Retirement
There's A Growing Gap Of Opportunity As The Boomer Population Ages
Wednesday, May 09, 2012 11:20

Tags: Boomers | life planning | retirement

As the age-denying Baby Boomer generation grows older, it may need your help to face reality. The growing gap between the Boomer and Echo-boom generations is highlighting the fact that Boomers’ reticence to deal with the challenges of aging is becoming a burden on younger generations.

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People across the globe are having fewer children. That means there will be fewer people to fill the jobs Boomers vacate as they retire. Global median age is expected to rise from 29 years old in 2010 to 39 by 2050.
 
Real life examples are already pointing to some of the demographic issues. As more and more people live beyond age 100, their children begin to face their own aging issues. A 107-year-old may have children in their 80s who are unable to care for them because of their own care needs. The fact that most Americans only have about $25,000 in retirement savings doesn’t make the picture any brighter.
 
These predictions point to a demographic reality, yet they seem to ignore the fact that the Echo-boom generation is as large in number as the Boomer generation. Although these problems are real and need to be addressed in a timely, one of the biggest gaps seems to be that an industrious younger generation is on the rise and may add unexpected relief. Still, relief relative to the oldest Boomers may not be timely.

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Becoming An Expert On Medicare Legislation And Benefits Could Be Your Next Business Growth Tool
Tuesday, May 08, 2012 07:50

Tags: healthcare | investing | retirement planning

Retirees may be in for a surprise when they discover that Medicare will only pay for 51% of their health care expense instead of the 68% they guessed on a recent survey.
 
Over half of retirees say their biggest worry about retirement is having enough to pay for health care, yet it is a worry they rarely talk about with their financial advisors. Developing a strategic health care back-up plan for your clients might be an excellent way to position your business for its next phase of strong growth.

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Getting up to speed on Medicare reforms can be to your advantage, especially in light of the possible 30% cut to doctors’ reimbursements unless Congress extends current laws. It’s yet another aspect of retirement planning that you can help your clients manage.
 
The first Baby Boomers turned 65 January 1 of 2011. Another 10,000 Boomers will reach that minimum Medicare benefits age every day for the next 20 years. That means there’s already a significant Medicare and health care market that you could be developing. Educating yourself now, before the legislation happens late this year or early next will position you well either way the legislation goes.

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Wade Pfau On Problems With Applying The 4% Withdrawal Rate Rule To Economies Beyond The U.S.
Sunday, May 06, 2012 09:19

Tags: retirement | retirement income | retirement planning

From an international perspective, a 4% real withdrawal rate is surprisingly risky. Even with some overly optimistic assumptions, it would have only provided "safety" in four of 17 developed countries studied, and a fixed asset allocation split evenly between stocks and bonds would have failed at some point in all 17 countries.

   

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An argument in support of the 4% rule is that, despite what I have argued before, is that the U.S. post-1926 did suffer a number of calamitous market events, such as the Great Depression and the Great Stagnation of the 1970s. It's hard to imagine an even future retirees ever facing more difficult times. Thus, the historical success of the 4% rule suggests that we can reasonably plan for its continued success in the future.

 

My first foray into researching about personal retirement planning was a study about the sustainability of the 4% rule in other developed market countries. Here I will provide further perspective about the results described in my article, An International Perspective on Safe Withdrawal Rates: The Demise of the 4% Rule? in the December 2010 Journal of Financial Planning.  

 

From an international perspective, a 4% withdrawal rate has been problematic. In the original article, to avoid claims of bias that I choose an asset allocation which exaggerates the risk of the 4% rule, I used a rather generous and unrealistic “perfect-foresight assumption.” For each country and in each retirement year, I used the asset allocation (between stocks, bonds, and bills) which supported the highest withdrawal rate. Though not always, in many cases this meant using 100% stocks. With the perfect-foresight assumption and an updated dataset which includes two more countries, the calculated SAFEMAX (this is the maximum sustainable withdrawal rate over 30-years in the worst-case scenario from a country's history) exceeds 4% in Canada (4.4%), New Zealand (4.1%), Sweden (4.1%), Denmark (4.1%), the GDP-weighted world portfolio (4.1%), and the US (4%).   The perfect foresight assumption is quite unrealistic, though, and here I will focus on a more plausible 50/50 retirement asset allocation. In terms of the SAFEMAX, 50% stocks and 50% bills generally outperforms 50% stocks and 50% bonds. For this reason, I will further consider results for the stocks and bills case. Though not shown here, I do also note that stock allocations below 50% support lower SAFEMAXs in all countries except Switzerland and Sweden. The results for 50/50 are in Table 3.2.

 

 

 

 

 
 
Table 3.2
Maximum Sustainable Withdrawal Rates, for Retirees 1900-1981
Asset Allocation: 50% Stocks & 50% Bills

 

 

 

 

 

 

 

Withdrawal Rate = 4%

 

Withdrawal Rate = 5%

 

 

 

SAFEMAX

 

SAFEMAX Year

 

10th Percentile

 

# Years in Worst Case

 

% Failures Within 30 Years

 

# Years in Worst Case

 

% Failures Within 30 Years

 

United States

 

3.96

 

1937

 

4.42

 

29

 

1.2%

 

19

 

41.5%

 

Canada

 

3.96

 

1937

 

4.58

 

29

 

1.2%

 

19

 

42.7%

 

New Zealand

 

3.78

 

1935

 

4.06

 

27

 

8.5%

 

18

 

42.7%

 

Denmark

 

3.65

 

1937

 

4.17

 

25

 

7.3%

 

19

 

62.2%

 

World

 

3.58

 

1937

 

4.09

 

23

 

3.7%

 

17

 

57.3%

 

Australia

 

3.5

 

1970

 

3.78

 

21

 

13.4%

 

15

 

39.0%

 

United Kingdom

 

3.36

 

1937

 

3.8

 

22

 

24.4%

 

16

 

48.8%

 

Sweden

 

3.22

 

1914

 

3.83

 

20

 

12.2%

 

14

 

41.5%

 

World Ex-US

 

3.21

 

1934

 

3.71

 

20

 

22.0%

 

13

 

52.4%

 

Switzerland

 

3.13

 

1915

 

3.42

 

19

 

34.2%

 

13

 

62.2%

 

South Africa

 

3.01

 

1937

 

3.81

 

21

 

15.9%

 

17

 

30.5%

 

Norway

 

2.98

 

1939

 

3.09

 

17

 

47.6%

 

12

 

69.5%

 

Netherlands

 

2.82

 

1941

 

3.76

 

17

 

22.0%

 

13

 

65.9%

 

Ireland

 

2.79

 

1937

 

3.15

 

19

 

36.6%

 

14

 

64.6%

 

Spain

 

2.16

 

1936

 

2.61

 

12

 

53.7%

 

10

 

87.8%

 

Belgium

 

1.58

 

1914

 

2.02

 

11

 

56.1%

 

9

 

73.2%

 

Finland

 

1.32

 

1917

 

1.8

 

6

 

43.9%

 

5

 

56.1%

 

Germany

 

1.01

 

1914

 

1.22

 

3

 

56.1%

 

3

 

70.7%

 

France

 

0.82

 

1943

 

1.31

 

7

 

75.6%

 

6

 

86.6%

 

Italy

 

0.8

 

1940

 

1

 

5

 

80.5%

 

4

 

86.6%

 

Japan

 

0.26

 

1937

 

0.29

 

3

 

37.8%

 

3

 

43.9%

 

Note: Assumptions include a 30-year retirement duration, no administrative fees, constant inflation-adjusted withdrawal amounts, and annual rebalancing.

 

Source: Own calculations from Dimson, Marsh, and Staunton (1900 - 2010) data.

 
 

With a 50/50 asset allocation, the 4% rule did not survive in any country, though it came close in the U.S. and Canada, with support for 29 years of expenditures and a SAFEMAX just below 4%. Even allowing for a 10% failure rate, 4% made the cut only in Canada, the US, New Zealand, Denmark, and the GDP-weighted world portfolio. In 10 of 19 countries, the SAFEMAX fell below 3%. World War II era Japan, in particular, faced the sort of crisis suggested by William Bernstein, as the SAFEMAX was only 0.26% for 1937 retirees. The 4% rule would have supported expenditures for only 3 years. Shockingly, the 4% rule would have failed more than half of the time for countries including Spain, Belgium, Germany, France, and Italy. Italians attempting to use the 4% rule would have actually faced failure in 80.5% of cases. The table also shows results for a 5% withdrawal rate, and failures rates are substantially higher than for 4%. Even if the 4% rule could somehow be deemed as safe, there is clearly not much room for error when seeing how quickly failure rates rise for 5% withdrawals. I do not use hyperbole when suggesting that the results in this table do not portray the 4% rule in a positive light.

 

To expand the previous table further, Figure 3.2 shows a boxplot of the distribution of withdrawal rates for each country, ranked by order of their SAFEMAX from smallest to largest. For each country, the red central marker is the median, the edges of the box are the 25th and 75th percentiles, and the whiskers extend to the most extreme datapoints not defined as outliers. Outliers are plotted individually. This figure does provide a broader view about the range of outcomes for each country.

 

 

 

 

 

Figure 3.3, meanwhile, shows the distribution of withdrawal rates across countries for each retirement year. From this figure, we can see the contemporaneous correlation of withdrawal rates across countries and also observe general historic trends. In recent years, those who have challenged the 4% rule are sometimes accused of falling victim to recency bias, placing too much weight on the poor financial market conditions of the recent past. However, Figure 3.3 suggests that recency bias may instead be responsible for too much faith in 4%. Across countries, the median sustainable withdrawal rate was under 4% in many cases prior to about 1945. Since World War II, however, the median outcome never fell below 4%, and in only a few cases did the 25th percentile fall below 4%. Indeed, in recent years the performance of the 4% rule across countries was much stronger than the earlier part of the historical period. While some of the worst outcomes can be connected with World Wars I and II, given the broader view of history suggested by William Bernstein, is it appropriate to ignore those cases? Whether there are important structural changes which might explain why the earlier period is less relevant to today’s environment is an exercise to be left for the reader’s interpretation.

 

 

 

 

Keep in mind also that I am only looking at the 19 developed market countries in the dataset, with data going back to 1900. Travel back in time to 1900, though, and ask people to put together a list of 19 developed market countries for the 20th century, and you would probably find frequent mention of countries like Argentina, Russia, and China, among others. As those countries never made the dataset, even the results I describe here include survivorship bias.

 

From the perspective of a U.S. retiree, the issue is whether the future will provide the same asset return patterns as in the past, or whether Americans should expect mean reversion that would lower asset returns to levels more in line with what many other countries have experienced. And for international readers, do keep in mind that the 4% rule is based on U.S. historical data, and mileage may vary quite dramatically in other countries.

 

It may be tempting to hope that asset returns in the 21st century United States will continue to be as spectacular as in the last century, but John Bogle cautioned his readers in his 2009 book Enough, “Please, please, please: Don’t count on it.

 

This speaks to the RIIA's fundemental goal of retirement planning to first build a floor and then expose to upside. 

 

 

Wade Pfau, Ph.D., CFA, is an associate professor of economics at the National Graduate Institute for Policy Studies (GRIPS) in Tokyo, Japan, and the curriculum director for the Retirement Management AnalystSM designation program. He maintains a blog about retirement planning research at

wpfau.blogspot.com

 

 

 

 

 


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Boomer Women Have Saved Even Less Than Men And Need Retirement Planning Help
Friday, May 04, 2012 10:22

Tags: Boomers | retirement planning | women investors

Although Baby Boomers are the notorious group for not saving enough for retirement, women have not saved as much as men and they need guidance for retirement planning. Women typically have saved $108,000 for retirement compared to $150,000 for men.

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Lack of income and too much debt are reasons that both genders have not saved enough. Fewer women are aware of how much money they will need during retirement and almost 70% of women say in a recent study that they look to family and friends to give them advice.
 
Women and others who are experiencing significant growth in control over investment decisions may offer a new segment of revenue growth to advisors who understand their approach to investing and the different needs they may have. The low savings numbers show that both genders still have compelling needs for retirement planning advice.

 

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Analyzing Long Term Bonds In A Retirement Portfolio; 10-Year Treasurys Versus Dividend Stocks
Thursday, May 03, 2012 16:02

Tags: bonds | dividends | interest rates | retirement planning

Oh, how advisors and their clients long for the days when it was easy to earn 6% on a U.S. Treasury bond. The income alone was enough to see many people through their retirement years.

 
It used to be so simple for those approaching retirement:  Start trimming the portion of your retirement portfolio dedicated to equities and move into laddered, safe fixed-income.
 
Just 10 years ago you could get a 6% yield on a 10-year U.S. Treasury bond. Now you don’t even get 2%. With yields rising around the world on government debt, the risk/reward tradeoff for long-term fixed income is weighted way too heavily on the risk side these days.

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Much has been written on the debt problems of the U.S. federal government and how our public Debt/GDP ratio is now above 100%. More than a handful of analysts have predicted skyrocketing yields within the next few years as our debt moves ever higher. But these are arguments all subject to serious debate and it is very difficult to time when (or if) treasury rates will rise. However, what we can do is look at the risk/reward tradeoff objectively.
 
Let’s take a 10 year U.S. Treasury bond, which has a yield of 1.9% today, and see how the total return will fare in various scenarios.
 
Interest Rate
Movement (%)
One Year
Total Return
-3%
27.0%
-2%
18.6%
-1%
10.2%
0%
1.9%
1%
-6.6%
2%
-15.0%
3%
-23.4%
4%
-31.8%
5%
-40.2%
6%
-48.6%
 
If interest rates don’t budge over the next year, the total return on a 10 year treasury bond (before taxes) will be about 1.9%. If rates continue to fall, the return will of course be higher. But how far can interest really fall from here? If the 10 year treasury rate declines by 2%, we’re into negative yields for the 10 year, which has never happened. At that point investors would be paying the government to hold their money for them for 10 years.
 
Looking at the scenarios when interest rates rise, we see how bad it can be. If the 10 year simply goes back to the levels that existed in the 2000, investors would see a -32% return on their investment. For a 30 year treasury bond, this scenario would produce about a -45% return.
 
Treasury bonds used to mean safety. They used to mean a secure retirement for retirees. That has all changed. Not only is the interest rate risk greater than it used to be, but there is also what was unthinkable a decade ago: credit risk.
 
The U.S. credit rating was notably downgraded by S&P last year for the first time in our country’s history. It’s obvious to most of us who follow the country’s debt problems that the U.S. is no longer a AAA country. No country with $1.5 trillion deficits and Debt/GDP above 100% should be considered AAA; not even the U.S.
 
So what can one do to get away from long-term fixed income and the risk that it entails? I have been a big proponent of companies which have a reasonable dividend yield, low debt, make things we need, and have shown consistent dividend growth over time. Companies that fall into this category are Johnson & Johnson (JNJ), Procter & Gamble (PG), Wal-Mart (WMT), Coca-Cola (KO), Exxon (XOM), and Merck (MRK).
 
Let’s compare how a 10 year treasury bond might fare against a solid dividend payer like Johnson & Johnson over a 10 year time frame. Let’s assume an investor buys $100,000 worth of a 10 year treasury bond and holds to maturity. Let’s also assume he buys $100,000 worth of JNJ stock and the dividend growth over that time period is 5%, while the stock price doesn’t move. Currently JNJ has a dividend yield of 3.5% and a 5 year dividend growth rate of 9.5%. I ran the scenario on JNJ in our publicly available calculator called Dividend Yield And Growth. This analysis assumes the investments are in a tax-deferred account.
 
Investment
Annualized
Return
Total
Return
Value of
Initial Investment
JNJ
4.2%
50.6%
$150,600
10 Year Treasury
1.8%
19.5%
$119,530
Difference
2.4%
31.1%
$31,070
 
Dividend growth stocks can help a retirement plan immensely, especially versus low-yielding treasury bonds. I plugged in the 4.2% total return figure I found in our first example into our retirement planner in place of the ten treasury bonds that were in the portfolio before. I found that if a typical 55-year old couple with $400,000 in assets moves 50% of their funds from Treasurys to dividend payers that give them a 4.2% return, over ten years they will have increased the time that their funds last in retirement by over ten years. 
 
I have no doubt where my money would rather be right now. Even if an investor doesn’t want to hold any equities, I believe it is prudent to keep one’s money in short-term fixed income and wait until yields rise enough to make it worth the risk. 
 

 

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