November 20, 2023 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage. Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for November 20, 2023

Andrew Opdyke – 2023 End-of-Year Economic Update

In this Episode of the Secure Your Retirement Podcast, Radon and Murs speak with Andrew Opdyke about a 2023 end-year economic update and the expected shift in the economy in 2024. Andrew is a Certified Financial Advisor and Economist at First Trust Advisor. Listen in to learn about the impact of the concentration of investments in the top ten companies and when the market broadening will happen. You will also learn about things to consider when expanding your investment portfolio in 2024…  

2023 End-of-Year Economic Update

Andrew Opdyke is back with us to get his insight on the broad economy. He’s been on our show multiple times, and he’s returned with his 2023 end-of-year economic update that everyone should listen to at least once. Whether you’re trying to secure your retirement or in the middle of retirement planning, it’s always important to keep a pulse on the market.

2023 End-of-Year Economic Update

Andrew Opdyke is back with us to get his insight on the broad economy. He’s been on our show multiple times, and he’s returned with his 2023 end-of-year economic update that everyone should listen to at least once.

Whether you’re trying to secure your retirement or in the middle of retirement planning, it’s always important to keep a pulse on the market.

October-November 2023 Economic Update

October was an interesting month due to the conflict between Israel and Palestine, and inflation remaining stubbornly high. Economic data came in stronger than anticipated, but there were still some concerns.

November 1st, the Fed’s meeting was a sigh of relief for many when they announced that maybe they’re “done” with trying to tame inflation. Perhaps rate hikes may remain on pause for now.

Rate easing may be ahead in 2024, which is what a lot of economists are hoping will occur.

However, as anyone who follows the market knows, just two weeks prior to these reports, there were just too many concerns that inflation may last a little longer. We just don’t have all the data yet to say if 2024 will see interest rates fall, stay the same, or even go a tad bit higher. Right now, as of mid-November, the New Year looks promising.

We’ll need to watch the data to better understand the ebbs and flows of the market right now.

Concerns of Investors Outside of the Magnificent 7 Stocks in the Market

When looking at the S&P 500, it has performed well this year when you include the stocks that are the “magnificent 7.” What are these stocks? They’re high performers that carry the market and include big names:

  1. Alphabet
  2. Amazon
  3. Apple
  4. Meta
  5. Microsoft
  6. Nvidia
  7. Tesla

If you remove these seven stocks from the market, you’ll notice that the market is down in an equal weight market. The percentage of companies beating the index is at a 20- or 30-year low. Equal weight provides a better picture of what’s transpiring in the market, which would show most stocks are either flat or slightly down.

How much are people paying for the top 10 companies in the index? Many investors are paying a multiple of 25 to 30 for these ten stocks and a multiple of 17 for others.

What does this all mean? The top stocks need to continue performing well for the overall market to recover. Andrew would like to see a broader market rise, in which dozens of stocks are lifting the market, and believes that it will take some time to materialize.

Will the Economy Land or Take Off?

Soft landing. Hard landing. A lot of terms are thrown around for the economy and how it will end up after the pandemic and the high level of inflation that we’ve seen. Some economists are of the mindset that the economy won’t land but will take off.

However, Andrew believes that we’re likely to see a soft landing.

What we saw in the third quarter is that companies have excess inventory, which is due to a slowdown in production after COVID. Companies purchased a lot of inventory due to supply chain issues and are likely to:

  • Slow spending over the next 3 – 9 months
  • Avoid some growth initiatives due to high-interest rates

Will we hit a recession? Who knows? A recession has been six months away for 18 months now. Companies are buying less, building is slowing and if we do go into a recession, there’s a good chance that it will be very shallow.

We need to get back to sustainable interest rates without outside influence and stimulus.

Entering into 2024, we should start to learn more about the strength of the markets and economy without any outside influence building it up.

Building an Investment Portfolio to be Recession-proof

If we enter a recession, will interest rates still remain high? Look at companies that have sustainable cash flow, because even Apple must pay the high interest rates of today when they take out a loan and they add tens of billions in free cash flow quarterly.

Investors will want to dive into balance sheets and see which companies can fund their own projects without loans.

You should also look at:

  • Smaller companies with healthy cash flow
  • Exposure to small- medium- and large-cap stocks
  • Potentially add international stocks

Recalibrating your portfolio to deal with the unknowns and still have exposure to potentially risky technology.

Hamas and Israel Conflict

The United States has been sending money to Ukraine and is now funneling money to Israel. Ongoing events like these play into how the economy will look in the future.

The main risk of this new conflict is in the energy markets.

If Iran or others enter the conflict, it can lead to higher energy markets and a further rise in inflation. Economic repercussions of the Israel and Hamas war are likely to be a lot less than even Ukraine and Russia.

Trade conflicts and fracturing are occurring, and the US is doing a good job by determining who our strong trade partners are and reallocating our investments to these countries. We’re importing less from China and are trading more with:

  • Canada
  • Mexico
  • Japan

We have shuffled back and pulled away from China, pushing them from the first to the third trade partner that we have.

AI and the Hype Around It

Cryptocurrency was a major trend in past years, followed by blockchain. Now, we’re seeing a lot of people harp on the idea of AI. We’re at a point where we were with the Internet first coming about, where companies knew that the landscape of the way we work was changing.

What does AI mean for us?

The environment and world are changing. Some professions may become obsolete, and some new jobs may be created. If you look at the top 10 companies in 1999 and today, only two remain: Microsoft and Exxon.

AI may be won by the biggest companies, but if history repeats itself, we’ll see some companies born out of AI that may change the world. We may see the next Facebook or Meta created, and it may be a company everyone is overlooking.

What are you Most Worried About?

Geopolitical issues that are popping up, and more are likely to be added, are a major risk to the economy right now. China is likely to see a more difficult path in the next 10 – 20 years. We’re also entering an election year, and the negative side of the election can cause market fluctuations.

Escalation of Russia and Poland, Iran entering the Israel and Hamas war or China invading Taiwan can all effect the economy. 

What are You Most Excited About?

AI excites Andrew, and he believes that while the technology is likely to change the world, in the next 24 – 36 months, we may see some major changes thanks to AI. Humanity is “fighting the fight,” with more people being literate and doing some amazing things.

We’re seeing how dementia has been in decline in the last decade, and as a whole, we have more people than ever trying to solve problems that have plagued the world around us.

Andrew is unbelievably excited to see how human potential is being unleashed.

Need help reviewing your retirement plan? Schedule a free 15-minute call with us today.

July 17, 2023 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for July 17, 2023

This Week’s Podcast – Annuities or CDs – What You Should Consider

In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the similarities and differences between annuities and CDs and the best one for retirement planning. In as much as CDs and fixed index annuities are similar, CDs are best suited for short-term investments, while annuities are best suited for long-term investments.

 

This Week’s Blog – Annuities or CDs – What You Should Consider

Annuities or CDs?” is a question many folks are asking because interest rates on CDs are the best they’ve been in a long time. In this article, we’ll cover both annuities and CDs to help you better understand which option is right for your current retirement planning strategy.

Annuities or CDs – What You Should Consider

Annuities or CDs?” is a question many folks are asking because interest rates on CDs are the best they’ve been in a long time. In this article, we’ll cover both annuities and CDs to help you better understand which option is right for your current retirement planning strategy.

Wait. CDs? They’re No Good, Right?

We haven’t talked about CDs for a long time. Interest rates weren’t that attractive in past years. Most people were lucky to receive 1% to 2% returns. Clients who want to reduce market risk can, at the time of posting this article, go out and get a 1-year CD at 5.5%, or a 5-year CD at 4.5%.

With returns like this, we have a lot of people questioning why they would put their money into an annuity – especially a fixed annuity.

First, we need to consider putting the funds into the right place for your retirement focused plan. You have a lot of options when investing, including the following three main categories:

1. Growth

You can put your money into growth assets, such as equities, because they have the highest return potential. These assets would include things like ETFs, stocks, and mutual funds.

These funds need to remain in the market for some time and have the risk of volatility. Markets go up and down all the time, and your funds will follow this trend, too. You do have the potential to lose money with equities, but we do have controls in place to limit these potential losses.

2. Safety

If you want to have a good rate of return without the risk of losing money on it, you’re now in the following territory:

  • CDs
  • Treasury Bonds
  • Fixed Annuities

These investment vehicles protect you from market losses, so you don’t need to worry about that, but you may earn less with a fixed option.

3. Cash

Easy money access. If you need liquidity, this is the avenue that you’ll want to choose because it gives you access to the money without penalties when you need it. However, you will not receive a high rate of return.

 Keeping this in mind, we’re going to expand on the second category, “safety”, because that’s where the discussion of CDs vs. annuities really exists.

Interest Rate Risks of CDs and Annuities

CDs and annuities are the “hot topic” right now. Interest rates have gone up due to inflationary measures and banks are now able to offer better rates on CDs than they have in a long time. The Fed’s goal is to tame inflation, and when it does go down, interest rates will also come down.

If you buy a CD today at 5% and allow it to reach maturity, you can choose to:

  • Take the money and put it back in a CD
  • Take the money out and put it into other investments

CD renewals will allow you to buy the CD again at current market rates. It’s very likely that rates will come down and you may have a CD rate of 3.5% or 4% at renewal – or lower. Two years from now, CDs may be 2% or 1.5%.

These lower interest rates are your “reinvestment risk”.

We like the idea of putting a portion of our client’s money into the six-month or one-year CDs, if they know they’ll use these funds in the next year and will need to access them. In the meantime, they will receive a nice return on their investment.

Fixed Indexed Annuities and Their Potential 

Fixed Indexed Annuities (FIAs) are driven by interest rates, so just like CDs, the interest rates have gone up in the last year. The key difference between a CD and an FIA is the length of the contract you receive. For an annuity, the term is longer, such as 10 years.

You may receive a 4.5% – 5.5% interest rate on CDs for 1 year or more. Over the past 10 years, FIAs with no riders or fees have had returns of 4% – 6%. Compared to CDs, this range for annuities was much higher.

In today’s market, because of higher interest rates you can receive an FIA that averages 5% to 10% over a 10-year period. However, you may have some years with 0% returns.

How does that work?

Annuities are linked to an index. For example, S&P 500:

  • S&P 500 rises 10%, so you earn 10%
  • Next year, the S&P 500 drops over 10%. Since you are protected from market losses in an FIA, you do not lose any money in that year.

Fortunately, FIAs often have many index options that allow you to diversify your potential and gain more opportunity.

We believe FIAs are really a bond alternative, as they are both conservative and protect against risk. Bonds in 2020 – 2022 hurt portfolios more than they helped.

Clients often look to bonds to make 3% – 5%, but FIAs offer:

  • Greater return opportunities
  • Principal Protection (protection from market losses)

Of course, if you have money that you want to park for a year and then use the money, put it into a CD and make your 5% return. However, for long-term investments and the potential to make more money, it often makes better sense to go with an annuity.

Annuities are longer-term, but the reward is more consistent. CDs are shorter-term and, while they have their place today, will see rates go back down as inflation falls and interest rates follow.

Do you want to read more about how to secure your retirement?Click here to view our latest books covering this topic, or schedule a call with us.

April 24, 2023 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for April 24, 2023

This Week’s Podcast -2023 1st Quarter Economic Update

Learn why you shouldn’t worry about the US debt ceiling and its impact from a market standpoint. You will also learn why inflation might last longer and cause a recession if the federal reserve doesn’t prioritize the inflation fight.

 

This Week’s Blog – 2023 1st Quarter Economic Update

Andrew Opdyke was our special guest on this past week’s podcast. If you’ve read through our blog or listened to our podcast before, you know that Andrew is who we rely on to gain insight into the economy. In December 2022, we asked him how is the economy doing right now?

2023 1st Quarter Economic Update

Andrew Opdyke was our special guest on this past week’s podcast. If you’ve read through our blog or listened to our podcast before, you know that Andrew is who we rely on to gain insight into the economy. In December 2022, we asked him how is the economy doing right now?

And now, at the end of Q1 2023, we’re asking him the same question. A lot has changed in the last quarter that everyone in the middle of retirement planning or in retirement must keep up to date on. P.S. You can also listen to this episode of the podcast here.

Major Points of Interest in Q1 2023

The first quarter of the year started off with a lot of unknowns. Fear of a recession and inflation were hot topics, and now, we have some clarity going into Q2. The year started with high inflation and questions about the Fed raising rates. 

  • How much will the Fed raise interest rates?
  • How long will rates stay elevated?

Finally, we’re seeing some break in inflation. Jobs also came in strong, although the numbers are starting to slow, and we still have a little time before GDP figures are released. We are noticing a divergence in the goods and services of the market.

If you remember, during COVID, the focus seemed to turn to goods.

The goods side is moderated at the moment and may even be in recession territory. However, the services side of the economy is picking up the slack and performing very well. The question on the Fed’s mind is why hasn’t inflation come down yet? And when it does, will economic growth be prioritized or inflation?

No one knows for sure.

On the market side, things are looking up. Many of the companies that struggled at the end of 2022 are leading the way in 2023. The question is whether the market can sustain itself.

Bank Situation in 2023

A lot of people reading this remember the financial crisis, but the new banking issues center around the US Treasury. The Treasury has been known to be one of the safest investments that you can make, but banks got hit from holding assets in an environment with rising interest rates.

Even banks like Silicon Valley Bank, which no one really heard of because the average person didn’t bank with them, have been hit. That’s because Silicon Valley Bank offered loans to many companies that thrived during COVID and sort of fizzled out or was less attractive after COVID.

Small and regional banks started to tighten up lending activity, leaving many small- and medium-sized businesses with less funding after the debacle with Silicon Valley Bank. Tightening in these banks led to a sort of “additional Fed hike” for non-public or large companies.

Larger entities work with major lenders, which are less impacted by the banking situation.

  • Hire
  • Invest
  • Expand

Andrew doesn’t believe that the banking side of things will be long-lasting. We will see the effects of these issues over the next 3 – 6 months as the banks pull back. The result? That’s what we’re unsure about. Growth may slow due to these banking issues. 

US Dollar and Losing Its Place as the Reserve Currency

For 200 years, the US dollar has been the world’s most important currency. International transactions needed the US dollar when trading. The world’s most stable currency becomes the reserve currency status.

The US benefits from being the reserve currency in a few ways:

  • Keeps interest rates lower
  • Higher demand for debt
  • Easier ability to trade on international markets

Every few years, we hear that the USD will fall out of being the reserve currency. This time around, China and Brazil made a deal, and China asked for the payment to be made in the Renminbi. Another deal in the Middle East requested the same, and this has led to speculation that the Renminbi will overtake the US dollar as the reserve currency.

If this happens, it will lead to:

  • Higher interest rates
  • Consumer impacts

Every few years, we hear this same story of the USD losing its reserve status. Even with these changes, over 60% of international reserve balances are held in USD. Between 60% to 80% of international transactions are in the US dollar.

China accounts for around 2% of transactions, primarily because businesses do not trust communism for their reserve currency.

Debt Ceiling Concerns

The US has printed a lot of money in recent years, leading to major concerns about being able to service the debt. While the US has a lot of debt, the numbers do not show the full picture without looking at both sides of the balance sheet.

On both the corporate and consumer sides, we’re at or near all-time debt levels.

We’re also at all-time asset levels, too. However, how much GDP percentage does it take to service the debt? Roughly around 1.9% of the GDP is necessary to pay these debts. In the 80s and 90s, we paid about 3% of GDP.

The balance sheet is in a better position now than in the past. 

However, we should raise our debt ceiling and pay our debtors. A US default is unlikely this year, and these talks will swirl again in a year or two because it’s very interesting and sells a lot of advertising to media viewership. 

What is Andrew Worried About in 2023?

A major concern is the Fed and if they will remain hesitant in the inflation fight. If the Fed remains slow to ease inflation, Andrew expects a recession in Q3 or Q4 of 2023. He does point out that not all recessions are created equal, and he thinks it will be like the 1990 – 1991 recession.

What is Andrew Optimistic About in 2023?

Progress is taking place in the market. He expects earnings to remain around the highest levels in history. Production and output growth are expected to pick up once the Fed gets inflation under control.

The service side of things is expected to keep the economy running.

In the second half of 2023, the economy is very likely to slow, but it will strengthen the economy going forward.

Andrew does believe that market volatility will occur towards the end of the year and in 2024, rate cuts will begin. The net effect is a short recession, and the market will be roughly flat by the end of 2023.

If Andrew is right, the US economy will slow down and then pick up steam in 2024. Overall, he is confident that next year will look a lot better in terms of production and growth.

Click here to join our free course: 3 Keys to Secure Your Retirement.

Federal Reserve and Inflation

The Federal Reserve and inflation are something that everyone is dealing with, from the gas pump to food prices at the supermarket. Of course, if you’re a retiree on a fixed income, your major concern right now is ensuring that you have enough money to pay for your everyday needs.

We’re going to discuss a lot of key issues in this article and how you should think about these topics rather than listen to the doom and gloom you’ll hear in the media.

What are We Talking About When We Say Inflation?

Inflation is occurring across the world right now, and when we say “inflation,” it’s best to look at some of the bigger items that are being affected right now. However, before we provide a few examples, it’s important to know why inflation is happening right now.

Unfortunately, the pandemic is the main driving factor of inflation. For example:

  • Stores and shops closed down
  • Material shortages began

A snowball effect happened with these two points, and then government spending increased, causing what is now an inflationary period in our economy. Many areas of your daily life are experiencing inflation and rising costs, but some of the most noticeable include:

  • Transportation: Car prices are high, primarily due to high demand and a low supply. 
  • Fuel: Gas and heating costs are rising due to inflation and what’s happening in Ukraine.
  • Grocery: Food prices have risen drastically in the past year due in part to supply chain issues and rising food costs.
  • Housing: Almost across the board, housing prices are much higher than they were a year ago, even in areas far outside of major cities. Low mortgage rates, the tight housing market and other factors impacted the housing market. Even rental prices are going up, sometimes significantly.

With all this in mind, the Federal Reserve is working to bring inflation back down to modest levels.

Understanding the Federal Reserve’s Approach to Inflation

The Federal Reserve has been adjusting interest rates to help fight inflation, but what does this really mean? When you raise interest rates on money that people will borrow, you restrict buying opportunities.

For example, if a person is looking for a new car, they’re far more confident with their purchase when it’s at a low rate. However, raising interest rates slows demand because customers aren’t going to be confident with their purchases.

Since supply is low, the lower purchases will allow inventories to build back up and leads to:

  • Lower prices
  • Lower profits for businesses

If we go back to the pandemic, there was too little supply and demand for cars. Car dealerships raised the prices of some cars by $10,000 – $15,000, and the increase in price was all profit. Many vehicles remained on the lot from before the pandemic hit and even used car prices skyrocketed.

Since people still needed cars and bought them, there was no incentive for dealerships to lower prices back to normal rates.

Even with buying a house, if you look across the country, people were paying higher than the listing price and bidding wars occurred. With higher interest rates, maybe buyers will pay the asking price or below on a home and bring the market down to more affordable prices. 

The Federal Reserve is in a difficult position because they need to:

  • Pull back on inflation
  • Experience a soft “landing,” where the economy is still growing

Sometimes, rising interest rates will cause a major recession, but the Fed is trying to hit the “soft” landing mark to make the impact less dramatic.

How Retirees Can Adjust to Inflation

Retirees have a little more control than a non-retiree because they are less susceptible to inflation. In most cases, these individuals:

  • Already have a home
  • Already have a vehicle

You can choose to stay out of the market until inflation and the risk of a recession passes. If you want to travel, you may want to travel when pricing comes back down. Retirees have more flexibility than someone who is working and tied to a family. You can wait for slow seasons and better travel prices compared to someone who has kids and needs to travel during busy seasons.

Food is one of the areas of inflation that will still impact a retiree.

You may need to eat out less often or change your diet to save some money. Unfortunately, food prices are hitting everyone hard.

When we develop a financial retirement plan for our clients, we account for inflation in the plan. Since we account for inflation, people are impacted less than someone who is just playing the market.

Inflation isn’t a new thing, and in the 70s, the Fed raised interest rates to help tame inflation. However, the Fed raised and cut rates over and over again without a clear direction. The end result was 10 years of inflation during the 70s that went from 5% to 12%+ inflation before it came back down and then hit 12.5% in 1980.

A lot of our listeners know that in the 70s, inflation was all over the place.

The Fed doesn’t want to make the same mistake. In the last 100 years, inflation has had an average rate of 3%, which is what the Fed is trying to target. We definitely won’t have 6% inflation for the next 30 years.

We’re in a period where there’s a bump in the financial landscape, but we will get through this period. 

Click here for our 4 Steps to Secure Your Retirement video course.

June 27, 2022 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for June 27, 2022 

This Weeks Podcast -How to Plan for Inflation in Retirement

Are you committed to having a tax-planning conversation outside the tax season? The only way to win in the tax game is to have a How does inflation affect your retirement? We’re currently experiencing high inflation due to a number of reasons and it’s only wise to know how to plan for it in retirement.

 

This Weeks Blog –How to Plan for Inflation in Retirement

Inflation is something everyone is dealing with right now. However, we focus on retirement planning. We want to help ease the minds of those trying to secure their retirement or those already enjoying life after work.

We’re going to be answering a lot of great questions today…

How to Plan for Inflation in Retirement

Inflation is something everyone is dealing with right now. However, we focus on retirement planning. We want to help ease the minds of those trying to secure their retirement or those already enjoying life after work.

We’re going to be answering a lot of great questions today, including:

  • What causes inflation?
  • How to protect against inflation?
  • What to think about when deciding to retire?
  • How to prepare your spending plan?
  • Can an income bucket protect against inflation?
  • Should I consider Roth conversions?

As you can see, we’ll be covering quite a few questions. So, grab a cup of coffee or some wine and settle in.

6 Questions and Answers When Learning How to Plan for Inflation in Retirement

1. What Causes Inflation?

Inflation is caused by quite a few things, but we’re going to discuss it from the view of what is driving inflation in 2022. Many people have stressed their concerns over the government printing money in recent years, and the main issue with printing money is that it dilutes the dollar’s value.

You may have $100, but the $100 is worth less than it was a few years ago.

This round of inflation is partly due to printing money, but there’s also:

  • Low supplies due to supply chain issues
  • High demand

When demand remains high and supplies are low, prices go up and inflation begins to hurt consumers. Low supplies always lead to higher prices because retailers are making less money and need to turn a profit.

Perhaps there are only 1,000 tires in stock when a company normally sells 2,000.

In this case, the company raises the price of the 1,000 tires when demand is high because they still need to pay their bills and remain in operation.

For example, we’re booking a flight for a meeting, and prices for a flight have never been this high. High prices are due to a few things:

  • Higher fuel costs
  • Some planes have been grounded
  • Staff shortages

However, we’re seeing indicators that inflation will subside, and supply chain issues will correct themselves. 

Will prices go back down to before inflation hit?

Probably not.

But we believe that prices will fall back down and level out. We’ve had issues in the past with inflation and supply chain issues. We’ve seen gas prices skyrocket, and then they recede, and everyone is happy again.

Keep in mind that the last decade has seen low inflation rates, and now the high inflation is somewhat of a shock for consumers. We’ll be going over a brief history of inflation in just a few minutes that will help you understand what we mean when we say inflation has been low.

2. What Can We Do to Protect Our Savings and Retirement from Inflation?

Protecting yourself against inflation really depends on one of the two types of investing:

  1. Passive
  2. Active

If you’re investing using a passive approach, you’re going to ride out inflation and see how your retirement pans out. However, we believe in a more active approach to investing, which allows you to adjust your portfolio to invest more in what’s working now than what’s not working.

Supply and demand exist in investments, so we try to find high-demand areas to protect against inflation.

For example, you may have heard about a 60/40 portfolio, where 60% of investments are in equities and 40% in bonds/fixed income.

The 60/40 methodology is risky right now because bonds are struggling tremendously in 2022. The 40% that is meant to keep you safe in retirement is hurting you just as much during inflation.

Instead, you can do things with an active portfolio that better protects your retirement at this time.

3. How Does Inflation Impact Your Plan on When to Retire?

If we were helping someone with their retirement planning, we might recommend delaying retirement by a year if there’s no room to cut back on spending. It’s very rare that we’ve ever had to tell someone to delay retirement, but it may make sense in some cases.

Right now, due to inflation, this may mean working for an additional year if your retirement plan is very tight.

You may also want to retire from a full-time job and go into a consulting plan to keep some money moving in. However, if your retirement is well-funded, you should be fine to retire, especially if you can curb your spending in the short term.

4. How to Prepare a Spending Plan During Inflation

We’re having a lot of our clients ask us about adjusting their spending plans, and when inflation is running at 8% – 10%, it’s a scary time for many people. We’re certainly going through a rough few years since the pandemic.

But inflation will come back down, especially with the Fed working to bring inflation back down.

For the past 10 years, we’ve averaged 2.51%, so we’ve been spoiled. However, over the past 100 years, we’ve had inflation at 11% and into the teens. During the late 70s and into the early 80s, we had 11.3%, 13.5% and 10.3% inflation.

If we average inflation over the past century, it was around 3.2%.

Inflation didn’t remain at 10.3% since the 80s, so inflation will come back down and enter into some form of normalcy.

When creating your spending plan, we’ll discuss:

  • Wants
  • Needs

Retirees have the ability to adjust their budgets and can even decide to travel when it’s most affordable rather than in peak season. Minor control like this can help you stay in retirement and keep money in your pocket. 

We can also run inflation scenarios when creating a spending plan to account for periods of inflation and ensure that you’re well on your way to retiring and living the life you want in retirement.

5. Income Buckets and Inflation

We talk a lot about income buckets when trying to secure your retirement. Income buckets come in three main types:

  1. Cash
  2. Growth bucket
  3. Income/safety bucket

If your income bucket is set up to help you avoid the stock market concerns, you don’t need to think about stocks. Income buckets are guaranteed income that will come in every month to help you pay your bills for 10 – 20 years.

These income or safety buckets help you survive through inflation without much concern about what’s happening to the stock market. And for us, the peace of mind that these income buckets offer is worth setting them up.

6. Should You Do a Roth Conversion?

We believe everyone should at least consider a Roth conversion because it is beneficial. Conversions take pre-tax assets, pay taxes on them, and then convert them into a Roth account.

There are tax implications to converting these accounts, but you’re paying taxes now and avoiding potentially higher tax rates in the future.

For example, let’s assume that you have $100,000 in an IRA that you haven’t paid taxes on. The market falls 50%, and now you have $50,000. Since the portfolio is down, you can convert a larger percentage of your assets that you can convert and pay less taxes.

Tax-free growth is something to consider, especially in a down market.

However, please talk to a tax professional to better understand the immediate tax implications of converting your accounts.

Do you need help trying to secure your retirement? Schedule a free, 15-minute conversation with us today.

Federal Reserve, Inflation and the Economy

We’ve seen a lot of headlines lately, as we’re sure you have, about the federal reserve, inflation and the economy. At the time of our podcast and writing this, Jerome Powell remains the Fed Reserve Chairman.

One thing we want to make clear is that throughout this article, we’ll be going over recent headlines.

Of course, at the time of reading this, we may have new information or outcomes for these headlines. But the good news is that the information should remain relevant.

What Jerome Powell Being Nominated as Federal Reserve Chairman Means

Jerome Powell is loved by some and not by others. There are two trains of thought here, and these are:

Side 1: People That Like Jerome Powell

A lot of people like Jerome Powell because he likes to print money. He wants to keep the economy moving aggressively, and for some people, they believe printing money will benefit the market.

Side 2: People That Dislike Jerome Powell

On the other side of the spectrum, there are concerns that printing money will cause long-term inflation, which is never a good thing.

Working as a Financial Advisor Through Federal Reserve Chairmen

Since we work with so many people nearly or in retirement, we get a lot of questions from both sides of the argument. For example, some clients want to invest heavily in the market because they believe that Powell will help the market soar, and others want to invest in financial vehicles that rise with inflation.

Our clients want us to forecast the future to try and determine what will happen if Powell is chairman.

For example, a client may ask us:

I’m concerned and excited about Powell’s reinstatement. Can we invest in something that protects against inflation and still reaps the benefits of the market?

Unfortunately, this is a loaded yet common question when dealing with inflation. What we believe is that two things need to be actively managed:

  1. Active investments in the market
  2. Overall retirement plan

Active management is important because trying to predict an outcome for an ever-changing market is a gamble. We would rather not gamble with our clients’ money, so we use the data that we have available at any given moment in time to make smart investment decisions.

Markets and investments can change rapidly in just a day or two, and active management helps our clients avoid major losses in the process.

We have a lot of passionate investors.

For example, some investors learn a lot about a particular company, love the direction and vision of the company’s CEO, and they put all their faith in this individual that they’ll help the company grow.

Unfortunately, there’s a lot of guesswork going into the scenario above that can lead to losses.

Through active management, we invest based on what’s happening now.

If inflation continues to rise and the pressure of inflation exists, we’ll adjust portfolios in three main categories:

  1. Equities, which are stocks
  2. Fixed income, such as bonds
  3. Cash

We recommend putting all three of these categories in a race to see who is winning in today’s market. At the time of writing this, equities are performing exceptionally well towards the end of 2021.

Using a number-oriented form of investing, we recommend:

  • Reallocating investments based on what’s happening now
  • Adjust as required

There are also some sides of the market where people would rather split their investments among the three categories above, so the investor may decide to invest 33% in all three categories and go with the flow.

Instead, we believe active management is the right choice because it reduces the risk of volatility.

Reactionary investing, based on headlines, is not something we recommend. Instead, use data and continue adjusting your retirement portfolio and investments to weather any changes in the market that occur today and 20 years from now.

Events Where Reactive Investing Never Works Out 100%

We’re not going to get political, but when there are presidential elections, there are many people who choose the doom and gloom path. If this Republican or Democrat gets elected, the stock market will CRASH.

Thankfully, these predictions rarely come true.

Making decisions based on assumptions never truly works out how a person thinks. We’ve been through many presidents in the last 20 years. One thing we’ve experienced, and it is rare, is that some people pull all their money out of the market because they believe a new president will cause the market to tumble.

Unfortunately, many of these individuals call us and explain how they wish they didn’t sit on the sidelines because their portfolio may have risen 10%, 20% or even more.

Another scenario is inflation.

Inflation is rising, so a lot of individuals are afraid and believe that the market will flop.

Emotions in the market rarely work out in your favor. As an advisor, we take emotions out of the market and our decisions. For example, even as surges in the coronavirus continue to happen worldwide, the markets remain strong.

Some investors feared that the market would suffer after each surge, much like it did when the pandemic first hit.

Using the data that we have available, we’re not seeing these surges impacting the market, so we recommend keeping money in the market. When the data changes, we’ll adapt our investments to minimize losses and maximize gains.

2020 Events and How We Shifted Money Going Into 2021

In 2020, the S&P 500 fell over 30%, but we did a few things:

  • First, most of our clients were sitting on cash to avoid losses in the market.
  • When reentering the markets, we took it slow and adjusted to the companies winning the race, such as technology companies.
  • January of 2021, we saw a shift where large-cap and technology started to slow and small and mid-cap companies began to revive as the market recovered. Using the race analogy, we adjusted portfolios to include more of these stocks to maximize client gains.

Since this was our first time living through a pandemic, we think we did exceptionally well for our clients and really solidified our thought process that active management is the way to go when investing.

Final Thoughts

We covered a lot in the past sections, and the sentiment remained the same: don’t react over headlines. If everyone could predict the future, we would all enter retirement ridiculously wealthy.

However, we can use the market’s data to make smart, timely investments and portfolio adjustments to avoid losses and ride gains to make the most of our investments as possible.

If you need help actively managing your portfolio or want us to run the numbers to see how we can help you grow your portfolio, schedule an introduction call today.

Inflation and Your Retirement

Inflation is a hot topic today. In fact, inflation is leading to the highest Social Security cost of living adjustment ever in 2022. For over 70 million Americans, they’ll have their benefits increased by 5.9% [1].

However, when it comes to retirement planning, there’s a lot of concern with inflation because many people didn’t account for inflation when coming up with their overall strategy to secure their retirement.

We’re going to be covering inflation and what it means for your retirement.

What is Inflation?

Inflation is a word that many people know, but they don’t really understand what it means in the whole spectrum of things. The term “inflation” relates to the increase in prices in an economy over time.

You’ve probably noticed the costs of the following items have risen:

  • Groceries
  • Automobiles
  • Gas 
  • Airplane tickets

In 2020, when the pandemic was running wild, the government pumped billions of dollars into the economy to keep everything running. Supply was a major issue at this time, so people couldn’t even purchase toilet paper.

However, manufacturers increased prices because the demand still existed.

Essentially, inflation makes your dollar worth less. For example, if you purchased a food item for $1 a year ago and it now costs $1.10, your dollar is worth less because you get less for your money.

Deflation also exists, but it’s far less common.

When deflation occurs, your purchasing power increases. 

Inflation is often portrayed as a bad thing, but it means that innovation is ongoing and that wages, hopefully, go up, too. However, with inflation rising rapidly like it is now, many people panic, especially in retirement or when employers aren’t offering salary increases to cover the cost-of-living increase.

Overview of the Inflation Over the Long-Term

When we work with clients, we like to go off of the 100-year average for inflation. Over 100 years, you’ll see a lot of periods of inflation and deflation, but the average inflation rate is just over 3%.

However, when you look at the last ten years, inflation has been at about 1.5%.

Since inflation rates over the past decade have been mild, it’s difficult to adjust to rising levels. If you think about the toilet paper crisis, high demand and low supply led to rising prices.

Thankfully, supply issues are easing, so we can expect supply and demand to equal out.

Another example of this is the housing industry. We’ve seen a lot of people’s homes going into bidding wars, with a lot of houses selling for more than they’re worth. However, this trend is expected to slow as inventory increases.

For people in the workforce, rising wages should help combat the rise in inflation.

Anyone who is already in retirement or planning to retire shortly will want to take additional steps to prepare for potential inflation.

5 Crucial Things to Consider When Preparing for Inflation in Your Retirement Plan

1. Long-term Fixed Income Investments

If you have long-term investments, such as government or corporate bonds (where the maturity date is 10, 15 or even 30 years), the long-term rates may not be as attractive as when you first purchased it.

Be sure to check your fixed-income investments, especially with high inflation, because they may no longer provide the returns necessary to cover inflation.

This doesn’t mean that you shouldn’t have any long-term investments like those mentioned, but you may need to readjust.

2. Risk Management for Your Portfolio

You need to have good risk management for your portfolio. It’s crucial to protect your portfolio so that if you lose 30% of it, you’re not struggling to make it back. A good analogy that we like to use is that if your portfolio drops 50%, you need to make a 100% return to recuperate your losses.

Let’s look at this with real-world figures.

If you have $100,000 in the market and lose 50%, you’re down to $50,000. However, if you gain 50% in the coming years, your portfolio is only up to $75,000.

It’s always better to protect your portfolio than try rebuilding it.

Good risk management protects against these losses so that they are minimal.

3. Think About Your Guaranteed Income

Guaranteed income is vital to your retirement, and this includes things such as:

  • Social Security
  • Pension
  • Etc.

If you know your needs and wants, you should have as much of your needs covered by guaranteed income. You should try and cover most of your expenses with guaranteed income so that you’re less impacted by inflation.

Growth buckets can help cover the increase in inflation.

4. Maintain a Good Spending Plan

Many people retire without any type of spending plan. Unfortunately, without a plan, you’re putting your retirement at risk. You should plan based on:

  • How you’re spending money
  • Essential needs (food, utilities, housing)
  • Wants (cars, vacations, etc.)
  • Legacy (charities, kids, etc.)

When you have a general idea of what you spend monthly, you can devise a spending plan. A good way to find out what you’re spending is to use Mint (it’s free), which will categorize your expenditures so that you can see and understand where your money is going.

5. Sit Down with a Financial Professional

If you have a financial planner that you work with, sit down with them and begin the difficult discussion of inflation and your retirement. When we sit down with clients, we do a few things:

  • Flush out a retirement plan before they become clients
  • Run plans and stress them out based on low rates of returns
  • Run plans at a 3% inflation plan
  • See how the retirement plan works through these tests

When we run tests for a person’s retirement, we can use the worst-case scenario and make adjustments based on this. For example, we may find that the person needs to work a few years longer or work part-time to retire.

Through tests and the help of a financial advisor, it’s possible to learn whether you have enough money for retirement and to stave off inflation.

Inflation will remain a consistent concern through retirement. Still, if you plan ahead and consider some of the points we’ve outlined above, we’re confident that you’ll be able to retire with peace of mind that you’re protected against inflation.

Do you want to follow an easy, four-step course that can help you secure your retirement?

Click here to access our FREE course, titled: 4 Steps to Secure Your Retirement.

Resources

  1. https://www.ssa.gov/cola/

How Does Inflation Affect Retirement?

Are you concerned about how inflation is going to affect your retirement savings?

There’s a lot of talk right now about inflation and how it’s going to change in the future. When you’re planning for retirement, this can feel like a curveball.

However, it’s no secret that inflation does impact your spending over time, especially when you’re no longer earning a monthly income. What can help is knowing how much it will impact your spending and what you can do about it.

In this post, we share everything you need to know about inflation in retirement. We illustrate how varying inflation rates can affect your savings over time and why you need to carefully consider your spending plan.

You can watch the video on this topic above. To listen to the podcast episode, hit play below, or read on for more…

How inflation has changed in recent years

Inflation can have a very real impact on your retirement funds, which is why we include it as part of your written retirement plan. But it’s important that we base the inflation rate on realistic, yet conservative figures.

To do this, we look at the average rate over the last 10 and 100 years. So, over the last century, the average inflation rate is just over 3%, which is why, when we build a retirement income plan, we set it at 3%. However, if you look at the average over the last ten years, it’s 1.7%. Therefore, we consider 3% a conservative rate as we expect inflation to be closer to the 1.7 mark.

Inflation and retirement planning

In this example, we’re going to talk about fictional retiree Cindy. Cindy is 67 years old, and she’s decided to retire now. She’s saved $1.5 million and receives $3,000 a month in Social Security.

Typically, there is a cost-of-living adjustment (COLA) with Social Security, which is somewhat tied to inflation. However, in this example, we are not going to include this adjustment or any other raise to Cindy’s Social Security benefits.

The key player when thinking about inflation in retirement is spending. Cindy plans to spend $7,000 a month in her early years of retirement. This is more than she plans to spend long-term because she wants to travel and do lots of activities while she’s able to. So, her initial spending in retirement will be higher than in her later years.

At age 67, Cindy will have to combine her $3,000 from Social Security with a $4,000 draw from her savings to provide her with $7,000 each month. It’s important to note here that we are factoring in a conservative 5% rate of return on Cindy’s savings.

How inflation affects spending

By adding 3% of inflation every year to her monthly spending after retirement, it’s going to require Cindy to gradually withdraw more and more from her assets. So, what does this look like year on year? Here’s how a 3% rate is projected to affect Cindy’s planned $7,000 spending each month.

  • Year one: $7,000
  • Year two: $7,300
  • Year three: $7,500
  • At age 80: $10,000
  • At age 90: $14,000

If Cindy wants to continue the lifestyle she has at age 67 through into her 80s and 90s, she’s going to have to withdraw increasingly more from her savings each year. Here, you can clearly see how inflation puts significant pressure on your savings.

In this scenario, at age 90, Cindy’s savings of $1.5 million have now dwindled down to just $56,000. With a monthly spend of $14,000, this is too uncomfortably low for us. But what if inflation isn’t as high as 3%?

How much difference 1% makes

If inflation was particularly high (around 3%) Cindy would know that she has to cut back on her spending in order to be more financially secure at age 90. However, if inflation was more in line with the most recent 10-year average (1.7%), what difference would that make?

If Cindy plans to spend $7,000 a month with a 2% inflation rise, she’ll have $765,000 left in her savings at age 90. This tiny tweak leaves her with a far more comfortable figure.

Now, we can’t choose inflation rates, but it’s important to see how much a 1% difference can impact your retirement savings. For Cindy, a higher inflation rate means she has to be more conservative with her spending, or she risks running out of her savings. But she also knows that if inflation holds steady, she can spend more comfortably for longer.

Changing your spending plan as you age

A key part of our roles as retirement planners is to help people like Cindy think through their spending. In Cindy’s case, she wants to spend more in her initial retirement years. She could live comfortably off $5,000 a month ­– the $2,000 is just extra.

Now let’s see what happens if we change Cindy’s spending based on this plan. In this example, we’ll add 3% inflation to her monthly spending of $5,000 and allow her 10 years of “fun money” – an extra $2,000 a month, with 0% inflation.

With this spending approach, Cindy would have $1.1 million left in her savings at age 90. Compared to the two other scenarios, this spending plan is more likely to give her peace of mind that her finances are secure for longer.

Navigating inflation in your retirement plan

This type of scenario is very common for our clients. People often plan to make the most of their first 5-10 years in retirement and then consider cutting back. We illustrate how spending and inflation affect our clients’ financial situations so that they can make informed decisions about their retirement plan. 

Inflation is a factor you need to take into account when planning your finances for retirement. However, it’s often not an issue to stress over. If you’re concerned about how it will impact your retirement, do reach out to your financial advisor or get in touch with us.

We offer a 15 minute complimentary call and can help put your mind at ease about inflation, saving for retirement, or any other questions you may have about preparing for retirement. Book your call with one of our advisors here.