Friday, February 9, 2018

Market Corrections

The stock market got “interesting” again this week. Volatility is back after having disappeared for the last year and a half. Volatility in the markets is normal and over the long-term, a 10 percent decline in the U.S. stock market happens once a year – on average.

This week I’ve been watching the financial media try to whip this up into something it’s likely not. I’m guessing it’s good for ratings as financial shows have seen a dramatic viewership decline in the last several years. Now, it’s way too early to start calling for bear markets, but you would think we are in the middle of one if you watch the financial news. And interestingly, each barking head has a different reason for what is happening, how can that be?…. but I digress. 

The market is down a little over 10% from its all-time highs, after running up over 100% cumulatively, the last five years – with dividends reinvested. But I do understand the pain we feel from investment losses is twice the joy we get from gains.

So what should we do when the market goes down?

#1. Stick to your plan and remain focused on your long-term objectives.

If you do anything, it may be a good time to rebalance your portfolio back to your targeted asset allocation percentages.

#2. Don’t pay heed to the pundits, they are looking to stir controversy or sell something or both and don’t obsess about the market value of your investments.

We are inherently irrational when it comes to investments, it may be wise to talk to your financial advisor or planner to discuss or revisit short and long-term expectations.

No one knows whether this correction will be short-lived or turn into a long, drawn-out affair. No one can predict how investors will react given the hundreds of variables that shape global market returns daily. But if you have a plan of attack or have put one in place working with your advisor, you sidestep the emotional flight response and hopefully will look back on this another behavioral vulnerability overcome. 

CBlakely, CFP®, CTFA                            02-2018

Tuesday, January 30, 2018

Its Never Too Late to Start Investing for Retirement

Michael Kitces, director of wealth management Pinnacle Advisory Group, sees it regularly in his financial planning practice: clients who are close to retirement but haven’t saved. “They fall into two groups — either they don’t focus on it, or they are despondent,” says Mr. Kitces. “They think their retirement is doomed — it’s a real lose-lose scenario.”

His clients are not alone. Among workers age 55 or higher and nearing retirement, almost half have saved less than $100,000, according to the Employee Benefit Research Institute. A third have less than $25,000.

The savings shortfall means many Americans face the prospect of retiring solely on Social Security, which replaces just 39 percent of pre-retirement income for the average worker retiring at 65, according to the Center for Retirement Research at Boston College.

But near-retirees do have some opportunities to improve their financial scenario in retirement. Which is not to give up on saving. Therefore, rule number one is to save more. If you don't live below your means, financial freedom is not within your reach.

If you start saving 25 percent of a $100,000 salary at age 50 could potentially have about $650,000 at 65 or about $1,000,000 at 70 (assuming a 7.5 percent investment rate).

So to start, create a household budget to reallocate spending to retirement saving - it is more challenging until your children are out of the house. But if possible, maximize contributions in your 401(k) account and open an IRA. Over the age of 50, you benefit from higher “catch-up” limits on tax-deferred savings, for 401(k) accounts it's $24,000; for I.R.A.s, it's $6,500.

The contribution limit for 401(k)'s and 403(b)'s increased to $18,500 in 2018. Take advantage of the additional pre-tax savings and future tax-deferred growth. The catch-up contribution limit for employees age 50 and over will remain at $6,000.

If you or your spouse has access to a workplace retirement plan such as a 401(k), you may not be able to additionally make a tax-deductible contribution to an IRA if you earn too much. The IRA tax deduction is phased out for high earners. The IRA contribution limit is $5,500, with an additional $1,000 catch-up contribution allowed for those age 50 and over. That’s potentially a total of $31,000 that can be invested in tax-deductible tax-deferred vehicles.

Also, waiting to file for Social Security offers another opportunity to increase retirement income. Social Security benefits, which are adjusted annually to account for inflation, can be claimed as early as age 62, but monthly benefits rise 8 percent for every year that you wait up to age 70, increasing your benefit by over 60 percent.

When investing be wary of high-cost funds, academics agree, generally the lower the cost of the fund, the more you keep – this translates to a larger balance at retirement.

As always, you should seek out a credentialed professional that is fee transparent and offers holistic, evidence-based advice.

CBlakely, CFP®, CTFA              01-2018

Sources: The New York Times, Center for Retirement Research at Boston College,  Employee Benefit Research Institute