Category Archives: Investment Planning

How Timing Impacts Your Retirement Portfolio Longevity

My Comments: Many a client has asked “How long will my money last?” and the only rational, unsatisfactory answer is “It depends”.

Unfortunately, luck plays a major role in our lives. If you’re alive and well today, chances are you’ve had at least some good luck. In answering the above question, much depends on timing, which is typically something over which we have NO control. Little more than deciding the date of your birth.

Follow these thoughts by Kevin Michels to get some additional insights.

Kevin Michels, CFP® February 20, 2017

How long will your retirement nest egg last? This is an intricate question to answer and many factors come into play such as rate of return, the value of your savings, annual withdrawals, inflation, etc.

However, one factor that is very important and is largely not spoken of is the timing of when you retire. In fact, the timing of when you retire is so important it can make the difference between running out of money in retirement or leaving a multi-million dollar inheritance to your children and grandchildren.

A Retirement Example

Let me explain by example. Let’s take 10 imaginary couples and pretend they have each saved $1 million for retirement. Each couple invests the full $1 million in the S&P 500 for the duration of their retirement, which we’ll assume lasts for a period of 30 years. Each couple also plans on withdrawing $100,000 per year from their portfolio and will increase that amount by 3% per year to account for inflation. The only difference between each couple is the timing of their retirement. The first couple retires in 1977, the second couple in 1978, the third couple in 1979, and so on and so forth.

All else being equal, aside from the timing of each couple’s retirement, how will they each fare over a 30-year period? The disparity between the longevity and value of each couple’s retirement portfolio is staggering.

Three out of the 10 couples actually ran out of money before the 30-year period ends, simply because they chose to retire one year too early or one year too late, while the other seven couples end the 30-year period with balances ranging from $500,000 to $3.2 million.

The three couples that ended up running out of money (1977, 1981, 1986) all had something in common. The first five to 10 years of their investment returns were subpar. The perfect storm for a short-lived retirement portfolio is created when you pair investment losses with withdrawals in the first five to 10 years of retirement. You get so far behind, that it becomes impossible to catch up. This is known as “sequence of returns risk.”

To put this into perspective, take a look at the table below regarding the most successful couple, who retired in 1979 and ended with $3.2 million, compared to the least successful couple who retired in 1977 and ran out of money in 20 years.


Longevity of Retirement Nest Egg

Average Annual Return of S&P 500 for 30-Year Period

Average Annual Return of S&P 500 for First 5 Years of Retirement

1977 – 2006

$0 after 20 years



1979 – 2008

$3.2 million after 30 years



Although over the long term the S&P returned 1.48% more per year in 1977 to 2006 than 1979 to 2008, the couple that retired in 1979 will leave a multi-million dollar estate largely because in the first five years of retirement they have superior investment returns than the couple who retired in 1977.

Safeguards to Protect Retirement Investments

Fortunately, we can put safeguards into action to mitigate the sequence of returns risk.

1. Don’t invest your entire portfolio in the S&P 500 or any other one asset class.

For the most part, it is good for retirees to be invested in stocks. This protects against inflation risk and low yields in the bond market as we’re seeing now. But volatility comes with stocks so it’s also important to include some bonds or bond funds in your portfolio as well, to smooth out returns.

2. Always keep at least the next two years of expected withdrawals in cash or short-term bonds.

In our example, each couple planned on withdrawing $100,000 per year and increasing that amount by 3% a year for inflation. So in their first two years of retirement, they could have liquidated $203,000 ($100,000 for year one and $103,000 for year two) and kept it in cash to safeguard against short-term volatility. This would have saved the couples who retired in 1977 and 1981. Both of those couples started their retirement with negative returns.

3. Rebalance your portfolio annually.

Rebalancing is simply the practice of selling high and buying low. If your portfolio is invested in 70% stocks and 30% bonds and the stock market underperforms the bond market for a year or so, naturally the stock portion of your portfolio will decrease while the bond portion will increase. If at the end of the year your portfolio is now made up of 65% stocks and 35% bonds, you can sell the 5% of bonds to reinvest in low-priced stocks or to keep in cash for future withdrawals.

4. Aim for a lower withdrawal rate in the first five years of retirement.

Your withdrawal rate is calculated by dividing your total withdrawals for the year by your total portfolio value at the beginning of the year. In our example, the withdrawal rate for our retirees starts at 10% ($100,000/$1 million), which is high for the first five years of retirement. As previously stated, the longevity of your retirement portfolio is greatly affected by your returns and withdrawals in the first five years of retirement. If each one of these couples would have started with a lower withdrawal rate, even 9%, they all would have had money left over at the end of the 30-year period. Try to start with a lower withdrawal rate and then increase it as your portfolio grows.

In the end, the decision of when to retire isn’t as important as the plan you have in place to ensure your retirement capital lasts the duration of your life. Before you begin living the golden years, make sure you work with your spouse and potentially a financial planner to have a plan in place that will provide peace of mind during those years of market turmoil.

3 Secrets to a Comfortable Retirement

My Comments: These lists are usually somewhat pathetic. Why just 3 secrets; why not 5? And these are not really secrets. But I needed something to try and catch your attention today so here are 3 Secrets!

I think it’s very possible that the next 30 years are going to be far less ‘profitable’ than were the last 30 years. So if you are in your 40’s and have enough presence of mind to know that there’s a high chance you’ll live into your 90’s, what follows makes a lot of sense. But I can tell you that when I was in my 40’s, having enough money to enjoy retirement never crossed my mind.

Walter Updegrave  |  January 17, 2017

The main goal of retirement planning is to be able to maintain roughly the same standard of living after your career as during it. But achieving that goal can a challenge. For example, the latest Transamerica Retirement Survey of Workers found that 40% of baby boomers expect their standard of living to fall during retirement, 83% of Generation Xers believe they’ll have a harder time achieving financial security than their parents, and only 18% of millennials say they’re very confident about their retirement prospects.
So how can you avoid having to ratchet down your lifestyle after calling it a career? Here are three ways:

1. Live below your means during your working years. This simple concept is something that many people have difficulty pulling off. Indeed, a 2016 Guardian Life survey on financial confidence found that nearly two-thirds of Americans say they’re not good at living within their means, let alone below them. But this is critical for two reasons: By saving consistently, a portion of your earnings today will be available for future spending when the paychecks stop. And the lifestyle you will be trying to continue in retirement won’t be as costly as what it might have been without the saving.

Granted, some people face such difficult financial circumstances that they have little choice but to spend all they earn. The issue for most of us, however, is finding a way to turn the resolve to save into actual dollars in a retirement account. The best way to tilt the odds in your favor is to make saving automatic, such as by enrolling in a 401(k) or other workplace retirement plan that moves money from your paycheck before you can even get your hands on it.

Generally, you want to set aside 15% or so of pay each year (including any money your employer kicks in), although you may need to step it up a bit if you’re getting a late start. If you can’t hit your target right away, you can work up to it gradually by boosting your savings rate a percentage point or so each year you receive a raise. If a 401(k) or similar plan isn’t an option where you work, you can sign up for an automatic investing plan and have money transferred each month from your checking account into an IRA at a mutual fund company.

Putting your savings regimen on autopilot allows you to bypass the chief obstacle to saving—you, or more accurately, your natural impulse to spend. It makes it more likely that the money you intend to save actually ends up getting saved. Further, if, say, 10% to 15% of your paycheck is going into your 401(k), then you pretty much have to arrange your life so that you’re able to live on the remaining 85% to 90%. In other words, you’re effectively forced to live below your means.

This approach isn’t foolproof. You can always sabotage yourself by running up lots of credit-card or other debt in order to overspend. But if you avoid piling on debt, save consistently and track your progress periodically—which you can do with a good retirement calculator like this free version from T. Rowe Price—you’ll reduce the chance that you’ll have to live a more meager lifestyle than you’d envisioned in retirement.

2. Learn to take pleasure in small things. Preparing for a secure and comfortable retirement is certainly important, but you don’t want to focus on saving and controlling spending so much that you don’t enjoy life. Fortunately, you don’t have to live large to be happy. On the contrary. Research shows that the pleasure you receive from spending even on major expenditures and big luxuries quickly fades. So indulging in more small, less-expensive purchases may actually lead to greater happiness than splurging on high-price items.

For example, in a paper titled “If Money Doesn’t Make You Happy, Then You Probably Aren’t Spending It Right,” researchers exploring the relationship between spending and happiness note that “if we inevitably adapt to the greatest delights that money can buy, then it may be better to indulge in a variety of frequent, small pleasures—double lattes, uptown pedicures, and high-thread-count socks—rather than pouring money into large purchases, such as sports cars, dream vacations, and front-row concert tickets.”

Clearly, you’re not going to eliminate all big-ticket expenditures during your life. But to the extent that you can find less costly yet still effective ways to treat yourself, you’ll free up more money to save for retirement and be better able to manage your spending after you retire without forcing yourself to live like an ascetic.

3. Get a bigger investment bang for your savings buck. Saving regularly by living below your means is the surest way to avoid seeing your standard of living fall in retirement. But another form of saving—reducing the amount you shell out in investment costs and fees—can also help. How? Simple. Morningstar research shows that lower costs tend to boost returns, which allows you to build a larger nest egg during your career and can lower your risk of depleting your savings prematurely after you retire.

The easiest way to reap the benefits of lower investing costs is to invest your savings as much as possible in a broadly diversified portfolio of index funds or ETFs, many of which you can find with annual expenses of 0.20% or less, vs. 1% to 1.5% for many actively managed funds. Low-cost index funds and ETFs can also bestow an advantage beyond their cost savings—namely, the more you stick to a straightforward mix of stock and bond index funds, the less likely you are to fall for gimmicky or exotic investments that can make it more difficult to manage your retirement portfolio and possibly drag down long-term returns.

I can’t guarantee, of course, that following these three guidelines will allow you to maintain your pre-retirement standard of living throughout your post-career life. But I can say that doing so should definitely tilt the odds in your favor.

Walter Updegrave is the editor of

Investment Strategies for Your Retirement Accounts

InvestMy Comments: A phrase I’m known to use from time to time is that ‘life in this country is better with more money than it is with less money.” While this might seem too obvious for you, there are many people whose efforts to have more money have fallen flat. Here’s a few ideas that might help you.

Michelle Mabry, CFP®, AIF® January 26, 2017

With interest rates coming off a 36-year low and expected to rise, most investors expect to see bond prices fall and consequently deliver a negative return in what is considered a low-risk asset. We have seen a rebound in equities, and with the S&P 500 and Dow at all-time highs, some say the stock market is richly valued. As a retiree seeking income from your investments and looking to preserve your principal, where can you turn? What are ways retirees can invest for income and still minimize risk?

You have always heard you need a diversified portfolio and that has not changed, but what has changed is how you diversify it. Retirees need to determine the proper asset allocation of stocks, bonds, cash and alternatives based on income needs, time frame, and tolerance for risk.

How to Diversify Investments in Retirement

Let’s look at bonds first. If you invest in a traditional bond portfolio you are exposing yourself to interest-rate risk as rates rise and bond prices fall. You need to understand the average duration of the bond investments you hold. For example, a typical intermediate-term bond fund will have a duration of 5-10 years. If the average duration is eight years, then a 1% increase in rates will result in an 8% decrease in the net asset value (NAV). This would wipe out all the interest gains and then some. The shorter the duration, the less the potential loss.

So it is important to look for other assets that have low-risk characteristics or standard deviation similar to bonds but produce absolute returns, that is, a positive return regardless of which way rates are moving. Floating rate income, TIPs and some market neutral funds can be a good way to diversify your fixed-income portfolio. You may also want to look at structured notes as a way to produce yield and protect your downside.

Dividends as Equity

For the equity portion of your retirement portfolio, consider blue chip dividend-paying stocks or dividend growth strategies. Many large-cap funds pay dividends in excess of 2.5%, plus you have the upside appreciation potential over time to keep pace with inflation during your retirement years. Remember to keep focused on the longer term and not be too concerned with short-term volatility. Dividend-paying stocks have outperformed most other asset classes over time. Small-cap stocks have been one of the best-performing asset classes, so it would make sense to find dividend-paying small- and mid-cap equities as well.

When searching the universe of mutual funds and ETFs, there are not many of these, but a couple that have attracted our attention are WisdomTree Midcap Dividend Fund and WisdomTree Small Cap Dividend Fund with yields of 2.63% and 3.03% respectively as of December 30, 2016. Of close to 2,000 ETFs available in the U.S., a search revealed only four that are exclusively dividend-driven and which also hold just domestic small- or mid-cap stocks. Two of the portfolios feature issues that have exhibited dividend growth while the other two ETFs (the WisdomTree funds) include all dividend payers in their capitalization range.

Include Alternative Assets for Diversification

Also important in developing a portfolio for retirement is a focus on absolute return strategies, and many of these fall into the alternative asset class. Alternatives are anything that is not a stock, bond or cash. Alternatives have no correlation or negative correlation to other asset classes so they are great diversifiers. Our retired clients typically have one-third of their portfolio in alternatives. Examples include managed futures and long/short strategies as well as volatility strategies using options. An example is LJM Preservation and Growth which has shown a positive return every year since its inception 10 years ago with the exception of one year, 2013, when the stock market went straight up and there really was no volatility. The fund was up in 2008 when stocks and bonds were not, and therein lies the importance of a diversified portfolio to manage risk.

By rebalancing your investments quarterly or semi-annually back to the original investment allocations you can create the cash needed to sustain your monthly withdrawals in retirement until the next rebalance. We do not recommend a withdrawal rate in excess of 4% in light of current market and economic conditions.

Wall Street’s 2017 Forecasts And Campaign Promises

rolling-diceMy Comments: We’re almost there. Whether it turns out OK or not remains to be seen. I suspect it’ll turn out better than many forecast and worse that many expect. Where you and I will fall in all this is a total unknown. But the combined intellect of those making these forecasts is staggering, so I’m paying attention.

by Julie Verhage / December 16, 2016

It’s a good thing that Wall Street analysts didn’t finish up their year-ahead outlooks prior to the U.S. Presidential election, because in the words of Deutsche Bank AG’s Chief U.S. Economist Joe LaVorgna, Donald Trump is “a game changer.”

At the end of each year, Wall Street firms publish outlooks for the next 12 months. While it is already difficult to forecast what the S&P 500 Index, for instance, will be trading at in roughly 365 days, having a regime change in Washington makes things even more complicated. Just ask Goldman Sachs Group Inc., which was stopped out of 5 of its 6 top trade ideas last year before Valentines Day.

“We can’t recall a time when a change in leadership in Washington had the potential for such large and diverging effects on the U.S. economy,” Bank of America Merrill Lynch analysts said in a recent note.

Strategists are thus doing their best to hedge their calls, with JPMorgan Chase & Co.’s equity outlook saying, “Due to uncertainties, these impacts [Trump’s campaign promises] are not incorporated into our base case earnings forecast until there is more clarity around which policies will be emphasized and/or are politically feasible.”

But given the market’s forward looking nature, that uncertainty hasn’t stopped a number of banks from at least trying to calculate what a Trump administration will do to their respective areas of coverage. Here are a few highlights.

U.S. Dollar

One of the biggest winners since the election has been the U.S. dollar. While many on Wall Street had been forecasting the dollar’s demise if Trump were to take the White House, the opposite has been true. Now, due to factors including the prospect for more fiscal spending and a potential tax holiday, analysts are changing their minds. Here’s a look at what some banks are saying:
BNP Paribas SA: “We continue to be bullish on the U.S. dollar following the U.S. presidential election. The key implication of Trump’s victory is that his proposed expansionary fiscal policy is likely to push U.S. yields up and steepen the curve. As a result, USD strength has further to run, in our view, although the speed of its rise is likely to differ versus the different G10 currencies.” The team adds that they are most bullish on the dollar vs the Japanese yen, with one of their models targeting a rise above 120 for the currency during 2017. It is currently trading around 115, after sitting below 105 before the election.
Citigroup Inc.: “We’ve got euro dollar falling just below parity, as consistent with the rate differentials very much moving in favor of a weaker euro. I mean, it’s largely driven by the U.S. side of things and a changing policy mix really gets you to a stronger dollar environment.”
Bank of America Merrill Lynch: “The Trump electoral victory is likely to lead to substantial U.S. fiscal easing, helping push the U.S. dollar up and yields higher,” the firm writes, adding that it expects the Euro to trade at 1.02 vs. the dollar by mid-2017 and the yen to hit 120.
Of course, there are also signs that the “long U.S. dollar” trade is getting crowded.

Bond Yields

While the vast majority of Wall Street was betting on interest rates to continue moving lower, that has not been the case. Analysts are now calling for yields to rise, marking an end to the bond bull market.
Bank of America Merrill Lynch: “The U.S. election was a game-changing development for markets, with single-party rule likely leading to significant fiscal stimulus. We look for a stronger U.S. dollar and higher U.S. yields in 2017,” the analysts write, adding that they are targeting a U.S. 10-year rate of 2.65 percent for the end of next year.
Credit Suisse: “In our judgement, President-elect Donald Trump’s policies are stagflationary at worst, or reflationary at best. Either way, bonds face challenges.”
BNP Paribas: “The key implication of Trump’s victory is that his proposed expansionary fiscal policy is likely to push U.S. yields up and steepen the curve.”


Stocks, some sectors in particular, have rallied to new highs following Trump’s win. In their outlooks for 2017, a number of analysts attempted to gauge which sectors would see the biggest boosts.
Deutsche Bank: “If the corporate tax rate is cut to 25 percent, all else the same, it would boost S&P earnings by $10 and support an S&P rally to 2,300 and 2,400 by 2017 end.”
JPMorgan Chase & Co.: “We estimate that Trump’s corporate tax plan, which incorporates a 15 percent statutory federal tax rate, would add roughly $15 to S&P 500 earnings.”
BNP Paribas: “After lagging since 2013, U.S. small caps may face more favorable fundamental trends than their larger peers under Trump administration.”;

Dividends and Buybacks

BNP Paribas: “In 2004, Congress implemented a 5.25 percent tax holiday on foreign profits for U.S. multinationals which resulted in $362 billion being brought on onshore. This led to dividend + buyback growth of +46 percent/+26 percent in 2005/2006 on top of adjusted earnings per share growth of just +12 percent/+15 percent over the same period. Markets have started to price the potential for a repatriation tax holiday as a part of corporate tax reform.”
Deutsche Bank: “If a repatriation holiday is introduced at a ~5 percent rate, as opposed to the generally proposed 5-14 percent rates, 10 percent even by Trump, then we think ~$500 billion will be repatriated in 2017. These funds will go to a combination of dividends, buybacks, onshore debt reduction, M&A and capex. We think a permanently more tax efficient means to access offshore earnings via a lower U.S. corporate tax rate, and thus lower repatriation tax, causes many S&P Tech, Health Care and Staples firms to boost their dividend payout ratios.”
JPMorgan Chase & Co.: “Cash repatriation alone could boost shareholder payouts by ~$350 billion over multiple years, with possibly even greater payouts coming from freed up cash on the back of a reduced tax rate — we estimate that buybacks from repatriation alone could add ~$1.30 to S&P 500 earnings per share, assuming that 60 percent of potential payouts come in the form of buybacks.”fundamental trends than their larger peers under Trump administration.”

Do Record Low Yields And Record High Stocks Spell Trouble?

roller coaster2My Comments: This week I’ve focused my posts on what other people think is likely to happen to your money if you have it invested in stocks and bonds. It’s pretty obvious that no one has a clue.

Until a lot of stuff gets sorted out, my recommendation is to go to cash and sit on the sidelines for a few weeks or more. I think the chances of losing money right now are higher than the chances of making money, which is what most of us are trying to do.

Of course, if you wait several weeks, and nothing bad happens, and you jump back in, be assured that within a few days, if not hours, the bottom will fall out. It’s your call.

Bryan Rich Jul 13, 2016

Earlier this week we talked about the disconnect between yields and stocks.

The move lower in German yields, given the contagion risk in Europe that people have feared from Brexit, as we’ve discussed, has also dragged down U.S. yields. With that, the U.S. 10 year yield, post-Brexit, has traded to new record lows.

So we have record highs in U.S. stocks, and record lows in U.S. yields.

For people looking for the next reason to be worried, this is where they are hanging their hats. But is the uneasiness associated with this divergence warranted?

Let’s take a look at the chart…

Now, you can see from the chart, we recently breached the record lows of 2012 in U.S. yields (the green line).

For a little back-story: Back in 2012, Europe was on the verge of sovereign debt defaults that would have blown up the euro and the European Union. The ECB stepped in and promised to do “whatever it takes” to preserve the euro, which included the threat of buying unlimited Italian and Spanish government bonds (the real threatening spot in the crisis). That sent bond market speculators, which had been running up the yields in Spanish and Italian debt to unsustainable levels, swiftly hitting the exit doors. At the height of that threat, global capital was pouring into U.S. government debt, which sent the 10 year yield to record lows.

Still, U.S. stocks at the time were in solid shape, UP nearly 8% on the year in the face of record low bond yields.

What happened when the ECB stepped in and curtailed the threat? U.S. yields bounced aggressively. And U.S. stocks went even more sharply higher, finishing the year up 16%. In fact, the U.S. 10 year yield more than doubled (to as high as 3%) over the next seventeen months, and the S&P 500 added to 2012 gains, going another 32% higher in 2013.

So we have a very similar scenario now — and the drag on U.S. yields is, again, Europe and the threat to the euro and European Union.

And again, U.S. yields have hit new record lows, and stocks are putting up a solid year, as of July (the same month the tide turned in 2012).

We would argue, for the many reasons we’ve discussed in our daily notes, that stocks are in the sweet spot. As long as a global economic shock doesn’t occur, which is what central banks have proven very capable of managing over the past seven years, U.S. stocks should continue to benefit from the incentives of record low interest rates. And when market rates/yields rise, it’s only because the clouds of uncertainty clear. That’s very good for stocks too.


bear-market--My Comments: Do you know what’s going to happen? Me neither.

Here are two very opposing opinions of what the markets will do in the coming days. If it makes you afraid, you are not alone. My only bright spot is a program that grew by over 50% in 2008. Will it do it again?



The EVERYTHING Bubble: What’s Coming Will Be Much Worse Than 2008
by Phoenix Capital… Jul 8, 2016

The amount of negative issues the markets are ignoring is staggering.
1. Italy’s banking system is on the verge of collapse. Nearly 20% of loans are non-performing (meaning garbage). This is not Greece. We’re talking about a €2 trillion banking system.
2. The US is in recession. Consensus is that all is well, but industrial production, labor market conditions, the corporate bond market, C&I Delinquencies, the Conference Board Leading Indicator, Inventory Accumulation and ISM are screaming “RECESSION.”
3. China continues to devalue the Yuan at an annualized pace of 12% year to date. This is exporting a massive wave of deflation to the West.
4. The US Dollar has begun the next leg up in its bull market. The first leg crashed Oil, commodities, and emerging markets. This leg will crater US corporate profits and stocks as well.
5. Corporations are more leveraged than they were in 2007. Meanwhile, earnings are at 2012 levels while stocks flirt with their all-time highs.

The whole mess is just like late 2007/ early 2008 all over again. Brexit was the Bear Stearns moment. Italy or Spain will likely be the Lehman moment.

The big difference between now and 2008? Central Banks have already spent $14 trillion propping the system up. And they’ve created the single biggest financial bubble in history.


S&P 500: Ready To Resume Higher; Next Stop 2300
Taylor Dart July 4, 2016

Sentiment levels are currently consistent with what is found at major market bottoms, not tops.

June 28th and 29th were consecutive 90% up volume days on the NYSE. This has only occurred 7 times in the past 50 years and forward returns are extremely bullish.

We are currently entering the two strongest consecutive months during election years, with average gains over the 2 months of 5.1%.

Despite many people labeling Brexit as a black swan, the S&P-500 is still bullish on all time frames and within 2% of all time highs.

Just a week ago today we had CNBC preparing to air its “Markets in Turmoil” special, bears were high-fiving on social media and it was near impossible to find a bull in sight. The S&P-500 SPY closed the week at 2037, and according to the bears this was the final nail in the S&P-500’s coffin. In addition to this, Nasdaq QQQ newsletter sentiment took a massive dive into bearish territory, as shown by the below chart. Monday morning opened up exactly as the bears wanted with more weakness below the psychological 2000 level, but by Monday night the bulls were out in full force. To say this week’s rally was impressive would be a huge understatement. The Brexit black swan that so many touted as being the beginning of the end for markets was completely absorbed with all of the losses erased in 4 trading days. The market closed this week at 2102 and posted the highest weekly close in over 11 months.

For those that are short the market currently I don’t know what their game plan is with Brexit being a complete non-event. Brexit and a potential June rate hike were the two big catalysts in the bears arsenal for downside this year but neither event inflicted any lasting damage on the market. I have been very bullish on the S&P-500 this year and believe this recent correction and violent recovery was extremely bullish.

Markets often find a way of shaking out the weak and impatient hands before the real move occurs, and Brexit did exactly that for us. Those that were long the market and panicked have now sold nearly 100 points below where we were Monday and will have a very hard time buying back in 5% higher. Those that were short the market that finally had their beliefs confirmed most likely did not cover as they believed a larger correction was finally underway. This correction and subsequent snapback rally has shaken out any impatient longs and trapped aggressive shorts, and in doing so, made the trade higher. I believe it is no longer a matter of if but when we will see 2200 on the S&P-500, and would not be surprised to see 2300 at some point before the year is over.

Secondary Market Annuities (SMA)

Piggy Bank 1My Thoughts: Last month I posted about having stock positions in your retirement portfolio and how much was appropriate. This post is about another option where there are no stocks at all, only a promise by an insurance company to return all your money to you, over time, at a guaranteed rate of interest. Typically, the rate of return, of ROR, is 4% or more, which in today’s world is pretty good.

The are called SMAs and are discounted receivables. Somebody (an insurance company) has agreed to pay someone else a series of payments for a specified period of time. The contract that makes this happen is an annuity, where the payments are guaranteed. The difference is that the initial recipient of these payments has changed his mind and instead, wants  a lump sum and not monthly payments. So that person sells the future stream of payments to another person in exchange for a lump sum. This new person sees all this as an investment, so he/she in turn finds someone who has a lump sum but would rather have a stream of unbreakable payments. Ergo, Secondary Market Annuities.

If you, for example, own your house and have some money sitting in a bank somewhere that is earning very little, you might consider using that money to buy a favorable stream of future payments, where the return on investment (ROI) is much better than what the bank is paying you.

How Do SMAs Work?
Secondary Market Annuities are not what you would normally associate with the term, “annuities.” Annuities tend to be more complicated – involving contracts with riders, contractual terms, guaranteed rates, variable indices, and a host of other terms. By comparison, the purchase of an SMA is quite simple.

The easiest way to explain SMAs is with an example case.

Using today’s SMA yields, you can purchase a 10 year SMA case for $91,656 that begins to pay $1,000 per month for 120 months beginning on June 1, 2016 and ending on May 1, 2026. This SMA offers a guaranteed payment stream with definite dates of payment. To determine the purchase price, SMA Hub, the provider of choice, applies a discount rate to those payments, and the result is the purchase price today.

Comparing Apples To Apples
The real value of an SMA comes to light when you compare this SMA to a period certain annuity, such as a 10 year Single Premium Immediate Annuity (SPIA).

If your goal as a member of the public is to have a check every month of $1,000, you’ll find that if you purchase a SPIA with the same 10 year guaranteed income stream, it will cost about $110,254 based in today’s rates.

In our example here, if you can find an SMA to provide $1000 per month for 10 years, would you rather spend $91,656 or $110,254 to achieve the same outcome? You’ll pay roughly 20% less, provide you with the exact same income stream, and comes to you from a very high credit quality insurance carrier.

Each SMA case is like a unique, rare gem. While they are not too good to be true, they are one of a kind. Each case is offered for sale and once sold, it is gone. I have access to a weekly inventory of what is available. Talk with me if you want to further explore this idea.