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Ponderings For the Week of April 11 to 17, 2022

Investors Await First Quarter Profit Reports

Federal Reserve policy and more trouble in Ukraine lead the checklist of investor woes last week. Fed members asserted that the Board will act rapidly and decisively to quell inflation, beginning with the next meeting in May. Economic reports last week contained no surprises and indicated that the economy was still relatively robust despite inflation and the war. Weekly jobless claims fell much more than expected to 166,000, the lowest since 1968. While information on service sector activity came in somewhat below expectations, it is still expanding. For the week, stocks pulled back a bit while longer-term bond yields rose to three-year highs. Bond interest is creeping up to a level that might entice investors, but they still should avoid longer-dated issues.

No wonder investors are befuddled by the to and fro of the market. Headline writers must get some sort of pleasure out of scary, but misleading descriptions of market action. One that stood out last Friday said:  NASDAQ Index suffers worst weekly loss since March 11

. Lest you wonder if this awful loss arose in March of 2000 or 2008, or 2020, it was actually 2022 – the worst weekly loss in a mere four weeks.     

 

The Die is Cast When You Retire

First, here are some definitions of “the die is cast:” the future is determined; events will proceed in an irreversible manner; the point of no return is passed. So it is with the amount of money retirees spend after the first couple of years of retirement. Based upon my years working with retirees, once your level of retirement spending is set, there’s little chance of reducing it in the future. Withdraw too much, and you’re setting yourself up for financial problems later on. In one instance, a couple was spending far too much and they committed to cutting their spending way down. After a year of what they felt was a painful curtailment of their lifestyle, it turned out that they reduced expenses for the year by just $50. The die had been cast for them. For whatever reason, it’s almost impossible to cut back until the money runs out and then, previously affluent retirees may risk being consigned to public housing and SNAP benefits, formerly called food stamps. Here are very general rules of thumb for the annual amount of your total retirement savings that you can prudently withdraw, assuming you diversify your savings between stocks and bonds:

In your 60s:  4% to 5%
In your 70s:  6%
In your 80s:  7%  

Withdraw much more than that and you’re gambling on your financial wellbeing.

Smart Money Tips 

 

  • Getting a tax refund is bad news. The average federal income tax refund is about $2,300. Perhaps that’s a nice surprise, but it constitutes an interest-free loan to the U.S. government. If you underpay your taxes, does Uncle Sam give you a tax-free loan? No way. Getting a tax refund is bad news, particularly when you can generally avoid it. The trick is to claim the number of withholding exemptions that will result in total withholdings that are close to what you’re going to owe. Or, if you’re retired, reduce the amount you pay in estimated taxes or the amount of income taxes withheld from any pension payments, Social Security, or IRA distributions you receive. You will want to check a couple of times a year to make sure you’re paying in enough taxes since your tax situation can change. Once you do away with your tax refund, what should you do with the extra income you’ll enjoy throughout the year? I’m glad you asked. It’s up to you, of course, but I’d recommend that you don’t take your increased take home pay home. Instead, put it away for the future either by increasing your retirement plan contributions at work or having the extra money transferred automatically to an IRA or investment account.  
  • A big mortgage is no badge of honor. I heard a couple of financial commentators urge listeners to take out a bigger mortgage. Tax preparers are often guilty as well, suggesting that a big mortgage is a big tax saver. But you have to lay out a lot more money to pay your mortgage than the taxes you save. You would think that past recessions and slumps in home values would have taught homeowners with large mortgages an enduring lesson about the importance of reducing debt, not maintaining it or, worse, adding to it. Always be skeptical of those who urge you to do things that don't make a lot of sense.

 

 

 

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