Investing in Retirement

Sarah Berndt

In my profession as a portfolio manager, it is not uncommon to have some clients preparing for retirement, and one of the most important aspect of retirement planning is how investments are allocated to stocks, bonds, and cash.  You may have heard various “rules of thumb” regarding this topic, but they, in my opinion, have only minimal value when it comes to each individual’s unique planning needs. I recently ran across this column by Christine Benz of Morningstar that concisely explains the process we use and why one retiree’s allocation will vary from another.  What is presented here is an excerpt from a September commentary.
 
“Off-the-shelf asset allocation guidance doesn't vary significantly for people who are still accumulating assets for retirement. . . stock-heavy at the outset and well into middle age, transitioning to more bonds and cash as retirement approaches.
 
Closing in on retirement, however, one-size-fits-all recommendations won't cut it. Some retirees should have 50% (or even less) of their portfolios in stocks, while others should hold portfolios that are much more aggressive.
 
Why such large variations? The key one is that different retirees will make different cash-flow demands on their portfolios. A retiree who's lucky enough to have a pension that supplies most of her living expenses can reasonably park a hefty share of her portfolio in stocks, holding just enough in liquid assets to cover unanticipated expenses or periodic splurges.
 
A retiree with a shorter time horizon who is forecasting spending his portfolio during his lifetime, meanwhile, will need to maintain more in liquid assets and less-volatile asset classes like bonds.  By venturing too far out on the risk spectrum, he runs the risk of needing to pull his money out at a time when stocks or other riskier asset classes are in a trough.
 
Guided by this concept, retirees can use their anticipated cash-flow needs to develop a customized asset allocation framework. Money they expect to need within the next few years should go into the only asset class with a guarantee of safety over such a short time horizon: cash. Assets for the middle years of retirement can go into high-quality bonds, which offer higher return potential than cash over a two- to 10-year time horizon with some--but not extreme--fluctuations. Finally, assets that won't be tapped for another decade can go into stocks, which are unreliable over time horizons of fewer than 10 years but typically land in positive territory if you're able to hang onto them for at least a decade.” 
 
By Christine Benz | 09-19-16 | 06:00 AM | 
Note: This article is part of Morningstar's September 2016 Retirement Matters Week special report.

Disclosures:
This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein. Some information in this presentation is gleaned from third party sources, and while believed to be reliable, is not independently verified. A317

How to Live Rich

by David Munn, CFP

A few years ago a blog post by Todd Henderson, a corporate law professor at the University of Chicago and a neighbor of President Obama, had many people questioning, “What is rich?”.

In response to Obama’s plans to raise taxes for those making over $250,000, Henderson, who admits to being in that group, wrote, “A quick look at our family budget, which I will gladly share with the White House, will show him that, like many Americans, we are just getting by despite seeming to be rich. We aren’t.”

As a financial planner who has worked with quite a few individuals in that tax bracket, I don’t have any doubt Henderson is telling the truth.  In fact, I’ve seen couples in their 50’s earning more than $400,000 with cash flow problems.  And we’ve all heard of millionaire celebrities who ultimately ended up broke.

Most people, at one point or another, struggle financially.  They deal with constant anxiety and frequently no end is in sight. There never seems to be enough money to satisfy all our needs and desires.  And so often it seems if we could just have a little bit more income, then we would be comfortable. 

But that’s not always the case.  Regardless of your income, more than likely there are people earning less than you who are more comfortable financially and people earning more than you who are less comfortable.  If you want to break out of your financial funk, you should forget about income and focus instead on factors that actually make a difference.

First, change your mindset by considering the following:  Recognize that money is ruling your life and that’s not the way it should be or needs to be.  Stop worrying about keeping up with your neighbors or appearing to be wealthy and start planning and prioritizing.  What are your goals? What are your values?  Specifically identify what you want to achieve and the life you want to live.  Then figure out what it will take to get there.

When you have a plan and appropriate advisors in place, you can stop making bad financial decisions.  Your spending decisions will most likely align with your objectives

Secondly, get out of debt.  The biggest obstacles I see between individuals and the financial freedom they crave are swollen mortgages, never-ending car loans and credit cards.  All three, with limited exceptions, are the result of attempting to live beyond one’s means.  And more income would not solve the problem, because most probably would use it to buy a bigger house, nicer car, or start shopping for real estate on the coast.  These are lifestyle decisions, but rather than resulting in happiness, they typically end up draining your life and style because of the anxiety and oppression they bring.  With large debt obligations, your options are limited.

There is a perception that it is better to purchase a dream home or car early in life--financed with a mound of debt—in order to start building equity.  But the numbers (which you may have heard don’t lie) tell a different story.  Financially—and emotionally, in most cases— the best route to purchasing your dream item is to start small and build equity quickly either by paying down debt or investing, then upgrading when you are in a more comfortable situation.  This works because of the third key:

Strive to own the company, not the product; be the lender, not the borrower.  There is a verse in the book of Proverbs that says, “Just as the rich rule over the poor, so the borrower is servant to the lender.”  Unfortunately, far too many people have learned this lesson through foreclosure or bankruptcy.  Borrowing is not a position of power and it’s generally not an effective way to build wealth either.  Why is the bank lending you money in the first place?  Because they are profiting off you. 

Investing, either through buying companies (stock) or lending money (bonds), is simply making your money work for you.  The alternative is you continue to work for your money and your money works for someone else. 

Disclosures:This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.These materials are not intended as any form of substitute for individualized investment advice.The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.Munn Wealth Management can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein. These materials contain references to hypothetical case studies.These are presented for the purpose of demonstrating a concept or idea, and not intended to be interpreted as representing any specific person.Such representations are not intended to substitute for individual investment advice, even if the case study appears to have similar characteristics.1323DDJ

Saving Taxes with Qualified Charitable Distributions

Drew Steinman, CPA

If you are age 70.5 or older, and subject to annual Required Minimum Distributions (RMD) from an IRA, a qualified Charitable Distribution (QCD) may be a valuable tax-saving strategy for you to consider.

A QCD is a tax-free distribution from an IRA directly to a qualified charitable organization. QCDs also count towards an individual’s annual RMD. With the passage of the Protecting Americans from Tax Hikes (PATH) Act of 2015, Congress made permanent this ability to make QCDs.
 

Requirements for Qualified Charitable Distributions:

1. Individual must be 70 ½ or order on the date of the distribution

2. Limit of $100,000 per individual per year

3. Must go to a public charity (not a private foundation or donor-advised fund)

4. Distribution must come from an Individual IRA (not a SEP, Simple IRA, or employer retirement plan)

5. Check must be made payable directly to the qualifying organization

Rather than making a taxable distribution followed by a charitable contribution, a QCD allows the distributions to go directly to the charity (thus no income and no deduction). Although on the surface this may seem to be the same, a QCD may be more beneficial than a typical distribution followed by a charitable contribution. A typical charitable distribution reduces taxable income, however it does not reduce Adjusted Gross Income on which many taxes and Social Security calculations are based. With a QCD, no income is counted at all.
 

Potential Benefits of a QCD:

1. Reduces taxes for individuals who take the standard deduction (not enough itemized deductions to benefit from charitable contributions).

2. Reduces taxes on Social Security income.

3. Helps avoid the Alternative Minimum Tax (AMT).

4. Reduces 3.8% Medicare surtax for high income earners.

5. Reduces Medicare Part B surcharge.

6. State of Ohio Income Tax benefit since Ohio does not recognize charitable deductions.
 

As you can see there are many benefits to using a Qualified Charitable Distribution with minimal tax disadvantages. As a helpful hint, a QCD will need to be received by the qualifying charity in the year it was distributed so don’t want until the very end of the year. Talk to your advisor about whether a QCD is right for your specific financial situation.

A304

Selfies and Investing

BY Darren Munn, CFA

I recently came across a couple news items that highlight a common issue – most people in society have a false perception of risk which causes us to behave in ways that are actually riskier.

For instance, it is safer to fly than drive, yet many people are afraid of flying and choose driving over flying.

“The chance of a passenger dying on any given flight with one of the world’s major airlines is just 1 in 4.7 million.  The chance of dying in a traffic accident, however, is 1 in 14,000. (The Week – April 11, 2015)

Many people are also afraid of sharks and refuse to swim in the ocean, yet it is safer than taking a selfie.

“A 66-year-old Japanese tourist recently died after falling down stairs while attempting to take a selfie at the Taj Mahal.  The incident raises they selfie-related death toll this year to 12.  To put that in perspective, there have been just six fatal shark attacks so far this year.  (Mashable – September 21, 2015)

We see similar behaviors when it comes to investing.  Many investors, by seeking to avoid risk, actually take on greater risk and put themselves in harm’s way.  Trying to avoid volatility often leads to investors failing to meet their objectives. 

Darren Munn

A291

3rd Quarter Market Commentary

BY DARREN MUNN, CHIEF INVESTMENT OFFICER

Brexit, Zika, Election, Oh My!

By Darren Munn, CFA

This quarter is a perfect example of how the market, and society in general, jumps from one fear to the next.  The vast majority of the time, the fears come and go with little lasting effect.  The end of the 2nd quarter ended with a bout of volatility over Brexit fears.  As the third quarter started in July, the market bounced right back and now Brexit is hardly mentioned anymore.  Then, with the Olympics in August, the Zika virus became a hot topic with fears of worldwide outbreaks.  Yet not a single athlete contracted the virus.  Now, attention has turned to the election and the fears of what will happen when the results come in.  Yet the market continues to be resilient in the face of the fears.  As the old adage goes, “the market climbs a wall of worry.”  

Many clients are asking about the impact of the election.  In our last letter, we discussed how the market hates uncertainty.  In the short term, until there is a certain and clear winner, both for president and congress, the market will probably bounce around with little progress.  Once there is certainty about our next slate of leaders, I believe the market will likely celebrate with some small gains, regardless of who is elected.  

Longer term, I don’t believe the President has as much impact as many believe, but there is certainly impact.  The result of the election will affect our expectations for future economic growth, which will influence how the markets do over the next 5-10 years.  But this impact will likely only be marginal.

The third quarter was the best of the year for stocks and the worst for bonds – both of which have done reasonably well for the year.  For both stocks and bonds, nearly all of the return for the third quarter came in July, with essentially flat markets in August and September.  

Positives

• Employment continued to be steady with the unemployment rate at 4.9% and job openings increased to 5.8 million.
• Low oil & gas prices continue to save money for consumers.
• Oil & gas rig counts have continued increasing over the last few months, which is helping to stabilize the energy sector of the economy.
• Housing has continued moderate--but choppy--growth.  Low interest rates have helped keep prices affordable.

Challenges & Risks

• Economic growth has been very sluggish: Q1 = .8%, Q2 = 1.4%
• Oil price declines are still working through the system and we are seeing the expected defaults from many energy companies.  
• Oil dipped during the quarter, but came right back to the $50 range.  So we got to enjoy some nice gas prices a little bit longer.  But the end of sub-$2.00 gas is likely upon us.
• Interest rates – the Federal Reserve still did not raise interest rates in September and now only expects one increase for the year.  The uncertainly has affected the markets and they seem to have painted themselves into a corner for a December rate hike just like last year.
• Government regulation is a huge drag.  Health care costs are continuing to rise significantly & government interference in several areas (finance, education, energy) continue to limit economic growth.

Frankly, we are pleasantly surprised with how well the market has done this year considering the weak economic growth and uncertainty surrounding the election.  Times like these reinforce the proven wisdom of diversification and not trying to time or predict the market.

WARNING: DANGEROUS PROMISES AHEAD

Josh Mudse, CFP

If (the Presidential candidate I do not agree with) wins in November, I PROMISE that I am moving to (Canada, Australia, Belize, etc.). If they win, our country is done and I will not stay here to watch it crumble. 

By now, you have probably heard a few celebrities, a handful of political commentators and possibly a friend or family member express sentiment similar to the statement above. Common perception is that the 2016 Presidential Campaign is the most contentious of all time, a result of increased polarization and idealism over several decades. With the election cycle entering the final weeks, the rhetoric is heating up, personal insults and negative ads are ramping up, and voter fatigue could not be any higher. 

With all of the attention focused on the campaign, it is perfectly normal to have concerns about how the economy and stock markets will react to a new President. The Vanguard Group recently published results of their study on the effect elections have on both short term and long term market performance. According to the data they analyzed, average daily market volatility is about 10 times higher in the 100 days leading into the election than the 100 days immediately after a U.S. Presidential election1. The following chart suggests that within the first 6 months following an election, volatility returns to normal levels.

You might be thinking that the election of 2016 is somehow unique; that this election season has been different somehow. Market pundits would certainly have you believe that markets have been unusually volatile. The exact opposite has been the reality. We can use the CBOE Volatility Index (VIX) as a measure of market volatility. For the three months ending September 30, only 3 trading days saw volatility exceed the average volatility for the last year2.

We work with our clients to develop a comprehensive financial plan to meet both their short term needs and long term desired outcomes. That plan includes an investment strategy built specifically to meet those long term goals. According to the same Vanguard Group study, after taking volatility into account, average market returns have been identical under Democrat and Republican Presidents.  

We believe that economies organized under capitalism find ways to grow over the long term. Companies have a remarkable ability to adjust and thrive to new laws, regulations, and changing economic conditions. A new President is constrained by the role of Congress. All campaign promises have to be legislated through the 535 elected members that represent a wide range of views and priorities.

Do you need an investment game plan based on the results of the election? In our opinion, no. We prefer to focus time and energy to the decisions that our clients can control. Decisions about asset allocation, finding companies that have long term records of generating free cash flow, looking for opportunities to reduce taxes, and implementing strategies to maximize the value and impact of their charitable giving.  

Sources:

1. Election: Markets are nonpartisan long term; September 23, 2016; vanguard.com
2. Google Finance   

Disclosures:

All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future results. Diversification does not ensure a profit or protect against a loss.This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Munn Wealth Management can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein. Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Munn Wealth Management.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information.  1323DAG

Understanding Risk

JOSH MUDSE, CFP

In the context of your investment portfolio, how do you define risk? For new investors, the answer usually involves the potential to lose everything, equating investing to some form of a casino game. Even though it is theoretically possible to lose all of the value in a portfolio, using the basic investing technique of diversification greatly reduces the possibility that your entire investment portfolio will drop to a zero value. For more seasoned investors, the definition of risk begins to form around volatility, or the range that their portfolio moves both to the upside during market growth, and to the downside during contractions. Market events such as “Brexit”, the tech bubble bursting and the Great Recession of 2008/09 provide opportunities to re-evaluate the risk in our portfolio. 

Traditionally, investment managers start and end the discussion about risk with some form of a Risk Tolerance Questionnaire, designed to quantify the amount of volatility that the investor is willing to accept in pursuit of long term growth. The results of that profile determine the long range asset allocation and the manager proceeds to invest your portfolio. Risk Tolerance is what I call your stomach number; how much downside portfolio volatility you can endure before your stomach attempts a double-back somersault. It is at those moments when good decision making is abandoned and many investors bail on their long term investment strategy. We think this simplified approach to risk leaves out a very important factor – Risk Required.

Risk Required is a calculation for how much market risk you need to take, or how much volatility you may need to assume in order for your portfolio to provide for your desired outcomes. Especially applicable to risk-averse investors, a portfolio that is designed from the start to underperform inflation can actually add risk to the portfolio, reducing your spending power over time. Determining the Risk Required for your situation is part of a comprehensive financial plan. We prefer to create an investment strategy within the context of your complete financial situation, including:

• Identifying the cash flow you are going to need to support your desired outcomes
• The timing of cash inflows and outflows
• How you plan on paying for medical expenses including long term care 
• What you want to leave behind in your estate for family and charity
• What type of accounts you own (taxable brokerage, deferred IRAs, annuities, stock options, etc.) 
• Your current and expected future tax situation

Because all investments carry some form of risk, managing risk involves more than planning for market volatility. Investors can help manage the risk of missing long term desired outcomes with comprehensive financial planning, which includes a portfolio constructed with a reasoned asset allocation. While no asset allocation is guaranteed to produce any specific rate of return, the allocation that best fits your situation is a combination of your Risk Tolerance and your Risk Required.     1323AVZ