Carolinas Investment Consulting // Summer 2014 // Volume VIII // The Consultant

Oliver Cross

Through the first half of 2014, global markets almost indiscriminately marched higher with stocks, bonds, and commodities all posting positive gains year-to-date (see chart below) – this is the first such synchronized advance since 19931. Despite a rocky first six weeks of the year, the markets bounced back on

decent economic reports and strong corporate earnings. Unemployment recently dropped to 6.1% and corporations have largely bested Wall Street’s estimates just as the harsh winter and negative first quarter GDP both vanished further and further into our rearview mirrors.



Dave Perkins

How much can I afford to spend without running out of money? How much money do I need to accumulate before I can retire with financial peace of mind?

Ever ask yourself these questions? Part of our wealth management process involves helping clients find
out their answers. While there is no substitute for a comprehensive financial plan, there are certain “Rules of Thumb” that financial planners have developed over the years to help judge how much a given client can afford to spend.

One of these is called the “4% Rule”. Here’s how it works. Let’s say you retire at age 65 and want to make sure you have enough to last until the survivor of you and your spouse reaches age 95. According to the Society of Actuaries, that’s a reasonable assumption for a married couple currently age 65.

If you invested 50% in the S&P 500 and 50% in Treasury Bonds, you could afford to withdraw 4% of your starting balance, and increase that every year by the rate of inflation, without running out of money. That was the conclusion of William Bengen, who published the initial research on this subject in 1994 after studying a series of different market returns and inflation rates from 1950 through 1993. Since then, other authors have expanded and challenged his conclusion. Mr. Bengen himself subsequently increased the successful withdrawal rate
to 4.5% after including a broader range of stocks in his allocation.

Bengen assumed living expenses went up each year at
the rate of inflation throughout retirement, which at a 2.5% rate would cause spending to more than double
from age 65 to 95. Is that realistic? In a recent whitepaper called “The Lifecycle of Spending”, JP Morgan Chase studied retirement spending patterns by examining the actual debit card transactions, mortgage payments and credit card activity of 1.5 million U.S. households. What they discovered challenges conventional thinking about retirement spending. Rather than steadily increasing spending each year, the average retiree in their study went through three distinct phases. From age 65 to 75, retirees tended to spend 100% of their pre-retirement levels as they traveled more and enjoyed long-delayed activities. From age 75 to 85, however, their spending dropped 20%-30%, as they became somewhat less active. Finally, after age 85, spending decreased further in all areas except health care (Note: the JP Morgan study did not include the costs of long-term care).


So what’s the impact on retirement planning? If total expenses increase only 15% over the period of retirement, rather than doubling, confidence levels in a secure retirement, also known as Monte Carlo success rates,
are certainly improved. And perhaps portfolios can be positioned to assume a lower drawdown potential while still meeting retirement goals.

Another criticism of Bengen’s 4% model is that it assumed a static withdrawal rate and static asset allocation. No matter what changes may have occurred
in the economic environment, in the investment markets or even in the retiree’s own personal situation, the 4% model assumed spending increased each year by the rate of inflation and the 50/50 allocation remained unchanged. But the truth is that the future is unpredictable, and most of us would adapt to changing conditions over time. Could a retiree in the mid-1990s have anticipated the period of near zero interest rates on CDs since the 2008 financial crisis? Could that retiree have anticipated the two stock market crashes in 2000 and 2008?
New studies have examined the benefit of making adjustment to withdrawal rates and portfolio allocation based on changing economic and market conditions. In
its recent report, “Breaking the 4% Rule”, JP Morgan
Asset Management describes this approach as a “dynamic withdrawal model”. The goal is to strike the best balance between spending and preserving your money during retirement. Stated differently, it’s easy to understand that none of us wants to run out of money before we run out of years, suffer a decline in quality of life or become a burden to our families. However, it’s equally important not to become so conservative that we fail to enjoy an appropriate level of satisfaction during retirement.


For example, in periods of particularly high inflation, or after particularly significant drops
in the investment markets such as 2007 – 2009, you might make lifestyle adjustments to “weather the storm” and then return to previous spending patterns after conditions stabilize. In a period
of sustained low interest rates on bonds, you might increase your stock allocation to create more dividends and capital gains. Or in a period of rising interest rates, you adjust your asset allocation by selling more from your equity investments rather than selling bonds when prices have temporarily dropped.

Here at Carolinas Investment Consulting,
we see this as part of the ongoing process of working with our clients. By melding
the investment management process with retirement and estate planning advice, we can more effectively help you monitor and manage your financial situation over time. Spending projections are certainly a key component of retirement planning, but what ultimately matters is the amount of cash flow that you will need for your own specific quality of retirement.


When calling into our office, you are greeted by a warm welcoming voice; the lovely person behind that voice is Linda Christine. Linda is also the first person you see when visiting our office, and those who have visited can attest to her affable nature. We recently celebrated Linda’s tenth anniversary with CIC! She has been in client services and administration throughout her career, and has brought a wealth of experience to her role as Receptionist.
Over the years, Linda has been very involved in the USO of NC, based out of the Charlotte Douglas International Airport. She has many family members who served in the military and enjoys giving back where she can. She relocated from Philadelphia in 2003 to be closer to her oldest son and grandchildren. She has three other children throughout the country and six grandchildren. Her devotion to family extends to her CIC family and the clients we serve.
We feel very blessed to have Linda as part of our team, caring for us and our clients, and look forward to sharing the coming years with her.


We are pleased to welcome the newest addition to our CIC team, Molly Peecher. Molly recently joined us as a Relationship Manager. She has previous experience at J.P. Morgan Private Bank and The Vanguard Group. We are excited to have her as part of our team.


Well, what’s next? History suggests it would be quite rare to see the markets continue to rise in unison, so we suspect this relationship will be short-lived. Longer- term, we continue to expect rates to move higher, putting pressure on bond prices, which is why we advocate holding shorter-dated bonds, on average. Such a rising rate scenario usually corresponds with stronger economic growth and subsequent inflationary pressures, both
of which tend to drive equity prices higher. However, we’re sitting at near record highs across the global equity markets and volatility is near record lows across stocks, bonds, commodities, and currencies2, so we caution against becoming complacent. Investors are notorious for becoming more risk tolerant as markets rise and more risk averse as markets decline. We expect choppier markets ahead and advocate maintaining vigilance around risk management.
As we’ve written about in the past, the single most influential determinant of investment success is “time in the market, not timing the market.” With life expectancy on the rise, you’d probably suspect investors have become more long-term oriented in their decision- making – the opposite is actually true. In fact, back
in 1960, investors who bought a stock held onto it for
8 years on average. Now that number can be counted
in days or months, not years3. This is problematic and largely explains why the average investor (not you, of course) returned 3.69% per year in equities over the past 30 years compared to 11.11% in the S&P 5004.
While reports of a major correction abound, remember what legendary investor Peter Lynch said, “Far more money has been lost by investors trying to anticipate corrections than has been lost in all the corrections combined,” and what Warren Buffett said, “The less prudence with which others conduct their affairs, the greater prudence with which we should conduct our own affairs.5
We look forward to helping you maintain balance, prudence, and long-term orientation!

1 0098564998
2 complacency
3 CommentariesArticles/2014-Q2/HighFrequencyTradingfinal6-14. pdf?ts=20120224_0941
5 Bottom%2002_14_07%20A%20Revised%2008_07.pdf


News of data breaches at retailers Target, Neiman Marcus, and Michaels remind us that identity theft is a serious problem affecting more people every day. There are steps you can and should take to help prevent future headache and harm.

  • Monitor your credit report – look for errors and fraud.
    You have the right to one free credit report per year from each of the three credit bureaus: Equifax, Experian, and TransUnion.
  • Read your credit card and banking statements thoroughly. Review for unauthorized transactions. Identity thieves can start by changing your billing address.
  • Protect the personal information on your smartphone.
    Smartphone users are 33% more likely to become a victim of identity theft than non-users. Password-protect your smartphone and enable its security lockout feature.
  • Secure your computer and portable devices. Use up-to- date anti-virus and anti-malware programs and firewalls. Encrypt sensitive information before storing or sending.
  • Avoid phishing email scams. Don’t open files, click on links, or download programs sent by strangers. It could expose your system to a computer virus or spyware that captures your passwords or other information you type.
  • Practice good password hygiene with your online accounts. Use strong passwords unique to each account, especially for your most sensitive online accounts (i.e. banking, email, and social networking accounts).
  • Use the “front page” rule on social networks. Don’t post anything online that you wouldn’t mind seeing on the front page of the newspaper.
  • Shred financial documents before throwing away. Your trash can be their treasure.
  • Be careful with unsecured Wi-Fi. Add a password to your home Wi-Fi network and don’t look up financial accounts on a public network.
  • Safeguard your Social Security number (SSN). Keep your Social Security card and other documents that contain your SSN in a safe and secure location.

Sources: The Privacy Rights Clearinghouse and the Federal Trade Commission.

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

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R. Wade Austin
Oliver R. Cross III
R. Christopher Gammon, CFA, CFP®
Christopher K. Grogan
Thomas E. (Ted) Highsmith
David A. Perkins, J.D., CPA, CFP®
and George H. Edmiston, Jr., President & Founder

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

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5605 Carnegie Boulevard, Suite 400, Charlotte, NC 28209
704-643-2455 |