The 4 percent rule no longer applies for most retirees
Nov 19, 2018 8:00 am
Post credits to Kelley Holland from https://www.cnbc.com/ For years, financial advisors have relied on a simple rule of thumb to guide people planning for retirement: withdraw 4 percent a year, and you have excellent odds of having enough money for 30 golden years. But with the era of low interest rates nearing its nine-year anniversary, that old approach is no longer working well—unless you are among the wealthy, or at least have more than enough socked away for later life. According to recently published research by PwC, "households that have accumulated considerable wealth may use the 4 percent rule as a conservative yardstick. For most households, however, the rule is simply an opening bid. Retirement readiness is too complex to be codified by a simple rule of thumb. Another problem, though one with a positive side as well, is that life expectancies have increased. Americans are living longer after they stop working, which means their savings have to last longer. A man reaching age 65 in 1970 could expect to live 13 more years, but by 2011 that figure was 18 years. A woman's life expectancy at age 65 rose from 17 years in 1970 to 20 years in 2011 (the most recent year for which such data is available from the Centers for Disease Control). Wealthy households do not have to worry as much about these issues since they are more likely to have accumulated more than enough money to support themselves in retirement. "They have enough money. It really doesn't impact them," said Anand Rao, a partner at PwC and an author of the study. But those with less savings have less of a margin for error. For them, PwC analyzed behavioral trends to describe another problem as well: the so-called sequence of consumption problem. The 4 percent rule expects people to draw down their money in a mostly linear pattern, but life is not linear. PwC found that retirees commonly spend more money—much of it discretionary—when they first retire, either because they don't know what they should be spending or because they are enjoying long-awaited activities such as travel. Spending tapers off in the middle of retirement, and then non-discretionary spending picks up later on, perhaps because of health-care needs. But households who overspent in the early years can wind up in a bind at that point. PwC's findings add to concerns raised earlier about the viability of the 4 percent rule. Research published in 2013 by Michael Finke of Texas Tech University, Wade Pfau of The American College, and David Blanchett of Morningstar Investment Management found that using historical interest rate averages, a retiree drawing down savings for a 30-year retirement using the 4 percent rule had only a 6 percent chance of running out. But using interest rate levels from January 2013, when their research was published, the authors found that retirees' savings would grow so slowly that the chance of failure rose to 57 percent. "The 4 percent rule cannot be treated as a safe initial withdrawal rate in today's low interest rate environment," they concluded. PwC has developed models to help investors and their advisors understand how prepared they are for retirement. Rao said the firm is also developing tools that mass market investors can use to determine how to draw down their savings. "The approach has to be much more personalized," he said. Michael Lonier, a financial advisor in Ramsey, N.J., who PwC acknowledges helped with the research, has a plan for helping his clients develop what he calls a dynamic spending process. He believes clients need to keep assets dedicated to their retirement needs invested in lower-risk assets such as bonds and annuities. On top of those funds is discretionary money. That is the only money Lonier would recommend that clients invest in anything with meaningful risk, like the stock market. As for drawdowns, he recommends "an actuarial view of the length of the plan remaining," or a calculation of how long a client's money has to last. Then he looks at clients' current balance net of recent market performance, and from there he can calculate how much is safe to draw down for a given time period. "If you do the household math, then you have a better sense of how much risk you are taking and whether it's a good idea," he said. Elvin Turner, managing director of Turner Consulting, a financial services consultancy, said the new research on the 4 percent rule also points to the fact that firms can use big data to better understand how people accumulate and spend their savings, and thus develop better plans for them. "The tools are much more sophisticated today." That's a good thing, he said, because people facing retirement today are looking at a much more complicated financial situation. "There is no longer a one-size-fits-all strategy," he said.
A Big Reason U.S. Economy Is Accelerating: Government Spending
Nov 18, 2018 8:00 am
Post credits to Kate Davidson and Jon Hilsenrath from https://www.wsj.com/ A stark pickup in government spending, particularly in defense, has helped fuel a broad acceleration in U.S. economic growth in the past year and a half, according to a Wall Street Journal analysis of Commerce Department data. The U.S. economy has expanded at a 2.9% annual rate since April of 2017, according to the Commerce Department’s tabulations of the nation’s gross domestic product, or output. That growth rate is faster than the 2.2% annual growth rate between mid-2009—when the expansion started—and April 2017. Faster government spending accounted for nearly half of the acceleration, according to The Wall Street Journal analysis. The Commerce Department breaks down various contributors to economic growth, including government spending, business investment, consumer outlays and exports. Defense shifted from contracting at a 2.1% annual rate between June 2009 and March 2017, to growing at a 2.9% rate since April 2017. The turnaround added 0.21 percentage points on average to the nation’s overall economic growth rate, according to Commerce Department figures. When including faster spending on nondefense items and spending at the state and local levels, increased government spending accounted for 0.34 percentage point of the 0.7 percentage point increase in the growth rate since April 2017, or nearly half. Other factors are at play. Faster business investment, due in part to energy investing, has contributed 0.3 percentage point to the growth rate, while faster consumer spending accounts for about a third of the pickup. A slowdown in home building has subtracted about 0.2 percentage point from the growth rate. The Commerce Department will provide its first estimate of third-quarter growth Friday morning, with new numbers on which sectors are contributing most. Economic growth is an important point of debate in the midterm elections. President Trump and Republicans say tax cuts and less regulation have accelerated growth. Democrats say faster growth is uneven and unsustainable. The role of government spending has gotten less attention from either side. “There really had been some pent-up demand within the Department of Defense for modernization, for training, for maintenance,” said Todd Harrison, a senior fellow and defense budget analyst at the Center for Strategic and International Studies. “Now [with] the sudden increase in the budget in fiscal year 2018 and fiscal year 2019, you see some of that pent-up demand being unleashed in the market.” Defense outlays grew 6% in the fiscal year that ended Sept. 30, thanks in part to a bipartisan budget agreement to boost government spending this year and next by nearly $300 billion above limits set in a 2011 law, including $165 billion more for military. From fiscal year 2010 to fiscal year 2015, the defense budget was declining after Congress implemented discretionary spending caps to help curb the deficit. Congress increased the caps slightly between 2013 and 2017, but not by much, Mr. Harrison said. A Republican-controlled Congress, with support from Mr. Trump, moved this year to raise the caps as part of a new two-year budget deal that began to take effect at the end of March. That led to a surge in defense outlays over the spring and summer. The gains are expected to continue into 2019 and 2020, as funding makes its way out of the Pentagon. Big projects such as building aircraft carriers require long lead times and likely won’t show up in military spending for several more quarters, Mr. Harrison said. Spending on services, such as maintenance and personnel, move through the system faster. “I would expect that, with the increase in the defense discretionary caps, that its contribution is going to increase, and in fact it will be leading overall GDP growth by mid-2019,” said Gus Faucher, chief economist at PNC Financial Services Group. The budget increase has been a boon for defense companies, as the military replaces worn-out equipment and updates technology. Lockheed Martin Corp. , the world’s largest defense contractor, said Tuesday it expects revenue to increase up to 6% in 2019 as it boosts production of missiles and F-35 combat jets. The company reported a $1.47 billion profit for the quarter ending Sept. 30, compared with $963 million a year earlier. Its order backlog rose to $109 billion. Boeing Co. , the world’s largest aerospace company by sales, raised its revenue and profit outlook for the year, thanks in part to strong demand for defense projects. The company won a trio of Pentagon contracts in recent weeks, after four years of sales declines in its defense unit. “This is the first year (in this decade) that we’re going to see mid-single-digit growth on average from the major defense companies,” said Seth Seifman, an aerospace and defense analyst at JPMorgan Chase. “As we look forward, the fact that you’ve got these budgets that have already been passed, those are going to fuel growth in 2019 and 2020.” It is rippling out to smaller businesses. Adam Crouse said business has picked up over the past two years at J & R Tools Inc., a machine shop in Loogootee, Ind., which works mainly as a contractor to the Navy, Army and Marine Corps. “We’ve hired three people in the past couple months,” Mr. Crouse, the shop’s co-owner, said last month at a White House economic summit for small-business owners. “The defense budget helped out.” Douglas Holtz-Eakin, a Republican economist and former director of the Congressional Budget Office, cautioned that the return of higher military spending might not last forever. The current budget agreement expires in September 2019, and the next Congress might not go along with more spending, Mr. Holtz-Eakin said.
“Financial advisor” and “financial planner” are not the same
Nov 17, 2018 8:00 am
Post credits to Cary List from https://www.investmentexecutive.com/ Canadians are confused — and rightfully so. Anybody licensed to sell any financial product or offer any form of advice that’s related to finances is a “financial advisor.” A vast range of individuals, many of who possess wildly different knowledge, skills and abilities — and in many cases offer very different services and products — use the moniker “financial advisor.” But in clients’ eyes, they’re all the same. The confusion caused by lumping all these “financial advisors'” into one basket continues to be ignored to the peril of Canadians. Further confusing the matter, the terms “financial planner” and “financial advisor” are also used interchangeably. This is not OK. Although all financial planners are financial advisors, not all financial advisors are financial planners. But ask the average Canadian and he or she will tell you that his or her “financial advisor” is a financial planner. Clients often believe that the investment advice they receive from their licensed “financial advisor” is a “financial plan.” They believe that their retirements are secure because they trust that their financial advisor is a highly qualified professional who is knowledgeable and competent in all financial matters. They also believe the financial advisor is obligated to act in their best interest, not only for the products these advisors sell, but for the “professional advice” they give. Canadians continue to be led to believe “financial advisors” are all one and the same. In fact, they have no idea that there is no clearly defined set of knowledge, skills or abilities for a “financial advisor”; that outside of Quebec, neither governments nor regulators provide any clarification on what is meant by the terms “financial planner” or “financial advisor”; and that there is no law on who can use either title. If governments, regulators and the financial services industry itself continue to perpetuate this confusion, consumers will remain frustrated and at risk of getting the wrong advice from the wrong people. I’m not splitting hairs; there are huge crevasses between the qualifications, licences and accountabilities from one so-called “financial advisor” to another. Yet, we throw them all in the same pot, call them all “financial advisors” or “financial planners” interchangeably and expect Canadians to recognize the difference. We describe an investment strategy as a “financial plan” and wonder why consumers are frustrated. The term “financial advice” and the title “financial advisor,” are currently generic terms that do not describe any single body of knowledge, competencies, practice, type of service or even product offering. The knowledge, skills and abilities of those referred to under the universal “financial advisor” title are as varied as the products and services these individuals offer. Each may possess their own, often distinct, competencies and/or qualifications based on their licences, but there’s currently no commonly accepted body of knowledge, competencies, or common barrier for entry (through a common standard) for this diverse group. The discreet and different knowledge required by licence for each of these “financial advisors” likely makes it impossible to adopt a clear, unified definition for the collective. As long as regulation of “financial advisors” remains siloed and based on licences to sell certain products, the term “financial advisor” will remain a confusing amalgamation of disparate elements. Financial planners, on the other hand, have a 30-year history in this country as professionals whom clients should expect to be able to provide a disciplined, multi‐step approach to assessing an individual’s current financial and personal circumstances against their future desired state. Clients also expect financial planners to develop strategies that will help them meet their personal goals, needs and priorities in a way that aims to optimize their financial well-being. A true professional financial planner is obligated to possess deep and broad knowledge far beyond product and to consider the inter‐relationships among relevant financial planning areas in formulating appropriate strategies. Even though many financial planners are also licensed to sell financial products, the use of the title “financial planner” must connote knowledge, skills, abilities, service and professional responsibility beyond that required of someone whose credentials do not extend beyond product licence. The financial planner title should be restricted by law to those who possess the requisite knowledge, skills, abilities and professional judgement required to provide objective financial planning at the highest level of complexity required of the profession. Furthermore, financial planners must be required to be held accountable to a professional body and be expected to possess the knowledge, skills and abilities delineated through a singular body of knowledge, competency profile and certification process that ensures uniform and consistent standards for the profession. Playing to the lowest common denominator is putting the financial futures of Canadians at risk. It’s time to adopt, in law, a unified title restriction for “financial planners” and adopt, in law, either elevation of the term “financial advisor” to truly mean something as a financial professional, separate and apart from the licence to sell a product, or to ban the term “financial advisor” entirely. Post credits to Cary List from https://www.investmentexecutive.com/
3 Money Mistakes You Don’t Want to Make
Nov 16, 2018 8:00 am
Written by Brian Poncelet
Borrowing from RRSP.
On the off chance that you require cash, obtaining from your RRSP isn’t the appropriate response. In the event that somebody proposes for you do that, it is essential that you put forth some critical inquiries. To start with, how does this cash get paid back and under what terms? Credit reimbursements are paid back with after-charge dollars and when you at last convey them in retirement they are assesses once more. Second, what happens in the event that I lose my activity? Regularly in many plans, you will be required to pay back the whole credit promptly on the off chance that you leave your manager. Something else, that cash turns into a dispersion, which acquires duty and potential punishments. Keep in mind, your RRSP is there to construct cash for your retirement. It’s something that should not be touched until the point that you achieve your brilliant years. In the event that you are following a tenets based way to deal with your money related choices, you would have assembled liquidity in an investment account to give you the money you require instead of need to stray into the red or acquire from your RRSP. For what reason would you need to get against your bliss in retirement? You worked so difficult to spare that cash, don’t utilize it.
Not Insuring Your Most Valuable Asset.
There are two things that you certainly require in your portfolio – disaster protection and handicap protection. They are not an ought to have they are an absolute necessity have. Try not to commit the error of not protecting your most profitable resource; yourself. Who might be fiscally affected if something somehow managed to happen and you couldn’t work, or far more detestable, the incomprehensible happens? Did you realize that affliction an inability that keeps you out of work adds to 62% of every individual chapter 11, as indicated by an investigation by the American Journal of Medicine. Numerous individuals are under the misguided judgment that life coverage or handicap protection are extremely costly when that truly isn’t the situation. Converse with your counselor to help locate the correct item to fit your needs. Also, recall, it will never be less expensive for you to purchase than it is today.
Not Changing Bad Behavior.
As of March 2016, the evaluated aggregate sum of extraordinary Visa obligation in America is $762 billion dollars. Indeed, even with all the instruction out there around obligation administration, obligation is clearly still an issue for many individuals. Thus, if this is an issue for you consider that your conduct might be the main thing keeping you down. Assume acknowledgment card obligation for instance. Paying down your Mastercard obligation or merging obligation is incredible however in the event that don’t alter the conduct that ventured into the red in any case, at that point you will be stuck in an unfortunate situation. A credit advisor or money related counsel can search through your spending and enable you to distinguish patterns. Maybe you were pouring excessively of your salary into essential costs, for example, lodging, auto installments and living expenses, and you have to assess approaches to minimize. It is critical to live inside your methods and to take a look at yourself before you wreck yourself.
Try not to make securing, sparing, and making the most of your cash harder than it must be. Ensure you converse with your Leap proficient about how to make your budgetary life normal, sound, and basic.