As we enter the fall, we are approaching the one-year anniversary of launching Richie Capital Group. We have spent much of the past year navigating regulatory requirements, launching early clients and preparing our platform to support larger institutions. We have also spent some time researching the market to better understand client needs, competitor offerings, and how RCG can be best positioned to provide solutions.
We have found that the problems facing clients both big and small are largely the same. In terms of retirement, most individuals have not saved adequately and are not on track for a comfortable and timely retirement. Many of the public pension funds set up for teachers, first responders and government employees are significantly underfunded.
- More than 38 million working-age households (45%) do not own any retirement account assets (including employee sponsored 401ks and IRAs)
- A median retirement account balance of $3,000 for all working age households and $12,000 for near retirement households
- Two-thirds of working households age 55-64 with at least one earner have retirement savings less than 1x their annual income (where the suggested savings factor is 7x-10x)
- The collective savings gap (the difference between current savings assets and assets required to meet retirement needs) among working households age 25-64 ranges from $6.8 trillion to $14 trillion
The situation is no less bleak for public pension funds.
Source: The Wall Street Journal, August 25, 2016
Moody’s Investor Services recently issued a report showing net Adjusted Net Pension Liabilities (ANPL) totaled $1.25 trillion, or 119% of pension revenue in FY 2015. This report also highlighted that the median public pension retirement plan achieved a 0.52% return on their investments in FY 2016 (ending June 30) where the average assumed investment return was 7.5%. In other words, last year most pension funds added significant underperformance to their already underfunded status.
The states with the highest pension burdens, measured as the largest three-year average ANPL as a percent of state governmental revenue, has been consistent for the last few years:
- Illinois – Pension liabilities at 280% of total governmental revenue
- Connecticut – at 209%
- Alaska – at 179%
- Kentucky – at 162%
- New Jersey – at 157%
Digging a bit deeper, we can see the depth of the gap. In Illinois, the average state pensioner will be due a $66,800 per year pension upon retirement, which averages out to a $2.1 million retirement payout based on Social Security life expectancy tables. Yet, these future recipients have only paid in to the program $128,000 per person.
The problems facing both individual retirees and major pensions are the same and the implications are clear:
- The current retirement savings system is not working for most households
- Families need to save more and start saving earlier in their careers
- Many will have to work longer to meet their retirement needs
But these steps alone will not be enough to solve the problem. Individuals and pension plans will need to be more aggressive in their savings and investment decisions.
What are the options for investors?
The retirement savings problem has been exacerbated by the fact that savers have fewer “safe” options to generate investment returns. Since the Dot-com bubble officially peaked in March 2001, The Federal Reserve has continued to lower the Federal Funds rate to close to zero (See Figure 1 below). The Fed reduced rates to spur growth in the economy after both the Dot-com Crash and the Financial Crisis.
Figure 1. (Effective Federal Funds Rate since July 2001)
The thinking was that lower interest rates would spur increased borrowing and business activity thus holding a deeper economic recession at bay. However, near zero interest rates also eliminated traditional sources of income and growth for retirement savings such as bonds, CDs, and savings accounts, whose returns tend to mimic Fed rates. This led to unintended consequences: an aging population combined with near zero interest earnings for a decade means that many retirees are at risk of not meeting their savings and investment needs.
With limited options in the form of fixed income, how can investors continue to grow their retirement assets?
One option is high quality, value oriented stocks. With “high quality” meaning investments in strong, market leading businesses and “value oriented” meaning purchasing stocks at a discount to their intrinsic value to provide a margin of safety. U.S. stocks have consistently earned higher returns than bonds and CDs over the long term, despite near term fluctuations in the market. From 1928 through 2014, the S&P 500 returned a compound average of almost 10% per year (7% adjusted for inflation). Over this same period, bonds returned 5.4% and short-term investments (savings accounts, etc.) returned 3.5% before inflation.
Richie Capital Group was established to help investors both large and small achieve investment returns that outpace the market and broader indexes. Our products include our flagship Alpha Fund as well as long/short, small capitalization and conservative portfolio products. Regardless of the portfolio option, we focus on helping our clients build wealth through investment. This investment blog will be a medium where we present commentary on market topics relevant to our clients as well as showcase investment ideas (both positive and negative) that we find interesting. We welcome commentary and feedback and we would love to speak with you about how we can help you improve your investment returns. Please direct inquiries to email@example.com.
“The Retirement Savings Crisis: Is it Worse Than We Think?” National Institute on Retirement Security. June 2013.