Tag Archives: 401K

The End of the 4 Percent Rule?

retirement plan1Untitled-logoThe “4 percent rule” was a retirement spending approach that became mainstream in the 1990s. The rule suggested that a retiree with an average portfolio distributed between stocks and bonds (approximately 60-40) should withdraw 4 percent of his or her retirement funds each year (adjusting each year for inflation). If the retiree could stay limited to that 4 percent, he or she would be able to fund retirement for at least 30 years.

The simplicity of the 4 percent rule made it a hugely popular with investors. The method made planning easy and was projected to leave the vast majority of retirees with surpluses late in life. Many quickly adopted the method and the approach became a staple of retirement budgeting.

Modern Problems

Recently, the 4 percent rule has begun to fall out of favor with financial planners and investors. The rule, which was designed in the bull market of the mid-90s, relies heavily on regular, high returns from stocks. However, since that time, low economic growth and a major slump [in] the market has made equities look much less attractive. Few retirees will want to take on the risk of holding over half their portfolio in potentially volatile stocks.

The market is simply not what it was once thought to be. Retirees who are trying to reduce the risk of significant loss are less willing to put faith in perpetual stock growth. In addition to smaller gains, the average lifespan is on the rise and people are living longer in retirement. Strategies have become more conservative to deal with these concerns, and individuals planning for retirement must consider changes to saving and investing.

Ideal Rates in Retirement

The changes in the market do not indicate that the 4 percent rule can never work for retirees, just that it causes problematic exposures. The 4 percent rule works when yearly withdrawals are matched by yearly growth. Even if a portfolio averages 4 percent real growth, it could still underperform a target goal because it suffered severe losses early on.

So is there a better rule to follow? A 3 percent rule, perhaps? Unfortunately, there are no fixed guidelines when it comes to retirement income planning. A retiree must adjust his or her plans regularly to match both changing needs and market performance. The 4 percent rule might be a great place for investors to get a rough estimate when planning, but they should always be prepared to adjust their annual withdrawals lower if necessary.

What Can Investors Do to Make Retirement Work?

Since investors cannot control market performance and the rate of return, they often try to increase allowable withdrawals by increasing total portfolio value. By starting with more money in their retirement plan, a smaller rate of withdrawal will still be worth a solid dollar amount.

To sustain larger dollar withdrawals, retirees must either invest more money or delay retirement by a couple of years. Though neither option may seem pleasant, retirement planning is full of these give-and-take situations; an investor must find a way to make retirement income sustainable.

As another option, some retirees might look to an annuity to lock in an income. Annuities do not provide the flexibility or adjustable withdrawals of direct portfolio management, but they are guaranteed to pay out for the rest of the retirees’ lives—always providing them with some level of income.

Changing Rates

There may be many reasons to change withdrawal rates during retirement, but retirees must always keep one eye on the market and the other on the future. A profitable year might entice higher withdrawals, but a retiree could benefit far more if the extra earnings were reinvested for later expenses. On the other hand, if withdrawals are greatly restricted early on, people might miss their opportunity to travel and enjoy active life in retirement.

There are no simple answers when it comes to the chaos of the market and the unknown developments of the future. Investors should prepare themselves for changes and be ready to adjust their portfolios as things come into focus. No matter what hap- pens, it is important to plan with trusted financial advice. If you have concerns about your retirement strategy or want to better understand your financial options, contact Stock Yards Bank & Trust Company with all your questions.

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This article was written by Advicent Solutions, an entity unrelated to Stock Yards Bank & Trust Company. The information contained in this article is not intend- ed to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. Stock Yards Bank & Trust Company does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2013 Advicent Solutions. All rights reserved

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6 Financial Traps New College Graduates Should Avoid

This spring, college seniors across the nation will graduate and start their careers. Financial lifestyle should be top of mind, says the American Bankers Association. ABA has highlighted six traps new college graduates should avoid to fortify their finances as they transition from the dorm to the office.

“Now is the time for college grads to get their financial life started on the right foot,” said Corey Carlisle, executive director of the ABA Foundation. “When it comes to managing your finances in the real world, pulling an all-nighter isn’t the best strategy.  Forming positive financial habits today will set you up for lifelong success.”

According to ABA, new college graduates should avoid the following financial traps:

Not having a budget.  Don’t spend more than you make. Calculate the amount of money you’re taking home after taxes, then figure out how much money you can afford to spend each month while contributing to your savings. Be sure to factor in recurring expenses such as student loans, monthly rent, utilities, groceries, transportation expenses and car loans.

Forgoing an emergency fund.  Make it a priority to set aside the equivalent of three to six months’ worth of living expenses. Start putting some money away immediately, no matter how small the amount. A bank savings account is a smart place to stash your cash for a rainy day. Use your tax refund for this instead of an impulse buy.

Paying bills late – or not at all. Each missed payment can hurt your credit history for up to seven years, and can affect your ability to get loans, the interest rates you pay and your ability to get a job or rent an apartment. Consider setting up automatic payments for regular expenses like student loans, car payments and phone bills.

Racking up debt. Understand the responsibilities and benefits of credit.  Shop around for a card that best suits your needs, and spend only what you can afford to pay back. Credit is a great tool, but only if you use it responsibly.

Not thinking about the future.  It may seem odd since you’re just beginning your career, but now is the best time to start planning for your retirement. Contribute to your employer’s 401(k) or similar account, especially if there is a company match. Invest enough to qualify for your company’s full match – it’s free money that adds up to a significant chunk of change over the years.

Ignoring help from your bank. Most banks offer online, mobile and text banking tools to manage your account night and day.  Use these tools to check balances, pay bills, deposit checks, monitor transaction history and track budgets. To learn about the tools Stock Yards has to offer, visit our website at www.syb.com.

Resource information provided by the American Bankers Association

Save or Spend: 5 Ways to Make Your Refund Count This Tax Season

According to the Internal Revenue Service, the nation’s taxpayers received an average tax refund of nearly $3,000 in 2015. This year, with more than 70 percent of taxpayers receiving a refund, the American Bankers Association is highlighting five tips to help them make the most out of their windfall.

“Tax season is a great time for consumers to reassess how they allocate extra cash,” said Corey Carlisle, executive director of the ABA Foundation. “It’s wise to take steps toward securing your financial well-being like storing your refund for rainy days or using it to get a jumpstart on saving for retirement.”

To help consumers make the most out of their money, ABA has highlighted the following tips:

• Save for emergencies. Open or add to a savings account that serves as an “emergency fund.” Ideally, it should hold about three-to-six months of living expenses in case of sudden financial hardships like losing your job or having to replace your car. Click here for more information regarding Stock Yard’s account options.

• Pay off debt. Pay down existing balances either by chipping away at loans with the highest interest rates or eliminating smaller debt first.

• Save for retirement. Open or increase contributions to a tax-deferred savings plan like a 401(k) or an IRA. Where can you get one? Stock Yards can help set up an IRA, while a 401(k) is employer-sponsored.

• Put it toward a down payment. The biggest challenge that most first-time home buyers face is coming up with enough money for a down payment. If you intend to buy a new home in the near future, putting your tax refund toward the down payment is a smart move.

• Invest in your current home. Use your refund to invest in home improvements that will pay you back in the long run by increasing the value of your home. This can include small, cost-effective upgrades like energy-efficient appliances that will pay off in both the short and long term. If you have more substantial renovations in mind, your bank can help with a home equity line of credit. Click here for more information on how to make the most of your investment.

Resource information provided by American Bankers Association