How much annual retirement income will you have?

Most people believe that their home is their most expensive thing they’ll ever pay for.  They’re wrong.  The most expensive thing people ever pay for is retirement. And they’ll pay for it after they quit working.

That’s why it’s important to have a clear idea of what you’re getting into before you decide to tell your employer that you’re leaving.

The typical retiree’s sources of income include Social Security.  They may have a pension, although fewer companies are offering them.  If there is a gap between those sources of income and their spending plans, the difference is made up by using their retirement savings.

Running out of money is the single biggest concern of retirees.  The big question is how long we will live and the amount we can draw from our savings before they are depleted.

For simplicity, let’s assume: You’re ready to retire today and plan to have your retirement savings last 25 years. You’ve moved your savings into investments that you believe are appropriate for your retirement portfolio. The investments will provide a constant 6% annual return. You’ll withdraw the same amount at the end of each year.

If you saved this amount Here’s how much you could withdraw annually for 25 years
$100,000  $7,823
$200,000 $14,645
$300,000 $23,468
$400,000 $31,291
$500,000 $39,113
$600,000 $46,936
$700,000 $54,759
$800,000 $62,581
$900,000 $70,404
$1,000,000 $78,227

Keep in mind that these examples don’t include factors such as inflation and volatility that can have a big impact on your purchasing power and account value.

For example, if inflation were 4% a year, a withdrawal of $31,291 25 years from now would only be worth $11,738 in today’s dollars.

Investment losses would decrease your account’s growth potential in subsequent years. To account for these factors, you might need to save even more.

Many experts estimate that you’ll need 80% or more of your final annual salary each year in retirement. Social Security may only provide around 40% of what you need. And don’t forget that retirees typically have different types of expenses compared to people still in the workforce, such as increased health care and travel costs.

This is why planning is so important.  A financial plan will provide you with answers to many of these questions.  Retirees also need to reduce the chances that their portfolio will experience major losses due to market volatility or taking too much risk.  This is where a Registered Investment Advisor who is also a Certified Financial Planner (CFP®) can help.  At Korving & Company we prepare retirement plans and, once you approve of your plan, we will manage your retirement assets to give you peace of mind.

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What happens if you are 70 ½ and you have an IRA and a 403(b)?

RMDs, or Required Minimum Distributions have to be taken after you become 70 ½ if you have a retirement account such as an IRA or 401(k).   To determine the amount you are required to take, the value of all of your retirement accounts have to be added together.  If you have multiple retirement accounts you can take the RMD from only one account and leave the others alone … unless you have a 403(b) plan.

403(b) plan accounts must be added to the total of the retirement accounts to determine the RMD.  But  you can’t use distributions from IRAs to satisfy the RMDs from 403(b)s, nor can you use 403(b) distributions to satisfy IRA RMDs.

However, if you have several different 403(b) accounts, you can take the RMD from just one of the accounts, as long as it’s at least as much as the RMD based on the sum of all of the 403(b) accounts.

If you are retired, you may be able to simplify your life by rolling all of your retirement accounts into an IRA.  That way you can eliminate a lot of confusion, and the potential penalties that go along with making a mistake.

If you have questions about retirement accounts, call us.

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When is the Next Recession?

One of our favorite market analysts, Brian Wesbury – who coined the term “Plow horse Economy” to describe the current economic situation – has been accused of being a “perma-bull” because he had discounted all the predictions of recession over the last 7 1/2 years.  We can understand why people are concerned about recessions because 2008 is still fresh in our minds.  The recovery that began in 2009 has been anemic.  Millions of people have not seen their financial situation improve.

Remember fears about adjustable-rate mortgage re-sets, or the looming wave of foreclosures that would lead to a double-dip recession? Remember the threat of widespread defaults on municipal debt? Remember the hyperinflation that was supposed to come from Quantitative Easing? Or how about the Fiscal Cliff, Sequester, or the federal government shutdown? Or the recession we were supposed to get from higher oil prices…and then from lower oil prices? How about the recession from the looming breakup of the Euro or Grexit or Brexit?

None of these things has brought on the oft-predicted recession.  Wesbury says that at some point a recession will come.  We have not reached the point where fiscal or economic policy has eliminated that possibility.  He mentions several indicators, including truck sales and “core” industrial production as indicators that should be watched.

Meanwhile,

Job growth continues at a healthy clip. Initial unemployment claims have averaged 261,000 over the past four weeks and have been below 300,000 for 80 straight weeks. Consumer debt payments are an unusually low share of income and consumers’ seriously delinquent debts are still dropping.   Wages are accelerating. Home building has risen the past few years even as the homeownership rate has declined, making room for plenty of growth in the years ahead.

Meanwhile, there haven’t been any huge shifts in government policy in the past two years. Yes, policy could be much better, but the pace of bad policies hasn’t shifted into overdrive lately.

In other words, our forecast remains as it has been the past several years, for more Plow Horse economic growth.   But you should never have any doubt that we are constantly on the lookout for something that can change our minds.

While the next recession may or may not be right around the corner, serious investors should be prepared for the eventuality so that when it does arrive, they will be ready.   We invite your inquiries.

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Retirement Lessons from Gene Wilder

Gene Wilder

Gene Wilder

Unlike many movie stars, Gene Wilder did retirement right.

Gene Wilder’s glory years came too late for the Golden Age of Hollywood and too early for the modern era of $50 million superstars, but he did well enough to walk away after a couple of decades.

In an industry where performers in their 80s and 90s outlive their savings and need to keep working into the grave to pay the bills, that’s an achievement.

While the details of his estate have not been made public, there are a number if things we do know.

Gene Wilder died somewhere between filthy rich and flat broke, spending down his cash while remaining comfortable to the end, which came last week from Alzheimer’s complications…

Wilder retired at 58 to do what he enjoyed, writing his memoirs while living in a relatively modest home in Connecticut with his wife.  While he was active in ovarian cancer charities, it’s unclear how much he gave to them other than lending his celebrity to the charities he favored.

After all, the spouse is the only estate planning goal retirees really need to consider. Everything else — from philanthropy to dynastic heirs — comes second.

The lessons here are simple, yet unusual in the entertainment business – whether we’re talking about movies or sports.  Too often highly paid entertainers adopt a lifestyle that absorbs all of their income.  That means that if their careers end after a few years they need to begin a new career.  The alternative is to end up broke.

Wilder put enough aside while he was working to allow him to live in the style he enjoyed for 25 years after retiring and leave his wife in comfort after he passed away.  It’s a lesson for all of us who are not movie stars.  Know what we want, save so that we can afford it, and retire when we’re ready to walk away and leave it all behind.

Who do you trust?

The latest issue of Wealth Management magazine dealt with the upcoming election.

One of the more interesting things about our recent presidential election (and it’s a long list) is that the traditional political battle lines have not only moved, they’ve been decimated—broken into such unrecognizable shapes that the head spins.

What the Editor found interesting is that neither candidate projects warm feelings toward Wall Street for different reasons.

For both parties and their supporters, Wall Street, and by extension financial services, is to be viewed with deep suspicion and skepticism.

The editor finds this troubling.  We’re not so sure.  When you turn your financial affairs over to another there has to be a certain level of trust.  However that trust must be reinforced over time and “Wall Street” has done enough damage to the trust that people have placed in it that it deserves to be viewed with suspicion and skepticism.

Trust is generated when promises made are promises kept.   The problem is that too often the promises that the major Wall Street firms have made were deceptive.  Wall Street firms like to pretend that they have the best interests of their clients in mind.  The truth is that the firms view their clients as customers and their brokers as the sales force.  The object is to generate commissions via the sales of products created to generate profits for the firm.  And if it benefits the client, that’s nice but it’s a by-product of the sales effort.

That’s why the growth of independent Registered Investment Advisory firms has been a good thing for people seeking investment advice that they can trust.  RIAs who charge fees for their services are not compensated for selling Wall Street products.  Because they work for their clients, not for Wall Street firms, they do not have divided loyalties.  They are supposed to be fiduciaries, not salesmen.  Not to say that there are no bad apples in the basket, but the vast majority of them will work to earn your trust.

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Dogs of the Dow Revisited

The “Dogs of the Dow” are the ten highest yielding stocks in the Dow Jones Industrial Average.  The reason they were referred to as “Dogs” is because stocks with unusually high dividend yields are often stocks whose prices have dropped, sometimes dramatically, because of bad news.

American companies, unlike their European counterparts, try to keep their dividends steady or increase them over time.  If they run into problems, including earnings declines, reducing the quarterly dividend is usually the last step.

To give an example, if a company whose stock which is priced at $100 per share pays a $2.50 dividend it is said to have a 2.5% yield.   If the company runs into problems and its share price drops to $50, the dividend yield is now 5.0%.  Thus it becomes a “Dog.”

Most companies run into problems from time to time: sales slow down and investors sell to invest in the next new thing.  That’s what happened to McDonalds a few years ago.  When oil prices dropped sharply so did the price of oil company stocks.  When natural resources prices dropped because of reduced demand so did the price of companies like Caterpillar which makes mining equipment.  Technology goes in and out of favor for various reasons and so does the price of tech stocks.

But most companies learn how to cope with adversity and make the appropriate changes to make a comeback.  That’s what often happens and it provides a way for investors to buy companies when they are cheap and make a profit.

The Dogs of the  Dow are a method of creating a portfolio of high yielding but out-of-favor stocks in the expectation that most will recover and provide a nice profit.

 So how have the “Dogs” done over the past 5 years?  We have tracked the performance of the “Dogs” using the share prices and yields of the 10 highest yielding DJIA stocks as of the last trading day of the previous year.  Here are the results:

  • 2011          16.4%
  • 2012          10.1%
  • 2013          19.1%
  • 2014         10.6%
  • 2015           2.9%

These returns are “total returns” and include dividends but do not include fees or expenses.  It should also be noted to these returns are different if the starting point was not the value as of the end of the prior year and the ending point was different.  It should also be noted that a 10 stock portfolio is not properly diversified and I have simplified the process of buying, trading and balancing the “Dogs.”

As a final note, this strategy was popular in the 1990s and as it became more popular it became less effective.  In addition, as technology stocks gained popularity in the late 1990s, the “Dogs of the Dow” lost money as investors moved massively away from old-line DJIA stocks and into the tech sector.  As they say in the prospectuses, past performance is no guarantee of future results.

For more information, contact us.

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Ex-NFL player, Mega Millions winner press $7.8M claims against Morgan Stanley

What do sports super-stars and lottery winners have in common?  Both are in financial danger.

That’s a strange thing to say about people who are often multi-millionaires.

The problem is that neither the talented athlete nor the lottery winner is usually any good at managing money.  That’s a harsh judgment to make but too many star athletes and lottery winners end up broke.  They end up broke for many of the same reasons:

  • They believe that the financial windfall they have received is inexhaustible.
  • They attract too many groupies and hangers-on who are after their money.
  • They spend the money they have received instead of investing it for their old age.
  • The money they do invest is often lost because of poor, or dishonest, advice.

From Financial Planning magazine:

Former NFL cornerback Asante Samuel and Mega Millions lottery winner James Groves are jointly seeking $7.8 million in damages against Morgan Stanley related to investment recommendations made by a now-barred broker, according to regulatory filings….

Samuel and Groves filed their claims in FINRA arbitration in July, according to a copy of Parthemer’s CRD. From 2003 to 2013, Samuel played for several NFL teams, including the New England Patriots and Philadelphia Eagles. Groves won $168 million in the Mega Millions lottery in 2009.

In this case, Asante Samuel was persuaded to buy a night club, probably hoping to capitalize on his fame as a football player.  It’s fairly common for professional athletes to open restaurants or night clubs.  The problem is that even for professional restauranteurs, the failure rate is shockingly high, and athletes don’t have the training or time to run these businesses.

The story of many lottery winners is one example of ruined lives after another.   Bud Post’s story is not unusual.

When William “Bud” Post won $16.2 million in a 1988 lottery, one of the first things he did was try to please his family, according to this Bankrate article.

Unfortunately, his kin was of the unfriendly sort. Post’s brother hired a hit man to kill him, hoping to inherit some money. Other family members persuaded him to invest in two businesses that ultimately failed. Post’s ex-girlfriend sued him for some of the winnings. Post himself was thrown in jail for firing a gun at a bill collector.

Over time, Post accumulated so much debt that he had to declare bankruptcy. He now relies on Social Security for income. “Lotteries don’t mean (anything) to me,” he is quoted as saying—after he lost all his money.

Is there no hope for professional athletes and lottery winners?  Yes, but it requires them to know their limitations, which may include hiring professional help before they begin spending their new-found wealth.

If you’re a sports star or lottery winner who would like to retire rich, and you want to have someone to talk to about the way you can fend off the vultures that your wealth and fame attract, contact us.  You don’t want to spend your time in court trying to get back what you lost.

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You Could be Making the Biggest Mistake of Your Life

There are a few things in life you can do that you can’t undo.  You can’t turn back the clock.  Once you jump out of a plane at 15,000 feet, you’re committed to your parachute.  Retirement is another one of those things that is almost impossible to undo.  It’s literally a life-changing event.  So why do so many retire without a plan?

People retiring in their mid-60s will likely spend 20, 30, or more years as a retiree.  Before they make the plunge – “jump out of the plane” – they had better know that they have a parachute that works.

The Baby Boom generation is retiring at the rate of thousands a day and most haven’t planned adequately.  Over the coming decades there will be a lot of changes in their lives.  They will have to spend their time differently.  The cost of living will go up and they may face medical expenses as they grow older.  Their income may not match their expenses and they will need to figure out how to bridge the gap or where to cut back.

A good plan, prepared before you hand in your retirement notice, can take most of these issues into consideration.  If you don’t plan, you could be making the biggest mistake of your life.

Contact us.

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Does the Bull Market Have Room to Run?

From time to time we share the thoughts of prominent stock market analysts.  As the markets reach new heights, we scour the headlines and find prophets of gloom and doom just about everywhere.  We are by cautious by nature, but not given to hyperbole.

Here is the market as viewed by Brian Wesbury, Chief Economist at First Trust:

Now, the pessimists can’t stop talking about profits. Both S&P 500 reported earnings and the government’s economy-wide measure of corporate earnings are down 4.9% from a year ago.

In hindsight, corporate profits peaked in 2014, just like they did in 1978, 1988, 1997, and 2006. So, they say, a recession and bear market are on the way, just like the ones that followed those peaks in profits as well. It’s time to sell, again!

One problem with this theory is that it assumes the decline in profits is permanent. But profits have been hurt by the downdraft of energy prices, which crushed profits in that sector, while also hurting other related businesses. However, energy prices are rebounding while profits outside of energy are accelerating.

In addition, the ingredients for a recession are not yet there. Monetary policy is not tight, consumer and corporate balance sheets are healthy, and the recovery in home building has much further to go.

….

None of this means the stock market must go up today, or this week, or even in the year ahead. But it does bolster our case for a continuation of the bull market.

Quite an alternate view from many of the talking heads on CNBC.  If Wesbury is indeed right, the Bull Market has room to run.  In the meantime we’ll continue to invest with caution.  Like the Boy Scouts, we’re always prepared.  No one rings a bell when the market turns and we want to be positioned so that we will not be blindsided when it does.

If you are uncertain about what to do, contact us.  We’ll be glad to help.

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Getting Financial Help

When people have financial questions, what do they look for?  According to a recent survey most people are looking for someone with experience.  We want to take advice from people who are familiar with the issues we face and know what to do about them.  We all know people with experience, but financial problems, like medical problems, are personal.  Most people we know would rather not go into detail about their personal finances with family or friends.  They are more comfortable sitting down with a financial professional to discuss their finances, their debts, their financial concerns, and their financial goals in both the short and long term. Professionals will provide advice without being judgmental and are required by their code of ethics to keep your information confidential.

Once people find someone who has a track record of giving good, professional advice, they want personalized advice and “holistic” planning.

No two people have exactly the same problems.  A good financial advisor listens attentively to learn the goals, the concerns and personal history of the people who come to him for advice.

People have specific issues and questions.  For example: a couple, aged 39, is seeking advice about their path to retirement.  They give their financial advisor a laundry list of their assets, their investments, their savings rate, their debts, and the ages of their children and ask if they should be doing something different or are they on the right path.  That’s a very specific question and the advisor’s response is going to be personalized for them.

The plan that the advisor comes up with is going to involve much more than money.  It’s going to take their personal characteristics into account.  This includes personal experience with investing, their risk tolerance, and their closely held beliefs and ethical values.  This is what is referred to as “holistic” planning; taking personal characteristics into consideration.

There is a fairly big difference in the advice sought by

  • “Millennials” (those born after 1980 and the first generation to come of age in the current century),
  • “Generation X” (the children of the Baby Boomers) and the
  • “Baby Boomers” (children of the soldiers returning from World War 2)

“Millenials” say that among their top three concerns are saving for a large expense such as a car or a wedding.  Too many are saddled by debt acquired to pay for higher education and are finding that their degrees are not necessarily an entry into high paying professional jobs.  Their next largest concerns are saving for their kids’ education and putting money aside for retirement.

“Generation X” is primarily focused on saving for retirement.  They are married, own their own home and may have children in college.  Concerns two and three are tax reduction and paying for their children’s education.

“Baby Boomers” have finally reached retirement age.  More than a quarter million turn 65 each month.  As a group they are a large and wealthy generation, but a vast number have not saved enough for a comfortable retirement.  Many are forced to continue to work to supplement Social Security income.  Their number one concern is the cost of health care.  Concerns two and three are protecting their assets and having enough income for retirement.  The three concerns for Baby Boomers are inter-connected.  For many Boomers, Medicare helps them with the costs associated with most medical issues.  However, as people live longer, there comes a time when they are unable to care for themselves and live independently.  Long-term-care insurance was once believed to be the answer but insurance companies found that costs were much greater than anticipated.  The result is that many insurers have stopped offering the policies and those remaining have hiked premiums beyond the ability of many to pay.  The cost of long term care is so high that many Boomers are afraid that their savings will soon be exhausted if they are forced into assisted living facilities or nursing homes.

Each generation has its own problems and at a time when the world has gotten much more complicated.  Getting experienced, personalized and holistic financial advice is more important than ever.

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