What do you think about the market?

Once in a while I will meet someone new and they will ask “what do you think about the market”?   Most often they are referring to the stock market.   Typically, if I probe deeper, they want to know if I think the market is headed up or down in the near future.  My response, the same I have given for over 15 years, is – I don’t know.  Anyone who tells you they know, is not telling you the truth.  No one knows and no one ever will.

I wish I had a more elaborate answer then that, but I don’t.  Sometimes the simplest answer is the best one.  I will leave you with a quote that I find of tremendous value:

“Basically, price fluctuations have only one significant meaning for the true investor.  They provide him or her with an opportunity to buy wisely when prices fall sharply and sell wisely when they advance a great deal.  At other times they will do better if they forget about the stock market.”

– Benjamin Graham, Author, The Intelligent Investor, 1949

Investments will fluctuate and when redeemed may be worth more or less than when originally invested.  Past performance is not indicative of future results. 2011308/DOFU 1-2018

Assets vs Income

Generally speaking, stock brokers, money managers and most investors are hard-wired to seek growth.  Appreciation of stocks and one’s portfolio seems to be priority #1.

But when it comes to producing INCOME from those assets, a whole new set of skills is needed.  There are different tools, different risks, and different objectives.  Asset accumulation is NOT income optimization.

You need a different set of skills to pursue income maximizing strategies.  Moving from accumulation to decumulation – the orderly draw-down of assets – can be aided by a retirement INCOME expert.

In my book, How to Turn a Lifetime of Savings into Income for Life, I detail several different kinds of retirement income strategies available, and how they address the range of risks one may face in retirement. To get your copy, go to the top of the page and on the right hand side you can request one be emailed or mailed to you.

2003141/DOFU 1-2018


Spend and Replace Retirement Income Strategy

This strategy can be very simple or very complicated, depending on the unique needs of the investor.  A simple hypothetical example would be a person who has $200,000 and wants to spend $5,000 a year for 10 years and after those 10 years, be back to having $200,000.  So they might set $50,000 in a bank savings account and take $5,000 a year from that account.  But what should they do with the other $150,000?

With the other $150,000 they would need to find something with a a goal of generating 2.88% a year for 10 years.  If they found an investment that could potentially do that they would be back to $200,000 after the 10 years has passed.  As the name implied, they spent some money and completely replaced it.

The strategy can get more complex if need be to accommodate various income needs at different points in time.  For example, you may need $5,000 for 3 years then $10,000 for the next 3 years then need $0 for 2 years.  Using various Time Value of Money calculators you could craft a strategy to help meet those spending needs and replace that money by a later point in time.

Some people may prefer to use lower investment risk vehicles like CDs, Government Bonds or Fixed Annuities.  While others may use investments that carry additional market risk knowing they might not replace what they have spent but they are taking that risk in hopes of maybe having more.  There are many types of hypothetical scenarios I could come up with but hopefully you have general sense of the ‘spend and replace’ strategy.


This is a hypothetical example for illustrative purposes only.  It is not indicative of any particular investment or guarantee of future performance. Does not account for product fees or expenses. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.   2011298/DOFU 1-2018

How a Laddering Strategy works

This strategy can be used with a variety of financial vehicles that focus on providing fixed income.  You could use CDs, US Treasuries, Fixed Annuities, Corporate Bonds or even International Bonds.  Often times the strategy is used when someone wants to make sure they have a little more income coming in each year down the road and don’t mind tying up their money for potentially long stretches of time.

To illustrate how this works I will use all of the above mentioned vehicles in combination with one another.  To keep the math easy I will assume someone has $100,000 and needs at least $3,000 a year of income from those assets.  Each “step” of the ladder is represented by one product but in practice it could be one or several financial vehicles at each step.
Step           Investment             Product Used                               Income Amount
1                 $10,000                   1 year 1% CD                                         $100

2                 $10,000                   2 year 1.5% Treasury                            $150

3                 $10,000                   3 year 3% Corp bond                            $300

4                 $20,000                   4 year 3.3% Corp bond                         $660

5                 $20,000                   5 year 3.1% CD                                       $620

6                 $20,000                  6 year 5% Intl bond                                $1,000

7                 $10,000                  7 year 5% Fixed Annuity                        $500
……………………………………………………………………………..Total Income = $3,300

The numbers used above are not representative of rates currently offered. The numbers used are for illustrative purposes only to demonstrate how a ladder is set up to help meet one’s income needs.

Generally speaking, investors who use a ladder reinvest their principal amount at the end of each year in a new vehicle at the back end of the ladder.  Using the above example this investor, at the end of the first year, would take their $10,000 that they received back by cashing in their CD and buying something with a 7 year maturity since the 7 year fixed annuity they originally purchased will be expiring in 6 years so they need something to fill that 7 year slot.

Investments in fixed income securities are subject to the creditworthiness of their issuers and interest rate risk.  As such, the net asset value of bonds will fall as interest rates rise. Investment risks associated with international investing, in addition to other risks, may include currency fluctuations, political, social and economic instability and differences in accounting standards when investing in foreign markets.
 2011355/DOFU 1-2018

Could I utilize a CD or Treasury to live off the interest?

This is a strategy we used to see more of, I’ll explain that more in a minute, but see less and less of today.  This is a strategy where someone would take their retirement dollars, let’s use $100,000 for example, and buy a Certificate of Deposit (CD) or a Treasury bill, note or bond.

Let’s say the person puts $100,000 in a CD paying a hypothetical 5% for 3 years.  That person would get $5000 each year from the bank, live on that, and theoretically leave their $100,000 untouched.  After 3 years they would evaluate their options and probably buy another CD or Treasury bill, note or bond.  And that pattern would repeat itself until they no longer needed income or passed away.  I have seen people buy a 10 year or 30 year treasury note/bond with the intention of living off of that interest for that amount of time.

Over the last 19 years I have met with a lot of folks who thought this was going to be their primary method to provide retirement income from their savings.  Many have shared with me that with CDs once paying over 10% in 1984, and even a little over 5% as recent as 2000, they thought just buying CDs from their local bank was going to be sufficient for them.  Unfortunately rates on CDs and Treasuries have consistently fallen since 1984, and have stayed flat for many years, as seen in the chart below[1].



In fact I met with a gentleman who assumed he needed $25,000 a year of income from his assets in retirement and he planned on 1 year CDs always paying right about 5% so from that he calculated he would need about $500,000 in savings when he retired.  With interest rates on 1 year CDs being less than 1% at the time of this writing[2], this strategy has failed to materialize.

This one example doesn’t mean this strategy won’t work for some people.  It just shows you have to be careful what assumptions you use on interest rates.

CDs are subject to inflation risk and may be subject to liquidity restrictions. 2011349 /DOFU 01-2018


[2] www.bankrate.com

Beneficiary Designations

In my 21+ years of advising people on their finances I find one often overlooked area is beneficiary designations.  You may be asking yourself why this topic would warrant a full article.  Please allow me to share two stories so you can see the first hand impact of not having your beneficiary designations updated.

Several years ago I received a call from a gentleman who was referred to me when he lost his wife of over 30 years to cancer.  He called because he was going to come into a large sum of money from her pension plan and her life insurance and he had no clue what to do with the funds.  As we started to work up a strategy he called me one day out of the blue and said we may have a problem.  The beneficiary designations on her life insurance and pension plan still had her sister and brother listed from when she started teaching 30+ years ago…a few years before she met him.  Since finances weren’t their specialty they never remembered or were advised to go back and revisit those beneficiary designations and make sure they were updated to reflect him, being her husband, and their 6 children.    Thankfully her brother and sister didn’t fight his claim to the money and after a mountain of paperwork and phone calls he was made the beneficiary of those accounts and the checks were cut to him.  But just think if her siblings had not been so nice.  They could have taken that money and never let him have a cent.

We hear about these types of situations in the media and it is so simple to avoid these problems.  Often times it’s just completing a new form and nowadays as simple as going online and doing it electronically.

More recently I had a client who passed away suddenly.  Months before his death his family situation had changed and made some updates to his life insurance.  One policy he had, not through me, required a new beneficiary change form be completed by him and mailed or faxed back in.  I helped him on the phone with this company get the required form mailed to his residence.  Unfortunately he never got around to filling it out and sending it back in.  As I mentioned, he died suddenly.  Thankfully, everyone in his family acknowledged his wishes and took the appropriated steps and filled out all the required paperwork so the money could go to the people he wanted.  But again, they could have played hardball and won.  Beneficiary designations override a person’s will, so even if a will gets updated, that doesn’t mean those people will get the money that was supposed to be left to them.  The beneficiary designations have to be updated as well to avoid all the trouble that could come down the road.

So please take the time NOW (there is no time like the present) to check your IRA’s, 403b’s, 401k’s, Life Insurance (Private and Work plans), Pension plans or anything else that has a beneficiary designation on it and make sure those designations match your wishes.

The two stories I shared are those I have first hand experience from but being in this industry as long as I have.  However, I have heard many, many stories just like this and not all had happy endings like mine fortunately did.

Have more questions and need some more specific help?  Don’t fret!  Just email me at larry@midwestwealthadvisors with your specific question.  You will get a reply just soon as I am able.


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Lawrence(Larry) Tate