Small changes make a big difference. Pension managers used to think they could average 8% after inflation over two decades or more. At that rate, a million dollars invested today turns into $4.7 million in 20 years. If $4.7 million is exactly the amount you need to fund that year’s obligations, you’re in good shape.
What happens if you average only 7% over that 20-year period? You’ll have $3.9 million. That is only 83% of the amount you counted on.
At 6% returns you will be only 68% funded. At 5%, you have only 57% of what you need. At 4%, you will be only 47% of the way there.
Looking at the assumptions, the median plan in the Public Fund Survey assumed 7.9% annual investment returns and 3.0% inflation. The average asset allocation was 50.7% equities, 23.2% fixed income, 7.2% real estate, and 15.1% alternatives, with the rest in cash and “other.”
If you are a state or city worker in one of these severely underfunded systems, or a recently retired one, now is an excellent time to develop your Plan B. Your chance of getting the full amount you were promised is somewhere between slim and none. The money simply isn’t there.
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