“You can’t time the market” is an old maxim, but you also might say, “You can’t always time retirement.” Market losses on the front end of retirement could have an outsize effect on the income you receive from your portfolio by reducing the assets available to pursue growth when the market recovers. The risk of … Suchit Punnose, Founder and CEO of Red Ribbon Asset Management explains the difference between investment banking and wealth management Investment banking and wealth management are among the most popular areas for people to work in within the financial sector. And while many terms are… Jim Caron, Portfolio Manager and Head of Global Macro Strategies, provides timely insights on what’s driving fixed income markets today. Listen now. Compass Ion Advisors is a holistic wealth management firm, and that is our sole focus. We believe that successful wealth management must first focus on the definition of Real estate investments and self-published books generate enough income for this 28-year-old early retiree to live on.
“You can’t time the market” is an old maxim, but you also might say, “You can’t always time retirement.”
Market losses on the front end of retirement could have an outsize effect on the income you receive from your portfolio by reducing the assets available to pursue growth when the market recovers. The risk of experiencing poor investment performance at the wrong time is called sequence risk or sequence-of-returns risk.
One strategy that may help address sequence risk is to divide your retirement portfolio into three different “baskets” that could provide current income, regardless of market conditions, and growth potential to fund future income. Although this method differs from the well-known “4% rule,” an annual income target around 4% of your original portfolio value might be a reasonable starting point, with adjustments based on changing needs, inflation, and market returns.
Basket #1: Short term (1 to 3 years of income). This basket holds stable liquid assets such as cash and cash alternatives that could provide income for one to three years. Having sufficient cash reserves might enable you to avoid selling growth-oriented investments during a down market.
Basket #2: Mid term (5 or more years of income). This basket — equivalent to five or more years of your needed income — holds mostly fixed-income securities, such as intermediate- and longer-term bonds, that have moderate growth potential with low or moderate volatility. It might also include some lower-risk, income-producing equities.
A significant market downturn during the first two years of retirement could make a big difference in the size of a portfolio after 10 years, compared with having the same downturn at the end of the 10-year period. Both scenarios are based on the same returns, but in reverse order.
Assumes a $40,000 withdrawal in Year 1, with subsequent annual withdrawals increased by an inflation factor of 2%. This hypothetical example of mathematical principles is used for illustrative purposes only and does not represent the performance of any specific investment. Fees, expenses, and taxes are not considered and would reduce the performance shown if they were included. Actual results will vary.
The income from this basket can flow directly into Basket #1 to keep it replenished as the cash is used for living expenses. If necessary during a down market, some of the securities in this basket could be sold to replenish Basket #1.
Basket #3: Long term (future income). This basket is the growth engine of the portfolio and holds stocks and other investments that are typically more volatile but have higher long-term growth potential. Investment gains from Basket #3 can replenish both of the other baskets. In a typical 60/40 asset allocation, you might put 60% of your portfolio in this basket and 40% spread between the other two baskets. Your actual percentages will depend on your risk tolerance, time frame, and personal situation.
With the basket strategy, it’s important to start shifting assets before you retire, at least by establishing a cash cushion in Basket #1. There is no guarantee that putting your nest egg in three baskets will be more successful in the long term than other methods of drawing down your retirement savings. But it may help you to better visualize your portfolio structure and feel more confident about your ability to fund retirement expenses during a volatile market.
All investments are subject to market fluctuation, risk, and loss of principal. Asset allocation does not guarantee a profit or protect against investment loss. The principal value of cash alternatives may be subject to market fluctuations, liquidity issues, and credit risk. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve higher risk.
Author: By Mark Fissel
Investment banking and wealth management – what’s the difference?
Investment banking and wealth management are among the most popular areas for people to work in within the financial sector. And while many terms are often used interchangeably in the finance world, these two refer to very different services.
What is investment banking?
Broadly speaking, investment bankers offer financial advice and services to corporate entities. These include:
They don’t offer these services to individuals.
The finest investment bankers are adept at managing the complex finances of multinational businesses. They are expert negotiators dealing with deals worth billions of dollars and facilitate leveraged buyouts. Their role often includes ensuring clients resist the threat of hostile takeovers. As such it’s a demanding and often fast-moving role.
Investment bankers must have an overarching understanding of the kinds of factors that lead to business success or failure. It’s far more than simply analysing stocks, and they must be real experts in the fundamental mechanisms of businesses. Much of their role revolves around analysing business conditions and formulating the best way to arrange financing or restructuring.
There are two main types of investment bankers:
What is wealth management?
Wealth management is all about providing financial services primarily to high-net-worth individuals (HNWI), very high net worth individuals (VHNWI) and ultra-high net worth individuals (UHNWI). For context:
According to the Capgemini World Wealth Report 2020, as of June there were more than 13 million HNWIs in the world. And, according to Knight Frank’s Global Wealth Sizing Model at the end of 2019 there were a total of 513,244 UHNWIs in the world.
However, wealth managers also work with people who are not in these categories. Some work regularly with individuals with assets between $50,000 and $500,000 while other wealth managers will only work with extremely rich clients. Because of the nature of their role, wealth managers tend to work closely with their clients on a one-to-one basis. But what do they actually do?
Wealth managers deal with all aspects of managing their clients’ money, for which they charge hefty fees. The services they supply include:
Providing these wealth management services is again usually split into two roles:
Unsurprisingly, for UHNWIs, there is often a whole team of people from the same firm working on the account.
Summing up the differences between wealth management and investment banking
Yields Are Low, But Fixed Income Opportunities Exist if You Know Where to Look
Diversification does not eliminate risk of loss. There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this portfolio may be subject to certain additional risks. Fixed income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Mortgage- and asset-backed securities are sensitive to early prepayment risk and a higher risk of default, and may be hard to value and difficult to sell (liquidity risk). They are also subject to credit, market and interest rate risks. Certain U.S. government securities purchased by the Strategy, such as those issued by Fannie Mae and Freddie Mac, are not backed by the full faith and credit of the U.S. It is possible that these issuers will not have the funds to meet their payment obligations in the future. High-yield securities (“junk bonds”) are lower-rated securities that may have a higher degree of credit and liquidity risk. Public bank loans are subject to liquidity risk and the credit risks of lower-rated securities. Foreign securities are subject to currency, political, economic and market risks. The risks of investing emerging market countries are greater than risks associated with investments in foreign developed countries. Sovereign debt securities are subject to default risk. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk).
Past performance is no guarantee of future results. The returns referred to in the audio are those of representative indices and are not meant to depict the performance of a specific investment.
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Author: Global Fixed Income Team
All You Need to Know
You are here: Home / Financial Services / Planning for a Retirement: All You Need to Know
Your retirement could be a smooth, scenic highway or a pothole-riddled road. It all depends on how you map out your route and how well you plan in advance. Having a comfortable, relaxed, and financially secure retirement depends on how you manage your expenses, savings, and investments. There are so many aspects to consider and so many opportunities to invest in, which can often make it difficult to know where and how to start. Here are all the important things you should know to start planning for your retirement.
The first step in planning for your retirement is to plan when to retire; you don’t have to decide on an exact date or age, but just a reasonable and general time frame or target age. This allows you to decide when and how to start planning for the same. It will help you answer questions like:
The key to answering these questions is to take the first step and that is to decide when you plan to retire and what your retirement goals are. Do you wish to retire in the city, or move to the countryside?
Post-retirement sources of income could include rent from a property you own, social security, provident funds, or return on current investments. In addition to finding sources of income, you need to chart out possible expenses like medical expenses, repayment of long-term loans, living expenses, and so on. This will help you calculate how much of a head start you need to get in terms of financial assets when you decide to retire. Retirement plans are not generic, and you need a plan that works for you, which requires a thorough understanding of your current situation. What percentage of your income should you put into savings? What kind of returns do you need on your investments? What type of insurance policies must you purchase? You must address these questions, as they will give you an idea of your current situation, and what you need to address moving forward.
There are numerous types of pension plans, low-risk bonds, stock investments, and mutual funds that you can invest in. But while making these investments, you need to also assess the risks involved. Various investments also offer tax savings and could be beneficial. Investing in property is also important. Your investments need to be made in such a manner that the returns can cater to your expense after considering inflation. You should also have a life insurance policy that secures your loved and dear ones in addition to suitable medical policies.
Planning and saving for your retirement is a lengthy process. Saving a huge portion of your income and compromising on your present needs is not the solution, neither is living today like there is no tomorrow. You need to strike a fine balance. The fact that you are here, reading this article, shows that you have the right frame of mind and are headed in the right direction. If it all seems too daunting, you could always seek professional financial advice. Slow and steady wins the race.
Compass Ion Advisors, LLC. | Happy 2021| Income Tax Battle & an Urban Migration
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End of Year Dip: As the holidays were in full swing, the numbers surrounding unemployment, home sales, and the like were all a little more difficult to read as indicators. Initial jobless claims were lower than expected in the last week of the year (pictured below) along with claims on regular state benefits.
The Battle for Income Tax: With the massive shift to remote work, states have begun contesting over who gets to tax whom on income tax. The question is over where one technically earns income—from the place from which they work or the place for which they work. The answer to that question is worth billions in state tax revenue. Whether the US Supreme Court will weigh in on the matter has yet to be decided.
Urban Migration: Paired to the interstate battle for income taxes is the large emigration of remote workers from major urban areas to places with lower costs of living. The chart below presents a general idea of the impact this has taken on US cities thus far.
UK Formally Departs from EU: After 48 years of participation, the United Kingdom formally departed from the European Union this past Thursday (New Year’s Eve). The agreement between London and Brussels amounted to more than 1,000 pages. The intended hope of the UK’s “Brexit” is to gain the autonomy to boost trade and more freely direct its economy. How this will affect relations between the UK and US is highly anticipated and likely to be a thread of 2021 news.
Drawing with an Airplane? As if we haven’t had enough strange news emerge from COVID, a German pilot flew 124 miles to trace a giant syringe needles in the sky as a form of campaigning for COVID vaccine awareness. All we can say is, the guy’s got serious skills.
How a 28-year-old managed to retire early and earn $16,000 a month in passive income
To reach your major money goals, such as saving for retirement, starting early is key, experts agree. But even the most gung-ho financial advisors wouldn’t expect many folks to be planning their financial futures between honors algebra and AP History. Then again, they probably haven’t met Rachel Richards.
“Before entering college, I was already pretty freaked out by the idea of student loan debt,” she says. “Because even by then I was a total finance nerd. I read everything I could about money management in middle school and high school.”
Richards earned several scholarships to attend Centre College in Danville, Kentucky, including one for playing piano, and made up the rest of her tuition — about $10,000 a year — by selling Cutco knives. Thanks to that side hustle, and to some AP credit she earned in high school, she graduated debt-free in 2013 at age 20.
Richards credits this solid financial foundation for what happened next: Less than eight years later, she and her husband are financially independent, she’s retired, and she brings in about $16,000 a month in passive income. Here’s how she did it.
Richards graduated with a Bachelor of Science in financial economics and worked for two years as a financial advisor. “I figured, I love finance, I’m passionate about helping people, and I have this really strong sales background,” she says. “So I figured it would be the perfect fit for me.”
The job came with a salary of $36,000, which Richards says bumped to $42,000 in her second year. Even though she wasn’t earning much, Richards says she was able to save the bulk of her salary. “My expenses were about $1,500 a month,” she says. “And since I didn’t have student loans and I was super, superfrugal, I was able to save over half my paycheck even then.”
Richards soon realized that her financial advisory work required years of cold-calling to build her client base. “I realized I wanted out of this, but I still wanted to help people with finance, because that’s what I love to do,” she says. “It took me a few years to figure out how to eventually get there.”
Richards took a few gigs in real estate before signing on as a financial analyst at a manufacturing firm in 2016, a job that paid $75,000. She stayed for three years before retiring from the 9-to-5 workforce at the age of 27 to focus on her income-generating projects.
In 2017, Richards began focusing on ways for her and her then-fiancé to generate passive income. “Before that, we didn’t have any other income streams,” she says. “We didn’t have side hustles. We didn’t have passive income. We were both just working the hustle of the 9-to-5 jobs.”
That year, the couple bought their first investment property: a duplex in Louisville that cost $100,000. “Each of us put $10,000 from our individual savings in to get us to that 20% down payment,” Richards says. “That came from the money we had been saving over the years.”
That her husband, a member of the military, had graduated debt-free as well helped matters a lot, says Richards.
The couple expanded their real estate holdings aggressively, purchasing six properties (a total of about 40 units) in two years.
Video by David Fang
The key to their rapid expansion: Rachel had her real estate license. That afforded them two big advantages, Richards says. One was speed. “If you have a license, you have a slight time advantage because you can literally get notified of properties that are being listed in real time,” she says. “So there were times where I had a search set up that if something, that if a property met my criteria, it would immediately email me if something was listed. At times I could be out to that property within 30 minutes of it being listed and be the first one to make an offer.”
She also acted as her own buyer’s agent, meaning she earned a commission from the seller when she bought a property. “Any time we would close on one of our properties, basically we would fully deplete our savings to buy a property, but then I would immediately get a commission check back for thousands of dollars,” Richards says. “Sometimes it would be like 10 grand. So that would jump-start the savings for the next down payment.”
Aside from the first duplex, most of the properties that the couple acquired were move-in ready and were already being rented, Richards says. From there, Richards looked for properties in which she thought she could make $200 to $300 in monthly profits per unit.
The couple ceased buying new properties in 2018. They now spend about 5 to 10 hours a week managing the properties. All in all, the profits total around $8,000 per month, Richards says.
Right around the time she and her then-fiancé were considering buying their first property, Richards was working nights on her pet project: a book.
“I started thinking about writing a book in early 2017 because all my family and friends were coming to me for financial advice,” she says. “I also began to wonder, well, why aren’t they reading books or learning on their own? And then I had this epiphany that, oh yeah, personal finance is boring for most people. It’s overwhelming, it’s complex, it’s dry. So I thought to myself, ‘How can I make this topic fun and sassy and simple?’ And that’s where the idea for ‘Money Honey’ came from.”
At first, Richards says, she was enamored with the idea of getting a traditional book deal. But she learned that many publishers expect authors to do the majority of their own promotion and marketing in exchange for a 10% to 15% royalty. Whereas “if you self-publish on Amazon, you can earn 35% to 70%,” she says. “So I figured, why am I going to pay them, essentially, if they’re not going to really do anything to help me market my books?”
Video by Stephen Parkhurst
After self-publishing her book on Amazon, Richards says she recouped her money within the first month. Since then, the book, along with her follow-up, “Passive Income, Aggressive Retirement,” have flown off the virtual shelves, netting Richards about $4,000 a month in royalties.
Richards also offers an eight-week online course, which is another source of passive income for the couple. The course, which costs $497 and is called “Get Your Financial $hit Together,” generates about $4,000 a month in profit for Richards.
Richards describes her and her husband’s financial situation as “Fat FIRE” – a financially independent lifestyle that doesn’t include the sort of bare-bones living that characterizes the FIRE movement.
“We wanted to create $10,000 a month in passive income. Now it’s $16,000 a month. Our expenses are probably $8,000 a month, on average,” she says. “We love to do things like travel. We travel a lot. We live in a pretty big house. We just wanted to be comfortable and be able to go to REI and spend money without worrying about it.”
Her husband still works: He earns a salary, plus benefits, such as the couple’s health insurance plan. Richards focuses on expanding her brand of personal finance advice targeted toward millennial women.
“Now it’s about working when, where, and if I want, and my passion just happens to be working on this business that I’ve created writing books and teaching women about financial literacy. So that’s how I spend the majority of my time,” Richards says. “My husband, on the other hand, has chosen to keep working for now, because he is a rare human in that he loves his career. He loves his job. He’s very fulfilled by it. So for him too, it’s about working because he wants to, not because he has to.”
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