Enlightened Capital Blog

Recently we simplified saving for college by helping you narrow down what financial assumptions to use. For my next trick, I’ll tackle an even more complex topic- retirement planning!

In this post we’ll do the same analysis for retirement planning that we did for saving for college, and simplify the process for you. I’ll walk you through the process of creating a budget, thinking through your financial goals and help you figure out what assumptions to use for retirement planning. I’ll also highlight why it is so important to start saving for retirement as soon as possible.

Large cap U.S. banks such as BAC and JPM, offer an attractive investment opportunity given my expectation for improved profitability driven by lower efficiency ratios and higher Net Interest Margins (NIM’s). Additionally, the banking sector currently trades at a historically large discount to the S&P 500 as well as the sector’s own history. Finally, banking sector balance sheets are much stronger than they were heading into the 2008 Global Financial Crisis, allowing the sector to emerge from this recession in a much healthier position.

Even small changes in your financial planning assumptions can lead to massively different potential outcomes. These assumptions can include expected investment returns, expected inflation, and your annual savings. This is especially true over longer time frames, due to the power of compounding, as well as all the unforeseen circumstance we all face. Because no one can see into the future, I like to analyze a range of possible scenarios for my family’s financial planning. This allows me to take comfort in the fact that even in a worse-case scenario, we will still be able to achieve our financial goals.

Recently I came across a chart on twitter that made me rethink my approach to asset allocation. The chart shows which asset classes are expected to generate strong returns in different economic environments and is a powerful tool for helping you develop your asset allocation. While I don’t recommend making substantial changes to your asset allocation, small changes can be beneficial depending on your economic outlook.

Bruce Greenwald’s Competition Demystified accomplishes its goal of simplifying competitive analysis. While Porter’s Five Forces is the most well-known framework for strategic analysis, Competition Demystified simplifies Porter’s Five Forces, by focusing on barriers to entry as the most important competitive advantage in an industry. Greenwald’s book provides value for both investors, and corporate executives looking to improve or maintain their competitive positioning within their industry.

For this week's blog post, we are launching a new series where I ask a financial professional five questions on important personal finance and investing topics. I'm excited to kick things off with a conversation I had recently with a friend of mine who is a financial advisor. We discussed topics such as the biggest personal finance mistakes people make in their 30's and 40's, the role of Roth IRA's for saving for college, and how to think about paying off debt or investing the difference. 

I believe it is important to share a diverse set of views on personal finance topics with my readers, especially on questions where there may be a variety of potential solutions for you. In addition to the answers from my friend I have also provided my own comments and linked to what I've written on these topics so you can compare our answers. 

This is one of the most common questions in personal finance and a question I’ve spent too much time thinking about! You should base your decision on two factors: the interest rate on your debt compared to your investment options, and your time horizon/risk tolerance. These factors are all related, as your risk tolerance will relate to how long of a time horizon you have. Let’s look at each of these factors individually and I’ll talk about how I use this framework for my family’s financial planning.

Reading 100 Baggers by Chris Mayer should be a litmus test for a career in investing. If you read the book and aren’t immediately excited to find great investments, then being a professional investor is not for you. While I have recommended investing exclusively in ETF’S, this book certainly makes the case for at least trying to beat the index with part of your portfolio.

Investors only have a few options available to build wealth in this challenging environment with lower expected returns for most asset classes. Additionally, there is a ton of uncertainty related to the economic impacts of COVID-19. As I talked about in 3% is the new 4% for Retirement Planning, to safely withdraw $100,000 per year in retirement you need a $3.33 million portfolio using a 3% withdrawal rate compared with a $2.5 million portfolio using a 4% withdrawal rate. Unfortunately, a larger investment portfolio is now needed to comfortably retire, compared to the recent past. This is due to historically low interest rates and elevated equity multiples, reducing the expected returns for bonds, stocks and real estate, going forward. Life expectancy continues to increase, so you should expect to spend more time in retirement than previous generations, which further increases your need for a larger investment portfolio.

In retirement planning, a 4% safe withdrawal rate (SWR) has been considered the standard for many years. Introduced by the Trinity Study¹ in 1998, the study states that investors can safely withdraw 4% of their portfolio annually in retirement, with a very low probability of running out of money. For example, an investor with annual expenses of $100,000 would aim to save $2.5mn for retirement. However, the Trinity Study focused on the 1925-1995 time period when interest rates were much higher than they are today, equity multiples were mostly lower than they are currently and life expectancies were shorter. As a result a 4% SWR is too aggressive for long-term planning given current market conditions. Let’s dive in to some of the changes since the study was conducted.