The Uncertainty Principle

Uncertain - An adjective describing something unable to be relied upon; not known or definite (thanks to Google for the definition and the physicist Werner Heisenberg for the title).

Lately I’m reminded a bit of the grind coming out of the Great Recession. By late-2009 and into 2010 stocks had been rising for some months even as many Americans were suffering terribly. Unemployment had hit 10%. Foreclosure rates were climbing steadily and would ultimately peak in 2010. Trillions of dollars had been lost from the nation’s housing market. It seemed like the situation was going from worse to horrible.

I used the word “uncertainty” a ton back then when talking with clients. I recall on more than a few occasions speaking to groups and getting pushback on how a vague term could possibly play such a large role in the stock and bond markets, and even our daily lives. Some couldn’t believe that human psychology impacts everything from the shopping habits of everyday consumers to investment decisions being made in Fortune 500 boardrooms.

But it’s true. When we feel certain we’re optimistic and can plan. We invest for the future and feel confident in our actions. Uncertainty, however, and rising amounts of it, undermines all aspects of our daily lives and economy. It makes us anxious and fretful. So, the word gets used a lot these days because maybe it best describes our current predicament. There are so many unknowns and much of what we’d ordinarily rely upon, no matter how mundane, seems to be in flux.  

Even though I feel like I’m squinting to see the light at the end of the tunnel, hope springs eternal. During the darkest days of ’09 and ‘10 that I mentioned above, tiny so-called “green shoots” were popping up everywhere within the economy. There was still lots of pain, of course, but ironically the recession had already technically ended (in June 2009, as a matter of fact – it’s always defined afterward) and the economy would soon come roaring back.

Here are two quick pieces from JPMorgan regarding recent market volatility and the health of the banking system. Both address questions being bandied about in the media and some of you, so I wanted to share these perspectives.

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Retiring Early?

This is a stressful time in many ways for many people. The nature of work may be changing, and a lot of folks don’t have a clear idea on what the future will look like. A job may have been lost or might be at risk. It could be a coronavirus-induced temporary lay-off that winds up being permanent. Or maybe it’s simply that the current environment is making it harder to think about going back to the grind.

While we shouldn’t make major decisions out of fear, all this uncertainty can be difficult to bear. The Wall Street Journal recently reported that about 80% of Americans feel like the country is spinning out of control, so it’s natural to feel uncertain about retirement as well.

Research shows that almost half of folks retire earlier than planned, often because they’re forced into the decision by getting downsized, or health problems make it too challenging to work as they did before. If you’re thinking about (or being forced into) retiring early, here are some financial planning considerations:

Look at your income sources.

You can start drawing Social Security anytime between age 62 and 70, so that’s an obvious first place to look for income. About 1/3rd of retirees claim their benefits at 62 and roughly 60% start taking benefits prior to their full retirement age (FRA, currently somewhere between 66 to 67 for most folks).

The problem with starting before FRA is that your benefits get reduced for life, perhaps by as much as 32% (an 8% hit per year). And if you’re married the reduction isn’t just for your life, but your surviving spouse’s life as well. Ideally, you’d wait at least until FRA, but longer is better because under current law your benefit grows by 8% per year up until age 70.

Instead, the best place to look for income early in retirement is probably your investment portfolio. You’ve been saving money in your 401(k), IRA, and brokerage accounts for decades, so it cuts against the grain to start drawing it before Social Security. As counterintuitive as this sounds your investments, at least on average, aren’t likely to outperform the 8% reduction/bump from Social Security. They might have in the past, but our best guess is that they won’t in the future. Maybe it’s more like 5-6% for a balanced portfolio. Essentially, we want to try to maintain the 8%-earning asset (Social Security) as long as possible, ideally until age 70.  

What are you currently spending?

If you haven’t been tracking your spending now is the time to start. Lots of folks retire without understanding their current cash flow and find themselves coming up short. You’ll want to take a sober look at your spending and decide what can be cut if necessary. Maybe you can shave off a chunk each month to help fund your early retirement. Maybe nothing can be cut. Either way it’s critical planning information that you really don’t want to guess at.

There are apps to help with this of course, but I favor pouring over bank and credit card statements. I feel closer to the information that way. Six months of statements is a good start. Just be sure to look at enough so that you feel it represents reality.

What about healthcare?

Assuming you’re retiring before enrolling in Medicare at age 65, you’ll likely need to pay for your own health insurance until then. You’ve probably already guessed that it’s expensive, but you’ll want to find out how expensive.

Your soon-to-be former employer will likely allow you to stay on their health plan if you pay full price. This lasts at least 18 months and is part of the government’s COBRA legislation from years ago. COBRA might not be your best option, however. You might qualify for government subsidies or simply choose to enroll in a more modest plan. Either way, you’ll want to do so within 30 days (or 60 in some cases) to avoid a lapse in coverage.

Once you determine your options, you’ll want to give this information to your humble financial planner for inclusion in your plan. Then you’ll mark your calendar for age 65 and Medicare enrollment, an event that almost always offers a sizeable savings.

Ponder how long you’ll be out of work.

While obviously tough to know for sure, it’s important to ask yourself how long this retirement phase could last. Will it mean no more work forever? Or, maybe you plan to go back to work part-time after taking a breather? Planning on absolutely zero income for the rest of your life is much more expensive than planning to have income at some future point. People often go back to work in some capacity and doing so later in life can help “pay” for retiring earlier than planned. Don’t limit your options by thinking you’ll never earn money again.

Stress-test your retirement plan.

All the above and more gets added to your plan and then the whole thing gets stress-tested multiple ways. Then we tweak it some more and test it again. Doing so let’s us understand how likely your new plan is to be successful. It also helps answer questions regarding when to start Social Security, the importance of going back to work at some point and what you need to earn, how well your investments need to perform, and so forth. It takes work but it’s doable.

The bottom line is that even with all the uncertainty we’re experiencing, you may have more flexibility than you realize if you plan well.

Have questions? Ask me. I can help.

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The Changing Face of Planning?

It’s been a little more than three months since the stock market craziness began and just over two months since the lockdown started. So much has happened since then it seems like a year already. I recently heard someone with an impending birthday joke that they’re skipping this year because they didn’t use it. I don’t know about you, but although I’m optimistic about the rest of this year part of me agrees with that sentiment.

These have been some of my most challenging months in business. Challenging not just in the sense of day-to-day work, but also mentally. As I’m sure has been the case for you, the last few months have been stressful and worrisome for me. So much uncertainty and so many mundane aspects of life upended. Following virus news has been a task all by itself, not to mention all the market and economic updates. But while much of this has been negative, enough has been positive that I’m hopeful about the future.

There are signs, although some are only barley flickering, that we’ve passed through the worst of the market impact of the virus and maybe also “the bottom” for our economy. If history is any guide there’s a strong possibility for a second shock to stocks in the coming months, but hopefully not nearly as bad as we saw in late-February and March.

The economy may also be starting its long slog out of the hole we’re in. Some have referred to their expectations for a “V-shaped” recovery, but it’s likely to look more like what others have termed a “Nike Swoosh” recovery. If you think about it a moment that makes intuitive sense: a deep drop followed by a long and hopefully steady ascent toward normalcy. I don’t know anyone reasonable who expects this process to be quick. And that’s just the financial aspects of recovery.

As markets and eventually the broader economy recover the social impacts of the pandemic will take longer to play out. We’ve been told to expect a “new normal”, but what will that look like? Will everyday life experience a V-shaped recovery, or will something like social distancing linger long after the effects of coronavirus wear off?

From my own little corner of the world I’m wondering how concepts like this will ultimately impact the nature and business of financial planning. Surely, planning has never been more important, even in the face of extreme uncertainty. Recent events may have forced your plans to change, or your perspective may have shifted during this crisis. One of the many things our current predicament has revealed to me is that the way we work together needs to be more flexible.

I’ve never been one to drag clients into my office so they can hear about things that are important to me but less so to them. This is why I don’t make clients come in every quarter, or even every year, if there isn’t a specific reason to do so. So much these days can be accomplished through phone, email, and now video conversations, that coming into the office seems less essential.

Though nothing beats in-person communication, the way we accomplish it is changing. If you had not heard of video conferencing before, you now know all about it. Tens of millions of Americans have been getting a crash course in the technology during this crisis. Face-to-face communication through the medium of your smartphone or computer monitor is now so popular and convenient that its likely to stick around. The trend had been growing steadily in recent years but, as with so much else these days, coronavirus has accelerated adoption.

Case in point, I’ve sparingly used screensharing and video with clients for a while but have been generally slow to adopt the technology. I’ve now used it more in the last few months than in the last five years combined. It’s just too convenient and helpful. We get to meet from wherever you are, with no concerns about traffic or parking. We can see each other’s screens to share information and, as the mood strikes you, can even see each other.

As it turns out this morning marks the second conference I’m attending virtually this month. In recent years I would have spent today and tomorrow in San Francisco and the other conference would have been in Denver. Both are now in the comfort of my office, my house, even I my car. While I have no intention of going entirely virtual with clients and hope to get to physically go to a conference again soon, video is a powerful and convenient way for us to communicate that should make your life easier.

I love financial planning and working with you to ensure your long-term success. The difficult times in my career have only served to confirm this, and the current crisis is no exception. As we move forward out of this pandemic together, I want to ensure that I’m being flexible enough to meet your changing needs. Leveraging video is a natural outcome of this.

Additionally, here’s a mildly optimistic article from The Wall Street Journal. As stated at the end, our ultimate path forward is dependent on the path of the virus, but it’s good to see economic activity perking up a bit.

https://www.wsj.com/articles/for-economy-worst-of-coronavirus-shutdowns-may-be-over-11590408000?mod=hp_lead_pos1

Have questions? Ask me. I can help.

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What to Make of the Stock Market

Covid-19, social unrest, an urgent national conversation about systemic racism. None of these issues seem to go along with surging stock prices. Even though stocks fell last week, how is it possible for the stock market to rise so fast given all that seems to be going wrong in the world? What are realistic expectations for stocks going forward? Let’s spend a few minutes addressing these questions.

Among all the news lately you might have missed how the government agency that tracks recessions announced that a recession began in late-February. I don’t think this comes as news to anyone, but it’s good to know when these things start and stop. What seemed strange at the time was how the announcement coincided with major stock indexes like the S&P 500 getting back to even for the year. I’m going from memory, but stocks were up on the date of the announcement as well. It just added to the weirdness factor of stocks rising in the face of so many negative headlines.

As we’ve discussed before the stock market isn’t the economy. It can seem like it is because the changing values of major indexes like the Dow and NASDAQ are quoted in the news every business day. Instead, it’s a place (in the most general sense of the word) where investors buy and sell company stock based on expectations about the health of the economy and how public companies will perform over time. I emphasize public because only about 1% of our country’s businesses are publicly held and traded on stock exchanges, according to the National Bureau of Economic Research (the same agency that calls recessions, by the way). Even though the percentage is small, it’s a diverse list of thousands of businesses that employ roughly 1/3rd of the country. So, while these companies are obviously not the real economy all by themselves, their performance in the stock market serves as a good temperature check on how things are going in the business world.

But the stock market is still just a market filled with buyers and sellers (and a lot of computer algorithms, of course) who are normally rational and look past the day’s non-financial headlines. This might sound unfeeling, but if you think about it that’s exactly how it should sound. While markets are prone to bouts of manic depression and irrational exuberance, they are still based on dollars and cents fundamentals and always, eventually, come back to them. When investors have what they think is good information, they put their rational hats on and their confidence shows up as relatively stable, rising prices for stocks. But when investors start losing confidence in their information, well, that’s when the wheels start coming off.

Case in point is our current situation. Stock prices briefly made it back to even year-to-date two weeks ago after a massive run from the lows of mid-March. Investors during this period were feeling a tailwind from Federal Reserve policy, the huge stimulus bill and, at least in May, positive developments in coronavirus numbers. Add in some better-then-expected news about the economy and investors were pricing in a V-shaped recovery, assuming that we’d be back to normal by year’s end. And we were already assumed to be in a recession, which was why making it official was such a nonevent.

But then states like Texas and Arizona started reporting upticks in virus cases as June began. This rekindled fears of a second round of shutdowns later this year, which obviously would be bad for everyone. Investors quickly realized they had gotten ahead of themselves in the recent rally and began taking profits last week. This sent stock prices down by the largest amount since the dark days of March.

These recent weeks are instructive regarding what to expect going forward. As we discussed previously, recovering from the self-induced coma we’ve put ourselves in is likely to look more like a jagged Nike Swoosh than a V shape. Housing, for example, is doing quite well nationally since interest rates are extremely low. This helps homeowners feel wealthier, allowing them to be mobile and spend more money. This in turn helps fuel our consumption-based economy but does little, of course, for someone who doesn’t own a home or have a solid job. Restaurant owners in Texas, for example, have the opportunity of being open but are still experiencing a 45% decline in reservations compared to this time last year, according to the booking website OpenTable. How long can a business survive in conditions like that? There are tons of mixed messages like these coming from all over our economy. This is likely to last awhile and perpetuate uncertainty.

Because of this we, as investors in the stock and bond markets, should expect more short-term market declines as we climb up the Swoosh, so to speak. Hopefully, they won’t be anything close to what we experienced in February and March. Those were historic moves. But couple the uncertainties of our current situation with the historic reality that secondary drops typically follow major market declines, and we’d be silly not to expect a bumpy road ahead.

Have questions? Ask me. I can help.

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Challenging Times Indeed

Greetings from your humble financial planner. While everything is still steady as she goes here at Ridgeview Financial Planning, we all sure have a lot to be concerned about these days. But as I trust is also the case for you, I have hope that before too long we’ll all be feeling a sense of normalcy and optimism again.

With all that’s going on out there in the world, and even in our hometown, it simply doesn’t feel right spending this week’s blog diving into planning and investing topics. I plan to be back next week with our regularly scheduled programming.

Until then, I wish you and yours the best during these challenging times.

If you’re interested in the meantime, here’s a link to a good article from Schwab’s Chief Investment Strategist, Liz Ann Sonders. Liz Ann touches on the market’s seeming disconnect with Main Street and provides a general outlook for stocks. I’d summarize as follows: The stock market is not the economy, so it often behaves differently. The stock market also doesn’t care very much about civil unrest or social issues unless and until it impacts corporate earnings. Stocks are a little overextended given how much prices have come up following their coronavirus lows in late-March. As I suggested recently, a short-term pullback should be expected.

https://www.schwab.com/resource-center/insights/content/disconnect-dots-main-street-vs-wall-street?cmp=em-QYD

Take care out there.

Have questions? Ask me. I can help.

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Tapering Into Retirement

There’s a slow but growing trend of workers thinking about a phased approach to retirement. The idea is that instead of working full tilt to some predetermined age and then quitting cold turkey, you start backing off from the 40+ hour work week earlier. Maybe you cut your week down by a day for a few years, followed by another and another until you’re eventually fully retired. You’d get more time with family, friends and your favorite activities, but also more years of income. I refer to this as tapering into retirement, but you can call it whatever you like.

While this might not meet the standard definition of retirement, and certainly not the “corporate” definition, it’s what would probably work best for most people. Many folks haven’t saved enough to retire early but don’t necessarily want to work full-time forever either. Part-time jobs during retirement can help with this, but people aren’t looking for just any job. Many simply would like to keep doing what they’re currently doing, only for less time and with less stress. Having three-day and then four-day weekends on a regular schedule would be nice, right? Maybe it helps strike a balance between wanting to slow down a bit while also remaining relevant and engaged in the workforce.

Tapering would also probably work best for most companies, even though it cuts against the grain. Employers large and small would get to keep their intellectual capital around longer while also making room for the next generation. Employers could (and probably should) keep these tapering employees on their benefit plans. The cost would likely be covered by the pay differential between those tapering and the younger staff members taking their place.

The tapering concept also makes sense from a technical planning perspective. While there would be less income during the beginning of the tapering process, the worker would probably continue working longer by avoiding burnout. This leads to more income for the household over time, fewer draws from retirement savings, delaying taking Social Security, and so forth, all of which helps shore up one’s retirement plan.

Perhaps the massive reconsideration of work and the workplace going on right now will cause Corporate America to wake up to new thinking about transitioning employees into retirement. Only time will tell, but at least one concept seems clear: the slow shift to virtual work has accelerated dramatically. This might help pave the way for would-be taperers.

Along the lines of tapering into retirement, check out the following article, “Losing the Retirement Assumption”, by Mitch Anthony, a thought leader in the financial planning industry.

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