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Posted on 19th September 2018 by Trevor Reynolds in Blog |Finance in Focus |Uncategorized

Time for a Financial Review?

Posted on 8th August 2018 by Trevor Reynolds in Blog |Finance in Focus

 Your financial aspirations are too important to be compromised by inaction – and you need to ensure that your finances continue to be suitably positioned before and after the next big financial shakeup.

We now have all-time low deposit account interest rates and rising stock market volatility coupled with all-time high stock market valuations, so it’s more important than ever to be confident of being on track to realize your objectives.

Sometimes a kick-start is needed to think about, discuss and plan one’s financial future.

What are your financial goals? Perhaps you are looking for capital growth, a regular income, to save for your children’s education, or minimize your tax bill?  At the very least, you will want to preserve your wealth and make a return in excess of inflation.

Whatever your short, medium and long-term goals, we’re here at Banner to help make them a reality – no matter how complex your financial affairs are. Of course, your personal circumstances are unique, so we tailor our investment advice accordingly. Broadly speaking, this involves four key stages:

  • Assessing your financial position – this includes understanding your current circumstances, aspirations, goals, and appetite for risk.
  • Developing a comprehensive plan – one based on robust and rigorous investment principles, such as effective diversification, strategic asset allocation, value for money, and consistent performance.
  • Putting your plan into action ­- we provide a clear timetable of what we will do and by when.
  • Staying on track – we can monitor and review your plan regularly, providing updates and reports.

Over the last 37 years in Japan, Banner has acquired broad investment experience and focused advice. With proven experience, you can access expert advice on virtually every type of investment – equities, commodities, property or bonds – in the local or international markets. We can also advise on using tax-efficient structures, pensions and investment bonds, as well as more complex and highly specialist schemes and trusts structures. It also means we can look at your finances ‘all round’ and so provide the right solutions that take into account the bigger picture.

Banner, since 1979, has helped thousands with their investing and the Banner team look forward to the opportunity of working with you.

email now info@bannerjapan.com

Overpromising has crippled public pensions. A 50-state survey

Posted on 24th July 2018 by Trevor Reynolds in Blog |Finance in Focus

By Ted Dabrowski and John Klingner

Download a pdf of the report: Overpromising has crippled public pensions. A 50-state survey

Introduction

The real problem plaguing public pension funds nationwide has gone largely ignored. Most reporting usually focuses on the underfunding of state plans and blames the crises on a lack of taxpayer dollars.

But a Wirepoints analysis of 2003-2016 Pew Charitable Trust and other pension data found that it’s the uncontrolled growth in pension promises that’s actually wreaking havoc on state budgets and taxpayers alike.[1] Overpromising is the true cause of many state crises. Underfunding is often just a symptom of this underlying problem.

Wirepoints found that the growth in accrued liabilities has been extreme in many states, often growing two to three times faster than the pace of their economies.[2] It’s no wonder taxpayer contributions haven’t been able to keep up.

The reasons for that growth vary state to state – from bigger benefits to reductions in discount rates – but the reasons don’t matter to ordinary residents. Regardless of how or when those increases were created, it’s taxpayers that are increasingly on the hook for them.

Unsurprisingly, the states with the most out-of-control promises are home to some of the nation’s worst pension crises. Take New Jersey, for example. The total pension benefits it owed in 2003 – what are known as accrued liabilities – were $88 billion. That was the PV, or present value, of what active state workers and retirees were promised in pension benefits by the state at the time.

Today, promises to active workers and pensioners have jumped to $217 billion – a growth of 176 percent in just 13 years. That increase in total obligations is four times greater than the growth in the state’s GDP, up only 41 percent.

Many of the top-growth states – including New Jersey, Illinois, Kentucky and Minnesota – have high growth rates due to recent changes in their investment assumptions.[3]

But more honest accounting, i.e. lowering the investment rate, is hardly a comfort to the residents of those states.[4] It simply reveals just how much in promises residents are – and always have been – on the hook for.

And it’s not just the fiscal basket-cases that are in trouble. Accrued liabilities have skyrocketed in states across the country. Legislators continued to grow their obligations even as their states’ pension crises worsened during the 2003-2016 period.

Twenty-eight states allowed their accrued liabilities to outgrow their economies by 50 percent or more. And pension promises in 12 states outgrew their economies by a factor of two or more.

Pension promises were meant to be funded by a combination of employer (i.e. taxpayer) contributions, employee contributions and investment returns. But as promises have skyrocketed and assets have failed to keep up, funding shortfalls across the 50 states have jumped.

The Pew data shows that unfunded state promises – known as unfunded liabilities – grew six times, to $1.4 trillion in 2016 from $234 billion in 2003.[5]

In all, states had just $2.7 trillion in assets in 2016 to cover accrued liabilities of $4.1 trillion. And that’s the rosy scenario. Most states use assumptions that underestimate the true size of the promises they’ve made to state workers. Under more realistic assumptions, the pension shortfalls are actually $1-$3 trillion larger.[6]

Those funding shortfalls are being piled onto ordinary residents. Government employee contributions are generally fixed and investment returns aren’t enough to dig most funds out of debt. So taxpayers are stuck holding the bag for the states’ massive unfunded liabilities.

The Pew data covers 13 years of pension growth, a relatively short period when analyzing pensions. A longer-term data series is needed for a deeper analysis. Fortunately, Wirepoints was able to collect 30 years of Illinois pension data. The state’s long-term numbers show an even greater disparity between the growth in total benefits and what taxpayers can afford.[7]

Total promised benefits in Illinois are nearly 1,100 percent higher now than they were in 1987. In contrast, Illinois personal income – a proxy for GDP – was up just 236 percent during that 30-year period.[8]

Illinois is the poster child for why the common narrative surrounding pensions – that crises are due to taxpayer underfunding – is false. The real problem has been the enormous growth in accrued liabilities across the nation.

There’s no fixing pensions without dramatically scaling back that growth in retirement promises.

Growth in total pension promises across the states

Some states have experienced far higher growth in pension promises, and far more fiscal strain, than others

At the top of the list are states like New Jersey, New Hampshire, Illinois, Nevada, Kentucky and Minnesota. Several of those states have lowered their assumed investment rates as a result of their crises (see Endnote 3).

All six states experienced accrued liability growth of more than 7 percent a year between 2003 and 2016.

At the bottom of the list, states like Wisconsin, Maine, Michigan, Oklahoma and Ohio have all kept their accrued liability growth rate below 4 percent per year.

That 3 percentage-point difference in annual growth is significant when the impact of compounding is considered over a 13-year period.

It’s pushed pension promises up in the top states by 160 percent over the period. In contrast, the states with more moderate benefit growth grew their promises by a total of 60 percent or less.

In many states, that’s made the difference between fiscal stability and financial crisis.

Pensions vs. economies

A vast majority of states have experienced unsustainable pension benefit growth compared to their economies.

In 28 states, accrued liabilities outgrew their economies by 50 percent or more between 2003 and 2016.

And 12 states were totally overwhelmed by increases in their accrued liabilities. The total growth was more than double that of their economies.

Again, it was New Jersey, New Hampshire, Illinois, Connecticut and Kentucky which were the most out-of-control.

Those states have mature pension systems that have been in operation for decades. There’s little reason, in theory, for their promised benefits to grow so much faster than their economies. In some cases, it’s due to more honest reporting of their true liabilities.[9]

Other states have seen robust increases in population – thereby necessitating some growth in services – but not enough to warrant the kind of increases in their pension obligations.

Nevada’s population, for example, grew more than 25 percent. But that doesn’t justify the fact that its pension promises grew by more than two times the growth in the state’s GDP.

Overall, only six states – Rhode Island, Wisconsin, Oklahoma, Oregon, Texas and North Dakota – experienced GDP growth that exceeded the growth in their accrued liabilities.

States with the largest and smallest pension benefit growth

There is a stark contrast between the states at the top and bottom of the accrued liability growth chart. Many states with rapidly growing pension obligations are in crisis. Most states with slow-growing obligations are not.

The five states with the largest growth in promises in the nation – New Jersey, New Hampshire, Illinois, Nevada and Kentucky – have all seen their benefits grow 150 percent or more since 2003.

That explosive growth in benefits has overwhelmed many of those states’ economies and their residents’ ability to pay. Every one of the top 5 states has seen their pension benefits grow 2 to 4 times more than their GDP growth.

Growing pension obligations is also reflected in those state’s promises as a share of GDP. For example, Illinois pension promises have grown to 28 percent of GDP in 2016 from 16 percent of GDP in 2003, a 75 percent increase. New Jersey has seen its promises as a share of GDP skyrocket 96 percent, growing to 42 percent from 22 percent. (See Appendix 3 for a full list of state accrued liabilities as a percent of GDP).

Unsurprisingly, these states are also home to some of the nation’s worst pension crises.

In 2016, New Jersey had the nation’s 2nd-worst credit rating and the worst-funded pensions in the nation – only 31 percent funded.[10] Kentucky was right behind with a funded ratio of 31.4 percent. And Illinois followed closely with a funded ratio of just 36 percent and the lowest credit rating in the nation, just one notch above junk.[11]

In contrast, the lowest promise-growing states in the nation – Rhode Island, Wisconsin, Maine, Michigan and Oklahoma –all kept their annual accrued liability growth at 4 percent a year or less between 2003 and 2016. (See Endnote 3).

That kept pension benefits from overwhelming those states’ economies. Take Wisconsin, for example. The state’s pension promises grew 48 percent over the time period, less than the state’s GDP growth, up 53 percent. And Rhode Island’s economy managed to grow faster than promised benefits. Benefits grew just 24 percent while the state’s economy grew 41 percent.

A common factor among these low growth states is their more reasonable pension benefits and a willingness to enact pension reforms.

Wisconsin’s “shared risk” pension plan and relatively modest benefit structure have kept the state’s promises limited and its pension system healthier than most for decades.[12] Michigan pioneered comprehensive state pension reform. Back in 1997, the state froze pensions for some state workers and created 401(k)-style plans for them going forward.[13]

And Rhode Island enacted major pension reforms in 2011. That’s one of the reasons why the state’s benefits grew more slowly than the economy. The state introduced hybrid retirement plans, cut cost-of-living adjustments and increased retirement ages for both new and current workers.[14]

A 30-year case study: Illinois’ overwhelming pension promises

Illinois provides the perfect example of how out-of-control pension benefits can create a state pension crisis.

Wirepoints analyzed Illinois pension and economic data stretching back to 1987 using data from the Illinois Department of Insurance. Our analysis found that Illinois’ total pension promises have grown exponentially over the past 30 years.

Illinois’ 2016 accrued liabilities were 1,061 percent higher than they were three decades ago. In 1987, total accrued liabilities equaled $18 billion. By 2016, that amount had swelled to $208 billion.[15]

No other measure of Illinois’ economy even comes close to matching the growth in pension promises. That growth was six times more than Illinois’ 176 percent growth in general revenues over the same time period; eight times more than the state’s 127 percent growth in median household incomes, and nearly ten times more than the 111 percent growth in inflation.

Illinois’ dramatic increase in accrued liabilities over the past three decades has been driven by three factors: overly generous benefits, pension sweeteners and a realization that pension promises were dramatically understated due to faulty assumptions.

Since 1987, lawmakers have added benefits to Illinois pensions that:[16]

  • Add compounding to a retiree’s 3 percent cost-of-living adjustment. That doubles a retiree’s annual pension benefits after 25 years.
  • Significantly increased the pension benefit formulas for the Teachers’ Retirement System, or TRS, and the State Employees’ Retirement System, or SERS.
  • Provided lucrative early retirement options.
  • Allow workers to boost their service credit by up to two years using accumulated unpaid sick leave.
  • Grant automatic salary bumps to workers who earn masters and other graduate degrees.
  • Allow for the spiking of end-of-career salaries.

As a result of these changes, long-time state workers in Illinois receive overly generous pensions. The average newly-retired state employee who worked 30 years or more receives $68,100 in annual pension benefits and will see his or her yearly pension payments double to $140,000 after 25 years in retirement. In total, career workers can expect to collect more than $2 million over the course of their retirements.[17]

Illinois state workers also tend to retire long before their peers in the private sector. In fact, 60 percent of all current state pensioners began drawing pensions in their 50s, many with full benefits.

Changes in mortality, investment rates and other actuarial assumptions also increased the amount of total pension benefits promised. In 2016 alone, assumption changes contributed to $10 billion of a $17 billion jump in accrued liabilities.[18]

For a deeper dive into Illinois’ pension crisis, read:
Illinois state pensions: Overpromised, not underfunded – Wirepoints Special Report

Interestingly, Transparent California recently analyzed California pensions over the same period, 1987-2016, and discovered similar results. The state’s accrued liabilities grew nearly 900 percent in total, far faster than any other economic indicator.[19]

State pension asset growth

On average, state pension assets nationally grew 3.7 percent a year through 2015, almost identical to the 3.8 percent annual growth in GDP over the same period. That trend was thrown off track in 2016, a year of poor investment returns.

The accrued liability/asset dynamic of the past 15 years is particularly important because in 2003, the (weighted) average funding ratio across all state pension plans was 88 percent.

If all legislatures had taken steps in 2003 to ensure that pension promises would not grow at outrageous rates – especially in states that lowered their assumed investment rates – many states across the nation would not be in crisis today.

As with pension promises, there is a lot of variety between states as to how much pension assets have grown.

Nearly half of all states grew their assets faster than their economies, an outcome that helped offset rapidly growing pension promises. But that wasn’t enough for many states to keep up with the full pace of their promises.

At the top of the asset growth list are states like West Virginia, Nevada, South Dakota, Idaho, Nebraska and New Hampshire.

All those states saw their pension assets grow more than 6 percent a year between 2003 and 2016.

And all of them but New Hampshire are well-funded in relative terms. They have pension funding ratios of anywhere between 72 and 97 percent.

Another exception to the rule is Illinois. It had the 8th highest pension asset growth in the nation, yet it’s just 36 percent funded. That’s largely a function of the Prairie State also having the 4th-fastest growth in accrued liabilities since 2003.

At the other end of the spectrum, Michigan, Rhode Island, Pennsylvania, Kentucky, and New Jersey all saw their assets grow less than one percent annually.

That’s a big problem for most of those states, in particular for those with rapidly growing promises like New Jersey and Kentucky.

It’s no surprise that New Jersey’s funding ratio fell from 93 percent in 2003 to 31 percent in 2016.

The same goes for Kentucky, whose funding ratio collapsed from 88 percent to 31 percent over the same period.

The lethal combination of collapsing assets and fast growing promises has dropped both states’ pensions into virtual insolvency.

Changing the narrative

The pension crisis is currently wrapped up in a false narrative of underfunding – that residents have never contributed enough to state pensions.

As long as that narrative dominates, higher contributions and tax hikes will be promoted as the only “solutions” to the crisis. It’s what states with the deepest crises are pursuing.

In 2016, California extended a millionaire’s tax that’s poured billions into teacher pensions.[20]New Jersey Gov. Phil Murphy and the state legislature have just agreed to a new tax hike package.[21] And Illinois Democratic gubernatorial candidate J.B. Pritzker is fighting for a multi-billion progressive tax hike – on top of last year’s record $5 billion income tax increase.[22]

But the nation’s pension crises won’t be solved by piling higher taxes on to residents. “Underfunding” is just a symptom of the real problem plaguing pensions.

Each state’s crisis is unique – but a common factor across almost all of them is a rapid and uncontrolled growth in accrued pension liabilities.

The states’ pension crises will only be solved when there is a reversal in liability growth. And that reversal will begin when states, the media, and politicians finally address the crises as a problem of over promising, not underfunding.

*********************************************************************

Appendix 1: Notes on the growth of state pension promises

 

A.  California’s 2016 pension data

The Pew data includes a revaluation of assets and liabilities by California’s Public Employee’s Retirement System (CalPERS) that occurred in FY 2016 under new GASB 67 and 68 accounting rules. As result, Pew was unable to provide a like-for-like comparison between CALPERS 2016 data and previous years.

In order to achieve a more like-for-like comparison, Wirepoints used CalPERS’ reported asset and liability data from the fund’s official 2016 actuarial report as a replacement for the Pew 2016 data.[23]

B.  Total vs. individual pension benefits

Wirepoints’ analysis does not directly address the generosity of individual pension benefits. Our analysis only examines the growth in total pension obligations – each state’s aggregate promises to its active workers and retirees.

In other words, this report focuses on the growing accrued pension liability faced by states, just as other reports address the growing aggregate of other debts.

C.  Comparing promised pension benefits across states

Comparing an individual state’s growth in pension benefits to another state’s is difficult because the math behind each pension system varies widely.

The government employees covered by the state pension systems differ from state to state. For example, California’s state funds cover local/municipal employees while Illinois’ state funds do not. The benefits offered to workers also differ, as do other perks tied to retirement. For example, some states offer compounded cost of living adjustments and early retirements while others do not.

Each state’s actuarial assumptions and the changes they’ve made over the years also vary. A pension system’s assumed rate of return on investment has a major impact on its accrued liabilities. States that have lowered their assumed rates of return during the 2003-2016 period will have, everything else equal, higher accrued liability growth compared to states that have not.

D.  Time period of Pew data

The Pew data covers a relatively short period in regard to the nation’s pension crisis. Problems have been building in most states for decades, long before 2003. Longer-term data needs to be collected for a deeper analysis. However, the limited data available still shows legislators continued to grow their obligations even as their states’ crises deepened during the 2003-2016 period. Despite its limitations, the Pew data provides a good proxy for how much politicians haveoverpromised pensions in each state.

Appendix 2: State pension liabilities and assets

Appendix 3: Accrued liability growth vs. economic growth

Appendix 4: Growth in accrued liabilities as a percentage of GDP

Wirepoints used the Pew Center’s pension data and economic data from the Bureau of Economic analysis to calculate each state’s total pension promises as a share of GDP. Because state pension assumptions, membership and benefits differ widely from each other, Wirepoints does not compare promises as a share of GDP across states. Instead, our analysis looked at the change, over time, in each state’s accrued liabilities as a share of GDP.

Appendix 5: Assumed investment returns of state pension funds, 2016 

Endnotes

[1] The Pew Charitable Trusts, “The State Pension Funding Gap: 2016,” (April 12, 2018). http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2018/04/the-state-pension-funding-gap-2016#0-overview.

[2] U.S. Bureau of Economic Analysis: Regional Economic Accounts https://www.bea.gov/regional/index.htm.

[3] New Jersey’s major pension funds have significantly lowered their expected rates of return in recent years, from as high as 8 percent in 2013 to as low as 3 percent in 2016. Those changes directly impacted the state’s promised pension benefit growth over the 2003-2016 period. It should be noted that New Jersey, along with Kentucky and Minnesota have used some of the lowest expected returns in the country. According to Pew’s collected pension data, nearly 80 percent of state pension funds with liabilities of $3 billion or more still use expected investment rates of return of 7 percent and above as of 2016. See Appendix 5 for more details. Wirepoints recognizes that if other states were to lower their assumed investment rates, the overall rankings of these states would change.

[4] For example, U.S. Census data shows New Jersey’s real median household income falling to $68,468 in 2016 from $73,136 in 2003, https://fred.stlouisfed.org/series/MEHOINUSNJA672N.; New Jersey has the 3rd-highest state-local tax burden & as a percentage of income according to the Tax Foundation. Morgan Scarboro, “Facts and Figures 2018: How Does Your State Compare?” Tax Foundation(March 21, 2018). https://taxfoundation.org/facts-figures-2018/.

[5] The Pew Charitable Trusts, “The State Pension Funding Gap: 2016.” See Appendix 1 for information on California’s 2016 pension data.

[6] Joshua D. Rauh, “Hidden Debt, Hidden Deficits: 2017 Edition: How Pension Promises Are Consuming State and Local Budgets,” Hoover Institution(May 15, 2017). https://www.hoover.org/research/hidden-debt-hidden-deficits-2017-edition.

[7] Ted Dabrowski and John Klingner, “A dramatic rise in pension benefits – not funding shortfalls – caused Illinois’ state pension crisis,” Wirepoints(February 2018). http://www.wirepoints.com/illinois-state-pensions-overpromised-not-underfunded-wirepoints-special-report/.

[8] Wirepoints used Illinois personal income as a proxy for GDP growth due to a U.S. Bureau of Economic Analysis warning against using state GDP data from 1987 through 2016 because of a discontinuity in its data beginning in 1997.

[9] See Endnote 3 for more information on New Jersey and the lowering of its expected investment rate of return.

[10] Samantha Marcus, “N.J. avoids another credit downgrade as perky economy trumps ailing pension system,” NJ.com (April 18, 2017). https://www.nj.com/politics/index.ssf/2017/04/improved_economy_helps_nj_avoid_another_downgrade.html.

[11] Ted Dabrowski and John Klingner, “Rating agencies warn, Illinois flirts with junk,” Wirepoints (April 24, 2018). http://www.wirepoints.com/rating-agencies-warn-illinois-flirts-with-junk-wirepoints-original/.

[12] Jason Stein, “Wisconsin’s fully funded pension system is one of a kind,” Milwaukee Journal Sentinel (9/26/2016). https://projects.jsonline.com/news/2016/9/26/wisconsins-fully-funded-pension-system-is-one-of-a-kind.html

[13] Anthony Randazzo, “Pension Reform Case Study: Michigan 2016 Update,” Reason Foundation (August 2016). https://reason.org/wp-content/uploads/2016/07/pension_reform_michigan.pdf

[14] Anthony Randazzo, “Pension Reform Case Study: Rhode Island” Reason Foundation (January 2014). https://reason.org/wp-content/uploads/files/pension_reform_rhode_island.pdf.

[15] Wirepoints, “A dramatic rise in pension benefits.”

[16] Commission on Government Forecasting and Accountability, “March 2017 Financial Condition of the Illinois State Retirement Systems,” (March 2017). http://cgfa.ilga.gov/Upload/FinConditionILStateRetirementSysMar2017.pdf.

[17] Member data received from a 2018 FOIA request to the Teachers Retirement System, State Universities Retirement System and State Employees Retirement System.

[18] Moody’s Investors Service estimates Illinois has a $201 billion net pension liability. See the May 29, 2018 edition of Moody’s Credit Outlook for more information.

[19] Robert Fellner, “Nearly 900% increase in CalPERS benefits dwarfs economic growth, taxpayers’ ability to pay,” Transparent California (July 12, 2018). https://blog.transparentcalifornia.com/2018/07/12/nearly-900-increase-in-calpers-benefits-dwarfs-economic-growth-taxpayers-ability-to-pay/.

[20] Chuck DeVore, “Coming Tax Hikes for Government Pensions, How Much Will You Pay?Forbes (July 22, 2016). https://www.forbes.com/sites/chuckdevore/2016/07/22/coming-tax-hikes-for-government-pensions-how-much-will-you-pay/#26d0dd41b429.

[21] Dustin Racioppi and Nicholas Pugliese, “NJ budget agreement: Deal on taxes, spending increases includes gimmicks Murphy faulted” NorthJersey.com (July 1, 2018). https://www.northjersey.com/story/news/new-jersey/2018/07/01/nj-budget-agreement-tax-hikes/748701002/.

[22] Rick Pearson, “Pritzker: Raise state tax rate, boost exemptions while working on a graduated income tax,” Chicago Tribune(April 3, 2018). http://www.chicagotribune.com/news/local/politics/ct-met-jb-pritzker-taxes-20180403-story.html.

[23] California Public Employees’ Retirement System, “Comprehensive Annual Financial Report FY 2017” https://www.calpers.ca.gov/docs/forms-publications/cafr-2017.pdf

Wisdom

Posted on 30th May 2017 by Trevor Reynolds in Blog |Finance in Focus

Starting early is so important especially in Financial planning.  So I wanted to share a story of one family who have done just that.

Their first child was born and the parents took out a modest savings account putting away $250 a month — today (18 years later) the account is worth over just over $100,000 achieving a only 6.2% return.   Their daughter now has a great start and will have little or no university debt (depending where she goes)

At the same time they also did this for themselves as one of the many things they added over time, houses, shares and their business, always remembering to pay themselves first as their income grew.

So now that their daughter is 18 they sat down and explained the magic of compound interest and together decided to take out another savings plan jointly with their daughter. She would contribute 25% and the parents would contribute 75% to ensure that she would be financially fit and would soon see the benefit and magic of compound interest.  Together they will contribute a $1,000 a month.  What could this become in 25 years when the daughter would be only 43 years old?

At a modest 6.2% it will be about $720,000.  If it achieved 10% it would become just about $1,300,000.

Remember this is just a $1,000 a month for 25 years, a total contribution of $300,000.  Started when their daughter was 18 and now that she is turning 44 she has options — you as a parent have the benefit of wisdom and this is a wonderful gift to pass on to your children. (This also fits under the gift tax allowance here in Japan.)

Talk to Banner and we can help make this happen.

Ebisu fund

Posted on 1st February 2017 by Trevor Reynolds in Blog |Finance in Focus

A fund run by ourselves at the Banner Group, The Banner Asset Management Ebisu Income fund domiciled in the Isle of Man.  We have worked hard over the last 8+ years to achieve this.

Banner Ebisu Income Fund

BAM started the Ebisu Fund in 2010, initially as a bridge lending fund; over time this has developed into an alternative income fund. The fund has earned an average return to investors of 13.50% p.a. since inception.

BAM is not a hedge fund and is not investing in speculative property appreciation – we are lending our funds to property developers.  The loans are structured to cover the build costs and we manage this process from the first $ to the last.  All the developments are usually 75% (or higher) pre-sold with 10% deposits normally taken on the units sold.  Loans are usually for a term of 18 to 24 months. Once the building is complete, settlements are made, the loans are repaid. The Banner Ebisu fund is usually invested in 12-15 projects at any one time.

All the loans are 100% asset-backed with full recourse personal guarantees so they are fully dischargeable in the event of default.

Banner Wholesale Fixed Interest Income Fund

The BAM Wholesale Fund began in 2011. Each investor chooses his or her investment.  BAM has managed over AU$ 3 billion in loans since inception.

Our initial two offerings have investment minimums beginning from AUS$500,000 and AU$ 5 million respectively.

The Banner Asset Management Ebisu Income Fund, domiciled in the Isle of Man, us now be available for investments starting from AUS$25,000, putting money to work in the same tried and tested investment process.  We anticipate returns in the 8-12% range in this investment class. We believe these returns will continue for the next few years at least. With –from our point of view — a high degree of confidence in the integrity and security of the fund process.

GOLD; the bull run has started again

Posted on 2nd September 2016 by Trevor Reynolds in Blog |Finance in Focus

Over the past 45 years, there have been 7 bull cycles and 7 bear cycles with varying duration and percentage gains.

 

GOLD 45 years

 

Life Wrappers and Japanese Taxes

Posted on 8th June 2016 by Trevor Reynolds in Blog |Finance in Focus |Uncategorized

Investments structured as life insurance products help minimise damage when you leave Japan, and indeed while you are here, as they can be reported but aren’t taxable unless you take money out at a profit (this means all unrealised capital gains are shielded from taxes). The new Japan exit tax is applied to financial assets valued JPY100m and more, and a life insurance product currently doesn’t fall into the financial asset category. The exit tax will apply to foreigners from 2020.

Also, the obligation to report overseas assets if their aggregate value was JPY50m or more by the calendar year end is already in force for all Japan tax residents. With legislation like FATCA and the OECD’s Common Reporting Standard (CRS) in place, more and more of our financial data gets automatically exchanged, so the authorities in Japan, who will join the CRS in September 2018, will become aware of assets held wherever they are held, if they aren’t aware already. So again if they are held in an insurance wrapper they can be easily reported but aren’t taxable unless you take a profit out (this means all capital gains are shielded from taxes). At which point one can plan to take things out when one is in the best tax friendly jurisdiction possible to mitigate as much tax or all if possible.

If you are interested in taking a closer look at life insurance products, their benefits, cost, etc., do let me know and we will send you information.

03 5724 5100  info@bannerjapan.com

Maximizing Your Social Security Benefits

Posted on 2nd June 2016 by Trevor Reynolds in Blog |Finance in Focus

Maximizing Your Social Security Benefits

By Dr. Larry Kotlikoff

Social Security benefits are a big deal, income wise, for most retirees. For 20 percent, it’s the only deal. For 30 percent it’s the main deal. And for another 20 percent, it’s the second biggest deal. So it’s passing strange, to use a Mark Twain expression, that most households, be they poor, middle class, or rich leave tens to hundreds of thousands of dollars in Social Security benefits on the table.

You can be the smartest person in the world and make the dumbest Social Security mistakes. My friend, Glenn Loury, a brilliant economist at Brown University, is an example. Glenn is a widower. His magical wife, Linda, tragically passed at 58 after a distinguished economics career at Tufts.

Glenn and I had dinner one night a few months shy of his 65th birthday. Somehow we got onto his Social Security plans. Glenn knew next to nothing about widower benefits. When I mentioned them, he dismissed the idea saying he had earned too much compared to Linda.

Glenn was wrong. Within two minutes I made him $120,000. The strategy was simple. Glenn, who was still working, would collect his widower benefit starting at his full retirement age, 66 (when Social Security’s stops applying their their earnings test that taxes the benefits of those still working).

Given Linda’s salary, Glenn’s widower benefit would, I figured, total more than $30,000 a year for four years. Meanwhile Glenn would let his own retirement benefit grow by 8 percent per year through age 70. Since Glenn had been planning on taking his own benefit at 70, the $120,000 was found money. Needless to say, Glenn paid for dinner.

How I Became a Social Security Expert

I learned about Social Security by necessity. I’m an economist at Boston University, but I have a personal financial planning software company, whose website is www.economicsecurityplanning.com. Our goal is to find safe ways to sustain and raise people’s spending power. And there are many such ways, particularly taking Uncle Sam’s best benefit and tax deals.

One of our programs, www.maximizemysocialsecurity.com, sells for just $40. But it considers each of your potentially millions of benefit-claiming strategies, finding precisely the one that will maximize your household’s lifetime benefits. Creating this program required learning Social Security’s rules, which I did at great cost to my sanity.

Social Security has 2,728 rules in its Handbook covering retirement benefits, spousal benefits, child benefits, disabled child benefits, widow(er) benefits, child-in-care spousal benefits, mother (father) benefits, divorced spousal benefits, divorced widow(er) benefits, divorced mother (father) benefits, disability benefits, and parent benefits.

The system’s Programming Operating Manual System has hundreds of thousands of rules about those 2,728 rules. The number of potential benefits, legitimate months for initiating collection of the various benefits, ways in which one spouse’s benefit collection decisions can affect the other’s, and all the rules within rules limiting what you can receive and when you can receive it makes Social Security far more complicated than even the federal income tax. This is why www.maximizemysocialsecurity.com needs to consider so many cases.

Becoming a Social Security Columnist

As a “reward” for learning all the mind-boggling details, Paul Solman, my friend and long-standing economics correspondent at PBS NewsHour, asked me to write a weekly column for the PBS NewsHour’s website answering Social Security questions. Three and half years later, the column is still one of the site’s top draws.

Given the huge thirst for Social Security answers, Paul and I, together with www.money.com columnist, Phil Moeller, decided to write a book describing the best strategies for collecting Social Security. The book, Get What’s Yours – the Secrets to Maxing Out Your Social Security was released in February 2015 and instantly became a #1 NY Times Best Seller.

Unfortunately, the book’s success had untoward consequences. The White House, we learned, didn’t like the idea of our telling people how to get what they paid for. In November, as part of the 2015 Budget Bill, they teamed up with Congress to change Social Security’s rules, taking away certain claiming options for many younger households.

From one day to the next, my company’s software and my co-authored Best Seller were out of date. This was no fun, to put it mildly. But my company’s exceptional engineers fixed our software within two weeks, and my co-authors and I immediately started rewriting our book. Our marvelous publisher, Simon & Schuster, also went into crash mode. They just released Get What’s Yours – the Revised Secrets to Maxing Out Your Social Security.

Three General Rules to Maximizing Your Lifetime Benefits

Our book became a best seller in part because Paul’s is an exceptionally funny writer and because Phil and I pulled no punches in describing Social Security as a bureaucrat’s daydream and a user’s nightmare. But the main draw was distilling Social Security’s gobbledygook into English and providing four central strategies for getting what’s yours.

Rule 1 – Be patient where patience pays.

Take a high-earning 60 year-old couple. Under the new law, they both make too much and are both too young for either to collect spousal benefits from the other. If the lower of the two earners dies first, the survivor can, however, collect a widow(er) benefit. But the immediate issue for this healthy couple is when to take retirement benefits.

If they take their retirement benefits as early as possible – at 62, they’ll receive $1.30 million in lifetime benefits (present valued as of their current age 60). If they wait till 70, the figure is $1.65 million. That’s an extra $350,000! It too represents found money. If the couple takes their benefits at 62 and finds $350,000 hidden in their attic they’d be in the same boat (ignoring federal income taxes). Had the law not changed, the $350,000 in found money would be $410,000. But $350,000 is still a massive bonanza.

Why does patience pay so much? The answer is that Social Security pays much higher benefits if you wait to collect them. For example, retirement benefits starting at 70 are 76 percent higher than those starting at age 62. This is above and beyond the annual adjustment for inflation. And these benefits continue for as long as you live.

Most people view Social Security as an asset, like any other. But it’s actually insurance – insurance against the worst thing that, financially speaking, can happen to you in retirement – you keep living! Dying early and not collecting your benefits entails no financial risk. You are, well, dead. But you’re also in heaven, where everything is free and there are no regrets. In particular, you aren’t sitting around kicking yourself for having not taken Social Security before you died.

No, the real financial danger in retirement is not dying. It’s living — living to the ripe old age of, say, 100. It’s a danger because you have to keep paying for yourself, day after day, month after month, year after year. If the money runs out, things can get mighty unpleasant as anyone who has tasted cat food can attest.

Much of our book’s success involved implanting the following simple thought in our readers’ brains — You can’t count on dying on time. Nor can you analyze Social Security on a breakeven, i.e., play-the-odds basis.

Insurance companies can play the odds. They can pool over their thousands of clients’ death dates. You can’t pool. You have only one life to lose and you could lose it at your maximum, not your expected age of death. As with any insurance, when it comes to Social Security’s longevity insurance you need to consider the worst cast scenario and make sure to get catastrophic coverage. With Social Security, this means, in most cases, waiting till 70 to receive your highest possible retirement benefit.

Many rich investors poo poo treating Social Security as insurance. They are so well heeled they don’t worry about risk, including longevity risk. But if they are smart, they will also wait till 70 to take their retirement benefits unless there is an even better way to maximize their family’s collective benefits (see below). The reason is that even on a pure investment basis, waiting to collect higher retirement benefits is a no brainer. In deciding in the 1970s ago how much to reward patience, Social Security used actuarial tables that are now decades old. They also used a safe internal rate of return that was over 200 basis (2 percentage) points higher than you can now earn on 30-year TIPS (Treasury Inflation Protected Securities). These factors make patience a terrific arbitrage opportunity.

Rule 2 – Understand All Your Benefits

I listed above the 12 different types of benefits you can collect from Social Security. You may be focusing on only one or two of these benefits right now thinking the others aren’t relevant. But you never know what might happen. My 96 year-old mom is my financial dependent. Were I to croak, she could collect 82.5 percent of my full retirement benefit instead of her own lower benefit. I made a special point of telling my siblings this fact. They two are very well educated people (my brother is the Provost of Cornell and a leading scientist), but they had never heard of the parent benefit.

With Social Security there is a host of gotchas. (We list 40 bad news gotchas in one chapter in the new book and 60 good news secrets in another.)  Perhaps the worst gotcha is Use It Or Lose It.

Had Glenn not mentioned Social Security, he’d probably have lost $120,000.  Benefits that aren’t taken on time are gone. (That’s not 100 percent true. In some cases, you collect 6 months of benefits retroactively.) Another top economist, this one at Harvard, called me recently about what to do with Social Security. He hadn’t read the book or run the software. When I explain he’d called three years too late and had lost $35,000 in spousal benefits, he was none too happy.  Then there was a recent email from a 75 year old who was still waiting for Social Security to start sending him his retirement benefit, for which he had never applied.

Let me be clear. Social Security doesn’t know or very much care about you. They don’t know if you are alive or dead, if you are married, if you are divorced, if you are widowed, if your ex is deceased, if you have children, if your kids can collect benefits on your record, and the list goes on. You need to tell them, not ask them what you can collect and when you want to start collecting it.

Rule 3 – Time Your Collection of Benefits

One of Social Security’s worst gotchas is that you can’t take two benefits at once. If you are entitled to collect two benefits simultaneously they will give you either exactly or approximately the larger of the two. To collect two benefits, you need to take one first, while letting the other grow and then take the later benefit when it stops growing. This was the strategy I laid out for Glenn – take widower benefits at 66, hold off retirement benefits, letting them grown by 32 percent between 66 and 70, and then take retirement benefit.

In the case of married couples, the optimal timing of benefit collection often has to be coordinated between spouses. Take a hypothetical couple I ran through maximizemysocialsecurity.com to discover the best strategy. Let’s call the husband, age 64, Ted and the wife, age 60, Joan. Joan is the higher earner. Ted is thinking of taking his retirement benefit immediately and Joan is considering starting hers at 62. Can they do better? They certainly can.

Thanks to the grandfathering provisions of the new law, Ted can collect just a spousal benefit on Joan’s work record between 66 and 70 and take his own retirement benefit at 70. But for Ted to do this, Joan has to take her own retirement benefit at age 62. Yes, this is the opposite of being patient. But at 66, Joan can suspend her retirement benefit and restart it at a 32 percent higher value at 70. Joan will still reduce her own lifetime retirement benefits, but the couple’s combine lifetime benefits will end up $155,053 higher!

Here’s another quick hypothetical example of how timing can matter. Jerry is 61 and just retired after a career as a middle manager. Jane is 45. She’s been a top-paid lawyer, but is retiring to look after their severely disabled son, Charley.  Their optimal strategy is for Jerry to take his retirement benefit at 62 at which point Charley can start collecting a disabled child benefit and Jane can receive a child-in-care spousal benefit. Thanks to the new law Jerry can’t suspend at full retirement age without cutting off Charley and Jane while his retirement benefit remains suspended. So he ends up stuck forever with his age-62 retirement benefit. At 70 Janes take her retirement benefit. At this point Charley starts collecting on Jane’s work record. When Jerry dies, Charley collects a child survivor benefit on Jerry’s record. Finally, when Jane die, Charley starts collecting as a survivor on Jane’s record. This multi-step strateg y can also produce a major gain in the family’s lifetime benefits.

Rule 4 – Tell, Don’t Ask Social Security What To Do

The staff at Social Security are overworked, underpaid, and undertrained. Most are well meaning. But a vast number are arrogant beyond belief. I’ve written about case after case where multiple Social Security staff have told the same person something that was 100 false while claiming they were 100 percent correct. In almost all of these cases, only my threat of writing up their mistake in my column led the staff or Social Security’s top brass to fix the problem. Indeed, I could write an entire book about the nature of Social Security’s “advice,” its failure to comprehend longevity risk, and why I would, were I elected President, fire the Social Security Commissioner on my first day in office.

My advice is read our book. It’s very inexpensive. Buy it from the local bookstore if possible or Amazon or Barnes and Nobles if necessary. Read it, then run the software. Then you’ll know exactly what to order not ask from Social Security.

Fixing Social Security for Real and for Good

My goal of becoming President is, actually, extremely serious as you can see at www.kotlikoff2016.com. Part of my platform, provided on that site, involves replacing the antiquated Social Security system with one that’s solvent and simple, indeed, one that requires not a single government bureaucrat to operate.  Social Security, by its Trustees’ own admission in their 2015 Trustees Report, is in the red to the tune of $26 trillion. That’s far larger than a year’s GDP! Stated differently, the system is 31 percent underfinanced. I.e., it needs a 31 percent immediate and permanent hike in its 12.4 percent FICA tax to pay all promised benefits through time.  Make no mistake. The $26 trillion is a massive bill we are dumping squarely in our children’s laps. It’s part of the far larger $199 trillion present value fiscal gap separating all future projected federal spendin g and all future projected federal taxes. The longer we wait to address our overall fiscal gap and Social Security’s in particular, the greater the economic damage to our children. This is why, It’s Our Children, not Vote for Me Because I’m Rich and Brilliant or Vote for Me Because My Name Ends in Clinton is my campaigns’ one and only sound bite.

Laurence Kotlikoff is a professor of economics at Boston University, a fellow of the American Academy of Arts and Sciences, co-developer of www.maximizemysocialsecurity.com, and co-author of Get What’s Yours – the Revised Secrets to Maxing Out Your Social Security.

Gold

Posted on 16th March 2016 by Trevor Reynolds in Blog |Finance in Focus

Gold hit its high in 2011 at a bit over $1900. The most recent low was $1,045 in 2015 and currently it stands at around $1,250.  Gold Shares have had an even wilder ride with the average gold stock down up to 70% – clearly not for the faint-hearted investor.

No one has a crystal ball and I certainly do not, but the low in gold is close – perhaps this recent rally driven by fear in Europe over the banking sector will not continue past $1,350 and we will see the lows tested one more time before we see the Gold bull market start up again.  We are witnessing the beginnings of the new gold bull market and clearly there is more upside now than downside. The previous two up-legs in gold gained 300% and 177%; the previous two up-legs in gold stocks (basis HUI) put on 1,300% and 325%.  Over the next while, for those who are patient, GOLD is a buy.

There are various ways to get things started just call 03 5724 5100

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Retirement

Posted on 8th February 2016 by Trevor Reynolds in Blog |Finance in Focus |Uncategorized

Planning for retirement has become more challenging than it was for prior generations. Nowadays, many people over the age of 65 are continuing to work or are forced to accept a lower income in order to retire. While retirement goals are still attainable, we must adjust our retirement savings plans and be strategic in our approach; knowledge, resources and commitment are all necessary in order to reach a comfortable retirement.
Recognize the trend of people living longer in retirement. People around the world are living longer due to improved standards of nutrition, medicine and public health. While this is a good thing for individuals, we must consider those extra years spent in retirement and if we have the resources to last us through.

Cope with the large gap in retirement savings. The reality is that many people are falling short on their retirement savings goals resulting in a large annual income gap for retirees. It is important for people to commit to larger annual savings targets and consider staying in the workforce beyond traditional retirement years.

Shift the focus from the size of your nest egg to the annual income needed to maintain a comfortable retirement over the years. Nobody knows how long they are going to live and people are constantly worrying about the overall size of their nest egg and whether it will last them through retirement. Since that can be hard to gage, an easier approach is to consider the annual income required for a comfortable retirement and focus on multiplying that year after year.

Contact us to discuss various income generating options and your review your retirement plans 03 5724 5100 or email info@bannerjapan.com