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De-Risking Your Portfolio

by BlogIncome DistributionIncome PlanningInvestment PortfolioWealth

Planning for retirement can be confusing and a bit scary. How do you manage your money now so you can be well-prepared financially for retirement? And how do you ensure that your retirement income will last throughout your life? How can you de-risk your portfolio to avoid the volatile markets like we’re seeing now (and will definitely see again). With increased life expectancies, it’s critical that you weigh all your options and plan carefully. This paper will discuss traditional retirement strategies, as well as introduce you to a less conventional, but potentially more effective and efficient approach to help you reach your retirement goals.

The Problem

Often, “the way we’ve always done it” is no longer the best way to achieve something. In retirement planning, a traditional portfolio uses only conventional stock and bond investments. In this paper, we refer to this as the Traditional Asset Allocation 6040 Portfolio (TRAA 6040). The problem? Traditional stocks and bonds on their own are not efficient for 100% of a retirement income portfolio. They expose a retiree to lower return potential and higher risk.

The Solution

Historically, stocks and bonds have been the mainstay of a typical retirement portfolio. The Hybrid Income Portfolio (HIP) offers a change in product allocation to reduce portfolio risk and increase the rate of return potential. The HIP strategy uses a combination of Traditional Investments (stocks & bonds), Structured Investment Products (SIPs) and Fixed Indexed Annuities (FIAs).

In addition to adding SIPs and FIAs, other strategies should be incorporated to lead to a more efficient retirement outcome, including:

 

  • Social Security Timing: Using the proper strategy to maximize this guaranteed income source
  • Tax Planning: Reducing taxes in retirement to increase the net after-tax income annually
  • Prudent Use of Home Equity: Incorporating HECM loans as a tax-free income source or portfolio safety net
  • Alpha Portfolio Management: Using active and passive portfolio management in the proper asset classes to add Manager Alpha to potentially increase returns. Manager Alpha is the rate of return an investment manager creates above or below the respective benchmark or index.

Read more in our white paper, A Portfolio for a Changing Economy

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Volatility: What’s the Best Defense?

by BlogIncome PlanningInvestment PortfolioRetirement IncomeRetirement Income PlanningWealth

Thoughts and ideas on the recent market losses and volatility due to the Coronavirus scare, and general economic and political uncertainty. Recent panic caused by the spread of the Coronavirus (COVID-19) has led to a stock market decline and has many investors feeling anxious. While portfolios will see ups and downs and this is a normal part of investing, the recent sell-off was sharp. It is in times like these that our team can best serve you by providing perspective on how we see these issues playing out.

The Best Defense is a Strong Offense
Nobody knows where the market is heading. Therefore, we believe that research and pro-actively planning, and implementing strategies that factor in potential significant drops in the market is critical. This is a strong offensive play in the world of portfolio planning (especially for those closing in on retirement). And what we consider to be the best defense to market volatility.

When the market heads up, and we get by this event-driven volatility, having a portfolio that has allocations to global equities to take advantage of market growth is critical. And if the market continues to fall, it’s critical to protect your principal with allocations to Fixed Indexed Annuities.

Either way, this “Hybrid Income Portfolio” strategy balances protection and growth, regardless of where the market heads. This is especially significant now, as equity prices are coming off all-time highs and bond prices are also high, as their yields have fallen to all-time lows. As we have seen recently, market conditions can change quickly in both directions.

For these reasons and more, we believe a Hybrid Income Portfolio to be a powerful alternative to other portfolio strategies. It’s also backed by academic research and has proven itself time and time again.*

The Impact on the Global Economy
Though the impact on human life is at the forefront of everyone’s concerns, there are many uncertainties surrounding the potential impact of the virus to the global economy. The global economy was already fragile from the nearly two-year-long U.S.-China trade war and the spreading virus will likely impact economic growth. While more equity market weakness is possible as the virus continues to grow globally, the downside could be limited as governments and global central banks have possible tools to combat the potential death toll and economic impact.

From the human life perspective, China took severe steps to limit the spread of the virus including forced quarantines, limited social contact, and significant population testing. We expect other inflicted nations to follow suit. From an economic perspective, global central banks including the People’s Bank of China and the Bank of Korea have already increased monetary stimulus or plan to do so. As we have seen in the U.S., and, specifically the U.S. housing market, over the past year, easing monetary policy can provide a potential economic stopgap. Furthermore, in the U.S., given unemployment levels near 50-year lows, the consumer, the driver of the current economic expansion, remains in good shape. We do expect market uncertainty to continue but downside may be limited. We also think the impact to markets will vary by sector. Sectors related to travel, such as cruise lines, airlines, and hotels are already taking a hit. Online entertainment companies and streaming services are performing better.

The team here at Retire Smart Network will continue to monitor and update information about our nation’s financial and physical health. If you’d like to discuss your portfolio strategy with a retirement planner or have a question about any retirement/financial topic, simply reach out and we’ll make it happen.

P.S. Don’t forget the Best Defense is a Strong Offense when it comes to protecting your health too…proper hand washing, eating right, getting enough sleep, avoiding sick people, stocking up on meds, food, water and household supplies, and having an attitude of positivity and gratefulness. Worrying about health or finances isn’t a productive use of time. Embrace optimism and reach out to us at any time.

*Sources:

  1. Morningstar Analysis, June 23, 2017, Snapshot Report.
  2. Roger G. Ibbotson, PhD Chairman & Chief Investment Officer, Zebra Capital Management, LLC Professor Emeritus of Finance, Yale School of Management Email: ZebraEdge@Zebracapital.com, Fixed Indexed Annuities: Consider the Alternative, January 2018.
  3. Shift Away from Potential Risk and Toward Potential Return, Nationwide (Morningstar), 06/16.

3 Ways to Cut Your Investing Fees

by Investment PortfolioRetirement IncomeRetirement Income Planning

In this U.S. News & World Report online article Your Retirement Advisor co-founder, Lynn Toomey discusses ways to cut fees and add more life to your portfolio.

Brian provides his take on what steps investors can take to reduce fees, beginning with education. “We believe that in order to reduce costs, one must be committed to getting educated: doing research and questioning your advisors on their strategy and fees,” says Lynn Toomey, co-founder of Her Retirement, in Leominster, Massachusetts. “If you’re a do-it-yourself investor, you’ll need to do much more research to understand the particular investment options, their performance and their fee structure.”

The article goes on with additional comments from Brian about hard to find fees in various investments. “Saranovitz says that hidden fees are especially difficult to uncover with most funds. “Look through the details of a prospectus and you won’t even be able to decipher all of a fund’s fees,” he says. “The internal transaction fees and commissions paid by mutual funds are typically not disclosed.”

Brian also provides insight for DIY investors suggesting the use of passive index funds, “Whether you’re doing your own investing or working with an advisor, you can fight back fees and potentially receive higher returns by utilizing a combination of low-cost passive index funds and ETFs, and actively managed funds,” Saranovitz says.

“Here’s how he breaks that strategy down:

  • Index funds and exchange-traded funds typically use passive indexes and charge a fraction of the fees that most active money managers charge. They also have low turnover in their portfolios keeping costs low. However, while less expensive, these funds won’t outperform the index.
  • Actively managed funds are managed to outpace the indexes and are appropriate for investors who are concerned about losses in a down market since these managers can use strategies to guard against this risk. It’s critical to pick active managers with care, choosing those with low fees and positive results in both negative and positive markets, as well as those with low turnover (which is the percent of holdings that are bought and sold each year).”

And finally, Brian’s comments end with his input on reducing fees when working with an advisor, “If you’re working with a professional investment advisor, you’re best served by working with the lowest cost, highest quality advisor you can find, Saranovitz says. “But beware the industry is plagued with high-fee advisors,” he says. “According to industry data, advisor fees average 1.65 percent and can go as high as 2 percent for a $500,000 portfolio, which is definitely an expensive proposition.”

“There are more client-friendly advisors and fee structures, but you need to do a little more research to find them. Look for an advisor who offers either a flat rate fee or a deeply discounted annual percentage fee based upon assets under management,” Saranovitz says.

The article finishes with a sentiment that Brian wholeheartedly believes in (as evidienced in his comments in the article) and shares with his students and clients , “Long-term investors really can’t afford to lose up to 40 percent of their portfolio’s value to high fees.  So, take a stand, get educated, and fight back on high investment fees. Decades down the road, when you’re counting your money in retirement, you’ll be glad you did.”

Read more about our perspective on fees, access a fee checklist to share with your advisor or get the details on our affordable and flexible fee structure.

Request a complimentary fee analysis of your portfolio  today or call us at: 508.798.5115

 

Why Simply Saving for Retirement Isn’t Enough? Part 1

by Income DistributionIncome PlanningInvestment PortfolioRetirement IncomeRetirement Income PlanningRetirement Savings

The other day I was having lunch with a friend and we were talking about retirement and the services that Her Retirement provides. She mentioned that she’s been very good about saving money in her 401(k) and said, “I’m all set for retirement.”

This comment made me realize that the average person might also believe the same thing. Many people think they’ve worked hard for 20, 30, 40 years and they’ve saved quite a little nest egg. Retirement plan done. No need to do anything further, but keep working until you feel ready to retire and give your boss or your business the boot.

Well folks, sorry to break it to you, but this is NOT a retirement plan. It’s certainly a great start and if you have more than 4x your salary saved and your 50 let’s say, you’re in pretty good shape, savings wise. However, when you move from the accumulation phase of life (pre-retirement) and into the de-accumulation phase (retirement), you need a comprehensive plan that includes sophisticated strategies to protect you from all the inherent risks you’ll face in retirement. There’s so many things that can go wrong in retirement. You MUST be prepared. And the best way to be prepared is to be pro-active…either learning about the risks and methods to minimize them, or work with a retirement specialist like Her Retirement to understand the blind spots and then put fortification around your savings so that it lasts throughout retirement.

With the right plan and strategies, you can not only mitigate risks, but you can actually make your savings last even longer in retirement (up to 10 years or more). In our full Retirement Income Projection Analysis, we show you the impact (and importance) of:

  • Re-allocating your portfolio (to include less risk/safe money options, improve your investment return and significantly reduce fees)
  • Reducing your taxes as close to 0 as possible
  • Maximizing your Social Security filing strategy to get the most money from this critical benefit
  • Determining your most tax efficient withdrawal or draw-down strategy

 

In our next few series of posts, we’ll dig a little deeper into what can go wrong in retirement and more reasons why simply saving for retirement is not good enough. Stay tuned.

In the meantime, we welcome you to learn more and take one of our new e-classes; try our QuickStart Income Calculator/Report, request a complimentary “Am I Ready” assessment or any of our other free or fee-based assessments.

How Much Annual Income Can Your Retirement Portfolio Provide?

by Income DistributionIncome PlanningInvestment Portfolio

Your retirement lifestyle will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. The annual percentage that you take out of your portfolio, whether from returns or the principal itself, is known as your withdrawal rate. Figuring out an appropriate initial withdrawal rate is a key issue in retirement planning and presents many challenges.

Why is your withdrawal rate important?

Take out too much too soon, and you might run out of money in your later years. Take out too little, and you might not enjoy your retirement years as much as you could. Your withdrawal rate is especially important in the early years of your retirement; how your portfolio is structured then and how much you take out can have a significant impact on how long your savings will last.

Gains in life expectancy have been dramatic. According to the National Center for Health Statistics, people today can expect to live more than 30 years longer than they did a century ago. Individuals who reached age 65 in 1950 could anticipate living an average of 14 years more, to age 79; now a 65-year-old might expect to live for roughly an additional 19 years. Assuming rising inflation, your projected annual income in retirement will need to factor in those cost-of-living increases. That means you’ll need to think carefully about how to structure your portfolio and your retirement plan to provide an appropriate withdrawal rate, especially in the early years of retirement.

Current Life Expectancy Estimates
MenWomen
At birth76.381.2
At age 6583.085.6

Source: NCHS Data Brief, Number 267, December 2016

Conventional wisdom

So what withdrawal rate should you expect from your retirement savings? The answer: it all depends. The seminal study on withdrawal rates for tax-deferred retirement accounts (William P. Bengen, “Determining Withdrawal Rates Using Historical Data,” Journal of Financial Planning, October 1994) looked at the annual performance of hypothetical portfolios that are continually rebalanced to achieve a 50-50 mix of large-cap (S&P 500 Index) common stocks and intermediate-term Treasury notes. The study took into account the potential impact of major financial events such as the early Depression years, the stock decline of 1937-1941, and the 1973-1974 recession. It found that a withdrawal rate of slightly more than 4% would have provided inflation-adjusted income for at least 30 years.

Other later studies have shown that broader portfolio diversification, rebalancing strategies, variable inflation rate assumptions, and being willing to accept greater uncertainty about your annual income and how long your retirement nest egg will be able to provide an income also can have a significant impact on initial withdrawal rates. For example, if you’re unwilling to accept a 25% chance that your chosen strategy will be successful, your sustainable initial withdrawal rate may need to be lower than you’d prefer to increase your odds of getting the results you desire. Conversely, a higher withdrawal rate might mean greater uncertainty about whether you risk running out of money. However, don’t forget that studies of withdrawal rates are based on historical data about the performance of various types of investments in the past. Given market performance in recent years, many experts are suggesting being more conservative in estimating future returns.

Past results don’t guarantee future performance. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

Inflation is a major consideration

To better understand why suggested initial withdrawal rates aren’t higher, it’s essential to think about how inflation can affect your retirement income. Here’s a hypothetical illustration; to keep it simple, it does not account for the impact of any taxes. If a $1 million portfolio is invested in an account that yields 5%, it provides $50,000 of annual income. But if annual inflation pushes prices up by 3%, more income–$51,500–would be needed next year to preserve purchasing power. Since the account provides only $50,000 income, an additional $1,500 must be withdrawn from the principal to meet expenses. That principal reduction, in turn, reduces the portfolio’s ability to produce income the following year. In a straight linear model, principal reductions accelerate, ultimately resulting in a zero portfolio balance after 25 to 27 years, depending on the timing of the withdrawals.

Volatility and portfolio longevity

When setting an initial withdrawal rate, it’s important to take a portfolio’s ups and downs into account–and the need for a relatively predictable income stream in retirement isn’t the only reason. According to several studies done in the late 1990s and updated in 2011 by Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz, the more dramatic a portfolio’s fluctuations, the greater the odds that the portfolio might not last as long as needed. If it becomes necessary during market downturns to sell some securities in order to continue to meet a fixed withdrawal rate, selling at an inopportune time could affect a portfolio’s ability to generate future income.

Making your portfolio either more aggressive or more conservative will affect its lifespan. A more aggressive portfolio may produce higher returns but might also be subject to a higher degree of loss. A more conservative portfolio might produce steadier returns at a lower rate, but could lose purchasing power to inflation.

Calculating an appropriate withdrawal rate

Your withdrawal rate needs to take into account many factors, including (but not limited to) your asset allocation, projected inflation rate, expected rate of return, annual income targets, investment horizon, and comfort with uncertainty. The higher your withdrawal rate, the more you’ll have to consider whether it is sustainable over the long term.

Ultimately, however, there is no standard rule of thumb; every individual has unique retirement goals, means, and circumstances that come into play.

More ways to help stretch your savings

  • Don’t overspend early in your retirement
  • Plan IRA distributions so you can preserve tax-deferred growth as long as possible
  • Postpone taking Social Security benefits to increase payments
  • Adjust your asset allocation
  • Adjust your annual budget during years when returns are low

Tax considerations

Prolonging your savings may require attention to tax issues. For example, how will higher withdrawal rates affect your tax bracket? And does your withdrawal rate take into account whether you will owe taxes on that money?

Also, if you must sell investments to maintain a uniform withdrawal rate, consider the order in which you sell them. Minimizing the long-term tax consequences of withdrawals or the sale of securities could also help your portfolio last longer.

Her Retirement affiliates are available to provide complimentary 1-on-1 workshops to review your situation and to provide help in determining how much income your portfolio will provide. He/she can also complete a full Retirement Income Projection Analysis (RIPA) to give you some further insight into how long your current nest egg will last.

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A Soon-to-Be Retiree’s Guide to a Crazy Market

by Investment PortfolioRetirement Income

Nearing retirement? When the stock market tanks … Do. Not. Panic. according to this CNN Money article…

You’ve heard that before. But it’s hard to sit tight during a market freakout if you’re closing in on retirement. Losing a big chunk of your savings now could be devastating.

Retirees should avoid drawing from investments (in other words, selling stocks) when the market is down. It’s the same golden rule you’ve followed all along, but it gets trickier once you need to use the money in your nest egg — and have fewer years for your investments to bounce back. Read more…

Once you’ve read the article, contact us for a complimentary consultation with one of our affiliate retirement specialists. He/she can review your portfolio and allocations to make sure you’re in the strongest position possible in any market. Even if you have an advisor, it’s always a good idea to get a second opinion.