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Ponderings For the Week of June 19 to 25, 2017

Stocks End Week Mixed

Uninspiring economic news dominated the investment markets last week, including weak housing starts and lower inflation readings. As was widely expected, the Federal Reserve Board raised interest rates by a quarter of a percent. Friday’s big news of Amazon’s acquiring Whole Foods weighed on stocks that produce and sell food. In effect, a very large sector of the U.S. economy is in the crosshairs of a disruptive behemoth. Fewer and fewer industries will ultimately be immune from the tentacles of disruptive innovation.

More economic reports are published this week, including home sales and leading economic indicators. With two weeks remaining in the June quarter, second quarter corporate profit reports and outlooks are just a few weeks off.



Preparing Realistic Retirement Projections

There are many useful online tools to help you project your retirement income. This is an essential task for both working age and retired people. Those in the workforce need a periodic projection to determine whether they’re on track to retire when they want to with sufficient lifetime income. If not, the projection should show them what they need to do to close the gap. Retirees need a periodic projection to make sure they aren’t overspending or their investment returns haven’t fallen short of what they had previously assumed.

The assumptions you make are the key to obtaining a realistic forecast.
Someone recently told me: “I could massage the assumptions we use to show that we could run out of money in our seventies or our kids could inherit millions even if we live to 100.”  Here are our suggestions for three key assumptions you will be asked to provide when you prepare an online retirement projection:

  1. Life expectancy. Unless your health is a major problem, use age 95 (100 if you’re under 40 or have parents who have lived into their nineties). A lot of people, particularly Baby Boomers, tell me: “I don’t want to live that long.” But they still have to prepare financially for the possibility that they’ll live longer than they desire. Don’t allow the projection software to automatically base your life expectancy on current mortality tables. You could still be going strong at the time your projection says you’re supposed to deceased.
  2. Inflation. Rather than assume that inflation will remain quite low as it has for the past many years, we suggest considering longer term average inflation rate that is around 3%. Better to overstate inflation a bit rather than understate it. By the way, at a 3% average annual rate of inflation, you’re living expenses are likely to more than double during your retirement years.
  3. Investment returns. While it may be tempting to assume high future investment returns, overstatement could lead to big problems later on when it will be very tough to cut back. My suggestion is to assume 5½% average annual investment returns during your working years and 5% after retirement to reflect the need to have more cash on hand to pay your bills after you retire. These returns assume you have a well-diversified investment portfolio with at least 40% in stocks. If you invest more conservatively, please lower your investment return assumption.  

You might consider using a couple of online retirement projection tools to get a second opinion since all of them use different calculation routines. Our favorite continues to be offered on www.analyzenow.com.


Smart Money Tips

  • Don’t fall prey to human nature. There’s an inherent danger in following the opinions of those who purport to know about the future of the economy, the investments markets, or any other condition, for that matter. The problem is that we tend to form our own opinions and then wait until we hear others state the same opinion. Once your own view is supported, you are convinced that the truth has been divined and act accordingly. But as you have probably found – or will discover – your actions may not reap the rewards you or your fellow opinion-sharers predicted. There is nothing that worries me more than people who are convinced that some future event is inevitable, whether it’s gold going to $8,000 an ounce or the stock market falling 80%. Might happen, but it probably won’t and you don’t want to bet your financial future on some outrageous forecast of an unprecedented event.
  • Consolidate your investment accounts. Riding herd on your investments is tough enough without having more accounts than you need. Most of us have too many. So combine your various accounts including rolling over any 401(k) and 403(b) plans from old employers into your IRA. You generally need only a single traditional IRA account and, if applicable, a single Roth IRA account. The same applies to brokerage accounts. While you’re at it, ask to receive your statements online to reduce both trading costs and the paper clutter in your home. 




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