There’s been a lot of talk in the media lately about economic recession, price inflation, and how the investment markets have and are likely to perform. Unfortunately, more of this comes from unknowledgeable ‘talking heads’ than it does those with a real handle on our economy.
Here’s an example: a USA Today article recently represented that we are in a recession because nearly 80% of the consumer polled had come to that conclusion. Only two business days later Ben Bernanke, the current Federal Reserve Chairman, represented that the
Another example is inflation. I’ll admit that we’re concerned about – as is anyone that has filled their gas tank or purchased groceries lately. Those listening to the major media outlets see inflation as one of the biggest problems in our economy right now. Admittedly, sustained inflation can be a major problem and it typically occurs when commodities prices and wages increase in a cyclical manner, each urging each other on to newer heights. What is largely unreported is that most commodity prices have peaked and have begun to back off and there has been no meaningful increase in wages. Indeed, the Consumer Price Index (CPI) increased at a rate of 4% in the 1st quarter of 2008, but the same 52 economists polled by USA Today see that as a peak and forecast the CPI rise to gradually decrease to a rate of 2.5% by mid 2009 – keep in mind that our economy has operated with health and vigor for lengthy periods with a rate of approximately 3%.
We’re not suggesting that our economy is operating at maximum efficiency and that everything is rosy. On the contrary, there are issues to be concerned about that must be addressed: continued increase of personal debt, an over reliance on energy consuming lifestyles, tightening credit standards in the face of lowered interest rates, poor savings habits, and longevity and sequence of return issues as they relate to investment accounts.
That last item, longevity and sequence of return is something most people don’t immediately understand and is rarely discussed. It has to do with a combination of our increasing life spans, a desire to retire at an age young enough to enjoy our retirements, an increased likelihood to spend on discretionary items like never before, and common ups and downs in the investment markets. Here’s the example: John and Mary are 63 years of age, newly retired, traveling now that they finally have the time, and being generous with their children and grandchildren. They see large balances in their retirement accounts and in the last 10 years their home value has doubled (even with the correction in the housing market). They presume that since their parents each passed away prior to age 80 they are likely to the same, and though the market returns on their investments have actually been negative over the past several months they’re sure they’ll still get 12% on their accounts like they think they did a few years ago when they finally started to pay attention to those accounts. What they are missing is that 60 is the new 40 (or something like that) and they’re likely to outlive their parents by a good 5 to 8 years, they aren’t likely to see average investment returns of more than 5-8% now that they’re retired and need to invest more appropriately, and they are likely to want to take the same monthly income from those accounts during down months that they are during profitable months. Though their home value may well continue to rise over the years, so will the cost of maintaining, heating and cooling, and insuring it along with an ever increasing desire to tax it.
Many retirees spend more in the first year of retirement than they did in the last year of employment, simply because they think they can. They need to resist the temptation to spend and continue to find ways to save, just as when they were raising their families. They need to moderate their expectations and look for ways to create revenues to bring into the household even though they are technically out of the work force. And they need to seek out ways to protect their investment accounts against too much volatility while at the same time seek out above average returns. These can seem like conflicting tasks, but can be accomplished today with many of the living benefits available in various types of retirement accounts (typically not in a 401k).
Prudence, optimism, self reliance and healthy living are the attributes that have made for great lives – nothing has changed. Taking the time to strengthen both family and professional relationships provides great ongoing resources we can tap in the future. As important financial decisions need to be made, we can rely on those relationships to help guide our actions. Just like relying on our investments and homes to allow us long and comfortable lives.
Rick Haskell – Signature Wealth Management
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