|
Retirement Withdrawal Risk
Inflation Risk
Longevity Risk
Zero Fed Funds?
Fed & Asset Prices
Dollar Vigilantes
Investment Markets
Bill Miller is Back?
Withdrawal
Risk
A major concern of many retirees is how much
income can be withdrawn from their IRA rollover after they retire without eroding principal. This is one
of the four main risks to retirees’ savings; it is known as withdrawal risk. When determining
the amount to withdraw, we want to keep several things in mind. First, inflation, over time, will eat into
your savings and income. Second, retirees, on average, will live a long time after they retire.
This all means that we will need to grow your savings and income to keep up with inflation.
Inflation Risk
Inflation, over the long term, can do serious damage to your income and standard of living. At
MaxOut Savings Advisors we think that inflation will continue to increase over the intermediate-term and long-term.
Let’s take a look at how a $50,000 income would fare under various inflation scenarios.
25 Year Inflation Adjusted Income
Inflation Rate
$50,000
0%
$30,477
2%
$23,800
3%
$18,756
4%
As we can see, a four percent inflation rate will
devastate your standard of living. This is why we must plan for an account to grow over the long term to
keep up with, or even outpace, the inflation rate.
Longevity
Risk
Over the last fifty years we have seen a remarkable
extension of life expectancy in the United States that has fundamentally changed how we manage investments for retirees.
In the past at retirement, the conventional wisdom was to invest in bonds because of the shorter life expectancy.
Today, things have changed for the better. The average male has a 50% chance of living to be 85
and a 25% chance of living beyond 92. For females, the news is even better with a 50% chance of living
to 88 and a 25% chance of living beyond 94. When it comes to income planning for married couples, the numbers
get interesting. For married couples, one of the spouses has a 50% chance of living to 92 and a 25% of
living to over the age of 97. If you are married, the odds are you will live longer. As
an investment manager, we are faced with providing income for what could be a period of over 32 years while still providing
some growth.
When it comes to income planning the trick is to balance your income withdrawal to achieve income and growth in your portfolio.
What we are looking to do is to achieve income and growth from the portfolio. Fidelity Investments
did a study of income withdrawal rates over time using different withdrawal rates. The hypothetical account
was weighted 50% stocks, 40% bonds and 10% short-term investments. The chart and table below show how long
the account lasted at various growth rates adjusted for a 5% withdrawal rate adjusted for inflation. The
accounts were started in 1964, before the bear market of the 1970s.
 The dark
red line marks a 5.93% growth rate coupled with a 5% withdrawal rate. If the rate of return of the investments
is worse, then you could run out of money sooner. The interesting thing is that this works with a 5.93%
rate of return. This shows why a conservatively actively managed portfolio will generally get you to a
solid retirement over the long term.
The following table gives
you an idea of how the withdrawal rate affects your portfolio and how long your money will last through retirement using a
standard 50% stock, 40% income and 10% cash model from 1972 to the 2000s.
Withdrawal Rate (inflation adjusted)
Year Money Runs Out
10%
8 years
8%
10 years
7%
14 years
6%
16 years
5%
27 years
4%
did not run out
Generally, at a 4.5-5.0%
inflation adjusted withdrawal rate, you will achieve a solid long term growth and income portfolio.
Any withdrawal rate over that is excessive and will lead to trouble over the long term, during which time you might
run out of money.
0% Fed Funds?
Over the last 18 months we have been through what is arguably the worse financial crisis
since the 1930s. We now have an unemployment rate of 9.8%, over 15% if you include those not looking for
a job or working part time. We have industrial production dropping at the quickest pace since World War
II. The US Treasury and the Federal Reserve have committed over $2 trillion to stabilize the banking system.
As we have written about for the last three years in the MaxOut Savings Report. Although the
economy has shown little signs of recovery, it has stabilized. The investment markets have moved up off
the March bottom, ahead of the economy. Investment markets usually move up six months ahead of an economic
recovery. But the extent of the move and valuations in the stock markets are telling us that something
is clearly happening beyond an expected economic recovery. Most of our work tells us that the economic
recovery will be tepid with continued high unemployment rates. When debt bubbles burst, past history tells
us that it takes years for the economy to return to normal. Why are the financial markets doing so well
when Main Street is clearly suffering?
Fed’s
Target Asset Prices
The answer is the Federal Reserve has engineered an environment of artificially low interest
rates. As can be seen from the chart below, the Federal Reserve has lowered the Fed Funds rate to .11%,
the lowest level in over fifty years (Fed Funds are the yields set by the Fed for very short term bank lend to each other).
With Fed Funds at .11%, CDs and money funds are paying very little and the Federal Reserve is forcing investors to
take more risk. The low short term rates also revalue most investments higher. What
the Federal Reserve is doing is manipulating investment asset prices higher with ultra low short term rates. What
the Fed is effectively doing is Targeting Asset Prices to help stabilize the economy. It is important to
keep in mind that this is an artificial environment and short term rates cannot stay this low forever.
 Dollar
Vigilantes
The record low Fed Funds rate coupled with runaway
government spending is resulting in the US dollar continuing to fall. We believe the dollar will continue
to hit new lows until the Federal Reserve gets serious about raising short term interest rates. If you
look at the chart above, at the center we can see where Fed Chairman Paul Volcker took Fed Funds to over 17% to crush inflation
in the early 1980s. This time, rather than inflation that will force the Fed’s hand, we believe it
will be the falling dollar. We wrote about this in the MaxOut Savings Report three years ago when we predicted
that the “dollar vigilantes” would give the Federal Reserve less room to maneuver. We believe
that the Federal Reserve does not have much room to maneuver over time to keep rates at zero because the dollar’s decline
will become disorderly; keep an eye on the dollar vigilantes.
The
zero Fed Funds policy that is causing the dollar to fall is also causing new bubbles in the stock and commodities markets
that could destabilize very quickly. We believe the best policy for the Federal Reserve would be a two
stage approach, normalize short term rates and then fight inflation. The first stage should have already
taken place. This stage would be that the depression is off the table and the Fed will normalize rates
at .75-1% over the next couple of months. The second stage would be to combat inflation and any move in
that direction would “not be for the foreseeable future”. This would allow for a smoother two
stage process. The way the Fed is going now rates could go from .11% to 3.5% or more within one year and
that will cause dislocations in the markets. At the present time, the Fed is caught between “we cannot
raise rates because of what happened in Japan” and a collapsing dollar. With the Federal Reserve buying US Government
debt the only thing that will flag concern will be the dollar. The dollar will force the Fed’s hand
in part because of out of control government spending in Washington.
ING Breakup
This week,
the European Commission forced the large European insurer, ING Group, to split up as compensation for the bailout it received.
The company will likely have to cut its over $2 trillion balance sheet in half. It will likely do
that by selling off its insurance arm and US banking operation to satisfy European regulators. Last year,
it received an almost $15 billion bailout and had over $50 billion in securities guarantees from the Dutch government to prevent
a failure. The ING situation bears watching because it could affect how US companies that have been bailed
out are treated. The question is whether this strategy will jump across the Atlantic and be used by the
government here to press the breakup of some of our large financial companies that have received government help.
The most notable banks that could be affected by the ING breakup are Citigroup and Bank of America.
Investment Markets
With oil prices moving over $80 per barrel, this could further slow parts of the economy and put additional stress
on the US consumer. We do not expect oil prices to move much above the $80 level over the near term future
as inventories are high and it could materially hurt consumer spending. Over the mid to long term, oil
could surge higher if the dollar continues to fall. Over the long term, energy is the place to be as the
dollar continues to fall, but we would be cautious in the near term.
According to John Hussman manager of the Hussman Funds, the stock market has “never been this (intermediate-term)
overbought”. He further states that markets this overbought rarely give investors much room to get
out once they start going down. Overall, we believe that many of the investment markets are overvalued
in here. That includes stocks as well as some bond asset classes as well. We continue
to like large cap blue chip companies paying a good dividend. As we have written about these companies
have great balance sheets and tremendous growth overseas. We believe that cash for part of your portfolio
is a good place to be so you can take advantage of corrections in the investment markets that could be quite steep.
In the bond markets, we believe that high yield bonds are overvalued, as
are long-term mortgage bonds. We would be careful of 30 year GNMA and FNMA mortgages and long term bonds
because of future inflation. At the present time, with the Federal Reserve buying thirty year mortgages
to support the housing market, it is a good time to sell them because we have a subsidized bid in them from the Fed.
With the Federal Reserve targeting asset prices and a declining dollar, gold is still in a long term bull market that
can be bought on a correction.
Bill Miller
is Back?
A couple of weeks ago Barron’s magazine
ran the cover story “It’s Miller Time” about famed value investor Bill Miller, manager of the Value Trust
(LMVTX). Bill was back on top with an outstanding 37.5% YTD return for 2009 beating the S&P 500 and
many competitors. We should take a closer look at the performance and how the fund has done in this downturn.
Taking a look at the performance of the fund the last two
years, we have concerns. If we assume a $1,000,000 account at the beginning of 2008 how has it done since
then?
January 2008
$1,000,000
2008 return (loss)
(55%)
Dec. 31 2008
$450,000
2009 YTD
37.5%
Value YTD
$618,750
Looking at the returns, the account is
still down 38.1% since the beginning of 2008 after a 37.5% return so far this year. This gives us an idea
of the type of losses some fund managers have suffered since 2008, even after great returns this year. Moral
of the story: beware of funds trumpeting performance this year and ignoring last year’s results.
Do you have an account at Fidelity?
Do you already have an account at Fidelity Investments? Why not let
the MaxOut Savings Advisors Team actively manage the assets for you at Fidelity? We will make the investment
decisions and you can sit back and relax. We use the same value based investment strategies we talk about
on the MaxOut Savings Show. In most cases you can sign a simple form and we can use your same Fidelity
account to get you started.
Considering
an IRA Rollover?
If you are retiring
soon or considering an IRA rollover, let the MaxOut Savings Advisors Team handle your IRA rollover. We
will sit down with you and go over your financial situation and needs and come up with a plan. We will
show you how we manage accounts using our value analysis strategy to grow your investments and reduce risk.
MaxOut Savings Advisors: Actively Managing Risk
In these volatile times, investing your retirement funds can be difficult and time consuming.
Is your advisor looking at risk and actively managing your retirement? Hiring the MaxOut Savings Advisors team to manage
your money or IRA rollover is a great first step. MaxOut Savings Advisors is an SEC registered, fee-only
investment advisor based in Houston, Texas. Ted Geoca has over twenty year’s investment experience
managing clients’ retirement assets. We invest in stocks, bonds and mutual funds for our clients using a value analysis
strategy that we have developed over the last twenty years. We look at risk as well as return to
actively manage your investments though today’s changing markets. We use Fidelity
Investments as the custodian for our clients’ assets. If you would like MaxOut Savings Advisors to manage your retirement
investments using our value methodology, I would be happy to meet with you. To schedule an appointment
please give us a call at 713-627-0400 or email me at ted@maxoutsavings.com.
Remember Save Aggressively and Invest Conservatively!
Ted
K Geoca
Doug Saam Kellan
Caldwell
President
MaxOut
Savings Advisors, LLC
Houston, Texas
ted@maxoutsavings.com
713-627-0400
Remember to catch:
The MaxOut Savings Show with Ted Geoca on Saturday at 11:00am on KNTH 1070AM!
The MaxOut Savings Show and Report does not give out financial advice. Any recommendation may not be suitable for all investors. Moreover, although information contained
herein is believed to be reliable, its accuracy cannot be guaranteed. MaxOut Savings Advisors, LLC may
or may not have positions mentioned herein. MaxOut Savings is a Registered Investment Advisor registered with the SEC. You
should always make investment decisions based on your own financial situation.
To sign up a friend for our free MaxOut Savings Report
or to remove your name off the MaxOut Savings Report list, email ted@maxoutsavings.com.
|
