Atlantic Capital Management

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Thursday, 04 August 2016 17:09

How Can You Make Your Retirement Money Last?

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These spending and investing precepts may encourage its longevity.

All retirees want their money to last a lifetime. There is no guarantee it will, but, in pursuit of that goal, households may want to adopt a couple of spending and investing precepts.

One precept: observing the 4% rule. This classic retirement planning principle works as follows: a retiree household withdraws 4% of its amassed retirement savings in year one of retirement, and withdraws 4% plus a little more every year thereafter – that is, the annual withdrawals are gradually adjusted upward from the base 4% amount in response to inflation.

The 4% rule was first formulated back in the 1990s by an influential financial planner named William Bengen. He was trying to figure out the “safest” withdrawal rate for a retiree; one that could theoretically allow his or her savings to hold up for 30 years given certain conditions (more about those conditions in a moment). Bengen ran various 30-year scenarios using different withdrawal rates in relation to historical market returns, and concluded that a 4% withdrawal rate (adjusted incrementally for inflation) made the most sense.1

For the 4% rule to “work,” two fundamental conditions must be met. One, the retiree has to invest in a way that will allow his or her retirement savings to grow along with inflation. Two, there must not be a sideways or bear market occurring.1

As sideways and bear markets have not been the historical norm, following the 4% rule could be wise indeed in a favorable market climate. Michael Kitces, another influential financial planner, has noted that, historically, a retiree strictly observing the 4% rule would have doubled his or her starting principal at the end of 30 years more than two-thirds of the time.1

In today’s low-yield environment, the 4% rule has its critics. They argue that a 3% withdrawal rate gives a retiree a better prospect for sustaining invested assets over 30 years. In addition, retiree households are not always able to strictly follow a 3% or 4% withdrawal rate. Dividends and Required Minimum Distributions may effectively increase the yearly withdrawal. Retirees should review their income sources and income prospects with the help of a financial professional to determine what withdrawal percentage is appropriate given their particular income needs and their need for long-term financial stability.

Another precept: adopting a “bucketing” approach. In this strategy, a retiree household assigns one-third of its savings to equities, one-third of its savings to fixed-income investments, and another third of its savings to cash. Each of these “buckets” has a different function.

The cash bucket is simply an emergency fund stocked with money that represents the equivalent of 2-3 years of income the household does not receive as a result of pensions or similarly scheduled payouts. In other words, if a couple gets $35,000 a year from Social Security and needs $55,000 a year to live comfortably, the cash bucket should hold $40,000-60,000.

The household replenishes the cash bucket over time with investment returns from the equities and fixed-income buckets. Overall, the household should invest with the priority of growing its money; though the investment approach could tilt conservative if the individual or couple has little tolerance for risk.

Since growth investing is an objective of the bucket approach, equity investments are bought and held. Examining history, that is not a bad idea: the S&P 500 has never returned negative over a 15-year period. In fact, it would have returned 6.5% for a hypothetical buy-and-hold investor across its worst 15-year stretch in recent memory – the 15 years ending in March 2009, when it bottomed out in the last bear market.2

Assets in the fixed-income bucket may be invested as conservatively as the household wishes. Some fixed-income investments are more conservative than others – which is to say, some are less affected by fluctuations in interest rates and Wall Street turbulence than others. While the most conservative, fixed-income investments are currently yielding very little, they may yield more in the future as interest rates presumably continue to rise.

There has been great concern over what rising interest rates will do to this investment class, but, if history is any guide, short-term pain may be alleviated by ultimately greater yields. Last December, Vanguard Group projected that, if the Federal Reserve gradually raised the benchmark interest rate to 2.0% across the three-and-a-half years ending in July 2019, a typical investment fund containing intermediate-term fixed-income securities would suffer a -0.15% total return for 2016, but return positively in the following years.3

Avoid overspending and invest with growth in mind. That is the basic message from all this, and, while following that simple instruction is not guaranteed to make your retirement savings last a lifetime, it may help you to sustain those savings for the long run.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 - money.cnn.com/2016/04/20/retirement/retirement-4-rule/ [4/20/16]
2 - time.com/money/4161045/retirement-income/ [5/22/16]
3 - tinyurl.com/hjfggnp [12/2/15]

Tuesday, 26 July 2016 20:35

Why Are We Saving More and Spending Less?

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Have our memories of the Great Recession altered our habits?

 

Consumer spending accounts for more than two-thirds of economic activity in the United States. Lately, that spending has moderated. Across the 12 months ending in March, personal spending advanced 3.4%. That matched the gain seen in 2015.1,2

Is a 3.4% annualized gain in personal spending adequate? Not in historical terms. During 2014, consumer spending accelerated 4.2%. The average monthly gain in consumer spending across the past 12 months (0.28%) is roughly half the historical average seen since 1959 (0.54%).1,2

While the personal spending rate has slumped recently, the personal savings rate has not. In March, it was at 5.4%. It has varied between 4-6% for more than three years, staying notably above the levels seen prior to the Great Recession of 2007-2009.3

Has consumer psychology been altered since then? That is an interesting question to consider, and it especially begs consideration, given the fact that inflation-adjusted personal spending has declined for three straight quarters.4

Real disposable income (that is, disposable income adjusted for inflation) has been rising without fail. It has increased for 13 straight quarters, beginning in Q1 2013 after the payroll tax cut at the end of 2012. You would think unflagging increases in real disposable income would promote greater economic expansion, but real gross domestic product grew just 1.5% in 2013 and only 2.4% in both 2014 and 2015. Those GDP levels are well below those seen in the early 2000s, not to mention the 1990s.4,5

When is too much frugality a bad thing? When it risks hampering economic growth. The 5.4% personal savings rate recorded in March tied a three-and-a-half-year high. As we are well into an economic recovery, it would seem only natural for Americans to spend more than they did several years ago.4

Perhaps people are just not ready to do that. As a Deutsche Bank research note asserted this month, the memory of the Great Recession may be too hard to erase: “The shock of the crisis likely increased the desire to hold more savings for precautionary motives.”4

Since 2001, Gallup has consistently asked Americans a question each year: “Are you the type of person who more enjoys spending money or who more enjoys saving money?”6

This year, 65% of respondents said they preferred saving and 33% of respondents said they preferred spending. That gap has never been so pronounced in fifteen years of polling.6

As recently as 2009, just 53% of Americans told Gallup they preferred saving while 44% indicated they preferred spending. The gap has gradually widened ever since, and it is now fairly consistent across all age groups.6

A little more polling history seems to affirm a perception shift. In 2006, Gallup found that 51% of Americans rated their personal financial situation as “excellent/good;” in that year, 50% of Americans preferred saving to spending. Four years later, only 41% of Americans felt their personal financial situation was “excellent/good”, and 62% indicated a preference for saving. This year, 50% of Americans ranked their personal finances as “excellent/good,” yet 65% preferred saving dollars to spending them. “The appeal of saving over spending shows some signs of being the new normal rather than a temporary reaction to the hard times after 2008,” Gallup’s Jim Norman observed last month.6

In its latest report on personal income and outlays, the Bureau of Economic Analysis says personal incomes were up 4.2% year-over-year as of March. Consumer prices rose but 0.9% in the same span. Unimpressive wage growth aside, it would appear that many households are nicely positioned to spend. Of course, what these two numbers do not take into account is debt: mortgage debt, student loan debt, credit card debt. The rebound in the personal savings rate surely relates to the goal of reducing such liabilities.7,8

The Great Recession taught America a great lesson about living within one’s means. Could that lesson, as vital as it is, now be constraining the economy? As economists try to pinpoint reasons for America’s slow recovery, they may want to cite the psychology of the consumer.

  

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - cnbc.com/2016/02/01/us-personal-income-dec-2015.html [2/1/16]

2 - tradingeconomics.com/united-states/personal-spending [5/22/16]

3 - tradingeconomics.com/united-states/personal-savings [5/12/16]

4 - usnews.com/news/articles/2016-05-11/years-later-psychological-scars-from-great-recession-skew-spending [5/11/16]

5 - statista.com/statistics/188165/annual-gdp-growth-of-the-united-states-since-1990/ [5/12/16]

6 - gallup.com/poll/190952/nearly-two-thirds-americans-prefer-saving-spending.aspx [4/25/16]

7 - shopfloor.org/2016/04/personal-spending-remained-soft-in-march-despite-decent-income-growth/ [4/29/16]

8 - reuters.com/article/us-usa-economy-inflation-idUSKCN0XB1I4 [4/14/16]

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