07/30/2009
How Much Annual Income Can Your Retirement Portfolio Provide?
Your retirement lifestyle will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. Your withdrawal rate is defined as the annual percentage that you take out of your portfolio, whether from returns or the principal itself. Determining an appropriate initial withdrawal rate is critical in retirement planning and presents many challenges. Take out too much too soon, and you might run out of money in your later years. Take out too little, and you might not enjoy your retirement years as much as you could.
Your withdrawal rate is especially important in the early years of your retirement; how your portfolio is structured then and how much you take out can have a significant impact on how long your savings will last. Gains in life expectancy have been dramatic. According to the National Center for Health Statistics, people today can expect to live more than 30 years longer than they did a century ago. Assuming rising inflation, your projected annual income in retirement will need to factor in those cost-of-living increases. That means you'll need to think carefully about how to structure your portfolio to provide an appropriate withdrawal rate, especially in the early years of retirement.
So what withdrawal rate should you expect from your retirement savings? The answer: it depends. A withdrawal rate of slightly more than 4% could provide inflation-adjusted income for at least 30 years. A higher initial withdrawal rate--closer to 5%--might be possible during the early years of retirement if withdrawals in later years grow more slowly than inflation. Broader portfolio diversification and rebalancing strategies can have a significant impact on initial withdrawal rates. Adding asset classes such as international stocks and real estate can increase portfolio longevity. You might consider freezing the withdrawal amount during years of poor portfolio performance. By applying some specific decision rules that take into account portfolio performance from year to year, it could be possible to have "safe" initial withdrawal rates above 5%.
More ways to help stretch your savings include: Don't overspend early in retirement, plan IRA distributions so you can preserve tax-deferred growth as long as possible, postpone taking Social Security benefits to increase payments, frequently adjust your asset allocation, and adjust your annual budget during years when returns are low.
Your home town banker can help you determine a retirement withdrawal rate that will work best for your situation.
07/23/2009
The Economy: What Can We Expect?
The current recession really started almost two years ago when real estate values began to plummet. Initially, we called this economic downturn the ‘Subprime Crisis’. As things worsened, the term became the ‘Credit Crunch’. As unfavorable conditions began to surface worldwide, the term morphed into the ‘Global Financial Meltdown’. The turn of events we’ve experienced since then has brought a new perspective on investing and the financial markets. With history as our teacher, we can look back at prior recessionary periods to try and predict what’s in store for us in the months and years ahead. Let’s uncover some history from prior recessions and look at the major factors that will shed some light on what we might expect in a post-recession economy.
According to the U.S. National Bureau of Economic Research, the Great Depression that began in 1929 lasted for 43 months. During that period, financial markets rallied several times before hitting bottom. The two most memorable recessions since then were the periods from 1973-1975 and from 1981-1982. These recessions were similar in that the decline in the economy from peak to trough both took an average of ten months. But the effect of these two recessions was mainly felt within our borders. The current economic crisis is much more far reaching in the devastation it has caused not only in the financial markets, but in the revaluation of world currencies, the production of domestic goods for domestic consumption and exporting, the production of foreign goods for exporting to the U.S. and other nations, the severe impact of unemployment, and the uncertainty it will bring with a new philosophy of consumer spending. Our current recession is not an average recession and, even if history does repeat itself, the experiences we encounter coming out of it may not be comparable to any previous recession we’ve had.
What will determine how we emerge from the current recession will depend on where our priorities lie in applying various methods to turn our economy around. Are we more concerned about easing credit policies and new government stimulus packages? Or are we more concerned with increasing debt and falling asset values? So far, it’s hard to tell. The U.S. government has spent billions of dollars in stimulus packages to prop-up financial institutions and insurance companies while, at the same time, it has agreed to spend billions of dollars purchasing mortgage-backed bonds at higher than market values to keep the real estate industry moving. I’m not sure I can identify the priorities we have for recovery, but I’m sure of this: we seem to be trying a little bit of everything on a trial and error basis to see what works. There’s nothing wrong with this, but down the road we can expect to have trillions of dollars of national debt, and governmental ownership, participation, oversight, and regulation of what once was corporate America.
Since World War II, the U.S. dollar has been the world’s reserve currency. This means that if other national currencies falter, the U.S. dollar will maintain value. In October 2008, the U.S. Treasury issued $30 billion in 4-week bonds and sold out before the auction ended in one day. Only 40% of this auction was purchased domestically, meaning that 60% of these U.S. bonds were purchased by international investors. The real kicker here is that these bonds were sold with zero percent coupons. In other words, 60% of international investors bought zero percent U.S. bonds expecting to keep their money---and their investments---safe. Forget about making any interest, just keep the investments safe.
What does this mean, really? It tells us that the U.S. has a reputation of long-term financial stability. When a severe recession like we’re experiencing hits the U.S., it makes things difficult and we Americans have to adjust, find resolve, and keep moving forward. When the same recession hits countries that are not as stable as the U.S. it can mean financial devastation and could even result in collapse of foreign governments. Bottom line, this reputation of long-term financial stability the U.S. enjoys basically allows us to operate at larger deficits and print money cheaper than any other country in the world.
So how do we make sense of all of this? What’s going to happen----and when? While the U.S. enjoys its reputation of stability, the global consequences of this recession may be more severe. Post-recession, the world will be poorer and quite possibly more dangerous. Emerging countries that survive may become militant toward their neighboring countries possibly spawning new wars and the rise and fall of governments. The U.S. will use its military might to sustain those countries with democratic principles. Domestic production might increase as a result and money begins to flow again---maybe---domestically at least. Economic conditions improve and the focus gets moved from the severity of the recession to international issues and foreign policy.
We wake up one day and determine this recession is over. Why? Domestic production is up in response to increasing demand for products. Unemployment is down with more jobs needed to meet production demands. Faith in our financial system is becoming restored. Investors are beginning again to take risks in the markets. The U.S. dollar is holding its value against international currencies. Uncle Sam is looking to increase tax rates to payoff trillions of dollars of debt. Unforeseen problems in healthcare reform are emerging. Government intervention in U.S. private enterprise is at its highest level ever. And an election year is coming up.
All of a sudden, this doesn’t seem so unusual. Or does it?
07/09/2009
Helping Grandchildren with College Costs
Helping pay for a grandchild's college education is a smart way for grandparents to pass on wealth without having to pay gift and estate taxes. Let’s discuss some ways to accomplish this goal.
One way to help with college costs is to make a gift of cash or securities, but this method has drawbacks. A gift of more than the annual federal gift tax exclusion amount--$12,000 for individual gifts, $24,000 for joint gifts--might have gift tax and generation-skipping transfer tax (GSTT) consequences.
A 529 plan is an excellent way to contribute to a grandchild's college education, while simultaneously paring down your own estate. Contributions grow tax deferred, and withdrawals used for qualified education expenses are completely federal and state tax free.
There are two types of 529 plans: college savings plans and prepaid tuition plans. College savings plans are individual accounts offered by most states and managed by financial institutions. Funds can be used at any accredited college in the United States or abroad. Prepaid tuition plans allow prepayment of tuition at today's prices for the colleges that participate in the plan.
Grandparents can open a 529 account and name a grandchild as beneficiary, but only one grandparent can be the account owner. Grandparents can contribute to an existing 529 account with a lump sum or in smaller, regular amounts. Lump-sum gifts have a big advantage in 529 plans because individuals can make a lump-sum gift of up to $60,000 ($120,000 for joint gifts by married couples) and avoid federal gift tax. A special election must be made to treat the gift as if it were made in equal installments over a five-year period, and no additional gifts can be made to the beneficiary during this time. This money is considered removed from your estate, even though one grandparent can still retain control over the funds if he or she is the 529 account owner. Note that if the donor were to die during the five-year period, a prorated portion of the contribution would be "recaptured" into the estate for estate tax purposes. Under current law, a grandparent-owned 529 plan won't impact a grandchild's chances of qualifying for federal aid. Note that funds in a grandparent-owned 529 plan may still be included when determining Medicaid eligibility, unless these funds are specifically exempted by state law.
Your home town banker can help you create a plan to help grandchildren pay for college.
07/02/2009
Recovering from Identity Theft
Last week we discussed precautions you can take to help prevent becoming a victim of identity theft. This week we will look at immediate action steps you should take if you discover you have become a victim of identity theft.
To minimize your losses, act fast. Contact, in this order:
- Your credit card companies
- Your bank
- The three major credit bureaus
- Local, state, or federal law enforcement authorities
Credit card companies are getting better at detecting fraud, but the responsibility to notify them of lost or stolen cards is still yours. If you do so within 30 days after you discover the loss, you won't be responsible for more than $50 per card in fraudulent charges. Ask that the accounts be closed at your request, and open new accounts with password protection. Follow up your initial creditor contacts with letters indicating the date you reported the loss or theft.
If your debit (ATM) card is lost or stolen, you won't be held responsible for any unauthorized withdrawals if you report the loss before it's used. Otherwise, the extent of your liability depends on how quickly you report the loss.
- If you report the loss within two business days after you notice the card is missing, you'll be held liable for up to $50 of unauthorized withdrawals
- If you fail to report the loss within two days after you notice the card is missing, you can be held responsible for up to $500 in unauthorized withdrawals.
- If you fail to report an unauthorized transfer or withdrawal that's posted on your bank statement within 60 days after the statement is mailed to you, you risk unlimited loss.
If your checkbook is lost or stolen, stop payment on any outstanding checks, then close the account and open a new one. Dispute any fraudulent checks accepted by merchants in order to prevent collection activity against you. And notify the check-guarantee bureaus: Certegy (formerly Equifax-Telecredit) www.certegy.com, Check Rite www.checkritesystems.com, ChexSystems www.chexhelp.com, CrossCheck www.cross-check.com, NPC www.npc.net, SCAN www.arjaydata.com, TeleCheck www.telecheck.com.
If your credit cards have been lost or stolen, call the fraud number of any one of the three national credit reporting agencies:
- Equifax (888) 766-0008
- Experian (888) 397-3742
- TransUnion (800) 680-7289
You need to call only one of the three; the one you call is required to contact the other two.
Next, place a fraud alert on your credit report. Once a fraud alert has been placed on your credit report, any user of your report is required to verify your identity before extending any existing credit or issuing new credit in your name. If you discover fraudulent transactions on your credit reports, contest them through the credit bureaus. Do so in writing, and provide a copy of the identity theft report you file. You should also contest the fraudulent transaction with the merchant, bank, or creditor who reported the information to the credit bureau. Both the credit bureaus and those who provide information to them are responsible for correcting fraudulent information on your credit report.
You should file a report about the theft with a federal, state, or local law enforcement agency. Once you've filed the report, get a copy of it because you may need to provide it to banks or creditors before they'll forgive any unauthorized transactions. Write down the name and contact information of the investigator who took your report, and give it to creditors, banks, or credit bureaus that may need to verify your case.
Contact your friendly home town banker for more ways to recover from identity theft.
Back to President's Articles
07/30/2009
How Much Annual Income Can Your Retirement Portfolio Provide?
Your retirement lifestyle will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. Your withdrawal rate is defined as the annual percentage that you take out of your portfolio, whether from returns or the principal itself. Determining an appropriate initial withdrawal rate is critical in retirement planning and presents many challenges. Take out too much too soon, and you might run out of money in your later years. Take out too little, and you might not enjoy your retirement years as much as you could.
Your withdrawal rate is especially important in the early years of your retirement; how your portfolio is structured then and how much you take out can have a significant impact on how long your savings will last. Gains in life expectancy have been dramatic. According to the National Center for Health Statistics, people today can expect to live more than 30 years longer than they did a century ago. Assuming rising inflation, your projected annual income in retirement will need to factor in those cost-of-living increases. That means you'll need to think carefully about how to structure your portfolio to provide an appropriate withdrawal rate, especially in the early years of retirement.
So what withdrawal rate should you expect from your retirement savings? The answer: it depends. A withdrawal rate of slightly more than 4% could provide inflation-adjusted income for at least 30 years. A higher initial withdrawal rate--closer to 5%--might be possible during the early years of retirement if withdrawals in later years grow more slowly than inflation. Broader portfolio diversification and rebalancing strategies can have a significant impact on initial withdrawal rates. Adding asset classes such as international stocks and real estate can increase portfolio longevity. You might consider freezing the withdrawal amount during years of poor portfolio performance. By applying some specific decision rules that take into account portfolio performance from year to year, it could be possible to have "safe" initial withdrawal rates above 5%.
More ways to help stretch your savings include: Don't overspend early in retirement, plan IRA distributions so you can preserve tax-deferred growth as long as possible, postpone taking Social Security benefits to increase payments, frequently adjust your asset allocation, and adjust your annual budget during years when returns are low.
Your home town banker can help you determine a retirement withdrawal rate that will work best for your situation.
07/23/2009
The Economy: What Can We Expect?
The current recession really started almost two years ago when real estate values began to plummet. Initially, we called this economic downturn the ‘Subprime Crisis’. As things worsened, the term became the ‘Credit Crunch’. As unfavorable conditions began to surface worldwide, the term morphed into the ‘Global Financial Meltdown’. The turn of events we’ve experienced since then has brought a new perspective on investing and the financial markets. With history as our teacher, we can look back at prior recessionary periods to try and predict what’s in store for us in the months and years ahead. Let’s uncover some history from prior recessions and look at the major factors that will shed some light on what we might expect in a post-recession economy.
According to the U.S. National Bureau of Economic Research, the Great Depression that began in 1929 lasted for 43 months. During that period, financial markets rallied several times before hitting bottom. The two most memorable recessions since then were the periods from 1973-1975 and from 1981-1982. These recessions were similar in that the decline in the economy from peak to trough both took an average of ten months. But the effect of these two recessions was mainly felt within our borders. The current economic crisis is much more far reaching in the devastation it has caused not only in the financial markets, but in the revaluation of world currencies, the production of domestic goods for domestic consumption and exporting, the production of foreign goods for exporting to the U.S. and other nations, the severe impact of unemployment, and the uncertainty it will bring with a new philosophy of consumer spending. Our current recession is not an average recession and, even if history does repeat itself, the experiences we encounter coming out of it may not be comparable to any previous recession we’ve had.
What will determine how we emerge from the current recession will depend on where our priorities lie in applying various methods to turn our economy around. Are we more concerned about easing credit policies and new government stimulus packages? Or are we more concerned with increasing debt and falling asset values? So far, it’s hard to tell. The U.S. government has spent billions of dollars in stimulus packages to prop-up financial institutions and insurance companies while, at the same time, it has agreed to spend billions of dollars purchasing mortgage-backed bonds at higher than market values to keep the real estate industry moving. I’m not sure I can identify the priorities we have for recovery, but I’m sure of this: we seem to be trying a little bit of everything on a trial and error basis to see what works. There’s nothing wrong with this, but down the road we can expect to have trillions of dollars of national debt, and governmental ownership, participation, oversight, and regulation of what once was corporate America.
Since World War II, the U.S. dollar has been the world’s reserve currency. This means that if other national currencies falter, the U.S. dollar will maintain value. In October 2008, the U.S. Treasury issued $30 billion in 4-week bonds and sold out before the auction ended in one day. Only 40% of this auction was purchased domestically, meaning that 60% of these U.S. bonds were purchased by international investors. The real kicker here is that these bonds were sold with zero percent coupons. In other words, 60% of international investors bought zero percent U.S. bonds expecting to keep their money---and their investments---safe. Forget about making any interest, just keep the investments safe.
What does this mean, really? It tells us that the U.S. has a reputation of long-term financial stability. When a severe recession like we’re experiencing hits the U.S., it makes things difficult and we Americans have to adjust, find resolve, and keep moving forward. When the same recession hits countries that are not as stable as the U.S. it can mean financial devastation and could even result in collapse of foreign governments. Bottom line, this reputation of long-term financial stability the U.S. enjoys basically allows us to operate at larger deficits and print money cheaper than any other country in the world.
So how do we make sense of all of this? What’s going to happen----and when? While the U.S. enjoys its reputation of stability, the global consequences of this recession may be more severe. Post-recession, the world will be poorer and quite possibly more dangerous. Emerging countries that survive may become militant toward their neighboring countries possibly spawning new wars and the rise and fall of governments. The U.S. will use its military might to sustain those countries with democratic principles. Domestic production might increase as a result and money begins to flow again---maybe---domestically at least. Economic conditions improve and the focus gets moved from the severity of the recession to international issues and foreign policy.
We wake up one day and determine this recession is over. Why? Domestic production is up in response to increasing demand for products. Unemployment is down with more jobs needed to meet production demands. Faith in our financial system is becoming restored. Investors are beginning again to take risks in the markets. The U.S. dollar is holding its value against international currencies. Uncle Sam is looking to increase tax rates to payoff trillions of dollars of debt. Unforeseen problems in healthcare reform are emerging. Government intervention in U.S. private enterprise is at its highest level ever. And an election year is coming up.
All of a sudden, this doesn’t seem so unusual. Or does it?
07/09/2009
Helping Grandchildren with College Costs
Helping pay for a grandchild's college education is a smart way for grandparents to pass on wealth without having to pay gift and estate taxes. Let’s discuss some ways to accomplish this goal.
One way to help with college costs is to make a gift of cash or securities, but this method has drawbacks. A gift of more than the annual federal gift tax exclusion amount--$12,000 for individual gifts, $24,000 for joint gifts--might have gift tax and generation-skipping transfer tax (GSTT) consequences.
A 529 plan is an excellent way to contribute to a grandchild's college education, while simultaneously paring down your own estate. Contributions grow tax deferred, and withdrawals used for qualified education expenses are completely federal and state tax free.
There are two types of 529 plans: college savings plans and prepaid tuition plans. College savings plans are individual accounts offered by most states and managed by financial institutions. Funds can be used at any accredited college in the United States or abroad. Prepaid tuition plans allow prepayment of tuition at today's prices for the colleges that participate in the plan.
Grandparents can open a 529 account and name a grandchild as beneficiary, but only one grandparent can be the account owner. Grandparents can contribute to an existing 529 account with a lump sum or in smaller, regular amounts. Lump-sum gifts have a big advantage in 529 plans because individuals can make a lump-sum gift of up to $60,000 ($120,000 for joint gifts by married couples) and avoid federal gift tax. A special election must be made to treat the gift as if it were made in equal installments over a five-year period, and no additional gifts can be made to the beneficiary during this time. This money is considered removed from your estate, even though one grandparent can still retain control over the funds if he or she is the 529 account owner. Note that if the donor were to die during the five-year period, a prorated portion of the contribution would be "recaptured" into the estate for estate tax purposes. Under current law, a grandparent-owned 529 plan won't impact a grandchild's chances of qualifying for federal aid. Note that funds in a grandparent-owned 529 plan may still be included when determining Medicaid eligibility, unless these funds are specifically exempted by state law.
Your home town banker can help you create a plan to help grandchildren pay for college.
07/02/2009
Recovering from Identity Theft
Last week we discussed precautions you can take to help prevent becoming a victim of identity theft. This week we will look at immediate action steps you should take if you discover you have become a victim of identity theft.
To minimize your losses, act fast. Contact, in this order:
- Your credit card companies
- Your bank
- The three major credit bureaus
- Local, state, or federal law enforcement authorities
Credit card companies are getting better at detecting fraud, but the responsibility to notify them of lost or stolen cards is still yours. If you do so within 30 days after you discover the loss, you won't be responsible for more than $50 per card in fraudulent charges. Ask that the accounts be closed at your request, and open new accounts with password protection. Follow up your initial creditor contacts with letters indicating the date you reported the loss or theft.
If your debit (ATM) card is lost or stolen, you won't be held responsible for any unauthorized withdrawals if you report the loss before it's used. Otherwise, the extent of your liability depends on how quickly you report the loss.
- If you report the loss within two business days after you notice the card is missing, you'll be held liable for up to $50 of unauthorized withdrawals
- If you fail to report the loss within two days after you notice the card is missing, you can be held responsible for up to $500 in unauthorized withdrawals.
- If you fail to report an unauthorized transfer or withdrawal that's posted on your bank statement within 60 days after the statement is mailed to you, you risk unlimited loss.
If your checkbook is lost or stolen, stop payment on any outstanding checks, then close the account and open a new one. Dispute any fraudulent checks accepted by merchants in order to prevent collection activity against you. And notify the check-guarantee bureaus: Certegy (formerly Equifax-Telecredit) www.certegy.com, Check Rite www.checkritesystems.com, ChexSystems www.chexhelp.com, CrossCheck www.cross-check.com, NPC www.npc.net, SCAN www.arjaydata.com, TeleCheck www.telecheck.com.
If your credit cards have been lost or stolen, call the fraud number of any one of the three national credit reporting agencies:
- Equifax (888) 766-0008
- Experian (888) 397-3742
- TransUnion (800) 680-7289
You need to call only one of the three; the one you call is required to contact the other two.
Next, place a fraud alert on your credit report. Once a fraud alert has been placed on your credit report, any user of your report is required to verify your identity before extending any existing credit or issuing new credit in your name. If you discover fraudulent transactions on your credit reports, contest them through the credit bureaus. Do so in writing, and provide a copy of the identity theft report you file. You should also contest the fraudulent transaction with the merchant, bank, or creditor who reported the information to the credit bureau. Both the credit bureaus and those who provide information to them are responsible for correcting fraudulent information on your credit report.
You should file a report about the theft with a federal, state, or local law enforcement agency. Once you've filed the report, get a copy of it because you may need to provide it to banks or creditors before they'll forgive any unauthorized transactions. Write down the name and contact information of the investigator who took your report, and give it to creditors, banks, or credit bureaus that may need to verify your case.
Contact your friendly home town banker for more ways to recover from identity theft.
Back to President's Articles