Worry less. Plan more. Do you want a secure retirement, free from worry, stress, and confusion? The Bucket Plan® is a must-read book for anyone serious about creating a practical and sensible financial plan for his or her retirement years. The financialplanning process outlined in this book is based on a three-bucket philosophy of strategically positioning assets to plan for and mitigate the risks and dangers that can occur in retirement. Readers will learn: • The three biggest dangers for your financial future and how The Bucket Plan helps protect from them • A formula for calculating whether you will have an income deficit and, if so, how much money is needed to prevent it • A surefire way to avoid taking on too much investment risk on money you may need in the near future • Much, much more When readers strategically allocate their money using Jason Smith’s three-bucket philosophy, they can create a plan that mitigates risk and offers an opportunity for growth into the future, allowing them to feel more secure about retirement.
|Publisher:||Greenleaf Book Group Press|
|Product dimensions:||5.60(w) x 8.40(h) x 0.80(d)|
About the Author
Jason L Smith is a successful speaker, financial planner, author, coach, and entrepreneur. Following in his father’s footsteps as a second-generation advisor, he founded his financial services practice, The JL Smith Group, in 1995 to provide clients with holistic financial planning services that align investments, insurance, taxes, and estate planning into one comprehensive, coordinated plan. With the overriding goal of improving the lives of American families through holistic financial planning, Jason utilizes his experiences as a highly accomplished advisor to train other advisors through live training events, monthly coaching calls, and study groups. To better fulfill this mission, he founded Clarity 2 Prosperity Mastermind Group, a professional network of leading financial advisors nationwide, and Prosperity Capital Advisors, an SEC-registered investment advisory firm. Jason is an Investment Advisor Representative and a Certified Estate Planner (CEP), and he holds his Certification for Long-Term Care Planning (CLTC). He is a member of Ed Slott’s Master Elite IRA Advisor Group, an exclusive and influential organization of financial professionals who are committed to the study and mastery of IRA planning.
Read an Excerpt
THE BIGGEST DANGERS YOU FACE IN RETIREMENT
Market Risk, Interest Rate Risk, and Sequence of Returns Risk
Before we dive into a full explanation of the financial dangers facing retirees today and The Bucket Plan as the solution, let's lay a proper foundation by looking at something everyone goes through during his or her lifetime: the money cycle. Knowledge of the money cycle is critical to your understanding of The Bucket Plan and how it can set you up for a secure future.
The money cycle includes three distinct phases we all go through in life: accumulation, preservation, and distribution.
Accumulation usually starts when you're a kid. You've got a piggy bank or a junior checking account where you put your tooth fairy money, birthday cash, babysitting income, money from mowing the lawn, and so on. This accumulation phase continues into adulthood and throughout your working years as you build your life savings. Perhaps you open a retirement savings plan, and maybe your employer even puts money in there for you by matching your contributions. Since you have a long time horizon ahead before you retire, you can afford to take more risks with your money during this stage of your life.
As you get closer to retirement (say, ten years out or less), you move into the preservation phase. At this point, you're financially stable and looking forward to winding down your career, effectively ending the accumulation phase on a big portion of your money. There's less time to make mistakes with your money or to experience major volatility now because you will need this money sooner rather than later. Remember, it's not about how much money you make but how much you keep. The preservation phase is when you will strategically position a portion of your assets to keep them safe, yet continue growing them to outpace inflation for the future and to account for the taxes you will encounter throughout retirement.
Finally, the last phase in the money cycle is distribution — distribution to yourself in retirement and to your loved ones upon your passing. Distribution is when you begin to draw from what you've accumulated and preserved and start taking an income from your savings and investments.
CAUTION: DANGER AHEAD!
The biggest mistake most people make is skipping over the preservation phase of the money cycle and going directly from accumulation to distribution.
Most people never preserve a portion of their assets to draw from in that all-important first phase of retirement. Instead, they continue to invest all their money as if they were a long way from retirement when it's right around the corner. That's how so many pre-retirees got into trouble back in 2000 and 2008 when the market took nosedives and many investors experienced substantial losses. From September 2000 to September 2003, the market dropped 44.7 percent and took forty-nine months — more than four years — to rebound to its previous high. From November 2007 to February 2009, the market dropped 50.9 percent from its previous high and took thirty-seven months to recover. Many investors didn't have time to wait for the market to recover from these corrections, so they panicked and sold as the market was in a decline, realizing the losses in their investments.
The preservation money is essential for financial stability and peace of mind in retirement. When the market has big corrections — as it always has done — and you're forced to take distributions during that time, you're essentially selling your investments for income when the market is down. I call that a "double whammy": withdrawing money for income at the same time your investments are declining. You can never make that money back, and you are depleting your savings much faster than you should. This is how you risk running out of money later in life.
What's the solution? You must be strategic and think in terms of money you will need now, soon, and later. Taking the money cycle into consideration and positioning your assets to preserve money you may need soon helps avoid three common and potentially devastating hazards: market risk, interest rate risk, and sequence of returns risk. Let's explore these in detail.
Unfortunately, nobody has a crystal ball when it comes to investing. We have no way of knowing exactly how the market will behave in the future. Several of the worst one-day drops in the history of the stock market are still painfully fresh in our minds, and even though the market recovered to blissful highs after these plunges, many investors who panicked by putting their assets in cash or who withdrew their money because they needed it did not recover.
Market swings of one hundred or more points in either direction are becoming more common. The last decade has demonstrated major volatility in the form of corrections and outright landslides. That's why the market is a very scary place for money that will be needed during the first stage of retirement (money that will be needed sooner rather than later).
The good news: history shows us that investors who keep their wits and can afford to wait out those kinds of drops in the market still prosper. But what about the rest?
The biggest danger with market risk is for people who need money quickly and cannot wait for a correction to recover, or people who panic when the market dives. These are regular investors just like you and your friends: retirees, people with families, or individuals like Irene who have just lost a spouse. In these cases, people could be forced to sell when the market is down because they need the money for income or because something unexpected happens and they need to access a chunk of money to resolve it. When that happens, they often make bad decisions — decisions that may lead to financial catastrophe. We'll look in depth at how emotions affect investor behavior in chapter 3, but for now just keep in mind that market risk is a major danger for retirees who may or will need to make withdrawals, or who will be forced to take out required minimum distributions (RMDs) from their IRAs once they turn seventy and a half.
INTEREST RATE RISK
According to a 2013 Edward Jones survey, about two-thirds of bond investors have no idea how rising interest rates impact bond values. In fact, most don't know how interest rates impact any of their investments. The truth is that, when interest rates are declining, bond returns tend to be higher. Obviously, that's a good thing for investors. But, as I write this in late 2016, most experts believe that interest rates have dropped just about as low as they can get ... and that's not a good thing for people holding bonds. Why? Because bond values typically go down as interest rates rise.
The concept of rising interest rates corresponding with reduced bond performance can best be illustrated by looking back at more than half a century of historical performance, as shown in the earlier chart.
As you can see, the period between 1950 and 1981 saw generally increasing interest rates. In 1981, the trend switched to one of mostly declining interest rates. During the period when rates declined, bonds returned a yearly average of 9.44 percent. Nice! But during the period when interest rates increased, bonds saw average returns of only 2.95 percent. Yikes! During those times, people holding bond funds saw periods of significant drops in account balances as well.
During volatile times in the stock market, investors may follow the common wisdom and flee to bonds. However, the general lack of awareness about how interest rates impact bond values poses a serious threat to retirees holding bonds or bond funds. If you are a retiree holding bonds, rising interest rates are particularly dangerous for you because if you need to access the money in your bonds or bond funds quickly, you could be forced to sell at a lower price when the account balance is down.
Since the consensus is that interest rates are likely to increase in the future and potentially trigger a corresponding drop in bond value, retirees would be wise to factor that into their financial plan without delay. Failure to position assets properly — especially when it comes to money that may be needed relatively soon — could spell disaster.
SEQUENCE OF RETURNS RISK
If you've ever heard of dollar cost averaging, then you are some-what familiar with sequence of returns risk because it is dollar cost averaging's evil twin brother. Sequence of returns risk (or "timing of returns risk") describes risks associated with investing and withdrawing money at a point in time when the balance is down due to investment performance. This hazard can be created because of a combination of market risk, interest rate risk, and a retiree's need for money sooner rather than later. This need is due to three things:
Anticipated income needs: Most commonly, people who are retired must draw out assets as income for their living expenses.
Unexpected income or withdrawal needs: Something unforeseen comes up. Life gets in the way. Perhaps the retiree needs to help a family member or friend, or there's a serious health issue that must be handled.
Forced income: At age seventy and a half, retirees are required to take forced income via RMDs. These are among the most sizeable and reoccurring distributions for retirees, yet often the most overlooked in financial planning. In 2009, the government waived RMDs because the market had dropped significantly in value, but do we really want to trust the government to bail us out if or when it happens again?
As I said, these three reasons for withdrawing money in the near term can affect virtually all retirees to varying degrees. Your portfolio can suffer serious harm because you have to make withdrawals whether you want to or not, regardless of the market conditions at the time. Let's explore how this plays out by considering two investment situations: one during a time of savings and the other during a period of withdrawals.
EXAMPLE 1: ACCUMULATION FOR TEN YEARS WITH NO WITHDRAWALS
The following chart shows what can happen to a $100,000 deposit during a hypothetical ten-year period of savings.
Returns listed are not typical and are for illustration purposes only.
On the left side of the chart (Ms. Lucky's deposit), there was a 30 percent gain the first year, bumping up the balance to $130,000. The second year saw another gain, this time of 20 percent, followed by six straight years of positive returns of 10 percent each. Ms. Lucky closed out her investment cycle with losses of 20 percent and 30 percent in years nine and ten, finishing with a balance of $154,764. This is an example of positive returns early in the savings cycle with a loss at the end.
The opposite happens on the right side of the chart. Mr. Unlucky took a loss of 30 percent the first year, reducing his $100,000 investment to $70,000. The second year he saw a 20 percent loss, bringing his balance down to $56,000. That was followed by six straight years of positive returns at 10 percent each, and then a positive run-up of 20 percent and 30 percent in years nine and ten. This illustrates an example of negative returns early in the savings cycle with a rebound at the end. Interestingly, Mr. Unlucky's ending balance is the same as Ms. Lucky's: $154,764.
Both investors ended up with the same amount of money regardless of whether the up- and down-years occurred early or late in the investment period. Both experienced a 6 percent average rate of return because the positives and negatives canceled each other out, leaving six years of 10 percent returns (60 percent divided by ten years equals 6 percent). Again, this is during ten years of savings. No withdrawals were made during this time.
EXAMPLE 2: DISTRIBUTION FOR TEN YEARS WITH WITHDRAWALS
Now, let's see what happens to these $100,000 deposits during the same hypothetical ten-year period when Ms. Lucky and Mr. Unlucky were making withdrawals for income rather than just saving.
Both examples show the same ten-year average rate of return (6 percent) but with a new wrinkle: 6 percent of the initial principal balance is being withdrawn per year for retirement income. For Mr. Unlucky, again there were down years early on but in the late years a rally. The same 10 percent returns existed for the six years in the middle, giving an average return of 6 percent. For Ms. Lucky, the reverse happened — positive years early and then negative years later. But, look at the difference between the ending balances. Even though 6 percent of the initial principal balance was withdrawn per year and experienced the exact same 6 percent average rate of return in both examples, Ms. Lucky finished with $105,544 while Mr. Unlucky had only $38,898!
This is because Ms. Lucky made gains early in the investment cycle on a larger balance and took her losses on a smaller balance. At the end of a period of years when the two investments seemed to average out the same, Mr. Unlucky was left with fewer assets because his losses were taken against the larger balance and the gains were made on the smaller one. Therefore, Mr. Unlucky, with the early drop, ended with a drastically lower balance than Ms. Lucky, even though they both had the exact same average rate of returns and withdrawals.
Investors speak a lot about returns, but as these examples show, just knowing the returns is not enough when you depend on your investment for retirement income. Once again, the critical thing to understand is that, although two investments might have the same average returns over time during a period of savings, the sequence of the gains and losses during a period of withdrawals can have as large an impact on a portfolio's ending value as the amount of money invested in the first place.
As you can clearly see, it's not about returns. It's about the account balance when you're in the distribution phase of retirement.
Remember: the timing of distributions during retirement cannot always be controlled because you may need to withdraw the money sooner rather than later for income, for an unexpected expense, or for forced withdrawals because of RMDs after age seventy and a half.
EXAMPLE 3: COMPOUNDING LOSSES
Here's another way of understanding the effects of sequence of returns risk. It starts with a simple equation:
-30 + 43 = 0
When is minus thirty plus forty-three equal to zero? You might think the answer is "never," but you'd be wrong. When you invest money and lose 30 percent of it, you'll need a 43 percent gain just to get back to zero. Let's say you invest $1 million and you lose 30 percent of it due to a market downturn. How much would you have left? That's easy: $700,000. But, you want to get your balance back to $1 million. What kind of gain would it take to restore your investment to $1 million? Most people would say you'd need a 30 percent gain, but 30 percent of $700,000 is only $210,000, which takes you only to $910,000. You're going to need a 43 percent gain on your money to recapture the loss from a 30 percent downturn!
The stock market has gone down almost 50 percent two times since the year 2000, and it's possible that we'll have additional downturns like that in the future. So, let's imagine the very real possibility that you must take not a 30 percent loss but a 50 percent loss on your $1 million investment. How much would you have left now? Half a million, of course. Now, how much must you gain to recapture your loss? Based on the previous example, you might say 60 or 70 percent, but again that would be wrong. You'll need a 100 percent gain to get back to even. You will have to double your investment! The more you lose, the harder it is to get your money back.
Let's say you are a retiree taking income distributions of 4 percent of the initial balance, and you run into another three-year period of market volatility like we had from 2000 through 2002 when many investors experienced losses of 30, 40, and even 50 percent.
Suddenly, your $1 million principal is reduced not just by 50 percent (which is bad enough!) but by 62 percent or more because you had to take distributions during that period to pay your bills. You'll now need to gain more than 163 percent just to get back to even!
Account Balance versus Rate of Return
Let's recap. In Example 2, Ms. Lucky and Mr. Unlucky both had the same rate of return, yet Ms. Lucky ended up with a lot more money once all was said and done because she took her gains on a larger balance and her losses on a smaller one. The rate of return was irrelevant. Example 3 showed that if one year you suffer a 50 percent loss and the next year you are up 100 percent, you will average a 25 percent rate of return, yet you end up right back where you started. How in the world can you average a 25 percent rate of return but not gain any ground? Well, because success is not measured by rate of return, but by account balance.
Excerpted from "The Bucket Plan"
Copyright © 2017 Clarity 2 Prosperity.
Excerpted by permission of Greenleaf Book Group Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
Chapter 1 The Biggest Dangers You Face in Retirement: Market Risk, Interest Rate Risk, and Sequence of Returns Risk 11
Chapter 2 The Bucket Plan® Philosophy: Buy a Time Horizon, and Invest the Rest! 29
Chapter 3 Behavioral Finance and Investments: The Worst Behavioral Mistakes Investors and Advisors Make … And How to Avoid Making Them 61
Chapter 4 The Asset Sheet Questionnaire: Identifying and Documenting Assets and Liabilities 73
Chapter 5 The Income Gap Assessment: Determining If There Will Be a Retirement Income Deficit (or Excess) and If So, How Much? 97
Chapter 6 The Volatility Tolerance Analysis: Assessing Attitudes About Risk and Volatility in the Soon and Later Time Frames 105
Chapter 7 The Bucket Plan® Design: Bringing All the Elements Together for a Well-Planned Retirement 117
Chapter 8 How Does Your Current Plan Stack Up?: A Few Important Questions and a Scorecard Assessment 133
About the Author 145