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Economics 101
"Obama to push for federal pay freeze"
Financial Times, November 20, 2010
We
must truly be living in extraordinary times. We try to keep
our investment decisions free of the hustle and bustle of
politics. More often than not, politics are a distraction from
the underlying factors that matter most, such as demographic trends and
valuations. But today, we can't avoid discussing politics because
so much of the market's action over the past three years has been
driven by (or at least seriously influenced by) decisions made in
Washington DC: bailouts, TARP, quantitative easing, health
reform...name any major factor that has been driving asset prices, and
chances are good that it came from the halls of government, either
domestic or foreign.
President
Obama's recent decision to recommend a two-year pay freeze for federal
employees seems to be truly extraordinary. Mr. Obama is a strong
supporter of the labor movement and of an active, energetic
government. His decision to freeze pay of federal workers is in
direct contradiction to both of these.
Perhaps
it is a "Nixon in China moment", just as it was said that only an
anti-communist hawk like Richard Nixon could make the
politically-difficult decision to recognize Red China, perhaps only a
liberal progressive like President Obama could make the
politically-difficult decision to slow the growth of the Federal
Government. Of course, his decision to do so was most
likely spurred by his party's loss in the mid-term
elections. But would a Republican in the White House have
been able to make the same decision without triggering mass strikes by
Federal workers? Of course, we'll never know, but the answer is
probably "no."
As investors, the relevant question to ask is "what does this mean for the markets going forward?"
Unfortunately,
that is a tough question to answer. Austerity at the Federal
level should mean a slowing in the economy until the private sector
recovers well enough to pick up the slack. All else equal, this
should be good for bond prices but bad for stock prices.
Of
course, "all else" is not equal. Fed Chairman Ben Bernanke is
attempting to pick up the slack in Federal fiscal stimulus by replacing
it with monetary stimulus-i.e. quantitative easing. All else
equal, the Fed's actions should stoke inflation, which would ultimately
be bad for bonds but could be good for stocks in the short-term.
Again,
"all else" is not equal. Credit continues to be destroyed by the
private sector faster than it is created by the Fed, meaning that
deflation is still a bigger risk than inflation. This is good for bonds and bad for stocks.
Suffice
it to say, there are a lot of countervailing forces at work, though the
evidence suggests that the economy is improving, little by
little. At this stage of the game, it is impossible to say how
things will shake out.
As
investors, it is important to maintain a level head, keep emotions in
check, remain flexible and take advantage of investment opportunities
as they develop. |
Steps to Retirement Planning
It
can be difficult to determine if you are prepared to permanently exit
the workforce. You need to save enough to last the rest of your
life--and you'll need a plan to manage that money to beat inflation and
minimize taxes. Retirees should also have a plan for remaining
connected to others and staying relevant in this new life stage. Here
are the first steps in this series how to tell if you are ready to
retire.
1. Establish a Retirement Budget
Retirees
no longer have to pay for professional work clothes or transportation
to the office. But unless you enter retirement newly mortgage-free,
most of your other expenses are likely to remain the same after you
leave your job. Most people find that their expenses do not go down in
retirement. The truth is that in the early years of retirement
you're probably going to spend as much or more as you spend now. If you
plan to travel or take up new hobbies, your expenses could increase in
retirement.
2. Examine Your Cash Flow
Most
federal retirees receive income from several sources, including Social
Security, pensions, investments, and increasingly, a part-time job. You
need to make sure you will receive enough income from these or other
sources to pay all of your monthly bills. Less common sources of
retirement income include home equity, annuities, insurance, royalties,
and rental income.
3. Size Up Your Nest Egg
How
much you need to save for retirement depends on what your retirement
expenses are and how much income you have coming in from other sources.
Your savings need to fill in the gap between your monthly living costs
and your Social Security, pension, and other guaranteed sources of
income. The challenge in determining how to effectively utilize your
retirement savings is that you do not know how long you will
live. That one unknown requires you to assess whether you'll need to
take less from your savings early in retirement - just in case. Latest
actuarial projections indicate that healthy baby boomers should plan as
if they will live until at least age 90, and perhaps 100.
Watch for more steps in determining your retirement readiness in the
next few columns here. In the meantime, if you'd like help in
examining your overall plan, contact our office to schedule a
complimentary assessment. |
You Can't Celebrate Christmas Here
In the holiday spirit, this month's quiz focuses on the Christmas
celebration in the United States. At one point in our history, it
was illegal to celebrate Christmas in this state. Be the first to
reply with the correct answer (to the e-mail address below) and win a
nifty holiday prize.
Be the first to respond to the email address in contacts and win a holiday prize.
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Alphabet Soup
High 5 No,
we're not talking about the congratulatory expression used by everyone
from used car dealers to professional athletes. In its December
1, 2010, report, the National Commission on Fiscal Responsibility and
Reform released their initial report on recommendations for reducing
the federal deficit. There were several key suggestions related to the
federal workforce affecting both current and retired workers. While
only a recommendation at this point, the mention of using a High-5
rather than a High-3 to calculate your federal annuity was one of the
proposals on the Commission's list that has federal employees up in
arms. Mathematically,
averaging in two more years of salary from presumably lower paid years
and then dividing by five instead of three will lower the number used
to calculate your annuity. What would it really mean in terms of
dollars and cents in your pension? Let's
look at a Fred the Fed making $100,000 in his final year of service.
We'll assume Fred has worked for 30 years when he decides to hang up
his badge and that he's received an annual 2% increase over the past
five years (more on the pay freeze in next month's column!). Under
the current rules, Fred's High-3 would be $98,052 and his annual
annuity in retirement would be $29,415. If the equation were to
change- remember it's only a proposal at this point - to using a
High-5, Fred's High-5 would be $96,154 and the resulting annual annuity
in retirement would be $28,846. The
difference of $569/year amounts to about $48 per month. Over the
next 20 years, adjusted for inflation, the overall difference would be
$13,825 less in Fred's pocket. Multiply
that by over 2 million current federal employees who could retire
sometime in the future and you do start to see some savings for the
federal budget. Fred the Fed will have to determine how it
affects his retirement fate. |
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Us and Them
China has a population that is 1 billion greater
than the population of the USA. The population of China is 1.319
billion. The population of the USA is 311 million (source: Census
Bureau).
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TSP Returns
Ongoing
concerns in Europe left the I Fund as the only TSP Fund with a negative
return for 2010. November and YTD returns are shown below:
G Fund
November - .17%
YTD - 2.60%
F Fund
November - (.57%)
YTD - 7.85%
C Fund
November - .01%
YTD - 7.86%
S Fund
November - 3.00%
YTD - 20.19%
I Fund
November - (4.84%)
YTD - (.17%)
L Income
November - (.05%)
YTD - 4.19%
L 2010
November - (.05%)
YTD - 4.10%
L 2020
November - (.49%)
YTD - 6.25%
L 2030
November - (.56%)
YTD - 7.16%
L 2040
November - (.64%)
YTD - 7.78%
Returns courtesy of :
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Jobs
Although US employers hired a net 39,000 workers in November 2010, the nation's unemployment rate rose to 9.8%, equal to 15.1 million out-of-work Americans (source: Department of Labor).
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More Than A Million
Through the first 10 months of calendar year 2010, 909,487 homes have been seized by lenders as a result of foreclosure, an average of 2,992 per day. At that pace, 1.1 million homes will be repossessed during calendar year 2010 (source: RealtyTrac).
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Last month's quiz
asked how the day after Thanksgiving came to be known as "Black
Friday." The correct answer is that's the day most retailers start to
make money or go into the black and start making a profit.
Congratulations to Doug Pedersen with USDA/APHIS for being the first
to respond with the correct answer. Thanks to all who
participated! |
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Contact Us
202 West 7th Steet
Carroll, IA 51401
Email:
federal.info@sklenar.com
phone:
866-792-6668 (toll free)
712-792-6400 (local)
fax: 712-792-6670
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Letter from the Editor
The
National Commission on Fiscal Responsibility and Reform issued their
initial report earlier this month on recommendations for reducing
overall government spending. This report included several
significant recommendations affecting the federal workforce and caused
quite an uproar.
The
two most notable proposals, although there are others that are
concerning as well, are a 3-year federal pay freeze and moving from
High 3 to High 5 for the purposes of calculating federal
pensions. Nearly everyone I've met with over the past few weeks
has brought these up.
What you want to know is how likely is it that these and other cost-cutting measures will occur? As noted in Economics 101 above,
President Obama has already proposed a two-year pay freeze, reduced
from the three-year freeze recommended in the Commission's report.
While not a "done deal" it does make that freeze fairly likely.
As
far as the High 5, this is something that has been proposed,
recommended and bandied about for many years. With unions and
NARFE acting as strong lobbyists on your behalf, I think this is less
likely to gain traction. If something like this were to
eventually pass, it would almost certainly be implemented on a gradual
basis similar to how sick leave for FERS retirees is being handled.
Phillip
Crosby said that if anything is certain, it is that change is
certain. This recent report highlights the need for planning on
your part - controlling those things you can and putting as many things
under your control as possible.
We'll
see what 2011 brings. In the meantime, enjoy this wonderful time
of year and the holidays with your family and friends.
Cordially,
John M. Sklenar
CPA, PFS, CFP
ChFEBC - Chartered Federal Employee Benefits Consultant
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