Welcome! I hope you may benefit from this month's edition of Notes Along the Path.
For those of you that are existing clients, I hope you will consider sharing this with someone you know who might be asking themselves some questions about their retirement.
Today we will be discussing:
Market Commentary, the month that was: A September pothole
The S&P 500 Index surged an impressive 60% from the March 23 bottom to the most recent high in early September (St. Louis Fed S&P 500 data). But stocks hit a roadblock in September.
Given the incredible run, a pullback was inevitable. But as I've counseled before, the timing, magnitude, and duration of a pullback is impossible to predict. More of your success is based on time in the market than timing the market.
Several factors played a role in last month's pullback.
● Any uncertainty creates a good excuse to take profits after a big run-up in price.
● Daily Covid cases in the US ticked higher last month, per Johns Hopkins data.
● While it won't be cheap, Congress has yet to find common ground on a new fiscal stimulus bill. The economic bounce in Q3 has been stronger than most initially thought likely. But investors and many analysts believe more support is needed.
● Finally, the election is front and center. We may not have a winner on election night. Worse, a disputed election would add to investor angst.
President Trump and the first lady tested positive for Covid, injecting a new round of uncertainty into an already tumultuous election. How this may play out is unknown, as we're in uncharted waters.
As always (OK, since March), much will depend on the path of the virus, but heightened uncertainty does put a damper on investor sentiment.
Amid acrimony on both sides, let me first say that my role is to be your financial advisor. I have worked hard to earn your trust, and am only an amateur in political analysis. I am here to guide you as you journey toward your financial goals.
Therefore, I will carefully and cautiously review the current contest through a very narrow prism–through the eyes of a dispassionate investor focused on the economic fundamentals and how that might impact equities.
Let's consider these facts.
Some investors fret that a Biden win would lead to higher corporate taxes and heap more business regulations. But might we see more fiscal stimulus and an easing in trade tensions, which could support shares?
When one party becomes pessimistic because their side lost, the other side becomes optimistic.
Longer-term stocks march to the beat of the economy, Fed policy, and corporate profits.
A growing economy fueled by innovation and entrepreneurship has been the biggest driver of stocks over the many decades. In my opinion, that's not about to change.
Questions to ask yourself about retirement
Achieving your financial goals doesn't just happen by itself. It takes a plan, implementing the plan, adhering to the plan, and when necessary, adjusting the plan.
You have heard the cliche: failing to plan is planning to fail. Don't plan to fail!
According to the Department of Labor,
● Only 40% of Americans have calculated how much they need to save for retirement.
● In 2018, almost 30% of private industry workers with access to a 401(k) plan or something similar did not participate.
● The average American spends roughly 20 years in retirement.
Nearly everyone will receive Social Security, but Social Security won't pay all the bills.
1. How important is regularly saving? It's critical.
Once you begin an automatic payroll deduction into a retirement account, you won't miss it. I promise. Let me tell you a short story about my own experience. When I first started saving in my company's 401(k), my initial goal was to put 10% of pretax income in my 401(k).
But that seemed like a mighty big chunk of cash, at least in the beginning. So, I started with 6%, raised it 1% per year after that until it reached 10% four years later. Taking baby steps was much easier than attempting to summit the peak in one leap.
I can't overemphasize the importance of capturing your entire company's match. It's free money. Don't leave free cash with your employer.
2. When to start? As early as you can.
It won't be long before my son graduates from college. In his mind, retirement is another planet, if not another universe. That's the case for many young people.
But we all know the magic of compounding. The savings we socked away when we were younger has paid big dividends.
Here's another story. A friend of mine in his early 50s is semi-retired. Yet, he sometimes laments that he started saving when he was 26 and not 22. For many, he's ahead of the game, even if he didn't start right out of college. Still, his decision to start early and max out his contributions put him on the path to wealth.
Let's illustrate by way of example. Tom is 28 years old and plans to save $500/month or $6,000 per year until he retires at 65. With an annual return of 7% (assuming annual compounding), Tom will have amassed $962,024 when he turns 65 years old. Total contributions: $222,000.
Kate decides to put away the same amount. Kate is 22 years old and will save for 43 years. While her time to contribute is only an additional six years, her decision to start early is rewarded with a portfolio of $1,486,659. Total contributions: $258,000.
Because Kate started sooner, the additional $36,000 amounted to an additional $524,635! (Source: Investor.gov Investment Compound Calculator. Calculations assume a tax-deferred account.)
3. What plan best fits my need?
That question will depend on your circumstances. For many, your company's 401(k) is tailor-made to save for retirement, especially if your firm has a matching contribution.
Whether to fund a traditional IRA or a Roth IRA depends on many factors, including your marginal tax rate today and the expected rate in retirement.
A Roth offers tax advantages if you qualify. Generally speaking, withdrawals from a Roth IRA are tax-free in retirement if you are age 59½ or older and have held the account for five years. But you won't capture a tax deduction on contributions.
Current tax law does not require minimum distributions, which can be a significant advantage during retirement.
A Roth may also be advantageous if you do not believe your marginal tax rate will fall much in retirement or if you have outside assets that limit your need to withdraw on your retirement savings.
Can't decide? Many 401(k) and similar plans like the TSP allow you to put half in a traditional account and the other half in a Roth-style account.
4. How much will I need at retirement?
Again, much will depend on your circumstances. Your retirement expenses and lifestyle will dictate your portfolio needs.
An old rule of thumb that you'll need 80% of pre-retirement income may not suffice for many. For example, will you still be paying on a mortgage after you retire? Or do you plan to downsize, which may reduce or eliminate monthly mortgage outlays?
One approach some folks consider is the 4% rule. It's relatively simple, but in the current low-interest-rate environment, it is unlikely to work. It assumes a 30-year time horizon and minimizes the risk of running out of money. 3% is a more realistic withdrawal rate.
The truth is that pinning down your number requires complicated analysis.
Unless you plan to work until you are 70, you need to look at several different retirement phases and calculate the money needed to get through each.
For example, let's say you want to retire at age 62.
5. How do I find the right mix of investments?
What works at 30 years old probably isn't appropriate at 50.
While our advice will vary from investor to investor, we can offer broad guidelines. Furthermore, retirement may be broken into different stages, which may require adjustments to the plan.
Some investors decide its best to take a very conservative approach. You know, "I can't lose what I've accumulated because I don't have time to recoup losses." But that has its drawbacks. For starters, you don't want to outlast your money. Equities, which have historically offered more robust returns, may still be an essential part of an investment strategy.
Others may be swept up by what might be called "the current of the day." Stocks have surged, which may encourage investors to load up on risk. However, a comprehensive financial plan helps remove the emotional component that can creep into decisions.
Talk to me any time about the concepts of Risk Need and Risk Appetite, and how they differ from the traditional question of Risk Tolerance.
6. I've saved all my life. How do I begin withdrawing from my savings?
It's a complete shift in the paradigm. No longer are you socking away a percentage of each paycheck. Instead, you are living off your savings.
First, if you are required to take a minimum distribution from a tax-deferred account, take it.
Next, consider interest, dividends, and capital gains distributions from taxable investments, which continues to tax shelter assets in retirement accounts.
If additional funds are needed, consider withdrawals from your IRA or other tax-deferred accounts. If you are in a high tax bracket, you may consider pulling from your Roth. Those in a lower tax bracket could leave the Roth alone and take funds from their traditional IRA.
These principles are simply guidelines. One size does not fit all. Plans we suggest are tailored to one's specific needs and goals. If you have any questions, we would be happy to share our ideas. We're simply a phone call or email away!
I trust you've found this review to be helpful and educational.
If you have questions or concerns, let's have a conversation. That's what I'm here for.
I hope you've found this review to be helpful and educational.
I understand the uncertainty facing all of us. We are still grappling with an economic and a health care crisis. It's something none of us have ever faced. We have addressed various issues with you, but there are always questions. If you want to talk any time, let's have that conversation. That's what I'm here for.
If you like it this newsletter I encourage you to pass it on to any contacts you have that might benefit.
I remain honered and humbled that my clients have allowed me to serve as their financial advisor. Thank you for your support.
All the Best!