401(k) and goals-- Your Weekly Update

At JL Davis, we help numerous employers with 401(k) plans, and we help numerous employees determine the proper amount to save within them. This week, we take a look at the goals of both employers and employees… through the eyes of a Nobel laureate, MIT Professor Robert Merton.

Of course, we’ll catch you up on the still growing run in the markets last week as always.

But the “fresh” thinking described in this week’s Update (thinking that we’ve been using for decades!) might just have you passing it along to friends, associates and family members.

That delights us.

All the best,
Lee and Jeremy


This Week’s Quote:

“Retirement at sixty-five is ridiculous. When I was sixty-five I still had pimples.”
― George Burns

JL Davis Thoughts This Week:

Though legendary comedian George Burns never actually retired, he did maintain his income until his death just shy of age 100. He did it the old-fashioned way; he worked.

Those who wish to have adequate income in retirement and not work already know that they must rely to a great extent on retirement plans like 401(k) plans. Yet according to Nobel laureate Robert Merton’s recent article in the Harvard Business Review, almost all participants in these plans wrongly focus on performance and the overall value (size) of their accounts.

Merton argues that the real focus ought to be on the income that is produced in retirement by 401(k) plan assets. We couldn’t agree more.

However, good performance over time (yes, the long term) is important in achieving results. Regardless of performance though, if the account size is not sufficient to produce the needed amount of income for life once a participant retires, performance really doesn’t matter. Today’s married female who works to age sixty-five can expect an average lifespan that takes her to age 92 according to recent mortality statistics. Male mortality is also improving. Twenty, thirty, even sometimes forty years in retirement is a relatively new phenomenon and having enough in a 401(k) plan to provide income for that long takes some serious saving.

So when Professor Merton postulates that 401(k) plan sponsors should communicate income instead of performance and asset size, we applaud. His point of view is that a wise participant should not only take into account 401(k) assets, but also Social Security and individual savings & investments…and then compute the total income those assets will provide. In simple terms, ask a different question: “What percentage of my income can be maintained in retirement?” Then get that question answered.

That’s not all. He goes on to talk about an asset mix that would include U.S. treasuries, inflation-adjusted deferred annuities, and stocks, among other things. His point of view is that the “mix” should then be adjusted over time as one ages to reduce risk and produce a “spendable income” that’s “secure.” We couldn’t have said it better.

Merton also discusses the concept of risk in great detail. His view is that once a participant has sufficient assets to purchase an inflation-adjusted deferred annuity that can provide adequate income for life, they should turn away from stocks. Though we’re not entirely on the same page there, we do agree with him when he says, “you wouldn’t normally put yourself in harm’s way for no reason.”

At J.L. Davis, we take great pains to help clients determine the amount of income their current and projected savings, including 401(k) plans, are likely to produce in retirement. And we’ve been doing it for decades.

As many of our clients have reached retirement age and begun to enjoy the fruits of carefully crafted savings habits, they have achieved the “secure” income Professor Merton talks about. That’s incredibly gratifying to us!**

http://hbr.org/2014/07/the-crisis-in-retirement-planning/ar/1
http://blogs.marketwatch.com/encore/2014/06/24/401ks-face-crisis-says-nobelist-merton/?mod=WSJBlog


Market Week: June 30, 2014

The Markets

Domestic equities seemed to shrug off a massive downward revision to first-quarter GDP and mostly ended the week flat. Though the Nasdaq's gain was slight, it was the sixth positive week out of the last seven. Meanwhile, the benchmark 10-year Treasury yield remained low as demand from bond investors continued to support prices.

Last Week's Headlines
• The U.S. economy contracted at a much faster pace in Q1 than anticipated, falling 2.9% (not the 1% recently estimated). The Bureau of Economic Analysis said its unusually steep downward revision of gross domestic product was caused not only by winter weather but also by exports and health-care spending that were both lower than previously thought.
• The housing market rebounded strongly in May from its winter slump. According to the Commerce Department, sales of new single-family homes leaped 18.6% in May and were almost 17% better than a year earlier. Also, the National Association of Realtors® said the 4.9% increase in resales of existing homes was the biggest monthly gain in nearly three years. However, the NAR also said existing home sales were 5% lower and the number of unsold homes was 6% higher than in May 2013.
• Data on April home prices also was mixed. Cities in the S&P/Case-Shiller 20-City Composite Index averaged a 1.1% gain in April, for a gain of almost 11% since last April. Boston saw its biggest monthly gain in the index's 27-year history, and San Francisco had its sixth straight price increase. However, seven cities reported a decline since March, and S&P said year-over-year price gains had begun to slow.
• U.S. incomes rose faster than personal consumption in May; according to the Bureau of Economic Analysis, incomes were up 0.4%, while spending rose 0.2%. Even after adjusting for inflation, incomes were up 0.2% for the second straight month. The bad news? That 0.2% increase in personal consumption expenditures--a key inflation gauge for the Fed--resulted in the biggest 12-month gain since October 2012; further increases could mean inflationary pressure that might affect interest rates.
• The European Union formalized a trade agreement with Ukraine, Georgia, and Moldova--the agreement whose rejection by the former Ukrainian president led to subsequent protests and ultimately Russia's annexation of Crimea. Shortly thereafter, European leaders told Russia it had until Monday evening to persuade rebels in Ukraine to respect a cease-fire or face further EU economic sanctions.
• Durable goods orders fell 1% in May after three strong months. However, the Commerce Department said most of the decline was caused by a 31% drop in defense spending on equipment. Other than defense, new orders were up 0.6%.

Eye on the Week Ahead

In a holiday-shortened week, trading volumes are likely to continue to be light. Manufacturing data may suggest whether recent improvements can be sustained. The European Central Bank is scheduled to report on Thursday, but last month's decision to adopt a negative interest rate likely precludes much immediate change in policy. And as always, the jobs report, issued a day early, will be watched.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Key Dates/Data Releases

6/30: Dallas Fed manufacturing survey
7/1: Auto sales, ISM manufacturing report, construction spending
7/2: U.S. factory orders
7/3: Unemployment/payrolls, balance of trade, ISM services report, European Central Bank meeting

Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2014