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    You’re Going To Have To Work Harder For Your Retirement

    The era of just showing up and getting paid is over, so why won’t politicos just give up the rhetoric when it comes to the harsh realities of public and even many private pensions?

    For generations, folks were taught that all they really had to do to pay for their retirement was to simply go along with the working crowd, and their pensions and Social Security would take care of them.

    Pensions were the norm. If you showed up on time, kept your head down and did a reasonable job, after so many years you’d get a gold watch, and regular checks would start showing up every so many weeks.

    Those pensions would protect against inflation, stock market gyrations and pretty much everything else. To make them even better, many pension amounts would be set based on a worker’s best years’ salaries — sweet.

    On top of the pensions, there’s been Social Security, whereby Uncle Sam would give back at least a portion of your taxes paid over all of those years of working. Any savings and investing that folks would do would simply be the gravy for retirement.

    This plan worked well for most people. And workers from the private sector world of corporations to those in the public sector of government were pretty much set when it came to retirement planning.

    Stock market calamities were not really an issue, as the pensions were set and supposedly watched over by State and Federal regulators. And remember: Traditional pensions were defined benefits — not defined contributions. The payouts were locked — not the pay-ins. That, of course, took the worry of making the right investments away from the working classes.

    Times change, of course. Yet too many folks just aren’t willing to recognize that retirement planning isn’t an option but a requirement, if you don’t want to have to keep working until you keel over.

    In the private sector there have been some serious wake-up calls regarding this former dream of retirement. First, companies that were supposed to be funding retirement pension plans discovered they were really going to have to go along with the rules, as they should have been doing all along.

    But thanks to the Financial Accounting Standards Board (FASB) for private pensions and the Government Accounting Standards Board (GASB) for public pensions, the folks running pensions don’t really have to run them based on real world market conditions.

    First, companies may use estimates rather than actual investment performance when accounting for the amount of assets needed to be held in pension-account funds. The idea behind this is that in any quarter, the markets might create big swings — either positive or negative — that would cause either overfunded or underfunded conditions that would create issues in the short term for companies.

    So FASB and GASB have allowed companies to use assumptions for performance. The assumptions are based on the perceived view that the markets generate long-term average performance returns of 8 percent. Yes, 8 percent is assumed to be a good number.

    While some at FASB have brought up the fact that the Standard & Poor’s 500 index hasn’t generated anything close to that number for more than a decade, it’s all be kept quiet so as not to upset corporate earnings. Congress has even stepped in to stop the FASB from changing the assumed rates, thanks to the power of the lobbyist class in Washington. Even for some of the modest adaptations in the rules last year, all they did was ease up a bit further on the assumption calculations.

    Second, while assets of pensions are allowed to be inflated by the FASB, liabilities are allowed to be minimized. Just two years ago, the discount rate for future payments was changed from the Treasury market rates to corporate bond average rates. This means that the lump-sum current value estimates to fund payouts are now significantly reduced well below long-term traditional amounts.

    The impact of both of these components of FASB’s pension accounting rules is to overstate assets and understate liabilities.

    With so many corporations over the past several years, it’s no wonder then that another government deal, the Pension Benefit Guarantee Corporation (PBGC), has faced major payout issues from underfunded pensions.

    For those who had the rude wake-up of a defaulted pension, the resulting nightmare is a dramatic drop-off in pension payments from the PBGC, which doesn’t pay out full promised amounts from dead pension plans.

    This isn’t just about the troubles of the private sector pension plans; it gets even stickier when it comes to the public sector.

    Right now, countless cities, counties and States around the union have pension plans that, even by the loosey-goosey GASB/FASB standards, aren’t even close to being funded.

    In some States, such as California, the majority of the budget is earmarked for paying current pensions.

    In several other States, underfunded liabilities amount to as much as $1 trillion.

    This is all well before anybody starts to look at Social Security’s pay-as-you-go gap that isn’t just looming; recently, it’s been a reality.

    The solution isn’t pretty. In the private sector companies have been switching away from defined benefit pensions to defined contributions. This means that companies offer workers the ability to set aside cash each payday into qualified retirement accounts such as 401(k)s, and they may or may not match those contributions.

    This is being discussed for the government sector, but not without a whole lot of screaming. And one thing politicos hate is screaming — especially around elections, which seem these days to be never-ending.

    In reality, this is the only way to go. To anyone who is working toward retirement: Why put your trust in any company or the government when it comes to your future?

    More and more folks are waking up to the fact that when it comes to funding a retirement, it’s their responsibility. That fact isn’t something that’s being cheered.

    Why scream about it? The reality is that you are going to have to work harder to make your retirement work.

    Even if you do have one of those old-fashioned pensions, don’t take your payments for granted.

    Take a look at your retirement accounts. Look at your 401(k) or equivalent plans such as 403(b)s or simplified employee pension plans (SEPs), as well as any individual retirement account (IRA). Add up what you have and then look at how much cash is being generated every month by the investments.

    Then do the even scarier work. Take out your checkbook and do a rundown on how many checks you cut every month. Add them up and then match it up with what your retirement accounts are generating.

    For many people, the numbers won’t match. Perhaps you’ve been doing your job, and your retirement accounts are generating more than you’re spending. More likely, you are spending a lot more than the retirement account is generating.

    Don’t panic. You’re not alone.

    The way to make the matchup work is to do what the government doesn’t like to talk about. Spend less right now; save and invest more. It may not be good for stimulating the economy, but it will be a whole lot better for stimulating your own retirement.

    Then go to work on what you’re actually investing in your retirement accounts. This is where my continued advice on Liberty Investor comes in. For months now in this column and years before in other venues, I’ve been writing and providing my recommendations of stocks, funds and other investments that focus on my core need from any investment: that it pays and pays well.

    From dividends to coupon payments, along with some gradual growth to offset inflation, the key for making your retirement accounts actually pay for your retirement is to make sure that you aren’t just holding the usual stocks of the S&P 500 and hoping that they’ll do something. Instead, make sure as you go down the list of your investments that they are piling up the cash and not just piling up the promises.

    Let’s take a look at one of my favorites, an oil-drilling company that is novel in that it has always looked at both sides of its business: the assets and the liabilities. Even better, it’s so focused on both, that often the liabilities tend to get more focus.

    The result is solid and steady performance with fewer mistakes — something that’s now getting noticed as its peers have gotten more than their wrists slapped for ignoring threats.

    The company is Seadrill Limited. The Norwegian company trades on the New York Stock Exchange under the symbol SDRL.


    Looking at the chart, you might see big gains of some 183 percent over the past five years alone. That’s fine, but that’s not why I’ve been recommending it.

    Instead, look at the income statement. That’s where you’ll see the structure of a company that knows how to get paid and pay out a great dividend to shareholders. Right now, even with the share price gains, it’s still yielding more than 8 percent.

    Even more important, look at the balance sheet. You’ll see a lot of cash and not a lot of debt. Remember: It’s all about liability management.

    There are plenty more companies and other investments just like this one that people who are ready to work on funding their own retirements need to own. All it takes is recognizing that no one is going to give you a retirement; you need to want to work at it yourself.

    — Neil George

    Neil George is the editor of By George, an investment advisory publication. George was the editor of Personal Finance for many years. In addition, he served as editor for a collection of other investment journals published in the United States, Germany and other selected nations. Prior to his career in media, George worked for more than two decades on six continents in senior positions with a select group of financial institutions in investment banking, bond trading, brokerage and asset management. The institutions included Merrill Lynch International Bank in Europe, Asia and the Americas, as well as U.S. Bank and British- and Chinese-based Investec PLC. In addition, George worked to build a collection of independent public and private brokerage and fund-management companies in Los Angeles and New York. He also currently serves as an adjunct professor and board member of Webster University's Walker School of Business and Technology. George earned an MBA in international finance from Webster University in Europe and a bachelor's degree in economics from Kings College.

    | All posts from Neil George

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