Tag: Andrey Dashkov

Afraid Your Money Will Vanish before You Do?

By Andrey Dashkov

Unlike Jack Nicholson’s character in A Few Good Men, we trust that you can handle the truth. No matter your age, securing a comfortable retirement is a huge concern. Folks want the whole truth about their financial outlook, but straight answers are hard to come by.

Both sides of the mainstream media habitually present opinion-tainted partial facts. Case in point: the unemployment numbers announced earlier this month. One side is cheering because unemployment dropped to a six-year low, while the other side is calling it pure fraud.

I found author and libertarian-about-town Wayne Root’s remarks in a recent article for The Blaze particularly telling:

The middle class isn’t getting richer, it’s getting poorer…

The only people being hired are your grandparents. 230,000 of the new jobs went to those in the 55-to-69-year-old age group. In the prime working age group of 24 to 54 years old, 10,000 jobs were lost…

It means grandma and grandpa are desperate and willing to take grandson’s low wage job to survive until Social Security kicks in. The US workforce is now the oldest in history. And if grandpa has to work (out of desperation) until the day he dies, there will never be any decent jobs for the grandkids.

Here’s the part Root gets wrong: Baby boomers are not working until Social Security kicks in. They’re working well past that point, because they feel they must. Smart boomers know they can’t afford to wait until robust interest rates return; they’re taking action to protect themselves now, lest their circumstances become truly dire.

You’re 65—Now What?

The Employee Benefit Research Institute surveys workers each year concerning their retirement confidence. Despite an uptrend, the latest report shows that 82% of workers feel less than “very confident” about having enough money to retire comfortably.

With that statistic in mind, we looked at three different 40-year retirement scenarios. Note that the numbers and charts in this overview are meant to illustrate several scenarios, not provide individual guidance. Every person’s situation differs in terms of taxes, time horizons, and other parameters, and we encourage you to work with a financial planner to manage your savings.

The data exclude other sources of retirement income you may have, such as Social Security or a pension. All of the amounts, including annuity incomes, are pre-tax.

• Scenario 1. At age 65, you decide to retire with $500,000 in personal savings. You anticipate your expenses will rise approximately 3% annually. Thus, with each subsequent year, you will need to withdraw 3% more than the previous year. You estimate that your savings will grow by 5% annually. You are planning for a 40-year retirement, meaning your savings must last until age 105.How much money can you withdraw each year, using those assumptions?
• Scenario 2. At age 65 you have the same $500,000 in personal savings that you did in Scenario 1; however, you take $100,000 from your account and buy an annuity. Our go-to source for annuity information, Stan The Annuity Man, says that currently, this annuity would pay $527 for the rest of your life. You use the remaining $400,000 as principal for the next 40 years in the same fashion as in the first case: assuming the same 5% rate of return and an annual 3% withdrawal increase.
• Scenario 3. Instead of retiring at age 65, you work for five extra years and buy a 100,000 annuity at age 70. We will assume you did not add to your savings during that time (though it did earn interest). Many boomers use extra working years to eliminate any lingering debt, so they can retire 100% debt-free. (However, note that we encourage a different approach: using extra working years to save as much as possible, including maximizing catch-up contributions to your 401(k) or IRA.)If your nest egg grew at a 5% compound rate, it will total $638,141 when you are age 70. So, excluding the $100,000 spent on an annuity, you have $538,141 to draw from. As with Scenarios 1 and 2, we’ll assume the withdrawals last for 40 years here, stretching the retirement period until age 110. Buying the annuity at age 70 instead of age 65 raises your monthly annuity payout to $582 per month.

Now, let’s take a closer look at each of these cases.

Scenario 1: He Who Takes It All Is Not the Winner

For your nest egg to last 40 years, in year one, you can withdraw $17,747, or $1,479 per month, from your $500,000 nest egg. Each year you take out 3% more to keep up with rising expenses.

Follow the yellow line representing your nest egg in the chart above. As you can see, after 40 years your $500,000 is gone.

What happens if you stay within your monthly allowance and live past age 105? Here’s hoping you have generous grandchildren. If not, you might be at the mercy of a Social Security system that may or may not be around in its current form.

There’s good reason the Bureau of Labor Statistics projects that workforce participation for people age 75 and over will rise to 10.5% by 2022, up from 7.6% in 2012. For the 65-74 age group, it projects that the rate will jump to 31.9%, up from 26.8% in 2012 and 20.4% in 2002. Better health and a sustained desire to work may be one reason more seniors are working longer, but another is fear.

61% of older Americans fear outliving their money more than they fear death. This is a fear we hope no one encounters as they near the end of the line. Other than the late George Burns, I doubt many centenarians are holding down a job.

Running out of money and having Social Security as your final safety net is a legitimate concern. Every politician, regardless of party, acknowledges the US government cannot make good on all of its promises. No one knows what the future will bring.

With that in mind, let’s move on to Scenario 2.

Scenario 2: Spreading Out Risk

Insurance companies have a range of annuities that will pay you for the rest of your life, which our team covered in detail in Annuities De-Mystified. In essence, holding an annuity as part of your overall retirement plan is one way to reduce the risk of running out of money. Since going back to work at 105 is both unappealing and impractical, let’s look at how Scenario 2—the same $500,000 nest egg with $100,000 used to purchase an annuity at age 65—plays out.

Your annuity will provide monthly payouts of $527. Using the same 40-year time frame, your monthly income from the remaining $400,000 will be approximately $1,183 per month in first year, or a total of $1,710.

You start out with a bit more money; however, the annuity payment will remain constant, with no adjustment for inflation. At the end of 40 years, your nest egg will be gone, but you will still receive the annuity payments.

There is no way to know how long you will live. Today, a man who reaches age 65 can expect, on average, to live to age 84.3; a woman, 86.6. One in ten 65-year-olds, however, can expect to live past age 95. Medical advancements are pushing those numbers up, making life after age 105 seem not too far fetched. An annuity is just one way to hedge against running out of money too soon.

One big disadvantage of an annuity is that it doesn’t offer real inflation protection. Even annuities with inflation riders usually yield marginal results.

If you receive Social Security, you can hope the annual inflation adjustments make up some of the difference, but it’s unlikely to be enough to maintain your current lifestyle. That brings us to Scenario 3.

Scenario 3: Delayed Gratification

Congratulations! You made it to age 70. The $500,000 in savings you had at age 65 has grown to $638,141 (at an annual rate of 5%). You buy an annuity for $100,000 that will pay you $582 every month until death and draw down the remaining $538,141 over the next 40 years—again assuming 5% growth rate and 3% annual withdrawal increase.

The lump sum of $538,141 will provide approximately $1,592 per month during the first year. Add the annuity payouts and your total monthly income comes to $2,174, before taxes.

In the first year, your total income, including withdrawals and annuity income, will be $26,085 compared to $17,747 in Scenario 1 and $20,516 in Scenario 2.

And although your savings will still run out after 40 years, you will be 110. By working an additional 5 years and deferring the start date you get an additional five years before you have to rely on the annuity only.

The Takeaways

This is all a reminder that the best way to enjoy retirement is to build a portfolio that can generate enough capital gains and dividend income to satisfy your spending needs, while leaving the principal intact as long as possible. If you want to end up in the 18% of people who are very confident about having enough money to retire, you may want to keep working after age 65, if possible, and invest part of your savings in an annuity to ensure you have at least some income if you outlive the rest of your nest egg.

To determine if an annuity is right for your retirement portfolio, read your free copy of our special report, Annuities De-Mystified. It includes tips for uncovering hidden fees and a frank look at the risks associated with annuities. Plus, it’s the only such report we know of written by financial educators who do not sell annuities. Access your free copy of Annuities De-Mystified here.

Everything You Need to Know About the S&P Until Christmas

By Andrey Dashkov

When I need to clear my mind, I put on my beat-up Saucony sneakers and drive to nearby Deer Lake Park in Burnaby, British Columbia. After a couple of miles, though, as my body gets into a rhythm, my mind wanders back to the thought that occupy it for hours each day: where will this market go next?

And I’ve thought a lot about what went on this summer. Since June 1:

•S&P 500 is up 2.7%, having set a new record high in September;

•MSCI World index is down 0.5%;

•10-year Treasury yield is down from 2.54% to 2.50%;

•Brent Crude 0il is down 12.8%; and
•Gold is down 2.2%.

The Bureau of Economic Analysis reported that the US economy expanded by 4.6% year on year in the second quarter, up sharply from the first quarter’s disappointing 2.1% annual decline. Consensus estimates for annual GDP growth in the third and fourth quarters of this year are about 3%.

The stage seems to be set for the fifth straight year of positive economic growth in the US; however, we’re always cautious about government-supplied information, especially during an election cycle.

At the moment, macro developments seem closely intertwined with stock market performance. Instead of slumping, the market was rather vibrant this summer. The S&P 500 showed resilience, reaching higher highs after a dip in late July and early August that coincided with increased uncertainty surrounding the Ukrainian crisis.

Geopolitics aside, the market was supported by GDP growth, which in turn was underpinned by strong corporate profits and margins. In fact, in the second quarter, the S&P 500 set a new record for profit margins: 9.1%. So much for “sell in May and go away.”

Expanding earnings and margins are great news on the fundamental front. Of the trends we observed this summer, at least two will benefit S&P 500 companies’ profitability. Cheaper oil may keep energy costs down, while consumers are more than willing to swipe their debit and credit cards. In August, consumer confidence jumped to its highest level since October 2007, having increased for four months in a row.

Loose Money Helping Stocks in the Short Term

The Fed has done its part, too. Long-term effects of its prolonged loose monetary policy aside, it’s hard to argue that it hasn’t helped stocks in the short term. With Treasury rates still low, debt options abound, and companies can obtain cheap funding for things like capital expenditures and buying back shares.

In the first quarter, 290 companies from the S&P 500 bought back shares at a cost of $159.3 billion, 59% more than a year ago. Dividends are up as well: in the first quarter, S&P 500 companies spent a record $241.2 billion on dividends and repurchases together, according to Standard & Poor’s.

Second-quarter share repurchases were estimated at $106 billion, according to Financial Post. That’s much lower than first-quarter repurchases (though the official numbers aren’t out yet) and down 10% year on year.

Buyback Frenzy Is a Net Positive for Share Prices

However, the most important takeaway is that the cumulative effect of the recent buyback frenzy was positive for share prices and dividends. With fewer shares, it’s easier for companies to maintain dividend payments. Higher share prices may drive down dividend yields, but companies tend to increase dividends over time, which makes up for that in part. And despite the S&P 500’s significant growth over the past five years, dividend yields have not decreased as much as one would expect.

The chart below tracks the S&P 500’s median dividend yield since the first quarter of 2009.

The median dividend yield decreased just slightly over this period: from 1.9% in 1Q09 to 1.7% in 2Q14, and it’s held relatively steady over the past three years.

The good news is that S&P companies aren’t stretching their balance sheets too thin to cover these dividend payments—these payments are backed by earnings. The median dividend payout ratio (the ratio of dividends paid to net income), although up from five years ago, still looks solid.

S&P companies can successfully cover their dividends with earnings, so there’s no reason to fear that they’ll have to borrow to keep paying them. However, a lot of investors worry about leverage. On one hand, financial leverage boosts return on equity (ROE), and prudent borrowing can be a positive for investors. On the other hand, large amounts of leverage leads to volatility in earnings, a less stable balance sheet, and risk that affects valuations.

Debt and Cash Both Up

These are legitimate concerns, but our next chart shows that in the past five years, S&P companies have increased debt while also accumulating a lot of cash on their balance sheets.

Debt and cash grew at about the same pace during the last couple of years. There were many reasons for this trend, but two interrelated ones stand out: the abundance of cheap debt that S&P companies took advantage of (why spend your own cash when you can finance on such great terms and pay it back over a long period?); and the desire to keep interest on that debt as low as possible by making credit rating agencies happy and holding a lot of cash in the bank.

If a correction is in the cards for the near term, this cash, increased earnings, and the support coming from share buybacks will provide some cushion for these companies’ valuations.

Why We’re Not “Permabears”

So what’s ahead? I wish I knew. There are a lot of market bears out there who say this rally will come to a halt sooner rather than later, and the S&P will fall off a cliff. I stay away from calling tops and bottoms and wonder how many pundits actually have any skin in the game. Going short the market requires timing; so any “permabear” who puts money where his mouth is may lose a lot if his timing is wrong.

I’m not saying the rising market is somehow “wrong.” There are solid company-level fundamentals and positive macro-level data points here and there that support a significant part of its growth.

Your Plan to Profit

We’re pragmatists at Miller’s Money. Quantitative easing and basement-level interest rates have flooded the market with dollars and eroded yields, but you should use these circumstances to capture some of the benefits they’ve created. No, you can’t earn much on CDs. No, dividend yields might not beat inflation (at least not all of them, and certainly not every estimate of inflation). And yes, the current rally will eventually end, one way or another. We just don’t know when or how. No one does.

What matters is that even in this situation you can protect your financial wellbeing by sticking to our core strategy: diversify geographically and across sectors; and invest in assets that provide robust yield relative to risk and have the potential to rise in price. You can learn more about the Miller’s Money Forever core strategy here—a time-tested plan designed for seniors, savers and like-minded conservative investors.