As a financial planner, I believe in planning bigger futures for my clients, but I have learned that there are subjects where I am unable to add value because they fall outside of my area of expertise.  Pre-nuptial agreements (commonly called pre-nups) fall in to this category.  Pre-nups identity the separate property of each fiancé (assets owned prior to marriage) and if, or under what circumstances, those assets or their future earnings should remain separate property or become community property (assets owned equally by both spouses).  This process begins with questions of law but quickly transcends into the emotional questions of "fairness,” the definition of which depends on one's perspective.

When two young people with few assets meet, fall in love and marry, their life is simple.  All assets are community property.  Upon separation, all assets are divided equally.

However, when one party comes to the marriage with substantially more assets than the other, he or she wants to assure that those assets are secure should the marital bliss end in dissolution.  That person usually believes that a pre-nuptial agreement is fair.  The other person often believes that their love is being diminished by money.  Who is correct?
Is it naive to believe that the marriage vows will result in a lifetime of happiness?  Or should the statistics of broken marriages and no fault divorces justify self-preservation at the outset?  Does either view increase the likelihood of either result?  Both views have some merit.

If pre-nups were illegal or if they had a time limit whereby 20% of separate property vested into community property every five years, would marriages last longer or would they be terminated before each five year anniversary?

Confused?  I am perplexed.

My only conclusion is that the "haves" see perfect clarity, as do the "have-nots".  As the disparity of wealth increases, the issue of fairness becomes clearer.
The equitable solution is easier to resolve if the couple included someone on the Forbes list of the 100 richest people.  Because of the huge disparity of wealth, no reasonable person could claim a community property right to the assets but the wealthy party could easily provide a separation package of several million dollars and still be financially secure.  
Circumstances involving the merely affluent person running a family business or the professional who built a practice over many years prior to marriage are different and potentially more difficult.  Lacking the resources, they might disagree about the terms of an equitable agreement.  For example, the woman who agreed to put her career on hold, become a stay-at-home mom, raise the children, and support her spouse with a stable home life might refuse to sign a pre-nuptial agreement.  She might claim that she would be contributing to the family’s financial success.  In such case, should all the separate property assets remain separate forever?  Should a portion of the assets become community property?  If the assets increase in value during the marriage, should the profits be shared either equally or equitably?  

I don't know the answer.  There are equities in the positions of each spouse.
What I have learned are the limits of my mandate as a financial planner and the wisdom of not taking sides.  When I was a young attorney and planner, I honestly answered a client's question about whether he should prepare a pre-nuptial agreement and I still regret not suggesting that he discuss the question with a domestic relations attorney as the expert.  It would have avoided years of hurt feelings, blame and discord.  Fortunately, I was a quick study and never repeated that lack of judgment.  Some questions demand clear answers while others require absolute neutrality.

The attorney could give clear advice to one client as his or her advocate but could not represent both parties because their interests are conflicting.  Likewise, if my client is the couple, I have a fiduciary relationship with both parties and cannot act as an advocate for them individually where their interests may conflict.

If only one party is my client, I could be both an advocate and a fiduciary before the marriage.  However, my client and I should realize that our relationship would quickly change after the marriage and conflicts of interest may require termination of the relationship.  Such potential conflicts are foreseeable and should be discussed.  Success of a long-term relationship relies on trust, so positions that undermine trust should be avoided.

A referral to an attorney who can be an advocate for each client is essential.  Each party should have their own attorney.  The individuals will ultimately resolve the issue of fairness to their satisfaction, and most importantly, without any resentment or distrust toward the financial planner with whom they have a continuing relationship.  Where the success of the relationship is dependent on the respect and trust of the client, both wisdom and compliance with the financial planner’s legal obligations require neutrality when facing conflicting positions. 

Marv Kaye, J.D., CFP® | Kaye Capital Management

The Complete Wealth Advisor

The Complete Wealth Advisor


I often wonder if the specialist is better than the generalist.  It seems intuitive that the specialist, whether in sports, academia or business, is more knowledgeable and competent than the generalist.  However, as time goes on, I find that the interaction between financial planning and asset management, objective and emotional decisions, confusion between one’s goals and dreams and the competing goals of a life partner may sabotage the ultimate goals.

In law and medicine, the business model is often referred to as the “practice”, rather than the business of law or medicine.  At first blush, it seems pompous, but there is quite a difference between the objectives of business, where the cost of materials, gross sales, and profitability is the dominant consideration, and professions, where the best interests of the client trump profits.  This distinction is very important.  If the bottom line focus of business shared some of the ethical and fiduciary requirements of attorneys, doctors and financial planners, the actions that almost destroyed the American banking system and caused the Great Recession in 2008 might have been avoided.

As wealth managers, we seek the highest return at a given level of risk for investments to achieve the life goals of the client.  Making more money in the short-term with greater volatility and uncertainty may create discomfort, and even fear, for some clients who are not emotionally prepared to commit for the longer term.  The tendency is to believe that rising markets will continue forever and unless one continues to take risk, they will not achieve their goals.  Or worse, when the markets correct, they should sell or risk losing all their money.  Emotions often interfere with the objective and intelligent focus of the normal market fluctuations and long-term trends.  As a result, the uninformed feel greater comfort buying at the top and selling at the bottom, just the opposite of the principle of making money by buying low and selling high. 

Warren Buffett, arguably one of the world’s smartest investors, reduced his stock position in the fall of 2007 until he had a 28% position in cash, which he held well into 2008 as the market declined by about 45%, and then aggressively began buying depressed stocks at much cheaper prices and valuations.  Baron Rothschild, member of the Rothschild banking family, is credited with saying that "The time to buy is when there's blood in the streets."

Investing without regard to one’s life goals is like going on vacation without a clear destination.  The specialist understands how to prepare for vacation but the generalist has a broader understanding of the types of vacations, finances and various ways to travel.  Similarly, financial planning without a clear strategy of implementation to accomplish those objectives is pointless.  The melding of the planning and implementation requires a skilled generalist with the education, training, experience, and fiduciary commitment, to assure that the client’s goals remain paramount.  This involves the specialized credentials of the CFP® and the money manager, the wisdom and caring of the counselor, the persistence of a coach, and the cooperation and trust of the client.  Each component is essential but success requires trust and a team effort.  Many adjustments are required over time to deal with both foreseen and unforeseen events because the future never exactly mimics the past. 

In football, position coaches are the technicians who focus on the fine points for each position on offense and defense but the head coach has a better understanding of the big position.  Neither is better, they merely fulfill different roles.  The financial planner, who understands and coordinates the many financial and legal strategies, as well as the lifestyle needs and wants of the client, is in the best position to see the big picture and direct the overall strategy as the generalist.  The experienced Certified Financial Planner designee, who has no conflicts of interest and places the clients’ interests before his or her own, has the greatest potential to achieve a positive result.

Marv Kaye, J.D., CFP® | Kaye Capital Management




Despite the oil crisis and threat of interest rate increases in the U.S., sagging economies in Europe, the Far East and emerging countries, and increasing market volatility this month, I believe that economic growth will improve in 2015 for the following reasons:
1.    The U.S. economy is growing, with a boost from the drop in oil prices.  Our gross domestic product (GDP) growth is approaching 4%, in the opinion of JP Morgan Asset Management.
2.    The federal budget deficit and trade deficit are both declining (source: U.S. Treasury Department and the Bureau of Economic analysis); this trend should help support U.S. equities and the dollar. 
3.    The U.S. dollar is arguably the strongest world currency.  Of course, this helps our purchasing power for imports but may create a drag on exports for our larger multinational companies.  Small stocks, with lower foreign sales, may benefit.
4.    Inflation is very low and now, with the oil price decline of over 45%, below 2%.  Low inflation is generally good for financial assets.
5.    Economic weakness in China and Europe are creating an environment for continued low interest rates and helping our consumer and business economy.
a.    Most forecasters believe that domestic interest rates will increase this year in line with the Federal Reserve’s stated intent to increase the Federal Funds rate starting this summer.  I disagree because the oil price decline already lowered inflationary pressures.  There is little reason to slow our economy and risk causing a recession.  A reasonable forecast is to be cautious this year or defer interest rate hikes to 2016.
6.    Estimates for fourth quarter earnings growth in the U.S. are as high as11%, but for a negative1% for foreign companies.  (Source: RBC Capital Markets)
7.    Dividend yields for S&P 500 stocks are higher than that of the 10-year Treasury bond.  The opportunity to benefit from a higher dividend, favorable tax treatment, plus the potential for capital appreciation is very compelling.  This disparity occurred four times in the last 50 years with large equity gains over the following twelve months in the other three cases.  (Source: Bespoke Investment Group)

If the trend in January continues, our belief in diversification may be rewarded.  Unlike last year, domestic small cap stocks, foreign large cap stocks, and emerging market equities appear to be leading the S&P 500.  It is still early to project that this trend will continue.  Volatility has been extraordinary.  On balance, we are optimistic that this will be a good year and that it will continue in 2016, a presidential election year, where neither party wants to rock the boat with new legislation.  

Marv Kaye, J.D., CFP® | Kaye Capital Management

New Year Resolutions

New Year Resolutions


This is the time that many people reflect on the coming year and make New Year Resolutions.  I also have been a serial maker of resolutions with mixed results.  I noticed that some resolutions were successful, while others failed.  Lack of motivation or frustration often sabotages the resolution, but the wish continues as it is deferred from year to year.  The process is not empowering, but the reason is crystal-clear.

As with all successes and failures in life, the difference is between a wish-list and a plan.  Certain goals fall into the category of wishes but are very difficult to do.  Examples include losing weight, getting into physical shape, getting organized or improving relationships.  They tend to be vague, unrealistic or poorly defined.  However, where the motivation is powerful and urgent, or motivated by pain and need, the carefully defined resolution must have a plan for success.
As financial planners, we deal with this process successfully by carefully defining the need, creating a goal, establishing a time horizon with regular milestones, and reviews for accountability.  Most importantly, the plan must be in writing.  I remember that in my first week of law school, my contracts professor said that "an oral contract is not worth the paper it’s written on."  Likewise, oral resolutions are wishes - not plans.

Goal-setting must be specific, realistic, and clearly defined.  Worthwhile goals are difficult and should be broken down into small pieces with short time horizons that are easy to achieve.  Every success should be celebrated when it is achieved.  Instead of minimizing each accomplishment by observing how far away the goal remains, pat yourself on the back because you did it and you are one step closer to your goal.  Create a time-line and write down your first accomplishment.  Tape it to a wall and add to it regularly.  Ignore all naysayers and thank all supporters.  You deserve it!

As you progress, expect to encounter many obstacles.  Think about the possibilities in advance to minimize the surprises.  Scheduling regular reviews will allow small adjustments to get back on track.  Understanding your weaknesses that caused past failures and being flexible may help to tailor plans to your lifestyle.  Seeking perfection often sabotages success.  For example, if your goal is to lose weight and you don’t plan for gaining weight during a vacation, it could cause you to get frustrated and just give up.  However, if you accept that gaining some weight and having fun is normal you still have a positive attitude knowing that in a couple weeks you will be ready to move forward again. 

Saving enough money for retirement may be the hardest goal.  It takes a huge commitment over several decades and involves overcoming many obstacles, both foreseen and unforeseen.  In comparison, learning to play the piano, losing weight, quitting smoking, or getting into shape are easy.  The process is the same.  Both involve creating a plan and getting started.  Think about Nike and “just do it”!

Resolutions with reasonable expectations are worthwhile.  Wish-lists, not matched with a strong desire, are a waste of time.  Over a lifetime, one annual resolution, taken seriously, will result in many happy celebrations.

Marv Kaye, J.D., CFP® | Kaye Capital Management

Holiday Message

Holiday Message

As this year winds to a close, I would like to thank you for your business and wish you a happy holiday season.  I would also like to reflect on the financial markets for the last few years and pontificate on the possibilities for 2015.  

My first thought is that the bull market of the past several years will continue into next year.  There have been modest short-term corrections but each year has been profitable.  Many are curious as to why the returns fluctuate greatly between years.  I will attempt to compare the last two years and reflect on next year.

2013 was wonderful.  Several of our positions gained more than 40% last year.

2014 was challenging because some of our winners became laggards.  There was no logical explanation for this reversal, so we gradually reduced some positions and sold others.  Unlike last year, there were gains in large stocks and declines in small stocks.  Cheers to the home team because the domestic economy and stock market was the leading performer and the U.S. dollar was the leading currency.  Next, the success of active management with individual stock selection last year changed this year when owning the index was the way to go.  Lastly, ownership of foreign stocks created a drag on total performance in 2014.  

Next year is still uncertain but we are very optimistic.  We reviewed our global asset allocation and reduced our foreign holdings.  We would never limit our investments solely to U.S. stocks because that could easily lead to a reversal of fortune when foreign stocks recover.  In fact, since prices are much lower in Europe and other countries today, long-term investors recognize the value of buying low now and waiting for a recovery.  Keep in mind, if we solely load up on today’s winners, all holdings will decline in tandem when fortunes change – and, they always change.  Each year is different, with new opportunities and pitfalls.

Uncertainty is what makes my job so exciting and challenging.  This is the time to gaze into the future and ponder the potential opportunities and obstacles.  I believe that the positives greatly outweigh the negatives.  I believe that the growth momentum for the U.S. economy will continue. The Federal Reserve this week signaled it would take its time in raising interest rates, which caused a two-day market rally on December 17 and 18.  The Wall Street Journal on December 19 reported that this was the Dow’s biggest gain since November 2008.  Also, the one-day gain of 421.28 on December 18 was the biggest in the last five years. 

Other positive factors include strong retail sales and employment gains as evidence of improving economic growth.  Low inflation and declining oil prices have been positive for business and consumers alike.  However, based on the history of past declines caused by lower oil prices, it will likely be short-lived, followed by a nice opportunity to buy energy stocks at lower prices.  The big losers are Mr. Putin and the Russian economy.

For those who enjoy some whimsy, equities often benefit in the third year of the presidential term.  The S&P 500 index has averaged a 16.5% annual return since 1950 during those third years, according to Strategas Research.  This may be the time to increase our allocations to equities.
Emerging markets have endured their challenges recently; but since they are the lowest cost producers because of their low wages, we may increase our allocations as their economies recover because we believe their potential to outperform the developed markets is undeniable.
On balance, we are very positive about the prospects for next year.

We are very excited about the current state of Kaye Capital and our plans for next year.  Our team is highly qualified, focused on excellent performance and client service and collegiality in working together. We invested to upgrade our technology for efficiency, as well as improved security and service.  Current discussions will hopefully result in meaningful changes to implement our vision to become an elite investment and financial planning firm.  
The office will be closed for the year starting the afternoon of December 24th.  

On behalf of Ken, Kelly, and Jessica, we wish you and your families a fabulous holiday season and New Year.  We wish you good health, love, and joy in the upcoming year. 

Warmest regards,




4th and last blog in a retirement spending series


The challenge to designing the perfect retirement spending strategy requires the wisdom of a great financial coach who understands both the technical requirements and the emotional needs of the client.  Just like top chefs who adjust their recipes for the dietary restrictions and tastes of their customers, talented wealth managers adjust the investment risks to match the fear of loss of their clients so they can sleep well and still achieve their desired financial results.  Knowledge and flexibility is required in both cases because the perfect solution is always personal.
This concluding section attempts to address the retiree’s concerns about outliving their money without worrying about taking too much risk.  There are many uncertainties during retirement over which we have little control.  Important questions include: how long will I live, how healthy will I be, how will our expenses change, how will our investment returns vary, will we have to help our children or parents financially and how long will our funds last?  Retirees mainly focused on risk avoidance may be concerned about meeting their needs but not planning for inflation, unexpected contingencies or discretionary spending to enhance their quality of life.  The more confident risk-taker may not be sufficiently concerned about reducing their risk profile to prepare for market declines at an age when they don’t have the time to recover.  Both may not have the knowledge or technical skills to change the growth strategy of their working years to a prudent investment strategy for preservation, income, and growth during their retirement years.  Moreover, their advisor may also lack the knowledge required for success during their many years of retirement.  A properly designed and funded plan should help to afford your desired lifestyle, and do so with a minimum of worry for as long as you live.  
Happiness means different things to each person.  Money for your desired lifestyle is important, but it alone may not create happiness.  As financial planners, we help to uncover the many tangible and intangible activities that make our clients happy.  When there is no clarity, we often suggest deferring retirement.  A happy retirement begins with a planned transition to a future lifestyle without employment.  Happiness involves not merely terminating employment, but interaction with people and activities you purposefully choose.  Taking the time to consider your loved ones, friends and activities that will fill your days is essential.  Fulfilling emotional and financial needs are both vital for success. 
The academic community might select the best solution to plan for retirement spending based on mathematical equations and market history without considering the specific needs, wants, fears and risk tolerances of individual investors.  Our preference is to employ the academically researched solutions to generate the investment growth needed for keeping up with inflation, unforeseen contingencies and luxuries.  For the core expenses of life, we prefer to match them with income sources that are guaranteed or very predictable.  It is very comforting to know that all recurring expenses are funded.  We can adjust or delay discretionary expenses like vacations, cars and dining out if necessary, but not rent, mortgage payments, utilities or taxes.  Of course, when the investment accounts outperform their expected returns, vacations, cars and restaurants are more obtainable. 
Each client finds comfort on a continuum from conservative to aggressive, so we mix- and-match strategies for the best financial and emotional solution.  The solution may be less than perfect, but if the client isn’t comfortable with the strategy, they won’t follow it and will be worse off.  Effective wealth management is a combination of art and science. 
Our goal is to help the retiree enjoy a long and happy retirement, knowing that their money will last for their entire lifetime.  Working together, they will be able to make the necessary adjustments during their journey.

Marv Kaye, J.D., CFP® | Kaye Capital Management




Dear Clients and Friends,

On behalf of Ken, Kelly, and Jessica, I wish you and your families a very happy and healthy Thanksgiving.  With all the hatred and fighting in so many parts of the world today, we are so fortunate to celebrate a special American holiday that is positive and optimistic.  All Americans are free to join family and friends for a day of fun and excess.  To make the day truly meaningful and uplifting, I hope you will take a moment to reflect on the people and things in your lives for which you are thankful and count your blessings.

To get started, the following profound and homespun thoughts from a diverse group might be provoking:
“The roots of all goodness lie in the soil of appreciation for goodness.”  —Dalai Lama
“Be thankful for what you have; you’ll end up having more.  If you concentrate on what you don’t have, you will never, ever have enough.”  —Oprah Winfrey
“When I started counting my blessings, my whole life turned around.”  —Willie Nelson
 “If a fellow isn’t thankful for what he’s got, he isn’t likely to be thankful for what he’s going to get.”  — Frank W. Clark
“There are only two ways to live your life.  One is as though nothing is a miracle.  The other is as though everything is a miracle.”  — Albert Einstein

At Kaye Capital, we are content with the current state of our business, the camaraderie and talent of our staff, and the appreciation of our clients.  We are empowered by past challenges and excited by our plans for future growth.

Most of all, we are blessed to have the opportunity to enhance the lives of our clients financially and in many other ways.  If we do our jobs well, your futures will be greater than your pasts.  We do not take this opportunity for granted and always thank you for your trust and confidence.  We

wish you health, happiness, and a wonderful Thanksgiving holiday.

Warm regards,

Marv Kaye, J.D., CFP® 
Kaye Capital Management 



3d blog in a retirement spending series



The retirement planning process during the distribution phase following retirement is considerably more complex than investing for growth during the accumulation years prior to retirement.  Merely investing for growth without any need for current income or distributions is relatively straightforward.  When the paychecks stop, the retirees must rely upon their investments, pensions and social security to replace their prior salary, with annual increases for inflation, and their nest egg must last for both spouse’s lives.  How does the retiree know if he saved enough money for this purpose if he doesn’t know how long he will live, how much his investments will earn, or how the family’s expenses will change in the future?  Also, is the financial advisor who helped during the growth phase qualified to advise during the more complex distribution phase?

Special expertise is required to balance competing goals and risks, with the least stress, in an uncertain world.  Health, lifespan and the capital markets are all uncertain – but you must determine a sustainable spending rate, adjusted for inflation, and a proper asset allocation.  The risk of running out of money increases if the retiree spends at too high of a rate, invests too aggressively, encounters declining markets during the early years or lives longer than expected.  
This section is for retirees who seek a higher standard of living and are willing to take more investment risk to achieve it.  There are many factors to consider before a retiree decides to increase his risk tolerance for potentially greater future returns.  It requires both a willingness and ability to tolerate greater fluctuations in value that may result in either greater gains or losses.  If the added risk results in losses that will interfere with the ability to pay for the necessities of life, the decision is foolish.  If it would only prevent the ability to fund another vacation, it may be justified.  

Conversely, retirees who didn’t accumulate an adequate investment account, or those who involuntarily retired sooner than desired because of unexpected health reversals or an unplanned termination from employment, must either reduce their cost of living or increase their investment risk to potentially increase returns and generate more income.  

Unlike the safety-first approach to meet needs-based goals, the focus of the market-based approach is on lifestyle goals, including needs, wants, likes, and wishes.  A diversified portfolio, with 60% stocks for both growth and income and 40% bonds for income, will potentially generate a total return that will support increasing annual distributions.  Relying on a simplistic rule of thumb like a 4% withdrawal rate for everyone is dangerous in view of the many variables and uncertainties.  With proper analysis, financial planning, and investment management, we believe that a starting rate of 4% or less is prudent for younger retirees, with increasing future withdrawals.  Older retirees, with shorter life expectancies, can increase distributions to 5% or more.

Rules of thumb are usually over simplified.  Even if they apply in most situations, the complexity and uncertainty of forecasting future capital markets, life expectancies, interest rates, and spending needs precludes using rules of thumb in all situations.  A recent analysis by Sam Pittman, Ph.D., at Russell Investments involves the creation of several models for various economic scenarios.   He uses Monte Carlo simulations  to determine if the assumed spending rate will be sustainable, or if there will be a shortfall with lower than expected investment returns or higher spending rates.  It is complex because it simulates future interest rates as well as investment returns.  If future interest rates and investment returns rise, the growing investment account will fund the assumed spending needs more easily.  Conversely, if interest rates decrease, the cost of funding the spending plan will increase.  

In addition, instead of initially forecasting success for the next 30 years, his forecasts are for multiple 10 year periods.  I like this more conservative approach because it assumes that the retirees will live for the next 30 years but performs the calculations over more manageable periods.  Projections over three decades are subject to magnified errors.  Looking back over the past 30 years, try to imagine how unlikely it would have been to project the extreme fluctuations in inflation, the stock market, and gold prices?  The long-held belief that you can’t lose money in real estate was disproved over the past few years. 

Whether the projection is for 10 or 30 years, more frequent monitoring is preferable so that we can recommend small adjustments to keep the plan on track.  The reality of real world events usually differs from projections.  As a comparison, every airline prepares a detailed flight plan but a storm over Chicago on routine flights from Los Angeles to New York requires a deviation to avoid the storm.  Likewise, stock market corrections, high inflation, and increased spending require adjustments.  These events are all foreseeable but unpredictable.

Knowing that you will not run out of money during your lifetime is the dominant concern to every retiree.  The wealthy with lavish lifestyles and the middle class with more modest spending plans share this concern.  Large public and corporate pension plans hire expensive consultants to perform complex mathematical calculations that project if the assets, earnings and future contributions will be sufficient to pay future monthly pensions for the lives of all current employees, retirees and their beneficiaries for their entire lives.  Every retiree shares the same concern, but can’t benefit from the principle of large numbers where some employees die younger and others outlive the average life expectancy.  Good health, family genes and luck could unduly stress their assets to last an additional 20 years or more.  Additionally, retirees must be self-reliant because they can’t count on the government or corporate employer to add money if there is a future short-fall.  Applying the analytical process used by large institutional pension plans might help the retirees plan their own futures.

The funded ratio is the metric used by defined benefit pension plan actuaries to calculate the safety of the plan.  It answers the important question:  Are the assets sufficient to guarantee the payment of pensions for the lifetime of all retirees, active employees, and their beneficiaries?  100% or higher provides a margin of safety.  Lower funded ratios of 80%-60% or less increase the cause for worry.  If the employer is financially unable to increase the funded ratio by additional contributions, the plan may become insolvent and fail.  

The calculation of the funded ratio is complicated but the concept is simple.  It compares the portfolio value with the cost of the future spending plan.  The plan is fully funded if the lifetime withdrawals are less than the portfolio value.  If the funded ratio is less than 100%, the plan will become more risky and may potentially fail.  This outcome may occur if investment returns are consistently below expected returns or if spending exceeds projections.  

By monitoring investment results and spending regularly, modest adjustments may keep the plan on track.  Planning for 10-year increments is better than blindly trusting a 30-year lifetime projection.  However, regular updates and calculations take time and many advisors lack the knowledge or skill for retirement spending calculations so advise clients to rely on rules of thumb.  This makes some clients happy because they prefer not to pay the planning fees.  The devil is in the details so a detailed analysis of all current and projected spending needs is essential.  Without proper planning, there can be no comfort in the plan’s success.  Even with proper planning, retirees who deviate from their budgeted spending plan may cause the plan to fail.

Have you noticed that over the past several years, most major corporate pension plans have terminated their defined benefit pension plans and replaced them with 401(k) plans to reduce their liability?  Today, defined benefit plans are mostly limited to government entities, but many are actively seeking to terminate them for newly hired employees.  Individual retirees do not have the option to pass on the liability to others, therefore, meticulous planning with an experienced Certified Financial Planner® designee is recommended.  We strongly recommend that our clients adopt a spending plan that is more than 100% funded so that a market drop or decline in interest rates will not cause their plan to fail. 

For those fortunate employees covered by defined benefit pension plans who enjoy a guaranteed monthly income for life, your concern with this section is limited, as follows: 1. If your retirement spending needs are greater than your pension.  2.  If inflation is higher than the annual increases guaranteed in your plan.  3.  To make up the shortfall between the lower benefits guaranteed to your beneficiary and the actual spending needs.  4.  For other succession desires to leave assets to children, family or charities.  The reason is that all pension benefits terminate at death. 

The time horizon, or life expectancy, and asset allocation are also important considerations in the plan design.  Where the spending needs represent a small percent of the retiree’s investments, there is no need to take unnecessary risk.  Where the spending represents a much higher percent of assets, the option may be the uncomfortable choice to either spend less or increase the portfolio risk with the hope to achieve greater returns.

It is difficult to assign a fixed withdrawal percent for retirement spending that is appropriate for every investor.  Considerations vary greatly based on the risk profile, age, health, life expectancy, size of the investment portfolio compared to the spending need, and desire to provide for successors or for charitable bequests.  As stated earlier, the starting withdrawal rate should ideally be lower than 4% to minimize funding problems and gradually increased if investment earnings exceed projections.  This strategy will also provide a cushion for error if adverse circumstances require higher withdrawals.  

We are great believers in the potential of equities for growth portfolios, but during the distribution phase, retirees should be more concerned about declines than growth.  With less ability to recover from market reversals, a more conservative asset allocation is appropriate.  An asset allocation model of 60% equities and 40% fixed income, reviewed and rebalanced annually, is a prudent initial strategy  More conservative models are better for fully  funded plans or at older ages.  Taking more risk than necessary for financial and emotional success is foolish.  

How to choose the best retirement income Strategy, July 22, 2014, by Joe Tomlinson, Tomlinson Financial Planning, LLC.  published in Advisor Perspectives.

Understanding the sequence of return risk – Safe withdrawal rates, bear market crashes, and bad decades.  By Michael Kitces,  MSFS, MTAX, CFP, CLU, ChFC, director of research for Pinnacle Advisory Group.  October, 2014, Retirement Planning magazine.

Various blogs by Jonathan Guyton and Michael Kitces, financial planners and Wade Pfau, professor at The American College.

Bill Bengen is credited with the development of the 4% rule in the early 1990s, postulating that the investment account would last at least 30 years if one initially withdrew 4%, and increased it annually at the rate of inflation.

2014 Retirement spending guide, by Sam Pittman, Ph.D. August, 2014 (revised October, 2014), Russell Investments.

Views from beyond the Barron’s staff by Mathew Greenwald, president of Greenwald & Associates, as published in Barron’s, November 10, 2014.


i.  Sam Pittman, Ph.D., Senior Research Analyst, Russell Investments, 2014 Retirement Spending Guide.

ii.  A Monte Carlo simulation is an analytical technique for problem solving by using a computer to perform a large number of trial runs, called simulations, to calculate the probability distribution of possible outcomes.  For retirement planning purposes, the simulation helps to project the probability that one’s investment assets will produce the required return to meet their long-term goals or how long the assets will last at a given level of spending.  Instead of a precise answer, the outcomes are expressed as a percent of confidence for success, with 100% representing total confidence and much lower percentages representing the likelihood of failure.




Ignore the noise; the direction of the stock market is up.  We are confident that our earlier research and market view is correct.  As long term investors, we focus on the fundamentals and not the noise of the day.

On October 12, I posted “Is the market headed up, down or sideways?”  (  At the time, market pundits were predicting 10-20% declines in the S&P 500 and investors were anxious about Ebola and economic problems in Europe, China and emerging markets.  My blog opined that “…there may be further volatility and modest declines . . .” but “We believe that positive economic forces will soon lead to a resumption of the bull market.”

The market did decline further but then rallied, with the U.S. outperforming most other countries in the past two weeks and year-to-date.  The S&P 500 gained 4.1% in the past week.  (Source: Morningstar Direct and Bloomberg, as of 10/24/2014.)  The decline helped to reduce stock prices so they were more in line with historic multiples to earnings.  

We believe that the fundamentals support further potential gains over the next several months for the same reasons discussed in the chart of the 10/12/14 blog above.  I listed several positive factors including strong jobs growth and lower unemployment, low interest rates, higher corporate profits, low inflation, reasonable stock prices, strong U.S. dollar and a supportive Federal Reserve.  Best of all, the U.S. is the leading world economy.  

The negative market concerns are still present.  The short-term traders and market timers still add to the market volatility.  The concerns may be different this time but market noise is normal.  On balance, we believe that cash positions should be reduced, and domestic equities increased.  While we can’t reasonably know the future market level, we believe that the direction for the next several months will be up.

Retirement spending plan for low and no risk investors

Retirement spending plan for low and no risk investors
2nd in a retirement spending series

Every retiree faces the challenge of replacing earned income from employment with income from investments, pensions and social security.  The challenge is two-fold:  1. the income must be sufficient to meet the expected or desired spending needs, and 2. the assets must last for their entire lifetime.  Neither running out of money in later years nor having insufficient income to live comfortably is desirable.  Many academic theories propose the best retirement spending approach, but I believe that individual circumstances preclude the adoption of one theory for every retiree.  For example, many variables must be considered including, but not limited to, the following: how much risk a retiree is willing to assume (if any), how much money the retiree has to work with, how much income the retiree needs or how much income the retiree wants if the retiree is willing to take more risk to achieve the lifestyle desired.  

The first part of this series discussed the benefits of working with a coach during the pre-retirement years to help avoid the behaviors that may sabotage the best plans.  This section outlines the safety-first spending plan for the very conservative investor who naively wants to avoid all risk.  In reality, we can minimize but not eliminate all risks.  This approach is realistic where the retiree has substantial assets or is willing to receive less income.  The third part of the series will discuss a more pragmatic approach, based on the probabilities of future market returns.  This approach may suit those willing to take more risk for greater returns. 

The “safety-first” retiree is not willing to assume the risk of a diversified investment portfolio in stocks and bonds.  They won’t rely on investment averages or past performance.  Even though it worked in the past does not mean it will work in the future or it is safe.  Unlike the guaranteed income from a bank CD, there is no safe withdrawal rate from an investment account that fluctuates in value.  Of course, guaranteed or more stable investments generally have lower returns.  We agree that less risk is preferable if the income earned from the assets available is sufficient to fund the retiree’s spending needs.  Otherwise, the option is to either defer retirement and accumulate more wealth or retire now and take more risk.

Asset-liability matching:  Many people like to separate all their expenses into categories or “buckets” and then pay those expenses from different sources of income.  The buckets might include fixed expenses (rent, mortgage, utilities, telephone, food, etc.), variable expenses (restaurants, clothes, gifts, vacations) and a wish list for luxuries, succession or special celebrations.  Predictable income sources such as social security and monthly pensions are matched with the fixed expenses while variable income sources such as investment income could be matched with variable expenses.  Luxuries on the wish list could be funded with excess savings placed in a bank account. 

For the safety-first retiree, the investments used to fund variable expenses might include certificates of deposit (CDs), an immediate income annuity, a laddered portfolio of high quality short and intermediate term bonds that mature every few years and inflation indexed bonds (TIPS).  For this type of cautious investor who is uncomfortable with risk or the stock market, lower returns with less risk are desirable. The focus is lifetime spending potential and not maximizing wealth.

Other retirees may be willing to accept some stock investments for longer term luxuries as long as the core expenses are covered with predictable, low risk sources of income.  

There are many different types of risk.  Many retirees focus on market risk in terms of future events that will interfere with their goal of enjoying a predictable standard of living or force them to lower their spending in the future.  They ignore the risk of fluctuating interest rates, inflation and income taxes.  For example, current interest rates are at historic lows so higher future rates should be expected and the value of current bonds will decline in value.  Of course, bonds held to maturity will return to full value but since inflation often rises with interest rates, the purchasing power at maturity may decline.  

Our next retirement spending blog will discuss the value of equity investments for growth and tax advantages to help counter the effects of inflation for those willing to accept market risk. 


Do you have a personal coach to monitor your retirement spending plan?

Do you have a personal coach to monitor your retirement spending plan?        

1st in a retirement spending series

The purpose of this piece is to address the psychological and motivational actions that tend to sabotage the best plans.  Future blogs will focus on different spending methodologies during retirement.  

You probably know many people who have a personal trainer to accomplish a weight loss or other healthy goal, but do you know anyone with a personal financial coach for the goal of financial success during retirement?   Many people engage the services of tax, legal, investment and financial advisors to provide analysis and advice, but no active partner or coach to guide them in keeping their financial plan on track.  After the plan is created, personal, family and outside changes require adjustments.  The goals may remain static but future circumstances require changes.

 Why do people hire a personal trainer?  The answer is simple.  Both getting into and staying in shape take hard work and discipline.  Gyms profit from selling long term memberships in January to people briefly motivated by New Year resolutions.  Once the enthusiasm wears off the membership becomes of little use.   When you pay a trainer, however, you show up and do the work because that person holds you accountable and you accomplish your goal.   
Professional golfers have the knowledge and the motivation to succeed but they still have a personal coach.  A highly trained outsider can often spot mistakes and assist in correcting them.  Alone, the pro may not be aware of the cause and fail to correct the problem. In sports and in life, nothing goes exactly according to plan.  We adjust our plans for each obstacle, whether it is facing a rival’s powerful defense or navigating changes and uncertainties in the economy.  When planning for retirement, why go to the expense, time and effort required to create the plan without achieving the goal of having your money last for your lifetime?  

How many times have you watched a sporting event where the losing team suddenly changed their strategy to change the outcome?  Doc Rivers, the Clippers’ coach, made an unconventional strategic change in a playoff game against the Oklahoma City Thunder and won the game.  All coaches make game-time adjustments but the great ones make them consistently.  Phil Jackson of the Lakers and John Wooden of UCLA were among the talented few with the skill to alter the course of a game through strategic player changes or motivational speeches. In sports and life, game-time adjustments are frequently required despite the most meticulously prepared plans.  Those serious and committed to their own financial success, make the effort to hire the best coach because failure is not an option.  

One of the biggest fears of retirees is outliving their money.  This fear may be realized by spending too much, not earning enough or not staying on track with their plan.  It can be difficult to determine good tradeoffs between competing spending priorities without the assistance of a knowledgeable coach.  There is a constant tug of war between needs and wants, and a good financial coach can remind clients why they chose to spend less on certain activities or downsized to a smaller house so they could help pay for a grandchild’s education or fulfill a desire to take more vacations.  A plan designed and implemented based on your core values makes it easy to prevent the spontaneous and emotional spending that can destroy the best plans.  A good relationship with a trusted coach who cares about your success can help you focus on your priorities and make the best decisions.

I was first attracted to the financial planning approach over 40 years ago after working for a national brokerage firm.  I observed that clients traded stocks without any concept of their long term goals or needs.  I witnessed how their good and bad decisions led to success or failure.  Like a rudderless boat, they moved at the whim of the tides.  At Kaye Capital Management, we make every effort to understand a client’s goals, dreams and priorities in order to assist in planning and navigating their personal road to success.