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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
from Spencer’s Benefits Reports: A recent Congressional Research Service (CRS) report argues for beginning retirement savings at an early age and at 10% of compensation rather than 6%. The report, Retirement Savings: How Much Will Workers Have When They Retire, notes that three variables affect how much money an individual can accumulate toward retirement: the percentage of earnings they save; the age at which they begin saving (i.e., the length of the accumulation period); and the total real rate of return from their stock and bond investments.
Only two of those variables (percentage of earnings saved and length of the accumulation period) are “more or less under the control of the worker.” Individuals have no control over the third variable: the rate of return. While some studies have argued that asset allocation rates chosen by individuals affect the results, this study asserts that attempting to control rates of return “will inevitably lead to some uncertainty in retirement planning.” Instead, the study assigned asset allocation using the Standard & Poor’s 500 Index of stocks and AAA-rated corporate bonds: 65%/35% for ages 25 to 34, 60%/40% for ages 35 to 44, 55%/45% for ages 45 to 54, and 50%/50% for ages 55 and older.
The table below illustrates the results that can occur when the length of time over which contributions are made and the annual contribution rate are changed. The figures assume a median salary and a median interest rate of return. Consequently, someone contributing at a 10% rate over 20 years will accumulate $267,000 in assets, versus $159,000 in assets accumulated using a 6% rate.
----Annual Contribution Rate----
# Of Years..........6%............8%................10%
20 years............$159,000....$213,000......$267,000
30 years............$353,000....$468,000......$594,000
40 years............$625,000....$844,000......$1,036,000
Source: Congressional Research Service
The CRS study also analyzed actual stock and bond returns between 1926 and 2005 to determine low, medium, and high rates of return, which dramatically alter the amounts accumulated.
As the report points out, since the individual has very little control over rates of return, it is better to assure oneself of a higher accumulation by starting early and contributing more. For example, someone who saves for 20 years would need to achieve high rates of return to accumulate an amount that is similar to a low rate of return over 40 years.
----Average Rate Of Return----
# Of Years..........Low..............Medium.............High
20 years............$119,000.........$213,000.........$372,000
30 years............$214,000.........$468,000.........$961,000
40 years............$370,000.........$844,000.........$2,025,000
Source: Congressional Research Service
A comparison of accumulations using a 6%-of-pay contribution rate versus a 10%-of-pay contribution rate produces even more dramatic results. For example, someone with a median salary contributing 10% of pay over a 40-year period is estimated to have an account balance assuming medium earnings of $1,036,000, versus $625,000 for someone who contributed 6% of pay over a 40-year period. However, over a 20-year period, the accumulation resulting from medium rates of return would be $267,000 for someone contributing 10% of pay, versus $159,000 for someone contributing 6% of pay.
The CRS report also noted that “inducing more people to purchase income annuities remains a challenge for many insurers” despite the fact that annuities can assure individuals that they will “not exhaust their assets before they die and spend their later years in or near poverty.”
According to the report, there are four reasons why the purchase of life annuities remains unpopular. First, they have a high price tag because they are bought by individuals who are in good health and have a healthy family history. Purchasers are not a random cross-section of the population, which would have lowered the price.
Second, individuals do not like the fact that the annuity premium will be forfeited to the insurer if they were to die young. Joint and survivor annuities and term-certain annuities can mitigate this result, but they are more expensive.
Third, most annuities offer only limited protection against inflation. Inflation-indexed annuities are available, but are expensive, the CRS report noted.
Fourth, and finally, the retirement assets used to purchase a life annuity are not available when a household has inadequate resources to pay any large expenses that may arise, such as medical costs or long term care expenses.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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