HTG Investment Advisors Inc.
Senior Wealth Advisor
Lex Zaharoff specializes in helping corporate executives make the right financial decisions as they go through job transitions - a busy time, often filled with uncertainty and emotions for both executives and their spouses.
Lex's specialization is based on 33 years of experience analyzing the complexity of corporate-derived wealth as well as his personal experience as a corporate executive who has gone through similar transitions. He is a guide and sounding-board for his clients, helping them stay the course through volatile times – a role which often feels as if he is their investment therapist.
Since job and career transitions raise financial issues that are complex and interdependent, clients benefit from the resources of his whole firm. Lex and his team are twelve professionals with complementary skill, working in a friendly, collaborative environment and drawing from their firm’s 22 years of experience helping more than 200 clients with issues such as these.
Lex is also fortunate to co-teach the MBA course, Wealth Management and Private Banking at NYU's Stern School of Business. For Lex, it is particularly gratifying to share thirty years of lessons learned to help his students better advise their clients.
BSE, Engineering, Princeton University
MBA, Harvard Business School
The stock market has returned to what has historically been a normal level of volatility which leads to the important issue you raise as to how much exposure to stock markets do you need to take in order to maintain your spending needs and, equally important, how much are you comfortable taking. The latter is important since what you don't want is to find that you don't have the emotional tolerance to stay the course now that we have returned to a more normal level of volatility. Since your plans are to draw $30,000 from a $800,000 portfolio, which is about 3.8%, you could have some of the portfolio invested in the stock market. Since you are only 70, you and or your spouse are likely to be drawing from this portfolio for at least a decade and quite possibly more than 20 years. That is a long time horizon during which inflation will erode the value of a low volatile portfolio of only high quality fixed income funds. Some stock market exposure would make sense to maintain given your time horison, but each of us has a different capacity and tolerance for volatility. Any shift should be gradual and one should always try to avoid the temptation of trying to time when to enter or exit stock markets.
A negative rate of return on an investment can be caused by:
1) Receiving less cash than you invested or, if it has not yet been sold, having an estimated current market value below the level when you invested.
2) Forgetting to include some of the cash flows in the return calculation. For example, if the investment has distributed dividends or interest duing the period you are measuring the rate of return, you need to include those cash flows in the calculation.
3) Sometimes one confuses the two types of returns. There is the arithmetic mean return (often called the simple average return) and the geometric or compound return over time. For example, a two year investment which goes up 50% one year and down 50% the other (the order does not matter). The simple average return is (+50 - 50) / 2 = 0%. The compound return is -25% over the two years since you start with $100 and end with $75.
More people say they beat the market than actually do so this is a great question.
To correctly "beat the market":
1) Write down which "market" are you trying to beat. For example, are you picking from publicly traded large company stocks (in which case a good market benchmark would be the S&P 500 index), focused on small companies (Russell 2000 would be a better index) or all non US stocks (an established benchmark is the MSCI All Country World Index ex U.S.). You need to write it down at the start because it is our human nature to remember the past the way we want to. I have worked with many investors who conveniently remember a different benchmark when they find themselves underperforming.
2) Actually realize the gain by selling the investment and receiving the cash. A price on a statement is not necessarily the price you will receive.
3) Since risk and return are related, you have to adjust the return for the risks taken. Higher risk may lead to higher returns, but also to greater losses. Compare the investment's realized return to its "market" on an equal risk basis.
3) One final point: don't be too impressed by anyone who says they have "beat the market." If you are thinking of investing with them, what you are buying into are their future returns, not their past performance. It is statistically very difficult to separate "luck" from "skill" unless the individual has well documented returns over a very long period of time. You don't want to pay anyone for their past luck.
There is a rule of thumb in investing that at your age: a safe withdrawal rate is up to 4% a year of the value assuming it is invested in a well diversified portfolio of approximately 2/3rds in equity markets (use a low cost global equity ETF or index mutual fund) and 1/3rd in a low cost, well diversified investment grade bond fund with an intermediate maturity in the 5 to 7 year range. Of course, rules of thumb are convenient but can be dangerous. A portfolio 2/3rds in equities is quite volatile and if you panic when it drops by 20% and change the mix, this rule of thumb will fail you. So if you receive $500,000, applying the 4% rule will provide you with $20,000 a year of supplemental income.
One thing to consider is whether you want to / need to draw the 4% per year starting now or use it later. For example, assuming the average return on the portfolio is 6% over time, withdrawing 4% each year starting immediately means that the value of the portfolio will only increase by 2%, on average, each year. That just barely protects your principal from inflation. If you decided not to touch it for 20 years, at 6% the $500,000 becomes $1.6 million when you are 48. Then if you start withdrawing at an annual rate of 4%, the amount is $64,000 per year (4% of $1.6 million). While no one knows for sure what the returns will be for the stock and bond markets and how much inflation, delaying spending and investing well through diversified low cost funds will provide you with greater financial support later in life. Spending now vs later is always a difficult trade-off.
The general rule of thumb is to access any accounts which are already taxed savings, such as a bank savings account or mutual funds held in your name first; then your tax deferred accounts such as 401(k) or Traditional IRAs, and delay taking Social Security until you are 70 unless you know of a major health issue. The reason for delaying Social Security is that its value to you increases by approximately 8% for each year you delay and that is a much better Government guaranteed rate of return than you can find elsewhere.
As regards your pension, every pension is different so it depends on whether there is any benefit to you in delaying it and whether you need pension payments now to meet your spending needs.
Of course, the above is just the general rule of thumb and the answer might be slightly different depending on your health, tax rates, spending needs, and overall wealth level. For example, if your 401(k) is large and if your Required Minimum Distributions (RMDs), which start when you are 70 1/2, will push you up in a higher tax bracket (of course we have no idea what will be the tax brackets seven years from now), then there is a strategy to take some from your 401(k) now and pay tax as long as you are and remain in a lower tax bracket than when RMDs start in seven years.