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Feeling Financially Secure

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Northwestern Mutual Planning & Progress Study found that 71% of Americans feel financially secure, yet US adults feel more cautious and risk-averse today
than they did 10 years ago.  Additionally, xx% of U.S. adults 18 and over say the economy will be better this year than in 2018, which is a considerable jump from the 31% who said the same last year.

Those are great signs for the future. But they’re also great reasons to focus even more on your finances. Being financially secure takes a lot of planning – and when you are feeling more optimistic about the future, it’s a great time to think about paying off debt and putting more into savings.

https://news.northwesternmutual.com/planning-and-progress-2019

2020 Investment Outlook

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Investors should expect heightened market volatility in 2020. History tells us that it’s not uncommon for three to four large-cap equity stock market pullbacks of at least 5% to occur each year and market corrections of at least 10% can occur every year. As a result, it may be prudent for investors to position their stock portfolios away from higher-risk asset classes for safer asset classes.

Portfolio Guidance:

  • Cash has an important place in a portfolio as a volatility dampener and a source of funds.
  • Focus on higher quality assets.
  • Go beyond traditional fixed income for yield. Investors may consider equity dividends as another source of income.
  • Defense can be a good offense. Given expectations for market volatility, suggest reducing exposure to riskier assets.
  • Focus on longer-term diversification, as shorter periods are likely to be more volatile

Deciding to retire or not | 3 preretirement phases | Fidelity

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Key takeaways

  • While financial and work-related factors are the primary reasons people continue to work, nonfinancial factors like family, health, and lifestyle ultimately cause people to pull the trigger to retire.
  • Wellbeing in retirement is not just about money, or even intellectual stimulation. It’s largely about the freedom to do what you want, when you want.
  • As you enter a stage of preretirement, consider working with an advisor to help shape strategies for Social Security, health care, and cash flow in retirement.

When will you be ready to retire? Particularly if retirement is still far away, you’re probably thinking in terms of dollars—how many you will have and how long they will last. But new research finds that for many people, the decision to retire is not just about money. It’s about life, and the freedom to enjoy it.

That’s the conclusion of an extensive survey of over 10,000 pre-retirees and recent retirees. The online survey was conducted by Fidelity Investments in collaboration with the Stanford Center on Longevity and Greenwald & Associates1 and only included respondents who believed they had some control over if and when they would stop working full-time.

While financial and work-related factors are the primary reasons people continue to work, with eligibility for Medicare and Social Security as key factors, the survey also finds that it’s often nonfinancial factors like family, health, and lifestyle that ultimately cause people to pull the trigger to retire. Among retirees, 72% chose leisure as a very or somewhat strong reason to retire, 64% pointed to stress at work, and 62% cited a desire to spend more time with grandchildren.

“We’ve seen a shift in values as people near retirement,” says Eliza Badeau, Director of Thought Leadership at Fidelity. “Many people seem to desire freedom over money. It’s less about the money and more about spending time where it matters most to them,” she adds. “Most people say they look forward to the freedom that retirement brings such as spending time with their family or doing hobbies they enjoy—ultimately trading in that job stress for leisurely interests.”

Research finds that for many people, the decision to retire is not just about money. Discover 3 preretirement phases that are influencing peoples decision to retire here.

— Read on www.fidelity.com/viewpoints/retirement/time-to-retire

Cash Flow Analysis in Retirement

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Adding up all the money coming in and going out is called cash flow analysis, and it looks at all income from investments, properties, work, or anywhere else. And it looks at spending.

When it comes to cash flow, there are no hard and fast rules about what is good—it depends on personal goals and values. But there are some general guidelines to be consider.

  • Try to start early and save at least 15% of income for retirement—and any employer matching counts toward this goal.
  • Retirees should try to limit withdrawals from their savings to about 4% of their account balance in the year they entered retirement, though they can increase that for inflation each year.
  • Limit your monthly essential bills and housing costs to 50% of your monthly income.
  • Save about 5% of your income for short-term expenses.
  • Look to keep your total monthly debt bills below 36% of your monthly income.
  • Consider a growth portfolio consisting of (70% stocks, 25% bonds, and 5% cash) that would have allowed a retiree to withdraw more than 7% each year over 25 years of retirement—over 25% more than a conservative portfolio (20% stocks, 50% bonds, and 30% cash) with a sustainable withdrawal rate of 5.7%.3

Cash flow analysis may also show some opportunities for tax savings and other ways to make the most of one’s money.

Source: Financial health: Know your vital signs, FIDELITY VIEWPOINTS, 09/30/2019
3. The chart, “More stocks may mean higher anticipated withdrawal rates, but with less certainty,” was created based on simulations that relied on historical market data. The historical range analyzed was January 1926 to July 2018. These simulations take into account the volatility that a variety of asset allocations might experience under different market conditions. The illustration compares 3 different hypothetical portfolios—conservative, with 20% stocks, 50% bonds, and 30% cash; balanced, with 50% stocks, 40% bonds, and 10% cash; and growth, with 70% stocks, 25% bonds, and 5% cash. For each of the hypothetical portfolios, the maximum withdrawal rate was calculated such that the portfolios do not run out of money in 99%, 90%, and 50%, respectively, of the hypothetical scenarios. See footnote 4 for more information on asset classes and historical returns.

Burton Malkiel says his passive investing idea was called ‘garbage’ | CNBC

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  • Burton Malkiel said an early review of his famous book blasted his ideas about passive investing.
  • Malkiel’s book, published in 1973, influenced the thinking of many industry leaders who pioneered index funds, including Vanguard’s Jack Bogle.
  • Malkiel said there are still not enough investors taking advantage of passive strategies.

Investing is a method of purchasing assets to gain profit in the form of reasonably predictable income like dividends, interest, or rentals, and appreciation over the long term. Investing involves time period for the investment return and predictability of the returns.

Burton Malkiel, author of “A Random Walk Down Wall Street,” said the investment community thought his passive investing idea was “ridiculous,” Burton Malkiel said an early review of his famous book blasted his ideas about passive investing.

Malkiel’s book, published in 1973, influenced the thinking of many industry leaders who pioneered index funds, including Vanguard’s Jack Bogle. Malkiel said there are still not enough investors taking advantage of passive strategies.

The father of passive investing told CNBC on Thursday that the shift toward index funds has vindicated his ideas and that there is still too much active management. According to Malkiel, passive investing has outperformed ninety percent of active investing over a fifteen year period.

Burton Malkiel is an emeritus professor of economics at Princeton University and author of the famous investing book, “A Random Walk Down Wall Street.” He said on CNBC’s “Squawk on the Street” that his idea that most investors should invest passively was originally met with ridicule.

He believes that each investment has a firm anchor of something called intrinsic value. It means that when market prices fall down, a buying or selling opportunity arises. The theory of Investment Value determines the intrinsic value of stock and then use the concept of discounting in the process.

He also believes that discounting basically involves looking at the income backward rather than seeing how much money an investor has in the next year; an investor looks at the money expected in the future and see how much less it is currently worth. Intrinsic value of a stock is equal to the present or discounted value of all its future dividends.

Burton G. Malkiel is the Chemical Bank Chairman’s Professor of Economics Emeritus at Princeton University. He is a former member of the Council of Economic Advisers, dean of the Yale School of Management, and has served on the boards of several major corporations, including Vanguard and Prudential Financial. He is the chief investment officer of Wealthfront.

— Read on www.cnbc.com/2020/01/02/burton-malkiel-says-his-passive-investing-idea-was-called-garbage.html

Inflation and Purchasing Power of the Dollar

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There is an extremely important concept that concerns the value of a dollar today versus tomorrow. Over time, inflation erodes the worth of money, so that a given amount buys less in the future than it can today.  When inflation is high, it erodes purchasing power, meaning your income must be greater to keep pace with rising prices and maintain a desirable lifestyle. The opposite is also true: A low-inflation environment, like the current one, puts less pressure on income.

pexels-photo-164656Photo by Pixabay on Pexels.com

Consequently, you want your sources of income to regularly exceed, or at least keep pace with, the rate of inflation—something the S&P 500 has been doing for the better part of five years.

Investors who hold cash or cash equivalents should not feel comfortable. They may have opted for a less riskier short-term investment, but have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value over the long-term.

When you are planning for the future, you are examining dollars over numerous time periods. To compare them, you need to put them on an equal purchasing-power footing, so they are all in equivalent dollar terms.

One approach, the equal footing will be the purchasing power of today’s dollars—that is, dollar amounts will always be stated in terms of today’s dollar equivalent.

Emergency Savings

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Emergencies Do Happen

When things are going well financially and monthly bills are being paid, emergency savings can seem unimportant. But in addition to your regularly occurring expenses, like mortgage payments and utility bills, individuals often might deal with major unexpected costs such as car repair or medical bills.

Emergencies, by their nature, are unpredictable. When they happen, they can derail your financial stability. A sudden illness or accident, unexpected job loss, or even a surprise home or car repair can devastate your family’s day-to-day cash flow if you aren’t prepared. While emergencies can’t always be avoided, having an emergency fund can take some of the financial sting out of dealing with these unexpected events.

An emergency fund are savings used to cover or offset the expense of an unforeseen situation. It shouldn’t be considered a nest egg or calculated as part of a long-term savings plan for college tuition, a new car, or a vacation. Instead, this fund serves as a safety net, only to be tapped when financial crises occur.

Reasons why emergency savings are important:

  • Being prepared – Issues like car or home appliance repair are common occurrences. However, since they do not happen regularly, people often overlook these costs as they create a budget. By anticipating these costs, you can be prepared for these potentially expensive items.
  • Avoiding debt – Emergency savings give you the option of dealing with the unexpected without having to take on debt. Without the cushion of emergency savings, you may be unable to pay regular bills if you face an emergency, and are more likely to take on debt.
  • Having peace of mind – Having emergency savings will give you peace of mind. Even if you can’t save much, a little money set aside may make a big difference when you need it and reduce stress. Emergency savings give you the option of dealing with the unexpected without having to take on debt. Without the cushion of emergency savings, you may be unable to pay regular bills if you face an emergency, and are more likely to take on debt.

Emergency savings can help you handle unexpected events. With money set aside for emergencies like unexpected car repairs or sudden job loss, you can better take care of yourself and your family financially.

But saving anything, even small amounts, can prove helpful. Aim to set aside 3-6 months of expenses in your emergency savings fund, but with a start smaller amount if necessary. It may take months or years to build a sufficient emergency savings fund, so don’t worry if progress seems slow. Just keep at it! Since, emergencies do happen when least expected and often at the most inopportune time.

Tap your emergency savings only for expenses directly related to an unexpected emergency.

It is important to tap your emergency savings only for expenses directly related to an unexpected emergency. And when you do have to take money from this fund, it’s important to immediately start rebuilding it.

If you start saving now, the money you save today can go a long way towards meeting your needs when the next emergency occurs.

Source: Building Emergency Savings, UMBC

3 moves for catching up on retirement savings | MassMutual

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In order to have a decent shot at maintaining your standard of living in retirement, you should have six to nine times your salary tucked away in a 401(k) or other savings accounts by your mid-50s to early 60s.

“That’s as good a general rule of thumb as any, but most people don’t come close to that, and some don’t have anything saved,” said retirement expert Mary Beth Franklin, a Certified Financial Planner® and contributing editor at InvestmentNews, in an interview.

Indeed, in a 2014 national poll conducted by Bankrate, more than a quarter of survey respondents aged 50 to 64 said they had not started saving for retirement.1

Granted, it’s never too late to start saving for retirement, but let’s not sugarcoat this. “At this stage of the game, you would need to save 40 percent of your income to reach the equivalent of what you would have had, had you started saving just 10 percent of your income in your 20s,” said Liz Weston, a columnist with NerdWallet, a personal finance site.
— Read on blog.massmutual.com/post/retirement-savings-catch-up

Individual Retirement Accounts

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The Traditional IRA and the Roth IRA offer ways to save for retirement, although each offers different benefits and advantages.

The Traditional IRA allows an individual with earned income to take a tax deduction for dollars contributed (if income falls below a certain threshold), and the growth in the account is tax deferred. When distributions are taken from a Traditional IRA, they are taxed as ordinary income. If one chooses not to take distributions from an IRA after reaching 59½, the IRS will force distributions to be taken at age 70½. These are known as required minimum distributions (RMDs) and are based on the presumable retiree’s life expectancy.

The Roth IRA was established as an account into which after-tax dollars are invested. While the Roth gives no tax deduction on the front end, the growth—and eventual distribution—is federal tax-free. The Roth IRA allows one to take out 100% of contributions at any time for any reason with no taxes or penalties. It is only the growth on which one must wait until the age of 59½ to draw penalty-free. There is also a 5-year aging period, which means that a payment made from a Roth IRA account is considered a qualified distribution if it is made after a 5-year period, beginning with the first taxable year after which a contribution to the Roth IRA occurs.

  • Traditional and Roth IRAs: The annual contribution limit for traditional and Roth IRAs is $6,000 total across both account types for those under the age of 50 and $7,000 for people 50 and over. Tax deductions for traditional IRA contributions begin to phase out at certain income levels if you or your spouse has a workplace retirement plan. You’ll lose your deduction entirely once your income is too high, but you can still make nondeductible contributions. The amount you can contribute to a Roth IRA declines once your income hits a certain threshold, and you can’t contribute at all once your income hits $137,000 if filing singly, $203,000 if married filing jointly, or $10,000 if married filing separately.
  • SEP IRAs: The annual contribution limit for a SEP IRA is 25% of up to $280,000 in compensation or 25% of net self-employment earnings (self-employment income minus SEP contributions and 1/2 of self-employment tax). Only employers can make contributions (you’re counted as an employer if you run your own business). The total maximum annual contribution is $56,000.
  • SIMPLE IRAs: The annual contribution limit is $13,000 for a SIMPLE IRA or $16,000 if you’re over 50. Employers can contribute 2% of compensation or can match contributions you make up to a maximum of 3% of compensation. You can open a SIMPLE IRA if you are self-employed or run your own business and can contribute as both employee and employer.