Can You Be Too Conservative?

Posted On February 13, 2017 By Scott Stratton, CFP(R), CFA In Retirement Planning /

As you approach retirement, you are probably thinking quite a bit about making your investment portfolio more conservative. We generally recommend that investors start dialing back their risk five years before retirement.

However, it is possible to be too conservative. Retirement is not an single date, but a long period of sustained withdrawals. We typically think in terms of a 30-year time horizon, which is not unrealistic for a 60 to 65-year old couple, given increasing longevity today.

The old rule of thumb was to subtract your age from 100 to determine your allocation to stocks. For example, a 65-year old would have 35% in stocks and 65% in bonds. Unfortunately, this old rule of thumb doesn’t work for today’s longer life expectancies.

Researchers analyzing the “4% rule” used for retirement income planning, typically find that optimal allocation for surviving a 30-year distribution period has been roughly 50 to 60 percent stocks. For most new retirees, we generally suggest dialing back only to 50/50 or 60/40 in recognition that the portfolio still needs to grow.

We still need growth in a retirement portfolio to help you preserve purchasing power as inflation erodes the value of your money. At 3% inflation, your cost of living will double every 24 years. So if you are retiring today and thinking that you just need $40,000 a year, you should be expecting that need to increase to $80,000 or more, to maintain your standard of living.

Another reason retirees should not be overly conservative: interest rates are very low today. Bonds had a much better return over the past 30 years than they will over the next 30 years. That’s not even a prediction, it’s just a fact. When we use projected returns rather than historical returns in our Monte Carlo simulations, it suggests that bond-heavy allocations are not as likely to succeed as they were for previous retirees. See: What Do Low Interest Rates Mean For Your Retirement?

The other side of today’s low interest rates is that some investors are reaching for yield and investing in much lower-quality junk bonds. While retirees often focus heavily on income producing investments, financial planners and academic researchers prefer a “total return” approach, looking at both income and capital gains.

We don’t want to take high risks with the bond portion of our portfolios, because we want bonds to provide stability in the years when the stock market is down. High Yield bonds have a high correlation to equities and can have significant drops at exactly the same time as equities.

We manage to a specific, target asset allocation and rebalance annually to stay at that level of risk. That gets our focus away from stock picking and looking at the primary source of risk: your overall asset allocation of stocks, bonds, and other investments. While no one can predict the future, a disciplined approach can help avoid mistakes that will compound your losses when market volatility does occur.

Don’t Miss Out on a Roth IRA

Posted On January 25, 2017 By Scott Stratton, CFP(R), CFA In Retirement Planning /

I am a big fan of the Roth IRA and think it is an underutilized tool for investors. There are many people who are eligible for a Roth and are not participating. If you have a chance to put money into an account where it grows tax-free, why would you not want to contribute?

If you have a 401(k) at work, your first goal should be to maximize contributions to that account. For 2017, you can invest $18,000 into a 401(k), or $24,000 if you are age 50 or older. Your 401(k) contribution is tax deductible.

But whether or not you max out your 401(k) contributions, many families are missing the opportunity to also contribute to a Roth IRA. YES, you can be eligible for a Roth even if you participate in a retirement plan at work. More people should be trying to do both. Even if you do invest $18,000 a year into a 401(k), who says that will be enough to retire?

For the 2016 tax year, you can contribute $5,500 to a Roth IRA if your modified adjusted gross income (MAGI) is below $117,000 (single) or $184,000 (married). If you are over age 50, you can contribute $6,500. Contributions must be made by April 15, 2017 to count as a 2016 contribution.

Many investors are contributing to their 401(k) plan and say they don’t have additional income to contribute to an IRA. But if you have a taxable investment account, you could use money from that account to fund your Roth. If you aren’t planning to touch that money, don’t leave it in a taxable account, put it into an account that grows tax-free!

Here are a couple of important points to know about the Roth IRA:

With a Roth IRA, if you need to access your money before age 59 1/2, you can withdraw your principal (your original investment amount) without taxes or penalty. It is only if you withdraw earnings, would you be subject to a penalty and taxes before age 59 1/2, and even then only on the earnings portion.
If you’re married, as long as your income is below the $184,000 threshold, both or either spouse can contribute to the Roth IRA. It doesn’t matter if one spouse doesn’t work outside the home, you’re both eligible.
If you make too much to contribute to a Roth IRA, AND you do not have any Traditional IRAs, you may be a candidate to make a “Back-door Roth Contribution”. Read how here.
For investors who are over age 70 1/2, you are allowed to contribute to a Roth IRA but not a Traditional IRA. Again, put your money into the tax-free account if you are eligible!

The biggest problem with the Roth IRA is that the contribution limit is so low. When you miss a year of contributions, you can’t get that opportunity back later. So don’t miss out. If you are eligible for a Roth for 2016 and haven’t funded it, don’t delay. Call me today.

The Boomer’s Guide to Surviving a Lay-Off

Most people in their fifties and sixties have a very specific vision of their retirement. But if you find yourself unexpectedly getting laid off at age 55, or 63, you are probably feeling extremely stressed about your plans being thrown off course. The reality is that many people retire earlier than they had originally intended due to being laid off, or because of health or family reasons.

We build detailed retirement analysis packages looking at when you can retire, how much you can spend, and how long your money will last. As much science and math goes into those calculations, we should recognize that things don’t always go as planned and that we may have to adjust our plans. If you find yourself unexpectedly out of a job, I want you to know that things will be okay and we can help give you a more informed dissection of what to do next. Here are five steps to get started:

1) Address immediate needs

Figure out your health insurance. COBRA may be very expensive, so take the time to compare COBRA to an individual plan. A lay-off is a qualifying event, so you may be eligible to join your spouse’s health plan without waiting until the next open enrollment period. Avoid gaps in your coverage. Researching your health insurance will likely take more hours than you want to spend, but it’s important to get it right.
Please note that if you are over 65 and did not sign up for Medicare because you had employer group coverage, that post-employment, you have an 8-month Special Enrollment Period to sign up for Medicare without incurring the lifetime surcharge. COBRA is not considered group coverage and will not delay the start of this 8-month window.
File for unemployment benefits so you can receive benefits as soon as you are eligible. You should never quit a job in advance of a layoff; doing so could jeopardize your eligibility for unemployment.

2) Create your household budget

Are you burning cash? How much money will you have left in 6, 12, or 24 months? Making a budget is how you will know. Uncertainty creates fear; planning creates clarity.
Can you live off one spouse’s income? Can you cut expenses? This is often not that difficult to do, but we resent it, because it was unplanned and forced upon us against our wishes. But we cannot stick our heads in the sand and ignore a new financial reality. If you are going to make changes, make them without delay.

3) Start your job search immediately

You have to document weekly job search activity to receive unemployment benefits, so you might as well get started!
It may take you much longer than expected to get your next job. Some of this may unfortunately be due to age discrimination, so I would not discount that consideration. However, many veteran employees have a skill set that was unique to one employer. You may need other skills for what the marketplace requires today. Lay-offs typically occur in jobs where there is a reduction in demand. Your next job may need to be very different.
Be careful of anchoring to your past income. If you are holding out that your next job will be the same work at the same pay as your old job, that may not be a realistic expectation.
Polish your resume and application; consider getting professional help with these materials. Most applications are done online today, so your words represent you. Practice your interview skills and be prepared to answer any question. Network with colleagues and meet with someone every week to chat about your next steps.

4) Consider retiring early

Maybe you are 63 and were planning to retire at 65. The layoff could be a blessing in disguise and will allow you to retire now. Make your budget and let’s take a look at your retirement plan. If you can afford it, why not go for it?
You may realize that you don’t enjoy your work as much as you used to and have other interests now. If you used to make $100,000, you might not be willing to work 50 hours a week for $65,000. Or you may decide that starting a new career isn’t going to be very fulfilling, if all you are doing is marking time for 2-3 years. Consider all your options.

5) Delay spending your nest egg

Can you hold off on withdrawals for a few years and get by on a spouse’s income or from existing cash and unemployment benefits? Postponing withdrawals by even two or three years can have a significant impact on the longevity of your portfolio.
Try to avoid dipping into your IRA and 401(k) at age 60, if you were not planning to touch those monies until age 66. The best withdrawal strategy remains to wait until age 70 1/2 and then take only your Required Minimum Distributions.
Lay-offs are one of the most common reasons people start Social Security benefits early. If you have longevity concerns – and most people should – you want to delay those benefits for as long as you can, even to age 70. You get an 8% increase in benefits by delaying for each year past full retirement age. Patience pays.
Take a part-time or seasonal job if it means you can avoid tapping your retirement accounts. Unemployment benefits are based on weekly income, so you would be better off working 40 hours in one week and zero the following week, versus working 20 hours both weeks.

Bonus: 6) Take care of your emotional needs

It’s easy to focus on the financial aspects of a lay-off, but the emotional impacts are even greater. If you are not yet financially ready for retirement, a very real concern is running out of money in your seventies or later. We need to address those fears with a revised financial plan.
It’s natural to feel resentment and even betrayal when you were planning on giving a company the rest of your working years, and they decide instead to kick you to the curb. It’s important to not take this personally. A lay-off does not have anything to do with your value as a human being, a parent, or even as an employee. If you still feel enthusiasm, optimism, and joy in your work, then your positive attitude will be as valuable to your next employer as your experience!
We need to have a sense of identity, self-worth, and purpose that is not tied to our job. We are more than just an accountant, teacher, or engineer. Many people who are laid off go through the same work withdrawal they would have experienced at retirement. They don’t have their old routine, colleagues, or sense of belonging. Can you fulfill those needs in another way, such as through part-time work, free-lancing, or volunteering? What exactly is it that you miss?

While you can do all these steps on your own, what may give you the most confidence to move forward is to meet with me and prepare a new financial plan. I’ve met a lot of folks in the same situation and can help. We will put together a detailed analysis reflecting your new situation, evaluate all your options, and chart a new course.

Sometimes we choose change and sometimes it is thrust upon us. Change isn’t always easy or what we would have preferred, but ultimately, it’s our attitude that determines how successfully we can adapt.

Avoiding Another 2008 for Pre-Retirees

Posted On October 10, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning / 2 Comments

In 2008, the S&P 500 Index was down a whopping 37%. Other stock indices and many mutual funds did even worse. Perhaps the worst part of the 2008 crash was that diversification didn’t work. Correlations went to 1. You couldn’t hide out in international stocks, or small cap, or high yield bonds. They all went down. With today’s global economy, if the US catches a cold, the rest of the world becomes very sick. This is bad news for investors who thought they were safe by diversifying globally.

Since 2009, the market has been up. Just like Autumn turns to Winter, there will undoubtedly be another recession and bear market for investors in the future. On average, bear markets occur every 5-6 years, so many argue that we are already overdue. While we don’t know when this will ultimately occur, it’s not a matter of “predicting” a bear market, but being prepared.

If you’re a long-term investor, you can recover from years like 2008. In fact, it’s an opportunity to buy more shares while they are on sale. All that matters to you is that the returns are strong over the next decade or longer. However, if you were planning to retire in 2009, a year like 2008 can potentially derail your plans. Whether your retirement strategy involves a 4% withdrawal rate, buying an annuity, or investing for income, taking a 37% hit to your principal will certainly impact the amount of retirement income you can generate from your portfolio.

Even worse off were the people who retired in 2007, because they didn’t have the option of delaying retirement. If you retired with $1 million on January 1, 2007, and took withdrawals of 4% ($40,000 a year), you would have ended 2008 with less than $600,000 if you had invested in an S&P 500 Index fund.

There is a crucial window from 5 years before retirement to 5 years into retirement, when a large drop could have a major impact on your retirement success. Even if the market later rebounds, as it always has historically, retirees have the risk that their withdrawals could deplete their shares and they are still unable to recover. Financial planners call this sequence of returns risk.

We are starting a new portfolio model specifically to address sequence of returns risk by investing in a portfolio with significantly lower volatility. Our new Defensive Managers Select portfolio uses institutional funds with a disciplined quantitative or fundamental process to invest with less risk. Our aim is to approximate the return of a 60/40 portfolio, but with with much lower price fluctuation, as measured by standard deviation. We use funds which have a demonstrated track record of delivering low volatility, smaller magnitude of losses, and consistent positive returns.

The portfolio can include active managers, low volatility ETFs, alternative strategies, and cash. Portfolios will typically own 4-8 different funds, which gives us diversification of manager and style, in addition to stock and bond diversification. How did these funds do in 2008? While the S&P 500 Index was down 37%, three of our allocation funds were down 9.8%, 4.6%, and 0.5%. Although past performance is no guarantee of future results, we believe that having a disciplined risk strategy is better than not having any strategy and simply taking market results.

Defensive Managers Select takes a different approach than our traditional Premier Wealth Management portfolios. The Premier Wealth Management portfolios remain our recommended solution for accumulation and for investors who do not require withdrawals within five years. These portfolios use passive strategies, which are very low cost, tax efficient, and I believe will deliver superior long-term results for investors. Implicit in being invested in a passive strategy is that you have the time and resources to remain invested if the market ever takes another 37% plunge.

The Defensive Managers Select portfolio is not designed to beat the market. Most managers do not beat the market over time, and track records have no predictive accuracy as to which funds will beat the market going forward. What is more consistent is volatility. We are buying those funds with a style, process, and track record of low volatility. Pre-retirees don’t need to hit home runs, they just need to make sure that they aren’t going to be wiped out in the next bear market.

No one wants to think about another downturn, but there’s old saying that “the best time to fix the roof is when the sun is shining”. If you are within 5 years of retirement, don’t wait until there is a big drop to decide to shift your portfolio strategy to a more conservative posture. If you wait, you are just locking in your losses and diminishing your chances of recovery. The market is up this year, and the sun is shining. Now is the right time to adopt a defensive strategy.

Let’s schedule a call to talk about your income requirements and retirement goals. I don’t see a lot of other firms offering truly defensive retirement strategies, or making any distinction between accumulation and retirement objectives. This is a unique approach and one which I am happy to compare to what you are doing today. If the possibility of a bear market, or God forbid, another 2008, would hurt your retirement, let’s address that risk before it occurs.

Please note that the objective of this investment strategy is growth and not preservation of capital. While our goal is low volatility, that is no guarantee that losses will not occur.

6 Steps at Age 60

Posted On September 12, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning / 1 Comment

The sixties are a decade of financial change. Are you prepared? Here’s my checklist to confirm if your finances are in good order at age 60.

1) 12.5X annual income. At this point, you should have saved at least 12.5 times your annual income in your investment and retirement accounts. Why 12.5 times? When you retire, we will recommend an initial 4% withdrawal rate. To replace one-half your income from investments, you would need 12.5X. For example, if your income is $100,000, we’d want at least $1,250,000 in investments to provide $50,000 a year in distributions.

Why replace only half your income? Won’t that be a significant drop in your standard of living? As an employee today, you are subject to payroll taxes (7.65%) which will not apply to your retirement income. Since you are saving today for retirement, that “expense” will go away in retirement. Plus the 50% is only withdrawals – when we include Social Security, and possibly pension income, your income replacement rate may be 70% or higher.

You may disagree with this, because at age 60, you have no immediate plans to retire. Therefore, you think this does not apply to you. Wrong. The 2016 Retirement Confidence Survey from the Employee Benefits Research Institute finds “a considerable gap exists between workers’ expectations and retirees’ experience about leaving the workforce.” Although 37% of workers expect to work past age 65, only 15% of retirees actually retired at this age. Most reported retiring for reasons beyond their control, such as layoffs, health issues, or family reasons. So, just because you plan to keep working does not guarantee that you will actually be able to do so.

Even if you do not retire for another five years, the market might not be higher over this short time frame. Certainly that was the experience for people who retired in January of 2009. If you already have 12.5X your income by age 60, then you aren’t dependent strong market performance in your last years of work to get you to the finish line.

2) Estate plan. If your will and documents are more than five years old, it’s time to revisit your estate plan for an update. This should include:

Checking the beneficiaries on your retirement plans, IRAs, life insurance, and annuities.
Updating your Will.
Establishing Directives and Powers of Attorney if you should become incapacitated.
Considering if you have the potential for an Estate Tax liability; considering whether trusts are needed for asset protection, tax planning, or special needs.

3) Health Care. Modern healthcare is extending the human lifespan. Even more significant than the added years is the high quality active lifestyle that people are leading in their seventies and even eighties today. Many of the miracles of modern medicine are in the early detection, treatment, and cure of common diseases such as cancer and heart disease. If you want to enjoy these life-saving advances, you have to participate and have regular screenings and testing as recommended by your physician. Don’t ignore minor symptoms, bring them to your doctor’s attention as soon as possible.

I think many of us are reluctant to go see a doctor when we feel well or can find an excuse to not go. Without your health, you are not going to be able to enjoy the fruits of your decades of work. Make a small, but essential, investment in your future by taking care of your self.

4) Long-Term Care Plan. Note, this says plan, it does not say insurance. Not everyone needs to have Long-Term Care Insurance, some people can afford to self-insure. No one wants to think of themselves as being in a nursing home. However, as people are living longer, more of us will need assistance. Today, many LTC insurance policies include coverage for home health care and aides, meaning that the policy may actually be the reason why you can stay at home and not have to go to a nursing home.

At age 50, people aren’t interested in buying LTC when it is 30+ years away. At age 70, a policy will be prohibitively expensive, and you won’t want to buy one even if you could afford it. Age 60 is the sweet spot for buying LTC insurance. Here’s what you should do: determine if you can afford long-term care in the future without the insurance. If not, contact me for more information. If leaving money to heirs or charity is a top priority for you, you should actually consider the insurance as it will reduce the possibility of depleting your assets if you should need care.

5) Social Security Statement. Create your account on ssa.gov and download your statement.

These estimates assume you continue to work until the age of retirement. Know your Full Retirement Age, and learn about how benefits are reduced for early retirement and increased for delaying up to age 70.
The spouse with the higher benefit will provide a benefit for both lives, under the survivorship benefit. Therefore, you should try to maximize the benefit of the higher earning spouse by delaying, if possible, to age 70.
Statements do not list spousal benefits, and all amounts are in today’s dollars. Benefits will accrue Cost of Living Adjustments to keep pace with inflation.

6) Health Insurance. Keeping your benefits is essential until age 65, when you become eligible for Medicare. When you do receive Medicare, you will still have to pay premiums for Part B, as well as any Supplement, Advantage, or drug plans. Don’t neglect to include these costs in your retirement budget!

Back in 2008, I realized that many of my clients had similar questions once they were within five years of retirement. This is a crucial final period of preparation for your decades ahead. To help educate pre-retirees about these issues, I wrote Your Last 5 Years: Making the Transition From Work to Retirement as your guidebook. Email me for a copy or order one from Amazon!

To Roth or Not to Roth?

Posted On August 29, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning /

The question of “Roth or Traditional” has become even more complicated today with the advent of the Roth 401(k). Which should you choose for your 401(k)? Like many financial questions, the answer is “it depends”.

In asking the same question for an IRA, investors often look at their eligibility for the Roth versus their ability to deduct the Traditional IRA contribution. For the 401(k), that’s not an issue – there are no income restrictions or eligibility rules for a Traditional 401(k) or a Roth 401(k). You should also know that while you may choose Roth or Traditional contributions, any company match will always go in the Traditional bucket.

How to choose, then? Here are five considerations to making the decision:

1) If you are going to be in a lower tax bracket in retirement, it’s preferable to defer taxes today and pay taxes later. If this describes your situation, then you are likely better off in the Traditional 401(k). A majority of people should have an expectation of lower taxes in retirement.

2) The problem is that we don’t know what future tax rates will be. We do know that we are running massive budget deficits and that the accumulated national debt is a growing problem. While every politician wants to promise lower taxes to get votes, that seems unrealistic as a long-term solution to our budget issues. Retirees are often surprised that their taxes do not in fact vanish in retirement. Pension, Social Security, RMDs, etc. are all taxable income.

Link: Taxes and Retirement

If you believe you will be in the same or higher tax bracket in Retirement, then the advantage goes to the Roth. While you will not realize a tax benefit today from a Roth contribution, your money will grow tax-free. If you are going to pay the same tax rates in the future as today, you would be indifferent, in theory. Except that…

3) When you reach retirement, a $1 million Roth gives you $1 million to spend, whereas $1 million in a Traditional IRA or 401(k) may be worth only $750,000, $600,000, or less after you take out Federal and State income taxes. This means saving $18,000 in a Roth 401(k) is worth more than the same $18,000 in a Traditional 401(k), because the Roth money will be available tax-free.

If you are in a lower tax bracket or can comfortably pay the taxes, then the Roth may be preferable. In retirement, if you have both Roth and Traditional accounts, you can choose where to take withdrawals to best manage your taxes. (We call this tax diversification.)

4) The only caveat to the Roth contribution is that contributing to a Traditional 401(k) can lower your Adjusted Gross Income (AGI). If having a lower AGI would make you eligible for a tax credit, or eligible for an IRA contribution, then it may be beneficial to choose the deductible contribution.

For example: The Saver’s Tax Credit

5) There are no Required Minimum Distributions from a Roth account. If you are in the fortunate position to have plenty of retirement assets, making Roth contributions will add to tax-free assets, rather than creating an RMD liability for when you turn 70 1/2.

Last thought: for the past two decades, I have met people who don’t want to invest in a Roth because they think the government will take away the tax-free benefit in the future. I don’t see this happening. The government actually prefers Roths because it increases current tax revenue rather than the Traditional, which decreases current taxes. And I don’t see Roth accounts being used or abused by Billionaires or corporations – the amounts are so small and used mainly by working families.

How America Saves

Posted On July 4, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning /

Defined Contribution (DC) Plans are the backbone of retirement planning in America. Vanguard manages DC plans for 4 million Americans, with over $800 Billion in assets. So, I am always interested to read their annual report, How America Saves, which offers a window into the state of retirement preparation in America.

Link: How America Saves, 2016 Report

Looking through this year’s report, I see both reasons for optimism as well as concern. On the positive side, 78% of eligible employees participated in their company plan. And the average account balance was $96,288. It’s great that a majority of employees are participating.

However, it is surprising to discover the difference between the average and the median. (As a quick refresher, the median is the data point that is exactly in the middle – with half being higher and half being lower than this point.) The difference between the average and the median scores in Vanguard’s report belies a growing chasm between participants who save the minimum and those who save as much as they can.

While the “average” account balance was $96,288 in Vanguard Retirement Plans, the median participant had only $26,405. That means that half of all accounts have under $26,405, and that the average is skewed higher by very large accounts of $300,000, $400,000 and more.

The problem is that many participants are simply not contributing enough. The average deferral rate is 6.8%, but the median again is lower: 5.9%. Disappointingly, the average deferral rate is down from 7.3% in 2007, which means that most people are saving even less than they were 10 years ago.

People really do need to save 10% or more for their retirement. Instead, many invest only 3% or whatever is the default minimum. That’s because many participants only contribute up to the company match. In fact, when I ran a plan for a small company with a dozen employees, all but two only contributed up to the match. When you contribute the minimum over the course of a career, you are not thinking in term of the outcome. Will I have saved enough to fund a comfortable retirement? Am I on the path to financial independence?

However, there are good savers out there. 20% of the participants in a Vanguard plan are saving more than 10% of their salary into their retirement plan. These are the accounts which are bringing up the median of $26,405 to the average of $96,288. And this is what you want to do -you want to be a savings overachiever!

Over time, compounding makes a huge gap between people who contribute the minimum versus those who save more. To examine this, let’s consider two employees: Minimum Mike and Saver Sally. They both have the same salary of $45,000 and earn 3% raises over the next 35 years. Mike contributes 3% to his 401(k) and gets the company match of 3%. Sally contributes 10% and also receives the 3% match. Both earn a return of 7% compounded annually.

Here are their account balances after 35 years:
Minimum Mike: $567,615
Saver Sally: $1,230,417

Saving 10% really does make a big difference over the length of a career. Although the news media would like for you to believe that your financial future hangs by a thread on the outcome of the Brexit, or the Presidential Election, or whatever new crisis is on that day, the reality is that the biggest determinant of your long-term wealth is likely to be the percentage you contribute.

Being average is still a lot better than being median. If you want to be above average, start by increasing your deferral rate.

There is still time to increase your 401(k) or 403(b) contribution for 2016. The maximum contribution is $18,000 for 2016, with an additional catch-up of $6,000 if you are over age 50.

Can You Retire In Your Fifties?

Posted On June 27, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning /

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I recently wrote that most people should plan to work to age 70 before retiring. As a society, embracing 70 as the new full retirement age, would greatly alleviate the forthcoming retirement crisis and reduce the level of poverty in senior citizens. While there are many advantages to waiting until 70, I also see how attractive it would be to retire in your fifties while you are young and healthy.

With enough planning, saving, and advanced preparation you can retire in your fifties. But, retiring at 55 is not the same as retiring at 65. Social Security won’t kick in until 62, and if you read my previous article, you know I suggest waiting until 70. You won’t have Medicare until age 65, so you will need to have your own health insurance coverage, a significant expense which keeps many would-be retirees in the workforce until 65.

I’m going to go through the math of how you might be able to retire in your fifties, and then I’m going to tell you how most fifty-year old retirees actually did it. (Which may disappoint you…)

The “4% rule” suggests that the safe withdrawal rate from a 60/40 portfolio is to start at 4% and subsequently increase your withdrawals for inflation to maintain your standard of living. This research, assumes a 30 year retirement period, such as 65 to 95. If you retire at 50 or 55, it is likely that you or your spouse could live for another 40 or 50 years, especially with continued advances in medical care.

Unfortunately, the 4% rule has a higher failure rate when applied to periods longer than 30 years. That’s because market volatility, especially in the early years of a plan, increases the possibility that an account will be depleted. So, if someone wants to retire in their fifties today, they may need to use an even more conservative withdrawal rate, such as 3%. That way their account will still grow, net of withdrawals, to cope with the inflation that will occur over the next 40 plus years.

Currently, we have record low yields in the bond market, and relatively high valuations (Price/Earnings or P/E ratio) in the stock market. Looking forward, our expected returns should be lower than historical returns. This is another reason why a 4% withdrawal strategy may be too aggressive today for someone who wants to retire in their fifties.

Link: BlackRock CEO says retirement savers should expect returns of as little as 4%.

An alternative to the 4% Rule is the Actuarial Method, which is what the IRS uses for Required Minimum Distributions: you take your current life expectancy and use that as a divisor to determine your withdrawal rate. If you think your life expectancy is 33 years, use 1/33 or approximately 3%.

Then to retire in your 50’s here’s the rule of thumb: at a 3% withdrawal rate, you need your investment assets to equal 33 times your annual withdrawal. For example, if you plan to spend $100,000, you should have at least $3.3 million in your investment portfolio.

This is a pretty high hurdle for most investors. Few people in their 50’s will have accomplished this level of assets, especially if they are still paying mortgages or for their children’s college educations.

The majority of people I know who have actually retired in their fifties have something I have not mentioned: an employer pension. They may have worked for the military, a municipality, school district, or increasingly rarely, a large corporation, and stayed for 25 or 30 years, starting in their twenties. Now in their mid fifties, if they are debt free, it may be possible for them to retire with a pension that pays maybe to 50 to 80 percent of their previous salary. Their taxes will be much lower, so they will actually keep a higher percentage of their pension and there will not be any OASDI or Medicare taxes withheld.

If their pension covers their basic necessities, they can avoid dipping into their portfolio, which can be used for discretionary spending. When the market is up for several years, they can spend a little more on trips or buy a new car. If their portfolio is down, they can hold off on purchases until the market rebounds. And while they may be scrimping by for now, they may get a raise later when they or their spouse become eligible for Social Security. But the key ingredient remains the guaranteed monthly income from their pension.

Most of us will not have a pension, in which case, we will need to be very aggressive savers if we are to end up with a portfolio 33 times the size of our annual withdrawal requirements. If you want to retire in your fifties, I can help you do it. It will take years of planning, so the best time to get started is right away.

Is This Amazing Technology A Danger To Your Career?

Posted On June 6, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning / 1 Comment

Last October, electric car maker Tesla introduced self-driving features into its cars overnight, with a software update installed via wifi. In January, General Motors invested $500 million into car-service Lyft with plans to begin testing driver-less car services for actual customers in one year. Google, Apple, Ford, Toyota and others are racing to produce self-driving cars and we are very, very close to seeing this incredible technology become a reality. Could your next car be an Apple iCar?

Technological change is nothing new, but we may be on the verge of seeing the rate of change increase dramatically, with significant implications for individuals and the economy as a whole. Some of these changes are fairly easy to predict, but there will be secondary and tertiary impacts which will be much more difficult to imagine. And while the changes will be net positive for society, cost savings often come about when jobs which are no long necessary become eliminated.

Self-driving cars will be much safer, virtually eliminating accidents from distracted driving, driver error, fatigue, or drunk driving. Driver-less trucks and taxis will gradually replace drivers, reducing transportation costs. Families will no longer need two, three, or four cars, and many will forgo car ownership altogether, being able to summon a vehicle for the relatively few minutes a day they require transportation. Your newborn child or grandchild may never even have a driver’s license!

Speeding tickets and traffic infractions will decline, creating budget gaps for cities who previously enjoyed significant revenue. Warren Buffett called self-driving cars a “real threat to insurers” like GEICO, which derive substantial revenue from car insurance. As insurance premiums fall for safer driver-less cars, you can expect that premiums for the remaining human drivers will skyrocket as they will quickly become the high risk vehicles on the road.

There are so many positives about driver-less cars that will make our lives better. However, if you are a truck driver, own an auto body shop, work for an insurance company or emergency room, you should expect less demand for your services, reduced revenue, and loss of jobs across your industry. For those individuals, the driver-less car will have the same effect as Henry Ford’s Model T had on carriage makers and buggy whip manufacturers a hundred years ago.

Innovation is great for society and the economy, but can come at a high cost for those individuals who get left behind. Last month, I wrote about the benefits of working until age 70. The greatest challenge for many people will not be their ability or willingness to work until 70, but just keeping their job for that long.

Last year, I met an individual who lost his job of 30 years at age 57 when his employer closed. He wanted to keep working and was not prepared, financially or emotionally, for retirement. However, his skill set was decades out of date. He wanted to hold out for his old salary and was unwilling to relocate or consider jobs that were not near. He looked for a job for three years before officially declaring himself retired at age 60. Now, he has no choice but to start Social Security at age 62 and lock-in a greatly reduced benefit. His retirement will be quite tight, which wouldn’t have been the case had he been able to work and save for another 8-10 years as he had originally planned.

To work to age 70, most folks will have several different careers and will need to continually educate themselves and possibly even retrain entirely if their profession is going to be impacted by innovations such as the driver-less car. Education will become life-long, instead of something which is completed and left behind in your early twenties. There is no doubt that it is a challenge to be a job seeker in your 50’s or 60’s, which is why the best thing for those at risk of job loss is to keep your skills and certifications fresh and to change jobs before you find yourself unemployed.

The two most valuable companies in the world today are Apple and Google, each with a valuation of roughly $500 Billion. That shows the remarkable economic opportunity behind innovation. And Google created that value in less than 18 years! As investors, it’s easy to recognize the growth achieved from new technology. For the sake of your individual financial plan, however, you first need to make sure that you will have an income to save and invest! Consider what are the risks to your career before those risks become a reality.

The Saver’s Tax Credit

Posted On May 30, 2016 By Admin In Retirement Planning, Uncategorized / 1 Comment

Since most employers today no longer provide defined benefit pension plans for their employees, the burden of retirement saving has shifted to the employee. Not surprisingly, saving for retirement is a pretty low priority for the many Americans who are focused on how they are going to pay this month’s bills.