Our daily roundup of retirement news your clients may be thinking about.
A group of lawmakers introduced legislation that would fix Social Security’s financial woes by substantially raising the income rate, according to this article from MartketWatch by Alicia Munnell, director of Boston College Center for Retirement Research. The bill also seeks changes to enhance the existing benefits, such as making inflationary adjustments to benefits using the Consumer Price Index for the Elderly (CPI-E) and increasing the first factor in the benefit formula to 93%, the expert writes. Under the bill, thresholds for taxation of benefits under the personal income tax would also be raised, resulting in bigger net benefits for middle-class workers, she adds. “I think this is the right approach.”
A study by a professor of finance at the University of Navarra in Barcelona found that the traditional one retirement portfolio with an asset allocation of 60% in stocks, 30% in bonds and 10% in cash outperformed bucket approaches, according to this article on MarketWatch. The study compared three different bucket strategies to 11 different non-bucket strategies. The traditional retirement strategy even had a 0% failure rate, compared with the bucket approaches, which had a failure rate of 4% to 5%, the study found. (Failure rates measured the number of years the strategy had insufficient assets to fund the required withdrawal.) Financial planners should “attempt to convince retirees that however plausible, comforting, and easy to implement the bucket approach may be,” building a well-balanced portfolio with a strong asset allocation “would be just as easy to implement and would ultimately make them better off,” says the researcher.
Defined-contribution retirement plans in the U.S. and six other countries increased to more than 50% of the total pension assets in those countries last year. This is up from 30% in 1998, according to this article from The Wall Street Journal, which cited a report from Willis Towers Watson. Defined-contribution assets have risen 8.9% in these countries over the past decade, with defined-benefit assets increasing at 4.6% over the same period, the report says. The shift to defined contribution plans presents a problem, an expert says. “We believe that the risk of widely underfunded retirements is very prevalent as we approach retirement ages for people who only have a DC benefit.”
Many clients do not fully understand the concept of “compound interest,” which will allow them grow their savings and end up with a bigger nest egg in retirement, according to this article on CNBC. To make the most of compound interest, clients should start saving in their tax-advantaged retirement accounts like 401(k) and IRA as early as they can, as this will give their investments more time to grow through compounding. “The earlier you start, the better off you'll be,” states the article.
