We have become used to watching disasters recently, as hurricanes, floods, fires and earthquakes ravaged cities and changed lives. With every passing month, a new disaster replaces the old in the headlines.
What if I told you one of the most common guidelines people use to plan for retirement is wrong? Further, what if I told you that making the mistake of following it can greatly impact the quality of life you live in retirement and the longevity of your savings?
Well, here goes.
More than 40 years ago, financial adviser William Bengen developed what is known as the “4% withdrawal rule.” This rule of thumb states you can withdraw 4% of your portfolio in the first year of retirement, adjust the amount withdrawn each year for inflation and safely avoid running out of money over three decades. (After further study, he later modified it to the “4.5% rule,” but still rounded it down.)
A great deal of thought and stress is put into planning and executing an appropriate withdrawal strategy. It’s arguably the most important factor for financial success in retirement. Taking out too much from your savings will lead to a shortage in your later years and potentially put your retirement at risk. On the other hand, spending too little could mean a lower standard of living than you want, or not fulfilling some of your retirement dreams.
Of course, by definition, rules of thumb are never meant to apply in all situations. However, it can be argued the hard, inflexible 4% rule shouldn’t be given much consideration to begin with.
The issue with inflation
The biggest flaw is in its annual inflation adjustment. Outside of health care, most retirees won’t see their expenses dramatically rise. In fact, overall expenses typically decline in retirement. According to the latest data from the Bureau of Labor Statistics, people ages 55 to 64 spend on average $60,076 per year, while people ages 65 and over spend $45,221, which is $14,855 less each year.
That’s why, in all my years as a financial adviser, I’ve seen very few, if any, clients give themselves a pay increase every single year.
The impact of market volatility
Furthermore, it’s important to be mindful of market conditions. For instance, it’s generally not a good idea to increase your withdrawal amount during a market downturn. Instead, you may want to consider a small, temporary cut. Especially, during a deep recession along the lines of 2008. In a best-case-scenario, this simply means making a few sacrifices, such as substituting a trip closer to home for a big vacation overseas. Other times, you may have a big, one-time expense to plan for. This is what I call a dynamic, or flexible, withdrawal rate.
The lack of flexibility
The reality is the 4% rule isn’t dynamic, so it doesn’t accurately reflect real-life spending habits. As in your working years, your income needs throughout retirement will also change. Early in retirement, you’re more likely to be active with travel, new hobbies, working on your home and other activities. So you may want or need more money. Over time, you’ll probably cut back on these big-ticket items for smaller, less expensive ones. Though by then medical expenses may begin to creep up. But, in a period where you have high medical costs, you will likely have reduced expenses in other areas.
One possibility: Dig deeper to start with
If you don’t anticipate your expenses, as with the average retiree, to rise as swiftly as inflation does, you may want to plan on withdrawing more than 4% in the early years of retirement. If you run a Monte Carlo simulation — a tool for assessing the probability of a portfolio’s survival — in your retirement plan, adjust the rate of inflation down and you’ll find that a withdrawal rate of 5% – 5.5% still leads to a high level of success. But Monte Carlos don’t accurately reflect real life. They don’t show the human element of making a smart adjustment to your withdrawals when markets drop.
Is an extra 1% really a big difference? Absolutely. For example, if you calculate that you need $54,000 in income from your personal savings in retirement, at a 4.5% withdrawal you would need to save $1.2 million to retire. But at a starting dynamic withdrawal rate of 5.4%, you would only need $1 million. For someone saving $1,000 per month during their later working years and earning 6%, you’d be able to retire a little more than two years earlier. Or, you could take the stance that you’d work and save the same length of time but have an extra $1,000 per month in cash flow.
If you’re a Nervous Nellie
However, with longer life expectancies and historically low bond yields, some may consider even 4% excessive. If you’re nervous about the risk of outliving your savings, you’re not alone. In a survey by financial firm Allianz, 61% of Baby Boomers said they are more afraid of running out of money before they died than death itself.
Fortunately, there are steps you can take to calm your nerves without making extreme lifestyle changes. One option is to simply build a larger nest egg, which may mean extending your retirement date or saving more during your working years. Or, you may be more comfortable starting with a lower withdrawal rate, provided all your expenses are covered. Then, you can gradually increase your rate as you become more confident in the survivability of your portfolio. With either option, the worst that can happen is you end up leaving a bigger financial legacy.
The bottom line
In any case, it’s safe to assume that you’re not going to put your spending on auto-pilot in retirement. With a little flexibility and planning, you can broaden your income options in your favor.
I can’t tell you the number of phone calls I’ve fielded about bitcoin in recent months. The shocking rise of cryptocurrencies this past year triggered a wave of media attention on this new form of money as an investment. Even my kids have asked me about it, and are investing themselves.
For early adopters of cryptocurrency, 2017 was a good year: The price of bitcoin rose about 1,500%. Litecoin, another cryptocurrency, recently jumped 73% in less than 24 hours right around the time bitcoin futures became available for the first time, in mid-December.
Of course, the market is changing so rapidly that this article is in danger of becoming outdated by the time you read this!
But if you’re considering bitcoin or another cryptocurrency as a possible investment, I suggest you tread carefully. In this article, I’ll answer some common questions that I’m hearing about bitcoin, and I’ll offer a few insights into my perspective about cryptocurrency as both an innovation and an investment.
What is bitcoin?
In my opinion, many of the people who are buying into the bitcoin rush know very little about it, or about blockchain and cryptocurrencies in general. That means they haven’t thought through some of the risks and realities of this kind of investment.
Bitcoin is a cryptocurrency, which means that it’s a digital version of cash that relies on cryptography to protect and verify transactions — and to control the creation of more bitcoin. This system is built in something called blockchain, which is basically a new way of creating and maintaining a ledger of transactions. (I won’t get into the creation, or “mining,” of bitcoin here, but it’s part of the system.)
Every time bitcoin is created or traded, it’s recorded on the blockchain, which is verified and shared across a network of participants instead of by a single institution, like a bank. Blockchain is special because it’s transparent, while remaining difficult to modify. It also runs forever, meaning there’s a record of every single transaction ever made.
For a simple comparison, think of an online message board: Everyone’s messages are automatically added and recorded where every other reader can see them. All the messages from the very beginning of the thread are logged and displayed for all to see. However, in a message board you can usually delete or edit your message later on — you can’t do that with blockchain.
What’s it worth?
A November 2017 CNBC headline asserted, “It’s Official: Bitcoin is Bigger Than Disney.” In other words, the total dollar value of all the bitcoin out there is greater than the value of a large and recognizable company with assets that you can put a dollar value on.
But an economic argument for what a “reasonable” price is hasn’t been so easy to come by.
Bitcoin isn’t like a Disney: It doesn’t have assets you can sell, and it doesn’t have bonds that provide income, which you can buy. It also has limited use as a currency. Bitcoin doesn’t have a history as a reliable or broadly accepted store of value, like the dollar, and its “exchange rate,” or price, has rocketed up thanks to market demand — but not by the economic value of bitcoin itself.
Add to this the reality that about 40% of all bitcoin is held by just 1,000 people.
That makes bitcoin extremely sensitive to the whims of that very small group — and their actions aren’t regulated by securities authorities because bitcoin isn’t a security. Cryptocurrencies in general aren’t regulated, and it’s not clear they could be effectively regulated in the future. The government is not involved yet, and it may or may not get involved in the future — and it’s tough to know how it could affect prices and demand in the future.
So why all the hype?
Is bitcoin worth something? Probably.
Blockchain is pretty widely considered a significant improvement on transaction recording, and the real-world potential for digital currency could certainly be there. The way I look at it is that blockchain is the arms dealer in the war between cryptocurrencies. No matter which one wins — or even if none of them does — in my opinion it looks like blockchain will be here to stay.
I’ve been around long enough to know the lasting impact that a new technology can have on financial markets and the world as a whole. (Do you remember the first “personal computers”? I sure do.)
But I’ve also been around long enough to know that when you hear words like “new world order” it doesn’t always end well. There are unforeseen risks and even known weaknesses in the system. Just in December, a South Korean bitcoin exchange called Nicehash went out of business after hackers made off with an undisclosed amount of the currency, while earlier in the month $70 million was stolen from the Nicehash exchange.
Exchanges can make promises about making investors whole, but this is an unregulated market — there are no guarantees.
In other words, I think it’s important to understand that “new world order” doesn’t always mean “smooth sailing.” Back in 1999, people were laughing at Warren Buffett for not recognizing the world had changed in the dot-com era. Some of the companies founded in those days did end up changing the world (such as Amazon), but a lot of good people also lost their life savings in the hype (remember the doomed Pets.com and its sock puppet?).
What if I really want in?
For those who are determined to be part of the bitcoin rush, I have three pieces of advice.
First, do your homework. Understand the product and learn everything you can about how it’s being used, where the potential lies, and what could impact its price — for better or worse.
Second, don’t invest money you’re not prepared to lose. My typical advice is to cap these types of investments at 5% of investable assets, but even that might be too much, depending on your specific financial situation, personal financial needs and overall asset allocation. If you don’t know what you can lose without impacting your overall financial goals, check in with your adviser.
Finally, prepare for any outcome. In my opinion, this is a “zero or hero” investment: It might work brilliantly, or it might amount to nothing. In these types of situations, where price is driven by demand and where there are few fundamentals to work from, you need to brace for volatility and the potential for heavy losses.
Whatever you do, always do your homework
Cryptocurrency may very well stick around and be a successful innovation, just like the tech sector was. The question is which cryptocurrencies will stand the test of time and go on to be successful — and at what price.
This is notoriously hard to predict. For example, few could have foreseen that MySpace would be eclipsed by Facebook, or that Amazon would grow from online bookseller to retail juggernaut.
In other words, I don’t know what’s going to happen in bitcoin, but what I see right now is a lot of uninformed investors piling in — and very few reasoned arguments for where bitcoin “should” be in terms of value. In my opinion this is a problematic situation to walk into.
My reasoning is simple: I think that when we stop acting like informed investors — or even informed traders — and start believing that something will be the winning lotto ticket, we’re likely to get in trouble.
Are people making a lot of money on bitcoin right now, at least on paper? It sure seems that way. But I’m concerned about all the people who could be left holding the bag when and if the bitcoin rush turns.
Like Warren Buffett, in this case I’d rather miss out on the upside than risk experiencing the downside. You can call it being a dinosaur if you want: I just call it being prudent.
Congress is working on its fourth stopgap spending bill since the 2018 fiscal year started in October 2017. If it can’t pass a bill by the end of Friday, Jan. 18, America could suffer a partial government shutdown – and even if the Legislature does get the job done, it will merely kick the can down the road to next month, where another impasse may loom.
But whether it’s Friday, or in February, or whenever – if the government shuts down, that does not mean the bull market will too.
It’s understandable if investors are getting nervous. They’re celebrating the market’s record sprint to Dow 26,000, and now the folks in Washington, D.C., look like they might just dump something in the punch bowl.
A government shutdown is serious business. It creates chaos and hurts the economy. Even if lawmakers come up with another last-minute, stopgap funding bill, that just creates more uncertainty down the road. And as you may have heard, the market hates uncertainty.
With the clock ticking down, investors are rightly wondering what they should do in the event of a government shutdown. We’re here to help. Here’s how to handle the situation in three easy steps:
Stocks are at all-time highs. By some measures, they’re more expensive than they have been in nearly a decade, with the Standard & Poor’s 500-stock index going for more than 26 times trailing 12-month earnings. Moreover, the current bull market is the second-longest in history, just months away from reaching the nine-year mark.
It’s natural, then, to worry about headlines that could put an end to the rally.
However, neither worrying about government shutdowns nor the actual shutdowns themselves are novel experiences for equity investors, experts note. And it always has worked out OK in the past.
“The market has seen this before, and while the short-term reaction is unpredictable, it tends to be short-lived,” says Oliver Pursche, chief market strategist at Bruderman Asset Management.
Indeed, there have been 18 government shutdowns since 1976, according to LPL Financial and FactSet. They have ranged in length from one to 21 days, and have produced an average loss for the S&P 500 of – wait for it – 0.6%. Even the worst loss, from September to October 1979, was a mere 4.4% that the market clawed back by the start of 1980.
Historically speaking, the market doesn’t seem to care about whether Washington shows up for work.
Investors still should be at least prepared for a potential hiccup in the markets – that’s just prudent planning. After all, a short government shutdown would affect some small level of spending, which could put an unexpected blemish on what’s otherwise expected to be a rosy 2018 for corporate America.
But rather than being ready to head for the hills, investors should put together a shopping list.
A massive corporate tax cut promises to boost profits for many American companies. And a repatriation tax holiday on overseas cash has numerous corporations bringing home billions of dollars, much of which is being pledged toward new jobs, wage hikes and other investments that should fuel domestic growth. That all points to continued gains for stocks – which is why a government shutdown-sparked drop in the market should be viewed as a dip-buying opportunity.
After all, the idea is to buy low, and when estimated earnings-growth rates are taken into account, stock prices don’t look so out of whack. The S&P 500 trades for a bit more than 18 times analysts’ expectations for future earnings, according to data from Thomson Reuters. That’s not much higher than its long-term average of 17.6, according to FactSet.
Any pullback in share prices, then, will afford investors an opportunity to buy stocks at valuations closer to historical norms.
Enjoy the Ride?
If anything, the market seems to have almost developed an appreciation of government shutdowns. The S&P 500 has actually delivered gains the past three times Congress couldn’t agree on a spending bill.
When the government was closed for 16 days in 2013, the S&P 500 rose a whopping 3.1%. (See the accompanying table, courtesy of LPL Financial and FactSet.) A 21-day shutdown from December 1995 to January 1996 resulted in a 0.1% increase in the benchmark index. And a five-day shutdown in November 1995 delivered a gain of 1.3%.
With numbers like that, investors should be praying for as many shutdowns as they can get.
That is said in jest, of course. But this does hammer home the point that Wall Street does not view government shutdowns as top-priority bear triggers. Why? Because they ultimately have little effect on what actually moves share prices.
“Markets rise and fall based on economic conditions and corporate earnings,” Pursche says. “And right now, it looks like both are going to continue to rise, which should bode well for the market. In short, ignore the news headlines and focus on what matters – data, and the data looks good.”
Every year or so, I pen a column about how to invest for the long haul using just a handful of Vanguard index funds (read the latest version: “6 Best Vanguard Index Funds for 2018 and Beyond”). Without fail, this article is more popular than anything else I write for Kiplinger.com. Plainly, keeping investing simple is a goal of many investors. Unlike me, most folks don’t relish the prospect of spending endless hours researching funds.
Many articles about retirement planning either start or end with someone walking into an office to speak with a financial professional.
Let’s imagine, instead, that you have your entire nest egg in your pocket or purse and you just entered a casino.
There are two blackjack tables from which to choose. At the first table, the rules say that if you beat the dealer, you’ll win 50% on your investment; but if the dealer beats you, you’ll lose 50%.
Then you saunter over to the second table. The rules there say that if you beat the dealer, you’ll make 10% on your investment; but if the dealer beats you, you won’t lose a thing.
At which table would you want to sit? Your decision likely would be based on how you feel about risk in general and how close you are to retirement, among other things.
It’s the same when you’re investing in the market. With some investments, you might make a killing, but you also could lose a bundle. With others, there’s a limit on what you can gain, but you’ll lose less — or nothing at all. There are pros and cons to both, of course, and plenty of debate about which is the right way to go.
The good news is you don’t have to choose one or the other. You may have a place for both in your portfolio. The goal is to figure out what you need and find the appropriate products to help.
The 6 concerns of retirement
I’ve met thousands of pre-retirees over the years, and everyone is different. They come from different backgrounds, and they have and want different lifestyles, but there are six core concerns they all have when entering retirement, and they need strategies that can deal with each:
Income longevity: They want to be certain their money will last their lifetime.
Risk: They worry a big market correction could take away much of their wealth.
Taxes: They don’t want to give Uncle Sam any more of their money than necessary.
Inflation: They want to avoid losing purchasing power as the years pass.
Long-term illness: They worry about becoming sick and/or disabled.
Death: They hope to leave some kind of legacy behind for their loved ones.
If you keep your money fully invested in stocks, bonds and mutual funds ‐ with a singular focus on growing your assets, as many people do — you are hoping that the growth will deal with all of these concerns. But what if you experience loss? It’s important to keep an open mind about safe alternatives that can provide income guarantees* while still offering the opportunity for growth, a disability backstop, tax efficiency and something that can be passed on when you die.
A possible answer for those concerns
A fixed-index annuity addresses all these basic retirement concerns.
Think back to those casino tables — and the one that offered a chance to play and make some money without the risk of losing. A fixed-indexed annuity is like that: It’s not intended to beat the stock market — rather, it provides the opportunity to make something based on the movement of the market. And that gives it more growth potential these days than other traditional safe accounts, such as certificates of deposit or money markets.
Now, I know some people are skeptical about annuities. I can lay out all the benefits they provide, and still a client will hear the word annuity and turn up his or her nose.
And I understand why. There are many different kinds, some have been misrepresented, even the best ones aren’t right for everyone, the contracts and costs can be confusing, and often people buy into them without really understanding what they’re getting.
But I urge even the most die-hard annuity haters to give them another look. They’re powerful tools that deserve consideration — especially by those who are retiring without pensions.
An annuity is a way of giving yourself a pension by asking an insurance company to manage some of your nest egg for you. And if that makes you feel more secure in retirement, what’s wrong with that?
If your financial adviser brings up the subject of annuities, give him a chance. If he doesn’t bring it up, ask. And then, do some investigating on your own.
Once you’re informed, you won’t feel as if you’re gambling with your nest egg. You’ll actually have done something to better protect it.
With the next recession on the horizon, the Fed is scrambling to prepare the economy. But the strategy they’re considering will take us into uncertain territory…
Before the next severe downturn comes, the Fed recognizes they need to get ready. But with interest rates near 0% today, they won’t be able to rely on cutting rates when things get bad. So now, they’re considering something a little drastic…
Typically, the Fed targets a specific rate of inflation. But now there’s talk of “price-level targeting”, in which the Fed would target a specific price level instead and allow inflation to run too high for a time.
Here’s the catch…
The Risk of Price-Level Targeting
This strategy is relatively untested and has not been adopted in 85 years, when it failed in Sweden. Additionally, Chicago Fed President Charles Evans has characterized this tactic as “extreme” and “too difficult to undertake during an economic crisis”.
Yet this strategy is on the table – a clear indication that the Fed can’t fix the next economic crisis with their regular tactics.
In fact, things are so bad, the Fed is willing to experiment with the economy.
How to Hedge Against the Risk
As the Fed considers going “mad scientist” on our economy, do you want your savings exposed? What about your IRA or 401(k) – can you risk your nest egg to the whims of these bureaucrats?
Don’t let the Fed gamble with your money. Instead, consider moving your wealth into something that’s been proven, time and time again, to protect your hard-earned money in times of economic uncertainty: physical gold.
While you still can: Get a FREE Info Kit on Gold here. There is zero cost and zero obligation to you – we’ll even pay for shipping.
Plus, this 16-page “insider’s” guide reveals the little-known IRS Tax Law to move your IRA of 401(k) into an IRA backed by physical precious metals – without paying any taxes on the transfer.
It’s an excellent option for anyone who wants to take advantage of this opportunity with any savings in their retirement account.
But remember, you must act soon. Once the Federal Reserve takes action, it may be too late to take advantage of this opportunity. To get started, click here to get this free info kit on gold.
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Car insurance rates have been rising, even for people with spotless driving records, and they’re likely to continue to go up in 2018.
Marci Alboher is vice president of Encore.org, a nonprofit that encourages baby boomers to use their skills and experience to help their communities. She’s the author of The Encore Career Handbook: How to Make a Living and a Difference in the Second Half of Life. Here is an excerpt of our conversation with her:
It’s not unusual for people to start a new year plotting out all they want to achieve in the coming months, whether that involves a new exercise regimen, a career switch or checking a few more items off their bucket lists. But the beginning of the year also can be a great time to work on your investment portfolio and financial plan.