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In Recent Years Large Financial Institutions Such As Mutual Funds And Pension Funds Have Been Becoming The Dominant

Agency Problems and Corporate Ownership Corporate ownership varies around the world. Historically, individuals have owned the majority of shares in public corporations in the United States. In Germany and Japan, however, banks, other large financial institutions, and other companies own most of the stock in public corporations. Do you think agency problems are likely to be more or less severe in Germany and Japan than in the United States Why In recent years, large financial institutions such as mutual funds and pension funds have been becoming the dominant owners of stock in the United States, and these institutions are becoming more active in corporate affairs. What are the implications of this trend for agency problems and corporate control

Funding Jill Morans Retirement Annuity

Sunrise Industries wishes to accumulate funds to provide a retirement annuity for its vice president of research, Jill Moran. Ms. Moran, by contract, will retire at the end of exactly 12 years. Upon retirement, she is entitled to receive an annual end-of-year payment of 42,000 for exactly 20 years. If she dies prior to the end of the 20-year period, the annual payments will pass to her heirs. During the 12-year accumulation period, Sunrise wishes to fund the annuity by making equal, annual, end-of-year deposits into an account earning 9 interest. Once the 20-year distribution period begins, Sunrise plans to move the accumulated monies into an account earning a guaranteed 12 per year. At the end of the distribution period, the account balance will equal zero. Note that the first deposit will be made at the end of year 1 and that the first distribution payment will be received at the end of year 13. Draw a time line depicting all of the cash flows associated with Sunrise's view of the...

The Bankruptcy of Government and Private Pension Systems

Although it is widely known that our Social Security and Medicare programs are threatened by these demographic trends, there are many who believe that they have accumulated sufficient private wealth to fund their retirement. But this may not be so. The same crisis that strikes the public pension programs can overwhelm private pensions as well. Since there will not be enough workers earning income, there will not be enough savings generated to purchase the assets the retirees must sell to finance their retirement. The reasons why retirees cannot turn their savings into consumption is because the assets of wealth can be transformed into goods and services only if they are sold to those willing to defer their consumption. In a modern economy, wealth does not represent stored consumption, such as a cache of acorns that squirrels bury to bide them through a long winter. You cannot consume your stock certificates but must sell them to someone else who wants a chance to consume at a later...

What are provisions for employee benefits and pensions

Pension and related commitments include severance payments, early retirement and related payments, special retirement plans, top-up plans providing guaranteed resources and healthcare benefits, life insurance and similar entitlements that, in some cases, are granted under employment contracts and collective labour agreements. A distinction is made between defined contribution plans where the employer commits to making regular payments to an external organisation. Those payments are paid back to employees when they retire in the form of pensions together with the corresponding investment revenue. The size of the pension payments depends on the investment performance of the external organisation managing the plan. The employer does not guarantee the level of the pension paid (a resource-related obligation). This applies to most national social security systems.

Do pension funds affect firm value and board structure

Table 9.5 reports the results of the Logit regressions where the various agency variables are considered simultaneously. The dependent variable is equal to 1 if company i is in the test sample and 0 if it is part of the control sample. The table shows that, with the exception of the variables that proxy for firm value that are significantly lower for our test firms, there is no statistical difference between our test and control firms. As shown in Table 9.4, companies in which occupational pension funds hold large stakes are not more profitable and do not pay higher dividends than the control firms. In addition, our test firms are not more likely to split the roles of chairman and chief executive officer, have less directors or more non-executive directors than our control group.These two last issues were the main focus of the recommendations of Cadbury (1992), which relied on pension funds for their implementation. Column (6), Table 9.5, controls for differences in other monitoring...

The Non Homogeneous Semi Markov Pension Fund Model

It is well known that the pension fund problem is one of the most important problems of the present time, not only for people today but for future generations. Clearly, this problem must be placed in a general economic, financial, demographic and political framework. For example, one of the basic facts is a change in mortality rates in almost all countries, these rates are decreasing so that more and more people will be entitled to a pension. It is now a fact that the numbers of the working population will also decrease. Nowadays, most national governments are preoccupied with the catastrophic evolution of national pension funds and some now see a need for collaboration with insurance companies. In any event, whatever the future choice of such collaboration may be, we will always need actuarial models that will describe the stochastic evolution of pension funds. The pension fund model should generalize the DTNHSMP presented in Chapter 4. In this way it is possible to take into account...

Retirement Planning and the Asset Salary Ratio

FASB 87 requires private pension plan sponsors to report their surplus, or the excess of assets over present-value liabilities, on a market-to-market basis. GASB 5, on the other hand, does not require public pension plans to measure liabilities with a discount rate that reflects current market conditions.

The liability for pension and other postretirement costs

The liability for pension costs is made up from the following amounts If this calculation comes out with a negative amount the company should recognise a pension asset in the balance sheet. There is a limit on the amount of the asset, if the asset calculated above is greater than the total of Within IAS 19 there are rules regarding the maximum pension asset that can be created.

Pension Fund as a Distinct Entity

The pension fund is merely an intermediary between the employer and the pension beneficiary, as depicted in Exhibit 12-4.The employer is ultimately liable for all pension benefits and bears all of the risks associated with the pension fund's investments.Con-sequently, many analysts do not regard the pension fund as an entity distinct from the employer firm and suggest that pension plan assets and obligations should be included (consolidated) with those of the employer for financial reporting purposes. The consolidation of the employer firm and its pension plan would dramatically alter the financial statements of most industrial firms. For example, Bethlehem Steel's pension plan had 4.9 billion in assets and 5.5 billion in obligations at the end of 1997. Bethlehem Steel itself had about 4.8 billion in assets (exclusive of pension amounts) at that date and only 1.2 billion in shareholders' equity. In this case, inclusion of the pension fund assets and obligations on Bethlehem Steel's...

Railroad Retirement Act and Social Security Disability

The Railroad Retirement Act (RRA) sets up a system of benefits for railroad employees, their dependents and survivors. The RRA works with the Social Security Act to provide disability (as well as retirement, survivor and dependent) benefits payable on the basis of a person's work in the railroad industry and in work covered by the Social Security Act. An important distinction is made between railroad workers who have worked fewer than ten years and those who have worked ten years or more. The RRA transfers to the Social Security system the compensation records of people who, at the onset of disability, have fewer than ten years of work in the railroad industry. This compensation is considered wages under the Social Security Act. The wages of those with ten or more years of work generally remain under the Railroad Retirement Act. The distinction has primary importance when you seek survivor's benefits based on the death of the insured railroad worker, and so the details are not covered...

Valuing retirement accounts

Where possible, you should try to save and invest in accounts that offer you a tax advantage. This is precisely what retirement accounts offer you. These accounts known by such enlightening acronyms and names as 401(k), 403(b), SEP-IRAs, Keoghs, and so on offer tax breaks to people of all economic means. Consider the following advantages to investing in retirement accounts Contributions are usually tax-deductible. By putting money in a retirement account, not only do you plan wisely for your future, but you also get an immediate financial reward lower taxes and lower taxes mean more money available for saving and investing. Retirement account contributions are generally not taxed at either the federal or state income tax level until withdrawal (but they're still subject to Social Security and Medicare taxes when earned). If you're paying, say, 35 percent between federal and state taxes (see Chapter 7 to determine your tax bracket), a 5,000 contribution to a retirement account lowers...

Understanding retirement building blocks

Did you play with Lego blocks or Tinkertoys when you were a child You start by building a foundation on the ground, and then you build up. Before you know it, you're creating bridges, castles, and animal figures. Although preparing financially for retirement isn't exactly like playing with blocks, the concept is the same You need a basic foundation so that your necessary retirement reserves can grow. If you've been working steadily, you may already have a good foundation, even if you haven't been actively saving toward retirement. In the pages ahead, I walk you through the probable components of your future retirement income and show you how to figure how much you should be saving to reach particular retirement goals. Social Security is intended to provide you with a subsistence level of retirement income for the basic necessities food, shelter, and clothing. Social Security is not intended to be your sole source of income. Some elderly are quite dependent upon Social Security For 22...

Crunching numbers for your retirement

Now that you've toured the components of your future retirement income, take a shot at tallying where you stand in terms of retirement preparations. Don't be afraid to do this exercise it's not difficult, and you may find that you're not in such bad shape. I even explain how to catch up if you find that you're behind in saving for retirement. Table 4-2 Retirement Planning Worksheet Retirement Income or Needs 1. Annual retirement income needed in today's dollars (see earlier in this chapter) 3. Annual pension benefits (ask your benefits department) multiply by 60 if your pension won't increase with inflation during retirement 4. Annual retirement income needed from personal savings (subtract lines 2 and 3 from line 1) 6. Value of current retirement savings 7. Value of current retirement savings at retirement (multiply line 6 by Growth Multiplier in Table 4-3) To get a more precise handle on where you stand in terms of retirement planning (especially if you'd like to retire earlier than...

Maximize taxdeferred retirement account savings

It's difficult for most people to save money. Don't make a tough job impossible by forsaking the terrific tax benefits that come from investing through retirement savings accounts. Employer-based 401(k) and 403(b) retirement plans offer substantial tax benefits. Contributions into these plans are federal and state tax-deductible. And once the money is invested inside these plans, the growth on your contributions is tax-sheltered as well. The common mistake fund investors make is that they neglect to take advantage of retirement accounts in their enthusiasm to invest in funds in non-retirement accounts. This can cost you hundreds, perhaps thousands, of dollars per year in lost tax savings, and tens of thousands to hundreds of thousands of dollars over your working years. Fund companies are happy to encourage this financially detrimental behavior. It's not detrimental to them. They lure you into their funds without educating you about using your employer's retirement plan first. Why...

The golden egg investing for retirement

Uncle Sam gives big tax breaks for retirement account contributions. This is a deal you can't afford to pass up. The mistake people at all income levels make with retirement accounts is not taking advantage of them, thereby delaying the age at which they start to sock money away. The sooner you start to save, the less painful it is each year, because your contributions have more years to compound. Each decade you delay approximately doubles the percentage of your earnings you should save to meet your goals. For example, if saving 5 percent per year starting in your early 20s would get you to your retirement goal, waiting until your 30s may mean socking away 10 percent waiting until your 40s, 20 percent beyond that, the numbers get troubling. Taking advantage of saving and investing in tax-deductible retirement accounts should be your number one financial priority (unless you're still paying off high-interest consumer debt on credit cards or an auto loan). Here are the main benefits of...

The UK pension fund system

The UK pension fund system includes, in addition to the public pension scheme, occupational pension schemes, which are organized and sponsored by employers, and individual pension schemes offered by financial institutions.The occupational pension schemes are usually defined-benefits (DB) where the amount of benefits relates to the final salary of the member while individual pension schemes are defined-contribution (DC) where pension benefits depend on the contributions paid during the working life of the members and the returns realized on the investment (Blake, 1995).This difference has significant implications on these two schemes' investment policies. With defined contribution plans, individuals bear the investment risk and require a more cautious investment strategy. As a result, the proportion of shares relative to total assets of occupational pension schemes ranges between 70 and 80 while defined contribution pension plans usually hold no more than 25-30 of shares (NAPF, 1996b)....

Controversies in Accounting for Pension Costs

Almost as contentious as the treatment of options is the accounting treatment of pension costs. There are two major types of pension plans defined benefit (DB) plans and defined contribution (DC) plans. Defined contribution plans, which gained enormous popularity in the 1990s' bull market, place both the employees' and employer's pension Under government regulations, DB plans must be funded that is, the firm must place assets in a separate account that will cover the expected benefits associated with these plans. In DC plans, the risk that the value of the plan at retirement will not cover retirement expenses is taken by the employees instead of the employers, and it is the employees who must decide where to place their investment dollars. Current rules for calculating the returns on the assets backing DB plans are generous to the corporations. The FASB allows firms to choose their own estimate of the rate of return on the assets in their portfolio, and often these estimates are too...

Pension funds investments and firm value

In this section we focus only on our test companies and test for the relationship between firm value and ownership structure. Table 9.7 reports the Pearson correlation matrix.The correlation between the various measures of occupational pension fund holdings and firm value is, in most cases, weak and negative. An exception is represented by the correlation between the market-to-sales ratio and the pension fund incidence variable. Similarly the correlation between firm value, blockholding and directors holdings is not significant. However, ownership variables are negatively correlated with size as measured by total assets, suggesting that occupational pension funds, directors, institutional blockholders (other than pension fund managers) and In each regression the dependent variable is computed for the period 1996-1997, while all independent variables are 1-year lagged (i.e., 1995-1996).The regressions are run separately for all 250 companies, All, low-growth companies (119), and high...

Effects of pension fund holdings on firms longterm performance

Table 9.8 Relationship between firm value and pension fund holdings The sample includes all companies that reported occupational pension fund holding above 3 . In columns (1) to (3) we use Q, the ratio of market value of equity plus book value of debt over total assets, as the dependent variable. In column (4) and (5) the results are simulated using the market value of equity to sales as dependent variable. The dependent variables are measured in 1996-1997 while the independent variables are measured in 1995-1996. TPF is the proportion of outstanding equity owned by all identified pension funds IPF is the ratio of occupational pension funds holdings over their total assets LN PFA is the log of the market value of the largest pension fund's asset N PF is the number of occupational pension funds E PFM is the proportion of equity held by external pension fund managers (either on behalf of pension funds or other clients) Dir is the proportion of outstanding equity owned by the directors...

Contributing to retirement plans

A retirement plan is one of the few painless and authorized ways to reduce your taxable employment income. Besides reducing your taxes, retirement plans help you build up a nest egg so that you don't have to work for the rest of your life. You can exclude money from your taxable income by tucking it away in employer-based retirement plans, such as 401(k) or 403(b) accounts, or self-employed retirement plans, such as SEP-IRAs or Keoghs. If your combined federal and state marginal tax rate is, say, 33 percent and you contribute 1,000 to one of these plans, you reduce your federal and state taxes by 330. Do you like the sound of that How about this Contribute another 1,000, and your taxes drop another 330 (as long as you're still in the same marginal tax rate). And when your money is inside a retirement account, it can compound and grow without taxation. Many people miss this great opportunity for reducing their taxes because they spend all (or too much) of their current employment...

Does funding retirement accounts still make sense

Historically, taking advantage of opportunities to direct money into retirement accounts gives you two possible tax benefits. First, your contributions to the retirement account may be immediately tax-deductible (see Chapter 11 for details). Second, the returns on the investments in the retirement accounts aren't generally taxed until withdrawal. In the preceding section, I mention a tax break for long-term capital gains and on stock dividends. This break, unfortunately, applies only to investments held outside of retirement accounts. If you realize a long-term capital gain or receive stock dividends inside a retirement account, those investment returns are taxed, upon withdrawal, at the relatively higher ordinary income tax rates. Thus, some have argued you shouldn't fund retirement accounts. In most cases, the people making the argument have a vested interest. One good reason not to fund a retirement account is if you have a specific goal, such as saving to purchase a home or start...

Selected Issues on the Regulation and Supervision of Pension Funds

National pension systems are typically characterized as multipillar structures that are defined in many ways, depending on the purpose of analysis.6 From the perspective of analyzing financial stability and development, it is useful to distinguish between (a) state-provided pension schemes, which are a combination of a universal entitlement and an earnings related component (b) occupational pension funds, which are funded by and organized in the workplace as Defined Benefit (DB), Defined Contribution (DC), or a hybrid and (c) private savings plans, which are often tax advantaged. As a result of increasing longevity and rising dependency ratios, the funding of promised retirement benefits (in DB plans) has become a challenge in many countries. This funding challenge has led to pension reforms that reduce benefits, increase contributions (i.e., taxes to pay state pensions), redefine risk sharing between sponsors and beneficiaries, and raise retirement age. Increased funding of pension...

Employee interest in pensions has widened

The percentage of pensioners and public pension expenditure are increasing. of population over 60 Public pensions as of GDP of population over 60 Public pensions as of GDP This has led to gloomy projections that countries could even be bankrupted by the increasing demand for state pensions. In an attempt to avert what governments see as a national disaster, there have been increasing efforts to encourage private funding of pensions. As people become more and more aware of the possible failure of governments to provide adequate basic state pensions, they recognise the advisability of making their own provision for their old age. This has raised their expectation that their employers should offer a pension scheme and other post-retirement benefits. These have increased, particularly in Ireland, the UK and the USA, and what used to be a 'fringe benefit' for only certain categories of staff has been broadened across the workforce. This has been encouraged by various governments with...

Pondering Pension and Retirement Benefits

You may not think of pension and other retirement benefits as types of debt, but they are. In fact, for most companies that offer pension benefits, the amount of money they owe their employees is higher than the amount they owe to bondholders and banks. Some companies offer both pensions (which are an obligation to pay retirees a certain amount for the rest of their lives after they leave the company) and other retirement benefits (which include contributions to retirement savings plans such as 401(k)s or profit-sharing plans). When looking at the note about pension and other retirement benefits, find out which type of plan the company offers Defined benefit plan The company promises a retirement benefit to each of its employees and is obligated to pay that benefit. This type of plan includes traditional retirement plans, in which employees get a set monthly or annual benefit from the company after retirement. Defined benefit plans carry obligations for the firm for as long as an...

Allocating assets for retirement and other longterm goals

If you're like most people and retire in your mid 60s, your retirement portfolio will need to fund your living expenses for 20 or more years. That's a tall order. Unless you have vast wealth in comparison to your spending desires, the money you've earmarked for retirement will need to work hard for you. That's why a retirement portfolio, particularly during your earlier working years, should be heavily weighted toward growth investments like stocks. _ w Your current age and the number of years you must wait until you retire should be the biggest factors in your retirement asset allocation decision. IlOsB The younger you are and the more years you have before retirement, the more comfortable you should be with growth-oriented (and more volatile) investments, such as stock funds. As you approach retirement age, however, you should gradually scale back the risk and volatility of your portfolio. That's why, as you get older, bonds should become an increasingly bigger piece of your...

Defined contribution pension schemes

Defined contribution schemes (otherwise known as money purchase schemes) have not presented any major accounting problems. The cost of providing the pension, usually a percentage of salary, is recorded as a remuneration expense in the income statement in the period in which it is due. Balance sheet assets or liabilities may exist for the pension contributions if the company has not paid the amount due for the period. If a contribution was payable more than twelve months after the balance sheet date for services rendered in the current period, the liability should be recorded at its discounted amount (using a discount rate based on the market rate for high-quality corporate bonds). Disclosure is required of the pension contribution charged to the income statement for the period.

Saving And Investing For Retirement

Almost everyone has to save and invest for future needs. The needs may be short-term (such as the down payment for a house or car) or long-term (such as retirement and children's educations). The analysis and modeling required to answer questions in all of these areas are similar we can address them by focusing on retirement planning. Some of the questions people ask most often about retirement are If during retirement I anticipate needing a certain amount of money per year, how much do I have to save and invest until retirement to be able to afford that Addressing questions like these fall under the general heading of retirement planning. Let us look at two approaches to retirement planning, one in real dollars and one in nominal dollars.

Real Dollar Retirement Planning

If you want to have a retirement income of 40,000 per year in real dollars, that is, 40,000 in today's dollars in the first year of retirement growing at the rate of inflation in each subsequent year, how big a nest egg will you need at the time of retiring The answer, of course, depends on your life expectancy and the return you expect to earn on your investments over the years. Although it may be adequate to assume that you will live until age 90 or 95, you can never be sure. You may live longer, and if you do and run out of money, you will be in a difficult situation. Many experts therefore advise that you should plan for retirement assuming you will live forever. If you plan for retirement assuming that you will live forever instead of until age 90 or 95, you will probably need about a 20 larger initial nest egg. Planning for this additional amount will provide an additional margin of safety and peace of mind. This is a simple and useful way to do retirement planning. We will...

Nominal Dollar Retirement Planning

In our discussion of retirement planning in real dollars as well as in retirement planning in general, a key assumption we make is that your investments will earn the assumed return uniformly over the years, and that during retirement you will sell a certain amount of your investment in stocks every year irrespective of market conditions. As we know, stock market returns do not come in a uniform stream over the years the market goes through long up-and-down periods. If you get unlucky and hit a few years of down period during the early years of retirement and keep selling the assumed (in your retirement plan) dollar amount of stocks every year, then you will significantly increase the chances of running out of money during retirement even if in the long run the stock market provides a return equal to your assumption. The reason is that if you sell a lot of stocks in a depressed market in the early years, then when the market recovers and provides much higher returns, you will not have...

Pension And Profit Sharing Plans

Pension plans can be defined benefit or defined contribution. The latter fixes the firm's contribution per employee each year. The former requires the firm to make contributions based on actuarial estimates of company-wide expected retirements, life expectancies, and other factors. Because of the transactions costs (for example, hiring actuaries) and value-adding impact (an accrued pension plan funding liability may occur on the firm's balance sheet), defined benefit plans have become increasingly less common. The contributions earn a return in the pension trust, which is not taxed. Trusts can be managed by financial institutions (such as banks), but are more often managed by large financial intermediaries, such as Dryfus or Fidelity. In the United States, employees can put in a maximum of 5 of wages plus 11,000 per year employers, the lesser of (1) 100 of employee's EXHIBIT 6.4 Contribution Flows in Company-Based Pension Plans EXHIBIT 6.4 Contribution Flows in Company-Based Pension...

You Get a Pension From Work Not Covered by Social Security

Let the SSA know if you start receiving a pension from a job where you did not pay Social Security taxes. For example, state workers covered under a state or local retirement system may receive pension benefits related to work that did not require the payment of Social Security taxes. Whether a particular state employee is covered under Social Security can vary from state to state and the type of agreements the particular state has entered into with the federal government. If you are not sure about your own situation, contact the official who manages your retirement plan. Also, if you receive U.S. Social Security disability benefits and start to receive a monthly pension which is based in whole or in part on work not covered by the U.S. Social Security system (such as a foreign social security pension), then your U.S. Social Security benefit may be smaller because the SSA may use a secondary formula to figure your U.S. Social Security benefit. For more information, ask at any U.S....

Example Retirement Calculation

As another example, suppose that you just turned 25 and are planning for your retirement. You hope to retire at the age of 60, and would like to be able to make end-of-month withdrawals from your retirement account of 2,500 per month for a 30-year period after that. If you plan on funding your retirement by making monthly deposits between now and when you retire, with the first monthly deposit occurring at the end of the coming month, how much must each deposit be if you can earn 1 percent per month in your retirement account (And, yes we're going to ignore taxes here.) Figure 5-8 Sample retirement problem. Figure 5-9 Sample retirement problem with withdrawals converted to lump sum. Figure 5-9 Sample retirement problem with withdrawals converted to lump sum. So, you need to deposit 37.79 per month at the end of each of the next 420 months in order to fund your desired retirement.

Estimating Pensions Risks With Simulation Methods

Some final applications of simulation approaches are to the measurement of pensions risks. With pensions, the general method is to build a model that allows the pension fund to grow in line with pensionfund contributions and the (risky) returns made on past pension-fund investment. If the model is sophisticated, it would also allow for the effects of the pension-fund portfolio management strategy, which might also be dynamic, and for the possibility of interrupted contributions (e.g., due to the holder of the pension scheme being unemployed). When the holder retires, one of two things might happen, depending on whether the pension scheme is a defined-benefit scheme or a defined-contribution scheme With a defined-benefit (DB) scheme, the holder gets a predefined retirement income, usually specified in terms of a certain proportion of their final salary or the average of their last few years' salary, plus possible add-ons such as inflation adjustment.21 In these schemes, the...

Looking at Types of Retirement Accounts

Retirement accounts offer numerous benefits. In most cases, your contributions to retirement accounts are tax-deductible. The contribution limits increased significantly in the earlier part of the first decade of the 2000s. And when you place your money inside the retirement account, it compounds without taxation until you withdraw it. (Some accounts, such as the newer Roth IRA, even allow for tax-free withdrawal of investment earnings.) If your adjusted gross income is below 55,500 per year for married taxpayers filing jointly ( 27,750 for single taxpayers), you may be eligible for a new, special tax credit for making retirement account contributions please refer to Table 7-2 in Chapter 7. The following sections detail the types of retirement accounts and explain how to determine whether you're eligible and how to make the best use of them.

Individual Retirement Accounts IRAs

Anyone with employment income can contribute to an Individual Retirement Account (IRA). You may contribute up to 5,000 each year 6,000 if you're age 50 or older. If you earn less than these contribution limits, you can contribute up to the amount you earn. This rule has an exception if you're a nonworking spouse As long as the working spouse earned at least 10,000 in income, the nonworking spouse can put up to 5,000 per year into a so-called spousal IRA, and the working spouse, up to 5,000 into his or her own IRA. Your contributions to an IRA may or may not be tax-deductible. For tax year 2009, if you're single and your adjusted gross income is 55,000 or less for the year, you can deduct your full IRA contribution. If you're married and file your taxes jointly, you're entitled to a full IRA deduction if your AGI (adjusted gross income) is 89,000 per year or less. If you make more than these amounts, you can take a full IRA deduction if and only if you're not an active participant in...

Allocating Your Money in Retirement Plans

With good reason, people are concerned about placing their retirement account money in investments that can decline in value. You may feel that you're gambling with dollars intended for the security of your golden years. Most working folks need to make their money work hard in order for it to grow fast enough to provide this security. This involves taking some risk you have no way around it. Luckily, if you have 15 to 20 years or more before you need to draw on the bulk of your retirement account assets, time is on your side. As long as the value of your investments has time to recover, what's the big deal if some of your investments drop a bit over a year or two The more years you have before you're going to retire, the greater your ability to take risk. Think of your retirement accounts as part of your overall plan to generate retirement income. Then allocate different types of investments between your tax-deferred retirement accounts and other taxable investment accounts to get the...

Setting up a retirement account

Investments and account types are different issues. People sometimes get confused when discussing the investments they make in retirement accounts especially people who have a retirement account, such as an IRA, at a bank. They don't realize that you can have your IRA at a variety of financial institutions (for example, a mutual fund company or brokerage firm). At each financial institution, you can choose among the firm's investment options for putting your IRA money to work. No-load, or commission-free, mutual funds and discount brokerage firms are your best bets for establishing a retirement account. For more specifics, see my recommendations throughout the remainder of this chapter.

Using Time Value to Determine a Companys Pension Liability

Cellex Manufacturing is a family-owned company preparing its year-end 2004 financial statements. The firm will follow generally accepted accounting principles for the first time. Therefore, it is required to record, for the first time, a long-term liability for its employee pension plan. Employees who retire from the company will be paid 10,000 at the end of each year following retirement for five years. Below is the number of employees expected to receive benefits and their projected retirement dates A. If all employees retire when scheduled and receive their full expected retirement benefits, what total amount of cash will this require

Transferring Retirement Accounts

Here's a step-by-step list of what you need to do to transfer a retirement account to another investment firm. Even if you're working with a financial advisor, you should be aware of this process (called a direct trustee-to-trustee transfer) to ensure that no hanky-panky takes place on the advisor's part.

Optimal asset management for pension funds

Purpose - The purpose of this paper is to study the asset allocation problem for a pension fund which maximizes the expected present value of its wealth augmented by the prospective mathematical reserve at the death time of a representative member. Findings - The paper demonstrates that the optimal portfolio is always less risky than the Merton's (1969-1971) one. In particular, the asset allocation is less and less risky until the pension date while, after retirement of the fund's representative member, it becomes riskier and riskier. Practical implications - The paper shows the best way for managing a pension fund portfolio during both the accumulation and the decumulation phases. Originality value - The paper fills a gap in the optimal portfolio literature about the joint analysis of both the actuarial and the financial framework. In particular, it shows that the actuarial part strongly affects the behaviour of the optimal asset allocation. Keywords Pension funds, Risk management,...

Pension fund problems 21 General considerations

A plausible situation in financial management is one, in which an agent pays an amount x0 to a fund manager at time 0, to be repaid, at time T, a lump sum x(T) - called here the pension. The latter is a result of an investment policy3 n(xt, t),t 0, T adopted by the fund manager, and also of the market conditions. The latter are deterministically non predictable and usually modelled with the help of stochastic processes. This causes the pension problem to be also stochastic. The manager's policy of administering a fund depends obviously on their objective function. The latter can be maximisation of the fund expected value, maximisation of probability to obtain a target amount, shortfall minimisation etc. Once the objective function is revealed, the manager's policy can be computed as a solution to a stochastic optimal control problem associated with the objective function. The problem solution should routinely comprise an optimal decision rule n(xt,t) and also a distribution of xt....

Salaryrelated pension schemes note

Having whinged about IFRS, this is one area where the new standards get full marks, despite protests coming from some companies. The concept behind a salary-related pension scheme is that employees and their employer will Under these schemes, employees could, for example, receive a pension that is equal to the number of year's service, divided by (say) 80, multiplied by the best of the last three years' salary. Pensions are often subject to inflationary increases year on year, subject to a set formula. The longevity of the members receiving a pension In the 1970s, salary-related pension schemes built up huge surpluses, because investment returns were good and people left their pension schemes to seek other jobs. In those days, if an employee had a relatively short number of year's service, then that employee would receive only a return of his or her contributions on leaving the employment. Often, the amount returned was relatively small. The most generous pension schemes (other than...

Treatment of retirement accounts

Under the current financial needs analysis, the value of your retirement plans is not considered an asset. By contrast, money that you save outside retirement accounts, especially money in the child's name, is counted as an asset and reduces your eligibility for financial aid. Therefore, forgoing contributions to your retirement savings plans in order to save money in a taxable account for Junior's college fund doesn't make sense. When you do, you pay higher taxes both on your current income and on the interest and growth of the college fund money. In addition to paying higher taxes, you're expected to contribute more to your child's educational expenses. So while your children are years away from applying to college, make sure that you fully fund your retirement accounts, such as 401(k)s, SEP-IRAs, and Keoghs. In addition to getting an immediate tax deduction in the year you contribute money, future growth on your earnings will grow without taxation while you're maximizing your...

Lotin retirement Noel and Patricia

Together, they want about 4,500 per month to live on. Social Security provides 1,500 per month, and Noel's pension plan kicks in another 1,500 per month. That leaves an extra 1,500 per month that must come from their 400,000 nest egg, currently comprised of Recommendations A good portfolio for a retiree must not only provide an income for today's expenses but also protect income for the years down the road. Noel and Patricia are managing to get by on the current income from their investments, but with only 20 percent of their nest egg invested for growth in stocks, they have left themselves quite exposed to the ravages of inflation. Their retirement could easily last another 25 plus years. Unless they allocate their assets more aggressively, their nest egg may not last that long. They can accomplish all their goals if they are able to boost their returns from 6 percent to 8 percent (you have to crunch some numbers to figure out where you stand in terms of retirement planning see...

Introduction To Part Ii Postretirement Benefit Obligations

Most medium- and larger-sized business firms provide retired employees with pensions and other postretirement benefits, mainly medical insurance coverage.The costs of these postretirement benefits are a component of employee expenses incurred during the service lives of the retirees, which are the working years prior to retirement. For this reason, the periodic expenses and obligations for postretirement benefits must be estimated to measure the operating performance and financial position of the employer firms. Standards for the measurement and reporting of postretirement expenses and obligations have tightened considerably during the past decade. Separate standards govern reporting for pensions and reporting for other (nonpension) postemployment benefits.The following sections describe and contrast the financial reporting standards for both types of retiree benefits.

Pension Expenses And Obligations

Pension plans are either defined contribution plans or defined benefit plans. A defined contribution pension plan specifies the periodic amount, usually a percentage of an employee's current salary that the firm must contribute to a pension fund. The employee's retirement benefit depends on how well the pension fund invests the contributions that it has received. In any event, the employer's only obligation is to make the agreed-on contributions to the plan. In effect, the employee bears all the risks and rewards of the investment performance of the pension fund.The financial reporting effects of defined contribution plans are straightforward and noncontroversial. Defined benefit pension plans, in contrast, specify the benefits that employees will receive at retirement. The employer makes periodic contributions to a pension fund in order to set aside funds to pay these benefits.Income tax rules and other government regulations influence the amounts of these periodic contributions....

Basic Accounting For Pensions

To illustrate financial reporting for a defined benefit pension plan, refer to Exhibits 12-5 and 12-6, which contain portions of the pension footnote disclosures from Bethlehem Steel's annual report for 1997.Bethlehem Steel's pension benefits are based both on the employees'years of service and highest earnings levels in the years preceding EXHIBIT 12-5 Pension Liability Footnote Disclosures Pension Liability Footnote Disclosures POSTRETIREMENT PENSION BENEFITS We have noncontributory defined benefit pension plans that provide benefits for and the five highest consecutive years of pensionable earnings during the last years prior to retirement or a minimum amount based on years of service. Pension liability at December 31 440 EXHIBIT 12-6 Pension Expense Footnote Disclosures Bethlehem Steel Corporation Pension Expense Recognized in Consolidated Income Statement (Adapted from the 1997 Annual Report) annual pension Pension cost retirement. Special attention should be given to the...

Measurement of Pension Expenses

Exhibit 12-6 shows the components of the pension expense reported in Bethlehem Steel's income statement, defined as follows Service cost, also called the normal cost, is the value of future pension benefits that employees have earned during the current year. Return on plan assets is a reduction in pension expense for the return that is expected on the plan's assets.This component is based on anticipated, not actual, return so that pension costs are not severely influenced by variations in investment values. Other items (net) includes the systematic amortization of liabilities existing when present pension reporting standards were adopted, the obligations resulting from subsequent changes in pension benefits, the revisions in various assumptions underlying the pension valuation, and other factors.

Measurements of Pension Obligations

Exhibit 12-5 shows three separate measures of Bethlehem Steel's pension obligation vested, accumulated, and projected benefit obligations. Managers and analysts often disagree about which of these best represents the firm's pension obligation. Managers sometimes assert that vested benefits are the best measure of the obligation, because this is the amount that must be paid to employees, even if the firm discontinues its operations immediately. Bear in mind, however, that financial statements reflect a going concern assumption, unless the firm is actually expected to liquidate in the near-term future.Alternatively, some firms argue that the accumulated benefit amount is a suitable measure, because it assumes continuity of the firm but does not incorporate salary increases that have yet to occur. Finally, analysts frequently argue that the projected benefit obligation is most realistic, because it is based on expected pension payments (assuming normal rates of salary increase)....

Other Postretirement Expenses And Obligations

Approximately one-third of all U.S. workers are covered by employer medical plans that continue the employee's coverage after retirement.The costs of retiree medical benefits are substantial and are expected to continue to increase as people live longer. Inflation and improvements in medical technology will also likely contribute to rising health costs. Until 1993, the predominant way of reporting these nonpension postretirement benefits was on a pay-as-you-go basis, in which expenses were reported on a cash basis and no obligations were recognized for future payments. Current accounting standards, however, require that firms report their obligations to provide future benefits and accrue the expenses during the years that employees provide service (SFAS No. 106, Employers'Accounting for Postretirement Benefits Other Than Pensions, December, 1990). For most affected firms, conversion to an accrual basis increased the amount of expenses currently recognized for medical benefits by two...

Illustration of Nonpension Postretirement Benefit Disclosures

Exhibits 12-7 and 12-8 contain excerpts of Bethlehem Steel's other postretirement benefit disclosures and will serve as a basis for our discussion. Observe that the overall format and content of these disclosures parallels that shown earlier for pension benefits (refer to Exhibits 12-5 and 12-6).The analyst would focus on the measurement of the firm's obligation and the determination of the annual expense. Exhibit 12-7 shows that Bethlehem Steel reports a liability of 1.9 billion for nonpension postretirement benefits at the end of 1997.This amount represents the difference between the present value of these benefits ( 2.06 billion) and the plan assets at fair value ( 120 million). Although this measurement is similar to the measurement of pension obligations shown earlier (refer to Exhibit 12-5), there are two notable differences. First, the accumulated postretirement benefit obligation measures the present value of the future benefits that employees and retirees have earned to...

Measurement of Nonpension Postretirement Benefit Expense

The cost components shown in Exhibit 12-8 for the nonpension expenses follow the same format as those for pension costs (refer to Exhibit 12-6).The service cost represents the amount of the accumulated benefit obligation that was earned by employees over the current year. The interest cost is the beginning of the year obligation multiplied by the discount rate. For firms like Bethlehem Steel, with mature employee groups, interest cost is the largest component of the net expense because the benefit obligation is so large. Because the benefits are not substantially funded, the return on plan assets provides only a minor offset to the other cost components. EXHIBIT 12-7 Nonpension PostRetirement Expenses Postretirement Benefits Other Than Pensions POSTRETIREMENTS BENEFIT OBLIGATION In addition to providing pension benefits, we currently Accumulated postretirement benefit obligation Accumulated postretirement benefit A comparison of the financial statement effects of pension and...

Retirement account applications

Individual Retirement Accounts (IRAs) tire among the most common accounts you might use at a mutual fund company. This section explains what you need to know to complete an IRA application (SEP-IRAs for the self-employed are quite similar). I use the T. Rowe Price mutual fund IRA application as an example (see Figure 11-5). If you plan to transfer money from a retirement account held elsewhere into the one you're opening, you need to be careful about two details before you start v* Make sure that the retirement account type you're opening (such as an IRA or SEP-IRA) matches the type you're transferring (unless you're moving money from a 401(k) plan, in which case you would be sending that money into an IRA account because you can't open a 401 (k) as an individual). V If you want to transfer individual securities from a brokerage account, you need a brokerage account application for whatever type of retirement account you're opening, not a mutual fund account application. to open an...

Stuff to do before transferring retirement accounts

If you have money in a retirement account in a bank, brokerage firm, other mutual fund company, or in a previous employer's retirement plan, you can transfer it to the mutual fund(s) of your choice. Here's a list of steps for transferring a retirement account. Note If you're doing a rollover from an employer plan, please heed the differences indicated Unless you check the box below, you can use the telephone computer to nuke exchanges between Identically registered T. Rowe Price IRA accounts. Anyone who can properly identify your accounts can make telephone computer exchanges on your behalf. Establishing retirement accounts when you're pressed for time V Go to your local bank. Establish your retirement account in a savings or money market type of account at the bank. Latei, when the dust has settled and you have breathing room, call your favorite fund company for its application and transfer forms to move the money. Bank employees will more than likely try to talk you into a CD or one...

Retirement account transfer forms

Transferring retirement accounts generally isn't too much trouble. In most cases, all you need to do is complete a transfer form. You can use a mutual fund transfer form to move money that's in a bank account, in another mutual fund, or in a brokerage account. You may only use this form to move investment money that you want liquidated and converted to cash prior to transfer.

Computing The Value Of A Pension

Many people receive a pension, usually payable monthly. A pension, or life annuity, is a series of payments to an individual, which continues as long as the recipient lives. It differs from the annuity certain studied in Chapter 5 because it contains a life contingency feature. This means that each payment has a probability that it, and all subsequent payments, won't be made. Some pensions offered by insurance companies contain a guaranty that a certain number of payments will be made. For example, a person might buy a life annuity, payable for her or his entire life, with a guaranty that payments will be made for 10 years. A corporation or government may give a pension to a retired employee. Usually, the employee must have a certain number of years of service and reach a required age in order to retire. Pensions may vest at an earlier age, or with less service. For example, one of the author's previous employers required 10 years of service and attainment of age 55 as an employee to...

Postretirement Benefits

Employee Retirement Plans The Company maintains several defined benefit pension plans for the majority of its employees. Benefits are based on years of service and average base compensation levels over a period of years. Plan assets consist primarily of equity, interest-bearing investments, and real estate.The Company's funding policy is to contribute annually not less than the ERISA minimum funding standards, nor more than the maximum amount that can be deducted for federal income tax purposes.The total expense of all these plans was 14.1 million in 1997, 24.8 million in 1996, and 22.7 million in 1995.These amounts include the Company's matching for the savings and investment (thrift) plan of 5.8 million in 1997 and 5.7 million each for 1996 and 1995.The decrease in 1997 pension expense versus 1996 was caused primarily by an improvement in the funded position of the Coors Retirement Plan and an increase in the discount rate (settlement rate) used to compute the 1997 pension cost of...

Pension Plans and the Balance Sheet

Now remember we said that pension plans are off-balance-sheet financing, and in PepsiCo's case, the 4.245 billion in assets and 5.214 billion in liabilities are not recognized on the balance sheet. Therefore, typical debt ratios like long-term debt to equity probably do not count the pension liability of 5+ billion. But it's even worse than that. You might think the net deficit of - 969 million would be carried as a liability, but it is not. Again, from the footnotes

Cash Contributed to the Pension Is Not Pension Cost

Now we have enough understanding to take a look at why cash contributed to the pension plan bears little if any--resemblance to the pension expense (also known as pension cost ) that is reported on the income statement and reduces reported earnings. We can find actual cash contributed in the statement of cash flows

Components of pension expense

Pension expense Pension expense Pension expense (a.k.a. Pension Cost) is reported on the income statement, and reduces reported earnings The first two components of pension expense service and interest cost--are identical to those found in the calculation of PBO. The next component is expected return on plan assets. Recall that the fair value of plan assets includes actual return on plan assets. Expected return on plan assets is similar, except the company gets to substitute an estimate of the future return on plan assets. It is important to keep in mind that this estimate is an assumption the company can tweak to change the pension expense. Finally, the two amortization items are again due to the effects of smoothing. Some people have gone so far as to say the pension expense is a bogus number due to the assumptions and smoothing.

Retirement Accounts Explained in Simple English

The most common type of retirement account is an Individual Retirement Account. An IRA is available for you to make an annual contribution of 2,000 or 100 percent of earned income that year, whichever is less, up until the year you reach age 70 V2. In other words, your contributions must come from a salary, wages, or self-employment income. Even alimony counts.

Another Way to Save for Retirement

Socking away 2,000 a year into a retirement program is great. But for those of you who have more money to invest, and want to take advantage of tax-deferred growth, you may want to think about an annuity. If you need help annuity shopping, call Independent Advantage Financial Services at (800) 829-2887 for more information. Depending on your objective, they can research and find an annuity that best suits your financial goals and retirement needs.

Retirement Fund Withdrawals and Form 1099R

Someday, hopefully not before you retire, you'll need or want to start enjoying all the money that you will have socked away into great mutual funds inside your tax-sheltered retirement accounts. The following sections explain what you need to know and consider before taking money out of your mutual fund retirement accounts.

MODEL 3 Retirement Planning In Nominal Dollars Version 1 The Problem

A friend of yours who is close to retirement has asked for your advice on how he should invest his assets and manage his withdrawals during retire ment. He will need to withdraw a specific amount of money (growing at the rate of inflation) every year for living expenses. He wants you to develop a model for him. This model should estimate how much money your friend can expect to withdraw annually during retirement under various assumptions from a nest egg of certain size. It should also estimate what size nest egg he will have to accumulate by the time of retirement to be able to withdraw a certain inflation-adjusted amount annually. (All of the money is invested in taxable accounts.) You explain to him the retirement planning approach we discussed earlier under Nominal Dollar Retirement Planning in Chapter 8 Financial Planning and Investments and he agrees to follow that approach. Build him a model that he can use to address his two concerns. The input variables for the model are...

Application To Pension Funds Evolution

This model is a general, rigorous and tractable stochastic evolution time model for pension funds, called the discrete time non-homogeneous semi-Markov pension fund model, taking into account economic, financial and demographic evolution factors so that it becomes a real-life model.

Classifying Italian Pension Funds via Garch Distance

The adoption of pension funds in the Italian social security policy has increased the offer of several investment funds. Workers have to decide what kind of investment to perform, the funds having a different composition and a subsequently different degree of risk. In this paper we propose the use of a distance between GARCH models as a measure of different structure of volatility of some funds, with the purpose of classifying a set of funds. Furthermore we extend the idea of equivalence between ARMA models to the GARCH case to verify the equality of the risk of each couple of funds. An application on thirteen Italian funds and fund indices is performed. Key words Agglomerative algorithm Cluster analysis GARCH models Pension funds Risk profile.

Planning for retirement

Good retirement-planning software and online tools can help you plan for retirement by crunching the numbers for you. But they can also teach you how particular changes such as your investment returns, the rate of inflation, or your savings rate can affect when and in what style you can retire. The biggest time-saving aspect of retirement-planning software and Web sites is that they let you more quickly play with and see the consequences of changing the assumptions. Some of the major investment companies I profile in Part III of this book are sources for some high-quality, low-cost retirement-planning tools. Here are some good ones to consider T. Rowe Price's Web site ( has several tools that can help you determine where you stand in terms of reaching a given retirement goal. T. Rowe Price (800-638-5660) also offers some excellent workbooklets for helping you plan for retirement. The company's Retirement Planning Guide is for those who are more than five years from...

Financial Equilibrium Of The Pension Funds

Before studying the equilibrium of the fund, let us remark that the formulas we wrote before are useful for solving the equations in the general case but, if we want to face the problem of pension applications, there are some differences. In fact, as we said before, the age horizon of the fund member must be at least 85 years and the seniority horizon at most fifty years. If in writing formulas we were to be more precise we would take into account the maximum seniority. For this reason the formulas of evolution equations should be adapted. Let us define The presented model allows the management of a pension fUnd in which the considered rewards change because of the state, seniority and time and furthermore allows one to follow the dynamic financial evolution of the fund and therefore its financial equilibrium, the central objective of the fund managers.

Step 1 Determine Your Anticipated Yearly Amount in Retirement

Step 1 in the worksheet shows how to determine the amount of money that you will need on a yearly basis in retirement. Begin with your yearly current income and determine the number of years until retirement. If you anticipate an increase in inflation through the years to retirement, you will need to take this into account because inflation erodes future purchasing power. The following example illustrates the process of determining the future yearly income in retirement. Current yearly income 120,000 Years to Retirement 25 Current income x Future value factor of 1 at 3 for 25 years x 0.80 Future retirement amount 120,000 x 2.094 x 0.80 201,024 In this example, with current income of 120,000, assuming an inflation rate of 3 percent for the next 25 years and an 80 percent estimate of current needs, the future yearly income needed in retirement is 201,024.

Step 2 Determine Where the Money Will Come from to Finance Your Projected Future Retirement Income Needs

Add your investment and savings account balances. Next, assume a rate of return that these investments will earn per year over the period until your retirement. If you expect your investments to return 5 percent after taxes on average for each year in the 25 years to retirement, you can find the future value of 1 factor at 5 percent for 25 years in Appendix A. This figure is multiplied by the total investment amount to equal the future value of these investments at retirement. You then need to anticipate a rate of return in retirement, which may or may not be a higher rate of return than your current projected rate. Assuming that your retirement nest egg will earn a rate of 7 percent per year, you can then determine what your total future investments will earn per year in retirement, as illustrated below Individual Retirement Accounts (IRAs) With IRAs you make tax-deductible contributions up to the allowable yearly limit, and the principal and earnings on the principal are tax...

Retirement planning software

If you know nothing about your retirement other than that it's something you eventually want to do, it's easy to put off saving for it. Creating a retirement plan is a great way to get yourself motivated to start saving money. Unless you were an applied math major in college, however, coming up with a useful retirement plan by using a pencil and a calculator is a complex task. There are so many factors to consider expected rates of investment return, inflation, tax brackets, savings rates, social security benefits, retirement ages, pension benefits, life expectancies and on it goes. So if you have a computer or access to one, let your computer assist you. Computers are a great tool for retirement planning because they make testing different scenarios easy. Tinker with any variable the inflation rate, for example, or your desired retirement income and you can quickly see how that change affects your whole retirement plan. Before you shell out the 40, though, take a look at some of the...

Assessment of Pension Schemes from a Financial Sector Perspective

A pension plan is a long-term financial contract that promises to pay a retiring worker a sum of money intended to support old age consumption (Mitchell 2002, p. 2). Pension plans are generally classified as either a defined contribution (DC) plan or a defined benefit (DB) plan. Those two plans have significantly different characteristics. In a DC plan, the sponsor promises to periodically deposit a specified contribution into the plan (e.g., per pay period), which is then invested in capital market instruments of various risk levels. An individual's total pension is based on amount contributed, length of employment, and investment return. By contrast, a DB plan is based on a promise by the sponsor to pay the retiree a specified benefit, usually based on the employee's wage plus the length of service. In that case, the market risk associated with the investment returns is borne by the employer (sponsor), who must set aside sufficient funds to pay the promised benefits. In a DC scheme,...

Step 3 Determine Whether You Will Have Met Your Expected Needs in Retirement

Add up your total projected income in retirement and compare this to the anticipated amount needed in retirement. For example, if you anticipate that your yearly future needs will be 120,000, but you only come up with 100,000 a year from all your sources of savings, investment accounts, and retirement accounts, then you need to put aside greater amounts now to fund this shortfall. You can use a computer or financial calculator to determine the additional yearly amount that you would need to save to make up a shortfall. Assuming that you have a 20,000 shortfall and you expect to earn 8 percent per year over the next 20 years until retirement, you will need to invest an additional 437.04 each year for the next 20 years. FIGURE 51.1 Planning for retirement How to Determine How Long Your Money Will Last in Retirement and the Amount of the Payment in a Systematic Withdrawal Plan The aim of most withdrawal plans is to have the retirement funds last through retirement. This means that you...

H3 Regulation and Supervision of Public and Government Pension Funds Risks and Regulatory Responses5

Public pension plans are schemes, social security or similar, whereby the government administers the payment of pension benefits. The basic goal is to provide benefits for the population at large. Traditionally, public plans have been PAYG, although some countries have prefunded pension liabilities or private plans. Oversight of government-run plans is required for numerous reasons, particularly the fiscal implications of mismanagement. The risks associated with DC schemes managed by the public sector arise namely from the government's control over a large pool of funds. Such control can be problematic because those funds are frequently subject to political manipulation and pressures to, among other things, increase benefits, lower contributions, and hide problems. Moreover, government officials can be tempted to direct the investment of such funds either into government securities to help fund the budget or into politically attractive projects, disregarding the interests of pension...

Step 4 Determine How Much You Can Withdraw over Your Projected Retirement Period

There are many Web sites on the Internet that have retirement calculators to determine how much you can withdraw over your projected retirement period. One such site is In order to find the calculator on this Web site, click on the arrow Select a Tool and highlight Retirement Income Calculator. Enter your information to determine how much you can withdraw. On completion of your information, you will get an annual withdrawal amount based on your retirement assets, your asset allocation, and the number of years for your retirement. Each retirement calculator makes its own assumptions with regard to rates of return on stocks, bonds, and money market securities, and rate of inflation. Step 3 Determine the length of time that your retirement funds will last. Step 4 Determine how much you can withdraw over your projected retirement period. Go to a retirement calculator on the Internet and enter your information. There are many websites that have retirement calculators,...

Pension Funds

The Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) has the potential to influence social investing through its scrutiny of firms' governance issues in its Social Choice Equity Fund portfolio (Carleton et al. 1998). In addition, the New York and California state pension funds have become leaders in developing their roles as active shareholders. The California Public Employees' Retirement System (CalPERS), well known for its shareholder activist strategies, recorded significant stock price reactions in targeted companies held by CalPERS as it successfully engaged in an active dialogue to change the companies' governance structures. Under the leadership of its president and chief executive officer, Claude Lamoureux, the Ontario Teachers Pension Plan demonstrated similar action in 2001, by voting against proposals to upgrade stock options and other incentive plans put forward by companies such as retailer Hudson's Bay Company, printing multimedia...


The entry for a retirement removes both the asset account and the accumulated depreciation account. Let's go back to our example. Let's say the asset cost 50,000 and was fully depreciated (meaning that Accumulated depreciation was 50,000). The journal entry to retire the asset we would be You can see that we need a debit to balance the journal entry. The debit we need is a special type of expense a loss. We would title the account ''Loss on retirement.''

Pension deficit

The 'pension deficit' shown as a non-current liability in the Balance Sheet is the difference between the liabilities of the company's salary-related pension scheme in respect of the scheme's members and the fair value of the assets held by the pension fund to meet these liabilities. This figure will change each year and some volatility is impossible to avoid. However, this liability should be recognised and it is assumed that over 10 years the company will fund the deficit. Accordingly, 10 of this deficit is charged to the Income Statement. First, any amount charged to the Income Statement (which has been added back to profits) is added back to the pension deficit in the Balance Sheet. The resultant figure from this addition is divided by 10 to arrive at the figure to be charged in the Adjusted Income Statement (Figure 4.4).


The defined benefit type of pension plan that has been widely adopted by U.S. firms, as discussed in Chapter 12, is relatively less important in other nations. In many countries, government-sponsored pension arrangements are more prominent than are company-sponsored plans, and most of the latter are defined contribution plans. Even in cases where defined benefit plans do exist, only the U.S. requires an annual evaluation of the discount rate that is used to estimate the value of the pension liability.This annual evaluation has in recent years caused the amounts of unfunded pension liabilities, and also the reported pension expense,to be more volatile for mature U.S.firms. More-over,U.S. standards require much greater detail in the footnote disclosures of pension assumptions, funding status, cost components, and other items.

Pension Trust Funds

Public employees retirement system funds are accounted for in pension trust funds. In no other area of accounting is actuarial assistance so vital. Abiding by the requirements of the retirement plan and considering the employee population as to age, gender, marital status, and the myriad of other variables that affect working lives and retirement, actuaries must estimate the amount of resources necessary as of a given date to meet retirement commitments. To protect the employees' interests, pension trust funds use a full accrual basis of accounting. Contributions to a retirement plan may be from both the employer and employees (a contributory plan) or from the employer only (a noncontributory plan). Employees who resign usu-

Pension entitlements

The executive directors accrue pension rights at the rate of one-thirtieth of basic salary per annum, subject only to current Inland Revenue limits. Bonus payments and other benefits are not included in pensionable pay. No actuarial reduction is applied to pensions payable from the age of 57, subject to company consent. Their pensions are guaranteed to increase in line with inflation up to a level of 5 per annum, and such increases will not be lower than 3 per annum, and their pensions at normal pension age of 62 will not be less than two-thirds of basic salary in the twelve months prior to retirement. On death in service, a lump sum of four times pensionable salary is paid, along with a spouse's pension of two-thirds of the member's prospective pension. When an executive director dies after retirement, a spouse's penion of two-thirds of the member's pension would be paid. The executive directors are not currently required to make pension contributions. Other financial information is...

Profits in Pensions

In 1999, International Business Machines (IBM) reported operating income of 11,927 billion. Of that amount, 799 million, or 6.7 , had nothing directly to do with the sale of computers. Instead, it represented investment returns on the computer manufacturer's pension plans. Under SFAS No. 87, Accounting for Pensions, the investment returns on a corporate pension plan's investment portfolio flow into the sponsoring company's operating income. Management can elect to capitalize all or a portion of the year's net pension benefit (cost) as part of inventory and then run it through cost of goods sold. Alternatively, the company can recognize the pension-related income by reducing its selling, general, and administrative expenses. As Exhibit 11.1 shows, IBM's income statement for 1999 does not break out this component of earnings. The statement highlights several Notes to Financial Statements (indicated by the letters K, P, Q, S, and T), but not Note W ( Retirement Plans ). Neither does IBM...

The Pensions Crisis

Many countries face a pensions crisis which will require that their pensions systems are significantly reformed. This section identifies the nature and consequences of this crisis. Once the analysis of social security is completed, we return in Section 22.9 to review a range of proposals for reform of the system in the light of this crisis. The basis of the pensions crisis is three-fold. Firstly, most developed economies have witnessed a reduction in their birth rates. Although immigration has partially offset the effect of this in some countries, there has still been a net effect of a steady reduction in the addition of new workers. The second effect is that longevity is increasing so that people are on average living longer. For any given retirement age, this is increasing the number of retired. Thirdly, there is also a tendency for the retirement age to fall. The consequence of the increase in the dependency ratio can be expressed in more precise terms by looking at the...

Financial reporting evolution of international

13.4 Defined contribution pension schemes 342 13.5 Defined benefit pension schemes 343 13.7 The liability for pension and other post-retirement costs 345 13.16 IAS 26 Accounting and Reporting by Retirement Benefit Plans 355 Summary 357 Review questions 358 Exercises 359 References 361

Developing good financial habits

More and more industries are subject to global competition, so you need to be on your financial toes now more than ever. Job security is waning layoffs and retraining for new jobs are increasing. Putting in 30 years for one company and retiring with the gold watch and lifetime pension are becoming as rare as never having problems with your computer. Speaking of company pensions, odds are increasing that you work for an employer that has you save toward your own retirement instead of providing a pension for you. Not only do you need to save the money, you must also decide how to invest it. Chapter 11 can help you get a handle on investing in retirement accounts.

Resurrecting active investors

Firm management and policies in an unbiased way. They have the incentives to buck the system to correct problems early rather than late when the problems are obvious but difficult to correct. Financial institutions such as banks, pensions funds, insurance companies, mutual funds, and money managers are natural active investors, but they have been shut out of board rooms and firm strategy by the legal structure, by custom, and by their own practices.43

Stock Market Indicators

In the third group, we have the Wilshire indexes produced by Wilshire Associates (Santa Monica, California) and Russell indexes produced by the Frank Russell Company (Tacoma, Washington), a consultant to pension funds and other institutional investors. The criterion for inclusion in each of these indexes is solely a firm's market capitalization. The most comprehen

Stock Price Maximization and Social Welfare

To a large extent, the owners of stock are society. Seventy-five years ago this was not true, because most stock ownership was concentrated in the hands of a relatively small segment of society, comprised of the wealthiest individuals. Since then, there has been explosive growth in pension funds, life insurance companies, and mutual funds. These institutions now own more than 57 percent of all stock. In addition, more than 48 percent of all U.S. households now own stock directly, as compared with only 32.5 percent in 1989. Moreover, most people with a retirement plan have an indirect ownership interest in stocks. Thus, most members of society now have an important stake in the stock market, either directly or indirectly. Therefore, when a manager takes actions to maximize the stock price, this improves the quality of life for millions of ordinary citizens.

Adding up your financial assets

A financial asset is real money or an investment you can convert into your favorite currency that you can use to buy things now or in the future. Financial assets generally include the money you have in bank accounts, stocks, bonds, and mutual fund accounts (see Part III, which deals with investments). Money that you have in retirement accounts (including those with your employer) and the value of any businesses or real estate that you own are also counted. Assets can also include your future expected Social Security benefits and pension payments (if your employer has such a plan). These assets are usually quoted in dollars per month rather than in a lump sum value. I explain in a moment how to account for these monthly benefits when tallying your financial assets.

National and Private Debt

This astronomical figure includes not only Bush's 298 billion, but all the money due to holders of government notes, bonds, and bills from the past. These instruments alone exceed 8 trillion, and they come due regularly. Let's not forget Social Security, which pays out public retirement benefits and government employee pensions and health care benefits to Medicare recipients. These additional debts are real obligations of the government, and they disclose important financial information needed to fully understand the country 's financial position. Illegal immigration also contributes to the increase of these figures. Government should be required to report economic figures the same way they require businesses to report so that stockholders don' t get conned by management and creditors don' t get defrauded.

Strategic versus Tactical Allocations

Strategic asset allocation is concerned with the long-term asset mix. The strategic mix of assets is designed to accomplish a long-term goal such as funding pension benefits or matching long-term liabilities. Risk aversion is considered when deciding the strategic asset allocation, but current market conditions are not. In general, policy targets are set for strategic asset classes with allowable ranges around those targets. Allowable ranges are established to facilitate flexibility in the management of the investment portfolio.

Crunching your numbers

Savings and investment accounts (including retirement accounts) Benefits earned that pay a monthly retirement income Employer's pensions * To convert benefits that will be paid to you monthly into a total dollar amount, and for purposes of simplification, assume that you will spend 20 years in retirement. (Ah, think of two decades of lol-lygagging around vacationing, harassing the kids, spoiling the grandkids, starting another career, or maybe just living off the fat of the land.) As a shortcut, multiply the benefits that you'll collect monthly in retirement by 240 (12 months per year times 20 years). Inflation may reduce the value of your employer's pension if it doesn't contain a cost-of-living increase each year in the same way that Social Security does. Don't sweat this now you can take care of that concern in the section on retirement planning in Chapter 4. * To convert benefits that will be paid to you monthly into a total dollar amount, and for purposes of simplification,...

Interpreting your net Worth results

In Chapter 4, you can crunch numbers to determine your financial status more precisely for goals such as retirement planning. I also discuss saving toward other important goals in that chapter. In the meantime, if your net worth (excluding expected monthly retirement benefits such as those from Social Security and pensions) is negative or less than half your annual income, take notice. If you're in your 20s and you're just starting to work, a low net worth is less concerning.

Emma Kuletsky Customer Service Representative Regional Bank

A mutual fund collects money from individuals and invests in a portfolio of stocks or bonds. A financial analyst in a mutual fund analyzes the prospects for the securities and works with the investment manager to decide which should be bought and sold. Many other financial institutions also contain investment management departments. For example, you might work as a financial analyst in the investment department of an insurance company and help to invest the premiums. Or you could be a financial analyst in the trust department of a bank which manages money for retirement funds, universities, and charitable bodies.

How are they accounted for

Defined benefit plans require detailed specific information disclosures in accounts. A defined benefit plan gives rise to a liability corresponding to the actuarial present value of all the pension payments due at the balance sheet closing date (Defined benefit obligation or, in US GAAP, Projected Benefit Obligation - PBO). In countries where independent pension funds handle the company's commitments to its workforce, the market value of the pension fund's assets are set off against the actuarial value of the liability. The method used to assess the actuarial value is the projected unit credit method that models the benefits vested with the entire workforce of the company at the assessment date. It is based on certain demographics, staff turnover and other assumptions (resignations, redundancies, mortality rates, etc.). Each year, changes in actuarial assumptions (especially the discount rate) and changes to retirement benefit plans give rise to adjustments in the calculation of...

How should financial analysts treat them

How therefore should we treat provisions for employees' benefits and pensions that may in some cases reach very high levels, as is often the case with German companies Our view is that provisions for retirement benefit plans are very similar to a financial liability vis- -vis employees. This liability is adjusted each year to reflect the actuarial (and automatic) increase in employees' accrued benefits, just like a zero-coupon bond,11 11 Seep. 319 where the company recognises an annual financial charge that is not paid until the bond is redeemed. Consequently, we suggest treating such provisions minus the market value of the pension fund's assets as a financial debt. In the income statement, we regard only pension service costs as operating costs and the balance of net pension costs (interest costs, notional return on pension assets, amortisation of various types, etc.) as financial charges. Consequently the balance of net pension costs must be deducted from EBITDA and EBIT and added...

Is This Too Good to Be True

It should be stressed that a reverse mortgage should not be your first option for retirement income, but if you have failed to accumulate enough funds, it could prove a godsend. Luckily, mortgage lenders are offering these programs much more actively. Today, the government issues guidelines that you should look into before moving ahead. Reverse mortgages also are a good source of funds for funding an investment account that, in turn, could be used to fund lifetime needs such as long-term care.

Limited partnerships LPs

Many of the yields on LPs have turned out to be bogus. In some cases, partnerships propped up their yields by paying back investors' principals (without telling them, of course). The other hook with LPs is tax benefits. What few loopholes did exist in the tax code for LPs have largely been closed. Amazingly, some investment salespeople hoodwink investors to put their retirement account money which is already tax-sheltered, just the way that you want it into LPs The other problems with LPs overwhelm any small tax advantage, anyway. If you want tax-friendly investments, check out Chapters 7 through 9.

Measuring the Effects of Economic Conditions

One demographic factor that makes income for advisory services less variable in the near term is the growing number of people nearing retirement and the trillions of dollars of concentrated wealth that will be distributed upon the death of its holders. The millennium market crash also caused many financial-planning do-it-yourselfers to recognize the value of advice, especially in a low- or zero-growth market environment. Between 2000 and 2004, the number of advisory firms doing more than 1 million in annual revenue doubled, according to the 2004 FPA Financial Performance Study of Financial Advisory Practices sponsored by SEI Investments, and the number of advisory firms growing beyond 10 million is a major part of that trend.

And Financial Environments

Tax incentives are the result of special interest groups influencing legislators. For example, exporters influenced the passage of DISCs. Doctors and attorneys influenced the passage of the Keogh pension plans. Some of these incentives benefit society as a whole others benefit only a few at the expense of the rest of society. It is hard to imagine all individuals placing the interest of the whole above their own interests. Therefore, it is difficult to perceive that tax incentives will be discontinued. Further, some incentives can be used to benefit large groups of people. 14. Financial intermediaries provide an indirect channel for the flow of funds from savers to ultimate users. These institutions include commercial banks, savings and loan associations, life insurance companies, pension and profit-sharing funds and savings banks. Their primary function is the transformation of funds into more attractive packages for savers. Services and economies of scale

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If mutual funds seem boring to you, there are other higher risk investment opportunities in the form of stocks. I seriously recommend studying the market carefully and completely before making the leap into stock trading but this can be quite the short-term quick profit rush that you are looking for if you am willing to risk your retirement investment for the sake of increasing your net worth. If you do choose to invest in the stock market please take the time to learn the proper procedures, the risks, and the process before diving in. If you have a financial planner and you definitely should then he or she may prove to be an exceptional resource when it comes to the practice of 'playing' the stock market.

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