We will avoid the burst of blather on the wisdom or the idiocy of the Fed changing rates. Investors and wealth managers should be much more concerned about the potential damage thanks to speculative bubbles and poor investment strategies created in the wake of seven years of interest rate policies. One thing is for certain nature holds the trump card in the deck. That card is the demographic headwinds of an aging worldwide population. Just look at Japan, for example, that may have just fallen back into recession after the strongest Quantitative Easing in history. For those of us paying attention, this is a demographic cliff we can all see coming towards us too. I don’t see any way to stop it. Ready or not, like it or don’t, the only way out is going through.
Review Your Returns
What we can do is look at our statements and the indexes to see what kind of year 2015 has been. The most interesting summary is the year-to-date numbers on the right that represent the time period from 1/1/15-12/11/15.
Weekly Update for the Week Ending December 11, 2015
As you can see, nine of the ten indexes shown here are in negative territory. Typically there is a Santa Claus rally in December for stocks. Not so far this year. As you study your rate of return for the year, it may be even more valuable for you to review your rate of withdrawal.
At this time of year is an excellent time to review your assumptions. This is not the time to think planning your financial success means it all works like setting a thermostat in the room and the machines will keep you nice and comfortable. With longevity and market volatility being the wild cards, the 4 percent rule as a retirement safe withdrawal rate recommended in the 1990’s established a high probability that your money might last for 30 years.
Apparently a number of retirees referred this year had the practice of withdrawing 6%-8% of their account balances every year. I never preach to investors how they are spending their money, but I do accept it as part of my responsibility to call attention to withdrawal habits that over time may not work out well. A 7% withdrawal rate is simply a high-risk endeavor. Markets fluctuate, but when shares are sold and markets move north there is no way to recover those shares sold and that spent money. Recently there have been other studies like the Journal of Financial Planning that predicted that a safe withdrawal speed limit be set at 1.8% each year.
After exploring the issue of sustainable withdrawal rates, using 109 years of financial market data for 17 developed market countries, on September 1, 2012, Wade Pfau, Ph.D., CFA, professor of retirement income at the American College, submitted that investors and wealth managers may have been very comfortable basing decisions using “the impressive and perhaps anomalous numbers found in the past US data. From an international perspective, a 4% real withdrawal rate is surprisingly risky.
Even with some overly optimistic assumptions, it would only have provided ‘safety’ in 4 of the 17 countries.” The research shows that a 2.5 percent withdrawal rate may result in an estimated 30-year failure rate of 10 percent. While there are few investors who would be satisfied spending such a small amount, the same investors are more savvy when they take the time to determine how much money is needed when you want to make work optional and what withdrawal rate might be sustainable. With the oldest person in the world being a 116 years old woman in Brooklyn, according to New York Magazine, 12/13/15, it is reasonable to me that many of us will live longer than we expected.
In my own situation, at age 90 we moved my mother down from the Bay area to So Cal. It was a good move, but the big deal was that her housing costs tripled. For the sake of yourself, and your loved ones, as this year winds down please stop texting 24/7, put your phone down, and take the time to stop and give yourself direction.
As you review your 2015 returns and withdrawal rates, here is a formula for planning your financial success:
- Account balance increases 5%-6% or more annually, net of fees.
- Expect inflation to decrease your account 3% a year.
- With these results you may be able to safely withdraw 3% annually from retirement accounts.