Financial Planning Education in the “Upside Down”

Temple University RMI 2501 Introduction to Personal Financial Planning

Educators globally are challenged to engage students and impart deep learning in the face of global COVID-19 pandemic restrictions. Distance learning dominates as Zoom’s market capitalization exceeds $140 billion (up 6-fold in 2020’s C-19 online pivot).

Online content from staid Powerpoint presentations are least likely to inspire thirsty young minds. Gen Z (born 1996–2015), will prove to be a powerful demographic going forward, 68 million strong in the USA alone.

Large universities like Temple University with international campuses (e.g. Rome, Tokyo) can augment US centric textbooks and learning resources by bringing a global lens to the subject matter. This requires instructors that are willing to engage cross-border with international colleagues, despite issues of time zone. I would argue most professors are keen to offer a new voice, a new face and, perhaps most importantly, a different perspective to their students.

Early examples in the course well underway for the fall 2020 term of RMI 2501 in both Philadelphia and Tokyo stress the markedly different circumstances families face, dependent solely on country domicile. Future collaboration sessions are planned throughout the term.

Taxation is a major variable in financial planning. Japan’s top tax rate for individuals is 55.95% (not including the 8.5% resident’s tax which is paid to one’s prefecture, Japan’s equivalent of states). US’s top federal tax rate is 37% with the tax brackets under their progressive tax system running from 10% to 37%. For a family making $100,000 (¥10 million), the tax differential is a sizable 5.7% ($500/month) with Japan’s tax higher in all income brackets.

Tax policies differ both between countries and, on occasion, within them. Hong Kong’s top tax rate is 17%, yet the top rate for the Peoples Republic of China (PRC), aka the mainland is a full 45%. Singapore has a top rate of 22%.

The fiscal circumstances of one’s country is something to keep in mind, given the degree to which an aging population relies on social security/ national pension. Japan has well over 200% of GDP (infographic below)in government debt (> US$10tln) with debt service devouring >22% of their annual budget, despite near record low bond yields on government debt. The US national debt is just over $27 trillion and has eclipsed 140% of GDP swiftly, due to Herculean efforts to counter the negative economic effects of the COVID-19 pandemic. Debt service currently accounts for 8% of the US budget at present (10-year UST 0.7%, 30 year UST , aka the long bond 1.5% yield, for reference).

It took 192 year for US debt to get to >$1 trillion and in April 2020 it increased $1 trillion in one month! It has increased another $1 tln since the end of April 2020.

Most employees that have a pension plan have a defined contribution plan which places the onus of investment performance/asset allocation squarely on their shoulders. With 80% of the global bond market yielding sub 2%, former “all-weather” allocations like 60% stocks / 40% bonds could well turn out to be fraught with typhoons and catastrophic loss versus previous investment cycles. Passive investment currently stands at 45% with retirement target-date funds the preferred retirement asset of millennials (Vanguard’s Target Retirement 2060 fund $VTTSX has > $6bln in AUM, as an example) . Baby boomers have a larger pool of retirement assets than millennials, most of which are still actively managed. The full pool of US retirement assets totals $25 trillion presently, largely residing in 401(k) plans ($2tln < than current US federal debt).

If COVID-19 has done nothing else, it has shown that building our resilience, through establishing and maintaining an emergency fund (3–6 months of total expenses) has been shown to a critical part of the financial planning process.

Temple Owls may not be the wisest birds in the global financial planning forest, but we do remember principle #1: The Best Protection is Knowledge.

Caleb Gibbons, CFA, FRM, Temple University, Japan Campus

John V. Dormuth, MSIM, CPCU, ARM, Fox School of Business, Temple University