A useful consideration for retirement planning should include evaluating the backstop in the case of a funding shortfall. In other words, if there are insufficient assets to support the desired standard of living in retirement who or what is the back-up plan?
Bob Collie’s article A Perspective on Retirement Security published in the September/October 2012 issue of IMCA’s Investments & Wealth Monitor contrasts two extreme cases:
Most approaches set money aside to back the targeted retirement income. The amounts vary considerably. At one extreme are employment-based pensions provided to federal employees before 1986 under the Civil Service Retirement System (CSRS). A significant part of these promises have not been pre-funded; they are paid when they fall due out of current federal government revenues. Despite a substantial unfunded liability of roughly $750 billion as of September 30, 2010 (OPM, undated), these pensions are backed by the full faith and credit of the U.S. government. The funding arrangement is exceptionally weak, but the backstop is exceptionally strong.
By contrast, consider the assets that must be set aside to fund benefits paid by insurance companies. Insurance companies are required to hold reserves against their book of annuity business based on cautious assumptions about interest rates and mortality. Those required reserves are materially larger if the assets are invested in anything other than the safest investments. This approach reflects the fact that insurance companies have no backstop, nowhere to turn for additional funding in the event of a shortfall. So if the insurance industry is to survive through thick and thin, it must take a cautious and long-term approach to funding and investment.
Notice how the lack of backstop for insurance companies dramatically affects their savings rate! This is a useful context for considering the backstop for each individual and it will likely be different for each client. Some clients will have the backstop of the federal government, some the backing of the Pension Benefit Guaranty Corporation (in the case that their Defined Benefit Plan fails), but many will have no formal backstop. I suspect that the degree of engagement in implementing a serious savings and investment plan will change dramatically for those who begin to contemplate the prospects of either materially reducing their standard of living in retirement or turning to children for help.
Hello! I could have sworn I’ve been to this website
before but after checking through some of the
post I realized it’s new to me. Nonetheless, I’m definitely delighted I found it and I’ll be book-marking
and checking back frequently!