How to “Stomach”
Market Volatility

During one of those days in February when market prices fell 3 to 4%, or over “1,000 points” as our friends in the financial media choose to refer to in order to embellish the story and capture your attention, one of our Relaxing Retirement members asked me a great question, “how can you be so confident even when markets are crashing?”  (those were her exact words)

Even though they have been members since well before the 2008-2009 crash, she admitted that the emotional reactions of her friends to the 24/7 news coverage every time market prices fall was getting to her.

I actually don’t blame her.  Unless you hide out in a closet, you can’t escape hearing about it these days with television, radio, and internet news in front of your eyes at all times, especially if you have an iPhone and/or an iPad!

Contrast that with October 19, 1987 when prices fell over 22% in one day!  Now that’s a crash!

On that day, the chairman of the Federal Reserve, Alan Greenspan, whom you would think would be completely aware of significant market movements moment by moment, was completely unaware of the crash for over four of the six and a half hours the market was open because he was on an airplane and there was no coverage in airplanes at that time.

Imagine that!  How times have changed.  Today, any kid with an iPhone can instantly discover the trading price of any stock in the world.

 System vs. Whim

The short answer I provided our members got a good laugh out of them: Vanguard founder John Bogle had a great response when asked how he handles market crashes, “I get scared just like everybody else when market prices fall quickly.  But, then I go and read everything I’ve written over the years to set myself straight!”

That’s actually not too far off!

The longer and more detailed answer I provided our members took a little bit, but they recommended that I share it with all of you.

The most important part is that we rely on a process and a system.  We don’t rely on a whim, or a hunch, or by deluding ourselves into thinking that we or anyone else can consistently predict short term movements in market prices.  I fully embrace the fact that I can’t and nobody else can either.

My answer also had nothing to do with making any short-term market predictions.  Not only is this an impossible task, but as I’ve discovered over the years, and will soon share with you, it’s completely unnecessary for the rational long-term investor with a plan.

Put bluntly, any time spent attempting to determine what markets will do in reaction to some stimulus/news story is a complete waste of your energy.

The Progression

Here is my recommendation for dealing with heavy doses of market volatility.  It begins with completely de-emotionalizing yourself, so let’s begin with some facts we’ve discussed over the last few months which I recommend keeping at the forefront of your mind at all times:

  • We are all trying to solve a long-term problem, not short-term, i.e. to have our Retirement Bucket™ support our desired lifestyle and remain intact for the remainder of our lives.  How long will that be?  Well, the average joint life expectancy of a 65-year old couple is 27.1 years, to age 92.  For a 75 year-old couple, it’s 18.4 years and age 93.4.  Given this, despite what the financial news media wants you to buy into for their purposes, we’re all long-term investors with the overwhelming majority of our Retirement Bucket!
  • We live in a rising cost world. In order for us to sustain our desired standard of living, our incomes must  And, in order for our incomes to rise to battle inflation and maintain our purchasing power, the value of our Retirement Bucket™ holdings must also rise.
  • Over the last 72 years since World War II, the value of the S&P 500 Index, our proxy for “the market”, has grown in price from 13.49 to 2,683.73 or just shy of 199 times in value! (You may want to take a moment to read that again) Markets have done a wonderful job of preserving our purchasing power throughout history.
  • This increase in value does not include dividends which we will get to in a moment.
  • Along the way, there have been 56 market pullbacks of at least 5%, with 9 bear market corrections between 20% and 40%, and 3 mega-bears over 40%, two of which were in the last 20 years.
  • The average length of time for the 9 bear market corrections to revert back to pre-bear prices was only 14 months. Bottom line: market volatility, corrections, and crashes are a given and a part of the long term investing experience.  They are not fun, but until we discover a way to rationally deal with them, we will never capture the wonderful returns markets have provided for us.

Reversion to the Mean

At the risk of getting over technical, there is a concept known as reversion to the mean which is very important for you to understand.  Vanguard’s John Bogle once said, “reversion to the mean is the iron rule of financial markets.”

Essentially, if you plotted the various short-term returns of a globally diversified equity portfolio, you would discover several things:

  1. Prices move wildly and randomly on a daily basis.
  2. There is a bell-shaped distribution of returns with a very large percentage of daily returns falling within a very small, concentrated range.
  3. And, a small percentage of returns falling outside of that heavy concentration of returns.

What this demonstrates is that, despite short-term movements outside of the “normal” distribution of returns, market prices eventually gravitate back toward the very long historical mean.

Time

What this means for you is investing is a long-term process and you must use time to your advantage.  In the short-term, prices move wildly and randomly and they don’t appear to make much sense.

In the long run, however, they make perfect sense and prices tend to revert to the mean.  We simply have to have a workable strategy in place to deal with short-term market volatility and hang in there long enough to capture rational long-term returns.

1.Global Diversification

Given all of this, the first tool in your Retirement Bucket Strategy™ toolbox to “stomach”      market volatility and remain confident is to play the higher probability percentages of owning a strategically allocated, globally diversified portfolio using low cost index and asset class funds which are built to capture the returns of various asset classes is a cost-efficient manner.

As opposed to attempting to “beat the market” by relying on superior selection of individual stocks, or actively managed mutual funds which have a horrible long-term track record of outperforming their respective index, take advantage of the opportunity to cost-effectively own a piece of close to 10,000 businesses (stocks) throughout the world.

By strategically diversifying your holdings in this manner, you position yourself to not only capture the returns of global capital markets as a whole, but also the potential of even better returns by taking advantage of the long-term risk premiums which have been provided by certain asset classes throughout history.

2. Liquidity

Your second tool to “stomach” market volatility is sufficient liquidity.  As opposed to someone who is still supporting themselves with the income from work, you are withdrawing funds from your Retirement Bucket™ of investments each month to support your lifestyle.  Because of this, short-term stock market price volatility can have a downside impact on you if you are forced to sell in a down market to provide the cash you need.  However, the downside impact is only on a very small portion of your Retirement Bucket™.

The mistake most retired investors make is assuming that all of their investment holdings are impacted by short-term market volatility.  If you are like most, you withdraw less than 5% of your Retirement Bucket each year.  And, most withdraw on a monthly basis, so that’s less than 1/2 of 1% of the value of your Retirement Bucket each month.  Given this, there is no need to shield your entire Retirement Bucket from short-term market price volatility. (Very important!)

Assuming for a moment that you have done your homework and you are crystal clear on your level of Retirement Bucket Dependence™, and you withdraw 5% of your Bucket per year, if you have 25% of your holdings held in money markets and short-term bonds, you have five years of your anticipated withdrawals immune to the short-term price volatility of stocks.  5 years!  (see historical lengths of market corrections earlier)

By having a carefully targeted portion of your holdings outside of short-term price volatility we experience with equities, you buy yourself time….time to hang in there with your equity holdings long enough (without panic selling during temporary market corrections) to capture long-term returns!

3. Dividends

During the phase in your life when you are “living” on your Retirement Bucket™, the third tool to help you deal with temporary market corrections is understanding the role that dividends play for you.

First, a few facts to keep in mind at all times:

  • While everyone always focuses on the current “price”, from 1950-2017, 6% of the total return of the S&P 500 Index came from dividends. 69.4% came from price appreciation which is the only measurement typically reported.
  • In 1960. the dividend on the S&P 500 Index was $1.98 on a price of $58.03. In 2017, the dividend was $48.93 on a price of $2,684, i.e. income grew from $1.98 to $48.93 over those 58 years!
  • While CPI inflation has averaged around 3% per year during those 58 years, dividends grew by 5.76% per year, or almost twice the rate of inflation.
  • Dividends have rarely gone down throughout history, and those reductions have been minor especially when measured against market correction prices.

Think of the role dividends play at this stage in your life when you are withdrawing funds to support your lifestyle.  During severe, yet normal and temporary market corrections, dividends provide significant liquidity, thus even more time to hang in there with your equity holdings long enough to capture long-term returns!

Not all stocks provide the same level of dividends, but the dividend yield of the S&P 500 Index last year was about 1.8%.  Assuming for a moment that this held true for the equity holdings in your Retirement Bucket, if you withdraw 4 to 5% of your Bucket each year to support your desired lifestyle, this means that almost half of your withdrawal come from dividends.

A great question you should know the answer to is what percentage of your annual Retirement Bucket withdrawals are supported by your dividends?  And, thus, how many more years of your anticipated withdrawals are substantially “immune” to short-term stock market corrections which dominate the news?

After I shared all of this with her, our Relaxing Retirement member asked, “so why does everyone make it sound like the end of the world when the market goes down?” 

Great question!  Two big, yet unfortunate, reasons:

  1. 24-hour news organizations do a fantastic job of scaring everyone to serve their own purposes. They perpetuate the myth that market price volatility is a bad thing when, in fact, it’s the source of long-term returns.
  2. They have no system for managing their money based on historical context, so they are forced to react emotionally vs. rationally to every piece of news.

 

Keep all of these points nearby so you can remain as confident as you deserve to be even when market prices are bouncing all over the place.

 

BEWARE:
“Retire Reassured”

Did you see this headline last week?

On Tuesday, February 27th, in big bold RED letters above The Wall Street Journal newspaper name across the top of the newspaper, was the headline, “RETIRE REASSURED, The fear of outliving your money is real, but has a solution been right in front of us all along? See Page A5.”

In tiny letters in the top left-hand corner was the word “ADVERTISEMENT.”

The full-page ad on page A5 begins with the headline, “The Return of LIFETIME INCOME: A time-tested strategy offers hope amid today’s looming retirement crisis.”

This sounds pretty appealing, doesn’t it? After all, it’s “time tested.”

As you may have realized by now, this is an advertisement by Jackson National Life Insurance Company which means we know what this “time-tested” solution is: annuities!

I have to give Jackson credit. The timing of this advertisement is very strategic, i.e. right after a rapid 10% correction in equity markets when the average American, devoid of long-term perspective and planning, has been conditioned to view short-term volatility as a long-term danger to their financial survival.

I can only imagine how incredibly expensive this was for them to run this ad in red color above the name of the newspaper on page one, and then a full-page advertisement on page A5! The cost was certainly into the hundreds of thousands of dollars, if not more!

The Problem and Solution Presented

The problem they present in the beginning, i.e. living longer and potentially running out of money, is right on and certainly accurate, and I applaud them for raising it.

The challenge, of course, is in their “solution”: “Similar to how Medigap fills the void in your health care costs by covering what Medicare won’t, adding an annuity to your plan can provide lifetime income, helping to fill the gap when Social Security, 401(k)s, and other investments fall short……As part of a comprehensive retirement plan, annuities can be a powerful way to bridge the money gap in retirement.”

A few paragraphs down, however, they tighten their grip on your emotions as they zero in on a huge fear they know Americans have. I have taken the liberty of bolding the sentence that is critical. However, the word “only” has been italicized by them for emphasis.

“There are numerous annuity options you can choose that can be customized to meet your needs. For example, some annuities start paying a lifetime income stream immediately, while others allow that income stream to be deferred to a time in the future. And with the purchase of a lifetime income benefit, an annuity is the only investment that can provide a steady stream of lifetime income unaffected by market downturns. In fact, that income even has the potential to keep growing.”

As all insurance companies do when they market annuities, they are preying on the average American’s fear of market corrections and volatility which is a very effective marketing strategy on their part.

You simply don’t want to fall prey to it!

As we have illustrated in great detail over the last few weeks, market volatility and corrections are nothing to fear for the rational, long-term investor if you employ a strategic plan. Not only are they not something to fear, but intelligent investors welcome them!

Annuities?

If you have been a steady reader of my Retirement Coach Blog, you know my feeling about annuities. While they do provide a tool in your planning toolbox, for the most part, the overwhelming majority of annuities marketed today are very complicated, expensive, restrictive, and they are grossly oversold. (One of the reasons they are oversold is they pay very large commissions to agents and advisors who sell them.)

Jackson recognizes these realities, so the ad attempts to deal with them.

“Sound too good to be true? It’s important to remember that unlike any other investment product, annuities were created by insurance companies, which have the unique ability to offer features and add-on options that help protect us against outliving our savings or having to drastically change our lifestyle in retirement.”

And, then:

“Annuities have been available for a long time, and it’s true that they can be complicated to understand and even challenging for advisors to sell in today’s regulatory environment. But that should never be a reason for investors or advisors to forgo consideration of something so critical as guaranteed lifetime income.” (I have again take the liberty of bolding this last sentence)

Doesn’t the phrase “guaranteed lifetime income” sound so attractive? Who wouldn’t want that???

What is omitted in this advertisement is the cost to you for providing this “guaranteed lifetime income.”

Guaranteed lifetime income comes when you annuitize your money.

When you “annuitize”, you are choosing to receive a guaranteed monthly payment for a period of time, typically for life similar to a pension or social security.

Two caveats (costs) come with this benefit, however:

  1. Who Owns Your Money: Once you annuitize, your money is turned over to and owned by the insurance company:
  • Single Life: When you select the single life option, you choose to receive payments for the rest your life. But, only your life. When you pass away, even if that is in three months, the insurance company keeps the money.
  • Joint and Survivor or Period Certain: If you have a spouse who you want to protect, or if the prospect of passing away too soon and having the insurance company keep your funds is a problem for you, you may select a joint and survivor or period certain plan. By doing so, you guarantee payments to your beneficiary either for your spouse’s life or for a certain period of time after your death. However, in order to compensate the insurance company for this added risk, you receive a smaller monthly payment while you’re living. And, when your spouse passes away, the insurance company keeps your money. 
  1. Inflation: Always remember that the biggest challenge we are all confronted with is having our income be able to keep pace in a rising cost world. In 1985, the cost of a first-class stamp was 15 cents. Today, it is 50 cents, more than a three-fold increase in only 33 years.

 With most annuities, your monthly payment is guaranteed. However, there is no cost of living increase each year to keep pace with inflation. So, if your monthly payout is $2,000 per month, 10 and 20 years down the road, the amount you will continue to receive is $2,000 per month while your costs to continue your same lifestyle have all increased.

Annuities which offer the ability to “potentially keep growing” cost more, so your monthly benefit is less to start.

The bottom line is to always have your eyes wide open when reading advertisements like this, and to beware of “magic pill” offers.

As much as we would all love a “magic pill” as this Jackson advertisement attempts to imply, there is no such thing.

 

 

Market Corrections and Time

Most Americans walk proudly and carefree when market prices are climbing.

Risk becomes irrelevant. Strategic asset allocation looks boring, and disciplined diversification gets called into question because some asset classes outpace others. Many begin to lament not having all of their money in the winning asset class over the last year.

The fact that markets correct all the time and have experienced many ugly stretches during their historic long-term climb is a distant memory.

And, then………the market hiccups!

We experience a normal, garden variety correction, like the 14% intra-year price drop we’ve experienced each year on average over the last 38 years.

The financial media jumps at the golden opportunity to increase viewership ratings by stirring the pot and perpetuating the myth that “this time is different.”

Microphones are placed in front of innocent retirees who claim, “I’m worried. At my age, I don’t have time to make it back.”

Investing for the long term sounds great when you’re in your 30s, 40s, or 50s, but I’m 70 years old. I don’t have time to make up for any losses.”  

Does this sound familiar? Have you ever had a similar thought?

If you have, I can assure you that you’re not alone. I can also tell you that it is unnecessarily in the way of you enjoying the Relaxing Retirement you deserve.

Whenever markets experience sharp corrections during their retirement years, the investment time horizon for too many Americans quickly shrinks.

While increases in market prices are typically met with apathy as I mentioned above, or reservation, i.e. “it can’t or won’t last”, sharp declines in market prices are greeted with the gut feeling of permanence, i.e. “it sounds really bad this time. I don’t think it will ever come back in my lifetime!

If you study financial news reporting, you will find a version of this story during every market correction.   So much so that the we don’t have time to make it backmantra is treated as an indisputable fact, one which governs investment decisions for the majority of Americans during their retirement years.

However, this dominant sentiment is not supported by facts.

Long Term Purchasing Power

We invest to solve a long-term problem, not a short term one. And, that problem is purchasing power.

Take a look at what you spend money on. If history is any guide, outside of a few items, prices will be significantly higher in the future if for no other reason than the stated goal of the Federal Reserve is an inflation target 2% per year.

Given this, in order for us to maintain our desired lifestyle, our income must increase substantially over our lifetime. This is not a want. This is a need.

Our income must increase. And, in order for our income to increase, our Retirement Bucket™ must increase in value over time in order to generate that lifestyle sustaining income.

In short, our shared problem is a long-term problem, not a short term one. If our lifespan truly is that short as the quote suggests, stock market corrections would have no significance.

First, we wouldn’t own equities because equities solve a long-term problem.

And second, although potentially uncomfortable to think about, if we did own equities and market prices temporarily dropped right before our demise, our beneficiaries would inherit and maintain ownership of them while prices corrected back.

 How Long is Long Term?

With all of this talk about time, i.e. “I don’t have time to make it back”, let’s examine the facts about just how long is “long term” using Average Life Expectancy information from mortality tables used by life insurance companies and social security:

  • Life expectancy for a 60-year old male is 44 years, and 24.37 years for a female. However, their joint life expectancy, i.e. the average life expectancy for the survivor in a 60-year old couple is 31.8 years, i.e. just shy of 92 years of age.
  • For a 70-year old couple, their joint life expectancy is 6 years (age 92.6)
  • For an 80-year old couple, their joint life expectancy is 5 years (age 94.5)
  • For an 85-year old couple, their joint life expectancy is still 1 years (age 96.1)

Take a moment to let these numbers sink in.

Assuming for a moment that you are just “average” (it’s highly likely that you are above average if you take care of yourself), where are you in these numbers?

For example, if you’re a 70-year old couple, your number is 22.6 years, so your personal investment time horizon is 22.6 years!

Stock Market Corrections

With your investment time horizon firmly in your mind, now let’s examine historical market corrections and the amount of time it took to “make it back.”   

** For simplicity, we will use the S&P 500 Index as a proxy for the market as it provides a long history to track and encompasses a large portion of the market value.  

Since 1945 (72 years after World War II ended), there have been 89 market pullbacks of significance:

  • 56 of them were between -5% and -9.99% with the average drop of 7%. It took average of one month to fall 7% and two months to recover back to the original price before the drop.

  • 21 of the pullbacks were between -10% and -19.99%, with an average of price drop of 14%. It took an average of 5 months to reach the bottom, and 4 months to recover back to the original price before the drop.

  • Of the remaining 12 pullbacks, 9 of them were between -20% and -39.99%, with an average of price drop of 26%. It took an average of 11 months to reach the bottom, and 14 months to recover back to the original price before the drop.

          • Adding those three together illustrates that 86 of the 89 pullbacks over the last 73 years have fully recovered in 14 months or less, with 77 of them (79%) recovering in 4 months or less.
  • Finally, 3 of the pullbacks were over -40% (including the two recent ones between 2000-2002 and 2007-2009), with an average price drop of 51%. It took an average of 23 months to reach the bottom, and 58 months to recover back to the original price before the drop.

Investment Time Horizon

With these historical facts, let’s now return to those Average Life Expectancy facts and your investment time horizon to determine if the often-heard quote, “Investing for the long term sounds great when you’re in your 30s, 40s, or 50s, but I’m 70 years old. I don’t have time to make up for any losses” is valid for you.  

Let’s assume for a moment that you have followed The Relaxing Retirement Formula™, i.e. you have determined precisely what it costs to support your desired lifestyle, and how much of that must be withdrawn each year from your Retirement Bucket™.

You have set aside multiple years’ worth (5 is a very safe number to start with) of your anticipated withdrawals in money markets and short-term fixed income instruments which do not experience volatility levels like equities. You then strategically diversified the remaining balance of your Retirement Bucket™ across a spectrum of equity asset classes and allowed all dividends you receive to accumulate in your money market. (**a very important distinction**)

If you are that 70-year old man, your investment time horizon is 14.13 years. If you are a woman, it’s 16.33 years.   However, if you are married, it’s 22.6 years! In either case, is the “I don’t have time to make it back” mantra factually valid? No!

Even if we experienced what has happened only 3 times in the last 72 years and it took 58 months (just shy of five years) for market prices to return, you still would not have had to sell any of your equity holdings at a loss to free up funds to support your needed withdrawals because, in addition to allowing your dividends to build up in your money market, you already had those funds set aside outside of your equity holdings.

The reality is that your investment time horizon is a lot longer than you may think, and if you adhere to The Relaxing Retirement Formula™, you do have time!

Knowing this should give you enormous confidence to spend what you have planned to spend no matter what the current market conditions are at the moment.

 

 

We Begin 2018 With That Word Again

While shooting baskets at the gym with my son Michael down in Chatham last weekend, I observed him do something I’ve seen him do dozens of times over the years. Something we’re all guilty of and can learn from as I will expand on in a moment.

As I rebounded and fed him the ball after warming up for a bit, he went on a roll and hit over a dozen jump shots in a row from behind the 3-point arc.

His energy level was way up and he began every shot with his legs. His eyes never left the front of the rim. He was completely focused and repeated the exact same motion and follow-through over and over from different positions on the court, all ending with the same good result. You could say that Michael was “in the zone.”

However, that didn’t last very long. In typical 15-year-old-boy fashion, almost as if bored with the good results he was having, he then began dribbling erratically and taking all kinds of crazy, off-balanced shots like you see NBA players taking on ESPN’s Sport Center highlights.

The disciplined form and follow-through he demonstrated before was gone. He dribbled the ball off his foot a few times. His eyes were everywhere but on the front of the rim. And, he clanked a bunch of shots in a row off the rim, hitting 20% of his attempts at best!

Interestingly, after sharing this observation with him (as any “good father” would do… wink-wink), and listening to him disagree with my assessment, he then attempted to get his rhythm back to where it was before.

After struggling for quite a while, it did eventually come back, but not without the pain of having to break the bad habits he developed in that short period of time.

(In full disclosure, my father was a terrific coach and a real “technician” on the correct way to shoot a basketball, so I learned everything from him. He was a classic “old school” John Wooden type who disliked any showboating, and believed in mastering the fundamentals. Into his 60s, he could still drain 10 out of 10 from the top of the key with no problem!)

Microcosm

The experience I just described to you is extremely common among young athletes, and it’s a microcosm of what goes on constantly in team sports. It’s the biggest reason why it’s so rare to see repeat champions.

There are countless examples of high level athletes and great teams who battle through challenging times with incredible levels of focus, discipline, and grittiness prior to experiencing a winning result.

However, after experiencing the high of the win, or the great play, they often spend a lot of time celebrating, and the focus and discipline that got them there goes out the window. They allow themselves to become distracted and complacent, and they lose their focus and their edge. They stop paying attention to the fundamentals and their performance falls right back into mediocrity.

The most blatant example I can think of is the 1985 Chicago Bears who dismantled and embarrassed the New England Patriots in the Super Bowl. You may recall “The Super Bowl Shuffle” video the players created, and the dozen players who cashed in by writing books and going on the speaking circuit after the season.

That incredible collection of players never won again after that. All of that talent was wasted.

This is why the truly great coaches (i.e. Bill Belichick – Patriots, Nick Saban – Alabama football, and Gregg Popovich – San Antonio Spurs) deserve so much credit.

Each of these coaches and their teams have experienced incredible levels of sustained success. In the middle of all of that long term success, however, was a bunch of short term failure. Yet, no matter what the result was, good or bad, they don’t allow themselves, or their teams, to get distracted for long.

Just think of Coach Belichick’s famous line after reporters repeatedly wanted to talk about the Patriots embarrassing loss on Monday Night Football a few years back: “We’re on to Cincinnati.”

In a world of filled with massive levels of distractions, especially for young athletes with large incomes, the ability of these coaches to keep their players focused on what’s important is legendary.

They have a carefully designed system in place for every important detail and situation. This is what allows them to unemotionally react to positive or negative results with a focused and winning mindset.

The Analogy and The Lesson

So, why am I sharing all of this with you?

Well, as the political banter continued at a feverish pace all year long, 2017 provided all of us with a lot of very good financial news. In addition to all major economies around the world growing in sync for the first time I can recall, market prices of virtually every asset class rose by double digits, dividends continued their upward trajectory, and our Retirement Buckets™ all grew substantially.

All of this took place with very little downward market price volatility. While the average intra-year peak to trough drop in market prices is 14.1% annually since 1980, we barely experienced a 3% pullback at any time last year.

This, of course, is great news and you should feel proud that you maintained the discipline and focus required to capture these market returns.

After all, mutual and exchange traded equity funds, which invest in stocks, remarkably remained in “net” withdrawal in 2017. That means that more Americans withdrew money from equity funds than bought them during a period of time when market prices soared. Translation: many investors lost their focus and discipline and missed the boat.

While we should all allow ourselves a moment to feel good about capturing these results, there is potential danger in allowing the celebration to go on for too long.

As is the case with athletes who experience a successful outcome like I described above, there is the temptation to become complacent, lose our discipline, and forget the fundamentals.

Just like we don’t overreact when inevitable market corrections occur and prices temporarily fall like the historically severe 49% decline from 2000-2002 or the 56% decline from 2007-2009, we want to have the same reaction to our results in 2017 when market prices grew substantially, i.e. not get too high with the highs nor too low with the lows.

Do everything you can to keep yourself grounded during all market conditions, and maintain your discipline so you can continue to make educated, rational, long term decisions.

In short, instill the discipline of adhering to the fundamentals.

The Fundamentals

An example of adhering to the fundamentals is maintaining your risk exposure to a pre-determined level through rebalancing.

2017 was quite a year for technology and emerging market stocks. Each of their respective indexes grew in excess of 30%.

While this is certainly good news to experience these sizable returns, a common emotional response is the assumption that these two asset classes have momentum, and will continue to rise in price this year thus validating many Americans’ desire to buy more.

What they forget during this emotional, and likely greedy, reaction are two very important points. First, any level of performance, and especially outer performance in any one direction as these two experienced in 2017, is no indication or signal of continued future performance, i.e. the famous tagline: past performance is no guarantee of future results.

The second point is that there is a flip side to overexposure to any individual stock, sector, or asset class: increased risk.

At this critical stage in your life, your investments should be strategically designed to capture the long-term investment returns of a diversified and calculated mix of asset classes with appropriate levels of exposure to risk and volatility.

However, as we all witnessed again in 2017, even if you have already taken this important step in the past, the market price of these various asset classes moves up and down a lot throwing your carefully designed mix out of balance over time.

Extensive Academic research of markets over years and years has demonstrated that out of balance investment portfolios, with asset classes that have grown beyond their target allocations, take on inappropriate risk exposures.

In order to ensure a consistent level of risk exposure for you, this is a great time to stick to the fundamentals by evaluating your current vs. your target allocation to determine if there is a need for rebalancing among all of your holdings.

 

 

Retirement Coach Jack Phelps Publishes New Article Sharing a Checklist of Year End Strategies to Consider

Jack Phelps, founder of The Relaxing Retirement Coach, introduces reminders of strategies that all retirees should address before the end of 2016

Wellesley, MA – December 8, 2016Jack Phelps, founder of The Relaxing Retirement Coach, a Retirement Coaching company, recently published an article on his website (https://www.theretirementcoach.com) sharing a checklist of reminders to address before the clock strikes midnight on December 31st.

In his article titled “2016 Year End Checklist”, Jack Phelps writes, “It’s hard to believe but December is here, so let’s take this annual opportunity to review a quick checklist of year-end strategies and reminders.”

The Relaxing Retirement Coach, Inc. provides their members with the ‘missing structure’ they need to make a seamless and relaxing transition to their retirement years so they can confidently do everything they want to do without worrying about money.  Their Relaxing Retirement Coaching Program™ provides members with a personalized, one-on-one retirement coaching relationship with constant attention to each and every detail necessary for them to consistently enjoy a relaxing retirement experience.

The entire article can be found at https://www.theretirementcoach.com/articles/2016-year-end-checklist-3.php

To learn more about The Relaxing Retirement Coach, Inc., please visit https://www.theretirementcoach.com.

About Jack Phelps

Prior to developing The Relaxing Retirement Coaching Program back in 1994, Jack spent five years as a registered representative with Prudential Financial Services. In 1989, Jack graduated from Holy Cross College in Worcester, Massachusetts with a B.A. in Economics.

2016 Year End Checklist

It’s hard to believe but December is here, so let’s take this annual opportunity to review a quick checklist of year-end strategies and reminders.

If we’ve all been properly strategizing and implementing throughout the year, as the overwhelming majority of Relaxing Retirement members have, this year-end checklist will simply serve to confirm what we’ve already done.

However, I know how busy life can get, and I know that managing each minute detail in your financial life isn’t always at the top of your list you draw up each and every morning with your cup of coffee.

Given that, if you haven’t already, here are some strategies and reminders to be thinking about and acting on before December 31st:

 

  • Medicare: Open enrollment for Medicare, including Part D and Medicare Advantage, ends this coming Wednesday, December 7th. Don’t miss this opportunity to shop plans to best suit your health needs and your wallet. Check out the non-government Medicare.com website for great information and their Annual Election Period Checklist.
  • Age 70 ½ (and older) Annual Required Minimum Distribution (RMD): If you’re age 70 ½ or older, you must take a mandatory distribution from your IRA. The amount you must withdraw in calendar year 2016 is based on the combined value of all your qualified retirement plans as of December 31, 2015 (IRAs, SEPs, 401(k)s of ex-employers, etc.). Roth IRA values are not included, and the value of a 401(k) plan you are still contributing to is not included unless you are more than a 5% owner in the employer sponsoring the plan.
  • Negative Income: Take a close look at last year’s (2015) federal income tax return. Make sure that your “taxable” income on page 2 of your 1040 is a positive This may sound like any oxymoron, but it’s not.

As you’ve heard me mention numerous times in the past, I see this way too often with folks in their retirement years, i.e. itemized deductions and personal exemptions which are higher than your taxable income.

This can happen for anyone who doesn’t have a significant pension. A new Relaxing Retirement member this year had over $2.35 million in their Retirement Bucket™, yet they still fell into this “negative income” category in 2015.

If this is also true for you, what it indicates is that you have an opportunity to realize and show more taxable income and still pay no federal income taxes.

How? Withdraw more taxable funds from your IRA that otherwise would have been taxable, or “realize” capital gains on some of your non-IRA investments.

  • Roth IRA Conversion: Explore converting some of your IRA to a Roth IRA, especially if you have “negative” income (see previous bullet). It gives you an opportunity to convert some (or all) of your IRA to a Roth with no (or very little) federal income tax consequences. And, allow your money to continue to grow tax free for the rest of your life!

The key is to be aware of your marginal income tax brackets so you are not paying too much to convert. For example, if your IRA is worth $900,000, converting the entire IRA would subject the majority of the $900,000 to the highest federal income tax bracket. However, converting $40,000 may allow you to do so with no income taxes given your itemized deductions and personal exemptions.

  • Retirement Plans at Work: If you’re still earning money from work, even if that is part time, make sure you maximize contributions to your 401(k), 403(b), or 457 MA Deferred Compensation Plans if employed, or your Sep, Simple, Defined Benefit Plan, or IRA if you’re self-employed. Every dollar you contribute comes off the taxable income column on your tax return.
  • Capital Gains and Losses: In addition to your realized capital gains so far this year, both from sales and from capital gain distributions in your actively managed mutual funds held outside of IRAs, take a close look at your unrealized capital gain or loss positioning in your Non-IRA accounts right now.

Then, go back to Schedule D on your 2015 return and verify if you have any realized capital losses that you may have carried forward to 2016.

Armed with this all of this information, you can make informed decisions on buying and selling in order to free up cash for your upcoming spending needs.

  • Your Spending: So you can continue to spend with confidence, take a look at what you spent in 2016 vs. what you predicted you would spend in your Lifestyle Cost Estimator™. Is it more? Is it less?

Remember, your goal is NOT to restrict your spending or to “budget”. It’s simply to “account” for what you’ve spent and be confident with your numbers.

If I had to sum up one commonality amongst my most successful Relaxing Retirement Members, it’s that they all know their numbers and they can tell you exactly where they are.

The reason they’re so financially confident, and in turn successful, is they are in complete control of their finances vs. the masses who are completely out of control and in constant reaction each day.

They’re not locked up in a room studying investments and tax laws all day. Quite the opposite!

They’re actually the ones who travel the most and have the most fun without being concerned about money. And, the reason they’re not concerned is they have a clear handle on what it costs for them to live exactly the way they want.

 

If you have any questions as to where you personally stand in relation to any of these, please don’t hesitate to call us.