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Three Key Risks of Retirement

Ready for Retirement?

As Boomers get older, we can expect that the number of retirees will grow each year.  After all, the oldest member of this generation is now 74 while the youngest is 56.  If we look at the statistics of Pew Research Center starting in 2012, the annual increase in the retired Baby Boomer population has run between 1.5 million to 2.5 million a year… until 2020.  The increase in 2020 was markedly higher at 3.2 million, for a total number of 28.6 million retired Boomers.

Some Boomers made a lifestyle choice in 2020, accelerating their retirement plans for personal reasons.  Others may have been furloughed, or lost their positions, and decided to not get back into the game.  For whatever reason, this choice is best made with preparation – emotionally and financially.

Let’s begin with our financial readiness, including the consideration of the risks during retirement. The Society of Actuaries identifies 160 retirement risks, but protecting against all of these is not possible.  Many are completely out of our control and not probable. Here are three significant financial risks, however, for which we can make plans:

  1. Longevity risk. This risk of outliving our money is a sobering one, especially considering the extension of our life expectancy.  Recent statistics are that for a 65-year old couple in relatively good health, there is a 50% chance that one in the couple will live to age 92, and a 25% chance that one in the couple will live to age 97.  Planning for 30 years of retirement is becoming the norm, and we should prepare ourselves accordingly.
  2. Market fluctuations.  If your life savings are invested in the stock and bond markets, you can expect to confront the uncertainty of market fluctuations.  Historically, 20%+ downturns in the stock market have been less frequent than people realize, but they do happen (remember March?) and create anxiety.  This is when an investment plan which dovetails with our personal needs and risk tolerance is critically important.
  3. Unexpected spending needs. It would be nice to know what negative surprise might present itself, and when it might happen, but that is not the nature of unexpected needs. What we can do, though, is model various scenarios for unexpected expenses and plan for addressing them. Stress-testing our plans also provides confidence that even an uncertain future can be handled.

Downside risks are a reality, but we can create peace of mind by addressing them. When we do, we are truly bringing together our money with the meaning it serves in our retirement lives.

Retirement planning can be an exciting process, filled with dreams of being liberated from a more structured schedule and envisioning more time to enjoy life, friends and family. Whatever our dream, planning financially and emotionally will help us enjoy it.

For disclosures, please click here.

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Thin(k) About Your 401(k) Plan: Reflections on 10 Years as An Advisor – Part 3

It’s probably not surprising that investment strategies are unique just like people. Each investment client is different in what motivates him or her to invest or how he or she feels about risk.  As a result, advisors use both science and art when working with each client to develop an investment strategy and construct a portfolio of diversified investments.

Based on my experience, I begin with two overarching goals for each client:

  1. Invest the client’s money in a globally diversified portfolio. The variety of different asset classes we consider include stock and stock like investments, bond and bond like investment, and real estate, among others.  Additionally, we consider growth and value stocks in companies of all sizes.  In the bond space, we look at bonds issued by governments, municipalities, corporations, and other issuers.
  2. Take the appropriate amount of risk for the client’s circumstances and goals. It is important for an advisor and client to have a full discussion to determine an appropriate risk level using both art and science in the process.

So how much risk is appropriate for each client?  First, there is a science to this decision that is driven primarily by the amount of time until the money will be needed.  For some this might be retirement while for another it might be to buy a house or pay for a wedding.  If there’s more time until the money is needed, the science side of investing says more risk may be appropriate.  Likewise we need to reduce the risk as we get closer to needing the money.

Stock investments generally are more volatile than bond investments.  So, we usually reduce the stock exposure as the date the money is needed approaches.

Second, there is also an art to determining the appropriate risk for a client to take.  This is the softer side of the decision.  How does the client feel about risk? Does he wake up at night worrying about the value of his account?  If so, we might recommend reducing the risk level.  Does she want to put the pedal to the metal and take as much risk as possible?  This could lead us to considering taking more risk than the science side would dictate.

As we craft a client’s investment strategy we continue to be mindful of bringing together money and meaning.  We can accomplish that when we know what each client’s ultimate goal is for his or her money.  That way, we can plot a course to reach that goal and help our clients create a globally diversified investment portfolio, take the appropriate amount of risk and adjust that risk lever as the need to use the money approaches. It’s about realizing that investment is both art and science.

Follow this link to see our core Investment Principles.

For disclosures, please click here.

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Thoughts in Charts: Office Space

 

Office Uncertainty: it’s a real thing. With so many people working from home, I’d love to see a graph about how much time people have spent wondering if they will ever return to the office. It’s probably up there with the thought time spent how to make sourdough.

Office uncertainty has also led to some discussion about the virus’s impact on the broader real estate market. With people leaving cities, will apartments struggle? Now that companies know we can work from home, will they cut down on the overhead of office space? We learned that everything can be delivered to our door – will we ever go back to shopping in person?

The answers to these questions may not matter as much for publicly traded US Real Estate Investment Trust (REIT) investments as you may think. These investments allow liquid access to real estate exposure, so they are a nice fit for most clients. Like many things, all of the uncertainty around the virus left this investment space pretty banged up, but the above chart challenges the notion that real estate can’t thrive without offices and malls.

A large part of public real estate is now cell phone towers and data centers.  I recently spoke with a fund representative who reminded me that when you order something from your phone, you actually engage three types of real estate: cell phone towers, data centers, and industrial properties. By his measure, that is about 45% of the public REIT universe.

That office space we have been pondering so frequently lately – it makes up about 7% of the public REIT space.

Alright, so about that sourdough…

For disclosures, please click here.

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Thoughts in Charts: We Will Pay for This

Source: Congressional Budget Office

This week’s graph is a bit of a bummer, so if you are having a “rainbows and butterflies” type of day, maybe just skip it. The chart is the Congressional Budget Office’s (CBO) projection of the national debt as a percentage of output if we don’t make any changes to current taxes and spending. We are already at World War II levels, and the projected uptick is steep.

There is a solid argument out there that says that the national debt really doesn’t matter that much. I tend to agree with a lot of that – to a point. I also believe that there is a level at which it very much will matter. I buy into the CBO’s statement that:

“High and rising federal debt makes the economy more vulnerable to rising interest rates and, depending on how that debt is financed, rising inflation. The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it increases the risk of a fiscal crisis or a gradual decline in the value of Treasury securities.” 1

The good news is that this is a ratio. If Gross Domestic Product (the denominator) goes up, then the overall percentage goes down. If we produce more than anticipated, it may not look quite so bad down the road.

Will we reach a point where changes will be required? As I look at this chart’s big picture, I think we will eventually have to face the spending and revenue numerator in this ratio. Yes, I mean changes to both government spending and taxes. I warned you that this wasn’t a feel-good read.

At some point, it seems likely that this level of debt will matter enough that we need to act. That being said, there are a lot of variables at play. If you’d like to dig in and find out what drives this projected ratio, “The 2020 Long-Term Budget Outlook” is very readable – plus, it has a lot of great charts!

For disclosures, please click here.

1 Congressional Budget Office. “The 2020 Long-Term Budget Outlook.” PDF file. September 21, 2020. https://www.cbo.gov/system/files/2020-09/56516-LTBO.pdf

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Where Did It Go?

When special US government programs distribute money to individuals broadly, we often wonder how the money was actually used. It can occur after a natural disaster, and it happened in March with the $2.2 trillion CARES Act stimulus in response to the pandemic.

Federal Reserve Bank of New York economists published in Liberty Street Economics the results of surveys they conducted to answer this very question. You can read the entire report, “How Have Households Used Their Stimulus Payments and How Would They Spend the Next?” Here are the key points:

  • While the payments ($1,200 for qualifying adults and $500 for each child) were a significant boost to the economy, only a small share (29%) was spent by June 2020. The remaining funds were allocated to savings (36%) and paying down debt (35%).
  • Survey results suggest “households expect to consume even smaller shares of a potential second round of stimulus payments, while they expect to use a higher share to pay down their debt”.
  • Across all demographic sectors, an average of 8% of the funds were spent on non-essentials, such as hobbies, leisure or other items not absolutely necessary. This 8% is included in the 29% spent by June 2020, as is 3% which was donated.
  • The same survey found respondents receiving Unemployment Insurance payments during June consumed in approximately the same percentage (28%), but that amounts allocated to savings were less (23%) and a greater amount was used to pay down debt (48%).
  • The New York Fed Survey of Consumer Expectations (SCE) is a nationally representative, internet-based survey of approximately 1,300 U.S. households. The analysis in the post is based on data collected as part of two special surveys on the pandemic fielded in June and August, 2020. In the June survey, 89% of respondents reported that their households had received a stimulus payment.

While the allocation of these payments varies among differing income and age levels, the results speak to the high uncertainty of how long the pandemic will last and the possible economic impact on recipients. Questions abound about how much money will be needed and when. For example, were parents concerned about “holding the spot” with their daycare provider? Was there concern about how long rent forbearance would last? Concern about layoffs this fall?

For a rough validation of the results of the survey, you can consider that the average U.S. FICO credit score increased in July to 711, the highest level in the past 15 years. Consumer debt levels represented by credit card balances have also decreased from $6,934 in January to $6,004 in July.

The average American was likely using sound financial strategy with their stimulus payments. The choice to forego spending where possible, add to cash reserves, and reduce personal debt is a healthy one during uncertain times and should reduce the possible negative economic implications as we work out of this situation.

Suzanne T. Mestayer is managing principal of ThirtyNorth Investments, LLC.

All investment strategies have the potential for profit or loss.

ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.

For disclosures, please click here.

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Thoughts in Charts: How long do you have?

At a firm where one of our key investment principles is that “time matters”, I love a chart that show why we value it. Before I dig in though, let me say loud and clear that past performance does not guarantee future results. I use history to teach me, but I don’t count on it repeating itself.

I’ve told you before that I’m a skeptic by nature, so I’m going to start by focusing on the bottom of each range. These are the worst 1, 5, 10, and 20-year-end returns from 1950-2019. It’s the historical worst-case return.

The first thing that jumps out is that a single year downside in a diversified stock portfolio has been as bad as -39%. Got it. In a single year, it can be bad – really, really bad; however, there has historically been enough good that the 5-year worst return is much less negative at -3%. That is significantly better, but let’s be real, if I lose 3% over 5 years, I’m a little frustrated. Frankly, if I have been in the market for 10 years, and I lose 1%, I’m still frustrated.

Here’s how time matters: if I coached myself to stay steady through some of those frustrating 5 and 10 year periods, the 20-year stock portfolio would have resulted in the most beneficial range of returns for my long-term goals. A stock portfolio’s worst 20-year return over the last 69 years was positive 6% – better than a bond portfolio or a 50% bond and 50% stock portfolio. On top of that, it also had the larger upside periods.

Let’s take a step back and look at the blue bars representing a diversified bond portfolio and the grey bar representing a portfolio that is 50% stock and 50% bond. It’s clear that the bond portfolio can act as a ballast. For the end of each year over the 69-year period, a 50% bond portfolio never had a negative worst-case return in a period longer than 5 years.

If you are still tracking with me, I’m going to give you my favorite nugget from this chart. The best 10-year returns on a 50% stock 50% bond portfolio are the same as a bond portfolio, but their worst case is better! I tend to think about bonds helping to limit losses, but in the 10-year time periods, including stocks in the portfolio actually limited downside as well.

Time does matter.

For disclosures, please click here.

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Thin(k) About Your 401(k) Plan: Long-Term Investing – Election Year Volatility

I can hardly help allowing the uncertainty that comes during a Presidential election year from creeping into my investor mindset.  I know many factoids about the market performance every four years when we elect a President.  Volatility is a certainty.  Typically markets perform well during election years and worse the year after, but nothing like this is written in stone.  In the short-term, anything can happen in the stock and bond markets.

We also observe that partisan government favors the markets in general.  It stands to reason that a President’s ability to enact legislation depends upon whether or not the House, Senate and President share the same political party.  Further, a President’s ability to push through radical policy change has many hurdles based upon the makeup of Congress.

Myriads of research and articles are available on the topic of the markets during and after election years.  Here is a link to an article I recently found interesting.

Here’s How The Stock Market Has Performed Before, During, And After Presidential Elections

Yet, I still find it difficult to not let the worry of the future creep into my mind.  I found the table below to be a helpful reminder of the impact maintaining a long-term view during short-term volatility especially during Presidential election years.  I’d be interested to know if this is helpful to you.

 

For disclosures, please click here.

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Choosing the Right Financial Road

When you don’t know where you are going, any road will get you there.  – Lewis Carroll.

This is true in life, careers, and our financial futures. It is particularly relevant when the stock market is as volatile as it has been throughout 2020. Our human tendency is to react in ways that undermine our long-term investment success, motivated through either fear or greed. We are especially susceptible when we don’t have clarity about where we are going

In her recent CityBusiness article, Suzanne outlines 3 tips to choosing the road for your financial future. Click here to read more.

For disclosures, please click here.

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Thoughts in Charts: Municipal Bond Double-Take

I love when a chart makes you do a double take. When a chart makes you go “Yes!” but then after another minute “Oh”.

Because municipal bond yield is usually exempt from state, local and federal taxes, investors are willing to take less yield than they would for a treasury – thus the squiggly line is under 100 most of the time.

Cue 2020. Yield from 10-year yield from municipals is now better than what we can get from a 10-year treasury.

Wait, wait, before you think you figured out how to get some steady income from municipal issued bonds, it’s worth a pause to remember the math driving the line in this chart. The 10-year treasury yield (the base of the number) has gone from well over 2% to about .70%. It doesn’t take much muni yield to create a number that will graph higher than 100.

In fact, muni yield has been on a wild ride in 2020, but has settled out at an all-time low as well. Ouch! The main advantage of buying a municipal fund is the tax savings on the yield. Unfortunately, this space is also facing significant challenges as municipalities and states struggle with revenue losses during COVID. It is unclear how badly our local governments are struggling because their fiscal year has just ended, and they don’t report for several more months.

Clearly this is a space we are watching closely.

For disclosures, please click here.

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Is a 60/40 Investment Allocation for Everyone?

 

One of the most important choices we have with our investments is the allocation of our dollars. How much will we invest in stocks, in bonds, or in any other assets? Large or small, growth or value?  Studies have shown that over 90% of the returns on our investments are driven by this very basic decision.  It should not be taken lightly, and many questions should be asked to help determine which allocation makes the most sense for our situation and risk tolerance.

As we read about this topic, we often find that 60% stocks/40% bonds has become almost a classic for a balanced portfolio. Do we really believe this to be the right allocation, or are we just  unwittingly using 60/40 more often than not?  Most importantly, it should reflect our unique needs and goals.

There are times when an investor will likely want to invest more or less aggressively. For example, a 100% stock portfolio may be great when you are 35, with a very long runway until retirement to absorb market fluctuations. It’s not always so wise when you need to tap your investments for living expenses in retirement.

The best retirement plans consider the answers to a host of differing questions:

  • Do you have health concerns?
  • Do you plan to retire completely or gradually reduce your work life?
  • How do you plan to use your time? Travel? Hobbies? For how long?
  • Are you depended upon for the needs of other family members? Caretaking responsibilities, or financial needs?
  • Do you know how much it will cost to maintain your desired standard of living? Will you really cut your costs, or will the costs of your post-retirement simply replace your current spending?
  • What is your best strategy for claiming Social Security benefits?

Your answers to these questions, as well as many others, should create a plan reflective of you and your needs.

Why is the 60/40 allocation so common? It’s a good balance when you need it.

The 60% often reflects the need for continued investment growth historically obtained from stocks. With life expectancy increasing, many people are planning a 30+ year retirement. In contrast, bonds traditionally provide relative stability and fixed income. In our current low interest rate environment, though,  the income aspect may become harder to achieve. As we age in retirement, the stocks/bonds ratio may move to 50/50 then to 40/60 and so on. It should be a process customized to your situation.

In the years leading up to your retirement, you should carefully consider your very personal answers to the questions above and plan accordingly. And don’t be surprised if it leads to a  60% stocks/40% bonds allocation along the way!

For disclosures, please click here.