown/Rich plan, involve who pays for the pensions. The proposal calls for partially redistributing the state’s funding burden to employees and the universities themselves.
– Universities and colleges would take on part of the employer share, with the percentage of payroll they contribute rising by a percentage point each year until the targeted rate is reached.
“The ability of colleges and universities to undertake this burden is contingent upon the state committing to maintaining at least the current level of state appropriations,” Rich and Brown wrote.
All of the burden should not be shifted to the universities, they wrote, and the state should continue contributing 6.2 percent of university and college payrolls into SURS.
“This is the amount the state would be required under federal law to pay in FICA taxes to support Social Security had the state not opted out of that system,” they wrote.
–The contribution by SURS members would increase gradually from the current 8 percent of pay to 11 percent of pay.
“In the spirit of shared sacrifice and shared responsibility, SURS participants should be asked to pay more,” Brown and Rich wrote.
The plan’s other major element would create a dual 401(k)-style defined-contribution plan that, in concert with a reduced defined-benefit plan, would make SURS participants more financially secure and save the state money.
Tier 2 employees
The reduced benefits provided to tier 2 employees — those hired after Jan. 1, 2011 — have prompted many new university and college employees to opt for an already-existing defined-contribution plan within SURS, Brown and Rich wrote. Under the educators’ plan, tier 2 employees could not retire with full benefits until age 67, would receive lower cost-of-living increases during retirement, wouldn’t have those increases compounded, and would have a cap on the amount of pensionable salary.
SURS employees do not receive Social Security, so those who opt for the defined-contribution plan instead of tier 2 benefits would have virtually no safety net in a complete economic collapse.
“Few pension experts would recommend a 100 percent DC retirement system for employees who do not participate in the U.S. Social Security System,” Brown and Rich wrote.
Their proposal calls for a dual system where employees receive a defined-benefit pension through the following formula:
–They would receive 1.5 percent of their final average salary for each year of service instead of 2.2 percent.
–Savings from the lower multiplier would be shifted to a defined-contribution plan in which each employee would automatically be enrolled.
–A small contribution would be automatically made, along with a 50 percent match of each percent a SURS member contributes, up to 4 percent.
“The hybrid system would increase overall participant confidence that the system will be funded,” Brown and Rich wrote. “While members of the General Assembly can choose to underfund defined benefit plans … no third-party defined contribution vendor will accept IOUs in lieu of real retirement plan contributions.”
Few employees would automatically be enrolled in the hybrid system. Tier 1 and 2 employees could voluntarily join the new plan.
Live option?
Unions and lawmakers involved in the ongoing pension talks did not return calls attempting to gauge whether Brown and Rich’s pension ideas are in the mix of ideas under consideration.
Brown, who served as a senior economist in the White House Council of Economic Advisers from 2001 to 2002, said state lawmakers are aware of their idea, but he has only heard secondhand information about whether they’re interested in incorporating it.
“I keep being told the idea of a hybrid is a live option,” Brown said. “I think everybody who has a role to play in this has read it and been briefed on it by someone. … I think the idea has clearly entered into the debate. There’s no evidence from any of the legislative proposals being put forward that we’ve actually had an impact.”
The lack of a defined-contribution element to Gov. Pat Quinn’s plan makes it a “missed opportunity,” he said.
“We’re dealing with more than one problem here. One is we’ve got the unfunded liability. Two is we’ve got to reduce costs and redistribute the costs. Third, the tier 2 system that’s in place … is really putting us at a competitive disadvantage because of the way they’ve structured it,” Brown said.
The two professors’ approach is a way “to save the state a heck of a lot of money but also allows universities to compete for the talent that we’re trying to compete for,” he said. “That issue seems to be completely ignored in the governor’s proposal.”
Chris Wetterich can be reached at (217) 788-1523.
How the professors’ plan could save the state money:
–The state’s normal cost for State University Retirement System pensions is roughly 13 percent of payroll. In fiscal 2011, the state paid $463 million.
–Shifting part of the normal cost to employees and universities and colleges through increased contributions would knock off at least 5 percentage points.
–Adjusting the “effective rate of interest” would save 2 percentage points.
Planning for Retirement
Are you planning for retirement? Have you thought about whether you want to stop working in three years – or 30? Or whether, when you say goodbye to your job, you want to volunteer for a good cause, hang out with your grandkids – or travel to every national park or to the seven natural wonders of the world?
Some family food for thought:
Think about a tentative retirement date. “This needs to be flexible and is not set in stone, but you have to start somewhere,” says Rich Rausser, 53, senior vice president of client services at Pentegra Retirement Services. “The next piece of the puzzle is, ‘How do I make sure I have enough retirement income at that time?’” (To get more information about how long you might live, try a life-expectancy calculator.)
Do the math with online tools. Try the AARP’s retirement calculator, the Social Security retirement planner, or Pentegra’s goal worksheet. “The key thing is, ‘When am I going to have a need to take money out of this plan?’” says Rausser. “When am I going to have a need for the money?”
Start saving now. “There’s a fear for new investors of what to do,” says Rausser. “Start with a small amount. Keep it simple.” It’s never too late. “People are absolutely amazed at the money that accumulates after just three years,” says Rausser.
Try target-date funds. They automatically reset your mix of stocks, bonds, and cash to meet a future date, such as when you plan to retire.
Sign up for a 401(k) – or increase your contribution. Take advantage of your employer’s “defined-contribution plan,” which makes it easy to use payroll deduction to set aside tax-deferred income for retirement. If you get a raise, bump up the amount you save, says Rausser. The current maximum contribution per year: $17,000. (For more information, see the IRS 401(k) resource guide.
Don’t put all your eggs in one basket. Diversify. Think about your personality, too. “Keep an eye on your risk-tolerance level,” says Rausser. “Never take more risk than you’re comfortable with.”
Catch up at age 50. This contribution lets you contribute $5,500 beyond the $17,500 limit if you’ve the big 5-0.
Think about part-time work. You don’t need to retire completely at a particular age. Instead, consider gradually decreasing the hours you spend on the job. Today nearly 27 million Americans hold part-time jobs. Check out sites such as careerbuilder.com and snagajob.com. For advice on combining a few part-time jobs, visit quintcareers.com.
Consider whether you’d like to move. Not sure about traveling when you retire? Sell your home and move to a place where you can do your favorite activities easily – the slopes if you’re a skier or the water if you’re a boater.
Hire an expert. Use online tools to find a member of the National Association of Personal Financial Planners, the Financial Planning Association, or the American Institute of Certified Public Accountants.
Think about Social Security. In the past you got full benefits at age 65. Now if you were born after 1959, you need to wait until you’re 67. If you don’t want to hold out, you can get a reduced benefit – 70 percent of the full payout – at age 62.
Decide what makes your life meaningful. Is it your job? Then don’t plan to retire early. Would you like to try a new career or a new hobby? Or would you like to give your time to a worthy cause? (Check out “Top 10 Tips on How to Make Like Bono and Volunteer.”)
Set family rules. Worried that you’ll end up just babysitting your grandkids or caring for your aging parent? Speak up!
Here’s to thoughtfully planning for retirement.
For more about retirement, read:
Should You Even Think About Retiring Early?
For more about part-time work, read:
Working 9 to…1? Part-time Jobs Can Give Full-Time Flexibility
Can Molycorp Recover Lost Ground?
The following video is part of our “Motley Fool Conversations” series, in which analyst Rex Moore discusses topics around the investing world. Shares of Molycorp have fallen by more than half over the past year. Today, Rex assesses the chances this rare-earth miner can make a major move upward.
Data continues to show that people are chronic undersavers for retirement. We tend to underestimate how much we’ll need and overestimate how much we’ll make in later years. Don’t be stuck putting off your retirement dreams just because you didn’t read our special free report: “3 Stocks that Will Help You Retire Rich.” The report won’t be available forever, so we invite you to enjoy a free copy today. You can access it by clicking here.
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Will Target Help You Retire Rich?
Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won’t just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.
Target (NYS: TGT) tries to be all things to all retail shoppers. On one hand, its big-box format more closely resembles price-conscious, discount retailer Wal-Mart (NYS: WMT) than upscale department stores. But at the same time, Target has done an excellent job of pulling in exclusive designers to do special collections for its stores, giving it an appeal that its bigger rival arguably doesn’t have. Can the retailer keep its savoir-faire in offering both the low prices they need and the fashion-conscious styles they want? Below, we’ll revisit how Target does on our 10-point scale.
The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.
Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.
When scrutinizing a stock, retirees should look for:
- Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts’ growth potential, but they do offer greater security.
- Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won’t make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock’s share price.
- Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won’t fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
- Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
- Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time — as long as it doesn’t jeopardize the company’s financial health.
With those factors in mind, let’s take a closer look at Target.
Factor
What We Want to See
Actual
Pass or Fail?
Size
Market cap $10 billion
$36.7 billion
Pass
Consistency
Revenue growth 0% in at least four of five past years
5 years
Pass
Free cash flow growth 0% in at least four of past five years
2 years
Fail
Stock stability
Beta 0.9
0.91
Fail
Worst loss in past five years no greater than 20%
(30%)
Fail
Valuation
Normalized P/E 18
13.61
Pass
Dividends
Current yield 2%
2.2%
Pass
5-year dividend growth 10%
20.1%
Pass
Streak of dividend increases = 10 years
44 years
Pass
Payout ratio 75%
25.6%
Pass
Total score
7 out of 10
Source: SP Capital IQ. Total score = number of passes.
Since we looked at Target last year, the company has picked up a point as its dividend yield rose above the 2% level. The retailer may not be known for its dividend, but its long track record of treating shareholders right with annual payout increases is especially appealing to retirement-oriented investors.
Target has done an excellent job of threading the needle over the years to come through with cheap-chic products. Through the efforts of executives including Ron Johnson and Michael Francis — both of which have since moved to JC Penney — Target was able to give customers great prices and a fun atmosphere.
But retail is undergoing a transformation, and it hasn’t been easy for some big-box retailers to compete. Best Buy (NYS: BBY) in particular has had difficulty closing sales with customers, as some shoppers come in only to scout out purchases they actually make through Amazon.com (NAS: AMZN) or other online sources. Target, though, has made deals with suppliers in order to avoid the “showroom” effect; its recent partnership with Apple (NAS: AAPL) to open small, niche, Apple stores within existing Target stores is just one example of how Target is defending its turf.
For retirees and other conservative investors, Target’s healthy and growing dividend is enough to outweigh some concerns about stagnant free cash flow. As long as the retailer can keep adapting faster than its competitors, then Target should remain an attractive stock in a tough industry.
Keep searching
Finding exactly the right stock to retire with is a tough task, but it’s not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.
If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool’s latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don’t waste another minute — click here and read it today.
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5 Stocks to Soothe Your Worries
Several global events have conspired to bring the stock market lower over the past six weeks. Our employment picture is only improving by baby steps, growth in China appears to be slowing, and Europe is just one hot mess. On top of that, only 25% of investors are bullish on stocks over the next six months.
While it’s understandable to be worried, veteran stock pickers know that when there’s fear in the streets, it often represents the best time to be buying stocks. Luckily for you, our Rising Stars have been publicly calling out their favorite stocks for more than a year. A check of their portfolios shows that there are definitely quality companies ripe for the picking right now.
Read below to find out what five of the most recent buys have been, and at the end, I’ll offer you access to a special free report on three stocks that will help you retire rich.
Apple (NAS: AAPL)
No introductions needed here. Dave Meier and John Reeves recently picked the world’s most valuable company for their portfolio. As tech investor Marc Andreessen pointed out, today’s mobile players have “the opportunity to put a computer in the pocket of 5 billion people. Practically everyone is going to have a general-purpose computer in their pocket.”
Think about that for a minute. Then consider the fact that from 2010 to 2011, Apple increased its market share in the global smartphone space from 15.8% to 23.8%. Then consider the fact that emerging markets have accounted for more and more revenue and still have a long runway for growth. Clearly, with today’s P/E sitting at just 14, Apple’s worth considering for your portfolio.
Fluor (NYS: FLR)
Last Friday, Alyce Lomax decided to add Fluor to her portfolio, a stock that focuses on socially responsible investing. The company is a global provider of construction, engineering, and project management services. This sector has been hard hit since the Great Recession, but Fluor nabbed a 12% increase in revenue last year, backlog orders are up 14% since then, and the company has a rock-solid balance sheet. On top of that, it currently trades for just 12 times forward earnings, and it offers a dividend.
Beyond the accounting metrics, the company is doing well by doing good. Alyce says, “Although this may not sound like the kind of company that could be a bastion of social responsibility, one of the reasons it hit my radar was its inclusion in Ethisphere’s list of the World’s Most Ethical Companies. In fact, it’s made that list for six straight years.”
Chipotle Mexican Grill (NYS: CMG)
Alyce also bought shares of everyone’s favorite burrito maker in late April. Make no mistake about it: Chipotle is a richly valued stock. But that doesn’t mean there isn’t room to grow. The company’s 1,230 stores equal only 3.6% the size of McDonald’s built-out base, and even Wendy’s has over five times the as many restaurants as Chipotle. Also, you can’t forget about the company’s promising ancillary concept: ShopHouse Southeast Asian Kitchen.
Like Fluor, the company also has a reputation for social responsibility. “Chipotle has committed to turning the traditional fast-food model on its ear, ‘serving customers the very best ingredients, all raised with respect for the animals, the environment and the farmers.’”
Textron (NYS: TXT)
Rising Star Jim Mueller recently went back to a company he’s already invested in: small aircraft and helicopter maker Textron. Revenue has been steadily improving for the company as the economy crawls back to normal, while profit margins are also expanding nicely.
Jim notes that his bullishness on the company comes from industrywide improvements as well:
My confidence is based on this being a broad sector improvement, not just at Textron. General Dynamics, maker of rival Gulfstream jets, reported strong interest in its planes, as did Textron. Honeywell also reported increased profits in its aerospace division.
Tempur-Pedic (NYS: TPX)
Finally, if you’ve been losing sleep over your investments lately, Anand Chokkavelu has just the remedy for you: high-end mattress maker Tempur-Pedic. The company has released a slew of good news lately: Sales were up 18% during the first quarter of 2012, while earnings increased by 26%, and the company reiterated its full-year guidance.
But analysts were hoping for a bump in the company’s outlook, and when Tempur-Pedic announced it would be slashing prices on one of its mattresses for holiday promotions this summer, investors went fleeing. But Anand believes the market is having a major overreaction, and it’s allowing investors to buy in at bargain-basement prices.
Further food for thought
Clearly, we think our Rising Stars represent the cream of the crop. That’s why we let them invest the Fool’s money on our behalf. If you’d like to know where they think the best bets for your retirement portfolio are, you should check out our special free report: “3 Stocks That Will Help You Retire Rich.”
Inside you’ll get the name of three long-term winners our analysts truly believe in. Get your copy of the report today, absolutely free.
Plan now to retire rich
: You may be working hard for a comfortable present and a better future but with little planning you can ensure that you have all the luxuries when you retire. But the mantra is to start early as in that case even with a modest investment amount you can achieve your dream of having few crore as savings.
If you are 30 years old and want to have R 5 crore by the time you turn 60, if your average rate of return stands at 12 per cent per annum then all you need to save is R 14,300 per month.
The first thing you need to do is to calculate how much you would need to sustain yourself when you retire and then calculate backwards as to how much you need to save in order to get a monthly income that can cover your expenses when you turn 60 and is able…
Is This Buffett’s Next Move?
The following video is part of our nationally syndicated Motley Fool Money radio show, with host Chris Hill talking with Ron Gross, James Early, and Joe Magyer. French fragrance company Coty has increased its latest bid to buy Avon, and this time Coty’s bid is backed in part by none other than Berkshire Hathaway. In this segment, the guys analyze Warren Buffett’s interest in the acquisition and discuss whether Avon should sell or continue to go it alone.
Berkshire Hathaway is one of the companies featured in The Motley Fool’s new report, “3 Stocks That Will Help You Retire Rich.” The report describes the savings habits you need to build long-term wealth and analyzes three stocks to help build a smarter retirement portfolio. You can get instant access to this report simply by clicking here — it’s free.
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