Bet you didn’t know that.
Jim Lorenzen, CFP®, AIF®
There was a time – for those of you old enough to remember – when companies would promise you a pre-determined retirement benefit, then do all the calculations required to figure out just how much they would have to fund your plan in order to achieve the promised results.
Not easy. They had to start with the ending value and work backwards, making capital markets assumptions for expected portfolio returns, based on how their investment portfolio was allocated.
Problems arose, however, when their projections were too optimistic resulting in many under-funded pension plans and an inability to pay promised benefits.
Goodbye pensions; hello 401(k). Companies decided they didn’t need the liability risk: You figure it out.
Now you get to decide how much funding is required. Can you calculate the time-value of money? Pensions promised a fixed benefit; but, in the real world, we have inflation and tax-law changes. Pensions never even considered those factors.
Not only do you need to factor-in additional inputs; you also need know how to manage portfolio risk, too! You might find this report somewhat enlightening, if not helpful.
Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991. Jim is Founding Principal of The Independent Financial Group, a registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.