Week of June 11, 2018
Quote of the Week
“One of the best ways to make money is not to lose money.” Michael Milken
Stocks were higher last week with the Dow posting its best weekly gain since the beginning of March. Last week the Dow was up 2.8%, the S&P 500 was up 1.6% and the Nasdaq was up 1.2%. For the year the Dow is up 2.4%, the S&P 500 is up 3.9% and the Nasdaq is up 10.8%. Again the high flying tech stocks are driving this market. The separation between the tech stocks and the rest of the market is growing wider which historically has not been a good sign.
While the pace of growth overseas has moderated a bit in recent months, global trade volumes have remained fairly healthy. This puts a spotlight on the current trade spats that have emerged, spurred by tariff announcements that could impact trade with NAFTA, Europe, and China. Last week’s G7 meeting in Canada was a disaster and did little to soothe the concerns of a brewing trade war.
Before even arriving at the conference on Friday morning, Mr. Trump floated the possibility of Russia rejoining the G7. Russia was kicked out of the group after invading Ukraine and annexing Crimea in 2014. Trump also arrived late to the meeting and left early.
Mr. Trump held a wide ranging news conference describing the meeting as a “10 out of a 10” success. He insisted he had very close personal relationships with, among others, Canadian Prime Minister Justin Trudeau, French President Emmanuel Macron and German Chancellor Angela Merkel. From the pictures I have seen and the comments that have been made by the other members of the G7 they are not looking favorably on the U.S. 25% tariff on steel and the 10% tariff on aluminum. They have promised to retaliate with tariffs of their own on U.S. goods.
Then the issue really got heated when Justin Trudeau of Canada held a press conference saying that the “U.S. tariffs were kind of insulting” and he “will not be pushed around”. Then the tweet storm started.
Chief Trump economic adviser Larry Kudlow went on CNN’s “State of the Union” and called Trudeau’s new conference a “betrayal,” adding: “He stabbed us in the back.” Then on top of that Peter Navarro, a trade advisor for Trump was even more damning in has comments about Trudeau. “There is a special place in hell for any foreign leader that engages in bad faith diplomacy with President Donald J. Trump and then tries to stab him in the back on the way out the Door,” Navarro said on “Fox News Sunday.”
What does this mean? It looks like it is becoming a ” mano a mano” situation. This will probably lead to a trade war because I don’t see anyone backing down because of the egos involved. A trade war will become a disaster for the world’s economy and especially for the U.S. economy as it will become the U.S. vs the rest of the world.
If you would like to “brush up” on “Tariffs and Trade Wars” you can access the “Your Money Our Thoughts” of April 23, 2018 where I went into detail.
Planning your retirement income is like putting together a puzzle with many different pieces. One of the first steps in the process is to identify all potential income sources and estimate how much you can expect each one to provide.
According to the Social Security Administration (SSA), nearly 9 of 10 people aged 65 or older receive Social Security benefits. However, most retirees also rely on other sources of income.
For a rough estimate of the annual benefit to which you would be entitled at various retirement ages, you can use the calculator on the Social Security website, www.ssa.gov. Your Social Security retirement benefit is calculated using a formula that takes into account your 35 highest earnings years. How much you receive ultimately depends on a number of factors, including when you start taking benefits. You can begin doing so as early as age 62. However, your benefit may be approximately 25% to 30% less than if you waited until full retirement age (66 to 67, depending on the year you were born). Benefits increase each year that you delay taking benefits until you reach age 70.
As you’re planning, remember that the question of how Social Security will meet its long-term obligations to both baby boomers and later generations has become a hot topic of discussion. Concerns about the system’s solvency indicate that there’s likely to be a change in how those benefits are funded, administered, and/or taxed over the next 20 or 30 years. That may introduce additional uncertainty about Social Security’s role as part of your overall long-term retirement income picture, and put additional emphasis on other potential income sources.
If you are entitled to receive a traditional pension, you’re lucky; fewer Americans are covered by them every year. Be aware that even if you expect pension payments, many companies are changing their plan provisions. Ask your employer if your pension will increase with inflation, and if so, how that increase is calculated.
Your pension will most likely be offered as either a single or a joint and survivor annuity. A single annuity provides benefits until the worker’s death; a joint and survivor annuity provides reduced benefits that last until the survivor’s death. The law requires married couples to take a joint and survivor annuity unless the spouse signs away those rights. Consider rejecting it only if the surviving spouse will have income that equals at least 75% of the current joint income. Be sure to fully plan your retirement budget before you make this decision.
Major Sources of Retirement Income
Fast Facts and Figures About Social Security, 2017, Social Security Administration
Work or other income-producing activities
Many retirees plan to work for at least a while in their retirement years at part-time work, a fulfilling second career, or consulting or freelance assignments. Obviously, while you’re continuing to earn, you’ll rely less on your savings, leaving more to accumulate for the future. Work also may provide access to affordable health care.
Be aware that if you’re receiving Social Security benefits before you reach your full retirement age, earned income may affect the amount of your benefit payments until you do reach full retirement age.
If you’re covered by a pension plan, you may be able to retire, then seek work elsewhere. This way, you might be able to receive both your new salary and your pension benefit from your previous employer at the same time. Also, some employers have begun to offer phased retirement programs, which allow you to receive all or part of your pension benefit once you’ve reached retirement age, while you continue to work part-time for the same employer.
Other possible resources include rental property income and royalties from existing assets, such as intellectual property.
Until now, you may have been saving through retirement accounts such as IRAs, 401(k)s, or other tax-advantaged plans, as well as in taxable accounts. Your challenge now is to convert your savings into ongoing income. There are many ways to do that, including periodic withdrawals, choosing an annuity if available, increasing your allocation to income-generating investments, or using some combination. Make sure you understand the tax consequences before you act.
Some of the factors you’ll need to consider when planning how to tap your retirement savings include:
- How much you can afford to withdraw each year without exhausting your nest egg. You’ll need to take into account not only your projected expenses and other income sources, but also your asset allocation, your life expectancy, and whether you expect to use both principal and income, or income alone.
- The order in which you will tap various accounts. Tax considerations can affect which account you should use first, and which you should defer using.
- How you’ll deal with required minimum distributions (RMDs) from certain tax-advantaged accounts. After age 70½, if you withdraw less than your RMD, you’ll pay a penalty tax equal to 50% of the amount you failed to withdraw.
Some investments, such as certain types of annuities, are designed to provide a guaranteed monthly income (subject to the claims-paying ability of the issuer). Others may pay an amount that varies periodically, depending on how your investments perform. You also can choose to balance your investment choices to provide some of both types of income.
An inheritance, whether anticipated or in hand, brings special challenges. If a potential inheritance has an impact on your anticipated retirement income, you might be able to help your parents investigate estate planning tools that can minimize the impact of taxes on their estate. Your retirement income also may be affected by whether you hope to leave an inheritance for your loved ones. If you do, you may benefit from specialized financial planning advice that can integrate your income needs with a future bequest.
Equity in your home or business
If you have built up substantial home equity, you may be able to tap it as a source of retirement income. Selling your home, then downsizing or buying in a lower-cost region, and investing that freed-up cash to produce income or to be used as needed is one possibility. Another is a reverse mortgage, which allows you to continue to live in your home while borrowing against its value. That loan and any accumulated interest is eventually repaid by the last surviving borrower when he or she eventually sells the home, permanently vacates the property, or dies. (However, you need to carefully consider the risks and costs before borrowing. A useful publication titled “Reverse Mortgages: Avoiding a Reversal of Fortune” is available online from the Financial Industry Regulatory Authority.)
If you’re hoping to convert an existing business into retirement income, you may benefit from careful financial planning to minimize the tax impact of a sale. Also, if you have partners, you’ll likely need to make sure you have a buy-sell agreement that specifies what will happen to the business when you retire and how you’ll be compensated for your interest.
With an expert to help you identify and analyze all your potential sources of retirement income, you may discover you have more options than you realize.
Prepared by Broadridge Investor Communication Solutions, Inc Copyright 2018
By the Numbers
IN THE YEAR 2034 – Social Security trustees announced on 6/05/18 that the trust fund backing the payment of Social Security benefits (OASI retirement benefits) would be zero in 2034. A zero “trust fund” does not mean the payment of Social Security benefits would also go to zero, but rather would drop to 77% of their originally promised levels through the year 2092. When the trustees released their report in 2008 (i.e., 10 years ago), the Social Security Trust Fund was projected to be depleted in 2042 (source: Social Security Trustees 2018 Report). – Michael A. Higley, BTN 06-04-2018
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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs. The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly. Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.