One topic that comes up often in conversations with our clients is retirement planning. While goals and dreams may differ, there is one common theme — financial security. More specifically, many ask the question, How much monthly income will I have during retirement?
Situations will vary from person to person. That is why we never employ a one-size-fits-all approach when guiding our clients. Each plan must have an individual element to it. But all plans are guided by time-tested principles.
Consider this — a top professional quarterback, his team and their coaches tailor a game plan for each opponent they face. However, the plans are guided by the basics — the fundamentals.
In our case, we also look to the fundamentals that span the financial planning spectrum. As you look forward to retirement, let’s touch on these various fundamentals and what you may want to consider in approaching them.
- Am I saving enough in my retirement plan or 401(k)? Is there a matching provision your company provides? If there is, don’t pass up free money! We can’t stress this enough, because too many employees leave cash on the company table. At a minimum, pick up the low-hanging fruit.
For many of you, we have discussed how much is needed to hit your goals, but if questions are beginning to arise, or you have concerns, let’s talk.
- Do I have enough in stocks? It’s a question that is often bantered around by financial professionals. For some who experienced the market declines of 2001 and 2008, there is a nagging fear that we will get battered again. It’s a fear that keeps them too close to the financial shoreline and delays or prevents them from reaching their financial goals because they may be too conservative.
We understand your concerns. It’s why we preach diversification within an asset class (numerous stocks across industries and countries) and diversification among asset classes (stocks/bonds, short-term cash, etc.). Diversification helps manage risk.
Historically, stocks have outperformed income-producing securities such as bonds or CDs over the long term. But we recognize a portfolio that is 100% invested in stocks, even if fully diversified, is too risky for most individuals. It’s one reason we “anchor” the portfolio with securities that are not as volatile.
You won’t squeeze every last dime out of a bull market — but you don’t need to. We want to be sure you sleep soundly when the inevitable decline in stocks occurs.
Now, let’s rephrase the question. Is it time to rebalance your portfolio? Do you have too much in stocks? Given solid gains over the last year, some of you may be too heavy in stocks.
It may be time to take some risk off the table and get you back within your proper parameters — in other words, the percentage of stocks that best meet your personal goals and tolerance for risk.
- When should I take Social Security? That’s a question that often comes up. You can take Social Security when you turn 62. Or, you can delay it until you reach 70.
While many factors will influence the timing, it’s usually best to avoid the temptation of dipping into Social Security too early.
Let’s look at a simple example.Barbara is 62 and will reach her full retirement age (FRA) at 66. (Note: if you were born in 1960 or later, FRA is 67.) If she starts taking benefits at 62, she will receive $1,200 a month. If she waits until her FRA to collect, she will receive 33% more, or $1,600 a month in Social Security. If she waits until 70, her benefits will increase another 32%, to $2,112 a month.
That’s about 8% compounded annually. Moreover, your spouse will receive a higher survivor’s benefit.
We can’t cover all options available to you in this limited space, but if you and your spouse are considering taking Social Security, let’s talk and see what might be the most advantageous strategy for you. We can produce a Social Security Maximization Report for you so you can see all the different combinations for withdrawals.
- Do you have a pension? How should you take it? Many prefer the peace of mind a monthly check will provide, one that comes on top of your Social Security and savings. Or, you may choose a lump sum payment and roll it into an IRA.
But consider this — might you want to choose a joint and survivor annuity?
Simply put, if you were to die before your spouse, he/she will continue to receive a monthly check at a reduced rate. Or, you may choose a reduced initial payout that continues at that rate if you pass first.
If you are being presented with various pension options and aren’t sure how to proceed, let’s talk.
- What are you going to do once you’ve retired? When you wake up each morning and are no longer going to work, what will you do? We covered this in-depth in an earlier newsletter — Six Ways to a Happier Retirement.
If you would like another copy, feel free to reach out and we will gladly share our insights.
Switching gears: 3% GDP growth — how does that make you feel?
Second quarter Gross Domestic Product (GDP), which is the largest measure of economic activity, was just revised upward, from the initial annualized reading of 2.6% to 3%. That compares with 1.2% in Q1.
The upward revision leads directly into the highlights of an August 30 CNBC interview with Warren Buffett that we happened to come across: (https://www.cnbc.com/2017/08/30/warren-buffett-this-doesnt-feel-like-a-3-percent-gdp-economy.html).
The legendary investor Warren Buffett was asked, “Does this feel like a 3% GDP economy to you?” Buffett didn’t miss a beat. “No, it’s been about 2% per year now since the fall of 2009.”
While he also pointed out that long-term growth of 2% “is not bad,” he maintained it just doesn’t feel like a 3% economy to him. In a way, he’s right. One quarter isn’t enough to sway sentiment.
If we look at the data provided by the U.S. Bureau of Economic Analysis, the economy has exceeded a 3% annualized rate just once during the last 2½ years. It’s also fallen below 1% twice. Coincidently, the average increase in GDP over the last 10 quarters is exactly 2%.
No doubt about it, at the margin, the improvement is welcome. And recent reports suggest the economy is on a firmer footing, even if GDP growth hasn’t been very robust.
The jobless rate stands at 4.4%, which many economists would argue is near or at full employment. And job creation has been respectable, if unspectacular.
Job openings stand at over 6 million, a record high that dates back to 2001 when this particular survey began. Plus, weekly first-time claims for unemployment insurance remain at an unusually low level, which indicates employers are reluctant to lose workers amid improving business conditions and the difficulty in finding new ones.
Generally upbeat conditions in the labor market may not spread evenly to every industry, and wages have yet to significantly turn higher, but favorable numbers are underpinning consumer confidence.
Just take a quick peek at the Conference Board’s monthly survey of consumer confidence, which has registered its second highest reading of the expansion and the second highest reading since late 2000.
The upbeat sentiment suggests the divisive mood in the country that has been played up in the media isn’t dampening sentiment. That, my friends, is encouraging.
Concerns for September
According to Yardeni Research, September has historically been the worst-performing month for stocks. It’s unclear why that happens, and it doesn’t necessarily mean we’ll be treated to an early Halloween, but here are three things to be concerned about this September:
- North Korea. It has yet to significantly affect shares, but what’s happening in Asia is unsettling and could create temporary dips in the market.
- A government shutdown. We may see one October 1. Historically, government shutdowns may create a few bumps as short-term traders react to headlines, but longer term, the 18 shutdowns since 1976 have had virtually no effect on the economy.
- Breaching the debt ceiling. The Treasury likely will run out of authority to borrow in early October. In the unlikely event Congress fails to raise the debt ceiling, we would sail into uncharted financial waters. If we tiptoe up to the deadline, expect uncertainty to rise.
While forecasting market surprises can be dicey, remember that longer term, shares react to the economic fundamentals, which are aligned with the financial plan we’ve recommended for you.
And lastly, the Market Update:
Table 1: Key Index Returns
Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: July 31, 2017 – August 31, 2017
YTD returns: December 30, 2016 – August 31, 2017
*Annualized, **in U.S. dollars
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