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The Psychology of Planning & the Ostrich Generation

The Wall Street Journal recently published an article dubbing many of today’s preretirees the “Ostrich Generation” – observing that folks are sticking their heads in the sand instead of proactively working on a retirement plan. In fact, according to the Employee Benefit Research Institute (EBRI), only 42% of Americans report that they’ve tried to calculate how much money they will need to save for retirement. It’s no wonder, of course, given the volatility in the stock market, low interest rates in the bond market, and the general state of the economy.

However, it does seem that now is a good time for folks to at least figure out how much money they’ll need to live on in retirement, and perhaps take a close look at all the retirement income strategies currently available. The current state won’t last forever – but similar situations may come around again before you retire – so it’s a good idea to take today’s lessons and apply them to help protect yourself from another financial retreat in the future. Like during retirement.

(CLICK HERE to read “Don’t Join the Ostrich Generation” at The Wall Street Journal, September 17, 2011)

(CLICK HERE for highlights of the EBRI’s 2011 Retirement Confidence Survey, March, 2011)

Experience shows that the more we learn about something, the more confident we grow about that area. Even though figuring out how much you will need may feel like an insurmountable number, the empowerment of the exercise may encourage you to become proactive. For instance, there are several strategies you can employ right now that don’t require that you invest for future growth. Many of these are outlined in the referenced Wall Street Journal article, such as:

  • Planning to work part-time during retirement – which can also help you stay active and engaged
  • Purchasing a long-term care policy – premiums are cheaper the earlier you buy a policy
  • Delaying Social Security – if you will soon be eligible for benefits, wait until age 70 and you’ll receive 132% of the full retirement age monthly benefit
  • Social Security selectivity – live on one spouse’s benefit and let the other’s kick in later at the higher percentage to help out with the rising cost of living and later-in-life health care costs

The point is, there is something you can do now: Make a plan. Granted, you’ll need to continue tweaking that financial plan for the rest of your life because things change – as we all well know. But the mere process of creating a financial plan is empowering in and of itself. It can help you feel more positive about the future – and your ability to have an impact on even unforeseen events. Creating a plan can also be more motivating than you might expect – finding areas to cut back in current living expenses and redirecting those funds towards your retirement.

Please contact me if you feel that you, too, might have had your head in the sand too long. I’d be happy to help you review your current strategy and create a sound approach for your future retirement.

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Let’s Celebrate Inflation

Last week, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3% in September; the 12-month increase equals 3.9%. The agency cited increases in energy and food prices as the main cause for the increase.  

As we’ve been wavering between threats of double-dip recession and higher inflation, this news may be the more positive direction for the economy. For the record, inflation usually exists even in a healthy economy. In fact, The Federal Reserve considers an annual inflation rate of around 2% as optimal. For a point of perspective, inflation averaged 2.8% during the growth years of the 1990s.1  

(CLICK HERE to read the full Bureau of Labor Statistics announcement, October 19, 2011) 

So, amidst all the current economic news, both good and bad, perhaps there are a few nuggets that are specifically relevant and actionable for consumers. As for inflation, prices typically rise because there is a sudden shortage of supply or because demand goes up. Given today’s current stagnant economy, increased demand is good news. This generally means consumers are spending more money; therefore companies can increase prices and, as revenues go up, payrolls increase and so does company growth and expansion – yielding more new jobs.

In related news that further demonstrates the positive side of higher inflation, the Social Security Administration recently announced a 3.6% cost of living (COLA) increase in Social Security benefits for 2012, following a two-year hiatus. Unfortunately for folks not retired yet, the agency also increased the limit on the amount of earned income that will be subject to Social Security taxes – from the current $106,800 to $110,100 starting in 2012.

The IRS also published new, increased contribution limits for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan. Plan limits are increasing from $16,500 to $17,000, starting next year.

(CLICK HERE to read the full Social Security announcement, October 19, 2011)
(CLICK HERE to read the full IRS announcement, October 20, 2011)

If these inflation adjustments are a sign of the times, it may be a good idea to consider options now for inflation-proofing your portfolio in the future. Common hedge strategies include commodities, REITs, currency strategies and inflation-linked securities such as TIPS (Treasury Inflation-Protected Securities). Also, investing in targeted asset classes such as commodities or TIPS through ETFs can be advantageous because they are low cost, transparent, and allow you to get in and out quickly.

If you’d like to discuss ways to protect your portfolio from the impact of rising inflation, please contact us today!

1 U.S. Inflation Calculator. http://www.usinflationcalculator.com/inflation/historical-inflation-rates. Accessed October 26, 2011.

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The Great Misconception?

Perhaps we’re missing something. Economists have called our recent hard times the Great Recession, and many call for a double dip on the horizon. But many of the numbers, particularly the ones released just last week, tell a different story.

Let’s start with the bad news. Consumers are still reeling from the credit, market, and political low notes we hit in August. Perhaps that’s why our poor outlook remains. On Friday, the Thomson Reuters/University of Michigan survey  results of consumer outlook fell from 59.4 last month to 57.5 – way off the more positive expectation of 60.2, and the lowest level in 30 years. 

Consumers reported that the biggest reason their finances have recently worsened was due to decreased household income, and 65% do not expect their income to increase in the year ahead.

 (CLICK HERE for CNBC coverage of the consumer sentiment survey, October 14, 2011.)

Then again, perception is about how we feel. In reality, the numbers aren’t all that bad. Last Friday, the US Department of Commerce announced that U.S. retail sales for September increased by 1.1% over August, and 8.1% over September 2010. Car sales also increased, up 0.6% in September and rising at the fastest pace since March 2010.

(CLICK HERE for the US Department of Commerce report, October 14, 2011.)

In job news, hiring was stronger than expected in September, with employers adding 103,000 jobs for the month. That number was bolstered by 45,000 striking Verizon workers who returned to work, as well as jobs added in the construction, retail, and professional/business services sectors. The picture may have looked rosier had it not been for Bank of America’s loss of 30,000 jobs in September, not to mention the ongoing woes of the public sector. As a result of state budget cuts, public schools lost 24,400 jobs across the country and local governments eliminated 35,000 jobs. Furthermore, the United States Army eliminated 50,000 troops as part of its five-year reduction plan.

(CLICK HERE and HERE for CNN’s coverage of jobs reports, October 7, 2011.)

(CLICK HERE for an employment update from Challenger, Grey & Christmas, October 5, 2011.)

To date, this year has experienced a teeter-totter between the languishing public sector (with a net loss of 267,000 jobs) and a well-capitalized private sector (with a net gain of 1.3 million positions). 

America’s corporations may be a bit stingy on job growth, but not on balance sheets. Economists estimate $2 trillion in cash reserves among the nation’s companies. In the first six months of this year, profits of the Standard & Poor’s 500® companies increased nearly 16% more than during the same timeframe last year. The 52-week S&P 500 consensus forward earnings forecast has increased from $96 at the start of the year to $108 (a 12% increase). 

These numbers clearly indicate that corporate profit is climbing much faster than economic growth. However, stock valuations remain priced for low expectations. Equity investors with nerves of steel who are willing to ride out the current volatility may eventually be rewarded. As the Global Investment Committee at Morgan Stanley Smith Barney points out, historically, years that start out with low levels of consumer confidence have witnessed higher than average equity one-year returns.

(CLICK HERE to read at Morgan Stanley Smith Barney’s market commentary, October 2011)

If you would like to discuss the equity allocation of your investment portfolio, please contact us today!

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Welcome

Today’s economic environment is more complex than ever before, and achieving financial success can be an incredibly confusing process to even the most experienced individuals. That’s exactly why we’ve created this blog – to provide a forum for discussion, a portal for helpful information and resources and an ongoing stream of expert insights to help you make informed decisions about your financial future.

What are your biggest financial concerns? If you’re like many individuals preparing for or actively enjoying retirement, you may be wrestling with any number of pressing issues that keep you up at night.  Many find themselves asking questions such as:

Have we really saved enough?
How do we make up what we’ve lost over the past 2-3 years
What are the right moves to make in today’s uncertain economy?
What should we be doing with our IRA and 401(K)?
Are there ways to reduce what we’re paying in taxes each year?
How do we create the most meaningful legacy possible for our children and grandchildren?
Will we outlive our retirement savings?

We’ll use this blog to provide valuable insights into each of these areas and more, so take a look around, check out the most recent posts and be sure to offer feedback or post a question if there are topics you’d like to see addressed!

Prefer to have your particular situation reviewed in person? We’d love to meet you!  Simply call (623) 544-3424 to schedule a complimentary consultation today!