Thursday, June 30, 2011

6 Ways To Calculate How Fast You'll Run Out Of Retirement Funds

One of the key aspects of retirement planning is determining the amount of time that it will take for you to exhaust your retirement savings. But there are several variables that must be considered in this somewhat complex equation, and some of these must be based upon reasonable assumptions. Lifestyle, longevity, long-term care, Social Security and the rate of return received on your investment portfolio are all critical issues that can materially impact the rate of your retirement plan withdrawals. However, all of these components can be computed in several different ways, depending upon some of the assumptions that you make. We will look at some of the common ways to calculate the drawdown of your retirement funds.

1. Percentage Withdrawal If you take a certain percentage of your retirement funds each year, then the amount that you withdraw may be at least somewhat dependent upon the amount of investment income earned in your portfolio. If your portfolio grows substantially during the year, then the amount you withdraw will also increase proportionately. If the portfolio shrinks, then so will your distribution.

2. Flat Dollar Withdrawal A systematic withdrawal of a fixed dollar amount from your retirement plan will make it easier for you to create and maintain a budget during your retirement, but it can be either good or bad for your portfolio, depending upon investment performance. If your portfolio grew during the year, then your distribution will constitute a lower percentage of assets. In contrast, a year of adverse performance means that you are taking out a proportionately larger chunk of your funds.

3. Required Minimum Distribution All owners of IRAs and qualified plans that are regulated by ERISA are required by the IRS to begin taking a mandatory minimum amount out of their accounts by April 1st of the year after the year in which they turn 70 and a half years old. This amount is calculated according to life expectancy and is usually done automatically by the account or plan custodian, although it can also be calculated manually by the beneficiary using the tables posted on the IRS website in IRS Publication 590. Those who take no more than this amount out of their plans can usually expect to see their funds last longer than those who take larger amounts or percentages each year.

4. Investment Income Only Those who wish to leave the principal of their retirement plans and accounts to their heirs may wish to live solely on the income from their portfolio if it is large enough to allow this. The amount of income earned will, of course, determine the kind of lifestyle that you are able to live during retirement, although you could dip slightly into your principal if necessary.

5. The Monte Carlo Scenario Professional portfolio managers can run hypothetical investment scenarios that may include one or more severe market downturns within the period of time of the projected growth for the investment or portfolio. This type of illustration is known as a Monte Carlo scenario. Those who are planning for retirement may also wish to account for the possibility of a bad year in the markets for their own portfolios, but other types of financial setbacks should be factored in as well. For example, the need for long-term care may require substantial withdrawals for anywhere from one to three years that are above and beyond what you take out to cover normal living expenses.

6. Total Depletion Some financial experts espouse the idea of dying broke. Those who follow this train of thought will try to use up every bit of their retirement savings before they are lowered into the ground. This type of drawdown calculation is fairly simple; merely estimate your life expectancy and divide your savings by the number of years that you think you have left. Then simply withdraw this amount for your annual distribution. But be careful to leave some margin for error here; if you live past your expectancy, you will still need some funds to live on!

The Bottom Line Of course, determining which of these methods is best for you will depend upon the size of your portfolio, your risk tolerance, your time horizon and various other factors. But someone with a large portfolio may want to explore whether they can live off of the income from their funds even if they have to pay for major medical expenses. Someone with a smaller portfolio need to use most or all of their savings. In most cases, these scenarios will also require a financial computer program to calculate correctly, due to the number of variables involved. If you are not comfortable doing this yourself, then consult a retirement or financial planning professional who can run an accurate illustration that incorporates all of the necessary data. Don't let the complexity of this issue prevent you from moving forward; these calculations can provide a reasonably accurate picture of what you still need to do in order to adequately prepare yourself for your nonworking years.

What will happen if US misses Debt payments?

Reuters reports; The United States would immediately have its top-notch credit rating slashed to “selective default” if it misses a debt payment on August 4, Standard & Poor’s managing director John Chambers told Reuters.

Chambers, who is also the chairman of S&P’s sovereign ratings committee, told Reuters on Tuesday that U.S. Treasury bills maturing on August 4 would be rated ‘D’ if the government fails to honor them. Unaffected Treasuries would be downgraded as well, but not as sharply, he said.

“If the U.S. government misses a payment, it goes to D,” Chambers said. “That would happen right after August 4, when the bills mature, because they don’t have a grace period.”

Fears of a technical default have been rising after budget negotiations between Democrats and Republicans fell apart in Washington earlier this week. Even a brief default by the United States would immediately increase the country’s borrowing costs, weighing on the fragile economic recovery and eroding the dollar’s status as a reserve #0066cc; background-position: initial initial; background-repeat: initial initial; padding: 0px; margin: 0px; border: 0px initial initial;">currency.

On August 4, the Treasury Department is due to pay off $30 billion in maturing short-term debt.

With the debt talks stalled, new ideas are surfacing such as prioritizing debt payments. But Treasury Secretary Timothy Geithner warned lawmakers on Wednesday that such a move would still cause investors to shun U.S. Treasury securities.

Geithner said that because the United States now borrows roughly 40 cents of every dollar it spends, prioritizing payments with no debt limit increase would require cutting 40 percent of all government expenditures.

S&P is not the first agency to say it will downgrade the United States if a payment is missed. Rival credit rater Moody’s on June 2 was the first to say it would downgrade the United States shortly after a possible ceiling-related default, but not as deeply — to the Aa range.

Chambers insisted that the likelihood of a U.S. default is “extremely low,” as S&P expects a last-minute increase to the country’s debt ceiling just like it has happened for more than 70 times since the 1960s.

He also noted a default on U.S. Treasuries — a benchmark against which all other debt is measured — would dwarf any worries about U.S. credit ratings as global #0066cc; background-position: initial initial; background-repeat: initial initial; padding: 0px; margin: 0px; border: 0px initial initial;">markets would crumble.

Chambers made clear, however, that S&P is more worried about the ability of the U.S. government to meaningfully cut its deficit over the next two years, with presidential elections in 2012 making a bipartisan agreement much tougher.

S&P is so far the only of the big-three credit ratings agencies to revise the outlook on the U.S. AAA credit rating to negative. It has said it sees a one-in-three chance of a downgrade within the next two years.

Moody’s Investors Service and Fitch Ratings have expressed concern about the pace of budget negotiations in Washington, but still maintain a stable outlook on U.S. ratings.

Yet they have been more vocal about the risks of a “technical default” in August. Fitch said earlier this month it would cut U.S. issuer ratings to “restricted default” if the government misses a more substantial debt payment on August 15.

The U.S. Treasury reached the country’s $14.3 trillion debt limit on May 16 and has been making use of extraordinary measures to keep servicing its debt since then. It will run out of alternatives to avoid a default on August 2, Geithner has said.

Pentair Stock Still Great Buy with $50 Target Water stock continues to gush profits: PNR

Pentair Inc. (NYSE: PNR) is a diversified industrial manufacturing stock that makes products and systems used in the movement, storage, and treatment of water. In a separate business division Pentair also manufactures custom enclosures that house sensitive electronics.

S&P upgraded PNR to a 5-Star “Strong Buy” with a 12-month target of $48. Technically PNR is in a powerful bull trend. After retreating to its bullish support line in June it resumed its advance. Heavy buying continues to support the bull trend, and so the “stairsteps” are likely to accompany the stock to new highs. I have recommended PNR stock several times this year, most recently on April 7, and on each occasion the stock has rewarded us with a new high.

The target for Pentair stock is still $50.

The Real Reason Behind This Rally - How High Will It Go?

If you've read any of my articles before you know that I have a mini obsession of reading (and quoting) headlines. As a contrarian, I always like to have a pulse on the media's outlook because it can provide valuable contrarian clues.

Here are some of the headlines featured last week:

'Greek default could trigger chain reaction' - AP

'Why Wall Street still says buy, and you shouldn't' - AP

'Is the bull market over?' -

Interestingly, the article commented that: 'A look at four different sentiment measures suggests that more pain may await investors.'

I looked at similar sentiment measures and my conclusion was just the opposite.

Bearish Sentiment Extremes

By last Thursday (June 16) the market had recorded a number of bearish sentiment extremes. The most notable was the CBOE Equity Put/Call Ratio, which spiked to the highest level since early 2009.

Bullish sentiment captured by the AAII and II polls had also dropped significantly. In fact, the percentage of bullish advisors and investors was almost as low last week as it was in the summer of 2010 when the S&P was just barely above 1,000.

The VIX (Chicago Options: ^VIX) was the only sentiment gauge that wasn't in dangerous territory. However, the VIX set up to trigger a buy signal for stocks on Wednesday (June 15).

The chart below featured last week by the ETF Profit Strategy Newsletter on June 17, neatly summarizes the various sentiment indicators. The Newsletter's simple conclusion was that: 'Things might be so bad, it's actually good.'

Support Levels

Sentiment gauges are valuable, but basing decisions merely on sentiment can be dangerous. For that reason, the ETF Profit Strategy Newsletter always looks at structurally important support/resistance levels.

Here are some of them mentioned in Wednesday's (June 15) Profit Strategy update:

1) A trend line originating at the March 2009 low 2) Fibonacci support 3) March 16, 2011 low 4) 200-day moving average 5) Weekly pivot support

All this support was clustered between S&P (SNP: ^GSPC) 1,259 - 1,245, and the Newsletter recommended to close out short positions (established when the S&P reached the Newsletter's upside target at 1,369) and leg into long positions as soon as the S&P entered this range. It did so on Thursday, June 16.

Bullish Dow Theory Non-Confirmation

In the week of June 13, The Dow Jones Industrial Average (DJI: ^DJI) dropped to a new 3-month low on Wednesday (June 15), while the Dow Jones Transportation Average (NYSEArca: IYT - News) recorded its low previously on Monday (June 13). According to Dow Theory, this is bullish as long as the Dow Jones Transportation Average does not fall below 5,043.21 and not close below 5,072.58.

Another bullish non-confirmation was found between the DJIA (NYSEArca: DIA - News) and the S&P 500 (NYSEArca: VOO - News), Russell 2000 (NYSEArca: IWM - News), Nasdaq Composite (Nasdaq: ^IXIC), and Nasdaq-100 (Nasdaq: QQQ - News). The senior DJIA was the only major index that did not fall to a new low on Thursday (June 16).

How High Will it Go?

The key question now is whether this rally is merely a bounce within a new bear market or an attempt to reach new highs. The assessment made on June 15 was that: 'The current trading range is seen to be between 1,250 - 1,300.'

Before the S&P moves above 1,300 it must overcome Fibonacci resistance at 1,300. If it can't break above 1,298 and instead falls below 1,284, there will likely be another bout of selling.

How to Profit in this Market

Let's The key question now is whether this rally is merely a bounce within a new bear market or an attempt to reach new highs. Yesterday the DJIA broke above the confines of a trend channel that kept the DJIA in check since early May. This is near-term bullish.

The S&P moved above Fibonacci resistance at 1,298. This is also near-term bullish. The next obvious but not only target is the 50-day moving average at S&P 1,317.

Slightly above the 50-day SMA are two Fibonacci resistance levels. How the S&P behaves at those levels will very likely determine whether the current rally will lead to new highs or to a sharp summer sell off.

Canada's housing bubble deemed close to bursting

Canada's housing market is in a bubble that's set to burst and prices could plunge by as much as 25 per cent, a major independent research firm warns.

“Housing valuations have lost all touch with fundamentals and household debt is at a record high,” economists at the economic research consultancy Capital Economics say in their most recent Canada Economic Outlook, issued Wednesday.

“Our fear is that, with the housing bubble now close to bursting and commodity prices retreating, Canada will go from leader to laggard.”

The report predicts a fall in house prices by as much as 25 per cent over the next three years.

A domestic housing boom coupled with high commodity prices worldwide have spared the economy the severe recession felt by other developed countries.

Canada’s economic success could become the thorn in its side as the threat of a downturn in the housing sector looms, the report says.

The firm says a burst housing bubble would shrink real estate investment and hurt consumption — two things that would considerably slow economic growth.

This decline in consumption will mean a slowly rising unemployment rate as well, according to Capital.

The company says Canadian house prices are overvalued by approximately 25 per cent, close to excessive levels seen in the frothy U.S. market at its 2006 peak.

Over-building is already visible; the number of unoccupied houses and condos is at a record high. It closely resembles the 1994-95 housing slump, when the construction industry experienced a severe downturn.

The report forecasts falling house prices and smaller residential investment. Real estate currently makes up 6.8 per cent of Canada’s GDP. Lower prices would mean a hit to household net worth as property now accounts for one third of a family’s total assets, the report found.

The firm expects the Bank of Canada to stay the course in the near term, as financial worries at home and abroad will keep interest rates at their current level for a while.

Silver May Go Super Nova Soon

"It appears that there is an undeliverable force heading towards an unmanageable object."

At some point the shysters will lose control of the monetary papier-mâché which they have created. And the subsequent reaction could be epic, with the almost inevitable force of nature, like a tsunami rolling in.

Only a few people understand this. So it could be quite the surprise to many.

In the meantime the bankers and politicians are scrambling for the goodies pouring out of the financial piñata which they cracked open in the financial crisis.

The banks have plenty of gold to lease into the bullion banks, and then on into the markets and as collateral for leveraged paper obligations. But they are running out of silver, which causes me to believe that the silver cartel will break first, and will lead the way higher, as it has been doing.

A handful of Too Big To Fail Banks seem to be short more silver than can possibly be delivered without incurring terrific losses, even by today's distorted standards. From the looks of it, it appears that there is an undeliverable force heading towards an unmanageable object. Further complicating matters is the possibility of a magnitude 9.6 sovereign debt earthquake in the markets.

Unless there is some forced settlement, some draconian government intervention, silver appears to be a leading candidate for the manipulated market most likely to gosupernova.

But I would be careful about trying to time this event too precisely, or overplaying one's hand with leverage. There are some powerful forces lined up with the Banks as you might well expect. And they can make things happen. We watch the charts, but they can write them, at least for the short term. But their time will come.

If the equity market does not fall apart over Greece et al., I would imagine that the trading desks will try to stand on the metals until a little closer to quarter end, then its elevator going up. But watch out for a Greek related problem. I am not sure how the markets might react to this if it really is another Lehman like event. So as you might expect I am running a paired trade, and net short into the close.

The dollar chart is a big problematic. I can make a scenario for a break either higher or lower from the chart. I think we will know the move when it comes, but predicting it in advance is a dicey thing, except for the broken clocks.

If the sovereign default situation goes badly there *could* be a liquidation selloff that would impact silver, and to some extent gold. This is why I am holding paired trades that are short stocks and long bullion. I further adjusted the risk downward today, and lengthened the shorts. (more)

McAlvany Weekly Commentary

The True History of Money in America

A Look At This Weeks Show:
-Central bankers worldwide see a “phase out” of the U.S. Dollar reserve currency status.
-The history of central banks in America—Or, the third time’s a charm (actually a curse).
-Hamilton and Jefferson: Two founders competing views of U.S. Money that impact us still today.

Be Sure to Visit:
McAlvany Financial’s You Tube Channel – Click Here

  • facebook
  • rss

Time to short China? (FXP,YANG)

Are we on the verge of a bubble burst in China? Maybe, maybe not. But a lot of smart money is betting against China right now. The Masters recommend FXP or YANG, (inverse China ETFs)

Jim Chanos , the well-known short-seller and vocal China bear spoke last month of not finding enough available shares to short some U.S.-listed Chinese companies with questionable accounting practices. Just a week after his interview, a short seller's report on a U.S.-listed Chinese timber company sent its stock tumbling 90%.

The rush of traders making bearish bets on Chinese stocks is the latest evidence of growing trend among smart money: if you're not bearish on China, you're missing the next big trade.

Of course, Chanos has been saying this since 2009 when his analysts studied China's building boom, leading him to call it "Dubai times 1,000." Edward Chancellor at GMO in Boston and independent economist Andy Xie also began predicting that year that China would soon stumble.

But more recently the chorus has been growing. Billionaire George Soros said this month China might be in a small bubble, Hong Kong's outgoing securities regulator called it "the new dot-com," and soothsayer economist Nouriel Roubini recently repeated his thinking that China's government will be powerless to stop a downturn caused by dubious real estate projects and poor fixed-asset investments after 2013.

Mastery Bottom Line

As we have started to uncover fraudulent accounting in China, it's possible that the frauds (or really, fraud discoveries) will turn into what we had after the Internet bubble in the U.S. (Enron, WorldCom, HealthSouth, Global Crossing, etc.). If that's the case, there's a real possibility that the Chinese equity markets have a signficant drop lower.

However, playing with leveraged inverse ETFs like FXP and YANG are risky business. Decide for yourself whether the risk/reward ratio is worth it for your portfolio.

Soggy Corn Fields Curb Planting as Demand for Ethanol, Animal Feed Climbs

U.S. corn farmers were unable to plant on soggy or flooded fields fromArkansas to North Dakota this year, signaling tighter grain stockpiles even after rising demand for livestock feed and ethanol sent prices surging.

The U.S. Department of Agriculture may cut its planting forecast tomorrow to 90.629 million acres, according to a Bloomberg News survey of 31 analysts. That’s less than the 92.178 million that farmers predicted in a government survey three months ago and would be the USDA’s biggest such reduction from the March forecast since 1995.

Parts of the Ohio River Valley and North Dakota had triple the normal rainfall in the past 90 days, Mississippi River floods were a record in May, and millions of Midwest acres were inundated with water. While prices slumped in the past few weeks as drier weather improved conditions, late planting means fields are more susceptible to heat and frost damage before the harvest in September.

“It’s incredible how wet it has been this year,” said Scott Stirling, who plans to make an insurance claim for the first time in his 21 years of farming because 500 acres of his 7,500-acre farm near Martinton, Illinois, were too soggy to plant. “We needed the best crop ever to begin to rebuild inventories, and that’s just not going to happen.”

Corn futures for July delivery, the closest to expiration, reached a record $7.9975 a bushel on June 10 on the Chicago Board of Trade. The contract has slumped 13 percent since then to settle at $6.98 today.

Biofuel, Feed

The most-active contract by open interest, currently December futures, has jumped 89 percent in the past year. Ethanol producers have used record amounts of grain to make biofuel, and meat prices at all-time highs kept livestock producers from cutting herds.

Higher grain prices mean consumers are paying more for everything from Hormel Foods Corp. (HRL)’s Jennie-O turkey to Del Monte Foods Co. (DLM)’s Kibbles ‘n Bits dog food. Global food prices are up 37 percent in the past year, reaching a record in February, according to the United Nations.

Another period of unusual weather, such as a heat wave in July or August or an early freeze, may send corn to $10, said Chad Hart, a grain-market specialist at Iowa State University in Ames.


“This market is primed to head up, and up significantly, if we have a short crop,” Hart said. “Concern about what’s going on in Europe and other places in the world has pulled everything down, but if we start to see some real concerns about how corn production is shaping up, we could see the market do a U-turn in a hurry.”

As many as 500,000 acres in Iowa, Nebraska, South Dakota and Missouri may be hurt by floods on the Missouri River, Hart said. The U.S. is the world’s biggest exporter of corn, soybeans and wheat.

Wet weather that extended into June also may have prevented farmers from seeding more soybeans, an alternative to corn because it has a shorter growing season. About 76.487 million acres may have been sown with the oilseed, down from the previous USDA estimate of 76.609 million, according to the Bloomberg survey.

Spring wheat, grown primarily in the Dakotas, Montana and Minnesota, may have dropped to 13.279 million acres, compared with 14.427 million estimated in March, according to the survey. That would leave total U.S. wheat planting at 56.725 million acres, down from the government’s March estimate of 58.021 million.

Under Water

Terry Borstad, who grows spring wheat, corn, soybeans and other crops on his 6,000-acre farm near Starkweather, North Dakota, said about 1,500 acres will go unplanted this year because some areas remain under water.

“The 75 percent we’ve been able to plant, I feel fortunate,” Borstad said. “A lot of farmers have only been able to get in 50 percent or 25 percent.”

Wet weather may have prevented 6.3 million acres from being planted in North Dakota, the most ever, said Aaron Krauter, the executive director of the state’s USDA Farm Service Agency in Fargo. The previous record was 3.9 million in 1999.

Ethanol Refiners

More of the U.S. corn crop will be used to make fuel in the year that ends Aug. 31 than to feed animals for the first time, the USDA estimates. Ethanol refiners may consume about 40 percent of last year’s harvest.

While U.S. lawmakers are considering an end or limits to tax credits for ethanol after corn and crude-oil prices surged, petroleum refiners are still required to use 15 billion gallons of renewable fuels by 2015.

“That means ethanol production is totally unresponsive to price,” Wallace Tyner, an agricultural economist at Purdue University in West Lafayette, Indiana, said in a report this week. “There’s no flexibility.”

U.S. corn inventories as of June 1 may have totaled 3.29 billion bushels, down from 4.31 billion at the same time last year and 6.523 billion estimated at the end of March, according to the Bloomberg survey.

Lower corn inventories signal feed demand isn’t slowing from livestock farmers, said Roy Huckabay, an executive vice president of the Linn Group in Chicago. In April, cattle futures reached a record $1.21625 a pound on the Chicago Mercantile Exchange, and hogs climbed to an all-time high of $1.0435 a pound.

U.S. production of beef, veal, pork and lamb rose 4.9 percent to 3.91 billion pounds in May from a year earlier, the USDA said June 24.