Delayed Gratification – Just How Important Is It?

The following Tweet was posted by Vanguard this morning – “Delaying gratification, avoiding debt, & saving are all central to a financial literacy program for student”. We all know that we are more responsible for funding our retirement than at any time in the last 60 years, but just because we know doesn’t mean we have the ability to do so.

Defined Contribution plans are the vehicles of choice for most private sector employers, if not their employees. However, funding these plans, even to meet the company match, is not easy for many (most) low to middle income households. At KCS, we’ve discussed the benefits of participating in a DB plan versus a DC plan since our founding.

But, if you have a job, don’t have substantial student loan our housing debt, and can afford to make sizable contributions into your retirement program, it is better to delay gratification and make those contributions as early and often as possible. Why? Because the math of compounding truly works.

For instance, if a 22 year old can make a monthly contribution of $833 for 10 years, the $99,960 in contributions growing at 4% / year will become $438,393.12 upon reaching age 65. Again, that is with making contributions for only the first 10 years. At that point, you’ve basically funded your retirement and now you can begin acquire some of the other assets that you’ve been deferring.

However, if you can’t fund your retirement upfront with sizable monthly contributions, but can only put in $194 / month for the next 43 years growing at 4% until age 65, your balance upon retirement would only be $256,648.87, or roughly $182,000 less in total assets. WOW!

Finally, just think about how little you’ll be able to accumulate in your account if you delay making contributions until the age of 32. For instance, if you can only make that $194 / month for the next 33 years your account balance at age 65 is only $154,500, more than $100,000 less than you would have had if you began contributing the $194 / mo for the prior 10 years.

So, DC plans need funding often and early to be successful, but having the financial wherewithal is not a given, and having the discipline is not easy.

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Stretch Too Far And Things Can Snap!

At the age of 55 I am getting to that point (regrettably) that it is becoming more and more difficult to do the things that I did as a younger man. However, this article’s title isn’t referring to my inability to touch my toes without straining most muscles in my body. No, I am referring to the stretch for yield by institutional investors that just my strain, tear, rip, and snap their portfolio’s fixed income exposure.

The holy grail for most public fund and Taft Hartley plan sponsors remains the ROA (return on assets assumption). As such, as interest rates continued to fall in the US, plan sponsors either exited fixed income or they sought higher yielding, less liquid fixed income alternatives in an attempt to generate a return that approximated their ROA. We’ve already discussed on many occasions the negative impact on the asset / liability relationship from reducing fixed income within a plan’s portfolio. There are short duration liabilities that can be immunized with lower yielding fixed income instruments that don’t need to have a return anywhere near the ROA.

In the second instance, the reach for yield has created crowded trades that may be difficult to unwind, potentially exacerbating any loss. We are beginning to see the higher yielding segments of the US credit markets twitch. In the week ended Wednesday, August 6th, EPFR reported that mutual fund flows from high yield funds was -$7 billion, which is the largest withdrawal since 2010, and the largest as a % of AUM ever. Furthermore, the flight to quality that has pushed the yield on 10-year Treasuries to a 52 week low of 2.39% (as of this morning), has also seen it’s yield spread to high quality credits expand beyond 100 bps for the first time since June.

Don’t be shocked if higher yielding credits in ETFs and mutual funds continue to see outflows. The fear of Federal Reserve tapering, geopolitical uncertainty (Ukraine / Russia and Iraq), and Europe’s inability to generate sustained economic growth are creating angst among the investing community. If you want to alleviate this uncertainty, KCS has developed an investment approach to convert your alpha assets (ROA-driven) into beta assets (liability focused) that will help stabilize your funded ratio, potentially reduce contribution costs, and use your fixed income exposure more wisely. Why risk injury trying to exit the credit markets with everyone else.

KCS Celebrates Third Anniversary

We are pleased to announce that August 1, 2014 marks the third anniversary for Kamp Consulting Solutions, LLC. KCS has spent the last three years fighting to keep defined benefit plans active. We continue to bring a different message to the marketplace that both assets and liabilities need to be managed together to accomplish the objective of maintaining a healthy retirement program for the plan’s beneficiaries.

Furthermore, we are excited to be part of a coalition that is bringing Double DB to the marketplace. DDB is a “fixed cost” defined benefit plan that is superior to the myriad hybrid plans that have been introduced into the market. This plan design just may provide the impetus for plan sponsors to maintain their current DB plan.

We are excited about what we’ve accomplished in our first three years, and very much look forward to helping plan sponsors and plan beneficiaries during our fourth year.

KCS Celebrates Third Anniversary

We are pleased to announce that August 1, 2014 marks the third anniversary for Kamp Consulting Solutions, LLC. KCS has spent the last three years fighting to keep defined benefit plans active. We continue to bring a different message to the marketplace that both assets and liabilities need to be managed together to accomplish the objective of maintaining a healthy retirement program for the plan’s beneficiaries.

Furthermore, we are excited to be part of a coalition that is bringing Double DB to the marketplace. DDB is a “fixed cost” defined benefit plan that is superior to the myriad hybrid plans that have been introduced into the market. This plan design just may provide the impetus for plan sponsors to maintain their current DB plan.

We are excited about what we’ve accomplished in our first three years, and very much look forward to helping plan sponsors and plan beneficiaries during our fourth year.

KCS August 2014 Fireside Chat

KCS is pleased to share with you the August 2014 Fireside Chat. This month’s article highlights survey results related to retirement savings. Are things getting better? In addition, we update you on some of the proposed legislation related to retirement plans that is being considered in Washington, DC. We hope you enjoy. As usual, we encourage you to reach out to us should you have any questions / comments.