There’s an epic public pension wipeout coming. Here’s how to avoid it.

The last trace of “guaranteed” retirement income will disappear in the next crisis…

The Wall Street Journal reports public pension funds, like all investors, have a difficult time finding safe yield today.

In 1995, pensions could sit 100% in bonds and earn a 7.5% yield. But today—thanks to persistent ultralow interest rates—they’re invested in some of the riskiest securities out there.

The discussion in the Journal is rather academic until you see the actual breakdown of real public pension funds’ assets…

Take the largest public pension fund in America—the $300 billion California Public Employees’ Retirement System (CalPERS). It sports some horrifying allocations:

  • Stocks: 53.1%

  • Bonds: 20%

  • Real Estate: 9%

  • Private Equity: 9.4%

  • Other: 8.5%.

Over 60% of the fund is allocated to higher-risk asset classes. That risk led to a 2.4% return in 2015… and it’s poised to do far worse in the next major market downturn.

[CalPERS’ current asset allocation resembles that of a young person with decades of time ahead of him before retirement. It’s closer to PBRG’s own “Asset Accumulation” allocation model (that aims for safe 9% annual returns over decades).

It ought to resemble something closer to PBRG’s “Set It and Forget It” allocation model (with far less equity exposure and ultrasafe 6% annual return goals). Review our detailed models here.]

Here’s the problem: Every day, 10,000 baby boomers hit retirement age (65). That rate will continue for the next 14 years. Pension funds don’t have the luxury of decades before needing to pay out. They need to do so—like clockwork, to millions of retirees—right now.

It’s led the funds to make the most dangerous investment decision possible today: “reaching for yield.” They’re exchanging far greater risk for somewhat higher income.

And they’re the next hundred-billion-dollar taxpayer-funded bailout in the making…

Recommended Links

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  If you’re planning on receiving (or do receive) a public pension, heed Mark’s advice in your own retirement planning. He highlights retirees’ worst mistake:

The biggest mistake retired people make is giving up all their active income.

You can get two different types of income. Active income is the money you make through your labor or through a business you own. Passive income refers to the income you get from Social Security, a pension, or a retirement account. You can increase your active income by working more. But the only way you can increase your passive income is by getting higher rates of return on your investment (ROI).

[A return on investment, or ROI, is a profitability measure that evaluates the performance of a business by dividing net profit by net worth.]

When you give up your active income, two bad things happen:

First, your connection to the source of your active income is cut. I’m talking not just about the business you had or worked for, but also the people you knew. (These are valuable connections you might want to go back into someday. But with every month that passes, it becomes more difficult to get back.)

Second—and this is something you may not have considered—your ability to make smart investment decisions is debilitated because of your dependence on passive income.

You will find yourself “reaching for yield” to make up for an income deficit. And you will likely lose a large portion of the assets you put into riskier high-yield investments… with no significant time left to make up for your mistake.

Bottom line: Most of America’s public pension funds are now reaching for yield. It’s brewing up America’s next systemic financial disaster.

If you’re reaching for yield in your own asset allocation mix, stop now. Your retirement decisions should focus on “return of assets,” not “return on assets.” It’s the only safe way forward.

Doing so will also ensure you have “dry powder” available to secure safe, high yields from trophy assets once the markets make their next—inevitable—correction downward…

  If your retirement dreams are dashed—or even just diminished—read this…

Maintaining an active income in retirement doesn’t have to mean working your same job until you drop dead…

Spending just 20% of your time earning an active income—doing something enjoyable—is often enough to keep you from “reaching for yield” on your retirement assets.

Mark’s team is hard at work researching the greatest active-income-producing opportunities available. You’ll like what they share. Stay tuned…

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