When was the last time you sat down and watched a Disney movie? Most Disney movies end the same way, after an epic struggle, the hero slays the witch, kisses the girl, or overcomes an epic challenge. Finally, the movie will end with the characteristic happily ever after.

How does your own life reflect the same story? You have overcome the obstacles in your life and made it to the Promised Land: Retirement. If your life were a Disney movie, you should be smack dab in the middle of your happily ever after – if that is true, congratulations.

They are not sure they are going to have enough income to survive the rest of their lives. How much stress are you enduring worrying about the same issue? If it were possible to know how much income you could draw every month of every year without running out of money before you died, would that be on interest to you? It is possible to find out, and actually fairly easy to determine.

If my house were on fire, it would burn to the ground. Even if I lived directly behind a fire hydrant, and all I had to do to save my house was to turn the hydrant on, my home would literally be toast. A professional firefighter would laugh at my incompetence, however, I would argue that knowing how much income you can draw for the rest of your life is as simple for me to determine as it would be for a firefighter to put out the fire in my house. It is simply a matter of where your area of expertise lies.

My expert advice: only put money at risk in the stock market that you do not need for at least 15-20 years. Allocate your money so that you have the income that you need for the next 5 years in a liquid non risk account.

This will allow your other assets to be put into accounts that actually are getting a decent return and take advantage of the power of compound interest. This concept may seem as foreign to you as my not knowing how to open a hydrant, but once you see how, you will think that this is easy too. Once you retired, the time for big risks in the market has passed. Make sure you only take as much risk as you need to succeed.

Try searching Google for “Flaws with the four percent rule” to read up on how dangerous this accumulation planning principle is.

What is the four percent rule? According to “Smart Investor Magazine” The four percent rule is “that in retirement you can safely take out no more than 4 percent of the combined value of all of your financial assets each year with an expectation that your money will last 30 years or more, which is longer than the average length of time Americans spend in retirement.”

This simplistic notion isdangerous and not true.

We see several problems:

1       “You can not plan the future by the past” — Edward Burke

There is a reoccurring trend ever 18 years in the stock market. For 18 years the market whizzes through a bull market, followed by 18 years of flat, choppy market returns.

If you retire in a bull market, your plan will work like a charm. Until the bull market winds down.  If you retire in a flat market your retirement could be over, your strategy fails you by potentially running out of money.

(see attached 18 year cycle chart showing the 100 year history of the Dow Jones.)

2      Never, never, never take money from a fluctuating account

With the ten year treasury rates below two percent (see chart) how can there be ANY logic in extrapolating four and half percent bond returns with the current bond yields at HALF that rate?  Again, it doesn’t make sense. However, most of you have dear friends that are being told that they can draw 4% of their principle and they will be fine.

3      Interest Rate Risk –

The four percent strategy tells you that your bond funds are your “safe” money.  Yet, according to the 100 year history of the 10 year treasury yield, bond funds have never been at more risk in 100 years!  Interest rate risk is the risk to principle if interest rates start to rise.  For example, in 1994 and 1999 rates went up and people who owned bond funds were hurt to the tune of double digit bond fund principle losses in calendar years 1994 and 1999.  When rates go up, your “safe” money will lose principle.

4      How many fingers am I holding up? Unless you’re a psychic the four percent rule is not for you

How does the 4% rule protect you against rising food & energy prices?  It doesn’t.  It can’t; you can’t guess the economic future.  In a low interest rate environment and a flat stock market, you can’t draw higher amounts to offset rising food and energy prices.  Those following the 4% rule will be slaughtered by inflation by losing their purchasing power.

5      If you don’t pay taxes you can skip this part.

Retirees often add up liquid assets and apply four percent rule forgetting taxes.  How many believe tax rates are going DOWN in the near future?  Tax rates will take a larger bite out of the retirement dollar to pay for these budget deficits.

6      Fate worse than death: Outliving your money

The four percent rule is based on the idea that you will only live 30 years into retirement.  That may not be the case.  Medical science is promising breakthroughs that raise life expectancies, thus straining your retirement nest egg even more.

The logical solution to the problems of asset allocation and the 4% rule is Distribution planning.  That is what we do.  If you are a client, please warn a friend and have them come in and solidify their retirement plan with Absolute Return Solutions.  We will eliminate or minimize the risks mentioned above so that your friends can have the income they need and want for the rest of their lives.

Most would consider Washington as about green as it gets – especially after our last election made national news.  But the linked article about where-not-to-die-in-2013 has the state colored RED.

Looking at the map, I’d like to say the best strategy is to live in Southeast Washington (no income tax), shop in Oregon (no sales tax), and then move to Idaho right before checking out (no state estate tax).  If that plan is not appealing, then estate planning needs to be on your to do list.

If you own a home, have an IRA, retirement plan, and other assets, the threshold posted below can easily sneak up on you.  If you are married and don’t utilize proper estate planning techniques before or after a spouse’s death, you may also miss out on the spousal exemption!

Part of our comprehensive planning at Retirement Income Solutions is maximizing legacy transfers.  As a Certified Tax Coach, Jim Black assists clients in reviewing their options to eliminate unnecessary taxation.  Just respond back to this email for your complementary tax review.

What is the Washington State filing threshold?

From the Washington State Department of Revenue Website

http://dor.wa.gov/content/findtaxesandrates/othertaxes/tax_estateOnAfter051705.aspx