Happy Spring, Clients and Friends!

This Spring is a particularly exciting time for us as we prepare to host our 10^th Annual Cleveland Economic Summit on June 26^th.  We hope you and your guests will join us for this exciting complimentary event which will take place at the world renowned Cleveland Botanical Gardens from 4:00 pm to 6:30 pm. Be sure to read more below about this year’s program and speakers, including how to RSVP to secure your place at a table.

A lot can change in a decade. When I think back ten years ago, both of my girls were still in school and living at home. Our team at Planned Financial Services was half the size it is today. The Cleveland Browns were just coming off their last winning season in recent history (10-6 in 2007); the iPhone had recently been introduced; Facebook had 100 million users compared to its 1.1 billion today; and we were smack dab in the middle of a global financial crisis. Today, the economy is in one of its longest expansions, corporate profits are at record highs, the unemployment rate is at a 17-year low and S&P 500 earnings have increased at a double-digit clip four out of the past five quarters, which we discuss in this quarter’s Market & Economic Update. 

Yet, when we step back and think about the things that have changed in our lives over the course of a decade or more, most of us don’t think about where the DOW or S&P 500 was or what the bond market or inflation were doing. We remember how old our kids or grandchildren were and what was taking place in our families’ lives. Were you celebrating the birth of a grandchild? Your own son or daughter’s graduation from high school or college? Your retirement or a job change? We mark time not by how much we have in our bank or investment accounts, but by the people and things that mean the most to us in life. It’s not how much we have, but how much we can do with what we have. 

That’s what we mean when we talk about your Return on Life^®. Helping you define the return on life you seek, which includes your goals for your family, business and future; how you want to live each day; and the activities and causes you would pursue today if money were no object is what we focus on every day. We look forward to continuing to provide the timely, relevant and actionable advice you depend on from your team at Planned Financial Services.

What's in It for You?

At-a-glance guide to your 2nd Quarter 2018 Frank Talk newsletter:

• News & Events
  • 10th Annual Cleveland Economic Summit Event Details
  • Brian Klecan Earns Certified Plan Fiduciary Advisory (CPFA) credential
  • Smart Business: Smart Women Awards Recap
  • Upcoming Smart Business Northeast Ohio Family Business Conference
    
    
• Market & Economic Update
  
  

News & Events

You and your guests are invited to join us as we celebrate our 10th year hosting one of the most insightful and informative annual events for the Northeast Ohio business community, the 10^th Annual Cleveland Economic Summit. 

Our entertaining and informative late afternoon event will feature two distinguished speakers: John Lynch, Executive Vice President and Chief Investment Strategist at LPL Financial and Greg Valliere, Chief Global Strategist at Horizon Investments. Our featured speakers will join your host, Frank Fantozzi, in providing investors, business leaders, and taxpayers with in-depth analysis and keen insight on the key factors that will impact your business, tax strategies and investment decisions in the coming months. Our speakers will answer your questions about the potential impact of tax reform and trade policies on the domestic and global financial markets; and share their outlook and perspectives on the economy, financial markets, business climate and political landscape in 2018.

When...

Tuesday, June 26, 2018

4:00 pm - 6:30 pm

Where…

Cleveland Botanical Garden - Woodland Hall
11030 East Boulevard
Cleveland, OH  44106 

Enjoy complimentary parking at onsite parking garage.
(Validate parking ticket with attendant upon arrival).

The Garden will remain open until 8:00 pm following the
Economic Summit. Stroll through, experience, and
become inspired by all it has to offer!

About our speakers…

John Lynch │Executive Vice President │ Chief Investment Strategist, Research, LPL Financial
As chief investment strategist, John Lynch leads the market and economic analysis for LPL’s Research team and is responsible for the firm’s strategic and tactical investment advice. Mr. Lynch joined LPL in 2017 with more than 30 years’ experience in the financial services industry. Previously, he held roles that included senior vice president and chief investment officer for the Mid-Atlantic region of Wells Fargo Private Bank, chief equity strategist with Wells Fargo Asset Management, and chief market analyst for Wachovia and Evergreen Investments. Earlier in his career, he honed his investment skills while working in New York in the securities industry, focusing on equity strategy and portfolio management.

Greg Valliere │ Chief Global Strategist │ Horizon Investments 
For more than three decades, Greg Valliere has followed Washington for investors. He specializes in coverage of the Federal Reserve and analyzing the impact of policy and politics on the markets. A graduate of George Washington University, Mr. Valliere co-founded The Washington Forum, linking Wall Street with Washington. He is the former Director of Research at the Charles Schwab Washington Research Group, and a frequent guest on CNBC, Bloomberg TV and radio, CNN, Fox Business News and CBS radio. Mr. Valliere is also frequently quoted in The Wall Street Journal, Barron’s, and The New York Times.

Recent Happenings...

Brian Klecan Earns Certified Plan Fiduciary Advisory (CPFA) Credential

Our lead Retirement Plan Advisor with 401(k) Prosperity^®, Brian Klecan, AIF^®, recently earned the Certified Plan Fiduciary Advisory (CPFA) credential, further demonstrating his knowledge, expertise and commitment to working with retirement plans and helping plan fiduciaries manage their roles and responsibilities. 401(k) Prosperity^® is the corporate retirement and institutional investment planning division of Planned Financial Services. For more information on how your experienced 401(k) Prosperity^® team helps create simplicity in a complex world, visit us at 401(k) Prosperity^®.

2018 Smart Business: Smart Women Breakfast Recap

PFS Wealth Advisor, Cynthia Yang, CFA^®, CIPM, was honored to serve as an award  presenter, recognizing the achievements of some of the region’s most distinguished women business leaders and entrepreneurs. Topics of discussion included the #MeToo movement, including how executives can build a workplace and culture that provides opportunities for everyone. The panel discussed how to instill the ideals of inclusion and diversity in team members and how leaders can be authentic, yet still culturally conscious.

Stay Tuned!

Smart Business: Family Business Conference and Family Business Achievement Awards

PFS will once again participate as a sponsor of the Smart Business: Family Business Conference and Family Business Achievement Awards on Thursday, September 6, 2018. The interactive workshop and awards program, presented by Cuyahoga Community College, will feature a dynamic line-up of keynote speakers and panelists, including Frank Fantozzi, who will share real life examples of what separates success stories from failures. Attendees gain perspectives from both industry experts and actual family business owners to address the real issues facing family-owned businesses every day. Visit Smart Business online for more information or to register for the event.

Are you a NE Ohio business owner?
Consider joining us at the Smart Business
Northeast Ohio Family Business Conference in September.

Visit our online Newsroom to learn more about recent PFS news, awards and recognition

Market & Economic Update

*First quarter earnings season was excellent by almost any measure. The numbers were strong even without the boost from the new tax law. In this week’s commentary, we recap the outstanding near-complete first quarter earnings season, highlight some of the key themes, and show why a potential peak in earnings growth is not cause for immediate concern.

Great Numbers

We expected a strong first quarter earnings season and we got it. Growth was very impressive, with S&P 500 Index earnings growing 26% year over year, the best since the fourth quarter of 2010. Even when excluding the impact of the new tax law (estimated at 6–7%), earnings growth accelerated from the prior quarter and approached 20%. A broad range of sectors produced substantial upside surprises.

Overall, just about any way you slice it, it was an excellent earnings season; other notable highlights:

• S&P 500 earnings have now increased at a double-digit clip four out of the past five quarters.
  
  
• The streak of consecutive quarters with earnings exceeding expectations is now 36, based on Thomson Reuters’ data.
  
  
• The percentage of companies beating earnings estimates at just over 78% is the highest since FactSet began tracking the data in 2008.
  
  
• The magnitude of the upside surprise, at 7.5%, was the biggest since 2010.
  
  
• Revenue grew more than 8% year over year, fastest since 2011 (and in line with the fourth quarter of 2017).
  
  
• Estimates for the next four quarters rose during reporting season, a relatively rare positive development.
  
  

Cause for Applause

Why so good? As we pointed out in our earnings preview in April, in addition to the new tax law, several other factors contributed to the strong numbers:

• Better economic growth. Accelerating economic growth in the U.S., based on gross domestic product, helped boost corporate profits. U.S. economic growth was 2.9% year over year for the first quarter (2.3% quarter-over-quarter annualized), above recent trends. Growth remains generally solid around the world too.
  
  
• Robust manufacturing activity. The U.S. manufacturing sector is booming, with the Institute for Supply Management (ISM) Manufacturing Index averaging near 60 year-to-date. Earnings are closely linked to the manufacturing sector.
  
  
• Weak U.S. dollar. During the first quarter, the average U.S. Dollar Index level was more than 10% below the year-ago quarter, which propped up overseas earnings for U.S.-based multinationals.
  
  
• Higher oil prices. A more than 20% jump in oil prices from the year-ago quarter drove a sharp rebound in energy sector profits.
  
  

Key Themes

Several themes have emerged during this strong first quarter earnings season:

• Companies with more overseas revenue exposure generally grew earnings faster. According to FactSet data, companies with more than half of their revenue outside the U.S. grew earnings 7% faster, on average, than those with less than half of their revenue coming from outside the U.S. The drop in the U.S. dollar was a big factor here in addition to stronger growth in developing economies.
  
  
• Buybacks are on the rise. Proceeds from the tax boost are clearly giving buybacks a lift. Goldman Sachs forecasts a record $650 billion in share buybacks in 2018, up 23% from 2017. Buyback authorizations year to date are up 48% versus the same period last year. Capital spending is also on the upswing.
  
  
• Trade policy not (yet) having much impact. Although a fair number of companies highlighted the uncertainty surrounding trade policy, particularly industrial companies, the first quarter came too soon for enacted tariffs to have material impact. Further, the potential for more tariffs does not appear to have negatively affected companies’ guidance.
  
  
• Cost pressures emerging. Some companies cited wage and input cost pressures, which is normal at this relatively late stage of the business cycle. But overall profit margins rose during the first quarter, both on a year-over-year and quarter-over-quarter basis. Business is simply good enough that companies have been able to mostly offset higher costs, even excluding the impact of the new tax law.
  
  

As Good as It Gets?

We mentioned that the peak earnings narrative might garner some attention. It certainly has—more than we anticipated—in part because Caterpillar’s management stated that the first quarter may be the “high-water mark” for the year on the company’s earnings call.^* The 26% earnings growth rate expected for the quarter may be as good as it gets for the rest of the current business cycle. Consensus estimates call for slower growth over the course of 2018, as wage and other cost pressures have started to build, and comparisons get tougher in 2019 after the anniversary of the tax law passes. But does that mean a recession is forthcoming? Is peak earnings growth a good time to sell stocks? We don’t think so. We identified S&P 500 earnings growth peaks and calculated the number of months from those dates until the next recession. The average time to recession based on the last 12 earnings growth peaks since 1953 is about 4 years. Should this relationship hold, we could expect a recession in mid-2022, which would make the current U.S. economic expansion the longest ever, at 13 years old.

The short time to recession following the 2000 earnings growth peak (9 months) was a product of the dotcom bubble; conditions today are not as extreme in terms of over-exuberance and over-investment. Also note that the S&P 500 was up an average of 59% during these periods between the earnings growth peak and the start of the next recession, meaning selling at these peaks may not be the best strategy.

As a result, we are not overly concerned about an earnings growth peak and believe more good earnings growth may be ahead of us. Assuming the economic expansion continues well into 2019 as we expect, while benefits from the new tax law (e.g., capital spending incentives and buybacks) are still cycling through, S&P 500 earnings per share growth in 2019 may reach or potentially exceed its long-term average of 7–8%.

Closing Remarks

First quarter earnings season was excellent by virtually any measure, while several tailwinds remain in place that suggest strong earnings may continue in the coming quarters. Earnings growth may slow, but an earnings growth peak does not necessarily mean a recession is looming. We reiterate our 2018 S&P 500 earnings forecast of $152.50 per share, representing growth in the mid-teens; this estimate may prove conservative given the substantial impact of the new tax law that is still cycling through. We expect strong earnings growth to drive a double-digit return for the S&P 500 in 2018, though as we have seen recently, those gains may come with higher volatility.*

We continue to watch the financial markets, economy, and geopolitical factors closely and adjust our portfolios in response to market activity to ensure our clients’ investment strategies are aligned with their stated investment objectives. And as we mentioned in our last edition of Frank Talk, we continue to keep a close eye on how recent changes in the tax law may impact you in the months and years ahead. We’ve always been firm believers that a personalized wealth management strategy that incorporates tax planning is critical to helping you capture opportunities and avoid unintended consequences. So, please don’t hesitate to reach out to your experienced team of wealth advisors that includes a Certified Public Accountants (CPAs) and an IRS-licensed Enrolled Agent if you or someone you know has questions or concerns about how tax reform may impact your personal or business finances.

We remain committed to providing you with the education, advice, and insight to help you retain a long-term perspective and focus on your individual goals throughout the year. Your Return on Life^® is always our top priority. If you need additional help or if someone you know needs our advice, remember, we’re only a phone call away at 440.740.0130. We are always honored to help our clients’ friends and business associates take greater control of their future with guidance from the PFS team. We welcome and are grateful for the many introductions our clients continue to provide.

Real People. Real Answers. 

Health, Happiness, and Good Fortune,

Frank Fantozzi
President & Founder
CPA, MST, PFS, CDFA, AIF^®
Frank@PlannedFinancial.com

To review our privacy policy, ADV Part A and ADV Part B, please visit our website at http://plannedfinancial.com/contact-us/.

*Research sources provide by LPL Financial May 2018.

IMPORTANT DISCLOSURES: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. All investing involves risk including loss of principal. 

DEFINITIONS: Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments, and exports less imports that occur within a defined territory. 

INDEX DESCRIPTIONS: The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

 The Institute for Supply Management (ISM) Manufacturing Index is an economic indicator derived from monthly surveys of private sector companies and is intended to show the economic health of the U.S. manufacturing sector. A PMI of more than 50 indicates expansion in the manufacturing sector, a reading below 50 indicates contraction, and a reading of 50 indicates no change. The U.S. Dollar Index measures the performance of the U.S. dollar against a basket of foreign currencies: EUR, JPY, GBP, CAD, CHF and SEK. The U.S. Dollar Index goes up when the dollar gains “strength” compared to other currencies. 

Investment advice offered through Planned Financial Services, a Registered Investment Advisor and separate entity from LPL Financial.

Securities offered through LPL Financial, Member FINRA/SIPC

John Lynch, LPL Financial; Greg Valliere, Horizon Investments; and Planned Financial Services are all separate, unaffiliated entities.

You’ve likely already heard a lot about the Tax Cuts and Jobs Act (TCJA), which became law in late December. But behind all the sound and fury, do you understand how the new tax law actually affects you?

In general, the TCJA attempts to simplify tax filing by reducing certain itemized deductions and increasing the standard deduction. So if you’ve itemized deductions in the past, you may want to take a different approach to minimizing your tax liability for 2018. The following summarizes major tax law changes that affect individuals. But be sure to consult with your tax advisor to learn how these rules apply to your specific situation.

Rate adjustments

The new law sticks with seven income tax brackets but adjusts the tax rates from 2017 rates of 10%, 15%, 25%, 28%, 33%, 35% and 39.6% to 10%, 12%, 22%, 24%, 32%, 35% and 37%, respectively. For 2018, the highest rate will apply when taxable income exceeds $500,000 for single filers and $600,000 for joint filers. These adjusted rates apply through 2025, at which time they’ll return to the prior-law rates — absent further congressional action.

Long-term capital gains rates haven’t changed and remain at 0%, 15% and 20%, with a few exceptions. These rates also apply to qualified dividends.

Exemption and deduction changes

In 2017, most taxpayers were able to claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. The TCJA eliminates that exemption for 2018–2025 but offers family tax credits to help make up for the elimination. (See “Tax credits for children and other dependents.”)

As for the standard deduction, the new law almost doubles it to $12,000 for single filers and $24,000 for joint filers for 2018–2025. These amounts will be adjusted for inflation beginning in 2019. Here’s how the law affects other deductions:

SALT. The deduction for state and local taxes (SALT) is preserved, but restricted. The TCJA limits it to no more than $10,000 for the total of state and local property taxes and income or sales taxes, for 2018–2025.

Mortgage interest. This deduction also survives in a limited form. Taxpayers can deduct interest only on mortgage debt of up to $750,000 for 2018–2025 ($1 million for mortgage debt incurred before December 15, 2017). Deductions for interest on home equity debt, though, are generally prohibited for 2018–2025, regardless of when the debt was incurred; there may be exceptions depending on how the debt is used.

Medical expenses. For 2017 and 2018, the medical expense deduction is expanded. The threshold for deducting such unreimbursed expenses is reduced from 10% of adjusted gross income to 7.5%.

Moving expenses. The moving expense deduction is generally suspended for 2018–2025. And employer-provided qualified moving expense reimbursements generally can no longer be excluded from gross income and wages.

Casualty and theft losses. The deduction remains, but for 2018–2025 it’s allowed only for casualty losses that have been caused by an event the President officially declares a disaster.

Alimony payments. The TCJA removes the deduction for alimony payments, while also excluding the payments from a recipient’s taxable income, for agreements reached or amended after 2018.

Miscellaneous. Itemized deductions for expenses such as investment expenses, certain professional fees and unreimbursed employee business expenses have been eliminated for 2018–2025.

AMT and estate tax alterations

The TCJA keeps both the alternative minimum tax (AMT) and the estate tax, but it substantially narrows the number of taxpayers affected by them for 2018–2025. For the AMT, the law temporarily increases the exemption amount to $109,400 for married couples (50% of that amount, or $54,700, for married individuals filing separately) and $70,300 for all other taxpayers (except estates and trusts). It also increases phaseout thresholds ($1 million for married couples and $500,000 for all other taxpayers except estates and trusts). These amounts will be adjusted for inflation.

The estate tax exemption is doubled to an inflation-adjusted $10 million (thus, $11.18 million for 2018).

Taking control

With 2018 already well underway, it’s important to get up to speed on the TCJA. Once you know how the law affects you, you’ll be better equipped to make tax minimization plans.

Sidebar: Tax credits for children and other dependents

For 2018–2025, the Tax Cuts and Jobs Act (TCJA) increases the child credit from $1,000 to $2,000 per child under age 17. The amount of $1,400 per child is refundable should the credit exceed actual tax liability.

The TCJA also extends the credit to more families by raising phaseout thresholds to $400,000 adjusted gross income for married couples and $200,000 for all other filers. Note, however, that the credit will lose value over time because the thresholds won’t be adjusted for inflation.

The tax law also adds a temporary $500 nonrefundable credit for qualifying dependents other than children eligible for the child credit. For more information about how the TCJA affects dependents, talk to your tax advisor.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor.

This material was prepared for the representative’s use.
© 2018

Bonds generally attract investors who are looking for a regular income stream and relative stability. And stocks typically appeal to investors who seek potential upside via share-price gains — though often with more investment risk.

But what if you’re looking for the reduced volatility of bonds with the capital-gains potential of stocks? The answer may be convertible bonds. These hybrid securities combine aspects of both asset classes.

A distinctive option

Convertible bonds, often called convertibles, are issued by a corporate borrower and can be converted into shares of the company’s common stock once that stock reaches a certain price. Convertibles are unique because they have a foot in both the fixed-income and equity worlds. They resemble bonds in that they provide regular coupon income for a specified duration — as long as the security’s issuer remains solvent.

However, unlike traditional bonds, convertibles give investors the option to convert the debt into stock once that stock reaches or exceeds a particular price, known as the conversion price. Because of this feature, convertibles usually offer a lower interest rate than a traditional bond of comparable duration.

Appropriate price

The hybrid nature of convertibles makes determining an appropriate price for them complex. But the issuer’s stock performance is a key factor. When a stock is trading much below the conversion price, the price of the convertible bond tends to resemble that of a conventional bond by the same issuer. If the stock price comes close to or tops the conversion price, however, a convertible’s price typically moves in line with the underlying stock, giving investors the opportunity to participate in the convertible’s upside.

The odds of being able to convert the bonds into stock are relatively low when the stock is trading well below the conversion price. But as the stock price closes in on the conversion price and the likelihood of an equity conversion increases, the convertible’s price creeps closer to the stock price. 

Potential risks and challenges

As with all investments, convertibles can cause investors to lose money. They also pose risks that prospective investors need to consider, including:

Capital structure. Convertibles are senior to stocks in a company’s capital structure but junior to traditional bonds. This means that, if an issuer defaults on its debt, owners of convertible bonds are in line to be paid back before stockholders, but after bond owners.

Trading characteristics. The convertibles market is much smaller than the market for either traditional bonds or equities, with relatively few participants. So convertibles can be less liquid and usually have higher trading costs than stocks or bonds.

Limited diversification. Currently, most convertibles issuers are health care and technology companies. Lack of sector diversification can increase investment portfolio risk, so investors should ensure that convertibles occupy only a limited portion of their portfolio.

Call risk. Most convertibles can be called (or redeemed) by the issuer if the equity price reaches a certain point — a factor that can limit the security’s upside and possibly force investors to reinvest in a less-favorable environment.

Professional advantage

Interested investors can buy convertible securities directly from their issuer. But because these instruments are complex and trading costs can be high, most investors gain access to convertibles via professionally managed portfolios. Portfolio managers generally are supported by a convertibles research team and may be in a better position to navigate the relatively illiquid convertibles market.

Talk to your financial advisor about whether convertibles might be appropriate given your situation, risk tolerance and investment goals.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor.

This material was prepared for the representative’s use.
© 2018

Natural disasters took a massive toll on North America in 2017. In addition to loss of life, hurricanes Harvey, Irma and Maria, various California wildfires, and earthquakes in Mexico resulted in total economic losses of $330 billion, according to Munich Re. This represents the second most financially catastrophic year attributed to natural disasters around the globe.

If you’ve been lucky enough to dodge a direct hit by a natural disaster, you could still be affected. To reduce risk, some insurance companies have tightened their coverage guidelines in certain regions and raised the cost of premiums. Learn how you can better protect your property and reduce potential losses in the event of future disaster.  

Working with insurance providers

To help ensure that your insurance company will be able to pay any disaster-related claims, check its financial stability. In general, you should do business only with insurers with high credit ratings. These companies are more likely to survive short-term financial difficulties caused, for example, by a surge in claims following a major disaster. Also check with your state insurance office to find out which companies have track records of paying claims on time.

Of course, even a highly rated insurance provider won’t adequately cover your losses if you haven’t purchased sufficient coverage. If your home has appreciated significantly in recent years, you may no longer have enough protection. Check with your insurance agent, who can help you figure out how much coverage you truly need given current property values or recent major purchases. Policy riders can provide extra protection for high-value items such as jewelry, art and antique furniture.

Keeping your coverage is another concern. Filing claims for relatively small amounts of damage may save you money in the short term. But do it too often and you may risk losing your homeowners insurance — particularly if you live in a state considered vulnerable to hurricane damage. In most cases, you’re better off paying for modest repairs yourself and saving insurance claims for larger, costly repairs. To save money on premiums, consider raising your deductible to the maximum you’d be willing to spend out of your own pocket.

Taking proactive measures

Following a disaster, it can be challenging to answer all of your insurers’ questions about what you owned and want to replace. Save yourself this anxiety by making a list now of your important possessions, including key information such as purchase dates and serial numbers. Take photos or video footage of every room in your house, making sure that particularly costly possessions are recorded. And don’t forget to store a copy of your inventory and images in a remote location — perhaps with a cloud computing provider or on a memory stick you’ve entrusted to a friend or relative.

If you live in an especially disaster-prone area, you should have liquid assets safe but readily available. Most experts recommend a cash fund of at least three months’ worth of emergency expenses.

Recognizing the possibility

No one likes to imagine the worst. But when it comes to protecting your property — and your life and the lives of family members — you need to think about the possibility of a natural disaster. With a loss-reduction plan in place, you’re more likely to weather even the worst storm.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor.

This material was prepared for the representative’s use.
© 2018

Determining how much of your retirement nest egg to withdraw each year can be stressful. You want to take out enough to maintain a comfortable lifestyle, yet the idea of running out of money is frightening. The 4% rule can help.

How it works

The 4% rule is derived from a 1994 study of stock and bond returns from the 1920s through the 1970s. The author of the study concluded that, regardless of the market’s ups and downs, there was no historical scenario under which annual 4% inflation-adjusted withdrawals would exhaust a retirement portfolio in less than 33 years.

To apply the rule, begin by withdrawing 4% of your portfolio in the first year of retirement. For example, if you’ve saved $2 million, you would withdraw $80,000 in the first year. To maintain your purchasing power, you would increase your withdrawals each year to keep pace with inflation. For example, if the inflation rate is 2.5%, you would withdraw $82,000 in year two and $84,050 in year three.

Exclusive use discouraged

Although the 4% rule can be a useful tool, relying on it exclusively may be dangerous. As with all investing rules, the fact that it worked in the past is no guarantee it will work the same way in the future. Today’s low bond interest rates may not even support a 4% withdrawal rate. Interest rates were substantially higher when the rule was established, and some experts believe that a 3% rule may be more realistic.

Also, if your portfolio contains more high-risk investments than the typical portfolio, the rule may not protect you in the event of a significant market downturn. What’s more, people are living longer and retirement periods well over 30 years aren’t uncommon. Planning for a 30-year retirement could leave you short of funds.

Then there’s the risk that a 4% annual withdrawal is less than you can afford and will lead you to miss out on some of the pleasures of retirement. The rule provides some protection against running out of money, but a large percentage of retirees who follow it end up maintaining or even increasing the size of their nest eggs by the end of the 30-year time horizon.

Better solution

So think of the 4% rule as a guideline. You might withdraw 4% the first year and then re-evaluate the lasting power of your savings annually. Talk to your financial advisor about a withdrawal strategy that takes into account your unique circumstances.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor,

This material was prepared for the representative’s use.
© 2018