Most professional sports teams have an owner. He or she bought or inherited the team, has particular objectives in mind, objectives that include or invariably are enhanced by winning.
PART 1 offers an overview of similarities between their problem and building a retirement plan.
A Parallel Universe
Let’s start with an example. Table 1 creates a blended hockey / retirement team, to highlight similarities in plans. The roster includes two goalies, the “last defense” against opposition goals that jeopardize chances of winning — much as Social Security provides a “last defense” against lack of resources that jeopardize sufficient funding for retirement. This hockey team has eight players who support their goalie by focusing on defense to minimize scoring lby the other team — a retirement plan could have a similar array of funding sources that support retirement needs, so should have minimal risk exposure. This team then has 12 other players who focus on creating offense to outscore the other team — a retirement plan could have a similar array of more aggressive investments that conceivably could fund retirement wants.
Table 2 identifies the goal, constraint, issues and guidelines for these parallel universes.
TABLE 1: A Blended (Hockey / Retirement) Team
- 2 Goalies
- Soso On loan from another league: (SSA) Social Security Administration
- Ben On loan from another league: (DBP) Defined Benefit Program
- 6 Defensemen
- Tippy Top-D Pairing: A Treasury Inflation-Protected Security
- Dewey Top-D Pairing: A Deferred Annuity
- Connie A mercurial role player, often from a Defined Contribution Program
- Proto Insurance Protection: versatile, covering long-term care, longevity,…
- Dwight Right-Dman: a conservative, a defensive d-man; safety-first
- Lefty Left-Dman: a liberal, offensive d-man; likes to join or lead the rush
- 4 Forward Lines
- E-T-F Line Top Line: Ed-Ted-Fred; a well-synchronized Exchange-Traded Fund
- B-N-B Line Checking Line: Bill-Note-Bond; neutralize top risks from opposition
- T-D-F Line Target-Date-Fund Line: become more conservative later in season
- C-D-C Line Wildcard Line: Commodities-Derivatives-Currencies; limited icetime
- Buck Head Coach = Financial Advisor; selects players, manages games
- Crunch Assistant Coaches: track player performances with data metrics
- Front Office
- Gem General Manager = Retirement Manager; aligns team with its Owner
- Sir Owner: ultimate responsibility for team success; must live with result
Table 2: Building a Blended (Hockey / Retirement) Team
- Build a winning team, from General Manager down to the last player
- For the NHL, a team has a salary cap, as well as salary maximum and minimum
- Unlike the NHL, each “Retirement Team” has an owner-specific salary cap
- With a salary cap in place; how to allocate limited funds among the 20 players?
- Do I have the right General Manager and Head Coach? Are they overpaid?
- What if Congress and/or your state “pull your goalie”?
- When should you deploy “special teams”, such as a “power play” or “penalty kill”?
- As a hockey owner, you know that goals are the name of the game
- Stable organizations that have a clear plan and stick with it tend to become winners
- No one player can win a championship by himself.
- Winners never quit, and quitters never win.
- There is no elevator to the Stanley Cup; take the stairs.
- Offense creates a headline, but defense creates a champion.
Several parallels can be developed, so let us begin that journey. Note that our two goalies (Ben and Soso) are on loan from another league, so could be recalled (an involuntary “pulling the goalie”). In our parallel universe one other league is not in Europe or Russia; it is the SSA (where current forecasts are that its trust fund will be exhausted by 2035 and some politicians have indicated a preference to eliminate the payroll tax; these two sources fund 20% and 80% of Social Security payments, respectively). The other league also is local, a DBP sponsored by a corporation or state, and similarly constrained to maintain current funding. Private corporate defined benefit plans are disappearing, and public DBPs are underfunded. Even prior to the coronavirus, at least a dozen state and large municipal funds had less than half the funding needed to meet legally-obligated payouts; another dozen had less than 60%. State pension debt exceeded $1 trillion heading into 2020. The disruptions due to coronavirus clearly will exacerbate this shortfall, as state and local budgets shrink, unemployment leads to lower payroll tax contributions, and more people choose to retire early rather than find work.
Following the only completely lost season (2004-05) by an American professional sports league, the National Hockey League (NHL) imposed a financial structure on all teams. It requires every team to carry 20 (to 23) players, and for the 2019-20 season the team salary limit is $81.5M. No player can have a salary less than $700,000 or more than $16.3M. Assume the starting lineup for our team ((Ben, Tippy and Dewey, and the E-T-F Line) is paid a collective $60M, or on average $10M each. That leaves a maximum of $21.5M to divvy among the remaining 14 players, an average of about $1.5M per player. More than 2/3rds of that roster is likely to be comprised of unproven younger players or mediocre (albeit relatively well-paid) veterans. If your star center (Ted) has an expiring contract and demands $20M to resign, what to do?
Your retirement plan also has a “salary cap”; it is the total funding available to support your unknown number of retirement years. A portion of that funding is from social capital, which is payments to you and your generation based primarily on payments from the current workforce. It might be wise to view that source as “players on loan”, like our two goalies, since there is no assurance that either Social Security payments or defined benefit payments will continue, at least at current levels. There is no requirement that the remaining funding must be allocated among “the 18 skaters” on your roster, but it might be prudent to act as if NHL rules are in force.
Assume that social capital at current levels comprises 50% of your total funding for retirement. You might distribute 30% of the balance in equal payments to your six defensemen, and the remaining 20% in equal payments to your twelve forwards. If Tippy and Dewey really are a stellar defensive pairing, double your allocation to TIPS (Treasury Inflation-Protected Securities) and deferred annuities – and cut back on allocations elsewhere to compensate. You also might act as if there are imposed limits on the number of players and minimum player salary. For the NHL, the current minimum salary equals only 0.86% of team cap — but it is not zero, and all twenty players get paid. A diversified retirement plan would keep all the players (goalies, d-men and forwards), make sure each contributes unique strengths, and match funding to needs.