Riddle me this, Batman!
What do YOU (a private investor) and the largest pension plan in the United States have in common? It’s not a trick question; I promise there is a similarity!
I don’t expect you to know the answer without a little background on CalPERS, or California Public Employees' Retirement System – the largest pension plan in the country. CalPERS is an agency in the California executive branch that manages pension and health benefits for more than 1.6 million California public employees, retirees, and their families.
The company has a giant responsibility with all the promises they make to school teachers, fire fighters, police and other state employees that if these people work a certain number of years they will receive a monthly pension check for the rest of their lives.
In a stunning development last December (2016) the Wall Street Journal reported the following:
California Public Employees’ Retirement System plans to propose that their board abandon a long-held goal of achieving a 7.5% (annual rate of return) and reduce (that number) to 7.25% or 7%, to start aligning its rate of return expectations with reality.
A reduction in CalPERS’ return target to 7% or 7.25% would have real-life consequences for taxpayers and cities. It would likely trigger a painful increase in yearly pension bills for the towns, counties and school districts that participate in California’s state pension plan. Any loss in expected investment earnings must be made up with significantly higher annual contributions from public employers as well as the state.
If the assumed rate of return fell to 7%, the state and school districts participating in CalPERS would have to pay at least $15 billion more over the next 20 years, said spokeswoman Amy Morgan. That number doesn’t include cities and local agencies.”
Here’s what this means and it’s not good for any of us. CalPERS has the best and brightest minds managing their money. They can get whomever they want but, with all that firepower, they’re still forced to reduce expected future returns. The ripple effect through California will be brutal. There will be ramifications from the Redwoods to San Diego as municipalities are forced to kick more into the kitty because they can’t earn enough return on their money.
Here’s what this means for you and the answer to the riddle of what you could possibly have in common with a giant pension plan.
There are two ways for normal investors (and pension plans) to reach their retirement goals. 1) to earn a higher investment rate of return or 2) to save more money each year. Can you see where this is going?
The first option (monkeying around with rates of return) is easier to fathom than the second. Saving more simply isn’t palatable to mere mortals (or municipalities). On the other hand, thinking you can squeeze a few extra points of investment return each year is much easier to digest.
As the guys at RealInvestmentAdvice.com are apt to say:
You cannot INVEST your way to your retirement goal. As the last decade should have taught you by now, the stock market is not a “get wealthy for retirement” scheme. You cannot continue to under save for your retirement hoping the stock market will make up the difference. As stated, this the same trap that pension funds across this country have fallen into and are now paying the price for.
So, that’s what you and many pension funds have in common. Neither of you is probably saving enough, both of you need to sock more away on a yearly basis because nobody, and I mean nobody wants the third option—having less money in the end.
That’s just the way it works!
Required disclosures: Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. BCM and (Strataxa Retirement Advisors, LLC) are independent of each other. Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents.
Information provided is not intended as tax or legal advice, and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional