4th Week of July 2021 Thoughts
What do you do…when they change the rules? Teresa Ghilarducci, Schwartz Professor of Economics at the New School for Social Research
Let's say you're one of the lucky ones and have accumulated $1 million after years of working. But, like many, maybe the pandemic and being in the office has you looking for the exit, stage left. Add to that, your employer is pushing older employees out the door.
How can you “safely” withdraw the $1 million and not run out of money? Do you live for the moment and spend it any way you like, or cut back and conserve to ensure it lasts for the rest of you and your partner’s life? Both decisions are wrong.
This, but this money management problem is uniquely American. Other rich nations don't require their elders to have to figure out how to make these complex financial decisions. But, to do it right, you need to make assumptions about when you and your spouse will die and how financial markets will fare. No wonder it is tempting to buy an annuity to have a guaranteed, even if it low…stream of income rather than having $1 million to manage.
If you do have that suitcase full of cash, AND you have beat the 30% chance of being in cognitive decline after age 70 AND the 35% risk of Alzheimer's after age 85 AND you have not been targeted by financial fraud…you then have a laundry list of decisions you have to get right. A big one: the standard rule of thumb was you can draw down 4% of your total assets (5% a decade ago) and a 1994 study shows 4% was a safe withdrawal rate. It was kind of nice to have a simple answer.
Today, though, the only real rule is that blindly sticking with 4% is dangerous: you can’t assume the same historic returns for stocks and bonds as in the past and 3% or a 3.5% withdrawal rate might be better. Delaying claiming Social Security, even if you have to tap into your retirement assets, is one of the best ways to build your base of income, especially since Social Security is inflation-indexed and lasts until the end of your and your spouses’ lives.
Is RISK a 4-letter word? What does risk really look like? Do you avoid it at any cost or consider the risks and make rational decisions? Here are some thoughts on risk…
1. Percentages matter. If a stock declines by 30% it has to rise by 50% to get back to where you started.
2. The foolishness of selling winners. Buy five stocks / funds: four go up, one goes down. Think you should take your profits, so you sell the winners and buy three more? Three go up, one goes down so you sell the three winners and replace them. Two go up and one goes down so you sell those two winners and buy two more. If one those goes up, you are left with four losers in your five-stock portfolio. This is where my charts pay off!
3. Diversification is more than numbers: diversification is not just owning lots of stocks / funds IF they are all in the same industry or asset class. You gotta spread out and own different types, different asset classes.
4. Look under the hood with mutual funds: being smart matters in life, especially with investments. While it might seem smart to look for the lowest cost funds, but where else in life is buying what is the cheapest, smart?
5. Success isn’t only about the return. It is NOT easy to calculate how much risk you took to get that return and it’s fine to accept a lower rate of return overall if the risk level can be substantially lower.
6. Don’t buy things you don’t understand. Have you ever had a friend tout an investment and wanted “to buy some of that?” I totally believe that investing some of your portfolio in companies you like and believe in is good, and fun! It helps you understand that your return comes from owning great companies.
😊Why does this matter to you? I believe that if we are good, smart, and lucky, life will be so much easier and more enjoyable. I love helping you with all three! Some of these might sound like Debbie Downer, but they are common sense.
The annual cost-of-living adjustment, or COLA, for Social Security benefits in 2022 — usually announced in October — could be 6.1%, the highest since 1983, based on Tuesday’s Consumer Price Index announcement reported the Senior Citizens League. The consumer price index for all urban consumers in June rose 5.4% over the past 12 months, the Labor Department reported. This represents the second-largest advance in over a decade and includes food and energy.) Much of the volatility in the market this year is related to the fear…and reality…of soaring inflation because inflation erodes the buying power of Social Security benefits. The Social Security Act stipulates that the formula for calculating COLAs be based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers. The COLA for December of the current year represents the percentage increase in the CPI-W from the average for the third quarter of the current year to the average for the third quarter of the last year. Last week, Rep. John Garamendi, D-Calif., introduced the Fair COLA for Seniors Act of 2021, which would require Social Security to use the Consumer Price Index for the Elderly (CPI-E) to calculate “a fairer cost of living adjustment” for seniors. The CPI-E uses the same formulas and prices as the CPI-W but puts more weight on expenditures typical of those 62 and older. From 1982 to 2011, CPI-E rose at an annual average rate of 3.1%, compared with 2.9% for the methods that are currently used, Garamendi said. Why does this matter to you? Cash Flow. Money in the bank. It has always mystified me that we can SEE costs going up…but so often, those increases didn’t translate into COLA. Looks like good news in 2022.