Well, same old same old? The last time I made an entry on these pages, "everything" was negative for the year and things just "felt" bad. Personally, I never "felt" the capitulation or panic from clients that I have experienced in past bear markets and sell offs. That's either great news, as hopefully the lows were made in June and we can continue this cyclical bull market OR we are going to re-test the low and see if it holds. The low on the S&P 500 this year was 3,666.79 on June 21. My eye is on earnings. I would not be surprised to see the effects of higher interest rates slowing the economy down and thus producing lower earnings. However, the question is, "how much of that is already baked in?" According to the Wall Street Journal, the current trailing price to earnings ratio of the S&P 500 is 22.84 (as of 8/26/22) which is historically high. I am also anxiously awaiting the election in November. I find it interesting that we passed the "inflation reduction act", which does little to combat inflation, as well as the "tuition forgiveness plan" that was just announced as I am writing this (08/24/2022). All of this done right before the election. Both of these policies only add money to a system that does not need it, creating more inflationary pressure. Bottom line, the election could create increased volatility in October as investors fret over who controls what. Stay tuned.
Here are the numbers for the year as of Monday August 29, 2022.
S&P 500 -14.87%
Dow 30 -11.16%
Gold Spot price $/0z. -4.9%
S&P U.S. Aggregate Bond Index -9.32%
Year To Date Performance as of 8/29/22 Source: Wall Street Journal, Marketwatch, SPglobal.com
The Withdrawal Rate
The withdrawal rate is a quick calculation that I use to gauge the health of a client's monthly or annual withdrawals from their investments accounts for income. I hope this brief explanation helps you in managing yours. The withdrawal rate is simply what you withdraw or what you wish to withdraw divided by total investment assets. For example, if you have $1,000,000.00 in taxable and/or retirement accounts (IRA) and you withdraw $50,000; that is a withdrawal rate of 5%. Why is this important? The withdrawal rate is what you have to earn to stay even. To me, it is the minimum of the earning range that we set in the plan. But withdrawal rates do not stay stagnant and will move due to either abnormal or unscheduled withdrawals AND investment returns. Again, from my previous example, if your $1 mil account fell 10% due to a market downturn and you do not change your withdrawal amount from $50,000, your new withdrawal rate is now 5.5% ($50,000/$900,000).
Another example would be invading your principal for a large purchase. Recently I had a conversation with a client that wanted to make a large purchase during retirement. I answered, "That it is fine to do that. However, the withdrawal rate on your accounts would increase, putting your income in potential jeopardy". Without that perspective, the client may put he and his spouse's lifestyle at risk.
If you are in retirement or nearing it, start with your budgetary needs, I.E. what you spend. Again, in my example, the client needs $50,000. To find out what they need in an account to provide that, we multiply times twenty. In my example, the client needs $1,000,000 to provide the $50,000 income ($50,000 X 20). That equals a withdrawal rate of 5% which in my opinion is reasonable.
Can withdrawal rates be higher or lower? They sure can. In fact, in some instances, the withdrawal rate could be too low. I once had a client with a 2% withdrawal rate. I suggested they start to either spend or gift more. They were not upset at that request. On the flip side, a withdrawal rate can be too high. For example, If your withdrawal rate is 10% and you don't earn 10% year after year, you are jeopardizing your lifestyle. The range I suggest is 4%-6% depending on the client's risk tolerance, age, financial condition and general needs. And again, it needs to be periodically monitored and potentially adjusted.
After reading this, you may find yourself wondering about your withdrawal rate as well as if your current investments can sustain it. We use a financial planning program that uses "Monte Carlo Simulation". This software tests your current holdings and allocation against any withdrawal rate that we set to see what the odds are that you run out of money in your lifetime. If you would like this simulation run for you, please reach out to Kim to set an appointment for us to discuss.
Lastly, does using a reasonable withdrawal rate guarantee you will never run out of money. Obviously the answer is no. But statistically speaking, using a reasonable withdrawal rate increases your chances of living a long and financially comfortable retirement.
You can't control the economy, markets, interest rates or world events. However, you can control what you spend, aka "your withdrawal rate". Let us know if we can help.
Until next time... Cheers,
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.