Single and Broke In Retirement?

We recently came across a news report that highlighted the fact that “singles” in the U.S. are more likely NOT to have a retirement account. In fact, only 51 percent of unattached people have a retirement savings account, according to a study released Wednesday by Mintel. (Mario Petitti / Chicago Tribune)

The population of single people is rising with almost half of adults today not living with a spouse, according to the U.S. Census. That’s up from about 30 percent in 1967.

“More Americans are staying single longer, and our data shows this trend will hold out for the foreseeable future,” Robyn Kaiserman, Mintel financial services analyst, said in the report.

Regrettably, the percentage of singles that have a retirement account is far less than people who are living with a partner or who are married, the research firm said.

Retirement savings accounts have been set up, in contrast, by 68% of people living with a partner and 84% of married adults.

We, at KCS, suggest that Americans overall need to take retirement more seriously, especially those not in a traditional DB plan.

For participants in defined contribution plans, just 27% contribute the maximum allowed to their plan, and 22% say they contribute only enough to get the employer match.

Whether you are single or not the key to funding a successful retirement is to start saving / investing early in life and be consistent (save with every paycheck). Taking advantage of a matching 401k plan should be a no brainer. Unfortunately, the power of compounding is lost on many people. But, why should that be a surprise? We provide so little financial literacy in our schools!

Next 10 years Could Really Challenge Your ROA Assumption – Are You Ready?

According to Standard & Poor’s Institutional Market Services, which polled 679 defined benefit plan sponsors, the median return on asset (ROA) assumption is 7.56%, down slightly from 2013.  How realistic is this objective?  According to Rob Arnott, sponsors will have a very difficult time in the near future meeting this objective. Arnott gave investors a gloomy forecast for medium-term returns at the Inside ETFs Europe conference recently, and urged the audience to think of a new way to attack the ROA challenge.

According to Arnott, “10-year forward-looking expected returns are unanimously low.” He is predicting that Core fixed-income stands at 0.5 percent real returns as well as long-dated inflation linked bonds. Long Treasuries will go barely above zero. U.S. equities are 1 percent above inflation, and small-caps also give 1 percent, despite their yield of 1.8 percent.

Furthermore, the “Growth of earnings and dividends over and above inflation is 1.3 percent, not the 5 percent or more that Wall Street wants us to believe,” said Arnott.

Importantly, these real return expectations are before fees, which for many active strategies would “eat” most of the potential gain. Arnott’s research found that the U.S. top-quartile active manager pockets 0.9371% of the “alpha” and only passes on 0.0629% on to the client.

The plan sponsor quest to meet the ROA challenge has also produced exceptional volatility.  In the next 10 years, volatility is likely to remain at these levels or increase, but it seems that the return won’t be there to compensate for that extra volatility.  Importantly, we believe that liability growth is likely to be flat to negative during the next 10 years as interest rates rise, so a more conservative asset allocation may accomplish a sponsor’s funding goal.

We would suggest that a plan sponsor focus more attention on the plan’s liabilities to drive asset allocation decisions.  However, in order to accomplish this objective, the plan needs to have greater transparency on their liabilities.  Receiving an actuarial report every one or two years will not suffice.  In order to gain greater clarity, we would suggest that plans have a custom liability index (CLI) produced. The CLI will use various discount rates, and will provide a view with and without contributions factored in.  The CLI is provided on a monthly basis.

As a reminder, the only reason that a DB plan exists is to fund a benefit that has been promised in the future. Knowing how that benefit is changing on a regular basis should be a goal of every plan. We stand ready to provide you with the tools necessary to gain greater transparency on your plan’s liabilities, since it doesn’t seem that plan’s will win the funding game by generating outsized returns in the next decade.