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A Paradigm Shift of Income Planning

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					                    A Paradigm Shift of Income Planning

The retirement crisis is likely to continue given the direction our pension plans are
heading. It is no secret that the traditional pension plan is pretty much unheard of in the
private sector. Today, your only real hopes of receiving a pension are through a
government job. Even at that, state and federal governmental authorities are struggling to
make the payments on a monthly basis. This is all the more reason why employees need
to take their retirement needs into their own hands.

With the lower yields, pension plan administrators have to take on much more risk in
order to keep up with the billions of dollars in monthly payment obligations. Many
payment obligations today were designed decades earlier when the economy could favor
annual yields of 7 -8%. The global recession yields today are closer to 2%. So in order to
make up difference, administrators are turning to higher risk investments, many in the
form of junk bonds. Unfortunately, higher yield potential comes with a greater chance of
default.

U.S. pension plan managers are investing large amounts of capital into smaller
speculative-grade borrowers, trying to yield the magic 8% yield needed for their payment
obligations. Much of this debt is from smaller start-up companies looking for capital to
try and capture a small portion of a saturated market. Borrowers with less than $500
million in annual revenue are paying much higher returns since big banks have decreased
small business lending by 12% since 2008. Big banks have decreased their lending to
these smaller companies due to the default ratios they were experiencing. None the less,
fund managers are actively pursuing these debts due to the Federal government's promise
to hold interest rates low through 2014. Unfortunately, these are the risks fund managers
are being forced to take on in order to make these overwhelming payment obligations.
This is a destructive trend, and regrettably a necessary evil.

According to a study by the Pew Center on the States in Washington, states were $1.38
trillion short of their retirement obligations in 2010; which was up 9% from the year
prior. These numbers include $757 billion in underfunded pension obligations and $627
billion short in retirement health. These numbers will continue to snowball with low
interest rates making it impossible for this trend to continue without exploring alternate
forms of revenue.

A few weeks ago voters in San Diego and San Jose, California approved measures to
restructure benefits for municipal workers in cities that could not afford them. Several
states including Wisconsin, Indiana, and Ohio have already started to limit collective
bargaining for public employees, and have started cutting benefits accordingly. These
limitations include reduced payouts for pensions and drastically less protection of
healthcare benefits. Many other states, including Texas, are trying to renegotiate less
favorable benefits for teachers and state administrators in order to help cut costs.
Eventually, government pensions are likely to go away in exchange for a deferred
compensation plan, following the suit of the private job sector.
It is no secret where this is heading. We are seeing a paradigm shift from the
responsibility of the employer to the employee. Employees today are being forced to be
more self reliant with respect to health care and retirement obligations. Relying on
employer or governmental obligations is proving to be a trend of the past. Because of
this, many employees are redirecting their deferred compensation plans to vehicles that
will yield an income stream within retirement. Vehicles not dependent upon a fund
manager yielding needed returns, but instead with income guarantees backed by cash
reserve pools. These income streams are guaranteed for life and use income account
values (non-cash values) to determine the amount of income one is eligible for at a given
age (usually from ages 50 to 90).

Failing to adapt to these market trends is going to result in Americans struggling
throughout their retirement years because of lack of income. Social Security and pensions
simply will not exist for many in the coming years. I believe that every US citizen under
the age of 50 should not count on much, if any, social security benefits being available to
them starting at the age of 62. Furthermore, when you take into account that over 90% of
workers today are not being offered pensions, the idea of a lifetime income becomes very
attractive. Once again, adaptation is the key. Those who fail to secure their income needs
for retirement can count on being a future burden to this country.

				
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posted:6/26/2012
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