Converting Savings to Retirement Income
2019’s final edition of Your Money / Our Thoughts Quote of the Week “We make a living by what we get, but we make a life by what we give.” – Winston Churchill Technical Corner U.S. stocks rallied slightly last week to a fresh new high. Bank of America came out with a prediction last week of a “stock market melt up”. I am sure that they were basing their predication on three issues that have dominated the market narrative for most of 2019. Issue number one is the “phase one” of a new trade deal with China easing fears of further trade escalation. The agreement, which has not yet been finalized, includes China making agricultural purchases from the U.S. or otherwise known as the “bean deal” plus some tariff relief. The “agreement” really doesn’t lower the tariffs already in place except for the lowering of the latest tariff increase from 15% to 7.5% on a small portion of the overall trade with China. I think this is just a deal to get a deal. The damage has already been done to the old trade arrangements with China. Also, this deal still does not give American businesses any real guidance as to expanding capital expenditures on hiring and plant expansion. Issue number two is the U.K. prime minister, Boris Johnson, received a strong mandate after his party won the majority in the general elections, which reduces some of the political uncertainty as the country negotiates its exit from the European Union. Every economist that I have read says this should be an economic disaster for the U.K. Issue number three is the Federal Reserve (Fed) left interest rates unchanged last week, signaling a pause through 2020. I think the Fed is behind the curve and should lower interest rates because the dollar is too high in comparison to other currencies around the world. Remember, with a strong dollar, our goods and services are less competitive, so will sell less in competition with other countries. With the recent headlines like “Melt up” and “Buy High and Let It Fly” (Barron’s) what could possibly go wrong? Well, let’s count the ways. According to Hedgeye, the fourth-quarter GDP is now forecast to come in around +0.39%. Corporate earnings for S&P 500 companies are expected to be negative for the fourth quarter. Stock valuations are stretched due to the market value increase and declining earnings. Industrial production is down and the “PMI Bounce” hopes ran into a no-bounce Market PMI of 52.5 in December. U.S. retail sales dropped to a 7-month low as per the U.S. Retail Sales Control Group. I certainly don’t know what the future will bring for the markets. As Yogi Berra says, “Predicting is hard, especially about the future”. But this is setting up as 1999 and we all know what happened from 2000 to 2002. So, we are going to maintain our cautious positions and take advantage of inflation-sensitive investments such as REITs, Utilities, Energy, Gold, and TIPs. Next year in Larry’s Thoughts I will be explaining in detail the investment system we use to manage your assets. I wish everyone a Happy Holiday Season. Sue’s Thoughts The last time I penned the “Thoughts” section, I mentioned that my husband had recently retired. It’s been about six months now, and since then, I look at expenses very differently. I’ve always tried my best to be frugal, or a cheapskate as my kids would tell you, and I am more so now! It’s a relief that I am still able to contribute to our savings while we figure out this retirement gig! The following article offers some strategies for living off your savings in your retirement years. Converting Savings to Retirement Income During your working years, you’ve probably set aside funds in retirement accounts such as IRAs, 401(k)s, or other workplace savings plans, as well as in taxable accounts. Your challenge during retirement is to convert those savings into an ongoing income stream that will provide adequate income throughout your retirement years. Setting a withdrawal rate The retirement lifestyle you can afford 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 both returns and principal, 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? 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, as it will have a lasting impact on how long your savings last. One widely used guideline on withdrawal rates for tax-deferred retirement accounts that emerged in the 1990s stated that withdrawing slightly more than 4% annually from a balanced portfolio of large-cap equities and bonds would provide inflation-adjusted income for at least 30 years. However, more recent studies have found that this guideline may be too generalized. Individuals may not be able to sustain a 4% withdrawal rate, or may even be able to support a higher rate, depending on their individual circumstances. The bottom line is that there is no standard guideline that works for everyone — your particular withdrawal rate needs to take into account many factors, including, but not limited to, your asset allocation and projected rate of return, annual income targets (accounting for inflation as desired), investment horizon, and life expectancy. 1 Which assets should you draw from first? You may have assets in accounts that are taxable (e.g., CDs, mutual funds), tax deferred (e.g., traditional IRAs), and tax free (e.g., Roth IRAs). Given a choice, which type of account should you withdraw from first? The answer is — it depends. For retirees who don’t care about leaving an estate to beneficiaries, the answer is simple in theory: withdraw money from
