Stock Market Volatility Can Wreak Havoc on 4% Withdrawal Rates.

Financial planning is often more about what we don’t know than what we think we know.

Jim Lorenzen, CFP®, AIF®

Often financial planning and wealth management is more about the unknowns in life than the knowns.

After years of supporting roles on the Flintstones, Barney and Betty decided to retire from acting in cartoons (it’s hard to be a cartoon character!) and enjoy life.  Using a 4% withdrawal rate, they planned to take $40,000 a year from their $1 million retirement account which, with their Social Security, would provide them with everything they needed for life.  Growth of investments would give them their inflation hedge.

“Security is mostly a superstition: it doesn’t exist in nature”  –  Helen Keller

They retired in 1999.  Unfortunately, after three years his inflation-adjusted withdrawals and the market’s poor performance had eroded his portfolio to less than $540,000.  At this point, his withdrawals now represented almost 8% of his portfolio value.   Bad problem.  Inflation made those withdrawals necessary but the 8% withdrawal rate simply wasn’t sustainable.

The market was good to him for the next five years; but, by the end of 2007, their portfolio was still less than $670,000, meaning withdrawals still amounted to more than 7% of portfolio value.

Then came 2008-9 – the melt-down.  Their nest-egg plummeted to less than $400,000 and withdrawals now represented more than 12% of account value (cost of living still going up!)

4% didn’t work too well for Barney and Betty.  Fred and Wilma (actually, more Wilma that Fred) had told them they needed a real plan that would be stress-tested for all the unknowns in life. 

Planning isn’t about what we know; sometimes it’s knowing what we don’t know – and recognizing that often there are things we don’t know we don’t know.   It’s more about managing risk than money; and planning for the unknowns. 

Nothing beats experienced guidance.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Like the S&P 500 Index?

Maybe you should look under the hood.

Jim Lorenzen, CFP®, AIF®

Like indexing?  Like the S&P?  You can get an index fund!  Sounds good.  Let’s face it, most (virtually all) investment management companies fail to beat the S&P index on a consistent basis.  We all know that.

There’s a good reason for it:  An index doesn’t have expenses while, in the real world, all assets have a cost of ownership – expenses – attached.

If your home is worth $500,000 and your local housing market, including your home, increased by 10%, your home and the market would become worth $550,000.  Did you tie the housing index?  Of course not.  You had to pay property taxes, homeowner’s insurance, maintenance and repair costs, mortgage interest, maybe even HOA and other costs that are required.   Sometime, just for fun, add up all your annual costs and see what your annual expense ratio is (total costs of ownership divided by your home’s current value).  You might be surprised, but I digress.

Expenses aside, how about using a fund replicating the S&P index (that’s as close as you’ll get)?  Let’s look under the hood.

According to Craig L. Israelsen, PhD, an Executive-in-Residence in the Personal Financial Planning program in the Woodbury School of Business at Utah Valley University, if all holdings in the index were weighted equally, each company holding would have a fixed weight of about 0.20% in the index.  However, the holdings aren’t weighted equally; their weighted according to their market capitalization.  This means that roughly 42% of the assets in a market cap-weighted S&P index are held in just 25 of the 500 stocks – another way of saying that the largest 5% of stocks represent over 40% of the allocation.

The practical implication of all this:  half the stocks in the market cap-weighted S&P index have very little impact on performance.

When tech goes up, the cap-weighted S&P index looks good.  When tech takes a nose-dive, not so good.

Is that good for baby-boomers now guarding their serious money for retirement?  Saving a point or two on investment expenses may not be the key issue for this group.  Wealth preservation and maintaining purchasing power for the long term may be more important.

Maybe there’s a better way to achieve long-term goals than riding the index roller coaster.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Does “Bucket Investing” Achieve Goals or Destroy Wealth?

Many investors, and advisors, like it; but there are some experts who apparently aren’t too sure.

iStock Images

Jim Lorenzen, CFP®, AIF®

Does the ‘bucket’ approach to allocating assets to life goals make sense—or does it actually destroy wealth?   Mentally, bucket investing is simply assigning money to ‘buckets’, i.e. goals.  Advisors utilizing this  approach use a variety of buckets.  Even some celebrated elite advisors have used this method.  One uses a two bucket approach:  Bucket #1 contains a five-year cash reserve and  bucket #2 is then free to invest in longer-term investments, typically stocks, stock funds or exchange-traded funds (ETFs).

Many people find the approach appealing for several reasons:

  • No need to  wrestle with sequence-of-returns risk 
  • No need to worry about liquidating assets during a  down market
  • Comfort:  It comports comfortably with the well-know behavioral bias of mental  accounting.  It’s easy to understand having a withdrawal account and a long-term investment account.

Javier Estrada, a professor of financial management at the IESE Business School in Barcelona, Spain conducted a research study, some time back, on the merits of the ‘bucket approach’ to investing for achieving long-term financial goals.  His study included highly-detailed back-testing of both Monte Carlo and  bucket strategies, back-tested over a variety of time periods and methodologies.    His study uses\d a risk-adjusted success (RAS) measurement—it’s defined as the ratio between the mean-expected value of outcomes  and the standard deviation of outcomes

Are you asleep, yet?

Basically, he’s measuring downside risk-adjusted success—measuring only downside volatility—the dispersion of only failed outcomes as opposed to simply looking at the disparity of upside to downside outcomes.  

Okay, enough of the weeds.  His extensive research shows that while the bucket approach may have psychological  benefits, it doesn’t perform so well when tested  for the highest  likelihood of success.   It failed in all performance tests to provide enough money to cover the needed  withdrawals.  Estrada found that as he extended  the number of years for withdrawals to occur, the worse the strategy became.

Reasons for the failure?  Estrada explained:  “Most implementations of the bucket approach… distribute funds from more aggressive buckets into more conservative buckets, but not the other way around.  Put differently, although bucket strategies avoid selling low by withdrawing from bucket #1 after stocks performed badly, they do not take advantage of also buying low as static strategies do with rebalancing.”

The bucket approach is popular due chiefly to a lack of knowledge.  Surrendering to the mental  accounting bias allows investors to conveniently stop worrying.  While increasing the amount of money allocated to bucket #1 might allow them to sleep better, it also increases the odds of running out of money.

Oops.  Not good.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Hidden Surrender Charges

You could be paying them without knowing it. It pays to do some math.

Jim Lorenzen, CFP®, AIF®

I don’t know anyone, certified financial planner professionals included, who is a fan of surrender charges; but, economically they are a fact of life for many products simply to make the offering available and viable for the investment or financial product provider.

For consumers, the surrender charge represents an obstacle that stands between them and having total liquidity—and the charge itself reduces the value of the product should that liquidity be required at some future date.   Sometimes, however, consumers are already paying for the liquidity they desire even if they never need or use it!

Hypothetical example:   Mary and John have $150,000 “just in case”  money set-aside in savings.  They have no particular purpose for it but they like knowing it’s there if they should need it.  They’re not making much interest, of course, probably less than 2% – but they like the liquidity.   They’ve heard about another investment that in all likelihood could help them achieve a 5% return, but it has a surrender charge—something they would like to avoid—so they’re staying with their savings account.    In effect, due to the return difference, they’re paying 3% per year for their liquidity right now.  In three years, they will have paid 9% – $13,500!   In five years the liquidity/opportunity cost will be 15% – $22,500—even without growth. 

Maybe the alternative might be a better bet—especially if other questions result in favorable  answers:  Is the tax treatment different?  How much of the money is even subject to surrender charges and how much might be liquid without surrender charges?   Does it make sense to pay 3% in opportunity cost up front for liquidity they may not even use—or does it make more sense to pay for it when it’s needed?  And how much would it even be?

It pays  to do the math and examine all alternatives.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Beware of Mortgage Loan Scams

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Jim Lorenzen, CFP®, AIF®

First I want to point out that this post is really courtesy of Senior Deputy Becky Purnell of the Moorpark Police who provided this information in the City of Moorpark Guide; but, I thought it was so worthwhile I wanted to relay the information here.

According to Deputy Purnell, you should be aware that scammers are targeting email accounts of realtors and escrow and title companies in order to steal your money!

So, if you are buying a home or refinancing, you should be alert to what could be happening and how to protect yourself.

  • The scammer hacks into the email account of a real estate agent or escrow officer and monitors correspondence between that person and the home buyer.   The scammer then creates an email that is nearly identical to the agent or officer’s email, including their writing style, logos, and signatures.
  • About the time the home buyer would expect to receive instructions on how to wire the money, the scammer sends instructions to wire the money to a specified account which goes to the scammer.  The agent or escrow officer is unaware this is happening

This scam targets people who are in the refinancing process and any other transactions that include the wiring of money.  Here are some ways Deputy Purnell recommends for protecting yourself:

  • Before you wire money, speak with the realtor/escrow officer by phone or in person to get wiring instructions and confirm the account number is legitimate.
  • Do not email financial information.  It isn’t secure.  Many financial firms do what I do:  they provide secure vault access to their clients so that documents never go through an email system.
  • Look for web addresses that begin with https (the s stands for secure).   Don’t click on email links that come in emails – it’s always safer to look up the website’s real URL and type in the address yourself.
  • Be cautious about opening email attachments.  Those files could contain malware.
  • Be sure your browser and software are up to date.

Especially if you’re getting emails from someone you don’t know, never click on the link.   Even when I get a link from my own bank, I never click on it.  I always enter the correct URL manually to gain access.

You can set-up a spreadsheet with columns for website names, URL, ID, Username, Passwords, and security questions and answers; but, make sure you spreadsheet is password protected and not accessible to others (you may want to store the data on an external drive, or example).

Hope this helps!   If you’d like to learn more about IFG, we can always visit by phone.   You can click on that link (if you feel confident), or you can simply go to the IFG website and contact me through the site.  www.indfin.com.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

There’s More than One Path to Retirement Security

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Jim Lorenzen, CFP®, AIF®

People often think investment strategies for retirement security involve a either/or choices, i.e, risky stocks or savings as a zero-sum choice, or active vs. passive investing as an either/or choice; Believe it or not, there’s more than one path to retirement security.  Sometimes (often) they can be blended.

Active vs. Passive

Vanguard on active vs. passive investingFor example, low-cost passive investments are attractive simply because it’s widely believed that active managers can’t beat their relevant indexes’ average return on a consistent basis.

That’s probably true, however the argument often ignores the downside protection active management can offer – something index investing doesn’t provide, and something important to investors for retirement security.

Does that mean there’s only one path to financial security… that active is better?  No – it’s just different.  Sometimes, the extra fee an active manager charges can be worth far more than the alternative downside exposure.   Vanguard has created a client education piece about active and index investing that you might find helpful.  You can download it here.

Active Institutional Management

Investors with smaller accounts often achieve diversification by investing in mutual funds.  While these investors can benefit from the diversification they offer, those with larger accounts can be penalized.  The reason is simple:  Mutual fund costs don’t scale.

For example, if you have $50,000 invested in a mutual fund that carries a 1.25% expense ratio (just to pick a number), you’re paying $625 a year in annual expenses.  Not too bad.  But, suppose your investment is $500,000 and you have a basket of mutual funds and all charge about the same 1.25%.  Your annual expenses would now total $6,250 per year.

Fund expenses don’t go down as the asset level increases.  1.25%, in our example, would stay 1.25%, regardless of how much your account increases in value.  And, those aren’t the only expenses!  You can learn about the other hidden expenses in another report, Understanding Mutual Funds, which you can also download instantly, right here.

Institutional money managers – at least all those I use – have fully disclosed fees; but, furthermore, their fee percentage actually declines as the investor’s asset level grows.  They can also provide tax-managed benefits not available in mutual funds.

Institutional managers seem to do far better than the individual investor.  As you can see from this independent Dalbar study, individual investors didn’t even come close- and the time period for the study included the famous ‘meltdown’ of 2008.

Institutional investors tend to outperform individual investors.

Screening for investment managersThe selection process for institutional managers, of course, is important, if not critical.

If you’d like to see the process I have been using here at IFG, you can get it here.

Of course, it’s not an either/or proposition:  Blending active institutional management with passive indexes can be quite effective.

It begins with a philosophy.

The key to successDo you know your investment philosophy? By the way, “I don’t want to lose money” is not a philosophy; it’s a wish.  A philosophy goes deeper – it’s the roadmap that helps you as you go through the investment/manager selection process.  IFG’s can be accessed immediately here.

Managing the Downside.

There’s a tv commercial sponsored by a mutual fund/insurance complex that asks the question, “Do you know your number?

While it’s a good question, it doesn’t go far enough.  The real question may not be how much you have, but how long it will last!   After all, that’s the key to almost everyone’s definition of retirement security.

Longevity risk – “Will I run out of money?”

This is the key issue for most Americans; even those with $1,000,000+ who want to maintain their standard of living, let alone the vast majority of Americans who have less.  You might enjoy getting our Money or Income report when you sign-up for the IFG ezine (you can always unsubscribe later).   You can get the report here.

 

 

What’s right for you is likely no one strategy, but a blend of this – and other strategies not even covered here – that best fits your particular needs and desires.

If you would like help, of course, we can always visit by phone.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

MONEY OR INCOME: Which is most important to you?- Part 3

Rising Inflation ScreenJim Lorenzen, CFP®, AIF®

An income for life – a lifetime retirement income strategy is what most people want – but are they willing to do what’s required?

For most, if not many, the idea of ‘bucketing’ money into categories – current needs, emergency needs, and future needs – is intuitive.  An that’s the ‘secret’ behind having a retirement income for life!  It’s not a secret, really; just a common sense strategy for creating a stress-free lifetime retirement income.

We don’t want to take money from one to fund another unless we’re absolutely FORCED to, which we seldom are – yet, that’s what a lifetime retirement income strategy demands.

This likely explains why people generally hate the idea of annuitization, even though retirees routinely say their biggest fear is running out of assets  –  aha!  Assets!  Not income?

I’ve known people who’re retired with generous pensions (with cost-of-living adjustments) from the federal government and lived amazing retirements, living on Florida waterfront property with boats outside their back doors, even though they had only a couple hundred thousand dollars in savings… and loving it.  You couldn’t get them to trade those pensions for anything!   It was predictable – it would never stop – and they had COLAs built-in!

But, the rest of society seemingly isn’t willing to make the liquidity trade.  Research seems to back this up, finding that the size of liquid holdings is directly related to their sense of well-being and satisfaction.  Apparently if they can’t achieve their need for future income until they meet their need for current assets, they feel cash-strapped – or they’ll choose retirement solutions that are inferior but psychologically more satisfying..

Mental bucketing comes in two forms:

  • Time segmentation:  Cash, bonds, and stocks are segmented according to time frames.  Cash funding near term, laddering bonds for intermediate term and interest-rate risk, and stocks for long-term inflation-hedges.
  • Spending segmentation:  Using financial tools to put predictability into outlays – Using Social Security and immediate annuities to create an ‘income floor’ for meeting essential expenses, and using portfolio withdrawals throughout the entire retirement period to provide for discretionary expenses.

For many, however, the delineation between essential and discretionary expenses can be fuzzy.   When people prioritize their goals, some will classify travel and cable tv as a need, while others will find few needs beyond food, shelter, transportation, medical expenses, etc.   And, many neglect to think about the biggest outlay they’ll make during their entire retirement – the annual tax payment to the I.R.S.

The most straightforward solution to longevity risk

For most, the biggest risk is outliving their money.  In short, it means running out of income.  The straightforward solution is simple:  Trading a portion of liquidity to pay cash for a lifetime income – and transferring longevity risk to an insurance company in exchange for an immediate annuity.  For many, this is a tough sell because they aren’t willing to give up liquidity of current assets to secure a lifetime income, despite the fact all those retired federal retirees in Florida have been doing it for years – and loving it.  And, also despite the fact that an immediate annuity solution is far superior to that of using a variable annuity with a guaranteed lifetime withdrawal benefit.[1]

Not only that, retirees want the potential for an increasing standard of living, as well!  Others may have additional legacy goals!   Inflation-adjusted immediate annuities are available, but haven’t been too popular due to their lower initial payout

The Hybrid Time-Segmentation™ (HTS) solves many of the issues and may appeal to investors who need a greater degree of certainty for their income strategy.

 

The HTS strategy puts an ‘income floor’ under the segments – a floor that’s both predictable and expected to last a lifetime, while still preserving short-term liquidity needs and providing for long-term inflation concerns.  For example, one popular approach is to use a portion of assets to purchase a ten-year deferred income annuity that provides a lifetime retirement income beginning in year #11.  In this way, an additional guaranteed income source is added providing an increased floor as the rest of the portfolio grows for future years.[2]  The entire strategy, of course, should coordinate liquidity, security, inflation-protection, and income needs.

If you’d like to learn more – and it’s worth doing – we have a twenty-minute educational video that explains this lifetime retirement income strategy.  I think you’ll  like it!   Grab some coffee, sit back, and learn more here.

 

Enjoy!

Jim

[1] I must admit my own bias against variable annuities.  To me, using the stock portion of a portfolio to purchase a variable annuity is only turning a potential capital gain into taxable income – something that’s made little sense to me, expenses aside.

[2] Using an ‘investment grade’ insurance company is more important, in my view, than simply grabbing for the best-sounding promise of a slick marketing campaign.

If you would like help, of course, we can always visit by phone.


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

MONEY OR INCOME: Which is most important to you?- Part 2

Jim Lorenzen, CFP®, AIF®

Last week I asked which was most important to you:

Never running out of money

Never running out of income

Whether you’re building a house or your ‘financial house’, it begins with a plan – that’s common sense.  Yet, I’ve seen more than a few people make major financial decisions BEFORE ever walking through my door for the first time:  Ready, fire, aim.

I’ve seen them retire, make Social Security claiming decisions and even pension decisions… then seek out financial advice – moves that often put them behind the 8-ball before they start.

So, what are the hazards retirees face?

  • Being underfunded.   It’s not uncommon today for people to live thirty years in retirement – one good reason why so many are opting to continue working after their ‘formal’ retirement.  It takes a lot of capital to fund thirty years of income after taxes and inflation – for two lives.  The problem with this hazard is that it’s extremely difficult, if not impossible, for an advisor to change at the point of retirement.
  • Bad timing.  This is something we call ‘sequence of returns’ risk.   To illustrate using simple numbers and ignoring taxes, imagine this scenario:  You retire with $1 million and plan to withdraw 4% annually.  That $40,000 combined with Social Security should meet your needs.

If the market goes up 20% and you withdraw 4%, you should have $1,160,000 after the first year.   Allowing for a 3% inflation rate, you can withdraw $40,000 + inflation = $41,200 in your second year, which computes to 3.55% of the second year’s beginning balance.  Not bad.  If the market does that every year forever, you’re fine!

What if the market goes down 20% in the first year as you withdrew your $40,000 (4% of the original balance)?  The market loss was $200,000 and you withdrew $40,000.  At the end of year #1, you’re down $240,000 and your new balance is $760,000 at the beginning of year #2.    And, of course, prices are higher – inflation has driven your living costs up by 3%!  You’ll need to take $41,200 in the second year, just as in the first scenario above, but now it’s coming from a starting balance of $760,000, which means your withdrawals now represent  5.42% of assets.  Another down year could be disasterous.

Diversification can help[1].   Diversification is all about using asset classes that have low correlation in their movements.  Think of pistons in a car:  If they all went up and down and down at the same time, where would they all be if the engine were to shut down?  Oddly enough, you may not want a portfolio that contains investments that all go up – the opposite could happen, too!

  • Withdrawing too much too soon.

Some people may simply not know how much they can, or should, withdraw.  With longevity risk becoming greater with our medical advances, knowing how much we can withdraw presents a problem for many.

How do you know how much you CAN withdraw and never run out of money?  The government has the answer!   They even publish it!  It’s the IRS required minimum distribution rules!  Just plug your numbers into the calculator[2] and that shows how much can be withdrawn!  The RMD rules apply to all qualified plans, but not to Roth IRAs while the owner is alive, and can be used for other accounts as a guide to avoiding longevity risk.

The good news:  RMD math virtually guarantees against running out of money within 45 years if the amount withdrawn is that calculated and no more.   There’s a practical weakness in this method as a guide for annual income, as well:   Remember our sample $1 million portfolio?

Practical:  Withdraw 4% of the original account balance each year, adjusted for inflation, regardless of market returns, i.e., $40,000 base adjusted only for COLAs each year.  Weakness:  Could lead to early depletion of assets if there are continuous market declines.

Not practical:  The RMD calculation is based on a percentage of the account value.  If the market declines, the percentage could result in a declining income for one or more years.

The bad news:  The RMD amount might be less than what’s needed to meet living expenses and, as noted, could even decline!  So, asset allocation, using the RMD rules, does not affect portfolio survival; but it does affect how much the retiree might receive each year – an unpredictable income.

How do we create a sustainable LIFETIME income?

That’s our subject for next time.

[1] You might want to access our report, Understanding the Diversification Puzzle.

[2] https://apps.finra.org/calcs/1/retirement

Enjoy!

Jim

If you would like help, of course, we can always visit by phone.


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

MONEY OR INCOME: Which is most important to you?

Jim Lorenzen, CFP®, AIF®

Which goal is most important to you?

–   Never running out of retirement money

–   Never running out of retirement income

–   Both

Sure, you said both.  And, maybe that’s possible!

The problem for many is that not only are substantial assets required to provide a comfortable retirement income – you also have to live a lifestyle below what many would believe you could afford.

I have a client couple who have done just that.  They’ve worked hard, invested responsibly, and lived well within their means allowing them to save at a rate greater than what would appeal to many others.  The result:  They’ve been able to retire in their late ‘50s in a beautiful area  – and doing it at a time their son graduated from college and is now entering grad school.  How many parents could afford to retire with a child entering grad school?   In short, they’re set!  They’ve taken all the right steps to insure their future, even into their 80’s and 90s… and even if everything in “the markets” went south on them.

I’ve also seen others who have amassed ten times that couple’s assets, but are living at a lifestyle that keeps them in perpetual jeopardy.  They’re constantly in danger of running out of money.   Their lives are like a hamster running on the spinning wheel, constantly chasing the cheese.  The lesson:  Even people with $30 million dollars can still be on the edge of disaster.  Think of all the multi-million dollar sports and entertainment figures who’ve ended-up broke, sometimes due to poor management, sometimes due to overspending, sometimes both, virtually always because of ignorance…. either on their part or the part of their ‘managers’, or both.

Choosing the right strategy

What kind of retirement income or wealth management strategy makes sense any given investor?  Naturally, it depends on age, goals, asset level and lifestyle.  It also depends upon what type of strategy the individual is open to considering – most of us have built-in biases based on how we’ve been programmed.

Given the level of financial literacy in America today, it’s a real concern.  Most of what people know about financial instruments they’ve learned from entertainment gurus, their parents, or their friends.  I saw a recent study that revealed more than 31% of Americans didn’t know they could lose money in fixed income investments; and 68%  thought rising interest rates would be good for bonds… all while 60% said they don’t consider themselves knowledgeable regarding fixed income, the market, or economic forces that drive bond pricing.

Generalizations are always dangerous; but hey, you’ve have to start somewhere, right?   So, let’s begin, as a starting point, with this basic admittedly oversimplified outline of what an overall retirement strategy might be:

Retirement Strategy

You might be wondering why those below age 45 aren’t included in my little over-generalized grid.  The answer is simple:  In 25 years’ of practice, only ONCE has someone below age 45 come to my office.  That was almost 20 years ago and I haven’t seen anyone in their 40s come to my office since – they’re still watching Kramer – but, I’ll see them after they turn 50 and finally figured something out they don’t know today.

Back to our grid:

The definitions of “modest” and “substantial” are somewhat squishy.  It’s like trying to define what a ‘middle-market’ company is – you can ask a hundred people and get a hundred different answers.  So, let’s just say the definition is whatever you think it is.

If you’re worried about running out of money, you might consider yourself to be a “constrained investor” – and you probably shouldn’t be trying to ‘make up for lost time’ by making risky bets.

If you’re like the couple who’s sitting pretty and just doesn’t want to blow it, you might be preservation minded – someone who wants to maintain their lifestyle after inflation and taxes and not do anything stupid.   [See my blog post, “Inflation and Stockshere.]

Back to our initial quiz:

Which worries you most:  Running out of money or running out of income?

Long-term plans don’t change just because temporary conditions do.

You can have an income forever; but, it may not be enough to even pay your utility bill if the asset base is too small; and, if you

run out of money, there’s no income.

Navigating it all is much like navigating a ship at sea, surrounded by all sorts of potential hazards.

Too much to cover in a single post, as you might imagine; so, we’ll be covering the issues and strategies you can use in upcoming installments.  I hope you’ll find them helpful.

If you would like help, of course, we can always visit by phone.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

A Guaranteed Income for Life?

Jim Lorenzen, CFP®, AIF®

In a previous post I talked about how everyone now has to be his/her own actuary, if they want to create a guaranteed income for life.

I’ve even provided a 20-minute educational video on how it’s possible to actually create a guaranteed income for life.  I think you’ll find it helpful; grab a cup of coffee and you can register to take a look.

While I’m at it, here’s a link to a report that takes a deeper look at a a ‘hybrid’ scenario many investors might find attractive.  I think you’ll find the report interesting, if not eye-opening.  You can access it here.

How does one GUARANTEE an income for life?  Well, there’s only ONE way to guarantee that outcome:  An annuity.  NO OTHER FINANCIAL TOOL WILL DO THIS.

Oh, yes, they do get bad press (what doesn’t?).  The real problem, though is the confusion around the different types of annuities that exists.

  1. Variable annuities
  2. Equity-indexed annuities
  3. Fixed annuities – can be either immediate or deferred

Options #1 and 2 can be problematic.  They are often loaded with excess costs, moving parts, and restrictions.

Option #3 is generally more straightforward.  It’s more of an I.O.U. with the insurance company.  You pay them; they pay you.

Here are some sample payout examples.  Take the first one:  the payout represents a 6.54% payout; and as you can see, the payouts do increase with age.

There’s a trade-off, however, the money is not just illiquid – it’s gone!  You are essentially buying an income stream for life!   You’re paying cash for a secure retirement.

So, should you do that with all your money?  Probably not.  It should not be an ‘all or nothing’ strategy.  That’s why I think you’ll find this report on a hybrid strategy helpful.

If you would like help, of course, we can always visit by phone.  Just pick a time convenient for you.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.