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Ideas with no specific focus

Retirement: 4 financial issues you’re probably not planning for

My Comments: There are a lot more than 4. But it’s a start.

Wherever you are on life’s trajectory, what we call ‘retirement’ is somewhere in there. And unlike some things in life, it’s not something we get to practice in advance.

Getting older is a one time thing and if you get there, you had better hope you paid attention and minimized mistakes ‘cause you don’t get to go back and try again.

These 4 issues are not hard to get your arms around. The sooner you understand their implications the more pleasure you will get from retirement.

In the meantime, be looking for an announcement about the online course I’m creating called Successful Retirement Secret(s). It’s a way to think about, and process information into a system to help you get to the other end with more money rather than less money.

Wendy Connick, Oct. 5, 2017

If you’ve developed a well-researched and comprehensive retirement plan, then good for you (and bonus points if you put it in writing).

But before you get too cocky about your well-funded retirement, check to see if your plan has left out any of these common issues. If it has, you could end up with a much smaller retirement income than you expect, as your savings gets gobbled up by these unexpected expenses.

Inflation

Inflation is the sneaky retirement-killer. It’s the reason why a dollar won’t buy as much today as it would 20 years ago. Inflation has averaged around 3% per year since the government began tracking it in 1913, although it can vary significantly over the short term. That means you must assume that your retirement savings will lose about 3% of their value every year.

To beat inflation, you need to pick investments that will produce high enough returns to outpace the loss of your money’s value. Historically, stocks are the only investment to reliably beat inflation year after year, with large-cap stocks producing an average return of around 10% before inflation over the past century. That’s why even retirees need to keep some money in stocks, despite their volatility.

Taxes

As long as you live, the IRS — and possibly your state revenue board — will try to collect a cut of your income. If your retirement plan doesn’t account for your future taxes, your entire budget could be thrown out of whack. For example, say you figure out that you’ll need $3,000 per month in income from your retirement savings to get by, so you plan to remove $3,000 from your traditional 401(k) or IRA. Your withdrawals will be subject to income tax, so you’ll have to pay a hefty tax bill, leaving you with much less than $3,000 a month to work with. And if your taxable income is high enough, your Social Security benefits will be taxed, too — leaving you even deeper in the hole. So start thinking about how you will minimize the amount of income you fork over to the government.

Of all the retirement tax minimizing tools out there, the Roth-type account is the undeniable king. Having a significant percentage of your retirement savings in a Roth account gives you more control over how much income tax you pay each year, minimizes your required minimum distributions, and allows your investments to grow tax-free for as long as they’re in the account.

Estate planning

Failure to do at least minimal estate planning puts an unfair burden on your family. They’ll already be upset and stressed by your passing; they shouldn’t also have to deal with a mountain of legal and financial issues owing to your lack of planning. Skipping the basics of estate planning could also cause your beneficiaries to shell out a lot more money. For example, if you don’t have a will, in most states the court will assign an administrator to distribute your assets according to state law, and the administrator’s fees (and possibly other legal fees) will come out of your estate.

The essentials of estate planning include writing a will, naming beneficiaries for all your accounts (and keeping them up to date), and setting up a power of attorney in case you become incapacitated. You may also consider filling out an advance medical directive to dictate which extreme lifesaving measures you want doctors to undertake if you’re incapacitated, as well as setting up trusts to manage issues such as probate and estate taxes.

Long-term care

The odds that you’ll need long-term care at some point in your lifetime are considerably better than even, and that care doesn’t come cheap: The average cost of long-term care for a couple is around $130,000. That being the case, building long-term care expenses into your retirement planning is a must. You can’t count on Medicare to help with these expenses; it won’t cover long-term care expenses unless there’s a clear medical necessity, e.g., if a doctor orders a nursing home stay for you — and even then, Medicare only covers the first 100 days.

Long-term care insurance can protect you from such expenses, and it’s best acquired while you’re relatively young and in good health, which will keep your premiums as low as possible. Most people can get the best deal by purchasing long-term care insurance in their 50s. One often-overlooked benefit of long-term care insurance is that while long-term care expenses themselves are difficult to predict, the insurance premium is predictable and thus much easier to budget for.

If you wait until you’re retired to build these expenses into your budget, you’ll probably have to make some sacrifices in order to squeeze them in. Luckily, it’s never too late to revise your plan. Consider seeing a financial adviser or other expert to help you deal with these issues. For example, someone with extensive tax knowledge may be able to come up with ideas you’d never think of for reducing your tax burden.

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The Coming Bear Market?

My Comments: The author of this article, Robert J. Shiller, is one of the worlds best known economists. To borrow a phrase, when he speaks, you should listen.

I’m phasing out of the investment advisory world. My skills are eroding. But I plan to keep myself informed and sharing ideas that I believe make sense and hopefully add value to whomever among you is paying attention.

In the meantime, know the world is not ending. Cracks are appearing in several directions, some of which are necessary and healthy. We need to be prepared for some significant bumps that are already starting to be felt.

September 21, 2017 • Robert J. Shiller

The US stock market today is characterized by a seemingly unusual combination of very high valuations, following a period of strong earnings growth, and very low volatility. What do these ostensibly conflicting messages imply about the likelihood that the United States is headed toward a bear market?

To answer that question, we must look to past bear markets. And that requires us to define precisely what a bear market entails. The media nowadays delineate a “classic” or “traditional” bear market as a 20% decline in stock prices.

That definition does not appear in any media outlet before the 1990s, and there has been no indication of who established it. It may be rooted in the experience of October 19, 1987, when the stock market dropped by just over 20% in a single day. Attempts to tie the term to the “Black Monday” story may have resulted in the 20% definition, which journalists and editors probably simply copied from one another.

In any case, that 20% figure is now widely accepted as an indicator of a bear market. Where there seems to be less overt consensus is on the time period for that decline. Indeed, those past newspaper reports often didn’t mention any time period at all in their definitions of a bear market. Journalists writing on the subject apparently did not think it necessary to be precise.

In assessing America’s past experience with bear markets, I used that traditional 20% figure, and added my own timing rubric. The peak before a bear market, per my definition, was the most recent 12-month high, and there should be some month in the subsequent year that is 20% lower. Whenever there was a contiguous sequence of peak months, I took the last one.

Referring to my compilation of monthly S&P Composite and related data, I found that there have been just 13 bear markets in the US since 1871. The peak months before the bear markets occurred in 1892, 1895, 1902, 1906, 1916, 1929, 1934, 1937, 1946, 1961, 1987, 2000, and 2007. A couple of notorious stock-market collapses – in 1968-70 and in 1973-74 – are not on the list, because they were more protracted and gradual.

Once the past bear markets were identified, it was time to assess stock valuations prior to them, using an indicator that my Harvard colleague John Y. Campbell and I developed in 1988 to predict long-term stock-market returns. The cyclically adjusted price-to-earnings (CAPE) ratio is found by dividing the real (inflation-adjusted) stock index by the average of ten years of earnings, with higher-than-average ratios implying lower-than-average returns. Our research showed that the CAPE ratio is somewhat effective at predicting real returns over a ten-year period, though we did not report how well that ratio predicts bear market

This month, the CAPE ratio in the US is just above 30. That is a high ratio. Indeed, between 1881 and today, the average CAPE ratio has stood at just 16.8. Moreover, it has exceeded 30 only twice during that period: in 1929 and in 1997-2002.

But that does not mean that high CAPE ratios aren’t associated with bear markets. On the contrary, in the peak months before past bear markets, the average CAPE ratio was higher than average, at 22.1, suggesting that the CAPE does tend to rise before a bear market.

Moreover, the three times when there was a bear market with a below-average CAPE ratio were after 1916 (during World War I), 1934 (during the Great Depression), and 1946 (during the post-World War II recession). A high CAPE ratio thus implies potential vulnerability to a bear market, though it is by no means a perfect predictor.

To be sure, there does seem to be some promising news. According to my data, real S&P Composite stock earnings have grown 1.8% per year, on average, since 1881. From the second quarter of 2016 to the second quarter of 2017, by contrast, real earnings growth was 13.2%, well above the historical annual rate.

But this high growth does not reduce the likelihood of a bear market. In fact, peak months before past bear markets also tended to show high real earnings growth: 13.3% per year, on average, for all 13 episodes. Moreover, at the market peak just before the biggest ever stock-market drop, in 1929-32, 12-month real earnings growth stood at 18.3%.

Another piece of ostensibly good news is that average stock-price volatility – measured by finding the standard deviation of monthly percentage changes in real stock prices for the preceding year – is an extremely low 1.2%. Between 1872 and 2017, volatility was nearly three times as high, at 3.5%.

Yet, again, this does not mean that a bear market isn’t approaching. In fact, stock-price volatility was lower than average in the year leading up to the peak month preceding the 13 previous US bear markets, though today’s level is lower than the 3.1% average for those periods. At the peak month for the stock market before the 1929 crash, volatility was only 2.8%.

In short, the US stock market today looks a lot like it did at the peaks before most of the country’s 13 previous bear markets. This is not to say that a bear market is guaranteed: such episodes are difficult to anticipate, and the next one may still be a long way off. And even if a bear market does arrive, for anyone who does not buy at the market’s peak and sell at the trough, losses tend to be less than 20%.

But my analysis should serve as a warning against complacency. Investors who allow faulty impressions of history to lead them to assume too much stock-market risk today may be inviting considerable losses.

Robert J. Shiller, a 2013 Nobel laureate in economics, is professor of economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. He is the author of “Irrational Exuberance,” the third edition of which was published in January 2015, and, most recently, “Phishing for Phools: The Economics of Manipulation and Deception,” co-authored with George Akerlof.

Another Poll !

I’m now working on the graphics for my internet course about Retirement Planning.

Please mark the one you like best, or NONE of them.

Many thanks. Tony

Please Help Me Find The Best Name

I’m creating an internet course to help people know which questions to ask about retirement before they start worrying about the answers.

Part of the process is to register a domain name for everything related to the course. I’ve come up with four possible names. There were several others but they were already taken or someone wanted $XXXX.00 to buy them.

So I found a site that helps you create a poll to send to people you know. There are four names below. Please select the one that resonates most strongly with you.

 

Many thanks!

Tony

How Much Will Social Security Benefits Increase In 2018?

My Comments: Those of us alive in the 70’s and early 1980’s recall a time when inflation was so high it dominated any economic discussion.

Those of us still alive today and getting Social Security benefits enjoy the increase that sometimes happens every year in January. It’s a cost of living adjustment or COLA. In 2016 is was 0.3% which didn’t amount to didly squat. This year it might be a little higher.

Tipswatch \ July 24, 2017

Summary

  • News media widely reported that a 2.2% increase in Social Security benefits is likely in January 2018.
  • How is the COLA determined and how could anyone project it in early July?
  • We need three months of data – inflation for July, August and September – to know the answer.

My wife and I were on vacation last week, eating breakfast at an Interstate hotel in southern Wisconsin. She read me a line from a USA Today story: “Social Security benefits projected to rise 2.2% in 2018.”

“What?” I nearly spit out my artificially-processed scrambled eggs. “How can that be? Inflation is running at 1.6% and we’re only halfway into the year. Wouldn’t this number come out in October or December? How can it be 2.2%?”

The article noted that the 2.2% number was a projection by the Social Security trustees, but that “officials will release the official cost-of-living increase for Social Security recipients in October.”

So I realized I had a lot to learn about Social Security and its annual cost of living adjustments (COLAs). My wife and I aren’t collecting Social Security yet, but I do track inflation every month. I wanted to know more.

The Weird Index
Social Security COLAs are based on the Consumer Price Index For Urban Wage Earners And Clerical Workers, otherwise known as CPI-W. It is similar to CPI-U (the “headline” inflation that you read about every month) but includes information only from households with at least 50% of the household income coming from clerical or wage-paying jobs.

CPI-W isn’t widely tracked, but the Bureau of Labor Statistics does update the index each month in its overall inflation report. In June, for example, the index was set at 238.813, for a 12-month increase of 1.5%, a bit lower than overall U.S. inflation.

I repeat: CPI-W increased 1.5% over the last year, less than overall inflation. Hard to see where we are heading toward a 2.2% benefits increase in 2018, but my research continues …

The Weird Formula
The Social Security Administration doesn’t look at a full year’s data to determine the COLA. Instead it uses the average index for the third quarter – July, August and September. Here is the language from the SSA site:
A COLA effective for December of the current year is equal to the percentage increase (if any) in the average CPI-W for the third quarter of the current year over the average for the third quarter of the last year in which a COLA became effective. If there is an increase, it must be rounded to the nearest tenth of one percent. If there is no increase, or if the rounded increase is zero, there is no COLA.

This is interesting wording, because it means that the SSA eliminates years where inflation was zero or negative, meaning there won’t be a “bounce-up” effect on benefits after a year of deflation. Instead, it goes back to the last year where there was an increase in benefits.

This happened in 2016, because there was negative average inflation in the third quarter of 2015 (and thus a 0.0% benefit increase in 2016). So when the 2016 benefit was determined (to take effect in 2017), the SSA compared the third-quarter averages of 2016 and 2014. Here is that formula:
(235.057 – 234.242) / 234.242 x 100 = 0.3 percent.

Benefits increased 0.3% in January 2017, and now the 2018 benefit will be determined by comparing the third quarter of 2017 with the third quarter of 2016 to determine the benefits increase starting January 2018.

Here are some historical numbers and my analysis of the current year’s trend:
Based on these numbers, a 2.2% benefits increase in January looks unlikely. If inflation remains stable over the next three months, the increase would be 1.6%. If it rises 0.1% each month, the increase would be 1.8%. And if it rises 0.2% each month, the increase would be 2.0% (In June, the index rose 0.08% before rounding. In May, it was 0.07%).

So why did we get a slew of news reports last week predicting a 2.2% increase in Social Security benefits in January? (Even the AARP reported the projection). The SSA trustees did issue their annual report on July 13, and it included projections that showed 2.2% as a “medium” outlook for the January COLA. But keep in mind that these projections were made before the third quarter began. There isn’t a single data point to support that projection. And if you follow inflation like I do, you know how unpredictable it can be from month to month.


Digging deeper into SSA data, I found a chart showing the half-year average CPI-W inflation numbers, which were up 2.2% in the first half of 2017. Interesting, but the COLA is based on inflation in three months – July, August and September – that aren’t in the first half of the year. So that number is irrelevant.

Last year, in their July 2016 annual report, the trustees projected a 0.2% COLA increase in January 2017. That number turned out to be 0.3%. Pretty close, or off by 50%?

I’d admit that the COLA could end up being 2.2% in January 2018, or it could be lower. Or even higher. I’ll also note there are no data – at this point – to support an accurate projection. We’re going to need to see inflation numbers for July, August and September.

The SSA says it will release the official number in October. I can tell you the exact date and time: Friday, October 13 at 8:30 am. That’s when the September inflation numbers will be released and then – and not until then – we will be able to say with confidence what the January 2018 COLA will be.

The Easy Guide to Growing Your Money — Florida Wealth Advisors

My Comments: I teach that investment risk is OK if you also have the ability to manage that risk. That happens if you have the discipline necessary to develop a rudimentary level of financial literacy. Reading these words from James Dennin is a good start. On the right side of this page is a link […]

via The Easy Guide to Growing Your Money — Florida Wealth Advisors

The Easy Guide to Growing Your Money

My Comments: I teach that investment risk is OK if you also have the ability to manage that risk. That happens if you have the discipline necessary to develop a rudimentary level of financial literacy. Reading these words from James Dennin is a good start. On the right side of this page is a link that allows you to schedule a phone conversation with me if you are so inclined.

By James Dennin \ January 11, 2017

When it comes to the stock market, young people are getting seriously mixed messages.

On one hand, you maybe know you’re supposed to own stocks — or at least you know that when your money goes into a retirement account like a 401(k), a good portion of it should be going into equities, aka the stock market.

At the same time, fearful memories of the financial crisis and the people who lost everything in the market downturn still loom large: Only 52% of Americans hold stocks according to Gallup, matching a record low.

Are these stock-shy Americans behaving irrationally?

There’s no doubt that the risks of investing in stock are real, if sometimes overblown. And it doesn’t help that for every person claiming the market is safer than ever is another sounding the alarm that the sky is falling.

But the short answer is yes, Americans and especially millennials need to hold more stocks than they currently do — not just to meet retirement goals but also to start building wealth outside of their paychecks. And when you’re investing for the long term, you can actually tune out much of the the day-to-day noise. So, to get started, turn off the news — and focus on the basics.

The very first step in becoming an investor is learning the terminology.

Start with “ticker symbols”: those little one- to five-letter symbols running across the bottom of CNBC. Stock brokers invented ticker symbols to save space on the little streams of paper that printed out the latest quotes. Not exactly of great use to would-be stock traders in the digital age.

Some of these are fairly intuitive. If you wanna buy Apple stock, you look for the symbol AAPL. Some are a little trickier to spot. Macy’s, for instance, is just M. Some really try to be clever, like the Sealy corporation, which sells mattresses and trades under the symbol ZZ. And funds (like Vanguard Total Stock Market, aka VTI) that hold bundles of stocks have tickers, too.

It’s good to know what tickers are in general, but you don’t have to go around memorizing them. Indeed, the fact that traders still use this shorthand is a vestige of history that makes investing seem more impenetrable than it is.

So what should you be focusing on? And how do you get started?

Let’s say you’ve already taken some super preliminary steps: You’ve paid your rent and funded your 401(k), you’ve put away a few months expenses into your emergency fund, and you still have about $1,000 (or even just $100) left to play with this month after food and fun.

It’s easier than ever to put that cash into the stock market, by setting up accounts with cheap, low-to-no-minimum online brokerages like OptionHouse (or free ones like Robinhood).
But before you start buying stocks or funds willy nilly, you have a little more homework to do: To help you figure out what to buy, here are 3 major “investing 101” terms you need to know, and what they mean.

1. Diversification
Diversification is a very simple idea that steers a lot of decision-making in the investing world; it is essentially how people try to manage and mitigate risk when they invest.
To use an example, the best way to get rich quickly in the stock market in one given day or year might be to put every cent into one company.

If you were investing on Dec. 7, 2001, one of those stocks would have been Enron. Shares of Enron stock quadrupled — meaning investors got a huge payday — after it emerged from bankruptcy, even as most analysts agreed that the shares weren’t even as valuable as the paper they were written on.

Thing is, many investors didn’t realize they were sinking their cash into what would become one of the most scandal-plagued companies of the decade. If you were unfortunate enough to buy many shares of Enron stock when it was at its peak price of $90.75? You might have then seen your savings wiped out when the share price fell to $0.67.

In other words, buying stocks is like betting, and with single stock bets you can win big — but you can also lose big. Diversification is about finding a middle ground: If you hold more than a single stock (or even a single type of stock), you’re more likely to balance bad bets with good ones.

A diverse portfolio should have a mix of stock styles and types — as well as non-stock assets like bonds. Your stock holdings should include a diversity of industries (so, not just tech stocks) and geographies (not just American companies), as well as a mix of value and growth stocks, a mix of small- and big-company stocks.

The thinking is that what’s good for some assets is always going to be bad for some others — and vice versa.

Want diversification the lazy way?

Find three low-cost, diversified funds that include hundreds of stocks (and bonds) across industries and geographies. Then set it and forget it.

2. Price-to-earnings or P/E ratio
The 12-month trailing price to earnings ratio (or the forward P/E ratio, if you’re using projected estimates) is probably the second most important concept to understand, since it’s one of the most common ways traders try to determine how attractive a stock is.

Just like with cars, there are old stocks that no one really gets excited about — and there’s new names everyone knows as the latest hotness.

When a stock is popular, people are willing to pay more money for it. At the risk of oversimplifying it, the P/E ratio is essentially a way of measuring the hype factor and how much that is inflating prices above the underlying value.

To calculate the P/E, divide a stock’s price by the amount of money the company earns off of each share of stock. If a stock is trading at a high price relative to actual earning, there’s a decent chance it might be overhyped.

On the flip side, a stock trading well below the average historical P/E ratio of roughly 15 might be something of a bargain. That’s especially true since the current average P/E for the stock market is relatively high, at about 26.

To build on the previous section, the lesson here is to not just pay attention to the diversification of your portfolio but also the valuations.

There are exceptions to every rule of thumb, but avoiding inflated valuations (of which P/E ratios are one type) will help you become a better investor.

So pay attention to the average P/E of the stocks inside before you buy a fund. And remember that the overall average P/E for the stock market matters too — the whole thing could be historically overpriced at a given moment.

When the market takes a dip? That could be a buying opportunity.

3. Sharpe ratio
A final measure that will help you invest is what’s called the Sharpe ratio.

Very simply, it’s a means of calculating how attractive a stock or portfolio is, taking into account both how risky it is and how high your possible returns are.
In other words, it’s a way of calculating what’s called a “risk-adjusted return.”

Generally speaking, the higher the Sharpe ratio, the more attractive the rate of risk-adjusted return.

Conversely, if a company has a negative Sharpe ratio, it means that you probably could have gotten a similar return while also investing in less risky stuff.
To give you an example, the trailing 3-year Sharpe ratio for a Vanguard Fund for international dividend stocks is 0.66.

That’s lower than the 0.83 ratio for the S&P 500 over that same period, according to Morningstar. But it’s still a lot better than the Guggenheim Solar ETF (TAN), which has a Sharpe ratio of -0.51.

Does this mean you should never invest in international stocks or solar energy companies?

Not necessarily.

But if you are shy about risk, the Sharpe ratio is a helpful tool for sorting the biggest gambles from the smaller ones. At the end of the day, investing in the stock market is a type of gambling, no matter how “safe” your investment.

As long as you consistently remember that — and only invest with money you can afford to lose — you’ll be in a good place.

Because, just as with gambling, you could also always win.