Considerations on which assets to accumulate return

This preview shows page 9 - 11 out of 14 pages.

Considerations on which assets to accumulate- return, risk, and liquidity The Importance of the Rate of Return Since saving is long term for retirement, rate of return matters a big deal Long-term assets offer a higher rate of return Long term- stocks bonds Short term- T-bills Investment Risk- Higher return rate, the greater the risk Investment risk- return on savings will be less than you had hoped for your retirement income o Inflation risk is type of investment risk- risk to retirement income from inflation Longevity Risk Risk that you will live too long and that you will run out of savings How the Financial System Can Help Economies of Scale, Pooling, and Risk Bearing Financial intermediaries can capture economies of scale by investments Additional some bear the risk that remains after diversification by promising savers a rate of return, and if the investment falls short that cover it with their own capital 10/7/2019 9
Image of page 9

Subscribe to view the full document.

Investment Management Delegating investments to financial intermediaries is even more advantageous if intermediaries are more successful than average investors Dealing with Longevity Risk Dealing with longevity risk is the annuity (relies on pooling) Adverse selection is problem with annuities (only healthy people will buy) Solution would be to make annuity mandatory Tax Advantages Investing, must consider the rate of return after tax. 3 ways to proceed: Investing Directly Yourself- o Paying tax on all income as you earn it (through interest rate) so on the final amount you have no tax Life Insurance- o Can put money into policy instead of investing o Return will defer (no tax until investment is realized) o Don’t pay tax until the investment is paid out to you A Pension Fund- o Tax on pension fund is deferred- both the tax on the contribution and the amount earned o FOR BOTH LIFE INSURANCE AND PENSION FUND- if your marginal tax rate is lower, the advantage of the deferred tax will be greater o Why would people invest in things other than pension fund? Tax code limits how much you can have in pension fund and tax deferred savings are rarely liquid Pension Plans Pension plan- agreement to provide income to participants upon retirement- generally sponsored by employer Unfunded PP- fund that depends entirely on credit of the sponsor (employer) Funded- PP secured by assets dedicated to fulfilling liabilities to participants Pension fund- intermediary that manages assets and pays the benefits The Evolution of Pension Plans- The failure of Pension Plans during the Depression- o Failure of PP led to Social Security (government sponsored PP) Expansion during WW2- Growth since WW2- Why do Employers Sponsor Pension Plans?
Image of page 10
Image of page 11
  • Fall '19
  •  Bank

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes