Since March 9^th of 2009, the U.S. stock market has taken off. Some have labeled this the longest bull market in history although FINRA technically gives that title to the 12 ½ years from October 1987 – March 2000. Many investors have reaped the benefits from strong equity markets over the last 9 years, but know the economy and markets are cyclical. What if the next decade isn’t as friendly to our bottom line? This question is especially relevant to retirees starting to withdraw from their investments to generate income. Understanding the impacts “sequence of return risk” can have on the life of one’s assets can be imperative to the success of a financial plan.

“Sequence of return” risk is the threat of adverse return orders, particularly in the early years of retirement. The attached table shows it is possible for two couples to have the same average return with very different results.

Both the Lucky’s and Unlucky’s have beginning retirement balances of $500,000, a $50,000/yr spending need inflated annually at 3% and an overall average return of 5%. The only difference is the order the returns occur is the exact opposite. In this scenario, the Unlucky’s portfolio would be spent down to zero in only 9 years, while the Lucky’s would still have $186,714 remaining.

There are a variety of ways to hedge against “sequence of return” risk. Crafting portfolios with a more conservative asset allocation is arguably the most popular tactic. Let’s face it, there’s a reason most financial advisors don’t have their retired clients in 100% equity portfolios. It’s too risky. More balanced portfolio’s containing a 50/50 or 40/60 split of stocks to bonds can help smooth the ride in volatile markets. You may not reap the highest highs, but you’ll likely avoid the lowest lows.

Monte Carlo analysis also addresses sequence of returns. Monte Carlo’s often run 1,000 or more simulations, accounting for good markets, bad markets and everything in between to calculate a plan success rate based on the clients’ goals. This type of statistical analysis is widely accepted by academics and has proven much more reliable than the straight-line method.

Speaking of academics, William Bengen’s “rule of 4%” states that one can initially withdraw 4% of their assets – adjusting annually for inflation in subsequent years – and expect to not run out of money in a 30-year period. Fortunately, this rule is more of a guideline, as many retirees require higher withdrawal rates to meet their specific goals. Nonetheless, the “rule” can provide valuable perspective when deciding on retirement lifestyle expense.

Given the choice, we’d all prefer to be Mr. and Mrs. Lucky. The problem is, we can’t choose – or even predict – what the markets are going to do or when. What we can choose is to actively engage ourselves in the financial planning process and meet regularly to discuss life changes and market changes as they occur.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification cannot assure a profit or guarantee against a loss. Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through Valmark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.

Many Boomers have saved their hard-earned money for years with plans of being able to retire. Some have faced job loss and various circumstances that have led them to not be able to retire – or at least not when planned.

For those who do have plans to retire soon or already are retired, having a plan to maintain their lifestyle without running out of money is the goal. We have found that many hopeful retirees may have a plan for how to have fun but may lack a plan to dole out their savings during retirement.

An income strategy can prove to be tremendously helpful, however, there is an essential aspect of a plan that can make or break it; sticking to the plan.

Many folks enjoy investing, but many more are forced to be investors out of necessity. The reality is that our money may not last the rest of our lives if we stop growing it once we retire. Could you handle a 15 to 30-year runway of no growth? How about if you were withdrawing assets? Most can’t, which is why many retirees need to have at least a portion of their assets invested to maintain lifestyle over the long haul in retirement.

An important task in the investing process is finding the appropriate level of risk to take.  The level of risk needs to be able to deliver plan success, but also needs to be one that you can live with (and not lose sleep over). Once that task is completed, the even harder job begins – sticking to your plan.

Sticking to your plan can prove to be easier said than done.  Many investors are still nursing some investment induced “Post Traumatic Stress Disorder” from the market gyrations of 2008-09, the dot com bust and the 3 years in a row the stock market was down from 2000-2002.

Through many discussions over the years we have found some investors were under diversified, which resulted in devastating losses equal to that of the market indices and sometimes even worse.  Understanding proper diversification and what protection it may provide, and what it cannot, is imperative. This can be an integral part of a successful retirement plan, because it helps give us the confidence to stay invested.

Even a well-diversified portfolio could probably go down if the stock market drops sharply, however, diversification may help mitigate risk depending on what’s inside. It is important to understand diversification and what to expect from your portfolio when facing volatility. It is also important to understand if volatility is affecting the ability of your long-term plans to be successful.   Fortunately, there are now financial planning programs that can help answer this question.

The confidence that an understanding of the markets and how/if it will affect your retirement plans may help you stick to your plan or make sensible changes to stay on track. It all starts with knowing thyself.

 The opinions expressed in this article are those of author and should not be construed as specific investment advice.  All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification cannot assure a profit or guarantee against a loss. Indices are unmanaged and do not incur fees. One cannot directly invest in an index. 

Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through Valmark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc. 

Older adults who lose their life savings may also lose years from their life, a new Journal of American Medical Association* study suggests.

Looking at more than 8,700 Americans ages 51-61, researchers found that those who lost 75% or more of their net worth within a two-year period were more likely to die over the next 20 years than those who maintained their wealth. For most, that wealth consisted of bank accounts, a home and vehicles — though those with a higher net worth often had businesses or investments, too.

One of the most striking findings, researchers said, was how often families suffered that kind of “wealth shock.” More than one-quarter of the 8,714 study participants lost 75% of their wealth at some point over the 20-year study, conducted from 1994-2014. Another 7 percent had no savings or other assets to begin with.

Why is wealth loss related to an earlier death? The study cannot fully answer that question, according to researcher Lindsay Pool, Ph.D. at Northwestern University.  But, she noted, the stress of losing your financial security — especially later in life — could take a toll on physical health.

The findings, published April 3rd of this year, add to research looking at the health toll of heavy financial loss. Multiple studies have found correlations between such losses and increased risks of depression, anxiety, substance abuse and suicide.

Recent studies have dug into the effects of the Great Recession that began in late 2007 and led to a doubling of the U.S. unemployment rate and millions of home foreclosures. This JAMA study looked at the longer-term fallout, specifically on older adults, who might be particularly vulnerable to the health effects of losing their wealth.

The study underscored that the Great Recession didn’t just cost us our jobs, or savings — but that the toll of the recession can be measured in human lives. There were 65 deaths per 1,000 people in the “wealth shock” group each year, versus 31 per 1,000 among people who held on to their assets.

The study had another interesting finding. The death rate in the “wealth shock” group was similar to that of adults who’d never built up any net worth at all. Therefore, the study seemed to link adverse health effects to both those who lost their wealth and those who never had it.

One of the many goals of financial planning during the retirement years is to prevent these aforementioned “wealth shocks.” Choosing an investment strategy designed to create predictability and minimize volatility can help. Choosing to not save money in the first place – well – at least you’ll know what to expect.

*https://media.jamanetwork.com/news-item/sudden-loss-of-wealth-associated-with-increased-risk-of-death/ 

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification cannot assure a profit or guarantee against a loss.

Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through Valmark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201– W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.

Since the new Tax Cuts and Jobs Act has doubled the standard deduction starting in 2018, few individuals are expected to itemize.  However, if you are an IRA owner over age 70 ½ and have a charitable intent, you can utilize Qualified Charitable Distributions (QCDs) to maximize the new higher standard deduction, in effect getting the standard deduction plus the charitable deduction.

Making a QCD as opposed to a normal charitable gift has two main advantages. First, a QCD counts toward satisfying an individual’s Required Minimum Distribution (RMD) for that year. Second, the distribution is excluded from the taxpayer’s income. It is this second benefit that really shines under the new tax bill.

The QCD only applies to IRA owners and beneficiaries who have already reached age 70 ½ or older. The donation must be directly transferred from the IRA to the charity and nothing can be received in return for the donation. Gifts to Donor Advised Funds or private foundations do not qualify. Total annual QCDs from all IRAs cannot exceed $100,000 per person, per year.

In addition, to the extent that the IRA owner had an RMD obligation for the year, the QCD is deemed to satisfy the RMD, even though the QCD is not taxable as an RMD otherwise would have been. One very important caveat of using a QCD to satisfy an RMD obligation is that an RMD is presumed to be satisfied by the first distribution that comes out of the IRA for the year. If you are considering this tactic, be sure to give to charity first!

The QCD is not included in the IRA owner’s gross income. Thus, the distribution does not increase gross income for purposes of determining such things as taxability of the IRA owner’s Social Security benefits and the IRA owner’s Medicare Part B premiums.

The IRA provider will report these as distributions to the owner from the IRA. The Form 1099-R it files with the IRS will have no mention of “QCDs” and no hint that the distributions are not taxable. It is up to the IRA owner on their personal tax return (Form 1040) to report the gross distribution and report the taxable portion as zero, writing “QCD” in the margin next to line 15b.

If you would like to hear more about this opportunity to benefit from this important tax saver, work with your financial advisor and tax professional.

Any tax advice contained herein is of a general nature. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein.

Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.