The Truth about the NC Pension Fund performance.

An Op-Ed in todays News and Observer.  

Summary:  When the fund sets its own benchmarks, you shouldn't be surprised when it beats them.  But compared to the rest of the USA, NC is 43rd (of 47) in terms of performance.

NC Pension Fund Returns - what is the benchmark?

Ron Elmer has an excellent blog posting showing that although the NC pension fund outperforms its own "custom" benchmark, it has lagged the median return for all public pension funds over 1,2, 5, and 10 years.  

In the past year, the fund underperformed by over 2%.

A couple of observations:

1. The NC Pension Fund benchmark is largely worthless because it changes from year to year and is created by the office that is running the money.   As Ron points out, a simple median of all state pension funds makes a lot more sense unless you believe that NC's pension fund is somehow special.

2. The 10 year underperformance is about -0.38%.   That gap could be eliminated by just reducing fees.  As I've pointed out before, the NC Pension Fund pays way too much in management fees, and lowering those fees by about 1/3 of a percent wouldn't be too hard.   

And in case you're wondering, a very back of the envelope computation of 1/3 of a percent over 10 years is about $2 Billion in fees (assuming $60Bn fund value as a rough average over 10 years).

We are bleeding money to Wall Street.

Refuting an attack on indexation

Probably the best money management blog out there is Andy Silton's "Meditations on Money Management".  Andy is a retired professional, who although in his earlier days was an active manager, now fully subscribes to the notion that you can't beat the market.

Andy's latest post [ here ] - is a rebuttal to a piece in the New York Times profiling Robert Olstein who is an active manager.  Olstein lives in a world where anecdotes and stories carry more weight than hard facts and data.  This is the world that most active managers live in.   They'll claim that of course, most people can't beat the market, but a few can - and they are part of the chosen few.   They'll point to a few good years of returns and say "see how I beat the market?"

All active manager's have stories and anecdotes about how they can beat the market, and if you believe them, then you'll hand over your cash and pay the 1% management fee.   But if you're smart, you'll index.   In the long run you'll be richer - because of the hard facts of the mathematics of finance.  No anecdotes needed.

Figure out your retirement number

http://www.thesimpledollar.com/how-to-quickly-figure-out-your-retirement-number/

1. Take your salary
2. * 0.8
3. * 1.03 ^ number of years til you retire
4. - any social security you expect to get
5. * 20.

The answer is how much you need to save.  The method is pretty simple but it should give you a ball park idea.

A brief discussion:

Step 2.
The 0.8 is pretty arbitrary - but is trying to get at what amount of your current salary you could live off - hopefully the kids will have left home and your house is paid off.  So this number could be 0.7 or less -but don't kid yourself here.

Step 3.
This is to try to get a handle on inflation.  Most forecasts (from long term bonds etc) peg inflation as being pretty low in the future.  So 3% should take account of any increases in your cost of living.

Step 4.
Social Security. You can got the Social Security website and they'll tell you what your benefit is going to be.  http://www.socialsecurity.gov/estimator/

Step 5.
This has nothing to do with you living for 20 years.  By multiplying by 20 you are creating a lump sum that could yield 5% income per year that would be enough for you to live on.   So this step assumes that you invest your retirement portfolio in an account that earns at least 5%.


If you already have some money saved then you can add the following steps:

6. Take dollar amount you have saved *1.05 ^ number of years.

This will give you an estimate of how much your current money will grow to.

2. Subtract this from the answer from #5 above.  This is the new amount you need to save.

3. To find out the amount you need per month, enter this formula in to excel  =PMT(0.05/12,12*years,0,amount needed).

This should give you the amount that you need to be saving each month for the rest of your working life assuming 5% return on your investments.  Arguably this is a little conservative as your income and amount saved will be going up.


Example:
Salary = 100,000, and 20 years to retire.
$200,000 saved currently.
$1,500 SS benefit per month = 18,000 per year.
Assume investment portfolio earns 5% a year.


80% = 80,000

- 18,000 = 62,000

62,000*1.03^20 = $130,000

130,000*20 = $1.44 Million.

Looking at current save money:
200,000*1.05^20 = 530,000

Amount to save = 1.44 M - 530,000 = 910,000

Using excel formula:

=PMT(0.05/12,240,0,910000) = 2,213 per month for the next 20 years (or about 22 % of your gross income).

Junk Bonds to fund Noah's Ark?

Unbelievable, but true.

The bonds will have no secondary market, are callable at any point, have no guarantee by the issuer and pay about 5% interest.  Oh, and they are going to pay for a museum called "Ark Encounter".  

What could go wrong?

Masters of Supply Chain and Engineering Management

If you are interested in getting a 1 year masters in Supply Chain with  an emphasis on the engineering side of things - check out this new program that is joint with my department and Industrial Engineering at NC State.

A slightly humorous Twitter IPO explainer.

Courtesy of the Guardian (that bastion of capitalism).