529 Year-End Planning

Do your children or grandchildren need financial help for college expenses? Would you like to help them?

1. A 20% tax credit up to $5,000 per year in contributions can be claimed against Indiana income tax ($1,000 max yearly credit).

2. For your contribution to be eligible for 2017 state tax credit, the funds must be received by the program manager, no later than December 31, 2017.

3. The account must remain open for at least one year to avoid recapture of tax credit on distributions used to pay qualified education expenses.

4. Anyone who is a U.S. citizen and resident aliens at least 18 years old, emancipated minors, UGMA/UTMA custodians, and legal entities may be a participant/owner of a college savings plan.

5. If it’s time for you to consider a 529 college savings plan, call your advisor for complete details.

 

IMPORTANT DISCLOSURES
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340.

Ohio Building

2017 Client Appreciation Banquet

Client Appreciation Event

Tuesday, November 14, 2017

Market Review 4:00-5:15

Mary Holland, Fidelity Advisor Funds

With Volkers Group Advisors

Meet and Greet 5:30-6:00

Dinner 6:00-7:00

7:00-8:00 Matt Iseman

Comedian and Host of American Ninja Warrior

Matt’s first love and the thing that convinced him to give up a career in medicine to move out to LA is stand up. He’s been a national headliner for over a decade… it’s also taken him around the globe performing forthe troops. He rode the ramp on a Chinook helicopter and sat in Saddam’s throne while giving his unique insight on the world, molded largely from 80s movies and a reluctance to become a fully responsible adult. His enthusiasm always shines through, whether he is talking about the geopolitical threat of nuclear war being resolved by Rocky Balboa or being dumped by a girlfriend for pursuing his dreams . . . and giving up being a doctor.

RSVP to Ashley Orndorff, ashley@volkersgroup.com or call our office, (812) 232-5822 or (888) 655-3774.

 

IMPORTANT DISCLOSURES
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340.

 

THIRD QUARTER 2017 – What Inning is It?

Fall is one of my favorite times of the year. The temperatures are mild, the leaves are changing colors and America’s favorite sports are in full swing. This is the only time of year you will see baseball, football, and basketball all playing at the same time. Tis the season of a sports fanatic.

Yogi Berra was quoted as saying “It ain’t over ‘til it’s over”. He was talking about baseball, but that quote has translated into a powerful statement pertaining to many aspects of life. Looking at the stock market, many are wondering when will the current bull market be over. Although it is impossible to guess when this 8 + year bull run will ultimately end, can we at least know what inning we are in?

Although we pride ourselves on our advisory skills, we don’t claim to have any prognostication abilities. With that said, we believe we are somewhere in the 7th or 8th inning of this bull run. This doesn’t mean too much, because in the stock market, innings can last for years and declaring something “over” can simply mean the start of a brand new game.

Here is what we do know. This past quarter, the S&P 500 was up 4.5%, putting us on pace for the ninth consecutive calendar year of positive growth when reinvesting dividends1, a feat not achieved since 1999. We also know that unemployment is staying low (currently at 4.2%) and inflation is creeping up (currently at 1.9%)2. This will most likely lead the Fed to increase interest rates again in December.

The Fed3 has also laid out its plan on unwinding the QE-laden balance sheet that totals $4.5 trillion of Treasury bonds and mortgage-backed securities (MBS). When you have a portfolio this large, you can’t sell ANY substantial part of it without flooding the market and driving up interest rates. According to the September 20th Fed announcement, they plan on slowly letting billions of dollars simply mature into the ether each month. The gradual dissolving of billions of dollars will eventually run down the balance sheet without too much market turmoil for bond prices. It will be a delicate operation and will probably have many revisions along the way. At least there is a plan, which by itself, helps keep investors calm.

Lastly, in our July monthly summary we mentioned that stocks are approaching an overvalued level compared to bonds. 

We aren’t at that point yet, but as interest rates increase, the target gets closer. However, it is important to realize that markets are driven by greed and fear, so stocks can be overvalued (by our measures) for several months or years before 

retreating.

When should we expect the next stock market correction? With all these moving parts, I lean toward Yogi’s perspective, “When it’s over”. Until then, enjoy all that fall has to offer.

 

 

1 Thomson Financial

2 www.bls.gov

https://www.wsj.com/articles/how-the-feds-balance-sheet-unwind-will-ripple-through-banks-1505934565

 

IMPORTANT DISCLOSURES
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340.

THIRD QUARTER 2017 – ADJUSTING THE SAIL

I have never been an avid sailor but I can remember well when we experienced a wicked bear market, the dot com collapse of 2000-2, and our office used an anonymous expression, “We cannot direct the wind, but we can adjust our sails.” We were referring to how we can each make changes to our lifestyle and investment strategies in response to difficult times.

Looking over the numerous life stages most often depicted, there usually is only one choice for a man who just turned 73 years of age, “late adulthood,” which by most sources begins at age 65. Dragging my wife through this stage has become interesting of late as we have made a major adjustment to our sails.

Seventeen years ago, we lived in the “empty nest” stage and rather than moving to a smaller house, we moved to a large ranch house just down the street from where we lived. An empty nest provides parents the time and money to do things around the house they could not do before. We thought the single floor home enabled us to respond to aging parents who needed our assistance, and the bigger home provided us room to bring our rapidly expanding family base together for birthdays, holidays and special occasions. Our plan worked wonderfully and we thoroughly enjoyed this home with our family and friends.

Just over three months ago, Janet heard me say that I might be interested living by the Wabash River in some new lofts that were going to be built in Terre Haute. Until then, I always said I wanted to stay in our ranch home until our grandchildren no longer enjoyed our pool. Times change and for us we found that we were always on the go. During the week there were frequent grandchildren events to try to attend. The weekends were filled with numerous trips—some business, some visiting friends, but many trips to a cottage we have in northern Indiana. The problem was that our life changes were taking us away from enjoying the house we worked hard to maintain. We were both primed to make a change and as soon as Janet heard me hint that I might be interested in a loft, she was on the hunt! If you know Janet, you know she can work in high gear once motivated. Two weeks after my hint, we signed a lease for a loft and listed our home. In another week it was sold and a month later we were in the apartment.

I do not think anyone will accuse Janet and me of being afraid to make changes in life. We really only go around one time through life and it is best to listen to your inner voice and to adjust to what is going on around you. I am sure there are many who live out their lives in the same home and are fulfilled, but I also believe that sometimes we do not recognize life has changed and we can too. We will never regret the years we had at the ranch house, but we are excited and thrilled with the adjustment we have made.

 

IMPORTANT DISCLOSURES
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340.

SECOND QUARTER 2017 – RISK TOLERANCE

In the investment world, there are two aspects of risk tolerance: (1) an investor’s capacity for risk, or ability to absorb losses, and (2) how comfortable an investor is with risk.

An investor’s capacity for risk is looked at purely from a financial point of view. How much money can the investor afford to lose? An investor who depends on his or her investments to pay daily expenses, and for whom a loss would represent a serious problem, has less risk tolerance than someone for whom an investment loss might merely be an inconvenience or disappointment.

How comfortable an investor is with risk, from an emotional standpoint, depends on many factors, including his or her objectives & goals, life stage, personality, knowledge of investing, and investment experience. Some investors will hang on to an investment during downturns in the market, while others will bail out at the first sign of trouble. You should only invest as much as you are comfortable with. If you find yourself losing sleep worrying about your investments, you may have invested too much or too aggressively.

Investors typically fall into three categories of risk tolerance: aggressive (those who are risk tolerant), conservative (those who are risk averse), or moderate (those who are somewhere in between). How risk tolerant you are is important, because it is one of the basic factors in determining the best investment strategy for you. Your risk tolerance can affect both the types of investments you make and the way you choose to diversify your portfolio.

What is investment risk?

In the investment world, risk means uncertainty, and refers to the possibility that you will lose your investment or that an investment will yield less than its anticipated return. That uncertainty about the outcome of an investment means that investment risk also refers to the way the price of an investment fluctuates or changes in value from time to time–its price volatility. The more the fluctuation–in frequency and in amount–the higher the volatility. Generally, the higher the volatility, the greater the uncertainty about the outcome of your investment, and the greater the potential risk involved.

There are three factors that are key to understanding risk: (1) the risk-return tradeoff, (2) the investment planning time horizon, and (3) the different types of risks that exist. You should have a solid understanding of each of these issues to select investments that maximize potential returns within your acceptable risk levels. Here is a brief discussion of each.

As risk increases, the potential for return increases. This is known as the risk-return tradeoff. Historically, investments with greater risk have tended to provide higher returns, though past results are no guarantee of future returns. The more aggressive you are as an investor, the more risk you take, and the greater chance you may have to earn a potentially higher return (assuming any return is earned at all).

Conversely, the more conservative you are as an investor, the less

risk you take, and the less potential you have to earn a high return (though you’re also less likely to lose your investment).

The length of time you plan to stay invested is referred to as your investment planning time horizon. Generally speaking, the longer your time horizon, the more you may be able to afford to invest more aggressively, in higher-risk investments. This is because the longer you can remain invested, the more time you’ll have to ride out fluctuations in the hope of getting a greater reward in the future.

Finally, many types of risk can affect an investment. Each investment is subject to all of the general risks associated with that type of investment. Risk also arises from factors and circumstances specific to a particular company, industry, or class of investments.

Note: All investing involves risk, including the potential loss of principal, and there is no assurance that any investment strategy will be successful.

An investor’s risk tolerance may not be static (although authorities argue about this). Personal and outside factors may influence your risk tolerance at any given time or over a period of time. Thus, you might expect changes in your feelings about risk when there are increases or decreases in your family obligations, major shifts in the economy, or other such circumstances. It is wise to be prepared to modify your investment plan should such changes occur.

How is risk tolerance measured?

There are tests that measure risk tolerance to assess how an investor reacts to different types of risk. These tests are designed to give you a general sense of how much investment risk you can accept, and the results are generally considered reliable. Generally, risk tolerance tests fall into two categories: investment preference & psychological.

Investment preference tests

Typically, an investment preference test is a questionnaire that addresses preferences for selected investment vehicles. It asks questions about your current financial situation, goals, and past investment experience. This type of test is easy to construct and relatively simple. The disadvantage, though, is that it does not accurately gauge risk-taking propensity because it does not deal with emotional reactions to risk.

Psychological tests

A psychological test is a more elaborate questionnaire that attempts to gauge an investor’s attitude toward risk. This type of test generally includes questions about your feelings or behavior, or it may ask you to respond to hypothetical situations. This method of testing is easy to administer and can be fun to take. The disadvantage is that people often like to consider themselves risk-takers and may not respond as accurately as they should, only to find out during their first market downturn that they are more risk-averse than they had thought.

Download here a sample, condensed version, risk tolerance questionnaire. If you would like to re-evaluate your risk tolerance, or if you are new to investing and would like a first-time analysis, feel free to fill it out and mail it in to our office. Your financial advisor will look it over and give you a call to discuss your answers, and results, in greater detail.

 

 

IMPORTANT DISCLOSURES
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340.

Second Quarter 2017 – Ten Regrets or Things People Want to Change

Instead of working efficiently, I am day dreaming. I am remembering the past, looking at the future, and evaluating the present. In the middle of my day dreaming and internet surfing, I landed upon lists of things people regret or want to do differently. It is not too late to change our future and enjoy what lays ahead.

Turn off the phone (or at least put it away).

I have been guilty of being obsessed with my phone. I justify my reason, but the bottom line is I do not need to be connected 24/7. I am learning to wean myself, and it is a process.

Worry less.

I have spent a crazy amount of time and energy thinking about terrible things that could happen rather than enjoying what was happening. This action has robbed me and others of the joy of the moment.

Play more.

Life can be short. This body of ours will die so we need to enjoy life while we can!

Take risks.

The safe thing isn’t always the best thing. We cannot stretch our wings and learn to fly if we stay within a cage. Fear keeps us from exploring, and it is time to tell fear to take a hike!

Happiness is a state of mind.

Most people have things that are worth celebrating. Life is designed to be enjoyed and enjoyed to the fullest. The happiest people I know choose to focus on joy rather than sorrow. Life is a series of choices, and happiness is one of them.

Do more for others.

It can be as simple as a smile, a door held open, picking up a piece of litter, feeding a sick neighbor, bringing donuts to the office, shall I go on? There are little things that can be done daily to benefit the life of others in big and little ways. Your life will be enriched when you help others.

Take care of yourself.

I have a body that allows me to physically do things, walk, clean, climb, etc. Not everyone has that. We need to treat our body well. We will be needing it our entire life.

Live in the Moment.

How much are we missing when we are planning the next thing and not enjoying what is happening right in front of us? We often spend so much time looking forward and planning that we forget to live now! Enjoy the moments of life as they happen.

Travel more.

I learned this lesson by observation. I had an aunt and uncle that saved and saved and saved. Retirement was within reach, just a few months away. The perfect motor home was purchased and the road trip was mapped out. Then my uncle had a fatal heart attack and died. Travel more.

Follow your passion.

In the scope of things, life is short, and the older I become, the shorter it seems. Follow your passion. It helps your heart stay healthy and happy.

As we are in the middle of summer with family vacations, corn on the cob, burgers on the grill, and the sweet laughter of friends and children. What will you do to enrich your life and the lives of those near and dear to you?

 

Second Quarter 2017 – A Steady Pace In Life

Three months ago a seventy year-old lady was making national news by running in the latest Boston Marathon. Her name was Kathrine Switzer, who 50 years earlier had become the first woman to compete in the race, though one official tried to pull her off the track after a few miles. I smiled as I read of her effort because it brought back the lesson Kathy taught me 44 years ago.

1973 was my second year of long-distance running. The local running club was sponsoring its second marathon with hundreds of runners participating. I had trained hard and believed I was ready to maintain an eight minute/mile pace. I knew a lady from New York named Kathy Switzer had been invited to run in our race as a celebrity entry.

The race began and I was running consistently at my eight minute pace after six miles, when 25 year-old Kathy ran by me. She was an attractive young woman and as I watched her move significantly ahead of me, some macho hormones got the best of me. This woman was running only a little faster than me and I am a man, even an athlete in my imagination. So, I picked up my pace to about seven minute miles and passed Kathy at mile ten. The next four miles went well, then my body began rebelling. By mile 16 I had such painful stomach cramps I could only tiptoe down a half mile long hill, as Kathy passed by me. My race was over and I walked/jogged the last ten miles, finishing the 26 mile race at a nine minute pace, far short of my goal.

What happened to me has happened to investors. An investment strategy can be well thought out, but emotional choices, impulse spending, and not focusing on the big picture can significantly damage a nest egg. Dalbar Inc., a financial services company, calculates average investor returns utilizing the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investment behavior. From 1997 through 2016, they calculate that the average investor has made 2.3%/year while J.P. Morgan reports that a 60/40 allocation, rebalanced annually, could have returned 6.9%/year! 1 I believe much of this underperformance results from inconsistent behavior and not sticking to a plan.

In 1975, two years after my failure, I stayed on my eight minute pace throughout the race, despite temptations to change my plan. There is always an excuse to explain alterations, but a good investor needs to focus on the plan.

Forty years after my Kathy Switzer lesson, Janet and I found ourselves trying to climb Pike’s Peak. Janet wrote a poignant story of this struggle in our 3rd quarter newsletter of 2013, available on our website. The relevant part of this story is on the second day I found myself at the tree line 12,000 feet high, doubting whether I could make it to the top. Two new friends, Larry and Shawn, sat and encouraged me to move ahead. I remember as they put their backpacks on and headed on up the mountain, Larry softly said to me, “Slow and steady, Frank, all the way to the top.” As I pondered his words, I realized I was three miles from the top with 2,100 feet of elevation gain. Knowing I was managing about a foot and a half stride, it came to me that I only had about 10,000 steps to make. With a hundred steps before each rest, I could reach the summit in 100 walks. Somehow, this impossible goal became achievable. Breaking down a big task, like saving a million dollars by retirement, needs to be broken down into smaller parts, like saving 10% of your salary each year for retirement. Forty years later you will be at your summit. Whether distance running, climbing, or investing, “slow and steady” is excellent advice.

1J.P. Morgan Asset Management, Guide to the Markets, June 2017, page 63.

Second Quarter 2017 – Playing the Long Game

Last night I watched the MLB Home Run Derby contest. I always find it the most entertaining part of the All Star festivities. Last night I saw the rookie, Aaron Judge, crush one home run after another, seemingly for the entire 5 minute time allotment. The 6’ 7” athlete was doing it effortlessly, with 500 foot bombs and shots that bounced off the roof. . . It was impressive.

It doesn’t feel like the market has been hitting home run after home run, but stocks hit the bottom of the Financial Crisis over eight years ago and really haven’t looked back. We have hit some slumps along the way, but our batting average since 2009 has been pretty impressive overall. This last quarter was no exception, with the S&P 500 up over 3%.

That truly differentiates the spectacle of the home run derby from a real baseball game. The derby gives you one goal, put the ball over the fence and hit home runs because anything else hurts your ability to win. The true game of baseball is so much more complicated and involves both offense and defense. While some batters might be wishing to hit home runs, most are hitting for singles and doubles or simply trying to move runners into scoring position.

This translates to investing as well. Far too often we hear stories of stocks doubling or tripling and wonder “if only”. In truth, it takes the entire portfolio working in a diversified allocation to weather the good times and bad. You can’t rely on just one stock to carry you through to retirement.

When the Volkers Group opened its doors in December of 1996, many clients owned shares of a local pharmaceutical company. It was trading around $15/share ($89 before adjusting for splits). With the help of a couple very successful drugs, the stock price shot up 200% in two short years—definitely a home run that truly blessed a lot of our clients’ portfolios and retirement plans. However, the trend for this stock reversed after that and it has never gotten back up to those historic prices. Although this one “home run” stock helped some dreams come true, it has been the diversified portion of their portfolio that has allowed those clients to achieve their goals for the past 18 years, because life didn’t stop after 1998.

As we continue to follow the markets the second half of this year, we will continue to focus on asset allocation. We might hit a home run or two, but we are hoping for consistency with singles and doubles to get us through the rest of this year. Enjoy the rest of your summer!

First Quarter 2017 – Ignore the Dirt

About twenty five years ago, I was hosting a small group of people from our church for a Bible Study. Oh, these people lived in lovely homes. People who used their designer touch to decorate their homes. People who knew what to do with the items that came from Pottery Barn. People who moved with grace and ease. People that I wanted to be like.

At the time, Frank and I lived in a modest house on South 31st Street with our five sons. While the magazine pictures and displays from Pottery Barn escaped me, I cleaned, scrubbed, rearranged furniture, and did okay. Our home then and now would be described as “comfortable.” Our guests finally arrived. The first guests happened to be a couple and their elementary school age daughter. As fate would have it, the daughter walked three feet into our house, and began throwing up with the force of someone that had just finished a hot dog eating contest. All through the house, vomit landed with the nauseating smell of a sick child. All through the house, the parents apologized as they guided their child to the bathroom. All through the house, no one noticed the cleaning, cooking, or furniture arrangement. Everyone noticed a sick child that needed attention.

Oh, the lesson I learned that day. I learned that I can only be me, and I’m not really a Pottery Barn type of girl. I learned that I cook simple meals, often the same meals my mother taught me to cook. I learned that it isn’t what is in your house, but what is in your heart. I learned that I need to stop trying to impress people, and just relax a bit.

Don’t get me wrong, I still like the house to be neat, clean and orderly. But I would rather open my door to you and invite you into my dust and dirt than not have you there. I want our home open to the sounds of laughter, blanket forts, games of Sorry, Uno, and Rook. Open to the smells of chocolate chip cookies, lasagna, a hot bowl of chili, and even the occasional bout of vomit.

The people that came to my house all those years ago still come to my house. These people became my 3:00 a.m. friends. You know, the people you call in the middle of the night when tragedy strikes. The people that stand with you in the bad times, and lead the cheers during good times. The people that simply have your back and live in your foxhole. (The people whose hearts are more beautiful than their homes or worldly possessions.)

There are people that do not have 3:00 a.m. friends. People that are feeling alone, uncomfortable, disconnected, and in need. As we venture into spring and a time of renewal, perhaps we need to look around to the hurt and lonely. I don’t just want the door to my home to be open, but I want the door to my heart to be open. I want to respond to the “still small voice” that guides me into relationship with others with love, kindness, acceptance, and humility. We can change the world the same way we eat an elephant, one small bite at a time.

First Quarter 2017 – Taking Income from Your Portfolio

I think one of the most frequently asked questions I get from new (and existing) retired clients is “how much money can I take out of my account without depleting my principle?” Not only is this question frequently asked, the answer to it is often debated.

There are a multitude of factors that go into determining one’s withdrawal rate. As we have stated many times, every investor is unique. With that in mind, one could understand how the appropriate withdrawal percentage would differ between individual investors who have individual and unique goals, means, and circumstances. Although there is no set ‘rule of thumb’ there are some factors that come into play such as, the amount of money saved, age at the time of retirement, other sources of income, like a pension or Social Security, and annual living expenses. In addition, when determining your withdrawal rate, your asset allocation, projected inflation rate, expected rate of return, investment time horizon, and comfort with uncertainty (risk tolerance) will need to be considered.

So, what rate should you expect to get? Short answer, it’s complicated. The long answer, 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 considered 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. So, I typically use 4% as a nice starting point. Essentially, the younger you start tapping your retirement savings, the lower the annual withdrawal percentage must be for savings to last.

As an example: if you will retire at age 60, it’s probably smart to dial back your withdrawal rate to 2 or 3%. Retiring at age 70, by contrast, may let you pull out 6 or 7% of your money each year.

When setting an initial withdrawal rate, it’s important to take a portfolio’s ups and downs into account. 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. 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, which leads me into my next point of why 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 summary, your withdrawal rate can be the most important factor in minimizing the likelihood of outliving your money. As most of you know, if you take out too much too soon you might run out of money in your later years. On the contrary, if you take out too little you might not enjoy your retirement years as much as you could. As we all know, retirement isn’t merely about preserving a nest egg but using hard-earned savings to live life to the fullest.

If you have any questions regarding your current, or future, withdrawal rate, please give us a call. We will be happy to review your unique situation.