Ask an author: David Loeper here to answer your retirement planning questions!

[sast]

Do I get a book for the most posts? Or maybe some one can send me one of their cards...

[sast]

Dave,
Ever consider electronic publishing or your book?

[breckrider]

I currently work for a utility company that has a defined pension plan. I'm 49 and 6 years away from the 25 year employment requirement and age requirement to retire. At that time I would draw about 55% of my base salary at that time.

I've had two job offers with other companies and turned them both down because my pension won't transfer. If I left the company, I would have to roll my pension over into a 401K or the equivalent. My questions are:

1. Would I be foolish to walk away from this pension at this time?
2. What would I have to invest and in what in order to make up what I would be walking away from so that I could still retire in about 10 years if that would even be possible. I have enough quarters to draw a little social security.

[Will]

Originally Posted by sast

Do I get a book for the most posts? Or maybe some one can send me one of their cards...

You certainly improve your chances with every question you ask.

This week, the lucky winners of David's book are idorunyc357 and GreerAngell.

We're giving away two copies of the book per week so there are plenty of chances to win.

[David Loeper]

Originally Posted by sast

Dave,
After reading your posts and whitepapers, It would seem that the best strategy might be to:
- Balance my portfolio to the appropriate level of risk/growth based on my needs
- Purchase index funds with the least possible load / costs
- Rebalance as needed based on needs and over/under funding
- sit back (financially speaking) and enjoy my retirement.
Restated, I'm saying rebalance my portfolio as needed for my wealth management needs but invest in index funds with little to no load. I say this because from the data in your white papers, it seems that the market performs at more or less the same level over the long term so it doesn't make sense to spend a lot of time or money toward active management of my portfolio. By minimizing my costs I will get the maximum return on my wealth. What do you think?

There is some misunderstanding here in some of the content. Markets are highly uncertain and do not "perform at more or less the same level over the long term." In my white paper "Measuring Temperature with a Ruler- Is Your Wealth Manager Really a Return Manager in Disguise" (available with all of my white papers at:
http://www.financeware.com/f_frame.a...hitepapers.asp) it clearly shows a high amount of uncertainty even over 80 years with the wealth of a widow in 1926 with $100,000 and spending $5,000 a year having equal (10%) odds of being bankrupt at age 54, or having over ONE BILLION dollars. Keep in mind, there is a 20% chance she would be OUTSIDE of this range!!! The markets do not more or less average out, they are all over the place even over long periods of time.

Setting your allocation based on the funded status of your goals might make sense, but there are other trade-offs. Would skipping one year of inflation adjustment to your income be worth a less risk portfolio? Would compromising a small portion of your estate goal for a larger travel budget in retirement be worth it to you? There are endless combinations of what might make sense, and they should all be continuously evaluated in context of one another in combination, not in isolation.

The portfolio is just one of those inputs, no more or less important than any of the others. Indexing has no chance of out performing, as the price one pays for avoiding the risk of materially underperforming. From a statistical perspective, this has a high benefit.

In a book I'm releasing this summer for ERISA fiduciaries, I show a couple of tables that shows the risk of not owning the entire index (i.e. a bet against being fully diversified) based on some of the information from our www.fundgrades.com free fund grading service.

In a chapter on diversification discussing how participants might be able to now sue their employer for merely underperforming the asset class with an active choice fiduciaries might make for their retirement plan investment alternatives based on the 2008 Supreme Court ruling, it shows some tables for Total Domestic Equities:

Criteria and % of funds that:

Return > than material under performance (>C-):
Result: All Funds= : 56.3% Verus Index Funds= 100%

Risk < than material additional volatility (>C-):
Result: All Funds= 57.8% Versus Index Funds= 100%

Both risk and return > C- combined:
Result: All Funds= 34.3% Versus Index Funds= 100%

This assumes reasonably priced index funds. I don't know how trustees will be able to prove their active bets against diversification were "clearly" prudent as required under ERISA based on these simple facts. As you noted though, and as you can see in this table, it probably is not a very good bet to make, so the indexing approach might be a good choice for you, provided all the other decisions about goals, funded status, etc. are considered in combination.


[1] Based on the www.fundgrades.com database for the period ending 3/31/2008. Material under performance or out performance is measured as those funds whose highest correlation coefficient was the Russell 3000, (relative to 31 asset classes and was greater than 0.82 or an R-squared greater than 0.67), with holdings that matched macro asset class minimums and maximums, and materiality of under or out performance measured by +/- 10% of the standard deviation of the benchmark. For example, if the standard deviation of the benchmark was 15%, for a fund to counted as material under performance (grade < C), it would have to under perform the index benchmark of the Russell 3000 by 1.5% annualized, and for it to be measured as out performing (grade > C), it would have to out perform by 1.5% annualized. A grade of C would apply if returns were within +/- 1.5%.

[David Loeper]

Originally Posted by sast

Do I get a book for the most posts? Or maybe some one can send me one of their cards...

This is not under my control...Will randomly selects them each week from all of those that have posted to this forum.

[kristyr8]

My husband and I are both 30 and have over 2x our annual salaries saved for retirement. We have about 30% invested in international mutual funds in our 401(k)s but every asset allocation tool I use says this is too aggressive. Do you think it's too aggressive given our age/savings? I want to make sure we capitalize on growth so our savings outlast us, not the other way around.

[David Loeper]

Originally Posted by sast

Dave,
Ever consider electronic publishing or your book?

My marketing/PR firm tried to format it for Kindle on Amazon but could not get graphics images to display correctly.

[David Loeper]

Originally Posted by breckrider

I currently work for a utility company that has a defined pension plan. I'm 49 and 6 years away from the 25 year employment requirement and age requirement to retire. At that time I would draw about 55% of my base salary at that time.

I've had two job offers with other companies and turned them both down because my pension won't transfer. If I left the company, I would have to roll my pension over into a 401K or the equivalent. My questions are:

1. Would I be foolish to walk away from this pension at this time?
2. What would I have to invest and in what in order to make up what I would be walking away from so that I could still retire in about 10 years if that would even be possible. I have enough quarters to draw a little social security.

You could roll your pension balance into your new employer's 401k if they permit it, or roll it into an IRA rollover account.

I don't really have enough information to calculate the answer to the analysis you are asking for in your question. Do you know how much would be distributed to you in your pension at this point if you left?

What is the difference in the current benefit you have vested versus what you would have at full benefit at 25 years of service? Does the pension have a cost of living adjustment?

Would you qualify for more Social Security benefits if you left the utility company?

The amount you would need to save would depend on your new employer's 401k match, the investment options & expenses, etc.

It is an easy calculation to perform with the right tools and complete information.

[breckrider]

I'll try to get that information then post it back here.

Originally Posted by David Loeper

You could roll your pension balance into your new employer's 401k if they permit it, or roll it into an IRA rollover account.

I don't really have enough information to calculate the answer to the analysis you are asking for in your question. Do you know how much would be distributed to you in your pension at this point if you left?

What is the difference in the current benefit you have vested versus what you would have at full benefit at 25 years of service? Does the pension have a cost of living adjustment?

Would you qualify for more Social Security benefits if you left the utility company?

The amount you would need to save would depend on your new employer's 401k match, the investment options & expenses, etc.

It is an easy calculation to perform with the right tools and complete information.