Seeking Financial Security When Life Changes Strike 1 of 2

Playing It Safe Does Not Usually WorkWe would all love to meet our needs by investing in assets

that have no risk of losses. Thus, many investors want to

rely exclusively on income their investments generate – until

they find out how much that provides. The 10-year Treasury

is considered one of the safest investments available, but it

currently pays only 2.25% on the amount

invested. To generate the average

household income of $56,500 with

those bonds, you would need to have

$2.26 million invested.

Inflation pushes the amount required

even higher. With 2% inflation, a $56,500

income would rise to $82,310 by year 20 and to $100,335

by year 30. Assuming the same 2.25% Treasury yield, you

would need to have $3.2 million invested in year 20 and $4

million in year 30 to provide that level of income solely from

Treasury interest.

Consequently, most people meet their spending needs

by consuming some of their invested capital as well as

the income their investments generate, which makes it

particularly critical to plan carefully. To avoid running out of

money, you need a reasonably good projection of present

and future spending needs while also allowing for a margin

of error.

by Bruce McCain, Chief Investment Strategist, Key Private Bank

When a major life change occurs, we often find ourselves more responsible for our own financial future. Sometimes we have

planned and saved for it, as for retirement. Other times it may be thrust upon us, as with the death of a spouse or a divorce.

Most people do not have the background or inclination to manage their own investments, but knowing some of the basics can

help make you a more intelligent consumer.

Assume again that you want to generate $56,500 for

30 years from funds earning the Treasury’s 2.25%. If you

do not increase that amount as inflation erodes the

purchasing value, you will need to invest roughly $1.2 million

instead of the estimated $2.26 million needed using only

income from the bonds.

As expected, allowing for inflation raises that amount

significantly. Assuming a modest 2% inflation rate, you

would need a total investment of $1.9 million to cover

the 30-year horizon – less than what you would need

consuming only the interest income, but still a challenging

amount to accumulate.

Be a Risk-TakerFortunately, you can significantly reduce the required

amount if you take more risk. Equities, or common stock,

offer the potential for much higher returns than bonds.

Equity prices decline severely at times and are therefore

riskier than bonds. At the same time,

they should provide more to fund your

future spending needs than “safer”

assets will.

How much more can you get from

equities? Remember that 10-year

Treasuries recently yielded about 2.25%.

Theoretically, equities should provide a total return (capital

gains plus dividend income) of something more like 5% to 6%.

As seen on Forbes.com

Seeking Financial Security When Life Changes Strike September 2017

This is part two of a two-part series on managing finances when faced with sudden life changes; you can read part one here.

About Bruce McCainBruce McCain is the Chief Investment Strategist for Key Private Bank, where he monitors the economy and the

financial markets and serves as part of the team that formulates investment strategies for clients. He supplies

frequent insights to media throughout the region and around the country. His comments and interviews have

been featured in such publications as The New York Times, The Wall Street Journal, Investor’s Business Daily,

and Business Week, as well as on television outlets such as CNBC and Bloomberg TV. He is also a regular

source for wire services such as the Associated Press and Reuters and is a Contributor on Forbes.com. Bruce

joined a predecessor of Key in 1987, after spending six years on the business faculty of the University of Iowa’s Henry B. Tippie College

of Business. Bruce earned a PhD in Business Administration from the University of California at Berkeley, and undergraduate degrees in

Psychology and Accounting from Boise State University.

Seeking Financial Security When Life Changes Strike 2 of 2

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice. ©2017 KeyCorp. KeyBank is Member FDIC. 170919-294539

We saw that it would take $1.9 million of Treasury bonds to

provide $56,500 of inflation-adjusted returns for 30 years.

Assuming your invested assets provide a return of 5.5%

over 30 years, you would need to invest just over $1 million

to generate $56,500. Moreover, equities tend to offset

inflation over the long term, so equities can also help protect

you from the effect of rising living costs.

Invest Differently for the Long and Short Term While equities provide more upside potential, you typically

should not invest all your money in them. They can lose 30%

to more than 50% of their value over a very short time – you

do not want to be forced to sell them after their price has

plunged. Bonds and some other asset

prices remain more stable, so they can

help sustain your spending needs until

equity prices recover. For that reason,

bonds are often a strong part of the

investment strategy for money needed

over the next few years.

The risk of major equity declines, however, is all but

eliminated over long periods of time (see: When Investment

Diversification Fails). Money that will not be needed

for 20 years or longer can be devoted to equities with

comparatively little risk. Bottom line: the investment horizon

of your spending needs plays a critical role in determining

where your assets can be safely invested.

Allow for TaxesBear in mind, too, that federal, state and sometimes local

governments require you to “share” what you earn. You

currently pay a lower tax rate on the

appreciation of assets you sell than on

dividends or the interest from taxable

bonds. Yet with even a minimal tax of

15%, the assumed $56,500 would net only

$48,025 after taxes, and tax rates often

run much higher than 15%. Be sure to allow

for government “sharing” as you plan for your financial needs.

Passing the TestMajor life events can leave us extremely anxious about our

financial future. By understanding the realities of financial

planning and investment, however, you

can at least understand more about your

circumstances and make intelligent choices.

Particularly when you have long periods of

time to prepare, you have options that can

ease the burden of providing the money

you will need for future living costs. Most of us need to take

more risk than we would like, but financial professionals can

help you use investment risk in ways that can help secure

your financial future.