Front Street Wealth Management

Fee Only, Proactive Wealth Managment

Battle Plan for Investment Volatility

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Stock markets are down this year between 10% and 15% across the globe. From their recent highs set in 2015, the drop has been an even larger 15% to 30%. Now is a good time to talk battle plans for handling this type of investment volatility.

While investment battle plans are best established prior to declines, it’s never too late and today’s lessons will no doubt help you tomorrow.

Your first line of defense is to do an investment risk assessment.

A proper risk assessment is a function of your age, income, assets, debts and your lifestyle desires. Together, these factors define your financial capacity for taking risk. It’s the brains, but not the heart of the matter.

A clinical exercise in financial accounting just isn’t sufficient to capture the power of your emotions. While investment advisers tend to denigrate investors’ emotional decisions, let me provide you with a more-nuanced view.

Like it or not, your emotional tolerance for risk will always be a part of you. Discounting who you are is generally a futile fight. Given this reality, your focus should be on properly aligning your portfolio’s high-level structure with your tolerance for taking risk. If you don’t know your portfolio’s asset allocation, review it now.

Your next line of defense is to actually know what you’re invested in.

If you own mutual funds, like most people, you should work to understand the investments sitting inside those funds. Remember, a mutual fund is just a box with wrapping paper on it. What’s inside is what matters most. If you don’t know the type of funds you own, find out.

Your third line of defense is to be diversified.

Diversification is often cited by investment advisers. Sure, it’s good, classic advice; don’t put all your eggs in one basket. But, calling it good after simply noting a long list of holdings on your account statements may open you up to some hidden risks.

Ask yourself if your portfolio is hanging on a common thread. For example, in your search for income in a yield-starved world, do you own too many real estate funds, lower-quality bonds or even safe-looking bond funds that rely on leverage?

Upon deeper analysis, you may have exposed your portfolio unknowingly and are actually undiversified. After all, diversification is not about how many investments you own. Rather, it’s about the commonalities and differences between them. If you are unaware of the factors that affect your portfolio, I’d suggest you start doing your homework

Jason P. Tank, CFA of Front Street Wealth Management will hold a free educational workshop on “Battle Plan for Investment Volatility” on Feb 24th at 3:30 pm in the Blue Room at the Traverse Area Chamber of Commerce. Call (231) 714-6407 with questions, visit frontstreet.com/workshop to learn more.

Retirement Income: From Where & When?

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One question has rung through loud and clear following my two recent columns on the big rule changes with Social Security and the development of a safe spending rate in retirement.

Soon-to-be and current retirees want help developing a holistic plan for the “living off my savings” phase of their retirement journey.

Specifically, their burning question can be broken down into three smaller questions. First, from which accounts should we withdraw our money and in what order? Second, how exactly will my Social Security benefits affect our tax bill? Third, what steps could we take now to help minimize our tax bill in retirement?

Our financial system is a ridiculously complex maze for retirees to navigate. At the center of the complexity sits our tax code.

Regarding the question of which accounts should be drawn from first and in what order, most retirees have two forms of savings. They have savings that have already been taxed and savings that have yet to be taxed.

To begin, it’s important to understand that the mere act of drawing from your already-taxed savings does not trigger a tax bill. Only your dividends, interest and realized gains result in tax payments. In contrast, the act of drawing from your tax-deferred savings creates immediate taxable income.

Given this, choosing the best source of retirement income clearly depends on your own tax picture. For this reason, sound advice about the best source of retirement income wholly depends on your personal financial setup. This requires some basic tax modeling of your present and future tax picture.

Next, you may not realize that Social Security benefits are often taxed. The proportion of this benefit that is taxed can range from none to a maximum of 85% of the benefit. The tax owed depends entirely on your other income, some of which is voluntarily created by drawing from your tax-deferred accounts, such as your IRAs.

With this understanding, the decision of which pot of savings to draw from – your already-taxed savings or your tax-deferred savings – can impact the amount of tax owed on your Social Security.

Finally, there are planning techniques that might allow you to minimize your future tax bills in retirement. Among these techniques are strategic, partial Roth IRA conversions and the possible utilization of the 0% capital gains tax rate on your federal tax return.

Intelligent planning for the “living off my savings” phase is increasingly on the minds of current and soon-to-be retirees alike. The educational steps you take now will no doubt pay dividends later. Best of all, those dividends are completely tax-free!

Jason P. Tank, CFA of Front Street Wealth Management will hold a free educational workshop on “Retirement Income: From Where & When?” on Feb 10th at 6:30pm in the McGuire Room at the Traverse Area District Library. Call (231) 714-6407 with questions, visit frontstreet.com/workshop to learn more.

Central Bankers: They’re Back Again

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Global central bankers are back at it again!

With Mario Draghi at the ECB talking about revisiting their policy in March – a code phrase for potentially increasing their current quantitative easing policy – along with Japan’s central bankers actually beginning to charge their banks 0.1% on excess reserves, it appears global central banking is taking its next step on the path to total manipulation of their respective economies.

Now, the Fed truly stands alone. Will the Fed pause and reverse itself if markets continue to waiver? Will such a reversal even matter? The burning question is whether or not monetary policy had lost its grip on markets.

Finding Your Safe Spending Rate

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More goes into planning for and sustaining a retirement than meets the eye. On the surface lies plenty of generic advice from the financial planning industry. Yet, beneath the surface are a slew of assumptions about a largely unknown future. To understand how to manage your sustainable retirement clearly takes more than simple rules-of-thumb.

It should come as little surprise that your retirement decision may be dominated as much by feelings of insecurity as it is by feelings of excitement. Thankfully, the balance between these two emotional poles can be tilted in your favor with pre-retirement planning.

For example, one critical first step for a soon-to-be retiree is to develop a deeper understanding of your post-retirement budget. During your working years, budgeting is all-too-often dismissed. However, when your income becomes more-fixed and less-active in nature, spending choices take on a new sense of importance.

During meetings with soon-to-be-retired clients, my early fact-finding focuses on gaining a better understanding of the true cost of their lifestyle. Without that understanding, retirement planning – and the day-to-day services that follow from that planning – can feel like stumbling in the dark.

With your lifestyle’s financial obligation defined, the traditional survey of your assets and debts and the review of your various sources of income begin to take on the deeper purpose of building financial sustainability.

Of course, the financial obligation that springs from your choice of retirement lifestyle must be met by sustainable income. For most retirees, at the base rests Social Security and, for a shrinking number, pension income. Together, these are just two legs of the proverbial three-legged financial stool.

The final leg of a sustainable retirement is built from income earned from your personal savings. While some might be generated from real estate or even business interests, it often must be earned from traditional sources, such as IRAs or after-tax savings and investments.

It is here, within this portion of private savings, where you may have a lack of confidence of how much you can safely spend from private savings each year.

This central question about your safe spending rate, known in the industry as the sustainable withdrawal rate, is where financial planners toss around overly-simplistic rules-of-thumb. In reality, the assumptions that underpin rules, like the “4% Rule”, are complex and debatable. For good reason, this subject dominates the thoughts of many financial planners. Honestly, it rarely strays far from my mind when managing my clients’ investment portfolios.

As we enter the new year, it would be wise for you, a current or soon-to-be retiree, to establish your own personalized safe spending rate. Only then will a confident retirement – and, yes, a worthwhile New Year’s resolution – be sustained.

Jason P. Tank, CFA of Front Street Wealth Management will hold a free educational workshop on “Finding Your Safe Spending Rate” on Jan 13th at 6:30pm in the McGuire Room at the Traverse Area District Library. Call (231) 947-3775 with questions.

Interest Rates to Rise Slightly

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The Fed did it! After nine years since the last rate hike, and following seven years of near zero interest rates, the Fed and Janet Yellen last Wednesday finally raised short-term rates by a whopping one quarter of one percent. The financial markets, which had been displaying concern and worry during the decision’s build-up, largely sloughed it off.

Listening to Yellen during her follow-on press conference, what strikes me is the Fed’s propensity to represent the consensus view. As economic cheerleaders, this is quite natural for the Fed, of course. What else could they say and how else could they feel other than believe the near-term future will resemble the recent past? The past trend is always the future trend to consensus thinkers. This is precisely why the majority of investors fail to anticipate a change in the trend.

For example, as the calendar turns, many will read market prognostications for the year ahead. Already I have noticed news stories that indicate stock market returns will be in the range of 5% to 10%. For as long as I can remember, I’ve seen this range of returns anticipated time and time again. Not coincidentally, that range fits the long-term historical return of stocks in the US.

Published along with the news release of the Fed’s decision last Wednesday, Fed governors made public their own individual projections of economic growth, inflation expectations and unemployment over the next few years along with their long-range expectations of these same measures. What’s striking about this report is their consistent lowering of economic growth and inflation relative to their prior projections. The Fed has consistently been too optimistic.

Like many economists and investors, the Fed has looked for inflation to rise back to its long range target of 2% per year. Today, that measure sits closer to 1%. The consistent undershoot of inflation is not a phenomenon of the US alone. Many of the largest economies in the world are also experiencing what’s known as disinflation – a decrease in the rate of inflation. This was true prior to the drop in oil prices and does raise questions about possible structural issues for the global economy that may lead to continued subdued inflation rates.

It’s fair to say that the largest concern of all central bankers is for disinflation to morph into deflation – that is, an outright drop in prices. This is what Japan struggles with today following their own financial crisis many decades ago. Global central bankers, through zero interest rates and asset purchases, responded to this prospect with an unparalleled monetary experiment.

The question is, did the experiment work? With the Fed finally raising interest rates off the floor, the largest impact may be in the confidence “signaling” impact for investors. In other words, if the Fed feels it’s safe to finally raise rates after seven years in credit crisis-recovery mode, they must feel the trend is their friend. Outside of asset price appreciation and a now-larger pile of low-cost debt, a definitive answer to the question remains unanswered.