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RFG Weekly Wealth Report

December 18, 2015
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It's not like it's a surprise!

Last week, investors didn't appear to be thrilled with the possibility the Federal Reserve might raise rates this week. They also weren't too impressed by another drop in oil prices. There was red ink everywhere as markets from Australia to Hong Kong, across the Eurozone, and throughout the Americas moved lower last week.

Bloomberg reported there was a 74 percent probability of a Fed rate hike at the December Federal Open Market Committee meeting. The Wall Street Journal's survey of business and academic economists put the chance at 97 percent. More than 80 percent of those surveyed said the Fed would lose credibility if it doesn't act in December.

It's important to remember the Fed doesn't actually set interest rates. It takes actions designed to influence financial behaviors. Even if the Fed does push to increase interest rates, it remains to be seen whether its efforts will bear fruit. The Financial Times wrote:

"...As "lift-off" has drawn closer some analysts have begun to highlight just how experimental this interest rate rise will be. The Fed's bloated balance sheet - swelled by its quantitative easing program - prevents it from using its traditional interest rate tools, so it has unveiled and has been testing new ones. The main new levers are known as the "interest on overnight reserves" and the "overnight reverse repo program," and central bank officials are confident that they will be able to lift the Fed funds rate, which is the main target. But some analysts caution that it could be a choppy take-off."

If the Fed acts and interest rates don't respond, there may be further volatility. The Financial Times reported markets almost certainly have priced in a rate hike at this point. We'll find out next week.

NEXT YEAR, CHINA'S RENMINBI (A.K.A. YUAN) WILL JOIN the U.S. Dollar, euro, yen, and pound, when it is added to the International Monetary Fund (IMF)'s Special Drawing Rights (SDR) basket - a supplementary foreign exchange reserve asset that is defined and maintained by the IMF. It will become the third weightiest currency in the basket. After the renminbi is added, the U.S. dollar will comprise 42 percent of the basket (unchanged from 2010). The euro will be 31 percent (down from 37 percent in 2010). The renminbi will be 11 percent. The Japanese yen will be 8 percent (down from 9 percent in 2010). The British pound will be 8 percent (down from 11 percent).

Managing Director of the IMF Christine Lagarde said:

"The Executive Board's decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system. It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China's monetary and financial systems. The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy."

So, is the renminbi likely to give the U.S. dollar a run for its money? Not any time soon, according to economists surveyed by The Wall Street Journal. Over the next 50 years, they gave China about a 34 percent chance of challenging the dollar. One said, "To match the dollar's appeal, China will need markets as deep as those in the U.S. and to produce economic indicators that are trustworthy."


Quote of the Week

"Power is of two kinds. One is obtained by the fear of punishment and the other by acts of love. Power based on love is a thousand times more effective and permanent then the one derived from fear of punishment."

--Mahatma Gandhi, Former leader of the Indian independence movement


Golf Tip of the Week

Train Your Grip with Toothpaste

Keeping consistent, light pressure on the club is something that many amateurs struggle with. You want the pressure in your hand to stay constant from all the way through the rest of the swing. One way to keep yourself from holding the club in a death grip is to do the toothpaste check. Grip a tube of toothpaste the way you would normally grip the club. Set up for a shot and swing. If you squirt out just a tiny amount from the tube, your grip is on target. If you make a mess with the toothpaste, your grip is too strong.

Another mistake many golfers make is to lose contact with the left palm during the backswing, causing them to lose control. Keep consistent contact with the fingers of your right hand to avoid losing your grip.


Financial Question of the Week

What is wrong with the 4% rule?

The standard rule of thumb for many years was 4%. That's how much you supposedly could withdraw every year from your retirement accounts - even on an inflation-adjusted basis - and not run out of money.

But the problem with that approach is that it's based on a single point in time. You make the decision once, and follow it for your entire retirement. And that may not be optimal because the one thing we can always count on is change. As you age, you will potentially live longer. You could experience an extended market downturn at the beginning of your retirement. Unexpected expenses could appear.

An examination of five different types of withdrawal strategies found this strategy is often the least efficient approach to maximizing lifetime income for a retiree.

The best strategy incorporates mortality probability, where the projected distribution period is updated based on the mortality expectations of the retirees and the withdrawal percentage is determined based on maintaining constant probability of failure.

Every year you are alive, figure out how much longer you are expected to live. You do it every year because the longer you live, the longer you are likely to live. As an example: the average life expectancy for a new born is approximately 74 years, the average life expectancy for someone 65, though, is 85.

A recent Retirement Adviser panel also urged retirees and pre-retirees to make sure they work with advisers who are familiar with using all the tools available for building a retirement-income plan. Some might focus solely on using a systematic withdrawal plan while others might focus solely on using annuities. To have a really good plan you need an adviser who understand both.

You have to strike a balance between taking too much money early and being broke later, and taking too little money early and having too much leftover later. The goal should be to smooth your consumption over time and build a plan broadly based around lifestyle changes.