Saving for a comfortable retirement is what motivates many people to start their wealth management planning regimen. Whether you’ve been planning for retirement since you were 25 or 50, saving is only half the battle; after retirement, the real work begins. With your primary source of income gone, you have to figure out how to make your retirement fund last. That’s not as easy as it sounds.
In 2008, at the beginning of the financial crisis, Metropolitan Life conducted a survey asking people who were about to retire on their 401(k) plans what they thought a safe withdrawal amount would be. The answer, on average, was about 10% annually.
That number might have made sense years ago, when interest rates were high and retirees could bank on making money on fixed-income investments like Treasuries. But today, 30-year Treasuries are paying just 2.8% annually, and 10-year Treasuries offer a lowly 1.66%.
Interestingly, not even the financial crisis got people thinking more seriously about retirement withdrawal rates. In a 2011 Fidelity Investments survey, the mean annual withdrawal rate came in at a solid 8.4%; but the answers were all over the place, ranging from a conservative one percent to a no-holds-barred 25%.
In lieu of a one-percent, 10%, or 25% annual withdrawal rate, many advisors have been telling their clients that four percent is a safer number (adjusted for inflation). But is that sustainable? One study showed that an inflation-adjusted withdrawal rate of more than five percent significantly increased one’s risk of wiping out their retirement savings.
The following chart shows how long a hypothetical $500,000 retirement portfolio (containing 50% stocks, 40% … Read More
When it comes to investing, our retirement planning rests in our ability to make sound economic judgments based on mathematically quantifiable numbers. We weigh the financial risks and rewards, and then make our decision.
Fortunately, or perhaps unfortunately, we are a little more complex when it comes to making decisions. For one thing, our emotions, developed after a lifetime of experiences, play a large part in how we act.
This fight-or-flight tendency helps us make good (some might argue “safe”) decisions; it prevents us from swimming with sharks or walking barefoot on lava flows. Granted, some aspects of nature can be somewhat predictable, but interacting with unpredictable investors on Wall Street is entirely different.
Despite our best intentions of trying to make rational decisions on something as black-and-white as finances and quarterly results, our plans are complicated by having to work with others who are attempting to interpret the same information—and coming out with different conclusions.
Too much avoidance of risk and/or fear can get in the way of making some really good investing decisions. We distrust our own conclusions and end up following the herd to financial mediocrity, or even ruin.
By better understanding who we are, where we come from, and what our fears and risk tolerances are, the better we can be at creating a solid, well-diversified retirement portfolio.
For example, at the most basic level, we know that the better we feel, the more apt we are to rush into something—and possibly make mistakes. A large number of optimistic investors—those who didn’t think revenues or earnings were important—saw their retirement fund take a beating at the … Read More
More proof has been released that suggests some retirees are better off handling their own wealth management strategies. According to a recent survey, individual investors who paid a mutual fund manager over the last decade would have done better by taking the reins themselves and investing in a passive index fund at a much lower cost. (Source: Pratt, J., “Study: Only 24% of Active Mutual Fund Managers Outperform the Market Index,” NerdWallet, March 27, 2013.)
The survey examined more than 24,000 mutual funds and exchange-traded funds (ETFs) available to U.S. investors for a 10-year period ended December 31, 2012. At the end of 2012, investors had invested more than $7.0 trillion in the 23,000-plus actively managed mutual funds and ETFs. Investors placed just $2.5 trillion in passive funds.
Of those who paid to have their funds managed, only 24% of active fund managers beat the market over the past 10 years. During that time frame, actively managed mutual funds returned just 6.5%, while the passively managed index products averaged 7.3%.
The return statistics for actively managed funds is probably even lower than the reported 6.5%, because the study does not include information on those funds that closed during the 10-year period.
Still, is it really possible that 76% of active fund managers wasted their money getting their Master of Business Administration (MBA) degrees, yet they are no better at finding winning indices than retail investors? This is where it gets fun. There’s even more compelling evidence to consider if you’re waffling between using an actively managed index and doing your own due diligence.
It turns out that a large number … Read More
When it comes to the stock market, there are three ways a profitable, publicly traded company can reward its investors: 1) pay a dividend; 2) initiate a share buyback plan; or 3) invest it back into the company. All three of these are aimed at building shareholder wealth, though some are more popular than others.
Investors looking for capital gains and an income stream in today’s economic climate can’t go wrong with fundamentally strong companies with a good history of paying out quarterly or monthly dividends.
In light of low interest rates, many dividend-yielding stocks outperform the historical avenues for investment income. Most banks begrudgingly doll out just 0.5% interest, while 30-year Treasuries come in near a mere three percent.
Investors hoping to maintain a comfortable retirement need to find better income streams—and for many, it’s in high-yield dividend stocks. Consumer goods company Altria Group Inc.’s (NYSE/MO) share price is up almost 200% since the beginning of 2009, and it currently provides an annual dividend of 5.1%. And business equipment provider Pitney Bowes Inc. (NYSE/PBI) provides an annual dividend of 10.1% and is up 35.5% since the beginning of 2013.
Getting quarterly checks from a company for simply being an investor is a great way to generate additional income. But are there any downsides? Cutting or eliminating a dividend can significantly impact a company’s share price. Paying out dividends decreases the amount of money a company has, meaning it may not be able to operate as efficiently if an unforeseen situation arises—like one did in 2008, when the markets crashed. Companies that didn’t have enough cash to operate … Read More
From home repairs, to fixing cars, to crafts, publishing, and decorating—in a do-it-yourself culture, nothing is out of bounds. Thanks to low interest rates and underperforming assets with terrible returns, many who are on the cusp of retirement are looking after their own retirement plans in an effort to boost their retirement income. Meanwhile, those already in retirement are looking for ways to sustain their savings.
Self-directed retirement investing is a great way to manage a retirement nest-egg. And there is a wide array of resources and tools available to help retirees going it alone to make informed decisions, including: online calculators (which help determine how much you need to save for retirement), articles, webinars (instructional seminars conducted online), and online videos.
While the Internet is the easiest place to turn to for self-directed wealth management and retirement planning advice, you have to be discerning. Making the wrong decisions can be costly, and it could significantly undermine how comfortably you enjoy retirement.
What follows are two popular wealth management retirement strategies that are commonly offered to those entering their golden years—but that investors need to seriously reconsider.
1. Postpone Retirement to Increase Savings
Whether you’re retired or near retirement, your time is still worth something. You just have to decide how financially set you are and what your time in retirement is actually worth in dollars and cents.
A lot of people nearing retirement are at the peak of their earnings potential. And in some cases, they may not want to quit—even if they are in their late 60s and financially prepared for retirement. The reason many want to … Read More