Tag Archives: global economies

Your Retirement Plan: What Corporate Executives Think

  By petillo | July 3, 2010 - 4:29 am | 401k, economics, IRA, Mutual Fund Investing, Repercussions: A Retirement Review, Retirement Planning Target 2025
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For most of us, retirement will consist of our ability to draw on many different sources. We’ll use 401(k)s, IRAs, pensions and the stock market. Some of us will rely on Social Security more than we would like and our houses may still play an important role for some as a source of financial security.

Yet it will be the money we invest on our own that will take us to those after-work-years. So we watch the stock markets more so now than we ever have. But what if they were acting irrationally, pricing the shares traded on these exchanges too far into the future? What if business leaders didn’t share the same outlook?

A recent study conducted by the McKinsey & Company among global executives finds that they are much more upbeat about the future than their investors are. “Although economic confidence is clearly shaken, more executives remain positive than negative overall, which likely explains why most expect their companies to continue growing” the report found.

The executives see stability but not stagnation. They believe that their businesses will still grow and with that growth, they see profits. This doesn’t necessarily translate into more jobs, but for those of us who are investing with these companies, the outlook doesn’t seem as grim as the recent sell-off might indicate.

They are however worried about the eurozone. Even Alan Greenspan expressed concern over the condition of Europe’s short-term economic future. When the surveyors asked about the recovery, the world view was portrayed quite differently. In the eurozone, they see the world recovering while the rest of the world believes the outcome of any recovery hinging on the ability of the eurozone to regain some economic strength.

The report found that of the 1832 surveyed over a wide range of industries, countries and functions, “Executives still expect low consumer spending to be the biggest threat to growth, and they are a little more worried.”

So what does this mean for your retirement plan? Long-range the answer is simple. Keep right on investing. This will play itself out at some point and businesses will lead the way. There is however no timeframe on when that leadership will occur. Unfortunately, businesses are quite comfortable with the cash they have on hand, the ratings of their debt and the ability to balance out-per-hour and inventories with some success.

In another survey conducted recently by BlueSteps Peter Altshuler, a Senior Marketing and Creative Strategist commented on the way investors behave. He said: “The markets are never an indicator of economic health….Stocks may have gained, but unemployment has risen, debt has soared, and trade has declined. Unless jobs are created, the cash available for non-essential goods will remain stagnant or become even scarcer, and that will fuel further reductions in employment as margins deteriorate in sectors such as food, healthcare, and other basic industries…the numbers look good but the reality is far more sobering.”

The wildcard is still the consumer and where that consumer will come from is anyone’s best guess at this point. The mere habitual action of regular investing will catch a great many of these companies in relatively good shape. They have weathered the largest part of the storm and done quite well. And even if your portfolio drops in response to recent stock sell-offs, your long-range opportunities to buy a lot of these companies for less is too good to pass up.

In the short-term however, the next five years will be a very volatile time.

A First Class and Sustainable Retirement

  By petillo | June 28, 2010 - 6:28 am | 401k, economics, financial planning, Repercussions: A Retirement Review, Retirement Planning Target 2025
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The goal to a first class and sustainable retirement is often simplified to the following: having enough to money to retire when you want and be able to outlive your accounts. And while there are numerous chances for the average worker to do exactly that, the odds are, most of us will not be able to pick an exact age nor will they feel confident that that money they have put into those retirement accounts will be enough.

According to the Melbourne Mercer Global Pension Index, which rates global pension plans based on those criteria, the US is doing just okay.  So what is keeping the US retirement system from doing better?  The Index looks a variety of different components to determine its rankings.

The US population’s rate of productive workers to retirees is expected to decrease..  Current projections of this ratio are built into the warning from Social Security that at some point in time, more people will be drawing from the system than are paying into it.  The level of government debt also plays a significant role in making sure programs like this can exist.  If it is too high, then the ability to keep these entitlements in place for the lowest income worker is compromised.

Pensions, suffering from what could be easily referred to as an entitlement issue of their own, find more liability in their plans than ability to cover those future obligations.  Having weathered a hundred year storm, numerous pensions are struggling with the next best step.  Those who do not have the promise of a pension built into their retirement plans are calling for the dismantling of those obligations.

Those with pension plans understand the problems associated with their current level of funding.  But the sacrifice of staying with a single employer throughout a working career (to get those promised benefits that are based on employee loyalty) is not something that should be dismantled.  But the alternatives to pensions haven’t proved to be the be-all-to-end-all answer either.

In fact, it is the 401(k) which the index found to be the most lacking element in the US retirement system.  This is based on a variety of reasons.  The 401(k), a defined contribution plan was sustained in part by the employer match, a system that encouraged workers to invest more by “matching” some of those contributed funds.  The economic downturn found many of those companies freezing or worse, eliminating those matching funds.  Investors in those plans recoiled as well, a move that acted as a double whammy on the plans of millions of Americans.

Until companies begin to feel better about their future prospects for growth, which according to the consulting firm McKinsey, is not happening all that fast.  Their most recent corporate survey found about two-thirds of the business leaders believed that their own country was recovering, but 39% of them didn’t feel the same way when asked about the global economy in general.  Until there  is far more global optimism than pessimism, the 401(k) will languish as a benefit not worth investing in.

This doesn’t mean that company executives are suggesting that their own companies won’t grow.  many think they will.  But the return to the generosity formerly benefiting their workers is likely to be much slower – if it resumes at all.  This leaves the forecast for future retirement benefits paid from 401(k) plans to drag the US standing in the Mercer survey further down.

Currently, the average American with a retirement account (including pensions and Social Security) has about 63% of what they will need to sustain their current lifestyle.  Two things can change that outlook, neither of which look to be in the realm of possibility.  The first would be to drastically increase the amount of money invested in these plans, match or no match and the second would be to lower post-work expectations.

Some solutions did emerge from the study, which found the US ranked at six in the eleven nation grouping (In order of best-to-not-the-best: Netherlands came in at number one, Australia, Sweden, Canada, the United Kingdom, the United States, Chile,  Singapore, Germany, China and Japan – none of which received an A grade from mercer.)

The first would be making sure lower income workers have enough to retire on, even if their jobs did not provide enough income to invest adequately for their future. Another suggestion that would likely be met with a great deal of corporate objection would be to make the contribution to their workers 401(k) mandatory.

Charles Salmans, a spokesman at Mercer also had some additional and equally unsavory fixes to the retirement situation.  Not only should employers be required to offer mandatory contributions, employees could made to do the same.  Pointing to Australia as an example, the US could raise the tax exempt ceilings while at the same time, removing some of the features that threaten the 401(k).  One of those features would be to eliminate access to the plan – mostly through borrowing and cashing the plan out with penalties – a move he believes would keep the retirement funds accumulated in the plan until retirement.

The other alternatives you have heard before: raise the early retirement age from 62, raise the mandatory age where pensions must be taken – which is currently 70 1/2, and lastly, educate the worker on not only the need to know what they will require in retirement but how much more they need to invest to get there.

When Balance Dominates the Conversation: A Commentary

  By petillo | June 19, 2010 - 7:01 am | commentary, economics
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Friday’s column by Paul Krugman of the New York Times offered a look at the German economy through the eyes of the American dilemma.  We both have debt and deficits – the difference between the two in case you were unaware is worth noting: debts in reference to the government is based upon what the government has spent since its inception and the revenues collected over the same time period, while deficits refer to what is collected in revenue against what is spent in a given year.

President Obama inherited debt and in response to the economic problems he also inherited, he has created deficits.  Because of the debt we have, the cost of debt service is added into the budget. By having an enormous amount of debt, an economy in trouble and a global economic crisis, deficits are a fact of life.  While Keynes does abhor huge government debts, he would agree that with unemployment at its current levels, Mr. Obama has little choice but to try and spend to save, a counterintuitive phrase if there ever was one.

Mr. Krugman worries that the hawks who want to see the spending stopped are doing so at the risk of creating more economic havoc. On this point he would be right.  Until we get the employment problem fixed – and there will always be unemployment but it should be short-term and not of the duration we have been experiencing – you can adopt austerity but it will not fix the problem.  Instead, it will harm the efforts even more and probably – because no one knows for sure – keep us in a tailspin for many more years.

While Mr. Krugman’s illustration was on the mark, the people who left comments to his column offered some interesting insights as well.  Here are a few excerpts from his readers.

Marshall Auerback of Denver sought to give us a lesson in macroeconomics: “Basic Macroeconomics 101 tells us that at any point in time, full capacity output is determined by the employment level consistent with all workers being able to work their desired hours times labour productivity (how much each unit of working hour produces). That is what we think of when we talk about aggregate supply. It is the maximum that the economy can produce given the current technology and desires of the available workforce.

“On the other side of the equation, total spending (which buys this output) is compromised on private, public and external components. So household consumption and private investment plus government spending plus net exports constitute what we call aggregate demand.

“If aggregate demand happens to be sufficient to absorb all the output that the fully employed economy produces then we are in a desirable state.”

Vincent Amato of New York offered: “What we are seeing is the beginning of the demise of capitalism as we have known it. Just as soviet-style socialism seemed an abysmal failure and eventually imploded, capitalism simply can no longer function as it once did.” He didn’t say what would replace the system.

Joe A blamed the audiences of Fox News – although he didn’t name them specifically: “This has very little to do with actual economics and everything to do with good old-fashioned class warfare. What is really sad is that working people and wage-earners of ordinary incomes are being recruited to protest government spending. These people don’t understand the big picture enough to realize they are blowing themselves up economically.”  I have often wondered how folks who protest the government, take government subsidies and are among the most vulnerable part of the working population can buy into such an argument.  Self-sufficiency is one thing; self-annihilation quite another.

Beata of Chicage wondered: “That desire to find black/white, right/wrong has begun to dominate American thinking (or lack of thinking). If some without education, and without a sense of doing what’s right for the country look at things that way, it’s understandable. It’s immoral for those who are governing, and have taken an oath to do serve the welfare of the nation to do so.”

C. Wolfe of Bloomington was amazed by a stat they recently uncovered: “Some employers, faced with daunting numbers of applicants for any given job opening, simplify matters by weeding out the unemployed. That’s right: they choose candidates to interview only from among those who already have a job.”

And while none of the folks who advocate the era of austerity can suggest how they plan on doing it – aside from penalizing the already unemployed and cutting the benefits of those who need them most, Mr. Pieper had a dream recently on how he saw it happening: “I once dreamt the US reduced its deficit by cutting the defense budget to a level justified for “defense” and eliminated corporate welfare. Then I woke up.”

You can read all of the comments and Mr. Krugman’s column here.