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Strategies for Generating Paychecks During Retirement

How do you pay yourself when you’re retired?

When planning retirement investments, there are three approaches used to generate income for retirement:

Income-focused
Income and some capital gains
Fully invested total return

Using this approach, investors focus only on investments that generate income. The growth of capital is largely ignored or not considered when making the investment. Those who focus on income will look at bonds, dividend-paying stocks, real-estate investment trusts (REITs), and Master Limited partnerships (MLPs). The interest payments or dividends will be paid into the retiree’s bank account.

There are several risks with this approach. It may be difficult to get the income you want. Bonds have been paying very low interest rates for over a decade. People who bought bonds years ago are finding that, as their bonds mature, current interest rates are much lower. This reduces their retirement income just when they need it most.

To get more income some retirees to put their money in riskier investments. These riskier investments have been known to reduce their dividends, decline in value, or even default during the next recession.

This is a hybrid approach that uses capital gains to supplement interest and dividends. In this case, income from dividends and interests can be accumulated and held in cash until it’s paid out.

But on a quarterly or annual basis, some investment can be sold to generate additional cash for living expenses. Like many compromises, this approach suffers from the fact that it incorporates the negative aspects of the income-focused approach while reducing the opportunity for growth of principal.

This approach seeks to generate growth of principal from which an annual income can be harvested. The return comes from growth in the value of the portfolio without reference to dividends or interest payments. This approach lends itself particularly well to mutual fund portfolios designed to reduce risk. It is designed to generate an acceptable level of income and meet the risk tolerance of the retiree in mind. It avoids the temptation to reach for high-yield securities that often expose the retiree to risks that he or she may not be aware of.

Money can be set aside in a cash account that the retiree uses for monthly expenses. When the cash account reaches a certain level, it is replenished by harvesting some of the gain from the investment portfolio.

Contact an RIA (Registered Investment Advisor) to create a portfolio designed to pay you a regular paycheck during retirement.

Is It Worth It? Determining The Value Of Risk-Managed Investing

Studies of investor behavior show that the average stock mutual fund returned 9.9% annualized in the two decades from 1991 to 2010. But the average fund owner only earned 3.8% on average per year.

How is this possible?

There is a big gap between market returns and what an investor earns. A number of studies have demonstrated that the biggest reason is investor psychology. The average investor operating on his own behaves in highly predictable ways, consistently buying when prices are high and selling when they are low. This has very little to do with intelligence or wisdom. Emotions affect us all.

No matter how astute an investor might be, a drop in excess of a certain percent causes investors to panic and exit the market. The amount of the drop varies with the individual, but the result is that it causes investors to sell at or close to the lows. The same analysis shows that the bulk of investor buying happens after a significant rally and this is frequently close to a near-term market top.

The cycle is often repeated. When the market takes another dip the investor sells again near the bottom, buys back in near the top. Rinse and repeat.

As if to illustrate this, the Wall Street Journal just reported that “Investors Pulled Record $25 Billion From U.S. Stock ETFs in January.” By giving in to their fears following December’s market decline, these sellers sold as the market had one of its best Januaries on record. They locked in their losses and missed the recovery.

Given the human tendency to act in an emotional manner when it comes to investment decisions, it is critically important that properly risk-managed portfolios be designed for investors so that maximum losses are well under their fear threshold. This will let the investor stay in the markets and benefit from long term investment returns.

This is where a risk-managed portfolio, created by a good financial advisor can keep investors from panicking and hurting their performance. A risk-managed portfolio will keep losses under the threshold that causes investors to allow fear to overcome their judgment. In years when the market rises sharply, a risk-managed portfolio will underperform the market because it’s defensive by nature. But it makes up for this underperformance in years when the market drops sharply.

The difference between having a financial advisor and taking your best guess on your own can mean the difference between taking advantage of every opportunity and potentially leaving money on the table.

If you find yourself buying when the market’s already gone up and selling when the market’s near the bottom, call us for a free consultation. We may be able to help.

The Successful Investor’s Perspective: All About Timing?

After December’s market plunge and January’s surge, we can forgive investors for feeling whiplash. During times of extreme volatility, it is especially common for investors to conclude, whether on a conscious or unconscious level, that the market is not for them. For that reason, it is worth reflecting on the market over a working lifetime.

The chart below depicts 40 years of market returns and the consumer price index (CPI). Over the long run, Certificate of Deposit (CD) rates return about 2% over inflation, so we used the CPI as a proxy.

I chose 40 years because it typifies the time period most people earn income through their work.

Over that length of time, whether you’re looking at stock funds whose graphs are moving upward or have your money in a CD whose value grows almost horizontally, you must ask yourself which line is right for you.

If you choose the orange level line with little fluctuation you need to know that the money you will have to finance your retirement is almost totally dependent on how much you can save. This is because the internal growth will be very low.

Choosing the blue line, realizing it’s more jagged, says that you want your money to work as hard for you as you work for it. As you reach a certain point in your career you may find that your investments are actually earning more money than you’re getting paid from employment.

The process of investing involves high points and low points. The view from the peaks is magnificent while the terror of the slide into the valley can be traumatic. But when you look back, having arrived at the destination of financial independence, the oscillation that had caused so much grief can be plotted as a straight upward line between two points. It’s not easy negotiating that perilous ascent, but it may help knowing that in the end it really will smooth out if you stick with it.

Some people can take this financial journey by themselves. Many others need guidance on how to invest and the psychological support they need in order to stay the course when fear takes over.

The principals at Korving & Company have been doing this for over 30 years. We invite you to find out how we can help you.

The Light Can at Any Time Go From Green to Red Without Pausing at Yellow -Warren Buffet

How to Handle Stock Market Volatility

Warren Buffett is the world’s third richest man, worth over $80 billion, and he made it all from investing. His advice on how to handle stock market volatility is worth listening to.

During times of volatility, Buffett says it’s best to stay calm and stick to the basics, meaning buy-and-hold for the long term.

In his 2017 Berkshire Hathaway shareholder letter, he quoted a classic poem by Rudyard Kipling titled “If”. His advice to nervous investors enduring market downturns ….

If you can keep your head when all about you are losing theirs …
If you can wait and not be tired by waiting …
If you can think – and not make thoughts your aim …
If you can trust yourself when all men doubt you …
Yours is the Earth and everything that’s in it.

How Panic Hurts Your Long-term Stock Market Portfolio

There is a very human tendency to do something, anything, as you see previous gains reduced and positive returns turn negative. That’s when people who panic make mistakes.

Market downturns are inevitable, Buffett pointed out, using his own company as an example:

“Berkshire, itself, provides some vivid examples of how price randomness in the short term can obscure long-term growth in value. For the last 53 years, the company has built value by reinvesting its earnings and letting compound interest work its magic. Year by year, we have moved forward. Yet Berkshire shares have suffered four truly major dips.“

He went on to cite each of the steep share-price drops, including the most recent one from September 2008 to March 2009, when Berkshire shares plummeted 50.7 percent.

Major declines have happened before and are going to happen again, he says: “No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow.“

Rather than watch the market closely and panic, keep a level head. Market downturns “offer extraordinary opportunities to those who are not handicapped by debt,” he says, which brings up another important investing lesson: Never borrow money to buy stocks.

Key Strategies to Weather Stock Market Volatility

There are several reasons people panic and “lose their heads” when they see the value of their investments decline. Here are three of the most common.

1. Have a 6-month Cash Cushion

They don’t have a cash cushion. It is imperative that everyone needs to have a certain amount of safe money that can be used to pay the bills for at least 6 months without touching their investment portfolio.

2. Diversification Helps Protect Your Portfolio

Fear of “losing it all.” This is usually an irrational response to a temporary decline in the stock market. Markets don’t go to zero. The only way anyone can lose their entire investment is if they own a single stock and the company goes bankrupt.

This is, of course, the reason that professional investors create properly diversified portfolios that are not concentrated in the stock of a single company or a single industry.

3. Talk with a Full-time Stock Market Professional

Have you ever heard of anchoring bias? It’s a common human tendency to rely on one piece of information or data when making decisions. Many amateur investors fixate on the maximum value their portfolios reach and view any decline from that a “loss.” This even affects people who do not depend on their investments for income or their personal needs.

Just like you wouldn’t fly a plane yourself when you want to travel somewhere, you want to work with someone who has spent years in their profession and is confident at the controls. Rather than panic or focus in on a small amount of information, an experienced advisor will help you navigate the ups and downs of investing with their wealth of experience.

Problems Overreacting Investors Face

Investors tend to see short-term volatility as the enemy. It can lead many investors to move money out of the market and “sit on the sidelines” until things “calm down.” Even if this approach appears to solve one problem, it creates several others.

When to get back in? For this to work, you must be able to make two back-to-back correct decisions: when to get out and when to get in.
By going to the sidelines (cash or Treasuries) you may be missing the next rebound. The next market recovery almost always begins at the point of greatest pessimism and fear. If you were scared out of the market when it began to decline you will surely be too afraid to get back in when it is at its lowest point.
By going to the sidelines you could not only be missing the next rebound but all the potential growth on that money going forward. Some investors who went to cash during the Great Recession of 2008 are still wondering if this is the time to get back in.

In 2009, during the last great market panic, the S&P 500 stock index declined 28% early in the year but rebounded enough to return 23% for the full year.

Like Warren Buffett, we believe that the wise course of action is to have a plan and follow it during both good and bad times. This reduces the chances that emotion takes over and the desire to “do something” that leads to mistakes.

If you don’t have a plan, recognizing that your emotions can lead you astray, finding an experienced financial advisor, a fiduciary who can create a plan and a properly diversified portfolio can be a big step toward taking Warren Buffett’s advice.

5 New Year Financial Decisions You Can Make

Pay off your debt

Consumer debt is expected to reach a record $4 trillion by the end of 2018. The average family is spending about 10% of their monthly income paying for auto loans, credit cards, student loans and personal debt; and this does not include mortgage payments! The wisest financial decision you can make in 2019 is to rid yourself of as much debt as possible.

Pay Off Debt

Getting out from under debt payments is like getting a raise, but it’s even better. You have to pay taxes on a raise, but eliminating debt falls right to the bottom line: it’s 100% yours!

It’s worth noting that the first thing that Bill Gates, the founder of Microsoft and one of the world’s richest people, did when he made his first million was to pay off his $150,000 mortgage.

Eliminating debt, and that includes a mortgage, as quickly as possible means that it’s much easier to overcome life’s unpredictable adversities. If you have an accident, become ill, lose your job or incur other unexpected expenses and are in debt, your problems multiply. Your once-manageable debts are suddenly going to become not-so-manageable and losing your car or your home – or even bankruptcy – becomes a possibility.

Debt reduction is critically important because it affects most of your other financial priorities. It reduces your basic living expenses while it provides the means for the second most important financial decision you make in 2019: saving.

Increase your savings

Captain Obvious here: Your savings rate has a huge impact on your financial future. The first reason is that the higher your savings rate, the more you are insulated from interest rates and the volatility of the market.

It makes sense that if your savings rate is low you will have to reach for a higher rate of return to reach your goal. Aggressive investing increases the risk of major losses, which leads to a higher probability of failing to reach your financial goals.

Increasing your savings rate allows you to plan for earlier retirement. While we can’t tell you the best savings rate for your situation without a formal financial plan, a rule of thumb is that a savings rate of 20-25% will get you to your financial goals sooner and with less risk of failure.

Another benefit from saving more is that you will accustom yourself to living below your means. Spending every dollar that you earn is a hard habit to break.

What makes saving so difficult is that we live in a consumer-driven economy which bombards us with sales messages that are hard to resist. Those big screen TVs keep getting bigger and better each year. Smart phones are getting smarter and car dealers are offering incentives to get us into their showrooms. The best way to save is to always pay yourself first. If you can put 20 – 25% of your take-home pay into savings for your retirement you will have taken a huge step toward financial security.

Over time, you will find that your investment income will gradually grow until it becomes larger than your savings rate.

This leads to another important point about saving: start as early as possible. Giving your money as much time as possible to grow makes a huge difference in where you end up financially.

For example, let’s assume you save $10,000 per year from age 25 to 40 and then – for whatever reason — stop saving. Your contributions will total $150,000. At age 65 your account will have grown to over $1,058,912 million (assuming a 6% annual return).

Your neighbor delays for a decade and decides to begin saving $10,000 at age 35 and continues to age 65. After saving for 30 years he will have contributed $300,000, but his account will only be worth only $838,019 (again assuming a 6% annual return).

That’s a big difference of over $220,000 and it’s all due to the power of time and compounding!

Thanks to the skyrocketing cost of higher education, an unfortunate side-effect of student debt is that it prevents too many recent college graduates from starting a savings and investment program. If you are in that situation or know of someone who is, get the advice of a good financial advisor. Time is of the essence.

Review your investments

Your life changes and so does the world around you. You should review your investments at least once a year to make sure they are aligned with your needs and objectives.

Begin by analyzing your personal situation. Identify key milestones or events that have happened in the last year. Has your family changed, and if so, what does that mean for your financial objectives? Has your career path changed, and what does that mean for your ability to save and your financial security? Are you nearing retirement, and do you know what your income, assets, liabilities and expenses are?

Just as your personal life is evolving over time, the financial world around you is constantly changing. Look over your portfolio:

Is it aligned with your goals and strategies?
Is it meeting your performance objectives?
What is your portfolio’s risk level? How comfortable are you with this amount of risk?
Is your portfolio too concentrated in one particular stock or sector?
Is your portfolio’s composition part of a coherent strategy or is it really just a haphazard collection cobbled together over time?
Evaluate each portfolio component and ask yourself if you would still buy it today.

There is a tendency for investors to “set it and forget it.” Over the last 2 decades we have experienced several severe financial shocks. Major banks and investment firms have gone out of business and their stock and bond holders have lost everything. Household names — some of whom have been around for a century — like General Motors, Chrysler, Delta Airlines, Sears and General Electric, have either gone bankrupt or lost most of their value.

Newcomers like Amazon, Apple, Facebook and Google/Alphabet have become financial giants. But there is an old Wall Street saying, “trees don’t grow to the sky.” If you are fortunate enough to have invested in these companies, review your holdings and if any of them become too big a percentage of your investment portfolio either individually or collectively, trim them back to a safe level. Too often, high growth companies turn into “torpedo” stocks – ones that can sink your investment plan if their share prices plummet.

Make a plan

Here’s some good news: you can positively affect your level of economic success by planning for your future instead of winging it. Without a goal, and a plan to get there, people can spend years chasing short-term objectives while their long-term objectives get farther away.

Most of the people who have come to us for a financial plan are getting very close to retirement. They want to know:

If they can retire,
When they can retire and
If they can live in the style to which they are accustomed.

But waiting until retirement is just around the corner leaves little time to make corrections. The ideal time to create a financial plan is when you’re young.

A financial plan is like a roadmap. It’s a map in time instead of space. Like a road trip, there are places you want to stop along the way, and an ultimate destination you want to reach. The stops along the way may be marriage, a home, college for the kids, cars, vacations or starting your own business. The destination may be retirement or leaving a legacy.

A Financial Plan Is Like A Roadmap

Along the route there are hazards to contend with: financial risks, illness, disability or even death.

Financial planning forces you to focus on the things you can control – like earning and saving — and understand that part of the future is outside of your control. It can point out ways to protect your goals against risks that are outside your control.

A plan will identify resources you will need to reach your objectives, including the professional advisors who will help you with the legal issues and determine who will provide the financial guidance you will require. A good plan can even help guide your beneficiaries and heirs once you are gone.

A plan does not execute itself. Like a map, you need to check it from time to time to make sure you are on the right road.

And, if you make the wrong turn and get lost, you need to be able to stop and ask directions. This is where a financial planner, the one who helped you create your plan in the first place, is the right person to ask.

Involve your family

One of the most common mistakes people make is keeping their spouse or significant other in the dark about the family investments. We have helped quite a number of widows whose husbands did not involve them in the family finances. This is unfortunate for many reasons.

Now is a good time to go over the family finances with your spouse or significant other so that if they find themselves “suddenly single,” they will not be both grief-stricken and concerned about how they will live.

If your spouse or significant other has a severe disinterest in finances and investing, now is the time for you to seek out a trusted financial advisor together, a fiduciary who will be able and willing to review and explain your investments from a professional perspective. Creating a professionally-managed investment portfolio that will outlive you and take care of the loved ones you leave behind may be one of the best decisions you can make in the new year!

Taking Money out of Traditional IRAs and 401(k)s

IRAs and 401(k) plans were designed to be used during retirement for supplemental income. For that reason, there are penalties for taking money out before you reach a certain age. However, the government wants older citizens to take money out of these plans so that the IRS can begin collecting taxes, which have been deferred for many years. These plans therefore require their owners to begin taking distributions once they reach age 70 ½.

As with all government regulations, there are exceptions, but here are the general rules that apply.

Prior to age 59 ½:

Distributions from IRAs and 401(k) plans are subject to tax as ordinary income, plus a 10% penalty unless an exception applies.

Example: You are in the 24% tax bracket and take $100,000 out of your IRA. You will owe $24,000 in federal income tax plus a $10,000 penalty, leaving you with $66,000. You will also owe state income tax on the early distribution of $100,000, and your state may assess an early withdrawal penalty.

There are very limited exceptions to the 10% penalty. These exceptions are for first time home purchasers, some educational expenses, disability or death, certain medical expenses, some health insurance premiums, involuntary distributions from a tax levy, and certain periodic payments. For a more comprehensive list, consult the IRS or a CPA.

After age 59 ½:

Once you reach age 59½, you can withdraw funds from your Traditional IRA or 401(k) plan without restrictions or penalties. Distributions from IRAs and 401(k)s are still subject to tax as ordinary income.

Example: You are in the 24% tax bracket and take $100,000 out of your 401(k). You will owe $24,000 in federal income tax leaving you $76,000. You will also owe state income tax on the $100,000.

Age 70 ½ and over:

Once you reach age 70 ½, withdrawals become mandatory, with limited exceptions for 401(k) plans if you are still working. Beginning the year that you turn 70 ½, you must begin taking an annual Required Minimum Distribution (RMD) from your traditional IRA or 401(k) plan. The amount of your RMD depends on the value of your retirement accounts and your age. RMD amounts start in the 4% range at age 70 ½ and increase with age. The IRS publishes tables with the factor at reach age, but most custodians will perform the calculations for you and tell you the dollar amount you must take.

Financial planning explained

Here’s some good news: you can positively affect your level of economic success by planning for your future instead of “winging” it. Without a goal, and a plan to get there, people usually spend years chasing short-term objectives while their long-term objectives get farther away.

Financial Planning: Closing In On Retirement

Most of the people who have come to us for a financial plan are getting very close to retirement. They want to know:
• If they can retire,and when to start financial planning
• When they can retire and
• If they can live in the style to which they are accustomed.

But waiting until retirement is just around the corner leaves little time to make corrections. The ideal time to create a financial plan is when you’re young.

Financial Planning: Roadmapping

A financial plan is like a roadmap. It’s a map in time instead of space. Like a road trip, there are places you want to stop along the way, and a destination you want to reach. The stops along the way may be marriage, a home, college for the kids, cars, vacations or starting your own business. The destination may be retirement or leaving a legacy.

Along the route there are hazards to contend with: financial risks, illness, disability or even death.

Financial planning forces you to focus on the things you can control – like earning and saving – and understand that part of the future is outside of your control. It can point out ways to protect against risks that are outside your control.

A plan will identify resources you will need to reach your objectives; the professional advisors who will help you with the legal issues and determine who will provide the financial guidance you will require. A plan will even guide your beneficiaries and heirs once you are gone.

A plan does not execute itself. Like a map, you need to check it from time to time to make sure you are on the right road.

And, if you make the wrong turn and get lost, you need to be able to stop and ask directions. This is where a financial planner, the one who helped you set up your plan in the first place, is the right person to ask.

Financial Planning: Protect Against Risks

Arie and Stephen Korving are both CFP™ (CERTIFIED FINANCIAL PLANNER™) Practitioners. To find out more about Financial Planning and what it can do for you, call us 757-638-5490 or use our contact page for a free consultation.

Should I use annuities as a temporary investment?

A Reader Asks:

“Should I use annuities as a temporary investment?”

Financial Questions Millennials Ask: “What is the best way to save for the future outside of a work retirement plan?”

A young professional asks: “I am 27 years old and have finally worked myself into a well-paying job. I want to make the most of it by setting myself up for success down the road. I am currently investing into my thrift savings plan (TSP) once a month with the drill paycheck I receive for being in the National Guard and I also will be joining my company’s retirement plan. Other than these two methods of saving that I am currently contributing to, what is the best way for me to save for the future? I don’t want to put all of my money into a standard savings account which will not grow much over time. Should I consider online savings accounts with higher interest rates? I am also intrigued by dollar-cost averaging. Should I consider index funds?”

Here’s my answer:

Thank you for your question and congratulations on being so forward looking. At age 27 you have about three decades of saving and investing before retirement. Your future is in your hands in more ways than you may know. For example, by the time you retire the Social Security Trust Fund may well be exhausted and your benefits may be a lot lower than current retirees.

You should put as much as you can into your TSP and participate in your company’s retirement plans, which probably includes either a regular 401(k) or a Roth 401(k) plan. At your age I would consider contributing to a Roth plan. A Roth plan does not reduce your current taxes, but when you retire you can get your money out tax free, and meanwhile your money grows tax free.

You should try to save about 15% of your income for retirement. You should first create an emergency fund. You may be surprised to learn that four in ten people in this country can’t afford a $400 emergency without borrowing. An emergency fund equal to 6 months of your net income should be adequate. After funding your TSP and 401(k) plans you should open an investment account with a discount broker. Fund it with extra savings beyond what put in your tax-free accounts. Keep in mind that tax free accounts like IRAs, TSPs and 401(k) plans are not readily accessible without taxes or penalties.

Over the next few decades you will need money for things such as a home purchase, weddings, children, vacations, etc. That’s why taxable investment accounts are needed. Your tax deferred, tax free and taxable accounts all provide you with the assets you need to retire when you are ready. Based on your question I am assuming that you are not an experienced investor. Few people your age are. In fact, most people of any age are poor investors. I suggest you shop around for a good fee-only financial advisor who is willing to spend time teaching you the basics of investment management. He will charge you a fee, but it will be well worth it because learning by making mistakes is a lot more expensive.

Good luck and give me a call if you need more advice.

4 Keys to Financial Peace

Financial peace arrives when you no longer have to worry about your income being sufficient to cover your expenses. It’s a great feeling. Unfortunately, many people are financially insecure. They earn less than they spend and borrow the difference.

Major Brokers Don’t Want Investors Under $250,000

As the major investment firms woo the millionaires and billionaires, they are working to drop the “smaller” investors. There are several ways they do this.

It begins with account fees that make it prohibitively expensive to open small accounts. Second, they won’t pay brokers on account that don’t meet their minimums. For example, Merrill Lynch does not pay brokers on accounts under $250,000. At these firms there is pressure from management to transfer accounts for the middle-market investor to call centers where they receive the kind of impersonal service you get when you call an 800 number. This breaks the personal bonds that investors and advisors need to work well together.

The account minimums that the majors impose on their advisors may help the megabank-owned brokerages compete for high-net-worth clients. But the requirements also means that modest investors cannot get the kind of personal guidance that they need to reach their goals. It was a factor that caused us to form our own independent RIA firm because there’s more to client relationships than account size.

5 Ways of Maxing Out Your 401(k)

Begin early. Sign up to contribute to your company’s 401(k) the first day at work. Even if you can’t contribute a lot at first, make a contribution and allow the power of compounding work for you over the years. All things being equal, the length of time you allow your earnings to grow has the biggest impact on how much you’ll have at retirement.
Max out your contribution. Force yourself to save and you’ll find that it’s easier than you think to live within your means.
Always max out the company match. Many companies match employee contributions up to a certain percentage. Be sure to take advantage of the company match up to its limit. It supercharges your savings.
Don’t take distributions or loans from your 401(k) until you are retired. Distributions not only reduce the amount you have at retirement but can cause painful tax penalties.
Create a well diversified portfolio from the choices available to you. This is one of the biggest problems employees have: not knowing how to invest the funds they are saving. Now there is help available from Registered investment Advisors like Korving & Company that specialize in helping people manage their retirement plans, turning your 401(k) into a 401(OK).

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