That truth must always be recognized.
When financial markets have a bad day, week, or month, discomforting headlines and data can swiftly communicate a message to retirees and retirement savers alike: equity investments are risky things, and Wall Street is a risky place.
All true. If you want to accumulate significant retirement savings or try and grow your wealth through the opportunities in the markets, this is a reality you cannot avoid.
Regularly, your investments contend with assorted market risks. They never go away. At times, they may seem dangerous to your net worth or your retirement savings, so much so that you think about getting out of equities entirely.
If you are having such thoughts, think about this: in the big picture, the real danger to your retirement could be being too risk averse.
Is it possible to hold too much in cash? Yes. Some pre-retirees do. (Even some retirees, in fact.) They have six-figure savings accounts, built up since the Great Recession and the last bear market. It is a prudent move. A dollar will always be worth a dollar in America, and that money is out of the market and backed by deposit insurance.
This is all well and good, but the problem is what that money is earning. Even with interest rates rising, many high-balance savings accounts are currently yielding less than 0.5% a year. The latest inflation data shows consumer prices advancing 2.3% a year. That money in the bank is not outrunning inflation, not even close. It will lose purchasing power over time.
Consider some of the recent yearly advances of the S&P 500. In 2016, it gained 9.54%; in 2017, it gained 19.42%. Those were the price returns; the 2016 and 2017 total returns (with dividends reinvested) were a respective 11.96% and 21.83%.
Yes, the broad benchmark for U.S. equities has bad years as well. Historically, it has had about one negative year for every three positive years. Looking through relatively recent historical windows, the positives have mostly outweighed the negatives for investors. From 1973-2016, for example, the S&P gained an average of 11.69% per year. (The last 3-year losing streak the S&P had was in 2000-02.)
Your portfolio may not return as well as the S&P does in a given year, but when equities rally, your household may see its invested assets grow noticeably. When you bring in equity investment account factors like compounding and tax deferral, the growth of those invested assets over decades may dwarf the growth that could result from mere checking or savings account interest.
At some point, putting too little into investments and too much in the bank may become a risk – a risk to your retirement savings potential. At today’s interest rates, the money you are saving may end up growing faster if it is invested in some vehicle offering potentially greater reward and comparatively greater degrees of risk to tolerate.
Having a big emergency fund is good. You can dip into that liquid pool of cash to address sudden financial issues that pose risks to your financial equilibrium in the present.
Having a big retirement fund is even better. When you have one of those, you may confidently address the biggest financial risk you will ever face: the risk of outliving your money in the future.
An emergency fund may help alleviate the stress associated with a financial crisis.
Have you ever had one of those months? The water heater stops heating, the dishwasher stops washing, and your family ends up on a first-name basis with the nurse at urgent care. Then, as you’re driving to work, giving yourself your best, “You can make it!” pep talk, you see smoke seeping out from under your hood.
Bad things happen to the best of us, and instead of conveniently spacing themselves out, they almost always come in waves. The important thing is to have a financial life preserver, in the form of an emergency cash fund, at the ready.
Although many people agree that an emergency fund is an important resource, they’re not sure how much to save or where to keep the money. Others wonder how they can find any extra cash to sock away. One recent survey found that 29% of Americans lack any emergency savings whatsoever.
How Much Money? When starting an emergency fund, you’ll want to set a target amount. But how much is enough? Unfortunately, there is no “one-size-fits-all” answer. The ideal amount for your emergency fund may depend on your financial situation and lifestyle. For example, if you own your home or provide for a number of dependents, you may be more likely to face financial emergencies. And if the crisis you face is a job loss or injury that affects your income, you may need to depend on your emergency fund for an extended period of time.
Coming Up with Cash. If saving several months of income seems an unreasonable goal, don’t despair. Start with a more modest target, such as saving $1,000. Build your savings at regular intervals, a bit at a time. It may help to treat the transaction like a bill you pay each month. Consider setting up an automatic monthly transfer to make self-discipline a matter of course. You may want to consider paying off any credit card debt before you begin saving.
Once you see your savings begin to build, you may be tempted to use the account for something other than an emergency. Try to budget and prepare separately for bigger expenses you know are coming. Keep your emergency money separate from your checking account so that it’s harder to dip into.
Where Do I Put It? An emergency fund should be easily accessible, which is why many people choose traditional bank savings accounts. Savings accounts typically offer modest rates of return. Certificates of Deposit may provide slightly higher returns than savings accounts, but your money will be locked away until the CD matures, which could be several months to several years.
The Federal Deposit Insurance Corporation insures bank accounts and certificates of deposit (CDs) up to $250,000 per depositor, per institution in principal and interest. CDs are time deposits offered by banks, thrift institutions, and credit unions. CDs offer a slightly higher return than a traditional bank savings account, but they also may require a higher amount of deposit. If you sell before the CD reaches maturity, you may be subject to penalties.
Some individuals turn to money market accounts for their emergency savings. Money market funds are considered low-risk securities, but they’re not backed by the federal government like CDs, so it is possible to lose money. Depending on your particular goals and the amount you have saved, some combination of lower-risk investments may be your best choice.
Money held in money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Money market funds seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund. Money market mutual funds are sold by prospectus.
Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
The only thing you can know about unexpected expenses is that they’re coming – for everyone. But having an emergency fund may help alleviate the stress and worry associated with a financial crisis. If your emergency savings are not where they should be, consider taking steps today to create a cushion for the future.
Seniors will see their retirement benefits increase by an average of 2.8% in 2019.
Social Security will soon give seniors their largest “raise” since 2012. In view of inflation, the Social Security Administration has authorized a 2.8% increase for retirement benefits in 2019.
This is especially welcome, as annual Social Security cost-of-living adjustments, or COLAs, have been irregular in recent years. There were no COLAs at all in 2010, 2011, and 2016, and the 2017 COLA was 0.3%. This marks the second year in a row in which the COLA has been at least 2%.
Not every retiree will see their benefits grow 2.8% in 2019. While affluent seniors will probably get the full COLA, more than 5 million comparatively poorer seniors may not, according to the Senior Citizens League, a lobbying group active in the nation’s capital.
Why, exactly? It has to do with Medicare’s “hold harmless” provision, which held down the cost of Part B premiums for select Medicare recipients earlier in this decade. That rule prevents Medicare Part B premiums, which are automatically deducted from monthly Social Security benefits, from increasing more than a Social Security COLA in a given year. (Without this provision in place, some retirees might see their Social Security benefits effectively shrink from one year to the next.)
After years of Part B premium inflation being held in check, the “hold harmless” provision is likely fading for the above-mentioned 5+ million Social Security recipients. They may not see much of the 2019 COLA at all.
Even so, the average Social Security beneficiary will see a difference. The increase will take the average individual monthly Social Security payment from $1,422 to $1,461, meaning $468 more in retirement benefits for the year. An average couple receiving Social Security is projected to receive $2,448 per month, which will give them $804 more for 2019 than they would get without the COLA. How about a widower living alone? The average monthly benefit is set to rise $38 per month to $1,386, which implies an improvement of $456 in total benefits for 2019.
Lastly, it should be noted that some disabled workers also receive Social Security benefits. Payments to their households will also grow larger next year. Right now, the average disabled worker enrolled in Social Security gets $1,200 per month in benefits. That will rise to $1,234 per month in 2019. The increase for the year will be $408.
Does your vision of retirement align with the facts? Here are some noteworthy financial and lifestyle facts about life after 50 that might surprise you.
Up to 85% of a retiree’s Social Security income can be taxed. Some retirees are taken aback when they discover this. In addition to the Internal Revenue Service, 13 states levy taxes on some or all Social Security retirement benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. (It is worth mentioning that the I.R.S. offers free tax advice to people 60 and older through its Tax Counseling for the Elderly program.)
Retirees get a slightly larger standard deduction on their federal taxes. Actually, this is true for all taxpayers aged 65 and older, whether they are retired or not. Right now, the standard deduction for an individual taxpayer in this age bracket is $13,600, compared to $12,000 for those 64 or younger.
Retirees can still use IRAs to save for retirement. There is no age limit for contributing to a Roth IRA, just an inflation-adjusted income limit. So, a retiree can keep directing money into a Roth IRA for life, provided they are not earning too much. In fact, a senior can potentially contribute to a traditional IRA until the year they turn 70½.
A significant percentage of retirees are carrying education and mortgage debt. The Consumer Finance Protection Bureau says that throughout the U.S., the population of borrowers aged 60 and older who have outstanding student loans grew by at least 20% in every state between 2012 and 2017. In more than half of the 50 states, the increase was 45% or greater. Generations ago, seniors who lived in a home often owned it, free and clear; in this decade, that has not always been so. The Federal Reserve’s recent Survey of Consumer Finance found that more than a third of those aged 65-74 have outstanding home loans; nearly a quarter of Americans who are 75 and older are in the same situation.
As retirement continues, seniors become less credit dependent. GoBankingRates says that only slightly more than a quarter of Americans over age 75 have any credit card debt, compared to 42% of those aged 65-74.
About one in three seniors who live independently also live alone. In fact, the Institute on Aging notes that nearly half of women older than age 75 are on their own. Compared to male seniors, female seniors are nearly twice as likely to live without a spouse, partner, family member, or roommate.
Around 64% of women say that they have no “Plan B” if forced to retire early. That is, they would have to completely readjust and reassess their vision of retirement, and redetermine their sources of retirement income. The Transamerica Center for Retirement Studies learned this from its latest survey of more than 6,300 U.S. workers.
Few older Americans budget for travel expenses. While retirees certainly love to travel, Merril Lynch found that roughly two-thirds of people aged 50 and older admitted that they had never earmarked funds for their trips, and only 10% said they had planned their vacations extensively.
What financial facts should you consider as you retire? What monetary realities might you need to acknowledge as your retirement progresses from one phase to the next? The reality of retirement may surprise you. If you have not met with a financial professional about your retirement savings and income needs, you may wish to do so. When it comes to retirement, the more information you have, the better.
We hope you had a wonderful holiday season. Whether you reached your personal goals in 2018, faced challenges, or are looking for a 2019 reboot, let's take a moment to hit on the key themes from the past year.
Flashback. Before we get started, let's reflect back one year ago as we left 2017 and began 2018. To jog your memory, 2017 was an excellent year for stock markets. In the U.S., the S&P 500 had increased more than 19% and global markets fared even better. Perhaps the most remarkable element of the 2017 stock market though was the unprecedented lack of volatility. The entire year, at no point did the S&P 500 have an intra-year drop of more than 2.8%.
To give you some perspective on this, between 1998-2017, the average intra-year stock market pullback was 15.6% (Charles Schwab, Investing Insights, Oct. 2018).
Volatility Strikes Back. So January 2018 began on a firm footing, building on highs in the wake of tax reform, low interest rates, low inflation and strong corporate profit growth. If stocks rise or fall on the fundamentals (and they usually do), the outlook was quite favorable as the year began.
However, while we will always believe no one can consistently time the peaks and valleys of the market, when there’s too much good news priced into stocks, any disappointment can create volatility.
A spike in Treasury bond yields tripped up bullish sentiment early in 2018. President Trump’s decision to level the playing field of international trade created uncertainty in the first half. Then, investors decided trade wasn’t important—until they decided late in the year that it was.
Another bout of selling began in October and the decline accelerated in December. Several factors contributed to the weakness, including fears that continued rate hikes by the Fed might stifle economic activity in 2019 and quash profit growth.
We’re also experiencing heightened uncertainty brought on by the ongoing trade war with China. In addition, key tech stocks (in particular, the FANG stocks – Facebook, Amazon, Netflix, and Google) that had been market leaders for several years lost their mojo and pulled on the major averages.
As the year came to a close, the peak-to-trough decline in the S&P 500 Index totaled 19.8% (St. Louis Federal Reserve thru 12.24.18). We exceeded the long-term average annual peak-to-trough drawdown by 4 percentage points. Still, we’re just shy of the 20% threshold, which is the commonly accepted definition of a bear market.
If Christmas Eve marks the bottom of the sell-off, it won’t be the first time we’ve had a steep correction that side-stepped a bear market. We witnessed similar declines in 2011 and 1998. In both cases, a profit-crushing recession was avoided.
But let us offer a little bit of perspective. The Q4 (quarter four) decline may have been unsettling. Nevertheless, the total decline in the S&P 500, including reinvested dividends, amounted to just over 4% (S&P Dow Jones Indexes) for calendar year 2018.
Overseas stocks fared quite a bit worse, as the global economy shifted into a lower gear earlier in the year, and trade tensions, which are more likely to rattle foreign economies, added to woes.
Many in their 20s and 30s don't even blink at a stock market decline. In fact, these can be some of the best times for younger investors (and if you have more than 10 years before retirement, we'd classify you as a younger investor) to be scooping up more shares at discounted prices.
Take note of this if you fit that description and consider your mindset. If you're still decades out from retirement and maintain a long-term time horizon, the near bear market declines we've recently seen shouldn't scare you, they should excite you. This is especially true if you have 401(k) and Roth IRA contributions on autopilot. By purchasing shares at a fixed interval every month, you take advantage of a strategy called dollar-cost averaging, which allows you to purchase a greater number of shares over time.
As we age though, we can't take such a sanguine view, and a more conservative mix of investments becomes paramount. Though we are unlikely to match major market indexes on the way up, we can still anticipate longer-term appreciation and sleep at night when the unpredictable market sell-offs materialize.
The same can be said of accounts that hold college savings, especially if the beneficiary is in college and doesn’t have the time to recover from a sharp dip in stocks. For those in the most conservative portfolios, the drop in the major market averages had little impact on your overall net worth.
Our recommendations are based on many different factors, including risk aversion. It’s rarely profitable to make decisions based on current market sentiment (i.e., panic selling or euphoria that sends us chasing the latest trends).
What’s in store for 2019
While 2018 began with unbridled optimism, caution quickly entered the picture and most major U.S. indexes had their first downturn since 2008.
In 2019, we have the mirror image. There is no shortage of cautious sentiment. But the fragrance that’s in the air today doesn’t always determine market direction throughout the year. As we’ve seen, markets can be unpredictable as investors try to anticipate events that may impact the economy and corporate profits.
Discerning Market Trends. We've always found it interesting that some analysts hope to discern trends from various calendar-like indicators. We’ve just entered a new year, and typically the so-called January barometer gets some play in that arena. Loosely defined, some say that how January performs sets the tone for the rest of the year.
Of course, if stocks perform well in January, the bulls already have a leg up on the bears. Throw in reinvested dividends and a natural upward bias in stocks, and it helps explain why a positive January usually results in a positive year.
But, that wasn’t the case for 2018. And by the same token, 2016’s weak start didn’t carry over into the rest of the year.
Then, there was this October 4th article in the Wall Street Journal: “Midterms Are a Boon for Stocks—No Matter Who Wins.” On average, the months of October, November and December have been the top-performing months during any year that included a midterm election (1962-2014). In 2018, though, there was a failure to launch.
While there’s still time left on the calendar, history indicates that Year 2 Q4-Year 3 Q2 is regularly the best three-quarter performance period of the 16-quarter cycle that begins just after a president has been elected or reelected. That’s using data on the performance of the Dow going back to 1896.
Finally, we could hang our hat on one other midterm indicator. That is, the S&P 500 has finished in positive territory in every post 12-month midterm period since 1950.
We say “could” because, while reviewing past election-year patterns to gain useful insights can be interesting (or nerdy depending on your perspective), we must stress this doesn't substitute for a well-thought-out plan that takes unexpected detours into account.
Table 1: Key Index Returns
Source: Wall Street Journal, MSCI.com, Morningstar
YTD returns: Dec 29, 2017-Dec 31, 2018
**in US dollars
We know that stocks can be unpredictable over a shorter period, and sell-offs are normal. And they aren’t pleasant. But we take precautions to minimize volatility and, more importantly, keep you on track toward your long-term financial goals.
We came across a recent piece by LPL Research that highlighted this. They found that the S&P 500 has lost an average of 31% every five years since WWII. Yet, the index has registered an annual advance 75% of the time (Macrotrends) and almost 80% when dividends are reinvested (NYU Stern School of Business Stock/Bond Returns).
Further, the S&P 500 has averaged an annual advance of nearly 10% since the late 1920s (CNBC/Investopedia).
During up markets and down markets, we like to stress the importance of your investment plan and the progress you're making toward your financial goals.
Stocks will hit small bumps in the road, and occasionally hit a major pothole, but the long-term data highlight that stocks have easily outperformed bonds, T-bills, CDs, and inflation.
As Warren Buffett opined a couple of years ago, “It’s been a terrible mistake to bet against America, and now is no time to start.” (Investment U, Motley Fool).
We trust you’ve found this review to be educational and helpful. As always, we're humbled to be in a position to serve and provide financial advice and guidance for each and every one of our clients. If you have questions or would like to discuss any matters above, please feel free to give us a call.
As 2019 gets underway, we want to wish you and your loved ones a happy and prosperous new year!
Gary Blom & Michael Howell
The views and opinions expressed herein do not necessarily represent the views and opinions of SCF Securities, Inc. or any SCF-related entity.
This research material has been prepared by Horsesmouth
How much could a college education cost in the 2030s? You may want to take a deep breath and sit down before reading the next paragraph.
A MassMutual analysis projects that four years of tuition, room, and board at a private college will cost nearly $369,000 in 2031. An article at CNBC offers a slightly cheaper estimate, putting the total expense at $303,000 for a freshman setting foot on campus in 2036. (Today, the cost of four years at a private university is less than half that.) How about the price tag for four years of tuition, room, and board at a public university in that year? The same CNBC article says that it may reach $184,000.
Even today, finding enough money to pay for college can be an enormous challenge. There are obvious ways to counter the cost: a student can work full time and apply much of the income toward school, or assume student loans. Fortunately, there are other ways – ways that you may want to explore if you do not want your child to take a hard-scrabble path through school or get soaked with debt.
Ideally, you use money you never have to repay. Grants and scholarships are more plentiful than many students (and parents) realize, and some go begging for applicants. Grants are based on need; scholarships, on merit. Grants can be issued incrementally or in lump sums to a student; most are awarded on a first-come, first-serve basis, which is why it is so crucial to fill out the Free Application for Federal Student Aid (FAFSA) early. A school accepting your student will evaluate your student’s FAFSA, then send an award letter detailing his or her eligibility for federal and state grants. As for scholarships, there are literally millions of them. Sallie Mae provides a convenient online search tool to explore more than 5 million such awards, and you can use it to drill down to opportunities that are strong possibilities for your student.
Through a 529 plan, you can invest to meet future college costs. 529 plans come in two varieties, and both varieties have common tax advantages. 529 plan earnings are exempt from federal income tax, and 529 plan assets may be withdrawn, tax free, so long as the money pays for qualified education expenses. While there are no federal tax breaks linked to 529 plan contributions, more than 30 states offer state income tax deductions or credits for them.
Some 529 plans are prepaid tuition plans, giving you the potential to prepay up to 100% of your student’s future tuition at a public university within your state (most of these plans do not pay for housing costs). You may be able to convert a prepaid tuition plan so that the assets can be used to pay tuition at an out-of-state university or private college. (There is also the Private College 529 Plan, which 250+ private colleges and universities collectively support.)
The great majority of 529 plans are college savings plans, analogous to Roth IRAs. In a college savings plan, you can direct your contributions into equity investments, which offer you the possibility of tax-advantaged growth and compounding. (If the investments perform badly, your college fund may shrink.)
You may choose to fund a 529 plan account incrementally or with a lump sum. States put different limits on the amount of money that a 529 account can hold, but six-figure balances are often permissible. You can invest in any state’s 529 plan and pay for higher education expenses with 529 plan assets at any qualified U.S. college or university.
Some families use Roth IRA assets to pay for college. A Roth IRA gives you a degree of flexibility that a 529 plan does not. Suppose your child does not go to college. (While this may seem highly improbable, some young adults do start successful careers without a college education.) In that event, you still have a Roth IRA: a tax-favored retirement savings account with the potential for tax-free withdrawals.
A Roth IRA is not a perfect college savings vehicle, however. First, the annual contribution limit is low compared to a 529 plan. Second, while you may withdraw an amount equal to your contributions without penalty at any time of life, a Roth IRA’s earnings represent taxable income when withdrawn. Third, while Roth IRA assets are not countable assets on the FAFSA, tax-free Roth IRA contributions, once withdrawn, still amount to untaxed income for your student (i.e., the Roth IRA beneficiary), and they lower a student’s eligibility for need-based aid.
Going to college should not mean going into debt. Would you like to plan, save, and invest to reduce or avoid that consequence? Then talk with a financial professional who is well versed in college planning. The variety of options available may pleasantly surprise you.