Those of you who have followed this column for some time will remember my previous articles on the terrible financial condition of many state and local government pension plans, an issue which will undoubtedly come back to affect us all in the form of much higher local and sales taxes. In fact, this may happen sooner than expected.
The State of California has a $300 billion employee pension plan known as CalPERS. It appears that CalPERS is considering cutting its investment return assumption going forward. Until recently, the plan has assumed an 8 percent annual return but underperformed that target by a considerable amount over the years. The assets of the plan failed to grow at nearly the rate of increase of the plan’s liabilities, resulting in a substantial shortfall, which if left to grow, could end up bankrupting the state.
Therefore, the suggestion is that they lower the return assumption again (they lowered it last year to 7.5 percent) to 7.25 percent or, maybe, 7 percent going forward. Have they routinely earned returns anywhere close to these new proposed targets? No!
Then, why even do this? Because lowering the investment return assumption will increase the amount of the annual pension contribution required which, in turn, will trigger tax hikes to meet these new, higher contribution levels. Traditionally, politicians tend to resist tax increases because of the negative effect they have on voter sentiment, but having to raise taxes to pay pension costs is more politically justifiable than raising taxes to increase spending.
You may wonder what this has to do with you (since you are likely living here in Florida) and personal financial planning. It applies in two ways: First, it is a clear indication local and sales taxes will be increasing (no surprise there) at what is probably going to be a much faster rate than inflation. Second, this same phenomenon happens with many individual financial plans. Many plans assume a return that sounds reasonable but is, in fact, much higher than most people are realizing on their investments. For example, many internet-based retirement calculators assume an 8 percent annual return yet the typical investor only realized a 3.5 percent average annual return so far this century (2000-2016). So, if you are relying on a plan that assumes a return far in excess of what you are earning, it may be time to change your investment assumption (i.e., lower it) and make whatever mid-course corrections are appropriate as a result.
As I write this article, markets are and have recently been at all-time highs, but we know how quickly corrections can occur (down 37 percent in 2008-2009). As always, we are merely a phone call away if you would like to delve into this further or learn more about our Retirement Ready educational workshops.
Frederic “Ric” Schilling is a Florida native, born in Jacksonville. Ric is president of Senior Guardians of America, a local North Florida firm specializing in tax reduction, long term illness planning, asset protection, probate avoidance and life income planning. Ric is a national speaker and advocate on senior issues and has been featured by the Florida Times Union and WJXT, TV-4 in Jacksonville as an authority on estate planning and retirement issues. Senior Guardians has an A+ rating with the Better Business Bureau and is a member in excellent standing with the National Ethics Association. Contact Frederic: 904-371-3302 or 888-891-3381 Please visit: www.seniorguardian.com
This article is not intended to give tax or legal advice. Securities offered through Center Street Securities, Inc. (CSS), a registered Broker-Dealer and Member of FINRA & SIPC. Senior Guardians is independent of CSS.