One of the most challenging areas for advisors and investors is to know how much one can safely withdraw from their accounts in retirement without running out of money later. The question is difficult because markets can be unpredictable in the short term and we also don’t know at what age we will live until.  Most of the information that’s in the popular money related articles refers to the rule of thumb of a 4% withdrawal rate as considered “safe”; meaning if you withdraw only 4% of your account value, no matter what markets you face when you first retire, you are not likely to run out of money.  
 
Recently, I was very excited to come across an article that discussed market history with reference to the 4% rule of thumb.  A trustworthy source, Michael Kitces, CFP discussed a study that showed the actual market performance year by year since 1870 with a balanced portfolio (60% stock & 40% bond) and a 4% withdrawal rate.  As predicted, he found it was exceptionally rare the retiree finished with less than what they started with at the end of the thirty-year period if you withdrew only 4%.  "There was only a small number of wealth paths that finished below the starting principal."  More surprising was that in two thirds of the scenarios, the retiree finished with more than double their net worth assuming a 4% withdrawal rate.  (Michael Kitces, www.kitces.com) The article went on to say, based on historical year by year market returns for a 60/40 portfolio, assuming a 4% annual withdrawal rate, your wealth would more than likely increase five times in value after thirty years than to finish with less than your starting principal!
 
So why does the media and at times advisors rely on the 4% rule of thumb?  According to this article, the 4% rule is built for environments that have severe bear markets in the first part of retirement.  The article went on to suggest if we assume averages, then the safe withdrawal rate would be over 6%.  
 
Here at the Investment House, we understand there is no way to predict market cycles; hence we rely on income from your portfolio as well as appreciation.  Currently, most of our balanced portfolios are creating an income of about 5% in the form of dividends and income from bonds.  When asked how much we think you can take from your account and not run out of money, we believe a 6 to 7% withdrawal rate is reasonable.  (Of course, there are no guarantees and past performance does not indicate future performance.)
 
Please click the link (http://wiba.iheart.com/media/play/27198137/) to hear more about this topic.  Also remember to tune in to “Straight Talk from the House” every Tuesday morning at 8:20 a.m. or visit our website (www.tantoninvestmenthouse.com) for archived programs.

Whether you’re looking to be conservative or aggressive with your withdrawal rates, we look forward to helping you in all market cycles.

The first thing to do on your year-end planning is talk to your tax person or investment advisor about 2015 taxes!  Here's some year-end items to be thinking about:

1.  Can you or your spouse add more to your 401k plan yet this year?  Maximum for this year and next year is 18,000 if under age 50 and 24,000 if age 50 or over.
2.  Can you or your spouse contribute to an IRA or Roth IRA?  Maximum is 5500 under age 50 and 6500 if age 50 or over or 100% of employment compensation, whichever is less.  Deadline is April 18th, 2016!  A few more days than "usual".
3. What about Roth Conversions?  Look to see if your income this year is expected to be lower than future years.  You may want to pay the tax today and have those dollars growing for you TAX FREE.
4.  If your income limits are too high for a Roth IRA, you can make a non-deductible contribution to an IRA and before it makes any earnings, convert it to a Roth IRA.  (I think of this as a "backdoor" Roth IRA)
5. Gifting - Your Mother always said, it's better to give than to receive!  You can give cash or appreciated securities to a qualified charity.  By gifting appreciated securities/mutual funds, you can avoid any capital gains tax and the charity receives it tax free as well!
6.  What if I don't know what charity to gift to?  Set up a "Donor Advised Fund" which will allow you to receive the deduction this year and you can postpone the decision of what charity will receive the money until some future date.
7.  Can I gift to my family?  Yes, you can give $14,000 to any individual (related or unrelated) without having to file a gift tax return.  This helps reduce your taxable estate, but it does not save you any income taxes since the money is not deductible!
8.  Portfolio Review -  Have there been changes in your life like retirement or needing an income from your assets that would necessitate a change in your mix of stocks and bonds? Check in with us to review your allocation....anytime!
9.  Tax Loss Harvesting - This tax technique receives a lot of press time.  The idea is to sell the investments which have a loss in non-retirement accounts to offset the capital gains.  This strategy has a lot of merit depending on your portfolio, but it is secondary to the investment decisions.  First and foremost you want to own stocks and bonds you believe will go up in value over time.  Often we want to sell the "dog" in our portfolio, but those might be the ones that are likely to do well in the future since they are currently undervalued. 
10. Have you met your Required Minimum Distribution?  If you have turned 70 1/2 this year, you now must take out the required amount from your IRA/ 401k plan by April 1st of the year following you turn 70 1/2.  However, we usually recommend  taking the withdrawal in the year you turn 70 1/2 to avoid taking your RMD twice in one year which may increase your tax bracket and therefore tax bill.  It can also increase the cost of Medicare Part B premiums which are based on Modified Adjusted Gross Income (MAGI) of your previous year's tax return.

Saturday Morning's Wall Street Journal said it all, "Stock Plunge Picks up Speed".  Fear led the market decline as the CBOE volatility index doubled.  Our bruising week ended with the Dow Jones Industrial Average dropping a total of 10.1% from a high reached in May, SP500 down 7.5% from May record.  We've hit a true correction in the DJIA index which is a decline of 10%.   The market declines 10% a year on average, 15% every three years and 20% or more (true Bear) every five years.  We have not experienced a correction since 2011 when the market fell due to the Standard and Poor's downgraded it's rating of US Debt.  We have been expecting this correction for sometime and are over due for this normal occurrence.  Of course, market declines, no matter how "correct" the correction, never feel good.  We wonder if the sky is falling and in particular, if the sky over China's economy shows signs of significant slow down.  According to the Wall Street Journal, China is a bit of black box because of their government tight controls make it difficult to know exactly what to expect from their economy.  China has had a tremendous growth trajectory increasing at a rate of about 10% a year for about thirty years and most recently slowing down to 7% per Brian Wesbury an economist at First Trust.  Another big concern is the federal reserve is expected to raise rates in September and how the strong dollar will impact big company earning reports due to a drag on exports.  (Our goods are now more expensive with a stronger dollar).

Let's assume the worst with China's growth.  What would happen if china's GDP measured in at 0%?  Brian Wesbury, an economist at First Trust discussed raised the question in one of his latest video posts.  He notes that we currently export .7% of our Gross Domestic Product (GDP) per year.  Hence if China stopped growing and buying our imports our GDP would fall by only .7% to about a growth rate of 1.8% per year.  He also notes that this would only be a one time hit against our growth number.  He admits this is rudimentary economics.  But the point still is valid.  We do not need China to keep growing. 

Our take, is market corrections are very normal and needed to keep a market healthy.  When investor sentiment becomes to bullish we become prime candidates for a market bubble.  We believe company fundamentals still indicate growth opportunity in US and Internationally.  If you have "extra" funds to invest for the long term.  This could be opportunity knocking!