What Is Your Number And Why It Doesn’t Matter!

Hey BT, it’s Brian. I’m here.

Oh, great. We’re ready to go. It’s 9:00 and you have the floor.

Thank you. I’m… My engine is wound tight and I am raring to go. We’re going to get to the subject matter of our call in a minute of what’s your number and if you have one, why you may be making a mistake by having a number. But, pardon me; you’re going to have to allow me a minute on my soap box.

This morning, on national TV, I saw a TV report. It must be right because it was on network news. I saw a TV report saying that the Obama administration is demanding, of a health insurance company, that they provide the administration with details to justify a recent rate increase. This is from Health Secretary Kathleen Sebelius. So the government can make sure that the company is spending the money on health claims and not on overhead costs. Well, I don’t know about you but that just annoys me to no end and I’m being polite here. The gall, the audacity, the arrogance of the government to think that they have what it takes to run a business efficiently just blows my mind. They have done a horrible job running the government, using the money that the taxpayer has entrusted to them. The gall, the arrogance that they think they’re in a position to make these decisions in private business? You got to be kidding me. And it’s disturbing and concerning to me that this administration has, I think the number is 8 percent, of people in cabinet positions and on the team so to speak, have real world business experience. Kind of scary. So, if this isn’t fuel for the fire to just throw them all out and start over again, I don’t know what is.

And kind of along those lines, I think I put this on my Facebook page last week, we were at an investment conference here in Orlando (TD Ameritrade). They brought in former Presidents Clinton and Bush, Bush II. And I’ll spare you the details of their comments but in observing these two men, it became very apparent to me that they were very relaxed, very at-ease, willing to for the most part speak openly about the questions that were posed to them. And I was amazed at how similar there viewpoints were with the exception of health care (shock shock) but on all the other issues they were remarkably in sync with each other. They were very polite. Very self deprecating. Very complementary of each other. You could tell when they didn’t always see eye to eye. But they would rather than name calling and mudslinging, they would more or less just poke fun at each other and at themselves. Yep, it was fun, entertaining, refreshing to see. And that got me thinking, “You know, how come they are like this now?” And to me, the only thing I can come up with is they both know and understand that they’re never going to be in a political elected office again, therefore they don’t have to worry about placating the special interest groups, the lobbyists, the political action committees and all that. So again, there’s another bullet for me, anyway, of why we need to have term limits. So, anyway, I’m done ranting and raving. My solution to the health care is going to be in the February newsletter, it ought to be hitting your mailboxes pretty soon.

Let’s get in with today’s topic. Everyone seems to have a number, at least from what we can tell, what’s your number? Here’s what I’m talking about. I remember years ago, I met with a couple. They never did become clients. This couple, at the time, accumulated, I think about $2 million and the wife wants him to retire. He’s thinking about retiring but isn’t ready quite yet to retire. And she’s a little annoyed with him because you know she’s been, from her point of view, sacrificing and delaying on doing things that she’d wanted to do with her husband. You know, travel and visits to the children and grandchildren. And he just wasn’t comfortable retiring yet and his excuse was he didn’t think $2 million was enough he’d be more comfortable and feel better about retiring when they had accumulated a nest egg of $3 million. So off they went. So then they come back to visit with me. Low and behold, they had accumulated $3 million. Well, she’s eager and ready to start planning and ready for him to retire and get on with life and the next chapter and adventure in their life. And he’s still fidgeting and nervous and not comfortable about retiring and tells her, “You know I don’t think $3 million is enough. Let’s wait until we’ve amassed $4 million.”

And I never saw them again. But I did hear that they got divorced. And this is like after 20-30 years of marriage. They ended up getting divorced because it seems that she had been holding back on some of her personal goals and dreams waiting for him to retire. She obviously felt they had accumulated more than enough money and he was unwilling, for whatever reason, I’m not going to get into that side of things, but he was unwilling to let go, retire. And she got tired of waiting around for him. So, that’s what I want to challenge your thinking on. If you’ve got a number in mind, you might be making sacrifices in your own personal situation that you really don’t need to be making.

The other, well, I’d call it a myth, you may have heard about, “Gee if you’re going to pull income from your investments a safe withdrawal rate is, depending on the report you’re reading, anywhere from 4-6%.” Well, depending on your view on your estate planning objectives you might be making a mistake there to as well. All the research I’ve read supports, and I don’t fault the research by the way, but all the research I’ve read supporting these 4-6% withdrawal rates are based on the premise that the end goal is to make sure that your current nest egg remains intact. That you’re able to pass it on to your heirs. Nothing wrong with that, if that’s truly your goal and a value that is of significant importance to you.

But what I can tell you is a number of people that I talk with, when I rephrase the question, “What if you’re able to live a life on your terms? Never be in a burden to anybody. Your family, or anybody else, financially speaking, but there’s not much left for the kids or the family to inherit.” And quite often I get feedback that says, “Well we could be OK with that. You know it’d be nice to leave them something, but at the end of the day, if we’re able to live and enjoy life, especially in retirement, and never be a financial burden to anybody, then that’s OK with us.” Well if you think that way, then you might, in fact, be able to take more money out of your investments, safely. Still having a cushion with more than enough money left over during your lifetime.

So what we have found is often times the emotional creatures that we human beings are, we tend to get fixated on a number. Whether, in this couple’s case, whether it’s $2 million, $3 million, $4 million, $100,000, it doesn’t matter. We tend to get nervous or let our emotions take over if our investment accounts fall below this often times arbitrary number we have anchored in our head. So what I want to suggest to you is a different, and I think a better way, of looking at your money, your nest egg. Think of it in terms of a pension fund.

If you’ve already got a pension or you’re going to be receiving a pension, what happens? Every month you get a monthly pension check, right? You got one last month, you got one this month, you’re going to get one next month. How often do you really think about the current market value of the pension fund that sends you your monthly check? Probably not that often. Now periodically you hear about various pension funds being over-funded or under-funded. Well if a pension fund is under-funded, what does that really mean? Does it mean the pension fund is going broke? No, hardly, all it means is according to government mandated actuarial assumptions on life expectancy, the interest rate earnings on the fund; it means that at this moment in time the pension fund is under-funded. And this usually happens when we go through a market like we just have when investment returns are negative or showing losses like they did in 2008. Then it’s very common that you see pension funds being under-funded. It doesn’t mean they are bankrupt or going out of business. On the flip side, often times when we’re in the middle of an economic expansion in a bear market you hear reports, usually not as often for some reason ( I guess they’re not as newsworthy) but you hear reports about pension funds being over-funded. And what does that mean? Well is just means that actuarial number crunching assumptions that the pension fund is required to use, it means that companies don’t need to make as big of, if any, contributions to the pension fund, again, at this moment in time.

So what I’m going to suggest to you is now or in the future if you’re thinking about or concerned about withdrawing money from your investment account and worried about the value of your investment account, and I’m not trying to sugar-coat or make excuses for overall investment performance, but a better approach is to look at your investment fund and determine are you over-funded or under-funded based on the income stream that you want to pull from your investments. And in periods of time where you’re under-funded, does it require any strategy change on your part? Either reducing what you withdraw or changing investment strategy or some combination. And the flip-side is true when you’re over-funded. Maybe you take a lower risk investment strategy. You could even withdraw more money compared to what you’re currently doing. So, start thinking about when it comes to your own individual investment accounts, be very clear on your goals. Know what you want from your investments in terms of income cash flow now and into the future. And then, determine whether you’re over-funded or under-funded at any given point in time. And it’s something that you’re going to have to continue to monitor as investment and economic conditions change. And the best way that we’ve been able to find right now to determine whether you’re over-funded or under-funded is a technical process. It’s called a Monte-Carlo simulation and analysis if you want to look that one up. But basically it’s a financial number crunching that you do not once but literally a thousand times and you change the investment results one year to the next in random order in each scenario that you run. And we run scenarios through age ninety five. And what you’re going to find is that just by changing the order of the investment returns, sometimes the reports going to look way too optimistic. Sometimes the report’s going to look way to pessimistic. And we come up with what we’ve referred to, if you’re working with us, you’ve heard us use this term a success rate. So simply put, if your success rate, the way do things is ranges anywhere from 75-90%, all that really means is your investment funds are on target or balanced relative to what you want to be withdrawing from your account. And if you’re below 75% then that means you’re temporarily under-funded. And if you’re over 90%, that means you’re temporarily over-funded on your investment accounts.

Again, we’re assuming you’ve got clear goals or objectives as to what you want to be withdrawing from your investment fund. So, that’s a critical component in just helping you understand and navigate, if you will, the up-and-downs that we have; that we have had and always will have. And also dealing with the ups and downs of the investment market.

So, in a minute, we’re going to open it up for questions. Before we do that, I just wanted to give one final comment on the investment markets. The performance was tremendous in 2009 and now the wheels may seem to be coming off in 2010. So what’s going on? Well, I can just tell you what we’re doing. We are following our investment system which monitors supply and demand in the markets. Earlier in the year, you know, some folks were heavy in cash. The kind of question is whether or not we shouldn’t be putting that cash to work. We then were explaining that the markets were a little over-bought in a high-risk area making us a little bit uncomfortable putting new money back into the market. And, for the most part, we did not.

And since then the market has weakened. We’ve got trigger points, if you will, on every individual investment. And if a particular investment hits or goes below a trigger point, then, in most cases we’ll just exit the investment which, quite frankly, is what happened last week. We exited our positions in Latin America and emerging Europe. Again, we’re just following our supply and demand system indicators and we are not listening to all the gibberish all the economic gurus are going to be pontificating about on the media. Sometimes they’re right, sometimes they’re wrong. But we know and understand from our just letting the numbers speak to us the supply and demand system that we use will give us better guidance on what actions need to be taken. So to us, right now it feels like its just a pull-back in the market that’s not unexpected after you see the run-up that you saw last year in the market. Whether it’s the beginning of another prolonged downturn like in 2008 or just a temporary pull-back time will tell. We obviously watching things on a daily basis position by position and we’ll take action when necessary. The positions we sold last week, money sitting in a money market account we don’t intend on having it sit there forever. When a viable investment opportunity with attractive profit opportunity presents itself, we’ll take advantage of it. Until that opportunity pops up we’ll just let that sit in cash and let the market sort things out and wait for a good opportunity.

And with that I think I’m finally done with my comments. So, BT, why don’t you tell everyone how they can get questions asked and feedback from us?

Sounds great. Well we got, let’s see, about 13 or 14 minutes it looks like left in the call. So we’ll open the line up for questions. And what I’ll do is un-mute the line. It’ll be basically like a party line everybody will hear everybody and we’ll hear what’s going on behind you. So if you know if you got some noise going on behind you, please feel free to hit *6. That will mute your line individually. So if your dog is barking or if there’s something going on back there that you’d rather we not hear just *6 will keep that quiet. We’ll go ahead and un-mute the line now and just speak up. Whoever talks first get’s to be the first on the floor and we’ll go from there. And everyone should be live now.

Ok, anybody have a question for us?
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Everybody’s shy. If you have a question just come on and tell us your first name and tell us what your question is.
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Another shy group this morning. Ok, well you might be thinking of a question you want to ask us, I’ll just add some other comments. I was going off, at the beginning of the call, about the current administration’s response to a health insurance company’s rate increase. I’ve got, in our newsletter, I’ve to a little article on how I would fix healthcare. If you might be interested in that, if you’re not getting our newsletter, just call the office or send me an email and we’ll be happy to add you to our newsletter list. But the bottom line is let the capitalistic free market enterprise system do its job and the government ought to get out of the way in a nutshell. Alright, I think I heard somebody come on. Any questions?

Brian, this is Dwayne.

Hey!

When you do that simulation. Can you kind of do a calculation that, as you said, shows you what is the maximum amount that you could withdraw on a safe basis?

Oh, sure!

OK.

Yeah, the simulation that we use is flexible in that regard. And we often give folks that feedback. So if somebody hasn’t started withdrawing money. Typically in a review scenario we’ll give them a heads up if you were to withdraw money, here’s what a safe withdraw rate is. And as long as you’re at that level or below, you should be good to go.

OK.

Thank you for that question, anybody else have a question?
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Alright, I’m going to let everybody get on with the rest of their week. Questions going once, twice. Well I want to thank everyone for joining us this morning. Just a reminder if you’ve got topics that you want us to cover, just give me a call or send us an email. We’ll be happy to cover those on an upcoming call. And other than that, everybody have a great rest of the week and we’ll see you hear next week, same time. Bye now.

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