WRS gets cuffed by the Bear market

Last updated: 2/3/2010 2:16:12 PM

Tips to Reduce the Pain

Michelle Slawny offers the following suggestions to retirees struggling with the negative adjustment.

Reduce your expenses. “It’s basic, yes, but I always tell members—of all ages—it’s not about how much you make, but how much you spend.” Any way you can reduce your monthly expenditures will help you deal with the reduced income.
Consider taking Social Security. If you are not already receiving your Social Security benefit and are eligible to do so, you might want to start. Be aware of the reduced benefit if you have not reached your full retirement age.
Put off large expenditures that may require dipping into your investments. Keep the money in the market to improve your buying power as the market recovers.
If you are in the Variable Fund, consider staying put! Moving into the Core Fund at this point will “lock in” the losses of 2008 as well as move you into an investment that will likely continue to suffer because of it.

In May, Wisconsin Retirement System (WRS) retirees saw reductions in their Core annuities for the first time in WRS history as a result of the 2008 market downturn—one of the worst economic declines on record.

The Core annuity adjustment was -2.1% in spite of the fact that the 2008 annual investment return for the Core Fund as of December 31, 2008, was -26.2%. In contrast, the Variable Fund annuity adjustment was a whopping -42%. Why the huge difference? By law, increases and decreases in the Core Fund are spread out over a five-year period. This “smoothing” is designed to reduce the year-to-year volatility of Core Fund investment returns. Positive earnings from 2004–2007 kept retirees in the Core fund from realizing the full reduction in their pension checks.

The Variable Fund, by law, is not smoothed; thus those invested in this all-stock option experience effective rates and annual annuity adjustments that are closer to the actual State of Wisconsin Investment Board (SWIB) total rate of return. Ouch! Overall, the 5- and 10-year averages of the Core Fund have outperformed those of the Variable Fund. It’s no surprise then, and likely a relief to many that the Employee Trust Fund (ETF) Board has recommended closing the Variable Fund. When this will happen will depend on when the State Legislature acts on the recommendation.

What Retirees Can Expect

Looking ahead, retirees in the Core Fund can very likely expect the annuity adjustments to get worse before they get better. To avoid a negative annuity adjustment in 2010, the 2009 investment return would need to be between 27.9% and 30.7%. Even then, the next five years annuity adjustments will be impacted by 2008 negative returns as they are factored into the adjustments as part of the smoothing.

What Pre-retirees Can Expect

Projected effective rates (the rate credited to active employees) may also get worse before they get better, according to the Sari King, Constitutent Relations at ETF. Those considering retirement in 3 to 5 years may be discouraged by the possibility that their pension effective rate could be reduced. (Investment results over the next few years will be a significant factor in your monthly pension benefit if that benefit is calculated using the money purchase calculation.) Does this mean you should retire earlier than planned?

Michelle Slawny, Sr. Retirement Income Consultant at WEA Trust Member Benefits, is quick to point out that your WRS benefit is just one piece of the retirement picture. “Your retirement decision should not be based on your WRS benefit alone. You still have 3-5 years of contributions to your retirement savings and the potential growth on your investments, plus you are delaying the number of years you may need to cover health insurance costs. These and other factors may more than offset the impact of negative effective rates on your monthly pension.”

One safety net retirees and pre-retirees have is the promise that the Core Fund annuities can never be reduced below the finalized annuity amount received at retirement. Only Core annuity dividends granted in previous years can be reduced. However, the Variable Fund doesn’t carry the same promise. For retirees participating in the Variable Fund, there is no limit to how much their Variable annuities can be reduced.

In a presentation to WEAC Retirees last spring, King shared hypothetical projections for various Core fund investment return scenarios including from -10% to 30.7% reinforcing the possibility that the next five years could be rough as the 2008 figure works its way out of the calculation.

Recovery Strategy: Historically Speaking

About one-third of the total price recovery of the last 11 bear markets—wrote Keith Bozarth, Executive Director of SWIB, in the ETF News—was earned in just the best five consecutive trading days following a major downturn. This means that investors who pull out of the market when the market drops, run the risk of missing the best chance to recover. For example, investors who were out of the market for the best ten days missed 38% of the total gain in the S&P 500 for the 20-year period from 1988 through 2007. And don’t forget, that down markets can present opportunities for investors to buy undervalued investments at low prices.

Retirement Income Analysis Available to WEAC-R Members

WEAC-R members are eligible to receive a Retirement Income Analysis offered by WEA Trust Member Benefits. This fee-based service can help answer your questions and clarify your retirement plans by providing you with:

Knowledge of whether you are on track to meet your goals.
Suggested adjustments to meet your goals.
Your future Wisconsin Retirement System payment estimates.
Your Social Security payment estimates.
A retirement distribution and cash flow analysis.
A tax analysis to help you anticipate your future income tax liability.

This service is provided by a Certified Financial Planners™ who:

Understand retirement benefits available to public school employees.
Is expert in coordinating those benefits.
Has your needs and best interest in mind.

A member discount is available to WEAC-R members and you may also be eligible for a reduction in cost if you have a 403(b) TSA account with WEA TSA Trust. A WEAC-R membership may be purchased in advance of retirement.

Call Michelle, our Sr. Retirement Income Consultant, to help you evaluate whether this service is appropriate for you.

1-800-279-4030, Ext. 6730

This Member Benefits service is fee-based, with no product sales or commissions attached.
Investment advisory services offered through WEA Financial Advisors, Inc.
This article is for informational purposes only and not intended to be legal or tax advice. Consult your tax-advisor or attorney before taking any action.

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