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What can I do to improve my financial well-being in the New Year?

What can I do to improve my financial well-being in the New Year? © alfexe via iStock

Very soon we will be at that point in the year where we make our resolutions for all the things we hope to do better in the coming one.

Consider that it was only a few years ago when investors of all types, from the largest institutions to the smallest retail investors, were clamoring for alternative strategies. Today, some of those strategies are experiencing significant net redemptions.

Most of us enter into this annual exercise with the best of intentions, but all too often our busy lives distract us. Typical resolutions, like eating healthier and going to the gym are on the list of things that sensible people should be doing. But this year we recommend adding an item to your list that that may be new to you: testing the health of your pension plans.

In all our years in wealth management, working with both institutional and individual investors, we have always been taken aback by how few clients take advantage of the services their advisors offer to assess the health of their pension plans. In our view, managing an individual’s money for the purpose of retirement income does not differ greatly from managing the pension benefits for municipalities, non-profits, private or public institutions.

We have always been taken aback by how few clients take advantage of the services their advisors offer to assess the health of their pension plans

While a typical new client may come to the planning process with an investment goal of “maximizing total return,” we think there is more to consider. A pension is designed to replace the major portion of one’s employment income throughout his or her lifetime. Individual clients also want to maintain their current lifestyle and standard of living and build in a certain amount of predictability. So, whether you are an administrator of a pension or an individual trying to plan for retirement, the question is the same: What considerations should be made to your investment strategy, to assist in paying a defined benefit in the future, while accounting for inflation, and at the same time taking as little risk as possible?

There are many obstacles to paying the required future benefits from delayed savings or allocating too little capital to fund a plan. Both scenarios could cause an unfunded liability. As many know, there is a national issue looming large about the risk to the funding status of the entire pension industry.

Persistently low interest rates have been an enormous contributor, and the impact they have on pension planning has affected the actuarial-return assumptions used for computing funding-benefit requirements.

With many pension plans assuming returns over the long term at 6 percent or higher, it is questionable and concerning as to whether these plans will be able to achieve those returns without taking on risk levels they simply cannot afford.

The same can be said for individual retirees. With interest rates at historic lows and a concern that an individual’s income spend throughout retirement may be an unfunded liability, how should he or she position assets in a low–interest-rate environment to account for the risk of longevity, rising healthcare costs and other forms of inflation—without taking on high levels of risk?

It is hard to summarize here the considerable research, thoughts, process and discipline that go into the strategies we offer clients. So, our suggestion is this: Take advantage of the resources made available through your financial advisor and get that checkup while there is still time to make course corrections and integrate new assumptions and facts into your plan.

We know that few of us like to deal with issues that remind us of our own mortality. And we know that pension planning and individual retirement planning can be a lot like that dreaded annual physical. But planning is a vital exercise, to ensure our plan’s health and maintain our confidence that the money we’ve saved for our “golden years” will last our lifetime. We hope that you will make this year one, where you take an active role in reviewing the health of your pension.

Tony Maddalena is a Wealth Advisor with the Wealth Management division of Morgan Stanley in Purchase, NY. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, member SIPC, Morgan Stanley Financial Advisors engage Worth to feature this article. Tony may only transact business in states where he is registered or excluded or exempted from registration ( Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Tony is not registered or excluded or exempt from registration. CRC1605322 11/16

This article was originally published in the December 2016/January 2017 issue of Worth.

Investing and the Economy

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