Trying to parse fact from fiction is challenging, especially in an acrimonious environment of public pension scrutiny. Fortunately for MEBA, the pension is entrusted to its members and appears to be in great financial shape. However, the MEBA plan is not immune to the same forces impacting its public union counterparts.


Pension data from MEBA Benefit Watch, Vol. 6, No. 2, Chart A. MEBA Pension Trust Benefit Payments, Chart C. MEBA Pension Plan Investment Allocation.
 
The plan will eventually have to adjust its distribution formulas to come in line with expectations for modest investment returns. For members nearing retirement, any talk of changes to the plan may be unsettling and foster a ‘leave while you can’ mentality. For those of you concerned about losing benefits, the plan will keep the promises it has already made. If you are vested, the lump sum option will be available to you regardless of any changes made. However, what may change is that pension credits earned after the plan is amended would be subject to the new rules.
 
Some retiring members are concerned that the plan has discontinued buying insurance contracts to back the liability. In the current market, locking up plan assets in insurance contracts that are paying a minimal interest rate isn’t smart. It’s like buying a 30-year Treasury bond when interest rates are at historic lows. The contracts that the plan currently owns were purchased when interest rates were much higher and represent attractive investments for the plan.
 
At this time there appear to be no concrete plans to amend the pension. Keep in mind that any changes to the plan will have an equal affect on the Trustees who are faced with making the decisions on behalf of the membership.
 
 
Choose a Financial Advisor that is a credentialed professional. Look for a CERTIFIED FINANCIAL PLANNER™ professional (CFP®) who is willing to review your portfolio at least twice per year. Research the advisor and his or her firm. This can be done by conducting a search on the FINRA website at http://www.finra.org/Investors/ToolsCalculators/BrokerCheck.
 
Look for advisors who provide a broad range of service and investments so that alternatives are available if your needs change. Consider the balance between the intimacy of a smaller office and the resources of a larger firm. Sometimes you can find the best of both worlds. Above all choose someone you understand and trust. Any investment you choose should be thoroughly understood, so your advisor should be a clear and patient teacher.
 
 
I have received several requests from MEBA members to review their holdings in the Money Purchase Benefit Plan and 401K. I make recommendations based on strategic asset allocation.
 
As an investment strategy, asset allocation considers investment objectives as well as risk tolerance. All investors prefer higher returns, but a free lunch is hard to come by. Thus, the axiom that higher-return objectives are almost always accompanied by higher levels of risk generally holds true. The strategy part of asset allocation asks not just what an investor seeks in returns, but how much he or she is willing to risk and how much volatility is tolerable.
 
The discipline part of asset allocation involves a commitment to the established strategy, regardless of one’s emotions. Fear and greed often emerge in the marketplace and can lead to poor investment decisions. Asset allocation discipline helps to commit investors to asset classes that may appear unattractive while limiting excessive enthusiasm toward those that may appear wonderful. The discipline implicitly incorporates contrarian views to some degree.
 
The resulting philosophy is one that doesn’t get carried away in good times or bad. By tempering emotional reactions, asset allocation naturally helps address panic in a crisis and mania in a speculative bubble. We believe having an asset allocation plan in place can help investors avoid some of the decision pitfalls that often accompany unusual marketplace conditions. However, asset allocation and or diversification does not eliminate the risk of fluctuating prices and uncertain returns.
 
Strategic Asset Allocation Strategies
 
Conservative Growth and Income: 
(Approximate asset allocation: 60% bonds / 40% stocks)
 
The Conservative Growth and Income strategy attempts to minimize short-term loss while seeking long-term returns consistent with moderate growth of capital. This portfolio may be appropriate for investors with a below-average risk tolerance.
 
Moderate Growth and Income: 
(Approximate asset allocation: 40% bonds / 60% stocks)
 
The Moderate Growth and Income strategy seeks to balance long-term growth of capital with potential short-term losses. This portfolio may be appropriate for investors with an average risk tolerance.
 
Conservative Growth: 
(Approximate asset allocation: 30% bonds / 70% stocks)
 
The Conservative Growth strategy emphasizes long-term growth of capital with potential short-term losses. This portfolio may be appropriate for investors with an above average risk tolerance.
 
Moderate Growth: 
(Approximate asset allocation: 15% bonds / 85% stocks)
 
The Moderate Growth strategy primarily seeks long-term growth of capital. This portfolio may be appropriate for investors with an above average risk tolerance.
 
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), member SIPC. Johnstone Financial Advisors is a separate entity from WFAFN. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations. Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity.
 
 
In 1979, my brothers and I worked at my dad’s business - Blue Water Trading Company in San Diego. Our ages ranged from 10 to 12 years old. To the outside observer, the business was a boat yard with 20 to 30 vessels in different stages of completion. However, the real money was being made in the back lot, where surplus mainframe super computers were salvaged. We were modern day gold miners, using wire clippers instead of shovels.
 
The timing of the salvage operation couldn’t have been better. Governments and Universities were replacing mainframes with PC’s creating huge inventories of surplus, and the price of gold was nearly $900 per ounce.
 
Working with a family of Vietnamese, we stripped the computers down to their frames. There were hundreds of printed circuit boards, backplanes, relays, pins, wire bundles, circuit breakers and power supplies. The real treasure lay in the circuit boards and backplanes, where reliability of gold conductors trumped cost.
 
We used an old heavy-duty paper cutter to separate the gold connectors from the printed circuit boards. The backplanes, tricky to remove, were crushed with large sledge hammers. As for the massive wire bundles, we cut off the pins and peeled back the plastic sheaths. We were paid a nickel for each pin. The skilled worker could earn about $3 per hour.
 
Everything was tossed into a bath of nitric acid. After about 24 hours, the boiling cauldron of poison dissolved the plastic, leaving a small fortune of gold. The aggregate was then separated, placed into crucibles and baked in a 2,000 degree Kiln. Nuggets the size of large pebbles were collected and sold for top dollar.
 
Currently the price of gold has surpassed $1,800 per ounce - its highest level since being discovered in 3000 BC. When gold prices peaked in 1980 interest rates were double digit, inflation adjusted oil prices were $98 per barrel, Iranian radicals had taken over the U.S. Embassy, and a nuclear Russia was flexing its muscles. By the end of 1982, the price of gold was $300 per ounce - a decline of over 65% from its 1980 peak.
 
While past performance is not an indicator of future performance, it’s important to recognize that gold has a history of spikes when fear is running high and crashes when cool heads prevail. My dad was out of the gold business by the end of 1980 - not because he timed the crash but because the supply of surplus mainframes had disappeared.
 
If during these uncertain times, you are seeking a safe haven and inflation hedge by investing in gold, it appears history may not be on your side.
 
Buying gold, silver, platinum or palladium allows a source of diversification for those sophisticated persons who wish to add precious metals to their portfolios and who are prepared to assume the risks inherent in the bullion market. Any bullion or coin purchase represents a transaction in a non-income producing commodity and is highly speculative. Therefore, precious metals should not represent a significant portion of an individual’s portfolio.
 
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
 
 
In 1998, retirement eligibility in the MEBA pension plan was loosened, allowing a 50 year old with 20 pension credits to receive full retirement. There are currently members who want to take advantage of this, but hold back because they don’t think they’ll have enough money to retire.
 
The biggest challenge to retiring early is funding the social security gap, lasting from retirement until age 62 when you can begin collecting social security. For a married couple it’s estimated that 30 - 40% of their retirement income will come from social security - so the longer the gap, the larger the nest egg will have to be (National Academy of Social Insurance, May 2007, No. 25).
 
In order to fund retirement during this gap, money will have to be taken from a nest egg. For most members that includes the lump sum, MPB and 401(k). Typically, the plan balances are rolled over into an IRA. Money withdrawn from a traditional IRA prior to age 59 1/2 may be subject to a 10 percent withdrawal penalty (see article “Understanding 72(t)”). Depending on age, options exist to withdraw funds without penalty. The MPB and 401(k) offer a distribution method known as installment payments that pay out plan balances over a fixed period of time. The example below illustrates how this can be a powerful tool when retiring early.
 
MEBA Joe is 55 years old and wants to retire. He’s determined that he’ll need $85,000 per year to meet his lifestyle goal. His nest egg consists of the MPB ($170,000), 401K ($200,000) and lump sum ($900,000) which he rolls over into a traditional IRA. Under this scenario, even though Joe’s nest egg is large enough for an early retirement, he wouldn’t be able to get enough income by withdrawing from his traditional IRA as the withdrawal would be subject to a 10 percent penalty. If instead, he elects to receive installments on his MEBA 401K over 5 years and rollover the MEBA MPB and lump sum into a traditional IRA, he would have enough income to retire early.
 
The solutions discussed may not be suitable for your personal situation, even if it is similar to the example presented. Investors should make their own decisions based on their specific investment objectives and financial circumstances. It should not be assumed that the recommendations made in this situation achieved any of the goals mentioned. This example is hypothetical and does not represent any specific investments or strategies.
 
 
Revenue ruling 72(t) exempts IRA withdrawals, prior to age 59 1/2, from a 10% penalty. 72(t) income is based on a calculation using the applicable federal rate (AFR), your account balance and age. You are required to take a series of equal payments for 5 years, or until you reach age 59 1/2 whichever is longer. A 10% penalty will be assessed on all distributions retroactively and with interest if the payment schedule is modified at anytime.
 
There are 3 different methods for calculating the payments: annuitization, amortization and minimum distribution. For a 55 year old, the income level using the amortization or annuitization method is roughly 5% of the IRA value and the minimum distribution method is about 3% based on current interest rates. Once you choose the calculation method for your payment schedule you can never increase it; however you can decrease it from the amortization or annuitization method to the minimum distribution method.
 
If you are considering an IRA rollover with 72(t) payments as an alternative to receiving a pension, be aware that principal protection of your IRA rollover investment cannot be guaranteed. The overall return on your investments will be reduced by various fees and expenses associated with the investments, investment program or account.
 
Although you can begin 72(t) distributions at any age, individuals younger than age 50 must make longer time commitments. This often increases the risk that you would need to alter your series of payments before age 59 ½ due to changing income needs, which could result in retroactive penalties and interest charges. Once begun, the substantially equal periodic payments must continue for 5 years or until age 59 ½ whichever is longer. If there is any modification to the 72(t) payment schedule prior to the completion of this time frame, a 10% penalty will be applied to all distributions, retroactively and with interest. If you are near age 59 ½ you may want to consider tapping taxable assets first to bridge any income gap until your IRA is no longer subject to the 10% penalty at age 59 ½ . Withdrawal rates that exceed investment rate of return may jeopardize your ability to sustain withdrawals through retirement.
 
Wells Fargo Advisors Financial Network did not assist in the preparation in this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. Johnstone Financial Advisors and Wells Fargo Advisors Financial Network are not tax or legal advisors. Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), member SIPC. Johnstone Financial Advisors is a separate entity from WFAFN.