Decumulate & Downsize

Most of your investing life you and your adviser (if you have one) are focused on wealth accumulation. But, we tend to forget, eventually the whole idea of this long process of delayed gratification is to actually spend this money! That’s decumulation as opposed to wealth accumulation. This stage may also involve downsizing from larger homes to smaller ones or condos, moving to the country or otherwise simplifying your life and jettisoning possessions that may tie you down.

Why retiring baby boomers won’t destroy the stock markets

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By Dale Roberts

Special to the Financial Independence Hub

It’s a fear or suggestion that we hear repeated quite often. The massive cohort of retiring baby boomers will need to sell their stocks to create income and that will crash the stock markets.

Or let’s just say it could cause a slow bleed, taking down or suppressing the stock markets over the coming decades. As you may know the the stock market is, well, a market: it simply lines up the buyers and sellers and when there are more sellers than buyers the price of the stocks will decline.

When we hear the numbers on the baby boomers and more specifically how many boomers will retire each day, it’s often the US numbers that are repeated. When it comes to financial markets it is often very US-centric.

From this from Forbes.com article …

There were 77 million Baby Boomers born between 1947 and 1964, roughly 4.5 million per year. Some doomsayers are predicting the Boomers will drain the equity markets of their capital once they retire. Should you worry? Are your equity portfolios at risk?

It’s now predicted that there are 10,000 baby boomers retiring (in the US) each day. Now when the AARP releases figures such as that they simply use age 65 as a retirement date. Perhaps that’s not a bad benchmark but so many will retire well before age 65, and many more will not retire until well into their 70s and beyond. Many will not retire at all; they’ll continue with part time work. Baby boomers are known for being quite entrepreneurial.

And then, not all retiring baby boomers are going to go out and sell all of their stocks on their 65th birthdays. The public and private pension managers are not going to aggressively sell out of their US stock positions. Pensions hold well-diversified portfolios of US and International stocks and bonds and that also includes massive exposure to private equity: assets that are not ‘in’ the stock markets.

Why the boomers won’t crash the markets

The markets are mostly efficient and they factor in all available information with respect to individual stocks, economies and larger trends. It’s not news that North America is getting ‘older.’ That’s already priced in to the markets.

There is a heavy concentration of US stock ownership by more wealthy US citizens. The challenge for many may not be how fast can they sell their stocks but what to do with all of this wealth. Also, baby boomers are about to inherit over $15 trillion over the next 20 years. That will reduce or eliminate the need to sell those stock shares. You’ll find that, and some other interesting baby boomer stats in this Fool article.

I’ve been writing on Seeking Alpha for quite some time, and the readership is largely quite affluent. Many of these American boomer investors write more of accumulating more stocks in the retirement stage. In Retirees Don’t Say No When The Market Offers You A Nice Bonus I linked to a study that confirms that more affluent US retirees don’t spend down their retirement assets. They even become ‘savers.’

It’s a continual theme as well that many of these retirees ‘live off of the dividends.’ They’re not selling shares; they are simply collecting and spending the dividends. They will not put sell pressure on the markets.

New buyers

The millennial generation is even larger than the Baby Boomers and they will enter their accumulation stage and will be buyers of stock assets directly and by way of their pensions. There will be demand for stocks from younger generations. The Washington Post stated that the millennials will overtake the Boomers in 2019. We also have those echo-boomers and Gen-X’ers stepping in.

Bond yields are low; investors and pension managers know that they need those stocks for the longer term growth potential. Of course, we can often get greater income (and growing income) from stock dividends compared to bonds. The low yield environment also affects those newer and current accumulators as well as they may choose to shun low yielding bonds and embrace more stock exposure.

In Canada we see investors in that Balanced Growth Sweet Spot.

What history has to say

And if we look to the past and to studies, historically the correlation between age and asset prices is weak according to this white paper … Continue Reading…

Declutter the pesky nest egg

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“Decluttering the pesky nest egg ranks high among investors. Now is a great time to snap into action.”

Investment clutter can easily develop from a variety of sources. The number of accounts opened, types of risks incurred, type of advice sought and style of adviser hired are just a few starting points that contribute. Some of the clutter often falls to the back of the closet, never to see the light of day again.

So I ask: “Is your investment closet cluttered with plenty of stuff?”

The stuff was likely purchased over several years and from multiple providers. The passage of time transformed it into a muddle that typically no longer serves its intended purposes. Perhaps, the investment closet has not been purged for longer than anyone cares to remember. If it feels like a mishmash, it probably is.

I keep tabs on portfolio requests seeking fresh opinions. The majority of cases hold 15 to 35 investments, primarily mutual funds and assortments of individual stocks. Keeping track of such selections is not easy for most investors. Overlap often makes its way into portfolios. The good news is that the best time to declutter the jumble is when stock prices are at or near their highs. Like now.

Spot the clutter

Accordingly, I highlight critical signs that recognize “cluttered investing”.If you spot any of these in your investment closet, you have some work to do: Continue Reading…

Should you withdraw the Commuted Value of your Defined-Benefit Pension?

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By Michael J. Wiener

Special to the Financial Independence Hub

Should you withdraw the Commuted Value of your Defined-Benefit Pension?

No. There are some exceptions, but the answer is almost always no. In fact, if a financial advisor is pushing you to pull out the commuted value of your pension, that’s a sign that you’re likely working with a bad advisor.

There is almost no chance that your advisor will choose investments that outperform a pension fund, mainly because the total fees you pay with an advisor are so much higher than the fees charged within a pension fund.

Some advisors will tell you that you won’t pay any fees because the mutual funds pay the advisor. Don’t believe this. Mutual funds and advisors get paid out of your savings.

Further, defined-benefit pensions have the advantage of handling longevity risk. Pension funds can afford to pay you based on your expected life span, and they’ll keep paying if you happen to live long. With an advisor managing your money, you need to hold back on your spending in case you live long.

Where it might make sense to take the commuted value

There are some cases where it makes sense to withdraw your pension’s commuted value. Here are a few:

1. Poor health makes you likely to die much younger than average. In this case, taking the commuted value allows you to spend more now or leave a larger legacy. Continue Reading…

How to create a pension for the Average Joe: 65 with as little as $200K in Savings

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By Billy and Akaisha Kaderli, RetireEarlyLifestyle.com

Special to the Financial Independence Hub

We know many of our readers are not “average.” However, if average Joe can support his retirement on as little as US$200,000 savings, imagine what you can do with the amount you have!

By reading the chart below, you can see that the average spending for retirement households age 65 – 74 is US$46,000.


It is tough to make that $46k amount with only Joe’s savings, so what should he do?

Social Security

The average recipient today (in the United States) collects US$1,461 a month, or US$17,532 a year. Joe’s SS check is average and he has a wife who also collects the average Social Security amount.

$17,532 times 2 (people) = US$35,000 per year.

Not quite the $46,000 that they need but getting closer.

Hopefully, Joe has his retirement money invested in VTI (Vanguard Total Stock Market) or SPY (S&P 500 Index) and is making market gains equaling around 10% annually.


Here you can see that since the 1950’s — about when Joe was born — the S&P 500 has had an annualized return of over 11%, dividends reinvested, but let’s use 10% as a more conservative projection.

Remember, Joe has to make up $11,000 to match his average spending ($46,000). But let’s give Joe an extra one thousand dollars per year so he can pamper Mrs. Joe with occasional gifts and dinners out.

So, he needs $12,000 out of the $200,000 in savings per year to make up the difference in spending. That’s an extra $1.000 per month.

Invested in the S&P 500 — based on 69 years of returns and using 10% as the annual return — after his first year he would have $220,000 minus $12,000 withdrawal = $208,000.

Now Joe has $47,000 in annual income: $35,000 from Social Security and $12,000 from investments.

Plus, his $200,000 has grown to $208,000, a 4% gain outpacing inflation at the current rate of less than 2% per year.

Their Social Security payment is also indexed to inflation so as inflation rises, so will their Social Security. Continue Reading…

Which came first: the Chicken or the Egg?

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By Kevin Flanagan, WisdomTree Investments
 
Special to the Financial Independence Hub
A funny thing happened recently when I walked into the office. No, this is not the setup for some joke; rather, I’m referring to what I heard regarding movement in the stock and bond markets. Specifically, the narrative was that the decline in U.S. equities resulted from the drop in the U.S. Treasury (UST) 10-Year yield.
Because I’ve been a “bond guy” for quite some time now, the rhetoric was fascinating to me and brought to mind this age-old question: Which came first: the chicken or the egg?

In my experience, the bond market typically reacts to developments in the stock market, not the other way around. Being a baby boomer (right at the tail end, mind you), I thought: Am I missing something here? Could the paradigm have shifted? Thus, I decided to do a little bit more investigating, and what I found was that, in my opinion, no, the paradigm had not shifted. The recent decline in the UST 10-Year yield had its genesis in the latest sell-off in the stock market, which began in early May and continued throughout the month.

Dow Jones Industrial Avg. vs. UST 10-Year Yield

UST vs Stock Market

Take a look at the graph. The UST 10-Year yield was essentially straddling the 2.50% threshold in the opening days of May until the Dow Joes Industrial Average (DJIA) took a nearly 475-point nosedive on May 7. This began the downward trend in which we find ourselves now. Remember, that trend was in response to the breakdown in U.S./China trade talks and the attendant escalation in “tariff talk.” Then round 2 hit as the DJIA plunged 617 points on May 13, leading the UST 10-Year to break through the 2.40% level, ultimately falling down to 2.37% —which, at that time, matched the 2019 low watermark set back in March. Notice how stocks rebounded somewhat after this episode: and what did the 10-Year yield do? That’s right, it moved back up as a result. Continue Reading…