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How Long Will My Money Last?

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How Long Will My Money Last?

This title, including the article, is specifically curated on the probable longevity of your retirement savings. A sizeable nest egg is the saviour and offers a profound sense of security during retirement. And, it is the one question millions panic of, given the importance of financial stability needed to see us through retirement and beyond.

How long your money will actually last is quite debatable and, rests on the degree of our financial literacy and other external, unforeseen circumstances. With the increased cost of medical expenses and, uncertainty becoming all the more relevant, the possibility of exhausting savings rapidly worries retirees.

Apparently, the constant worrying about the duration your retirement money will last will have negative consequences on your daily performance with factors affecting your health too.

Factors Affecting Retirement Savings

Figuring out the exact number of years your retirement savings will last is tricky and is often half-baked. Several components like pensions, if any, social security account, returns, inflation, unexpected expenses and others drastically affect the longevity of your nest egg. Your standard of living and your lifespan also play a significant role in determining the savings for your retirement.

However, still, making a calculated analysis of your savings, taking your investments and annual expenses into account can give you more-than-a-draft of your financial status.

Ways to make your Nest Egg last Longer 

The 4% rule

Sticking to the 4% rule allows you to safeguard your retirement account from deteriorating early. The rule specifies how much you should withdraw from your retirement funds every year. The rule ensures steady income while also maintaining the balance through an incoming flow of money.

The rule should be followed every year with an inflation adjustment. This consists of dividends too and, is a safe bet to ensure a strong investment account. Life expectancy plays a great role here as several expenses, including medical costs, can increase with an increase in age.

Inflation in the 4% Rule

One thing to note in this case is, you need to increase the rate to keep the effects of inflation under control. You can choose to increase the rate by 2% every year or match it with the actual inflation rate.

But there are circumstances where the 4% rule doesn’t work in favour of the retiree. If your portfolio has high-risk investments, it can drain your account during a market downturn. Moreover, you have to be in control of your withdrawals and keep away from violating the rules. Drawing excessively cuts off the principal amount and, impacts the compound interest directly.

The dynamic withdrawal

There are some restrictions in the 4% rule, resulting in limited withdrawals. The money withdrawn every year is only adjusted by inflation. You cannot draw much beyond the limit. To combat this, a dynamic withdrawal option allows you to adjust your withdrawals to investment returns.

The income floor strategy

This works on preserving your stocks even during a market fall and, ensures savings for the long-term. You can set aside a specific amount to cover your monthly essentials through social security or annuity. A single annuity can be a large sum to enhance your income floor.

The Importance of Taxes

Taxes play a huge role in determining the size of your nest egg. There should be a place for marginal tax rate while calculating your retirement income. Check the following:

Standard taxable brokerage account

This tax will be charged every year on your income in case your savings are not in retirement accounts like 401(k), 403(b) or IRA. Tax is charged on dividends and interest earned and, also on capital gains. And, capital gains are taxed at a whopping 15%.

Pre-tax retirement account

This comprises of 401(k) and IRA accounts and, the amount you deposit in a year is excluded from tax. However, the amount you withdraw is taxable. Tax payment on capital gains on a yearly basis is also not required.

After-tax retirement account

It’s highly beneficial to have a 401(k) or a Roth IRA account. You’ll be free of taxes in retirement since you’ve already paid taxes on deposits. What’s more? Your withdrawals are 100% tax-free.

A Balanced Investment for a Bigger Retirement Nest Egg

A sure shot way to keep your retirement savings swelling is to create a powerful, diversified portfolio. Just like a well-balanced meal is important for our overall good health and energy, a well-balanced investment portfolio keeps you financially strong and secure during retirement. Your portfolio should have a good mix of:

  • Stocks
  • Stock Index Funds
  • Bonds
  • Certificates of Deposit
  • International Equities
  • Cash

The asset allocation works in your favour depending on your age and your risk tolerance capability. Also, a proportionate balance of equities and fixed income in your portfolio is important to keep pace with inflation. Investment returns always fluctuate with different market conditions. A well-allocated portfolio ensures protection against other significant losses and, your portfolio enjoys a smoother performance. This eventually helps your savings to increase big time for your retirement.

Changing and Rebalancing Your Portfolio

Changing asset allocation is usually required as you arrive closer to your investment goals. It is also important when there is a change in your financial situation, change in risk tolerance or even a change in financial goals.

If you are not in for changing your portfolio, you can consider rebalancing the same. This involves increasing the proportion of stocks when the stock market is happening. Rebalancing is what most savvy investors prefer to do. It’s about getting your portfolio back to its original shape in case of fluctuations in alignment. By doing this, you can get your asset categories to a more uniform level.

Rebalancing your portfolio is recommended every six to twelve months or better when there is substantial fluctuation in the relative weight of a particular asset class.

Whether it’s changing your portfolio or rebalancing it, it should be done infrequently to derive the best possible results.

The Order of Retirement Income Withdrawal

Withdrawing your retirement income should be from each category and, in a particular order. These include:

  • Bucket one should have enough cash to comfortably cover annual expenses
  • Bucket two should include fixed-investments and, a year’s worth of expenses should transfer to the cash basket. With this, you can cover upcoming expenses
  • The third bucket, filled with equities, should be withdrawn only during an overflow. At the end of the year, you can sell excess equities and refill your fixed income and cash buckets

You should have the patience and the perseverance to wait for a substantially long period before your equities overflow. Your fixed income and the cash buckets can hit an all-time low during such a phase. Don’t become a victim of your own emotions and sell away your investments at unfavourable times.

The Pay-Cut Rule

This rule is apparently useful during the bear market. When the market is low, it affects your portfolio value too and, the withdrawal rate increases. The rule secures your retirement income by instating you to cut down the annual withdrawal by a specific percentage. It provides the flexibility needed to ensure fluctuating market conditions.

The Prosperity Rule

This is the exact opposite of the pay-cut rule. You can enjoy a raise up to the time your portfolio enjoys a positive run in the market. The monthly withdrawal is increased in proportion to the increase in the consumer price index. You enjoy a higher level of retirement income with the ability to maintain your purchasing power.

Retirement Income – In a Nutshell

Under any circumstances, you need to take a disciplined approach and follow the rules to keep your investment portfolio in great shape and ensure a sizeable nest egg for a comfortable retirement. If you are new to this field, pause and take professional guidance. Learn new skills one after the other and, always make the right financial decisions to generate and maintain a lasting retirement income.

Before implementing your own retirement income plan, educate yourself thoroughly about the basics and advanced methodologies of investment and retirement income. You can also take professional advice from an expert who is familiar with the latest tools and techniques in this field.

Always plan your retirement income on the lines of the following questions:

  • What will my savings cover in my retirement?
  • How much do I need to save for my retirement?
  • How much should I save each year for my retirement?
  • How can I make my retirement savings last?

Devise an action plan for every question and consider all the necessary inputs to come up with practical, in-depth answers capable of initiating to lay the foundation for a strong nest egg.

Also, decide the best time to draw benefits from your social security account. As a matter of fact, waiting till you reach 70 is not always the best option.

Investing

Are clients truly getting value from their BR solution?

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Are clients truly getting value from their BR solution? 1

By Matt Dickens, Senior Business Development Director at Ingenious

Financial planners and wealth managers strive to deliver on the needs of their clients by always providing the most suitable and effective advice. But as with any service, this advice should also be delivered at the best possible value for the investor. Value can be simplistically defined as the service that delivers the most benefit, balanced against the financial cost, but in the estate planning space, how do you assess what good value is?

1. Total fees and charges

Product fees are guaranteed to negatively impact returns, so it is important to minimise their impact when looking to gain the best value from the investment. Some managers report little or no fees paid by the investor to the manager, but instead charge the company or investment service itself. While this might initially be seen as better value for the investor, it is not as simple as that. Investors in unlisted BR services become a shareholder of the portfolio companies, so the reality is that any fees paid by the companies are effectively being paid by the shareholder (or investor). Therefore, both investor fees and company fees will both negatively impact the final return and must be considered together.

Analysis of what a manager is paid by the investor and by the company over a significant period will enable an adviser to conclude if the manager is offering good value, or if a disproportionate amount of fees is going to the manager at the expense of their investors.

2. Real investment returns

Another key component of assessing value is what the investment actually delivers. For BR solutions, investors’ main objective is commonly to pass on the maximum sum possible to their beneficiaries upon death. This may lead to a conclusion that delivering Inheritance Tax relief at the lowest possible cost is the primary driver of value. However, especially for clients with longer time horizons, the one-dimensional goal of avoiding a potential 40% Inheritance Tax bill can easily over-shadow the equally important goal of aiming to steadily grow the investment, preventing erosion by inflation, drawdowns and investment fees. Unlike some IHT-focused solutions, such as trusts or gifting, investors in BR services do not have to accept zero growth of their wealth from the point of investment.  Instead, investors can continue to earn returns, either taking an income stream or increasing the final sum to be passed onto their beneficiaries, precisely in line with their original objective.

While most BR managers predict their ongoing returns at a certain level, those targets are not guaranteed and historic performance varies widely.

3. The relationship between fees and risk

Given that the majority of managers in the BR space state their performance targets net of fees, to produce positive growth and achieve their target return, those managers must first earn back any fees they are taking. Let’s take the below scenario to illustrate this point.

 Are clients truly getting value from their BR solution? 2Manager 1

Annual performance target, net of fees: 3%

Annual fees: 3%

Gross performance target: 6%

 

Are clients truly getting value from their BR solution? 3Manager 2

Annual performance target, net of fees: 4%

Annual fees: 1%

Gross performance target: 5%

Initially, it might appear that Manager 2 must be taking more risk to target a higher net return of 4% than Manager 1, who is targeting 3%. However, Manager 1 has to deliver an additional 2% of gross return than Manager 2, to make up for charging higher fees. Higher fees not only impact returns and value, but they can also mean greater risk.

Market comparison

In the Tax Efficient Review’s most recent analysis of Unlisted BR Services1, they released data that ranks services in the market in terms of both investor returns and total fees. IEP Private Real Estate achieved the top rank for returns delivered, with the second lowest total fees in the market, demonstrating that it represents attractive value for investors in comparison to other services.

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Reuters Events Launch Global Investment Summit Online Edition Uniting Institutional Investors, Asset Owners & Financial Institutions

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Reuters Events – today announced the agenda for their Global Investment Summit (Dec 3rd -4th). The 2-day strategic summit has been reimagined in the era of social distancing and will be broadcast free of charge to the public.

This Summit, with a diverse range of international voices and anchored by Reuters News-led sessions, is the only place for institutional investors, asset owners and financial institutions to come to terms with the events of 2020.

Click for more information and for complimentary registration to the online edition

The Energy Transition team report an industry leading speaker faculty for 2020, including:

  • Eileen Murray, Chair, Finra
  • Philip Lane, Chief Economist, European Central Bank
  • Gregory Davis, Chief Investment Officer, Vanguard
  • Hanneke Smits, CEO, BNY Mellon Investment Management
  • Pascal Blanque, Chief Investment Officer, Amundi
  • Desiree Fixler, Group Chief Sustainability Officer, DWS
  • Joe Lubin, CEO, Consensys
  • Bahren Shaari, CEO, Bank of Singapore
  • Mark Machin, CEO, Canada Pension Plan Investment Board

The agenda released by Reuters Events Investment is both ambitious and comprehensive, and will cover four key themes: Market Outlook, Asset Management Strategies, Industry Deep-Dives and the Future of Investment.

View the full agenda here

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Halliburton & Baker Hughes CEO’s join Reuters Events: Energy Transition 2020

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Reuters Events – today announced that CEO’s of two of the world’s leading energy service companies, Halliburton and Baker Hughes, will join the speaker faculties for their flagship Energy Transition Summit.

The event will explore the creation of the future energy ecosystem and offer companies, from across the asset spectrum, a definitive guide to their net-zero strategies. The alignment of the two biggest O&G global service companies, Halliburton and Baker Hughes, represents a significant step in the transition to low-carbon energy

More information on the Europe and North America editions can be found below. Registration for the LIVE stream is free.

Alongside their CEO speaker representation, Halliburton join as Platinum sponsors of the North American edition. Baker Hughes join as gold sponsors for the European edition of the flagship energy transition program.

The Energy Transition team report an industry leading speaker faculty for 2020, including:

  • Lorenzo Simonelli, Chairman & CEO, Baker Hughes
  • Jeff Miller, CEO & President, Jeff Miller
  • Tristan Grimbert, CEO, EDF Renewables
  • John Pettigrew, Chief Executive, National Grid
  • Pratima Rangarajan, CEO, OGCI Climate Investments
  • Alex Schneiter, CEO & President, Lundin Energy
  • Gretchen Watkins, President, Shell Oil Company
  • Calvin Butler Jr., CEO, Exelon Utilities
  • Francis Fannon, Assistant Secretary ERB, S. Department of State
  • David Lawler, Chairman & President, bp America
  • Andreas Schierenbeck, CEO, Uniper

More information on the Europe and North America editions can be found below. Registration for the LIVE stream is free.

Governance & Cooperation – Does the energy transition face a ‘governance deficit’? To understand how the energy transition will develop over the next decade, it is crucial to understand the driving governing forces behind it. Will the Green Deal provide the first domino, how can we ensure progress in the shadow of Aberdeen and ensure that we translate targets into action?

Financing Energy Transition – We must address the elephant in the room; who is going to pay for it all? An understanding of where the funds are likely to come from is key to staking claim to the infrastructural projects that will redefine the modern world in the 21st century.

New Energy Infrastructure – Low-carbon energy supply and consumption will need a radical overhaul of infrastructure. As well as revamping the old, we’ll need entirely new assets and new systems of energy delivery. It’s an unprecedented opportunity with estimated spending at $70 trillion over the next decade. Knowing which technologies are ready to be scaled first is the key to understanding opportunity

Business Model Innovation – Who will provide leadership through the age of transition and how do we want our future energy system to look? Speed and timing will be crucial if you are to stay on the right side of the transition. Join us in setting business led, evidence based, targets as industry drives towards net-zero

More information on the Europe and North America editions can be found below. Registration for the LIVE stream is free.

At Reuters Events, we’re committed to tackling the Energy Transition head on; to shed light on the defining issue of our time and help energy companies meet a uniquely difficult challenge. That is, to be both an energy company of today, and the energy companies of tomorrow. In a period that will be defined by uncertainty we can, together, lighten the way forward.” – Owen Rolt, Head of Energy Transition, Reuters Events

Contact

Owen Rolt

Head of Energy Transition

Reuters Events

UK: +44 (0) 207 375 7596

E: [email protected]

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Editorial & Advertiser disclosureOur website provides you with information, news, press releases, Opinion and advertorials on various financial products and services. This is not to be considered as financial advice and should be considered only for information purposes. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third party websites, affiliate sales networks, and may link to our advertising partners websites. Though we are tied up with various advertising and affiliate networks, this does not affect our analysis or opinion. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you, or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish sponsored articles or links, you may consider all articles or links hosted on our site as a partner endorsed link.

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