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Planning for Aging

As of 2019, the population of those 65 and older reached 54.1 million or 16% of the population.  By 2040 this number will be closer to 22%.  Healthier lifestyles and better medical care means that people will live longer.  Even though we have better medical treatments, the mind/brain is one of the fields of medicine in which we still have a lot of work to do.  

In conjunction with establishing an estate plan which includes a power of attorney, we recommend that you add a trusted contact(s) on each of your accounts.  This will allow the trusted contact to communicate with the custodian (Schwab), if/when the account holder becomes unable to handle the account due to mental and/or physical decline.  In a study done by Schwab, people's cognitive decision making tends to peak at age 53 then gradually declines. As people reach their 70-80’s, they lose the capacity to process new information. Once someone reaches their 80’s, about half of the population has a medical diagnosis of substantial cognitive decline. These are all unfortunate realities of getting older, and reasons why you should have trusted contacts attached to your accounts.

Listed below are instructions for establishing or amending your trusted contacts and beneficiary designations for those with online access at Charles Schwab and Company.  If you do not have online access you can contact us to provide the necessary forms for each. 

Home Page (Schwab.com) after login

-> My Profile (top right, next to search bar, drop down menu)

-> Trusted contact (second tab, middle of page) 

-> Input information of your Trusted Contact

-> Save

Home Page (Schwab.com) after login

-> My Profile (top right, next to search bar, drop down menu)

-> Beneficiaries (third tab, middle of page, next to Trusted Contact)

-> Input/check information of your Beneficiaries

-> Save

If you have any issues or questions, please contact me at (847) 991-6050 or email me at This email address is being protected from spambots. You need JavaScript enabled to view it..

Volatility and Remaining Calm

Recent market volatility has shattered the steady march upwards of the last year or so, but it should be put into a longer term perspective.  Since 2008 the stock market has had days in which it closed down at least 1% a total of 448 times for an average of 35 times per year.  How many of those declines do you really remember? 

Once an investor realizes that volatility is normal, then they start to recognize that investing is a battle between your present self and future self.  Investors tend to care more about current changes in wealth (present self) than their actual level of wealth (future self). A portfolio of $1mm feels much different depending on whether the starting point was $2mm or $500,000.  Yet the absolute dollar amount of $1mm is exactly the same.   Whose interests are more important to you - your current self or future self?  Does the recent change in the value of your portfolio matter to you more than its absolute value, and its ability to generate income and protect your purchasing power from inflation?   

The financial phase of life you are in will influence your answers to these questions.  If you have decades of investing in front of you, then your future self will likely be disappointed if you make rash decisions that alter the absolute future value of your portfolio.  On the other hand, if you are near or in retirement, then your future self may be happy that you avoided being greedy and used the profits over the last few years to prepare for retirement or fund your lifestyle.  Take a look at our sequence of return blog to better understand the financial impacts for those in the accumulation phase versus the distribution phase. 

At the end of the day, there is a winner and loser with every investment decision. Are you focusing on making the winner your current self or future self?  Reframing your thinking to better align your investment portfolio with your goals is an important part of a successful long-term plan. 

Longevity Risk

With health and well-being at the forefront of everyone’s mind, I believe it is a good time to have a discussion about longevity and the risks it presents to retirees and those close to retirement. This topic has also been discussed in a previous blog about risks retirees face linked HERE.

With medical technology improving at an astounding rate, people who retire at 65 could be looking at 35 years in retirement.  With this longer expected lifetime, the question for clients becomes, “Can our money last that long”.  This leads to the new idea in the retirement planning world of Longevity Risk Aversion, or the fear someone has about outliving their assets.  Rather than using the average life expectancy, which 50% of the population will outlive, we use a life expectancy of 97 of which only about 10% of people will live beyond. Going forward we might have to increase our life expectancy assumptions so that we can make sure our clients will have enough money to last through their retirement given that longevity will increase over time.  

Longevity is dependent on an individuals’ habits, health, family health history, and other socioeconomic characteristics that correlate with mortality – it is up to each person, in consultation with their financial professional, to include these assumptions in their retirement plan.  For example, if a client has poor health and has family health issues, they might want to front load their distributions to enjoy the rewards of their years of work while they can.  While someone who is healthy and had parents who lived well past the averages might want to back load distributions to make sure they do not run out of money while still alive.  Below are example charts of life expectancy.  If you would like to see your personal longevity illustration, please visit LongevityIllustrator.org

American Academy of Actuaries and Society of Actuaries, Actuaries Longevity Illustrator, http://www.longevityillustrator.org/, (accessed Dec., 4, 2021).

Retirement Withdrawals

The old rule of thumb for safe withdrawal rates from retirement accounts of 4% may not apply in coming decades.  With today’s low bond yields and above-average equity valuations a withdrawal rate closer to 3% may be more appropriate.  Additionally, determining your tolerance for variations in your retirement cash flows should be considered.

When thinking about withdrawals it can be helpful to view it on a spectrum. On one end is a static withdrawal system. Such a system assumes a retiree withdraws a percentage (3 or 4%) in year one of retirement then inflation-adjusts the dollar amount in each subsequent year. For example, if a portfolio is valued at $1 million a retiree would withdraw $40,000 in year one. If inflation was then 2%, the withdrawal in year two would be $40,800 ($40,000 * 1.02). This method delivers a stable inflation-adjusted cash flow.

On the other end would be a fixed percentage system. In this system a retiree would set an initial withdrawal rate and keep the percentage steady. Assuming a 4% withdrawal rate, a $1 million portfolio would yield a distribution of $40,000. If there was a decline in the portfolio value due to a market downturn of 20% in year 2, the withdrawal would need to be reduced to $32,000.  Conversely, if the portfolio had grown 20% the withdrawal would be $48,000. 

There are positives and negatives with each of these systems. The static withdrawal approach has the advantage of simulating a paycheck. At the same time, the static method runs the risk of prematurely depleting a portfolio if there happens to be a weak market near the beginning of retirement. This is called sequence of return risk.  The fixed percentage system addresses the sustainability issue, but cash flows are much more variable year to year. This means in a “lean” year with bad market conditions a retiree might not be able to withdraw enough to fully cover their expenses. 

The good news is that there are a couple of options that sit in the middle ground. One is a method called Required Minimum Distributions (RMD) which means each year a retiree takes a slightly larger percentage of their portfolio (due to reduced life expectancy), based on the previous year’s ending balance. RMD’s begin at age 72.  Another method uses fixed annual percentage withdrawals as a starting point and applies a “floor” and “ceiling”. This means in a bad year a retiree would slightly reduce withdrawals from the base percentage and in good years they would slightly increase withdrawals (dynamic spending strategy).  Small adjustments to retirement spending, guided by actual market conditions, can go a long way toward boosting the probability of long-term retirement success.

Each retiree should consider their tolerance for the risk of depleting their assets prematurely and the variability of cash flows as they design a plan that is customized for their lives.  Issues that should be considered are the size of their retirement assets, other sources of income such as Social Security or pensions, and willingness to adjust your lifestyle each year.

Investor Quotes

Being a successful investor means keeping your emotions in check and thinking long-term. Here are quotes from some of the greatest investment minds of all time.

 

“The investor’s chief problem – and his worst enemy – is likely to be himself. In the end, how your investments behave is much less important than how you behave.”

Benjamin Graham, Author, professor and mentor of Warren Buffett

“Your success in investing will depend in part on your character and guts, and, in part, on your ability to realize, at the height of ebullience and the depth of despair alike, that this too, shall pass.”

Jack Bogle, Founder Vanguard

“The function of economic forecasting is to make astrology look respectable.”

John Kenneth Galbraith, Harvard professor of economics

“The idea that a bell rings to signal when to get into or out of the stock market is simply not credible. After nearly fifty years in this business, I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has.”

Jack Bogle, Founder Vanguard family of funds

“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”

Peter Lynch, Former manager of the Fidelity Magellan fund

“The stock market is a device to transfer money from the impatient to the patient.”

Warren Buffett, Investor

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”

“The intelligent investor is a realist who sells to optimists and buys from pessimists.”

Benjamin Graham, Author, professor and mentor of Warren Buffett

“You make most of your money in a bear market, you just don’t realize it at the time.”

Shelby Cullom Davis, Investor

 

Following the advice of great investors will lead to success as an investor if you can manage your behavior and stay focused on your long-term goals.

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