Category Archives: Investing Money

Forget the 4% Retirement Rule…

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My Comments: With much of my time these days building a new business around retirement planning, the question of how long your money will last has huge implications.

The 4% rule evolved in years past using the assumption that it would keep you from running out of money before you died. That assumption is not longer valid, given the age to which many of us live, the increasing cost of health care, and the likelihood of a major market crash on the horizon.

So what to do? Whatever you decide, it’s a crap shoot. However, these thoughts from Dan Caplinger might be helpful.

by Dan Caplinger \ June 11, 2017

Whenever you’re striving toward a financial goal, it’s helpful to have a number in mind. That’s why the 4% retirement rule is so popular among retirement savers: It gives you a way of figuring out exactly how much money you should aim to save toward retirement. Yet there are several ways in which the 4% retirement rule falls short of working perfectly, and some investors feel more comfortable merely using the rule as a starting point and then looking to improve on it.

The appeal of the 4% retirement rule

People like the 4% rule because of its simplicity. To figure out how much you can afford to withdraw from your retirement savings, just multiply it by 4%. You can use the rule to reverse-engineer how much you need to save. If you expect to need $40,000 per year in retirement, then save $1 million, because 4% of $1 million is $40,000.

The 4% rule does have analytic origins, going back to research in the early 1990s that looked at the historical returns of various types of investments. The conclusion of the research was that with a balanced portfolio between stocks and bonds, you could start by taking 4% of your savings the first year, and then increasingly that amount by the rate of inflation every year after that. So as an example, if you saved $250,000 in your retirement account, then the first year, you’d withdraw $10,000. If inflation was 3%, then in year 2, you’d withdraw $10,300. Subsequent payments would grow with inflation, keeping your theoretical purchasing power constant. If you did that, according to the research, you would be able to make your money last at least 30 years into retirement.

Some problems with the 4% rule

The seeming simplicity of the 4% rule hides some flaws. The first is that it’s based entirely on backward-looking performance data. Admittedly, the analysis included some very tough market environments, including the Great Depression. However, there’s no guarantee that future markets might not be worse, and that could lead to the rule no longer working as intended. In particular, bad performance early in retirement has an especially adverse impact on the 4% rule, because the reduction in principal value increases the percentage of your entire portfolio that you withdraw each year. For instance, if you withdraw 4% the first year and then your portfolio loses 50% of its value, then the next year’s withdrawal under the rule will be around 8%.

In addition, there are reasons to believe that current market conditions differ from what have usually prevailed in periods in which the rule worked well. Most notably, interest rates are extremely low, and that has reduced the amount of income that the bond side of the investment portfolio can produce. This will therefore require sales of assets to finance the withdrawal amounts in retirement. Moreover, the risk of capital losses on bond investments is higher than normal because of the low rate environment.

On the flip side, the 4% rule is too conservative in certain circumstances. Because the rule is designed to deal with a worst-case scenario, it is usually far more cautious than it needs to be. That means you’ll have money left over at your death, and while that might be useful for your heirs, you might have missed out on a more secure retirement by not spending as much as you could have.

Can you improve on the 4% rule?

Researchers have looked at the question of how to get better results from the 4% rule. Some of the proposed changes include the following:

  • If you’re willing to allow for the potential of reduced withdrawals if the market performs badly, then it can dramatically extend how long a portfolio can last. Even if you only cut your withdrawal by 5% or 10%, it can nevertheless be enough to allow you to increase your withdrawal slightly without jeopardizing long-term viability.
  • If the market does exceedingly well early in retirement, then it can be viable to boost your withdrawal rate slightly.
  • Making personal adjustments for life expectancy can be useful. For instance, some retirees are living well into their late 90s, making a 30-year period too short and requiring a smaller withdrawal percentage. Yet for others, 30 years is longer than they have a legitimate right to expect, and so a larger percentage might make more sense. Just keep in mind that once you make a decision, it’s hard to go back and change it if it turns out you were too pessimistic in your assessment.

As a starting point, the 4% rule is a useful way to estimate how much you’ll need when you retire. By understanding its limitations, you can look at making refinements that will more accurately reflect your own personal retirement savings needs. That way, you’ll have a retirement strategy that will work best for you.

Source: https://www.fool.com/retirement/2017/06/11/forget-the-4-retirement-rule-heres-a-smarter-way-t.aspx

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A Glossary of Basic Investment Terms

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My Comments: Financial literacy has to start somewhere.

If you are planning for an eventual retirement and want to grow your money between now and then, a degree of financial literacy is mandatory. Start here…

by Emma Johnson \ June 1, 2018

If you’ve ever scanned the business headlines, you’re probably familiar with terms like the S&P 500, ETFs and bull markets. But do you actually know what they mean, or how they compare to related investing lingo like the Dow, mutual funds and bear markets?

If you said no, you’ve got plenty of company. In one recent Bankrate survey, nearly half of those 25 and younger said a lack of knowledge about investing kept them from putting money in the market. And in a recent Harris Poll, 69% of adults 35 and younger said they found investing, and the accompanying jargon, complex and confusing.

So we’ve rounded up 19 common investing terms you’ve probably heard, but may not really understand, and given you the lowdown on all of them.

Bear vs. bull market
A bull market is when everything is just wonderful: Markets are on the rise and investors are confident that strong results will continue. Though the market can have “bullish” days, technically, a bull market is when the market increases in value at least 20%. Hint: Bull market means “up” because real-life bulls attack by driving their horns up in the air.

A bear market is the inverse: The market—and investor confidence—is declining. The job and housing markets may also be down. The upside, however is that bear markets are a bonanza for savvy investors, as prices have recovered historically (and then some) after every bear market. You can remember that it means “down” because bears attack their victims by swiping their paws downward.

Stock vs. bond
Stocks, or shares of a publicly traded company, are a fundamental element of most investment portfolios. The value goes up and down with the company’s financial well-being—and with shareholders’ perception of that company’s well-being. They’re risky, but potentially rewarding.

Bonds are essentially loans that you give to the issuer, which can be a corporation, municipality or the federal government. When you buy, you do so with the expectation of getting paid back, with interest, in a certain amount of time—criteria that render bonds a low-risk, if boring investment.

ETFs vs. mutual funds
An ETF is a stock, bond or commodity fund that usually tracks an index. Because they’re more passively run, they tend to charge lower fees. They’re also traded like common stocks at varying prices throughout the day.

A mutual fund—which pools your money with other investors to purchase stocks, bonds and other assets—is professionally managed and therefore tends to come with higher fees. Shares are priced once based on their net asset value (NAV) at the end of the trading day.

Money market vs. savings account
A money market account (MMA) is a bank account that typically pays a higher interest rate than checking and many savings accounts (for which the average interest rate is currently less than .50%). MMAs have check-writing abilities, as well as ATM or debit cards; and, like savings accounts, federal regulations restrict you to no more than six withdrawals a month. There’s usually a higher minimum balance requirement for MMAs compared with savings accounts.

Passive vs. active funds
Calling an investment fund “passive” or “active” refers to how it’s managed. Passive funds are run with a hands-off approach, and therefore generally come with lower fees. Index funds, for example, are set up to move in tandem with associated indexes, like the S&P 500, and mirror their returns.

Active funds, on the other hand, are handled by investment managers, who attempt to beat their benchmarks by making a wider variety of investments. You’ll pay more in fees in exchange for their expertise.

Growth vs. value stocks
Growth or value? Both, if you want a balanced investment portfolio.

Growth stocks have a recent history of above-average performance. While all signs suggest these investments (think: newer companies, especially ones in the tech sector) will continue growing, they’re risky because you’re solely relying on the company’s success for your investment to appreciate.

Value stocks are investments that trade at a lower price than their fundamentals, like high dividend payments and company earnings, might indicate. That effectively puts these stocks in the bargain bin, and savvy investors may be able to capitalize.

Investing vs. trading
Both investing and trading are means to the same goal: making money from the financial markets. Yet they represent different functions.

Investing typically refers to “buy and hold,” meaning investors create a balanced portfolio of stocks and bonds, and hold on to them for the long-term—gaining from the power of compound interest and weathering the natural up-and-down market cycles.

Trading, by contrast, is a much more active effort to profit, requiring a trader to frequently buy and sell investments with the aim of beating out buy-and-hold investors. It also comes with more risks.

401(k) vs. IRA
A 401(k) is an employer-sponsored retirement savings account, where you can contribute a maximum of $18,000 pretax ($24,000 if you’re over 50) in 2016. As an incentive to save, many employers match a portion of your contributions. (Free money!)

An IRA, which stands for individual retirement account, is accessible to anyone. This year, you can contribute up to $5,500 pretax (plus another $1,000 if you’re 50 or older) in a traditional IRA.

With a few notable exceptions, you’ll pay a 10% penalty for withdrawing funds from either of these retirement accounts before age 59½.

Roth IRAs are a bit different. Provided you don’t earn more than the income limits, you can contribute up to $5,500 ($1,000 more if you’re 50 or older) posttax dollars, but it grows tax-free. You’re allowed to withdraw funds you contribute—but not any gains—anytime without penalty.

S&P 500 vs. Dow vs. Nasdaq
The Dow Jones Industrial Average, DJIA, -0.43% a.k.a “the Dow,” is an index that tracks 30 large, established, U.S.-based companies across all sectors. Today, these include companies like 3M, MMM, +0.31% Coca-Cola, COKE, +0.76% Apple, AAPL, -6.63% Nike NKE, -0.27% and Walmart.
WMT, +0.76% As such, the state of the Dow often serves as a general pulse of the economy in the minds of the media, investors and general public.

When people refer to “The Nasdaq,” NDAQ, +0.00% they’re typically talking about the Nasdaq Composite—a price-weighted index of more than 3,000 companies listed on the exchange of the same name. Because it’s is so much bigger than the Dow, a glance at the day’s Nasdaq can give a broader view of the economy, though it’s skewed toward the tech sector.

The S&P 500 refers to the Standard & Poor’s 500 index, which includes, yes, 500 primarily large-cap stocks selected by a team of analysts and economists at Standard & Poor’s. It’s often used as a benchmark for the stock market because it includes a significant portion of the market’s total value.

My source: https://www.marketwatch.com/story/confused-about-these-investing-terms-youre-not-alone-2018-05-10

The Truth About Trump’s ‘Great Economy’

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My Comments: Few of you reading this are confused about my politics. So I share these words with you as someone trained in economics and finance who has been an entrepreneur in financial services for over 42 years.

Our society gives us, via the Constitution, the ability to express which values are important to us and which are not. Most of us do this by voting whenever there is an opportunity. The dilimma we face today is that we have someone in the White House who exhibits virtually no degree of intellectual curiosity or a motivation beyond his own personal self interest.

For me, what I see is a degree of corruption and dishonesty that has the potential to make life very difficult for my children and grandchildren. And for that I’m angry.

by Robert Reich \ October 21, 2018

I keep hearing that although Trump is a scoundrel or worse, at least he’s presiding over a great economy.

As White House economic adviser Larry Kudlow recently put it, “The single biggest story this year is an economic boom that is durable and lasting.”

Really? Look closely at the living standards of most Americans, and you get a very different picture.

Yes, the stock market has boomed since Trump became president. But it’s looking increasingly wobbly as Trump’s trade wars take a toll.

Over 80 percent of the stock market is owned by the richest 10 percent of Americans anyway, so most Americans never got much out of Trump’s market boom to begin with.

The trade wars are about to take a toll on ordinary workers. Trump’s steel tariffs have cost Ford $1 billion so far, for example, forcing the automaker to plan mass layoffs.

What about economic growth? Data from the Commerce Department shows the economy at full speed, 4.2 percent growth for the second quarter.

But very little of that growth is trickling down to average Americans. Adjusted for inflation, hourly wages aren’t much higher now than they were forty years ago.

Trump slashed taxes on the wealthy and promised everyone else a $4,000 wage boost. But the boost never happened. That’s a big reason why Republicans aren’t campaigning on their tax cut, which is just about their only legislative accomplishment.

Trump and congressional Republicans refuse to raise the minimum wage, stuck at $7.25 an hour. Trump’s Labor Department is also repealing a rule that increased the number of workers entitled to time-and-a-half for overtime.

Yes, unemployment is down to 3.7 percent. But jobs are less secure than ever. Contract workers – who aren’t eligible for family or medical leave, unemployment insurance, the minimum wage, or worker’s compensation – are now doing one out of every five jobs in America.

Trump’s Labor Department has invited more companies to reclassify employees as contract workers. Its new rule undoes the California Supreme Court’s recent decision requiring that most workers be presumed employees unless proven otherwise. (Given California’s size, that decision had nationwide effect.)

Meanwhile, housing costs are skyrocketing, with Americans now paying a third or more of their paychecks in rent or mortgages.
Trump’s response? Drastic cuts in low-income housing. His Secretary of Housing and Urban Development also wants to triple the rent paid by poor households in subsidized housing.

Healthcare costs continues to rise faster than inflation. Trump’s response? Undermine the Affordable Care Act. Over the past two years, some 4 million people have lost healthcare coverage, according to a survey by the Commonwealth Fund.

Pharmaceutical costs are also out of control. Trump’s response? Allow the biggest pharmacist, CVS, to merge with the one of the biggest health insurers, Aetna — creating a behemoth with the power to raise prices even further.

The cost of college continues to soar. Trump’s response? Make it easier for for-profit colleges to defraud students. His Secretary of Education, Betsy DeVos, is eliminating regulations that had required for-profit colleges to prove they provide gainful employment to the students they enroll.

Commuting to and from work is becoming harder, as roads and bridges become more congested, and subways and trains older and less reliable. Trump’s response? Nothing. Although he promised to spend $1.5 trillion to repair America’s crumbling infrastructure, his $1.5 trillion tax cut for big corporations and the wealthy used up the money.

Climate change is undermining the standard of living of ordinary Americans, as more are hit with floods, mudslides, tornados, draughts, and wildfires. Even those who have so far avoided direct hits will be paying more for insurance – or having a harder time getting it. People living on flood plains, or in trailers, or without home insurance, are paying the highest price.

Trump’s response? Allow more carbon into the atmosphere and make climate change even worse.

Too often, discussions about “the economy” focus on overall statistics about growth, the stock market, and unemployment.

But most Americans don’t live in that economy. They live in a personal economy that has more to do with wages, job security, commutes to and from work, and the costs of housing, healthcare, drugs, education, and home insurance.

These are the things that hit closest home. They comprise the typical American’s standard of living.

Instead of an “economic boom,” most Americans are experiencing declines in all these dimensions of their lives.

Trump isn’t solely responsible. Some of these trends predated his presidency. But he hasn’t done anything to reverse them.

If anything, he’s made them far worse.

The Next Bear Market is Coming, but it Should Be Less Fierce than the Last Downturn

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My Comments: I’ve been cautious for a long time. Some would say too long since it means I’ve missed some great advances in the markets. But I’ve reached an age where I simply don’t want to be stressed and watch huge chunks of our money disappear. That being said, I can only urge you to be careful going forward.

by Tai Hui \ South China Morning Post

This month marks the 10th anniversary of the collapse of Lehman Brothers, the event that turned turmoil in the United States housing market into the global financial crisis. A decade on, people are naturally wondering how long it will be before the next equity bear market.

Investors are growing increasingly mindful of just when the US economic growth cycle will end. While the relationship between bear markets and recessions is not perfect, eight of the last 10 bear markets in the US were associated with recessions.

Given that the Hong Kong market is highly correlated with the US market, it would be difficult for the region to decouple from the US when the downturn comes. Since 1990, 73 per cent of the monthly returns for the S&P 500 and the Hang Seng Index have moved in the same direction, whether up or down. On a more positive note, market downturns are usually shorter than upturns.

Precisely predicting market downturns and recessions is notoriously difficult. Since the current US economic growth cycle is already the second longest on record, some investors think the end must be near. However, comparing the length of the cycle with the averages tells you little about the durability of the current cycle.

Financial conditions in the US remain accommodative. Real interest rates remain low by historical standards, and the real yield on the US 10-year Treasury, at 0.5 per cent, is well below the long-term average of 2 per cent. In six of the last eight US recessions, the real yield on the 10-year Treasury breached 2 per cent in the lead-up to an economic decline. The current interest rates are still favourable for debt servicing and should stay this way for the next 12-18 months.

Beyond the US, the global economy is showing decent momentum. The global manufacturing Purchasing Managers’ Index is still above 50, reflecting firm growth. Despite the political noise, the unemployment rate continues to fall in the European economy, consumption is solid and business investment is picking up.

China’s economy has softened on the back of Beijing’s effort to deleverage, but the authorities are prioritising selective stimulus measures to maintain growth around the official target in the face of trade worries. Global trade has weakened in the first half of 2018, with uncertainties from the US-China trade war yet to fully manifest themselves, but this should be partially mitigated by strong demand globally.

On the issue of recession, it needs to be said that, despite the past crisis, the US economy has actually been getting more stable over time. Better inventory management and more stable housing and services sectors in the US have all contributed to this trend. Banks are also better capitalised. This suggests the next recession is more likely to resemble the relatively mild recessions of 1990 and 2001 than the monster of 2008.

Likewise, the next bear market should not be as ferocious as the last two. In the last two bear markets, the US stock market fell by an average of 50 per cent. However, in the previous nine recessions, the average stock market decline was just 24 per cent. This makes intuitive sense – the last stock market tumble came against a backdrop of the single biggest recession since the Great Depression, while the stock market entered the previous bear market with valuations that were a full 50 per cent higher than the average forward price-to-earnings ratio over the last 25 years.

If the next bear market is indeed serious but not catastrophic, then investors need prepare to weather the downturn prudently, instead of adopting an Armageddon strategy.
For investors in Hong Kong, the extra complication is the performance of the Chinese markets, which has been challenging this year due to the trade tensions, and the slowing growth momentum due to deleveraging.

Sentiment in China is also pessimistic. This may be undue, especially given the chance of the central government bringing in further stimulus measures. Nonetheless, it makes sense for local investors to reduce their exposure to Hong Kong equities.

Tai Hui is chief market strategist, Asia-Pacific, at J.P. Morgan Asset Management

Retiring Soon? Plan for Market Downturns

My Comments: Are you nervous yet? If you have 20 years or so until you retire, you may not need to be nervous. But if retirement is just around the corner, then you need to start being defensive, if you’re not already.

There are a number of pressures building in the markets. This gives you a few steps to offset them. Personally, I think the average annual returns over the next decade are going to be significantly less that what they’ve been since 2009.

The author’s syntax is a little confusing but you’ll get the message.

By Anne Tergesen | Sept. 21, 2018

For every year by which a bull market persists, staff change into likelier to retire. However those that depart the workforce now—the ninth yr of the longest U.S. bull market—are probably setting themselves up for a tricky stretch that might check their portfolio’s long-term resilience.

Why? When the inventory market turns into traditionally costly, as some metrics recommend it’s at present, analysis reveals it’s typically a harbinger of below-average future returns. This may be particularly painful for retirees with lengthy life expectations as a result of withdrawals mixed with poor returns will depart much less in an account to compound over many years.

Take, as an illustration, a 65-year-old who retires when his or her portfolio is price $1 million. If the retiree withdraws 4%, or $40,000 within the first yr, and the portfolio loses 40% of its worth quickly after, she or he can have simply $576,000 left to fund a retirement that might final 30 or extra years. Any subsequent withdrawals will make it even tougher for the portfolio to get better.

Returns in “the primary 5 to 10 years of retirement matter most,” says Wade Pfau, a professor of retirement revenue on the American Faculty of Monetary Companies in Bryn Mawr, Pa. Early declines can “lock a portfolio right into a downward spiral.”

That doesn’t imply that individuals on the cusp of retiring ought to cancel their plans. For one factor, it’s notoriously tough to foretell the arrival, length and severity of bear markets. And if you’re prepared to go away your job, sticking round might undermine your well being and happiness.

The excellent news: There are steps you possibly can take to restrict withdrawals from shares when they’re down and partly shield your portfolio. Simply make sure to perceive the trade-offs.

1. Construct a money cushion

This technique sometimes includes setting apart one to 5 years of dwelling bills in money so that you received’t must promote shares at depressed costs.

Retirees with money buffers typically react extra calmly to market declines, decreasing the percentages that they are going to panic and bail out of the market fully, says Ross Levin, a monetary adviser in Edina, Minn.

The issue, Mr. Levin says, is that the low returns on money typically cut back a portfolio’s long-term returns. “If in case you have 80% in shares and 20% in bonds with a three-year money place, that’s a worse technique from a returns standpoint than having 70% in shares and 30% in bonds,” and nothing in money, he says. A money buffer “lets you handle a shopper’s psychology throughout dangerous instances, however it’s not an optimum technique.”

To unravel that drawback, some advisers as a substitute use bonds as a buffer. A $1 million portfolio with 60% in shares and 40% in bonds successfully holds eight years of dwelling bills in bonds, Mr. Pfau says.

But when shares sink and a retiree must liquidate bonds to cowl dwelling bills, the buffer is more likely to shrink.

To stop purchasers from promoting shares at depressed costs to replenish their bonds, many advisers advocate ready till the shares get better their losses to take action. However an investor who used such a method in 2008—when the monetary disaster slammed U.S. shares—would have had to attract down his or her bond buffer for about 5 years earlier than beginning to construct it again up, a nerve-racking expertise for all however the least risk-averse, Mr. Pfau says.

2. Rebalance

A greater technique, many say, is to spend money on a diversified portfolio—resembling 60% in shares and 40% in bonds—and rebalance it after main market strikes.

Retirees who accomplish that will use their winners to cowl at the very least a few of their bills. For instance, in 2008, when the S&P 500 misplaced about 37%, investment-grade bonds gained about 5.25%. Consequently, somebody who had 60%, or $600,000, in shares and 40%, or $400,000, in bonds earlier than the crash had 47%, or $378,000, in shares and 53%, or $421,000, in bonds afterward.

If a retiree with such a portfolio wanted $40,000, he would begin by withdrawing the $21,000 of bond income. As a result of bonds comprise considerably greater than 40% of the post-crash portfolio, the investor would whittle them additional, by withdrawing the extra $19,000 in spending cash he wants. To re-establish the specified 60% stock-40% bond allocation, he would then switch $77,400 extra to shares from bonds.

In distinction to holding a “money buffer,” this method “systematically ensures” that an investor sells holdings which have appreciated most whereas additionally shopping for issues which have declined and are comparatively low cost, says Michael Kitces, director of wealth administration at Pinnacle Advisory Group Inc. in Columbia, Md. By shifting cash into belongings which are crushed down, rebalancing helps a portfolio get better quicker when a turnaround lastly arrives, he provides.

In keeping with latest analysis, which checked out 140 mixtures of funding methods, withdrawal charges, and buffer-zone sizes over successive 30-year durations from 1926 to 2009, traders got here out forward with cash-buffer methods in solely three cases. In distinction, with rebalanced portfolios, they got here out forward in 70 simulations, stated co-author David Nanigian, affiliate professor of finance within the Mihaylo Faculty of Enterprise and Economics at California State College, Fullerton. Within the remaining 67 mixtures, the methods carried out the identical, he stated.

How typically must you rebalance? Some traders accomplish that quarterly or yearly. Cameron Brady, an adviser in Westlake, Ohio, says he acts when his purchasers’ portfolios drift by 5 proportion factors from goal allocations.

3. Use one other kind of buffer

What in case you like the concept of a money buffer, however don’t wish to tie up a portion of your portfolio in an asset that’s certain to earn low returns?

To supply purchasers with a supply of money within the occasion of a market meltdown, some advisers advocate utilizing home-equity traces of credit score or reverse mortgages, which permit folks ages 62 and older to transform their house fairness into money.

Each cost upfront charges. For instance, the upfront “mortgage insurance coverage premium” many debtors pay on reverse mortgages is now 2% of the house’s worth, capped at $13,593.

With a home-equity line of credit score, Mr. Pfau says, debtors should make month-to-month repayments. (Reverse mortgages should be repaid when the borrower dies, strikes, or fails to pay property taxes or house owner’s insurance coverage.) Each cost curiosity.

Mr. Pfau recommends that individuals with everlasting life insurance coverage, together with entire life and common life insurance policies, take into account tapping the money worth in these insurance policies throughout market crises. You may withdraw premiums tax-free and in addition borrow from the money worth to get extra tax-free revenue, he says.

“You’ll cut back the loss of life profit,” he provides, “however by serving to to protect the portfolio, you’re in all probability higher off.”

[ Wall Street Journal ]

The Biggest Risk Retirees Face Right Now

My Comments: On TV and in murder mysteries, there’s often a reference to ‘being in the wrong place at the wrong time’. Well, it can happen to any of us planning to retire, but instead it reads this way: ‘being born at the wrong time…”.

These words from Michael Aloi from earlier this year show what this means. And it has special meaning for any of you planning to retire in the next twelve months or so. We’re close to the end of an historic bull market and for some of us, it will be painful. Look at the two respective totals in the chart below.

Michael Aloi, CFP | March 23, 2018

Those planning to retire face many risks. There is the risk their money will not earn enough to keep up with inflation, and there is the risk of outliving one’s money, for example. But perhaps, the biggest risk retirees face now is more immediate: Retiring in a bear market.

To put this in perspective, First Trust, an asset manager, analyzed the history of bull and bear markets from 1926-2017 and found bull markets — which are up or positive markets — lasted on average nine years. If that is the case, this bull market should be ending right about now, as it just turned 9 on March 9, 2018. Consider also the study found that the typical bear market lasts 1.4 years, with an average cumulative loss of 41%.

Not to be all doom and gloom, but the chart below illustrates why the biggest risk retirees face right now is a bear market. It shows what happens to two identical $1 million portfolios, depending on the timing of bad stock market years.* Adjusted for 3% inflation

Mr. Smith and Mrs. Jones start off with the same $1 million portfolio and make the same annual $60,000 annual withdrawal (adjusted for 3% inflation after the first year). Both experience the same hypothetical returns, but in a different sequence. The difference is the timing. Mrs. Jones enjoys the tailwind of a good market, whereas Mr. Smith’s returns are negative for the first two years.

The impact of increasing withdrawals coupled with poor returns is devasting to Mr. Smith’s long-term performance. In the end, Mrs. Jones has a healthy balance left over ($1,099,831), whereas Mr. Smith runs out of money after age 87 ($26,960).

With stock market valuations higher and this bull market overdue, by historical averages, retirees today could be faced with low to poor returns much like Mr. Smith in the first few years of retirement. However, retirees like Mr. Smith still need stocks to help their portfolios grow over time and keep up with the rising costs of living. Unfortunately, no one knows for sure what the equity returns will be in the next year or the year after.

This is the dilemma many retirees face. The point is to be aware of the sequence of return risk, illustrated in the chart above, and take steps now if retirement is in the immediate future.

Here are two of the many planning possibilities retirees today can use to avoid the fate of Mr. Smith:

1. Use a “glide path” for your withdrawals

In a study in the Journal of Financial Planning, Professor Wade Pfau and Michael Kitces make a compelling argument to own more bonds in the first year of retirement, and then gradually increase the allocation to stocks over time. According to the authors’ work, “A portfolio that starts at 30% in equities and finishes at 60% performs better than a portfolio that starts and finishes at 60% equities. A steady or rising glide path provides superior results compared to starting at 60% equities and declining to 30% over time.”

The glidepath strategy flies in the face of conventional wisdom, which says people should stay balanced and gradually conservatize a portfolio later in retirement.

The glidepath strategy is a like a wait-and-see approach: If the stock market craters in the first year of retirement, be glad you were more in bonds. Personally, I would only recommend this strategy to conservative or anxious clients. My concern is what if markets go up as you are slowly increasing your stock exposure — an investor like this could be buying into higher stock prices, which could diminish future returns. An alternative would be to hold enough in cash so one does not need to sell stocks in a down year per se.

Though not for everyone, the glide path approach has its merits: Namely not owning too much in equities if there is a bear market early on in retirement, which coupled with annual withdraws, could wreak havoc on a portfolio like Mr. Smith’s.

2. All hands on deck

The second planning advice for Mr. Smith is to make sure to use all the retirement income tools that are available. For instance, if instead of taking money out of a portfolio that is down for the year, Mr. Smith can withdraw money from his whole life insurance policy in that year, so he doesn’t have to sell his stocks at a loss. This approach will leave his equities alone and give his stocks a chance to hopefully recover in the next rebound.

The key is proper planning ahead of time.

The bottom line

Retirees today face one of the biggest conundrums — how much to own in stocks? With the average retirement lasting 18 years, and health care costs expected to increase by 6%-7% this year, retirees for the most part can ill afford to give up on stocks and the potential growth they can provide. The problem is the current bull market is reaching its maturity by historical standards, and investors who plan on retiring and withdrawing money from their portfolio in the next year or two may be setting themselves up for disaster if this market craters. Just ask Mr. Smith.

There are many ways to combat a sequence of poor returns, including holding enough cash to weather the storm, investing more conservatively in the early years of retirement via a “glide-path” asset allocation, or using alternative income sources so one doesn’t have to sell stocks in a bad market.

The point is to be mindful of the risk and plan accordingly.

This Data Visualization Shows What’s Really Responsible For Our Current Bull Market

My Comments: Apart from my concern that many of us will wake up one day soon and discover much of our money has disappeared, it is helpful to understand where all the gains have come from since the last significant crash in 2008.

By Nicolas Rapp and Clifton Leaf September 25, 2018

Who’s responsible for the bull market: Trump, Obama, Bernanke, Yellen? Answer: Tech companies. Here’s a look at what’s really driving growth.

As Wall Street’s raging bull continues its historic charge, there has been plenty of chatter about who deserves the credit: Mr. Trump? Mr. Obama? Former Fed chairs Ben Bernanke or Janet Yellen, perhaps? But the answer seems not to be a “who” but rather a “what”: tech companies. From the market bottom in 2009 to now, the capitalization of companies listed in the S&P 500 index grew by more than $18 trillion. But three of every 10 dollars in gain came from the 73 tech companies in the index. And the true bull market of the past decade was even narrower than that. Nearly 16% of the market cap growth derived from just four stocks: Apple, Alphabet, Microsoft, and Facebook. Their combined valuations soared from just over $300 billion to more than $3 trillion.

[ FORTUNE ]