Ponderings For the Week of June 7 to 13, 2021

Small Gains for Stocks Last Week

Most of the widely-followed stock indexes gained a fraction of one percent last week. Trading volume was light, which is characteristic of the summer season. Last Friday’s jobs report indicated that employers added 559,000 jobs in May, a bit less than what had been expected. That, and other jobs numbers, provided some assurance that inflation and higher interest rates are not near-term threats to the economy as had recently been feared. Other reports also showed a generally robust economy. Jobs in the service sector are booming and manufacturing activity remains strong.

Despite generally upbeat economic reports, the investment community’s enthusiasm for stocks is on the wane. While recent weekly action on Wall Street may seem like the bull market is continuing, stocks have gone almost nowhere over the past seven weeks.      

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 compiling 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 a bundle 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 currently 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 a 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 5% to 5½% average annual investment returns during your working years and a bit lower 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.

If you need one more push to prepare a retirement forecast, consider the findings of a report by the World Economic Forum on worldwide retirement preparedness. The report calculated that American 65-year-olds have enough savings to cover just 10 years of retirement income (excluding Social Security), leaving a gap, based on life expectancy tables, of 8 years for men and 11 years for women, who live longer. This was better than many other countries in the survey, but not by much.  

Smart Money Tips 

  • Help your parents cope with their financial worries. Thanks to the incessant negative drumbeat of the media, many seniors are convinced that their finances are never going to see them through the rest of their lives. That’s probably not the case, but many are losing a lot of sleep and some are contemplating making major changes in their financial lives, like selling the home, going back to work, or cutting way back on their spending. If you sense that a parent or other older generation family member is overly concerned, encourage them to take a detailed look at their situation rather than focusing on what others are saying.
  • Avoid unnecessary repairs on your car. When you take your car in for maintenance or for a recall, don’t be surprised if the dealership or repair shop suggests additional items that need to be attended to, like power steering flush, fuel injection service, the timing belt, an extensive brake job – the list is endless. Also, be prepared for a scary lecture on the risks of not having the work done. At a minimum, get a second opinion. If you follow the car’s recommended maintenance schedule, you should be okay. The best way to avoid being taken for hundreds of dollars in unneeded repairs is to find a good auto repair shop or dealership that follows your instructions and doesn’t come up with a long list of unexpected repairs when you bring your car in.








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