How Much is Enough?

How much is enough? How do we begin to answer that sort of question? Some days I think I’m close, while other days I’m miles away, adrift in the countercurrent and watching “enough” chase the horizon. Is enough a static goal in and of itself, or a constantly shifting target? These questions can quickly transcend the realm of personal finance, but let’s spend a few minutes considering the questions from the financial planning angle.

I’m wondering about this after reading some articles referring to a report from Schwab suggesting that Americans think it takes about $2.2 million of net worth to feel wealthy and $774,000 to feel comfortable. These numbers are higher than 2021 but lower than pre-pandemic levels and seem to move around a lot.

Here’s a link to the information if you’d like to read more.

https://www.aboutschwab.com/modern-wealth-survey-2022

How do people come up with these numbers? Is it someone’s best guess about how much money it takes to retire, since retiring from full-time work is usually the stated goal in surveys like this? Those numbers are averaged over the country as well, so your San Fran nest egg needs to be bigger than if you were in Denver or Houston, for example. Home equity is included, so regional economic differences impact the numbers in that way too. Additionally, who’s to say that one person’s goals and expectations are even remotely close to someone else’s, regardless of where they live. Depending on one’s situation, $500,000 can go pretty far toward funding retirement while millions in the hands of a spendthrift might never be enough.

Whatever the dollar amount, we need a better way to determine if what we have is enough, or if we’re on the right track to get there. Otherwise we end up saving blindly, hoping that we’re doing enough to get enough, so to speak. Unfortunately, this leaves the average American in their 40’s, for example, woefully behind the curve with about $106,000 in their 401(k) as of earlier this year, according to tracking updated annually by Fidelity. Maybe they’re close to Schwab’s “comfortable” number if they own a house with lots of equity, but I doubt it, at least on average.

And making this more challenging is how elusive the definition of enough is. It is a moving target. People reevaluate their goals and life interrupts best laid plans. Accidents, even serendipitous events, happen that can cost large amounts of money.

That said, here’s a basic framework for figuring out if you’ve arrived at enough:

You have no debt, or at least very manageable debt. (Debt with a fixed interest rate on principal low enough that your payments are easily covered by dependable income.)

You have sufficient cash flow to cover your recurring expenses.

You have other savings to cover unexpected costs without derailing your cash flow. But since by definition these costs are unexpected, how do we plan for them?

Peeling back the layers soon makes a simple exercise into something complicated and nerve-wracking. The first parts about debt and cash flow are relatively simple. But how can you know if you have enough when there are so many other unknown variables to consider?

This is where financial planning software comes in. We plug in the basic stuff like your assets and liabilities and known sources of cash flow. We make realistic assumptions about how much your money can grow and how much inflation we’ll have to deal with. On top of these basic inputs we add a variety of future one-off or periodic expenses. This can be replacing cars every X years, or paying for that new roof you know you’ll need but don’t know exactly when. We’ll add layers of expense for self-funding long-term care or money for helping the kids buy a first home. In short, we attempt to replicate what your actual spending pattern might look like in retirement: smooth with periods of lumpiness.

The result is a complicated set of variables that can be tweaked in a variety of ways but that can also show if you’re on the right track to being able to afford all this or, even better, if you’re already there = enough.

What’s been surprising to me during years of doing this work is just how wide the spectrum of enough seems to be. Different people have different goals, their financial situations are unique, and what’s possible can be more than they imagined. Part of this has to do with how people tend to think of having enough as hitting a particular number, as discussed above. It’s easy to fixate on that and forget that a stream of future cash flows could also be thought of as a lump sum today, even though you can’t access it in that way. Take Social Security as an example. The average benefit is currently about $1,800 per month. Assuming you get your benefits for 20 years and cost of living adjustments average out to, say, 2.5% per year, those future cash flows are worth about $345,000 today. Could you add this present value of future cash flows to your thought process about having enough?

Here’s an online calculator if you want to plug in numbers for your pension, rental income, and so forth, to gauge present value. While not technically part of your net worth, it’s a different and maybe more expansive way to consider the resources you’ll have for retirement.

https://www.calculator.net/present-value-calculator.html

A few notes on the calculator: “Periods” could be months or years and the “Periodic Deposit” could be your monthly or annualized cash flow. Keep the interest rate reasonable but you can play with it to see how higher and lower rates impact present value.

So, having enough is really about your total combined resources and how they match up with your goals over time. The balance of your savings and investment accounts at any particular point is a big part of this but won’t by itself answer the question of whether you have enough.

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Happy Independence Day!

Since it’s a holiday I’m taking the day off from writing my blog. I’ll be back at it next week with our Quarterly Update. In the meantime, I hope you and your loved ones enjoy celebrating our nation’s 247th birthday. Here’s to hoping that working to overcome our challenges only makes us stronger.

Happy Independence Day!

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More Conference Notes

In recent posts I’ve called out takeaways from conferences I’ve attended in the past month or so. Here are a couple more and, in the interest of brevity, we’ll look at the last few next week.

On Investing in China –

Andy Rothman is a strategist at Matthews Asia, a mutual fund company based in SF and known for specializing in financial markets of the Pacific Rim. Andy has been working in and on China for decades and talked about attending the first pop concert in the country by a western band, Wham!, in 1985 while stationed in Beijing with the State Department. His experience in the country is long and varied and gives him a unique perspective. Similar to Liz Ann Sonders of Schwab, Andy is someone to make time to pay attention to.

The title of his talk was “Xi Returns to Pragmatism”, a perplexing topic in the context of post-trade war, post-Covid, and post-positive working relationship with the US. Andy spoke highly of China and its people, emphasizing that as with here at home, much of the fiery rhetoric happens within the political class and state-run media, and isn’t necessarily reflected in the daily lives of typical Chinese people.

Andy spoke of how our economies are still highly (and positively) interconnected and how, according to his understanding through interviews with business owners and even higher-ups in the Chinese military, the government has no intentions of overtaking the US as a leading world power but wants to own its neighborhood. And it wants to have a greater voice in world affairs because, essentially, there’s more money in it. Pragmatism rules the day with President Xi, according to Andy Rothman, and not political ideology. And since Xi seems to have real staying power, his pragmatism should matter longer-term to the rest of us.

Andy made the point that, for long-term investors, China presents a huge opportunity. The country’s markets are underpriced after recent declines, but he talked about risks and suggested that much of the financial data coming from China is untrustworthy. Andy emphasized sticking with larger companies and said that stock picking with boots-on-the-ground research is key in sniffing out good opportunities. Obviously this can mean buying a Matthews fund or, perhaps also or instead, an emerging markets index fund to broaden your exposure. The biggest options in this space probably have nearly half of fund assets invested in China and Taiwan, so are simple and cheap ways to access Chinese markets.

All in, this was a different perspective regarding China than we hear in the news and that’s good. Real risks remain for investors and from a geopolitical perspective, but reality might contradict the mainstream narrative at least somewhat.

CA’s Energy Policy –

Severin Borenstein is a professor and economist at UC Berkeley and an acknowledged expert on CA’s energy infrastructure and policies. He sits on the board of the CA Independent Systems Operator, for example, and was an advisor to the Bay Area Air Quality Management District. You may wonder what a speaker like this is doing at a financial planning conference and so did I. That’s why I attended the talk. It was labeled an “Ask me anything…” sort of discussion, with few slides but a lot of good baseline information about the reality of the state’s energy priorities.

Borenstein painted a rather bleak (at times) picture of a state committed to decarbonizing its economy while suffering through household energy prices that are the highest in the country. The “leading edge and bleeding edge of technology”, he said. Gasoline prices are high but still too low compared to the societal costs of extraction and pollution. And he questioned the state’s ability to maintain a stable market as it attempts to phase out gasoline. (For example, refiners could continue to leave the state if conflicting priorities – “We want your product now but not forever” – make business planning too challenging and this would send prices even higher.) That, he predicts, will be awhile and wouldn’t impact sectors like commercial trucking and the airlines. He discussed how a “mystery tax” of perhaps 40 cents per gallon adds billions of extra cost per year on top of other taxes and surcharges. He thinks this money is simply going to the oil companies and said that the state will soon investigate the cause of the mystery tax. Okay...?

Borenstein went on to discuss natural gas prices and how those are also high, mostly because of additional costs baked into monthly bills. Fire-related infrastructure improvements and policies and programs associated with the “electrify everything” movement might be 2/3rds of your bill. He suggested that Californians often pay 50 cents or more per kWh when most of the rest of the country pays less than half that. This is a form of regressive tax disproportionately impacting lower income households and he discussed how we got to this point via legislative decisions. The details are beyond the scope of this post, but it’s fascinating.

The professor alluded to an eventual reprieve offered by new technologies, but much of that looks to be well off in the future. If anything, costs could rise as the state continues toward decarbonization.

The subtext of all this in a room full of financial planners, most of whom live and pay in CA, was one of frustrated acceptance. I don’t know how else to describe the outlook except, as I mentioned above, rather bleak cost-wise, especially for lower-income households and people living on a fixed income.

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Quarterly Update

The second quarter (Q2) of 2023 was great for stocks at home and abroad, with much of the positive performance coming from a small group of stocks within a few sectors. Bonds struggled to maintain positive performance so far this year amid fears of higher interest rates and consternation about the federal government potentially defaulting on its debt. In short, it was another eventful quarter for investors that ended well, all things considered.

Here’s a roundup of how major markets performed during the quarter and year-to-date, respectively:

  • US Large Cap Stocks: up 8.7%, up 16.8%
  • US Small Cap Stocks: up 5.7%, up 8%
  • US Core Bonds: down nearly 1%, up 2.4%
  • Developed Foreign Markets: up 3.3%, up 12.5%
  • Emerging Markets: up 1%, up 5.2%

Clear winners during the first half of 2023 and Q2 were stocks that did poorly last year. Stocks in sectors like Technology, Communication Services, and Consumer Discretionary were up 40%, 36%, and 32% this year, respectively, as the quarter closed. The largest stocks beat the smallest handily, with the large-cap tech-heavy NASDAQ 100 index up 39% this year versus various small company indexes up in the mid-single digits. This large-cap bias helped the S&P 500, the typical US stock benchmark, rise 6.5% during June to finish the first half of the year up nearly 17%. This was quite the turnaround after these market indexes declined from 18% to nearly 40% last year!

The primary drivers of this uptick for stocks were declining inflation and our resilient economy, rising interest in artificial intelligence, and a relief rally after government officials avoided a debt default early in June.

Inflation peaked last summer at 9% and has been declining steadily since, dropping to 4% in May. The Federal Reserve has a stated goal of 2% inflation and has raised interest rates ten times since March of last year to slow the economy down. Among other things, this has increased short-term borrowing costs in the economy by about 5%. The Fed held off raising rates at its June meeting while suggesting that more rate increases could come later this year. Only time will tell if and how much more the Fed raises rates, but we’re marching closer to their 2% objective and more rate increases are getting harder to justify. This soothed investor concerns a bit during Q2, but lingering pessimism about Fed policy still took some wind out of the bond market’s sails as the quarter closed.

Also at play was the surging popularity of AI. Hyperbolic notions about the technology’s risk to humanity notwithstanding, investors caught the AI bug during Q2. This helped drive stocks like Apple, Microsoft, Alphabet (Google) to each rise 30+%, and chip maker NVIDIA to rise almost 190%! These companies help make up the top 25 list of the benchmark S&P 500 and this group’s total publicly traded share value has grown by nearly $4.5 trillion so far this year. The entire index grew by $5 trillion, according to Bespoke Investment Group, so it’s easy to see how one-sided this rally has been so far.

Also helping stocks was the eleventh-hour resolution of the drama around our nation’s debt ceiling and potential debt default. While nothing new per se, this time around the debt ceiling “crisis” took a toll on investor sentiment, helping various metrics reach some of the lowest points on record. Once the issue was resolved (or merely delayed, depending on your perspective) investors got back on the stocks bandwagon and drove indicators like CNN’s “Fear & Greed Index” to “Extreme Greed” after being at “Extreme Fear” barely a year prior. The popular AAII Bullish Sentiment index also jumped to its highest level in two years. Generally speaking, large upward moves in investor sentiment tend to linger and can help drive stock prices further in the short-term.

All of that sounds pretty good while being in stark contrast to where we felt we were a handful of months ago. But the outlook is mixed. We continue to see surprisingly good consumption, housing, and jobs numbers in the economy, but the impact of higher interest rates should eventually slow the wealth effect. Student loan repayments will restart soon, and analysts disagree on how much that will impact consumption. The commercial real estate picture in some major metros looks dire and the financial impact of that also takes a while to play out. Stocks were up while commodities were down nearly 9% last quarter as global manufacturing demand slowed. All this should eventually slow our economy in a meaningful way, we just don’t know by how much. Analyst opinions differ on near-term recession risk and potential severity while investors seem keen to shrug off recession risk in the short-term. Whose right is anyone’s guess.

One takeaway from Q2 juxtaposed with the market’s poor performance last year is how hard it is to forecast the future in a consistently accurate way. Stock market analysts get paid to do this and the good ones are right just a bit more than they’re wrong when averaged over, say, a ten-year period. That math works if you can hold on when the news gets scary and markets get volatile. But many people can’t. The rest of us try to focus on controlling what we can control and let time work for us. We don’t chase market trends – we diversify and rebalance as needed. And we don’t try to guess the “right” time to buy or sell, even though that’s what the media pushes every day. This approach isn’t always popular or even one that feels good all the time, but it’s one that works if you let it.

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Final Conference Notes

This week let’s get into our final installment of my conference notes. Hopefully some of these have been worthwhile. The content has been varied but our first few notes today are more like what you’d expect from a meeting of financial planners. The last note is a little different but, as with others in recent weeks, helpful with the human side of personal finance.

Social Security and Medicare –

If you’re already drawing Social Security you’re no doubt aware of the 8.7% cost-of-living adjustment this year. That’s old news at this point after a runup in inflation last year. But it’s important to note that this bump helps those waiting to start their benefits as well. And since SSI benefits don’t deflate even if the economy does, this raises the floor that all future inflation adjustments will be based on.

As a reminder, Social Security COLAs are based on changes in the government’s primary measure of inflation from October to October. Inflation peaked last summer at 9% and has been trending lower ever since, down to 4% in May. Assuming this trend continues we could be down to 2-3% by October and a net decline from a year prior, implying no benefit increase for next year. 1-2% per year has been more the norm in the past decade or so, but we’ll find out when the SSA makes its announcement in October.

Regarding the program’s health, current projections are for the Social Security “trust fund” to cover about 80% of benefits by 2035 while still supporting 74% of benefits by 2097. That baseline assumes, as I understand it, a benefit reduction starting in 2035. That’s not etched in stone, of course, just part of a long-range projection with a trajectory that could, at least in theory, be altered at any time by Congress.

This probably sounds obvious, but the younger you are the riskier it is to assume current levels of Social Security benefits during your retirement. Who knows what our elected officials end up doing regarding this issue, so it’s prudent to plan and save appropriately to nurture and eventually hatch your own next egg. Ideally, whatever you receive from Social Security down the road is a bonus, not something you’re relying on to make ends meet.

Here’s a link to the SSA’s website for details on these projections and the variety of proposals lingering in Congress to shore up the system.

https://www.ssa.gov/oact/solvency/index.html

The Medicare Part B monthly base premium is $164.90 per person and gets more expensive as your adjusted gross income rises to $194,000 for joint returns and $97,000 for single filers. Part B and Part D premiums max out at around $637 per person per month for households with over $750,000 of AGI. Base Part B premiums are expected to be about $175 per month for 2024, but the final number won’t be announced until November.

IRA Beneficiaries –

There have been a lot of changes in recent years to how inherited IRAs are treated. Most of the complexity relates to non-spouses who inherit an IRA. For example, before 2019 a popular option for beneficiaries was to “stretch” the account balance over one’s life expectancy. Doing so reduced the tax burden on distributions and, at least hypothetically, allowed the account to grow and pass to the next generation. Then the SECURE Act did away with this by capping the stretch period to ten years from the year following the original account owner’s death. And then at the end of last year the SECURE Act 2.0 added more complexity.

One of the lingering issues following these changes was whether someone inheriting an IRA had flexibility as to which year they took distributions during the ten years mentioned above, or if they had to start immediately. The IRS issued proposed regulations to clarify the “at least as rapidly” rule, so we now understand that if the original account owner was taking required minimum distributions, then so must the beneficiary during the ten-year period. This is a bit of a turnaround but comes on the heels of a Covid-era waiver period for missed beneficiary RMDs. So, if you missed taking an RMD due to this issue, now is a good time to get started.

Interpersonal Neurobiology –

Two financial “life” planners presented their very interesting work on integrating the research of Dr. Dan Seigel into the realm of financial planning. If you haven’t heard of Dr. Seigel, he’s a psychotherapist, author, and either the creator or a chief proponent of the field of Interpersonal Neurobiology.

Frankly, the details of IPNB are beyond me but the gist is a series of tools to increase self-awareness and empathy through regulating our emotions by understanding the signals provided by our body and mind. That’s sort of a mouthful and might sound a little woo-woo, but cultivating more awareness and understanding can be helpful in the fractured and fractious times we’re living through.

How does this inform my work as a financial planner? Essentially, the presenters suggested that we need to be able to master our own preconceived notions and fears about money, risk, and uncertainty, for example, before we can do a better job helping clients in these areas. Empathy is important, as is patience and the ability to link the interpersonal nature of our work to the technical stuff. Easier said than done, but it’s good to see these sorts of conversations happening in the context of a financial planning conference.

Here's a link to Dr Seigel’s “Wheel of Awareness” if you’d like to check that out. There are some guided explanations of these concepts that are similar to meditation.  

https://drdansiegel.com/wheel-of-awareness/

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Conference Notes: Updates on Aging

Last week I mentioned some takeaways from two speakers at recent conferences I attended and this week I’m continuing that theme. Part of the reason I make time for these conferences is the variety of information we get to hear. It’s a lot about investments, for sure, but we also hear from cybersecurity experts, technologists and futurists, financial therapists and, for nearly four hours, updates on aging in America.

But before we get into that, a few people have asked about this week’s Fed meeting and whether our benevolent central bankers are likely to raise interest rates again. We’ll find out tomorrow, but the emerging consensus is that the Fed may hold off raising rates this month. The simplest summary of why this might be the case comes from JPMorgan and I’m including it and a chart below. The rest of my post follows.

On Wednesday, the Fed should provide more clarity on the trajectory of rates after vacillation in market expectations over the past month, which we illustrate in this week’s chart. As of Friday, the federal funds futures market was pricing in a 28% probability of a hike in June and a 54% chance of a skip in June followed by a hike in July. Since the FOMC last met, expectations have oscillated due to resilient growth, moderating inflation, diminished threats from regional banking turmoil, a solution to the debt ceiling standoff and mixed messages in the public pronouncements of Fed officials.

Given a gradual slowdown in growth and inflation and the fact that we have yet to see the full effect of the cumulative 500bps [100 basis points = 1%, so 500 bps is 5%] of hikes so far, the Fed would be well advised to pause at this point. Nevertheless, another hike is still clearly on the table and, if the Fed doesn’t hike this week, Chairman Powell will likely emphasize that skipping a rate hike now does not necessarily imply that the Fed is done raising rates. However, regardless of the Fed’s decision and messaging this week, we expect to see rate cuts within the next year that should improve the backdrop for investors across a broad range of assets.

Now on to the updates about aging in our country…

Carolyn McClanahan –

Carolyn was a family MD before becoming a financial planner and speaks about related issues from that unique perspective.

She’s an advocate for care planning since a lot of the problems faced by families with aging relatives could be avoided, or at least mitigated, by doing so. Waiting to plan makes just about everything more expensive, so start conversations early and write things down. These documents, even of informal agreements between family members, can help later when everyone is stressed.

Part of this means defining goals for care and understanding that those goals can, and often do, change. For example, how long does mom and/or dad want to stay at home? What resources (financial and familial) are available to support this? Who will take the lead on decisions and care, and are you planning to hire help? If so, get an idea of cost and plan for inflation. Earmark accounts and investments for these purposes.

The following site from Genworth is a good starting place to determine cost in your area.

https://www.genworth.com/aging-and-you/finances/cost-of-care.html

Are there sufficient resources? If not, start thinking about and planning for Medicaid assistance early.

Carolyn also talked about The Dwindles, or “failure to thrive”, that occurs in about 40% of elderly people. This can mean reclusiveness, lack of appetite and low energy, all of which makes caring for the individual more difficult and obviously impacts quality of life. This can be especially true for those widows and widowers living at home alone. Are they engaged with family and others? Who is measuring their quality of life, and do they have an advocate?

Carolyn spent more time talking about homecare and the variety of issues related to deciding to move into a more supportive environment. She offered this search tool from Medicare that shows homes and rehab services in your area.

https://www.medicare.gov/care-compare/?providerType=NursingHome

And this checklist helps with evaluating different types of facilities.

http://www.canhr.org/factsheets/nh_fs/html/fs_evalchecklist.htm

If your loved one has a long-term care policy, start the claims process early so as not to leave money on the table. There may be other benefits available, such as from the VA. Carolyn mentioned how some folks who served in Vietnam, for example, assume they don’t qualify, and nobody calls to find out. Other programs exist, such as SHIP and PACE in some parts of California, and those websites follow.

https://www.aging.ca.gov/Programs_and_Services/

https://www.npaonline.org/pace-you/pacefinder-find-pace-program-your-neighborhood

Andrew Carle –

Professor Andrew Carle, of Georgetown University, gave us a fabulous but at times bleak presentation on the future of aging. It’s a global phenomenon, with Japan and Italy listed as the #1 and #2 countries with the highest percentage of the population over age 65, respectively, but most of his talk was geared toward the US (we’re #36 on that list, by the way).

According to Prof. Carle, the three-legged stool of caregiving is collapsing. More households have both spouses working full time so there’s less time to provide care for aging parents. Additionally, roughly 20% of family caregivers are themselves over age 65 and 7% are over 75. And we’re over 4 mil short of professional caregivers. He discussed ways to address this staffing shortage, including pending legislation to incentivize entering the field, expanding legal immigration, and trying to keep older adults healthy and working longer (maybe even as professional/paid caregivers).

Carle’s other proposals included shifting away from seniors aging in place, which is inefficient for the healthcare system, to more facilities-based solutions that are easier to staff at scale. But he admitted that the industry needs to get away from the stigmas associated with “nursing homes” and build facilities people actually want to live in.

He said the assisted living industry is gearing up to offer more choice for seniors who want to congregate. These facilities will offer the same essential services but would be aimed at niche audiences, such as Asian-Americans, university alums, RVers, and even fans of The Grateful Dead and Jimmy Buffett. Some of these properties are quite successful, so more money is moving in this direction. These changes, Carle said, should accelerate as seniors demand better options for continuing care.

But since many seniors will still want to stay at home for as long as possible, the healthcare industry needs to help while not making the professional deficit worse. Along these lines Carle discussed the rise of what he termed “nana technology” to make care more efficient. Some of the ideas currently being researched by a range of companies and universities include:

Services that track medications and remind various contacts when it’s time to take a pill and if it isn’t taken. Apparently, medication-related errors are the primary cause of hospitalizations for those over age 65, so reducing this problem will take a load off the healthcare system.

Various gadgets and web-based services that track those with dementia/Alzheimer’s and alert a variety of people if the wearer gets outside of a predetermined range. Other services, such as Grandcare.com, track the wearer/user in their home and can provide telehealth services on demand.

Also mentioned were custom insoles for shoes that help with balance to avoid falls, and even exoskeletons from companies like Honda in Japan that greatly reduce fall risk. Researchers are also developing “i-textiles” that could serve all of the above functions while being worn like clothing. Apparently MIT is working on a version that will administer CPR if the garment’s sensors are triggered.

So, both of these speakers discussed the challenges of aging but there’s reason for optimism. Planning ahead can help alleviate a lot of stress down the road and various entities are trying to adjust and innovate to serve the aging population. There should be more choice in care options as time goes on and that should help keep quality of life higher for longer.

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