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The RFG Weekly Wealth Report

March 30, 2016
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Are corporations in the United States struggling?

In its cover article last week, The Economist (a British publication), suggested there is not enough competition among American companies. It pointed out:

"Aggregate domestic profits are at near-record levels relative to GDP...High profits might be a sign of brilliant innovations or wise long-term investments were it not for the fact that they are also suspiciously persistent. A very profitable American firm has an 80 percent chance of being that way 10 years later. In the 1990s the odds were only about 50 percent."

At the end of last week, U.S. headlines indicated concern about declining corporate profits:

  • Consumers prop up U.S. economy, but profits under pressure
  • U.S. Fourth-Quarter GDP Revised Up to 1.4% Growth but Corporate Profits Fall
  • Corporate profits fall in 2015 for first time since Great Recession
  • U.S. Corporate Profits Fall 8.1% in 4th Quarter

So, are U.S. companies experiencing record profits or are they in trouble?

Last week's press release from the Bureau of Economic Analysis indicated corporate profits (after inventory valuation and capital consumption adjustments) declined from the third quarter of 2015 to the fourth quarter of 2015; hence, the headlines.

However, a one-quarter decline doesn't provide a complete picture of the health of corporate America. As pointed out, over the full year, corporate profits were up 3.3 percent year-to-year.

Trading Economics offered additional context. From 1950 through 2015, U.S. corporate profits averaged about $395 billion annually. Profits hit a record low for that period, $14 billion, during the first quarter of 1951. Profits rose to an all-time high of about $1.64 trillion during the third quarter of 2014.

Fourth quarter's profits of $1.38 trillion remain well above that average.

IF YOU COULD LIVE ANYWHERE, WHERE WOULD YOU LIVE?  If cities are your cup of tea, then here is some good news. The 2016 Worldwide Cost of Living Report compares the prices of 160 products and services -- from food and drink to domestic care and private schools -- in cities around the world. It found the cost-of-living in many cities fell during 2015 thanks to lower commodity prices, weakening currencies, and geopolitical unrest.

Be warned: a lower cost-of-living doesn't mean a city offers good value. Take Zurich, for instance. Remember the uproar when the Swiss unpegged their currency early in 2015? The Swiss franc realized double-digit gains, the Swiss stock market swooned, and the Swiss people went shopping in neighboring countries. Well, the cost of living in Zurich fell from September 2014 to September 2015, but the decline wasn't proportionate to declines elsewhere in Europe, and Zurich currently reigns as Europe's most expensive city.

In September 2015, the most and least expensive cities in the world were:

Most expensive:

  • Republic of Singapore
  • Zurich, Switzerland
  • Hong Kong, China
  • Geneva, Switzerland
  • Paris, France

Least expensive:

  • Chennai, India
  • Karachi, Pakistan
  • Mumbai, India
  • Bangalore, India
  • Lusaka, Gambia

Cities in the United States didn't fare well, either. A strong U.S. dollar helped push all 16 of the U.S. cities that were in the survey up at least 15 places. New York and Los Angeles both rank among the 10 most expensive cities in the world.


Quote of the Week

"The first step in the evolution of ethics is a sense of solidarity with other human beings."

-- Albert Schweitzer, Winner of the Nobel Peace Prize


Golf Tip of the Week

Stuck Between Clubs? Choke Down.

When you're faced with a tricky shot between clubs, don't reach for the shorter club. Instead, choose the longer and choke down an inch or two on the grip; think of it as adding a half-club without having to modify your swing. Set up and swing as you normally do and hold back on the impulse to swing softer.


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.