Retirement is no longer a three-legged stool

When preparing clients for retirement in the early years of my career, I would often introduce the concept of viewing retirement as a three-legged stool. The three legs were represented by the client’s personal savings, his or her pension plan and, of course, Social Security. While all three legs were not necessarily the same size, all three were nonetheless vital sources of income during the retirement years.

But that was then, this is now. Things have changed over the years. Nowadays when preparing a family for retirement, it’s very likely that the pension leg no longer exists. If by chance it does, the dollar amount of the benefit is probably not nearly as large as had been initially projected.

That’s because many pensions were frozen several years ago and the pension benefit became fixed. The amount no longer increased with additional years of employment.

So today, the bottom line is simply that for people approaching retirement, the pension leg is either non-existent or very much shorter than anticipated early in their work careers. Unfortunately, for most young people beginning their career, there won’t be a pension leg.

As our society moves away from traditional pension plans, more emphasis is obviously put on personal savings and Social Security. Any working person has a certain amount of control over how much they save. But they have no control over Social Security. And as I have expressed numerous times, I’m concerned about the financial strength of Social Security.

Like it or not, Social Security is deeply intertwined with politics. That’s especially evident during an election year. I’m not necessarily criticizing the Social Security program as it stands today. I merely want to point out some of the red flags that are being waved by the Social Security trustees. Because it seems to me that the flags are flying under the radar.

I think it’s great that Social Security statements are once again being sent to those in the workforce. I suspect that most people skim the verbiage and simply look at the tables that project their income at early, normal and delayed retirement.

I hope they’re aware that the numbers are only projections, not promises. Because the statements point out that, on its current course, there eventually will only be enough Social Security funds to pay 77 percent of projected benefits. That’s a legitimate concern that needs to be addressed.

I also want to bring to the attention of my young readers a recent error made by the Congressional Budget Office (CBO). An error they corrected in early February. Last fall, the CBO projections for people born in the 1960s and retiring at age 65 were incorrect.

It was initially projected that Social Security would replace 60 percent of income for middle income workers and 95 percent for those in the lower quintile. The projections were corrected to 41 percent for middle wage earners and 60 percent for the bottom quintile. That’s substantially less.

I certainly understand that mistakes happen and commend that they were corrected promptly. But it doesn’t change the big picture. The program needs attention sooner than later.

Before politicians talk about expanding the program, the very foundation needs attention. As it stands, the current program doesn’t inspire long-term confidence. That makes long-term financial planning extremely difficult.

Ken takes a coffee break. That was then. This is now.

I recently stopped at a local fast food restaurant to pick up a coffee and noticed a help wanted poster in the window.  It stated that the job paid $9.50 per hour, substantially below the $15 per hour being sought by a number of minimum wage crusaders.

Perhaps to counter the shortfall, the poster also stated that health insurance was available for both individuals and families, that employees were eligible for up to $700 of educational assistance and that they got five paid days off.

It made me harken back to my own first job.  I wondered how today’s numbers compared to my experience.  It was 1967 and I was working at a meat market.

I washed trays, swept the sawdust out of the freezer and did whatever else I was told.  Not the greatest job, but it put a few dollars in my pocket.  And it was a good experience; it taught me both responsibility and accountability.

Back then the minimum wage was $1.25 per hour.  Out of curiosity, I checked the Consumer Price Index (CPI) to see what today’s equivalent would be.

Around since 1913, the CPI measures “changes in the prices of all goods and services purchased for consumption by urban households.”  According to the CPI calculator the average annual inflation rate has been 4.07 percent since 1967.

That adds up to a cumulative rate of just over 607 percent.  The $1.25 per hour I earned in 1967 would be equivalent to $8.84 per hour today.  So at face value, the $9.50 today is far better than the $1.25
I earned in 1967.

By this comparison alone, a $15 per hour minimum wage would be far better than my $1.25.  But, there’s much more to the equation.

For example, in 1967 the total amount withheld for Social Security was 3 percent, one half each by my employer and me.  Today, that amount has skyrocketed to 12.4 percent, again, split two ways. 
                   
I mention minimum wage in a personal finance column because many of my readers and clients are small business owners.  As a small business owner myself, I’m sensitive to the employer viewpoint.

Over the years, I’ve also spoken to many young students about to graduate high school.  I feel these young people benefit from the responsibility learned from their first job experience.

Yes, I’m very concerned about people trying to live or raise a family on minimum wage.  It’s an extremely difficult challenge.  But, as a society we need to emphasize that minimum wage jobs should be educational launching pads, not lifelong careers.  The way it was in my day.

Somehow, as a society we need to help people move up the economic ladder.  Not just to get on it and be content.

Determining a fair and equitable minimum wage is a polarizing and controversial topic.  Both sides have valid points.  But at the end of the day it’s the employer that makes payroll, not Uncle Sam.

If the bar is set too high, I fear many young people will miss out on the first job experience because there simply won’t be any first jobs.  Wages, like housing costs, vary throughout the country.  For that reason, I believe the minimum wage should be set at the state level, not by Uncle Sam.

Let’s talk about Valentine’s Day

What can you say about Valentine’s Day?  Hallelujah, if you’re a florist or jeweler, or own a restaurant, candy store or card shop. You’ve just had one of your busiest and most profitable weeks of the year.  In my opinion, the hype surrounding Valentine’s Day is one of the great economic stimulus programs of all time.

As I kiddingly tell friends and clients, it’s probably more successful than any stimulus plan our government has ever come up with.

There’s no question that a lot of men spend a lot of money to show their special someone how much they care.  A lesser amount, I’m guessing, is spent by women on their special guy.

But, from a financial perspective, what about the other 364 days of the year?  When all the hype fades away and Cupid goes into hibernation, a lot of household problems revolve around money issues.

It’s easy to speculate that more income would mean fewer arguments over money.  But my many years of experience lead me to believe otherwise.

For example, in my career I have worked with a quite a few high-income earners who, surprisingly, save very little of their income.  It seems that no matter how much they make, they manage to spend just a little bit more.

Quite often, one of the spouses tries to live within a budget, but he or she becomes frustrated over the spending habits of the other.  Unfortunately, many marriages have fallen apart over financially related problems.

For whatever reason, couples often just don’t have the ability or desire to discuss financial problems.  I’ve even seen situations where one of the spouses refuses to acknowledge that a problem even exists.

Valentine’s Day is one of the few days when financial problems are put on the back burner, but couples still need to talk about money.

From my experience in working with families, there is generally one spouse that is the financial dominator of the household.
You might think it tends to be the husband, but it’s just as often the wife.  But, whoever is financially dominant, he or she needs to bring the less dominant spouse into the equation.  It’s called teamwork.

Both spouses need to understand the big picture.  That means each needs to know how much they can spend and how much they need to save.  And in arriving at their financial goals, both parties need to be involved in the discussion and the decision.
Financially related goals include such items as college funding for kids, dollars set aside for vacations and retirement, plus every other aspect of running the household.

Money can be used to express love, but unfortunately, I have seen relationships fall apart where money is a driving issue.  The problem might be a lack of money or the spending habits of one of the spouses.  Occasionally, both spouses have bad money habits.

What’s my advice for celebrating Valentine’s Day?  Get on the same page financially.  Talk about money.  Talk about spending.  Discuss savings and financially related goals.

It’s true that discussion often leads to compromise, but if that compromise leads to financial harmony, it’s certainly better than a marriage that falls apart.  So Happy Valentine’s Day to one and all.  I hope I’ve given you something to talk about.

The upside of the market downslide

Without question, the investment world is down significantly since the beginning of the year.  And while there certainly is some cause for concern, I believe the situation also presents some opportunities.

Looking at the big picture, I’m concerned that the nation may slide back into a recession.  That, of course, would lead to a loss of jobs, households missing payments, and a return to a whole host of problems so many people crawled out from just of a few years ago. 

But although our nation’s economy has been growing at a snail’s pace for the past few years, I don’t foresee us falling back into the depths of the Great Recession.

The opportunities I see involve new investment dollars.  For example, if you’re eligible for a 2015 tax year contribution into an IRA, this is an exceptionally good time to make a contribution.  You’ve certainly heard the old adage, “Buy low, sell high.”  Well, guess what?  Most things are relatively low right now. 

Is there an investment you were considering six months ago?  I’d say you’re going to like it even more at current prices, especially if you have a long-term time horizon. 

Over the years, I can’t tell you how many times I’ve heard investors lament, “If only I bought ABC stock when it was down to X dollars per share.”  If you’ve ever made a comment similar to that, it may be the right time to take action. 

Yes, Murphy’s law says that the day after you buy something it’s likely to go lower, but there never is a buzzer indicating a market bottom to tell you that now is the precise time to jump in.  But there definitely are a lot of investments you can buy today at a much lower price than just a few weeks ago.

I’ve often joked that, as a financial advisor, I’m paid to worry.  And there certainly is plenty to be concerned about in the financial arena.  However, at the top of my worry list are the people who retired in the last couple of years and are drawing income from their nest egg. 

Why?  Let me run through some math.  For example purposes only, let’s say a retiree needs $30,000 of income per year from their savings.  Suppose they hit their magic number of $500,000 in their nest egg. 

At a six percent withdrawal rate, and assuming they’ve earned a reasonable interest, they can get their $30,000 without depleting their principal.  However, 2015 was relatively flat, so taking their $30,000 would drop the principal down to $470,000. 

So the next year, their nest egg loses value, dropping just over 10% to $420,000.  Now to get $30,000 of income, they have to withdraw 7.2%.  That extra 1.2% may not seem like much, but this is a dangerous path.

The sequence of investment returns is extremely important, especially in the early years of drawing retirement income.  A few down years in the early years of drawing income can cause irreparable damage to a nest egg.

With the investment world on a downward slope, it’s important to make your investment decisions wisely and your withdrawals cautiously.  Deciding to retire and start the withdrawal sequence once you reach a certain nest egg number, such as $500,000 may not be a prudent choice.

What in the world is going on?

With all due respect to the month of January, I’m glad it’s over. I’ve often mentioned that long-term investors frequently need to climb a wall of worry.  Unfortunately, the current wall appears to be a bit taller than many anticipated.

In today’s world, there’s an abundance of interconnected factors that can have a significant impact on your nest egg.  Take a look at the recently ended Detroit International Auto Show for example.

It was fantastically successful and it came on the heels of a record-breaking year for auto sales.  You’d think that would motivate a large number of financial analysts to be bullish on the auto industry, right? Especially with the price of gasoline far below $2 per gallon and interest rates hovering near 2%.

However, that’s not the case. One of the reasons for the short-term negative sentiment is the apparent economic slowdown in China.

Which, of course, translates into lower than anticipated overseas car sales by our domestic automakers.

But that’s only a part of the story.  A Chinese slowdown also means a lower demand for oil.  And now, at a time when Iran can legitimately re-sell oil on the worlds markets, the dominoes are falling.

The addition of Iranian oil creates a greater glut, which contributes to the domestic decline in production, which contributes to a slowing domestic economy.

Yes, it’s complex, but it’s all connected in this world of instant, 24/7 communications.  When something occurs halfway across the world we know about it immediately.  And it often has an impact on our daily lives and our finances.

The investment world has historically gone through various unpredictable cycles, much like our Michigan weather.  I believe, in the not too distant future, that we’ll look back at January and clearly see that it marked a transition, just like a sudden change in the weather.

There’s no shortage of events that have contributed to the recent downfall.  Our domestic politics, for example are nastier than I can ever recall.  As previously mentioned, China’s economy is beginning to slow down, causing their stock market to plummet.

Whether they’re real or imagined, North Korea’s nuclear claims are in the headlines and putting many countries on edge.  And tensions are even greater in the Middle East with sanctions lifted against Iran and their oil once again hitting the market.

Meanwhile, I believe interest rates are among the most overlooked factors contributing to global uncertainty.  European banks are softening interest rates at the same time our Federal Reserve is raising them.

By no means am I an expert on international banking, but with the financial world so globally intertwined I cannot see how both European bankers and our own Federal Reserve can be right.  They’re moving in opposite directions on interest rates.  Somebody’s got it wrong.

We are in the midst of a financial storm (world events) at a time when the financial world is changing seasons (interest rates). So what should you do?

Diversifying and keeping your emotions at bay can help. This isn’t the first difficult period I’ve seen during my long career.  I doubt it will be the last.  Experience has taught me that financial decisions made with the heart rather than the mind seldom turn out to be the best long term decision.  Above all, be patient.

How to be certain in uncertain times

The new year has not been kind to investors. In fact, to put it bluntly, it’s been downright brutal from the very start. The only bright spot is that we know what fueled the sudden downturn. Just take a look at what’s going on around the world.

There were the North Koreans testing a nuclear weapon. Or at least they’re claiming to. In China, a steadily sagging economy is perpetuating a staggering slide in their stock market. And in the rarely stable Middle East, tensions remain high between Iran and Saudi Arabia.

All this uncertainty has spurred an economic slowdown, which, in turn, has lead to dramatic drops in commodity prices. Oil prices have been the most visible; we see them every day at the pumps. But copper and steel have also taken terrific tumbles.

Yes, there’s no doubt about it. The world has been dealing with an onslaught of unsettling news.

In the midst of the uncertainty, there is a bit of good news. At least domestically. Our own auto companies are reaching unprecedented heights. In 2015, car sales were 17.5 million. While it wasn’t by much, it was enough to break the record of 17.4 million set in 2000. But bright spots notwithstanding, the pervasive mood is still one of caution and apprehension.

As a financial advisor who has guided many households through unsettling times, I suggest everyone keep a level head. Yes, it’s upsetting to see your daily account values tumble, but changing your financial course in the middle of a downturn may hurt your nest egg in the long run.

Of course, you could sell all your investments now and buy them back when things get better. But while this strategy may work for a rare few, in my experience not many investors ever get it right on both ends. They typically sell at the bottom and re-enter near the top.

Most are better served by developing a diversified strategy and maintaining it throughout economic cycles. Generally, it’s a good idea leave things to the money managers you had confidence to manage your funds in the first place

They follow your investments and the economic climate daily, affording them the opportunity to jump on opportunities that can add to the value of your portfolio.

Unfortunately, in the investment world it’s too easy to pull the plug on your well-thought-out plans. More often than not bad things happen when fear takes control.

Imagine you’re on a commercial flight and your plane suddenly encounters some severe turbulence. Would you consider asking the pilot if you could take over and land the plane?

That doesn’t make any sense, but that’s exactly what some are doing with their money. Modifications in your portfolio may be appropriate during a review. Tweaking a portfolio periodically may be in order. But total abandonment? It seldom turns out well.

Abandoning your strategy may make you feel better initially. But in the long term, the odds are your nest egg will suffer. I understand that it’s difficult to see account values fall. But I’m confident that investors who stick with their strategy will be rewarded for their commitment.
I don’t know when the slide will stop or the market will turn around. But I do know both events will happen.

Is your investment portfolio out of control?

From my perspective, time is moving at the speed of light. I’m continually reminded that we cannot control time. We can only manage it. To a certain degree, the same principle applies to investing. You can’t dictate your results; you can only manage your investments and hope for the best.

Let’s take a look at the conservative portion of your portfolio. You’ve likely got your money earning interest in a bank or credit union. You can- and certainly should- shop banks for the highest interest rate available. But other than that there’s not much you can do. You can’t control the interest rate; you can only manage it.

On the growth side of your portfolio, you can choose virtually any stock or mutual fund. The choice is almost limitless. Common, preferred. Domestic, foreign. By sector, by country. You name it.
Whatever you choose, your investments can move up or down on any given day. You can’t totally control outside events that affect the direction. But you can keep a close watch and manage your investments accordingly. And since it’s still early in the year, the good news is that you have more than eleven months to do just that.

Let’s take a look at some activities you can control. First, you can review the IRA rules to determine if you’re eligible to make a contribution.

If you don’t already have an IRA account, you can open one now, or contribute to an existing account and deduct the contribution on your 2015 tax return. This applies to a regular IRA account. Contributions to a Roth IRA are not deductible, but are withdrawn tax-free.

You can also manage your retirement plan contributions. The beginning of a new year is always a good time to review your previous year’s contributions. For example, if you were contributing five percent of your pay last year and it was relatively painless on your cash flow, now might be an opportune time to up that contribution to six or seven percent.

If five percent was leaving you feeling a bit squeezed, you could do some number crunching on the spending side of your ledger and find a way to do some trimming. Either way, it’s something you can control.

And while there’s much in the world that we can’t control, it’s not always a bad thing. Prices at the pump, for example, are down substantially. Conversely, health care costs continue to rise.
This past Christmas I received a fit-bit. For those that are not familiar, it’s a device that measures your daily steps. Clearly, I can manage that number; set and meet a daily goal. But, while it may help my health, it can’t assure good health.

The bottom line is that you can manage activities but you can’t control results. In order to do that you need to establish measurable investment goals and objectives. Carefully monitor your progress and make any adjustments that may be necessary.

When it comes to finances, nobody can ever guarantee results. That’s why it’s up to you to put your self in the best possible situation for success.

Knowing that you can’t dictate results, you need to manage the elements that lead to them. Save and invest and periodically review. That’s the best you can do.