I have had the pleasure of assisting many of you for years. Others are newer clients. Our paths crossed via referrals, or we met through various professional organizations.
There are many reasons why you’ve reached out to me for assistance.
But there has generally been one common thread—the complexities that inevitably spring from managing a portfolio and the many, but confusing, roads that can lead to holistic financial planning.
We hear many good questions during our retirement planning meetings. While your goals and dreams may differ, there is one common theme—financial security. More specifically, many ask the good question, “How much monthly income will I have during retirement?” The great question is, “Will my retirement assets adequately handle my spending habits?” Do you see the difference between a good question and a great question? Hint, the latter gets to the heart of the greatest fear, running out of money.
That’s where this month’s newsletter takes off.
Situations will vary from person to person. That is why we never employ a cookie-cutter approach when guiding our clients. Each plan must have an individual element to it, but the plans are guided by time-tested principles.
Consider this— Iowa and Iowa State just completed their annual football rivalry game. Each quarterback, his team, and their coaches tailored a game plan for each other. However, the plans are guided by the basics—the fundamentals.
In our case, we 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.
There are good questions that can be helpful, but then there are great questions that really change the way one can approach a decision, a problem, and the outcome of this game. Let’s review some of the fundamentals.
1. Good Question: Do I have enough to reach my retirement goals?
Great Question: How do I define what ‘enough’ means to me?
The later question strikes right at the heart of the retirement planning mindset. When is enough really enough? Our job is to help you define it in a meaningful way that is unique to you. Answering this question will force you to think about not only your spending goals during retirement, but your mission statement during these coveted years. Armed with this information, we now help you better understand how likely you are going to be able to achieve these goals via our comprehensive cash flow and asset modeling tools.
2. Good Question: Am I saving enough in my retirement plan or 401(k)?
Great Question: Am I saving enough relative to my retirement asset growth goals?
You must begin with the end in mind. Critical thought gets you to the end. Our job is to help you formulate a targeted retirement asset growth goal that is unique to you and your spending goals. This is an important bucket that you will draw income from during retirement. Company retirement plans are a terrific vehicle to get most of us started. Is there a matching provision that your company provides? If there is, don’t pass up free money! I 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.
3. Good Question: What’s my optimal asset allocation?
Great Question: What is the annualized personal rate of return required to achieve my desired future retirement asset goal?
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 us too close to the financial shoreline and delays or prevents us from reaching our financial goals because we may be too conservative. My goal is to help clients “Right-Size” their risk exposure by utilizing the mother of all fundamentals, diversification.
Believe me, I understand your concerns. It’s why I preach diversification within an asset class (numerous stocks across industries, size, and countries) and diversification among asset classes (stocks/bonds, short-term cash, etc.). Diversification helps to manage risk. Approximately 87% of portfolio returns are determined by its asset allocation mix.
Historically, stocks have outperformed income-producing securities such as bonds or CDs over the long term. But I 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 too. I want to be sure you sleep soundly when the inevitable decline in stocks occurs.
4. Good Question: When should I take Social Security?
Great Question: What is the optimal age that I/we can take full advantage of the different Social Security income options?
That’s a question that comes up often. Everyone will have personal factors, such as income resources and health history that must be factored into this decision. Our modeling can help the picture come to life. While many factors will influence the timing, it’s usually best to avoid the temptation of dipping into Social Security too early.
You can take Social Security when you turn 62. Or, you can delay it until you reach 70.
Let’s look at a simple example Fidelity recently provided. “Colleen is 62 and will reach her full retirement age (FRA) at 66 (note: if you are born 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.
I can’t cover all options available to you in this limited space, but if you and are your spouse are considering taking Social Security, let’s talk and see what might be the most advantageous strategy for you.
5. Good Question: What are you going to do once you’ve retired?
Great Question: How do you learn to focus on what is within your control during retirement?
For example, when you wake up each morning and are no longer going to work, who will you surround yourself with? What will you do to keep your mind and body productive? Retirement is a process, not a single event. I covered this in-depth in another newsletter—A Better Retirement Mentality - 6 Ways to a Happier Retirement.
If you would like another copy, feel free to reach out and I will gladly share my 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 by the U.S. BEA, from the initial annualized reading of 2.6% to 3.0%. 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 I 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 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 that 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. BEA, 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% (U.S. BLS), which many economists would argue is near or at full employment. And job creation has been respectable, if unspectacular (using payroll data from the U.S. BLS). Job openings stand at over 6 million, a record high that dates back to 2001 when this particular survey began (U.S. BLS). Plus, weekly first-time claims for unemployment insurance remain at an unusually low level (Dept. of Labor), 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, in my view. 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.
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.
Table 1: Key Index Returns
Dow Jones Industrial Average
S&P 500 Index
Russell 2000 Index
MSCI World ex-USA**
MSCI Emerging Markets**
Bloomberg Barclays US Aggregate Bond TR
Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: July 31, 2017-August 31, 2017
YTD returns: December 30, 2016-August 31, 2017
**in US dollars
I hope you’ve found this review to be informative. If you have additional questions about this month’s newsletter or you would like to talk about any other matters, please feel free to reach out via email or phone.
We are always thrilled to hear from you!
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.
Portions of this article were created with the assistance of Horsesmouth
The views expressed are not necessarily the opinion of FSC Securities Corporation, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Individual circumstances vary. Investing is subject to risks including loss of principal invested. No strategy can assure a profit against loss. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.