{"title":"BOOK REVIEW: Review of Book Reviews","authors":"Anthony Webb","doi":"10.3905/jor.2021.1.100","DOIUrl":"https://doi.org/10.3905/jor.2021.1.100","url":null,"abstract":"","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"9 1","pages":"89 - 90"},"PeriodicalIF":0.0,"publicationDate":"2021-12-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49330927","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Lifestyle or static allocation funds are designed to expose investors to a certain level of risk. The asset allocation is constant and does not change over time. The fund manager’s job is to ensure that the level of risk does not exceed the fund’s target risk. These funds have also been become the popular investment choices in several 401(k) and IRA pension plans. This study looks at the absolute and risk-adjusted performance of three lifestyle mutual fund categories (aggressive, moderate, and conservative) from January 1994 to August 2017 and compares them with various stock and bond benchmark indexes. The authors find that lifestyle mutual funds have underperformed benchmark indexes and index funds with lower absolute and risk-adjusted performance from January 1994 to August 2017. They also compute the seven-factor alpha (Carhart four factors plus excess returns of FTSE All-World ex US, Barclays Aggregate Bond Index, and Citi World Government Bond Index) during this time period. They find that all three categories of lifestyle funds have negative net alpha during the entire period. Gross alphas for all three lifestyle fund categories are negative but insignificantly different from zero. These results indicate that lifestyle mutual funds are successful in security selection but charge fees to deliver outperformance that are too high.
{"title":"An Empirical Examination of Lifestyle Mutual Funds","authors":"Srinidhi Kanuri","doi":"10.3905/jor.2021.1.098","DOIUrl":"https://doi.org/10.3905/jor.2021.1.098","url":null,"abstract":"Lifestyle or static allocation funds are designed to expose investors to a certain level of risk. The asset allocation is constant and does not change over time. The fund manager’s job is to ensure that the level of risk does not exceed the fund’s target risk. These funds have also been become the popular investment choices in several 401(k) and IRA pension plans. This study looks at the absolute and risk-adjusted performance of three lifestyle mutual fund categories (aggressive, moderate, and conservative) from January 1994 to August 2017 and compares them with various stock and bond benchmark indexes. The authors find that lifestyle mutual funds have underperformed benchmark indexes and index funds with lower absolute and risk-adjusted performance from January 1994 to August 2017. They also compute the seven-factor alpha (Carhart four factors plus excess returns of FTSE All-World ex US, Barclays Aggregate Bond Index, and Citi World Government Bond Index) during this time period. They find that all three categories of lifestyle funds have negative net alpha during the entire period. Gross alphas for all three lifestyle fund categories are negative but insignificantly different from zero. These results indicate that lifestyle mutual funds are successful in security selection but charge fees to deliver outperformance that are too high.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"9 1","pages":"72 - 87"},"PeriodicalIF":0.0,"publicationDate":"2021-12-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44180363","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article reviews the literature on the recent benefit and funding landscape of state and local government employee pension plans. Many plans, with generous benefit structures and inadequate funding, are in troubled financial condition. The state of Connecticut’s pension plans are a good illustration of that situation. The author simulates the range of funded ratios and actuarially determined contributions for the three large plans in 2030 under 10-year periods of historical annual investment returns and shows the substantial risk the plans represent to taxpayers. He then considers policy implications that include federal mandatory funding policy and the closing of the plans to new workers to cap the risk and replacing them with defined-contribution plans.
{"title":"The Trouble with State Government Employee Pension Plans: The Case of Connecticut","authors":"M. Warshawsky","doi":"10.3905/jor.2021.1.097","DOIUrl":"https://doi.org/10.3905/jor.2021.1.097","url":null,"abstract":"This article reviews the literature on the recent benefit and funding landscape of state and local government employee pension plans. Many plans, with generous benefit structures and inadequate funding, are in troubled financial condition. The state of Connecticut’s pension plans are a good illustration of that situation. The author simulates the range of funded ratios and actuarially determined contributions for the three large plans in 2030 under 10-year periods of historical annual investment returns and shows the substantial risk the plans represent to taxpayers. He then considers policy implications that include federal mandatory funding policy and the closing of the plans to new workers to cap the risk and replacing them with defined-contribution plans.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"9 1","pages":"55 - 71"},"PeriodicalIF":0.0,"publicationDate":"2021-12-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48202660","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Prior research finds mixed evidence of annuity preference among workers. In a survey of participants in an employer-sponsored retirement savings plan, the authors found that nearly twice as many prefer a mix of annuitized income and investments to a system that offers only investments or only a pension. When given a choice to allocate savings among stocks, bonds, and an income annuity, respondents would place 33.5% of their total retirement savings in an income annuity, and higher annuity allocations are preferred by older and average-income respondents. The most important attribute of a retirement savings plan is the ability to understand how much a retiree can safely spend. Eighty-one percent of participants indicate that they are somewhat or highly likely to prefer a retirement plan that substitutes guaranteed income for bond investments. The peace of mind offered by a product that provides a guarantee of lifetime income, the reduced fear of outliving savings, and the ability to budget spending in retirement are the most frequently cited reasons for preferring an annuity.
{"title":"Employee Opinions about Partial Annuitization in a Retirement Plan","authors":"Michael R. Finke, Jason J. Fichtner","doi":"10.3905/jor.2021.1.095","DOIUrl":"https://doi.org/10.3905/jor.2021.1.095","url":null,"abstract":"Prior research finds mixed evidence of annuity preference among workers. In a survey of participants in an employer-sponsored retirement savings plan, the authors found that nearly twice as many prefer a mix of annuitized income and investments to a system that offers only investments or only a pension. When given a choice to allocate savings among stocks, bonds, and an income annuity, respondents would place 33.5% of their total retirement savings in an income annuity, and higher annuity allocations are preferred by older and average-income respondents. The most important attribute of a retirement savings plan is the ability to understand how much a retiree can safely spend. Eighty-one percent of participants indicate that they are somewhat or highly likely to prefer a retirement plan that substitutes guaranteed income for bond investments. The peace of mind offered by a product that provides a guarantee of lifetime income, the reduced fear of outliving savings, and the ability to budget spending in retirement are the most frequently cited reasons for preferring an annuity.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"9 1","pages":"9 - 31"},"PeriodicalIF":0.0,"publicationDate":"2021-10-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48261211","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article explores the accuracy of subjective life expectancy estimates using data primarily from the from the Health and Retirement Study (HRS). Although individuals appear to have some sense about their likelihood of survival (i.e., their subjective mortality), there are notable gaps in these estimates, consistent with past research. Evidence suggests that although subjective estimates may be relatively accurate, on average, and that households appear to do a relatively good job considering various objective factors (for example, health status), there are often significant errors in individual forecasts, and households do not appear to correctly consider all the relevant objective factors (such as income and smoking). Therefore, financial planners need to educate themselves on how to better model and personalize mortality assumptions into financial plans versus relying on purely subjective estimates to ensure that planning assumptions are as accurate as possible. Key Findings ▪ Errors in mortality forecasts can have a significant impact on a variety of household decisions, such as required savings, optimal retirement spending, etc. ▪ This analysis suggests that while individuals appear to have some sense of their mortality, there can be notable errors in these estimates and that a number of attributes are not appropriately considered when forecasting mortality. ▪ Given the clear gaps that exist in subjective mortality estimates, objective information should largely (or entirely) be the basis for any type of retirement period estimate in a financial plan.
{"title":"Minding the Gap in Subjective Mortality Estimates","authors":"David Blanchett","doi":"10.3905/jor.2021.1.093","DOIUrl":"https://doi.org/10.3905/jor.2021.1.093","url":null,"abstract":"This article explores the accuracy of subjective life expectancy estimates using data primarily from the from the Health and Retirement Study (HRS). Although individuals appear to have some sense about their likelihood of survival (i.e., their subjective mortality), there are notable gaps in these estimates, consistent with past research. Evidence suggests that although subjective estimates may be relatively accurate, on average, and that households appear to do a relatively good job considering various objective factors (for example, health status), there are often significant errors in individual forecasts, and households do not appear to correctly consider all the relevant objective factors (such as income and smoking). Therefore, financial planners need to educate themselves on how to better model and personalize mortality assumptions into financial plans versus relying on purely subjective estimates to ensure that planning assumptions are as accurate as possible. Key Findings ▪ Errors in mortality forecasts can have a significant impact on a variety of household decisions, such as required savings, optimal retirement spending, etc. ▪ This analysis suggests that while individuals appear to have some sense of their mortality, there can be notable errors in these estimates and that a number of attributes are not appropriately considered when forecasting mortality. ▪ Given the clear gaps that exist in subjective mortality estimates, objective information should largely (or entirely) be the basis for any type of retirement period estimate in a financial plan.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"9 1","pages":"8 - 20"},"PeriodicalIF":0.0,"publicationDate":"2021-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49309649","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study describes a tax-efficient withdrawal strategy that can add substantial value to many clients of financial advisors with financial portfolios worth up to $2 million. In early retirement years, these households can delay the start of their Social Security benefits and make Roth conversions to fill relatively low tax brackets, which are generally also their marginal tax rates. Once Social Security benefits begin, they can make tax-free Roth withdrawals to minimize the amount of tax-deferred account (e.g., 401(k)) withdrawals that are taxed at 185% of their tax bracket, due to the taxation of Social Security benefits. With a series of cases, we show that a financial advisor can add substantial value to many of their clients’ financial portfolios by recommending such a withdrawal strategy. Key Findings • Due to the taxation of Social Security benefits, there is a wide range of income where a household will have a marginal tax rate of 150% or 185% of their tax bracket, where marginal tax rate denotes the additional taxes paid on the next dollar of income. • This study presents a general tax-efficient withdrawal strategy that will help many singles and married couples with financial portfolios worth up to $2 million substantially reduce the present value of their lifetime income taxes. In addition, these withdrawal strategies can greatly reduce the percentage of these households’ lifetime Social Security benefits that will be taxable. • In the general tax-efficient withdrawal strategies, in early retirement years, these households should delay the start of their Social Security benefits and make Roth conversions to fill relatively low tax brackets, which are generally also their marginal tax rates. Once Social Security benefits begin, they can make tax-free Roth withdrawals to minimize the amount of tax-deferred account (e.g., 401(k)) withdrawals that are taxed at 185% of their tax bracket, due to the taxation of Social Security benefits.
{"title":"How Social Security Coordination Can Add Value to a Tax-Efficient Withdrawal Strategy","authors":"William R Reichenstein, W. Meyer","doi":"10.3905/jor.2021.1.092","DOIUrl":"https://doi.org/10.3905/jor.2021.1.092","url":null,"abstract":"This study describes a tax-efficient withdrawal strategy that can add substantial value to many clients of financial advisors with financial portfolios worth up to $2 million. In early retirement years, these households can delay the start of their Social Security benefits and make Roth conversions to fill relatively low tax brackets, which are generally also their marginal tax rates. Once Social Security benefits begin, they can make tax-free Roth withdrawals to minimize the amount of tax-deferred account (e.g., 401(k)) withdrawals that are taxed at 185% of their tax bracket, due to the taxation of Social Security benefits. With a series of cases, we show that a financial advisor can add substantial value to many of their clients’ financial portfolios by recommending such a withdrawal strategy. Key Findings • Due to the taxation of Social Security benefits, there is a wide range of income where a household will have a marginal tax rate of 150% or 185% of their tax bracket, where marginal tax rate denotes the additional taxes paid on the next dollar of income. • This study presents a general tax-efficient withdrawal strategy that will help many singles and married couples with financial portfolios worth up to $2 million substantially reduce the present value of their lifetime income taxes. In addition, these withdrawal strategies can greatly reduce the percentage of these households’ lifetime Social Security benefits that will be taxable. • In the general tax-efficient withdrawal strategies, in early retirement years, these households should delay the start of their Social Security benefits and make Roth conversions to fill relatively low tax brackets, which are generally also their marginal tax rates. Once Social Security benefits begin, they can make tax-free Roth withdrawals to minimize the amount of tax-deferred account (e.g., 401(k)) withdrawals that are taxed at 185% of their tax bracket, due to the taxation of Social Security benefits.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"9 1","pages":"37 - 57"},"PeriodicalIF":0.0,"publicationDate":"2021-09-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42150730","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Although target date mutual funds (TDFs) have only been around since the mid-1990s, they are now common vehicles for retirement investing. Sixty percent of US companies now automatically funnel employees’ non-directed retirement funds into TDFs, which account for nearly one-quarter of all savings US workers have in 401(k)s. Helping investors pick among TDFs, Morningstar rates past risk-adjusted performance using a star system and provides forward-looking evaluations of more than 2,500 TDFs using either Analyst Ratings or a newly implemented machine-learning-based Quantitative Ratings. Morningstar assigns Analyst Ratings to a smaller subset of TDFs that tend to have been in existence the longest and have the largest size. We find that TDFs with lower fees have significantly higher star ratings than their higher expense counterparts. No-load TDFs have significantly higher star ratings than their load-charging counterparts. In assessing future fund prospects, TDFs with low expense ratios are favored by both analysts and artificial intelligence. TDFs without load charges have significantly better Quantitative Ratings than their load charging counterparts. TDFs with Quantitative Ratings tend to be smaller, younger, and have poorer prior performance than TDFs with Analyst Ratings. TOPICS: Long-term/retirement investing, mutual funds/passive investing/indexing, information providers/credit ratings Key Findings ▪ Target date funds (TDFs) with low expenses and without load charges have significantly higher Morningstar star ratings of past risk-adjusted performance. These same low-cost funds have higher Morningstar Analyst ratings and Quantitative ratings, which estimate future fund prospects of performance. ▪ Regression results suggest Morningstar’s two forward-looking fund ratings are not perfect substitutes. Analyst ratings weight fund expense and fund age more heavily (both negatively) while the computer-generated Quantitative ratings are more positively influenced by past fund performance. ▪ Morningstar’s star ratings, Analyst ratings, and Quantitative ratings all suggest that retirement investing will result in a larger nest egg when attention is restricted to no-load, low-expense TDFs. Additionally, the ratings suggest investors should favor larger but relatively younger funds.
{"title":"Importance of Costs in Target Date Fund Selection Using Three Morningstar Ratings","authors":"C. E. Chang, T. Krueger, H. Witte","doi":"10.3905/jor.2021.1.085","DOIUrl":"https://doi.org/10.3905/jor.2021.1.085","url":null,"abstract":"Although target date mutual funds (TDFs) have only been around since the mid-1990s, they are now common vehicles for retirement investing. Sixty percent of US companies now automatically funnel employees’ non-directed retirement funds into TDFs, which account for nearly one-quarter of all savings US workers have in 401(k)s. Helping investors pick among TDFs, Morningstar rates past risk-adjusted performance using a star system and provides forward-looking evaluations of more than 2,500 TDFs using either Analyst Ratings or a newly implemented machine-learning-based Quantitative Ratings. Morningstar assigns Analyst Ratings to a smaller subset of TDFs that tend to have been in existence the longest and have the largest size. We find that TDFs with lower fees have significantly higher star ratings than their higher expense counterparts. No-load TDFs have significantly higher star ratings than their load-charging counterparts. In assessing future fund prospects, TDFs with low expense ratios are favored by both analysts and artificial intelligence. TDFs without load charges have significantly better Quantitative Ratings than their load charging counterparts. TDFs with Quantitative Ratings tend to be smaller, younger, and have poorer prior performance than TDFs with Analyst Ratings. TOPICS: Long-term/retirement investing, mutual funds/passive investing/indexing, information providers/credit ratings Key Findings ▪ Target date funds (TDFs) with low expenses and without load charges have significantly higher Morningstar star ratings of past risk-adjusted performance. These same low-cost funds have higher Morningstar Analyst ratings and Quantitative ratings, which estimate future fund prospects of performance. ▪ Regression results suggest Morningstar’s two forward-looking fund ratings are not perfect substitutes. Analyst ratings weight fund expense and fund age more heavily (both negatively) while the computer-generated Quantitative ratings are more positively influenced by past fund performance. ▪ Morningstar’s star ratings, Analyst ratings, and Quantitative ratings all suggest that retirement investing will result in a larger nest egg when attention is restricted to no-load, low-expense TDFs. Additionally, the ratings suggest investors should favor larger but relatively younger funds.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"8 1","pages":"66 - 83"},"PeriodicalIF":0.0,"publicationDate":"2021-04-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46512846","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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