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Retirement Headwinds
Do you ever dream of going to work, not because you have to, but because you want to? That’s the number one goal of most Americans over 40. But most financial gurus say that some of the headwinds facing the decision to retire are as daunting as ever.
Consider these Retirement Headwinds:
- Low portfolio return expectations
- Lower bond returns: Over time, bonds generally provide long-term returns similar to the coupon percentage they make (i.e. if the coupon of a bond is 5% and held to maturity, you will receive 5% annually until maturity if there is no default). Interest rates on the 10 year treasury recently went below 1.7%. This is the lowest yield on the 10 year Treasury in over 50 years. Since most bond yields are positively correlated with the 10 year treasury, the argument could be made that all yields are lower than their historical average. According to the Wall Street Journal, rates on the 10 year Treasury touched the lowest yields in modern history.
- Lower than average stock returns: Historically the stock market (S&P 500) has traded at an average Price to Earnings ratio of 15, but has ranged between 7 and the low 30’s (Price to Earnings, or P/E is the ratio of a company’s current share price compared to its per-share earnings) . Today the P/E is around 12.[i] If the P/E is contracting (i.e. when the P/E shrinks), the price investors are willing to pay for the combined earnings of the companies trading in the market declines. This usually results in a decline in the value of the stock market. This is happening for a few reasons. One economic study points to the Baby Boomers. Baby Boomers are entering the stage of life when they generally need to be more conservative. They may feel that it is no longer suitable to invest in the stock market. This pool of money that has been added to over the last 30 years now needs to be used. The largest segment of our population with a sizable amount of investment resources is likely being more cautious and, thus, selling more equities than they are purchasing. You can read the full FRBSF economic letter here.
- Volatility: Markets may continue to move erratically, which tends to cause poor behavioral finance decisions (basically buying high and selling low). This is not new or necessarily worse than before, but still a major challenge for inexperienced investors and advisors.
- Inflation: Higher inflation may be coming in many different ways.
- High government debt: As a portion of GDP, government debts can kindle higher prices.
- Currency devaluation: Low dollar value can cause resources to cost more. For example, higher oil prices are likely the result of oil sales being denominated in U.S. dollars.
- Health care costs: People are living longer due to advancements in medical and biomedical technology. Many don't realize the financial burden a few extra years will be for this generation, but it's expensive to be on those meds and have that 2nd hip replacement.
- Increased tax rates – The debt will need to be paid by someone. You can see some of the new Pension taxes that where just pushed onto retirees in the state of Michigan last year. The extra 4.35% Pension tax adds up year after year. There are more tax hikes coming at the federal level next year, too.
- Currency devaluation: Low dollar value can cause resources to cost more. For example, higher oil prices are likely the result of oil sales being denominated in U.S. dollars.
- Real median personal income: Adjusted for inflation 2010 dollars (as shown by Wikipedia using census data) are flat after inflation over the last 20 years - so it’s been difficult for the average American to save more without changing their lifestyle.
With all these headwinds, surely there are some tailwinds working in our favor? Well, even though I’m a “glass half full” kind of guy, I just don’t see any. So that means investors need to make adjustments to compensate for the headwinds. Coming up in my next blog, I’ll explain some ways to do that.
Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Past performance may not be indicative of future results. The opinions expressed in the FRBSF Economic Letter are those of the authors and not necessarily those of Raymond James. Diversification does not assure a profit or protect against loss.
[1] Yahoo! Finance
Angela Palacios Training for Not 1, but 3 Triathlons!
What was I thinking? CFP Angela Palacios, our Portfolio Coordinator, makes a commitment to healthy living that has her diving into a summer of triathlons.
Summers are my favorite time of year. My family and I are fortunate enough to have a pool in our backyard and a great place for a summer BBQ with our friends…unfortunately, we have a great place for summer BBQs with our friends. That means there is always a party and reason to celebrate with chips, meat, desserts and beer at our house! This invariably ends up in my clothes fitting a bit snugly come September.
Well, this year I decided no more! So instead of just deciding to cut back on indulging so much each weekend, like a normal person would do, I decided to commit to doing 3 sprint triathlons this summer (.5 mile swim, 12 mile bike and 3.1 mile run). Since I have never done anything like this in my life, I’m still not sure what I was thinking but after several months I have learned how to swim (other than just floating around on a pool toy), ride a bike (which I haven’t done for over 20 years), and run (which I have never been a big fan of). After logging 12.4 miles in the pool, 163 miles on my bike and 48 miles on foot so far in training, I feel as though I may actually be able to do this.
My first triathlon is June 20th at Island Lake Recreation Area and my ONLY goal for the first one is to finish. We’ll see after that if I set any more lofty goals for the next two in July and August.
Hopefully at the end of all this I will be in better shape at the end of the summer than I am now and will be setting a great example for my daughter Lilly that you can truly do anything you set your mind to!
Why is Ford Motor Company Offering to Pay-Off 90,000 Retirees?
On April 27, 2012, Ford Motor Company announced via an internal communication a voluntary lump sum buy-out offer for 90,000 retirees and surviving beneficiaries. Essentially, Ford wants to pay off or pay out as many retirees as possible. So why of the sudden generosity? There are two primary reasons:
1. To get retirees off the books. Paying lump sums will get the pension liability off of their company balance sheet – which according to Bob Shanks, Ford executive vice president and chief financial officer, will "improve the underlying strength of our balance sheet”. And,
2. The math looks better in 2012. The Pension Protection Act of 2006 (“PPA”), fully in effect in 2012, allows companies to use the higher yielding corporate bond rate versus the lower Treasury rate when calculating lump sum payments; making the cost of a lump sum lower to employers such as Ford.
Point 2 forces us to further consider how lump sum payments are calculated (for all employers – not just Ford Motor) and its impact on our decision making process.
How the Math Affects the Company and Retirees
First let me apologize to all of the actuaries (i.e. number crunchers with serious calculators) for grossly underestimating the complexity of the calculation. Calculating a lump sum takes into account factors such as your specific income, years of service, age, and survivor’s age, if any. In addition, a “discount” rate is used in determining how much all of the monthly payments (present value) would equal if paid in a single lump sum today. Why is the discount rate important?
1. The higher the discount rate, the smaller the lump sum.
2. The lower the discount rate, the greater the lump sum.
On a relative basis, with general interest rates near historical lows, lump sum payments should be higher than say 10 years ago. However, the change in the discount rate via the PPA significantly reduces an employer’s lump sum payment obligations – perhaps by as much as 30%. So while Ford has had a desire to offer this type of payout in the past – waiting until 2012 provided a lower cost.
So, let’s agree for the moment that this plan is good for Ford’s balance sheet. However, there is a far more important issue: Is a lump sum good for your finances? Are you better off receiving a one-time lump sum payment rather than guaranteed lifetime monthly payments (guarantees based on For Motor’s ability to continue payments)? What’s good for the company….may or may not be good for you. (I don’t say this lightly – growing up in Dearborn I witnessed firsthand Ford’s exemplary community stewardship). I do however suggest taking a page out of Fords book – run the numbers to see what is most appropriate for you.
Is it good for your finances?
So how much is at stake? Plenty. For example, a 60 year old male entitled to a $2,000/monthly pension might be offered a lump sum close to $600,000 depending upon the actual discount rate used (this is a hypothetical only assuming a single life payment and 3.5% discount rate). Depending upon your unique circumstances this might be a “good deal” – but it might not.
On one side, if you are someone with a long life expectancy and very risk averse you should consider declining the lump sum and sticking with the monthly benefit. On the other hand, if you are single and not in good health, taking the lump sum might be a better option. As you might expect, most folks will fall somewhere in between these two extremes.
At the risk of stating the obvious, this is a complex and important decision, and you are encouraged to consult with a financial planner and/or tax advisor. Talking with an experienced advisor about your personal situation can help lead to an appropriate decision focused on your balance sheet.
The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.
You LIKE, We Pay!
In honor of the 6th Annual Cystinosis Fun Run for TEAM KACY on May 6th, The Center will donate $1 for each person who likes our Facebook page or follows us on Twitter. This is in addition to our overall support of the event.
All you have to do is LIKE and we pay.
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The Financial Benefits of a Healthy Lifestyle
Spring seems to be the time to get moving and get healthy in preparation for the coming summer months (and the need to sport a bathing suit at the beach!!!). Many of my co-workers and I are in training mode for various events – 5k runs, Triathlons, you name it. And it turns out that our healthy behavior could have more benefits to us than just our fit and trim bodies and strong heart rates – we could be developing healthy wallets, as well!
Recent studies by the University of Rutgers in New Jersey have found that physical health and financial health are highly correlated to each other, and to a person’s overall happiness. It appears that the habits that lead to a healthy lifestyle, like the ability to stay disciplined, make good choices and see the future implications of decisions, lead individuals to have a more positive outlook on life, including their current and future financial success.
Interestingly, these are some of the specific relationships that the Rutgers studies identified between health status or behaviors and finances:
- Studies show that physical appearance affects a person’s earning ability; smokers typically earn less than non-smokers who do similar work.
- Healthy people pay lower health insurance premiums now, and typically have lower health care costs throughout their lives.
- Inactivity has been estimated to cost $670 to $1,125 per person per year due to the impact of obesity on overall health.
- Eliminating unhealthy habits saves dollars that can be redirected to investments for future goals. For instance, eliminating a junk food habit could save $3,650 or more annually.
For the chance at a financially successful future, get up, get moving and get healthy!!
Source: Rutgers University Health Finance and Health Behaviors Studies (http://njaes.rutgers.edu)
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Center for Financial Planning, Inc., and not necessarily of RJFS or Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.
Lessons in Delayed Gratification from a 4 year old
On Easter morning my daughter, Lilly, who is 4 years old, awoke with great anticipation as every child does. Knowing the Easter Bunny came the prior night, she ran downstairs to hunt for her basket and was thrilled to find it. She turned to me and said, “Mommy the Easter Bunny left me a basket full of c-AN-dy,” stretching the word out for emphasis. I know, I know, I’m not winning any parent of the year award by filling the basket with candy but, hey, it’s a special occasion. So then she said, “Come on Mommy let’s go upstairs and lay out all of the candy and you can tell me about each one.” So we did this and she didn’t even ask to eat a piece. I was blown away! When I asked if she wanted anything she said, “No I’ll wait until after breakfast when I can eat more than one piece of it without getting a belly ache,” which is often my reasoning when telling her she has to wait until after breakfast for a treat.
Her Easter morning restraint reminded me of the study done on deferred gratification by a psychologist at Stanford in the late 1960’s. Here’s a great YouTube of what came to be known as the Marshmallow experiment. In the experiment, each child was offered a marshmallow now or, if they could resist eating the marshmallow, they could receive two. The children that participated were later studied to determine if this resulted in future success. In fact, it did. The children that waited showed higher SAT scores, had higher self-esteem, and weren’t so easily frustrated.
Deferred gratification is a very important life lesson and one of the keys to financial success. In order to meet future financial goals, something has to be given up today, but that doesn’t always have to be difficult. Here are a few easy steps:
- Avoid the temptation of spending money now, for example, not taking that extra vacation this year in order to make my Roth IRA contribution (which is still painful for me even though I know it is the right thing to do).
- You need to find an alternative because you still have to make life worth living in the present. So for me that ends up being a local “staycation” instead of that big vacation.
- It is always important to focus on the reward, which in my case is hopefully a comfortable retirement, or in my daughter’s, lots of candy after breakfast.
While I’d like to take credit for my superior parenting skills by pointing out my 4 year old grasps the concept of delayed gratification better than most adults, I don’t think I can. That one she came up with all on her own. And it is a lesson that we all need to incorporate into our lives to become better savers and investors.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.
Health and Wellness in April
With April showers in mind, The Center held a Parking Spot Raffle the last week in March. The winner of the raffle received the right to park in the reserved (and very close) spots for the rainy month of April. And those lucky winners were….Brenda Spencer and Tim Wyman! Proceeds from the raffle went to benefit the Epilepsy Foundation of Michigan.
Tuesday Tennies continue to roll as we lace up our tennis in our quest for a healthier lifestyle. It’s a fantastic way to smell the flowers and enjoy our beautiful surroundings. You’ll find our business neighbors circling the grounds as well!
Strawberry Shortcake for everyone! For the price of a small donation we gobbled up this delicious goodie for our Thursday Treat this past week. In our effort to strive for a healthier version we used angel food cake, fresh cut strawberries and fat-free whip cream…Yum! Donations went to the Cystinosis Research Network.
Our Center initiatives and efforts have been noticed recently. Look hard and you'll find a few Center team members pictured throughout Blue Cross Blue Shield's Annual Report.
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April is Financial Literacy Month
It is a sad statement about our society that we need to have an entire month dedicated to financial literacy. Today, a large percentage of individuals and families are experiencing some kind of financial difficulty that is negatively impacting their everyday lives. Money Management International recently reported that Americans carry more than $2 trillion in consumer debt and 30 percent report having no extra cash. This is just Americans – you can only imagine what the figures might be worldwide!
Much of our problem, in my opinion, is lack of education. We need to start teaching basic financial education to children, so that good financial habits are built over a lifetime. The problem is, there are very few schools teaching financial education, and many parents don’t have the resources (or sometimes the knowledge) to teach their children these important lessons.
The good news is that we have a great resource locally. Detroit is home to Junior Achievement Finance Park, a hands-on financial learning center. I recently spent the day volunteering with the FPA of Michigan at JA Park with a classroom of 8th graders from Detroit. I saw first-hand how this high-tech facility can help students learn the basics of money management by spending the day in the life of an adult. Students were assigned a life scenario and were responsible for:
- Calculating their Net Income (salary after taxes)
- Managing monthly expenses by making lifestyle choices
- Setting aside a portion of the budget for savings and charitable giving
- AND, ultimately, creating a balanced budget
As we all know, this is not always an easy task. The day provided students with some real-life perspective on how difficult it can be to manage money, and on why Mom and Dad sometimes have to say “No” to their daily wants.
In honor of Financial Literacy month, you have the opportunity to visit JA Park with your children FREE of charge this Saturday, April 28th, from 9 a.m. to a 1 p.m. for JA Family Day. I encourage you to attend with the children in your life…let’s work together to help the next generation become financially literate!
Please feel free to e-mail me for additional financial literacy resources for children and adults.
Raymond James is not affiliated with Junior Achievement.
Investment Commentary - 2nd Quarter 2012
Stock investments roared into 2012 with the S&P 500 closing the first quarter up 12.59%. International markets also posted strong quarterly returns as investors seemed to feel that Greece compromises helped to avoid a chaotic default and seemed to buy some breathing room. The quarter was also notable formuted volatilityin equities. While stocks zoomed, bonds stalled and their returns were relatively unchanged.
Source: Morningstar Direct
Economic data seems to be disappointing bulls and bears alike. Pessimists are predicting recession, but leading indicators continue to suggest that things are getting better. Those more naturally optimistic are looking for better employment numbers and decisive growth. We break down unemployment trends here.For now, we think it’s best to be constructive and cautiously optimistic.
The exceptionally strong market returns of the last six months may mean that it’s time for a breather, or (in market speak) consolidation. Longer term, balance sheets and stock earnings continue to indicate corporate health. Another indicator, University of Michigan Consumer Sentiment, shows recovery off of depressed lows over the summer, but is below the 30-year average. Keep in mind that stock dividends are rivaling Treasury bond yields and we are comfortable maintaining neutral allocations to stocks.
As the saying goes, “Don’t fight the Fed” and Operation Twist coupled with European Central Bank liquidity injections seem to be helping to support modest growth. On April 11th, Vice Chairman of the Fed, Janet Yellen, indicated that low rates could extend beyond 2014if the pace of growth fails to accelerate. For more on the impact of recent Quantitative Easing on stocks, click here.
The lackadaisical recovery and Fed accommodation may be buying time for bondholders as the Fed works to keep interest rates low. Data shows that investors have continued throwing money into bonds in spite of the threat of rising interest rates. This may be good news for stocks as strong returns were not driven by investors “crowding in”. Conversely, the nearly insatiable public demand for bonds gives us pause. Those relishing the relative comfort that bond investments have offered in the past thirty years may want to reconsider future assumptions. Learn more about our concerns in bond markets and how we’re investing here.
We’ve just completed a blog series that discusses components of our investment process that you might find helpful.
Introduction: The Investor’s Chief Problem
Strategic Allocation: Building Your Foundation
Tactical Allocation: Deck the Halls with Tactical Allocation
Types of Investments: Time to Declutter
If you have topics you would like us to cover in the future, please let us know! As always, we appreciate the opportunity to meet your financial planning and investment needs. Thank you!
Sincerely,
Melissa Joy, CFS
Partner & Director of Investments
Financial Associate, RJFS
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Melissa Joy and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Please note that international investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. Dividends are not guaranteed and must be authorized by the company’s board of directors.