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The Independent Investor: How Much Is Too Much to Spend in Retirement?

By Bill SchmickiBerkshires Columnist

More and more baby boomers retire each year. One of the questions that trouble them the most is whether they have enough savings to last their lifetime. The answer largely depends on how much they plan to spend each year.

The historical guideline that most financial planners use is a 4 percent drawdown of your retirement savings after taking account of social security and other non-portfolio sources of income, such as rentals or part-time work. That number has been shown to provide most retirees with a comfortable living over the course of a 30-year retirement.

However, I advise my clients to use the 4 percent rule of thumb as a starting place and adjust along the way. Times change and so do markets, so no single number will be appropriate for every situation. Take inflation, for example. Every year inflation climbs higher. Over the last five years, inflation has been fairly well contained but that doesn't mean it will always be so.

I suggest that above and beyond the yearly 4 percent savings drawdown, enough money should be withdrawn to account for the inflation rate. This year, for example, inflation should come in slightly above 2 percent. In which case, a retiree should plan on withdrawing 6 percent of his funds next year to accommodate for these higher costs.

For the last 30 years or so, conventional financial wisdom has dictated that retirement portfolios should be predominantly invested in bonds. Advisers argued that this was the safe, conservative approach for those who can no longer afford to play the volatility of the stock market. As a result, some planners are now arguing that the 4 percent guideline should be lowered given the historical low rates of returns in the fixed income markets. They are extrapolating that since rates are low now they will therefore continue to be low in the years ahead. I think that is nonsense.

First off, as I have written before, bonds are no longer a "safe and conservative" investment. I believe that bond prices in the future will fall considerably as interest rates rise. Why keep the lion's share of your retirement savings in a losing investment that will continue to decline over the next several years?

The state of the bond and stock markets will also impact that 4 percent rule. I suggest that you adjust your spending based on how the markets perform. If the stock market is declining, the economy stalling and/or interest rates are rising; you might want to pare back your spending and your withdrawals. If the opposite occurs, you may consider withdrawing more money, but within reason.

I have one client, a single woman age 82, with health issues, who has about $1.5 million invested fairly conservatively with us. Each year we have managed to generate enough returns to satisfy her 6percent withdrawal rate and make substantially more above that for her. The problem is that every year we do, she immediately withdraws those additional profits, leaving nothing for those "rainy day" years when the markets are down. I have my hands full convincing her to leave some of those profits alone. The point is that you must remain flexible while still planning for the future.

But not everyone need abide by the 4 percent rule. Actuaries will tell you that if you follow the 4 percent rule you have a 90 percent confidence level that your retirement savings should last your lifetime. But 90 percent is a high rate of probability, maybe too high for your liking. You may opt to spend more and reduce your probabilities to a more reasonable 75 percent that your money outlives you.

That lower confidence level might actually be more appropriate for your planning purposes. By now, you may realize that if you have not discussed this with an investor adviser it is never too late to start.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
     

The Independent Investor: The Fed Turns Off the Spigot

By Bill SchmickiBerkshires Columnist
The Federal Reserve Bank announced an end to their latest quantitative stimulus program on Wednesday. The markets worldwide sold off on Thursday. Was it just a coincidence?
 
It was not as if their announcement was unexpected. The Fed has been winding down its $85 billion a month purchases of bonds and mortgage-backed securities since the beginning of the year. Each month they have pared back $10 billion/month incremental purchases.
 
June's policy meeting confirmed that the last purchases would end in October.
Some investors were relieved, while others were concerned. Many believe that the longer the Fed's program continues the less impact it will have. Others disagree. That is nothing new, since, from the outset, the entire Quantitative Easing (QE) program has been mired in controversy. 
 
The initial round of QE in 2008 was intended to prevent the economy from plunging into a second Great Depression. The Fed succeeded in that desperate bid and followed the first QE with successive bouts of stimulus in 2010, 2011 and 2012.
 
Unfortunately, its goal — to jump-start the economy and return it to a healthy growth rate — has had, at best, mixed results. While unemployment has fallen from almost 10 percent to 6.1 percent in June, the economy has remained mired in a slow-growth recovery. At the same time, this unprecedented meddling in the economy has resulted in a number of distortions, some good and some not so good.
 
Keeping interest rates low was supposed to convince American investors to sell their low-yielding, safe-haven U.S. Treasury bonds and buy riskier assets such as stocks and corporate bonds. The hope was that would in turn spur an increase in lending, consumer spending and investment. Very little of that actually happened. Investors and banks alike either remained in cash or their Treasury bonds.
 
It was the stock market and rampant speculation that has been the main beneficiary of the Fed's efforts. Some argue that the gains in the stock market have only benefited a tiny portion of the population (the One Percent) and there has been precious little "Trickle Down" impact on the economy.
 
Although the unemployment rate has declined, economists argue that the numbers are deceiving. Many After years of attempting to find a job, many people have simply dropped out of the rolls thereby reducing the unemployment rate. The data also indicate that a growing number of these gains are low-paying, part-time jobs, something the Labor Department's numbers fail to account for within these trends.
 
Then there are the risks. Potential inflation heads that list. Contrary to those who have been predicting hyperinflation, the numbers do not bear that out. For the last two years inflation has been running below the Fed's target rate of 2 percent.  
 
However, that could change. If, at some point, banks begin to lend those trillions of dollars, instead of speculate with it, if corporations begin to invest in plant and equipment rather than buy back their stock or someone else's, then the story could change.
 
The multiplier effect of money begins to come into play. That is when the dollar I lend to you is used to buy a widget or two, in turn, the widget seller turns around and uses that same dollar to pay my neighbor to make more widgets and so on and so on. In that way one dollar becomes many more. That's what causes inflation. We haven’t gotten to that point yet. And the Fed says they will raise rates when and if that happens. 
 
Some say all the Fed has done is cause a gigantic bubble in financial assets. The Fed says no, markets, in their opinion, are simply fairly valued. No one, including the Fed, really knows for sure. In many ways this entire QE program has been a grand experiment and the final outcome has yet to be written.
 
So back to the stock market, if you trace the behavior of markets through these various QE programs, one thing stands out. In every instance, once investors understood that the QE program was ending, the stock market declined.  One wonders if this will happen again this time.
 
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
 
 
     
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