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How To Head Into Retirement With No Mortgage

How To Head Into Retirement With No Mortgage

“Should we pay off our mortgage before we retire?”

This is among the most common questions I get from clients and “Money Matters” listeners (tune in from 9-11 a.m. Sundays on WSB radio (News 95.5 and AM 750 WSB). I most recently heard it from a couple who are on their final approach for retirement.

Let’s call them Rose and Jim Jackson. The Jacksons had set their sights on paying down their mortgage early and have been adding a little extra to their payment each month over the years to chip away at the balance. Today, Rose and Jim are both 59 and are looking to retire in five years, when they hit 64. They have about $100,000 left on their mortgage, with plans to pay it off before they enter retirement.

After reviewing the Jacksons’ financial situation, I was able to provide the Jacksons with an answer. I told them, “In my opinion, yes, you can pay off your mortgage.” In fact, I told them that, if they wanted, they could make a final lump-sum payment that day!

I’m a big believer that being mortgage-free can help provide a foundation for a happy retirement. That’s because the research for my book, “You Can Retire Sooner Than You Think,” showed that the happiest retirees were four times more likely to have their mortgage paid off within the next five years versus unhappy retirees.

Now I know that there are arguments against paying off a mortgage early, especially if the mortgage carries a low interest rate. So, let’s talk about that.

Some financial professionals may have looked at the Jacksons’ situation much differently. The couple has a 4 percent interest rate on their mortgage. They also have the $100,000 available to pay it off in full today with after-tax savings. The argument against paying off their mortgage today is that the Jacksons would be better served by investing their savings. This way, some financial pros would argue, the couple could garner an 8 percent return over time in stocks.

Let’s run the math both ways. If the Jacksons pay off their mortgage today, they would be saving approximately $15,000 in interest. If they waited to pay off the mortgage and instead invested their $100,000 and, assuming they earned 8 percent, they would earn about $8,000 per year. Over the next five years, they may end up with an extra $40,000. Subtract the $15,000 they would have paid to the bank, and they have another $25,000 left over. Sounds like a good deal, right?

Maybe, and maybe not. Consider this: What if the stock market doesn’t go up for a year, or two, or five? Or what if we get into a rut as we did in the 2000s when markets were relatively flat for a decade? Where does that leave you? Well, you’re still out the $15,000 to the bank for the mortgage, but you haven’t pulled down that theoretical 8 percent in returns, so this strategy has gone bust.

The average investor doesn’t necessarily make a steady 8 percent per year return. Not paying off the mortgage means trading a certain 4 or 5 percent return for the possibility of a higher return.

Back to the Jacksons: They were in a great position to pay off their mortgage and sail into retirement with one fewer line item (and it was a hefty one) on their monthly budget. Not everyone is so fortunate; of course. Only about 25 percent of owner-occupied housing units are without a mortgage, according to a 2016 study by the American Community Survey.

But since we know that paying off a mortgage can create tremendous peace of mind and happiness during retirement, let’s prioritize that goal. Here are four ways to make this dream a reality:

1. Go low to aim high. Keep your required mortgage payments at or below 15 percent of your gross monthly income. The mortgage and real estate industry will often cite a more aggressive 30 percent, but a lower percentage gives you greater ability to pay down the debt faster.

2. Use an early payoff calculator. There are several early mortgage payoff calculators available online. One example is Bankrate.com. This (or another) calculator will help you determine how many years you can trim off your loan by adding a few hundred dollars each month on top of your regular payment.

3. The differences between weekly versus monthly payments. Simply cut your mortgage payment in half, and pay that amount every two weeks. With this method, if your mortgage payment is $3,000 a month and you opt for the two-week payment schedule, you’ll pay an extra $3,000 that year due to the way that the calendar falls. The best part? You may not even realize you are paying extra.

4. The one-third mortgage rule. This one is straightforward but should only be used as a guide. If you can pay off your mortgage using no more than one-third of your nonretirement savings, consider writing a check today. For example, if you owe $40,000 on your home and have $150,000 in savings (not including your 401(k) or IRA funds), you are within the one-third rule. Once you pay off your mortgage, you’ll still have a sizable cushion left over, which is the optimal situation.

It is a joyous day, indeed, when you know you own your home free and clear. So, no matter where you are on your retirement timetable, take steps (however small) toward getting your mortgage to a zero balance. Not only will you be in a position to spend more money on the activities you love and cherish, but you’ll also likely have a greater sense of security and peace of mind.

 


The original AJC article appears here.

DISCLOSURE

This information is provided to you as a resource for informational purposes only and should not be viewed as investment advice or recommendations. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.


 

How To Create A Solid And Comprehensive Estate Plan

Over a century ago, Ambrose Bierce wrote, “Death is not the end. There remains the litigation over the estate.”  Some things never change.

Today, a solid estate plan is critical – it moves the fate of your estate away from lengthy court proceedings and towards the preservation of both assets and family harmony.

Estate planning is a must-do for everyone regardless of age, marital status, or net worth.

Several important documents form the basis of a comprehensive estate plan. These include wills, trusts, Financial Powers of Attorney, and Advance Directives for Health Care.

A will allows you to state how you wish to have your assets allocated to your heirs. You may have heard the term “probate” thrown around when it comes to wills. That’s because the process of settling an estate under a will is called “probating the estate.” And, it must be done through the “probate court.”

Here, it’s important to take a moment to distinguish between property that passes under your will (called “probate assets”) and property that passes outside the will (called “nonprobate assets”).

You can include things like money, real estate, personal property, family heirlooms, any business you own and stock investments in your will. But things like life insurance policies, IRA accounts, and other retirement accounts with beneficiary designations pass outside the will – meaning they go straight to the beneficiary named under the policy. So, another crucial part of estate planning is making sure that your beneficiary designations on these assets are current and correct.

Bank accounts can be both probate and non-probate assets, depending on how they are designated. If you have a payable on death (POD) account, or if you have a joint account, when you pass away the bank account will go to the POD beneficiary or will simply become the sole property of the joint owner.

A properly written will is a legal document that must be enforced, meaning that your executor must follow what is written in your will. Say, for example, that you leave $100,000 to each of your three children. Each then receives $100,000, outright, from your estate.

But what if you don’t want your heir to receive all of that money in a lump sum? Here’s where trusts come in. In the simplest sense, a trust is like a bank account with rules. Say two of your children are responsible and prudent, but one is a spendthrift. You can set up a trust along with your will to hold this child’s inheritance. The trust document details how you wish the assets to be distributed to the profligate child, and names a trustee, or manager, to oversee the trust account. A common trust provision limits monthly or annual distributions unless the money is to cover education or health care expenses.

You can also provide a trust for a beloved pet. American businesswoman Leona Helmsley made headlines when she left her Maltese, Trouble, an astounding $12 million in trust for the dog’s care. These days, pet trusts are common, as owners seek the comfort of knowing their favorite animal will be well cared for after the owner is gone.

The next two documents in the estate plan will be incredibly powerful in situations where you are unable to manage your finances or make your own health care decisions.

We’ll start with the money piece. Many folks are familiar with the term “Financial Power of Attorney,” but may have some misunderstanding as to what this document can do, and when. First, it is critical to understand that whoever is named as your agent under a Financial Power of Attorney (FPOA) can “stand in your shoes” and conduct whatever business and money transactions that you have authorized her to do. You can give your agent the power to do things ranging from simple banking to selling or buying real estate and other assets.

Here’s the catch, however – the powers granted under the FPOA don’t have to start right away. You can set the FPOA to be “springing,” meaning that the powers granted to your agent don’t kick in until you are incapacitated or are otherwise unable to manage your own affairs.

The Advance Directive for Health Care (ADHC) is the cousin of the FPOA. Here, you also designate someone to be your agent and act on your behalf, only this time it’s in the realm of health care and medical decisions. In your ADHC, you can spell out exactly what your wishes are when it comes to the medical care you would like to receive if you are incapacitated or otherwise unable to communicate your preferences. This document has a natural springing component to it – your agent can’t act unless you are unable to.

If you think planning for incapacity seems like more trouble than it’s worth, I understand your feeling. No one wants to believe they won’t be able to do for themselves. And hopefully, you’ll always be able to make your own decisions. But, if you can’t, both the FPOA and ADHC give your family guidance on how you would like things to be done.

If someone becomes incapacitated before creating an FPOA or ADHC, their family or friends must petition the probate court for guardianship, conservatorship, or both. A guardianship allows someone else to make, among other things, health care decisions for the incapacitated individual, while a conservatorship enables someone else to make financial decisions. This is a costly process, both financially and emotionally.

Benjamin Franklin once remarked, “In this world, nothing can be said to be certain, except death and taxes.” My advice is to pay your taxes and plan for the time when you leave this earth. Do your due diligence and consider executing a basic estate plan. If you do, chances are both you and your loved ones can sidestep heated litigation and messy probate proceedings and challenges, and, most importantly, the possible strain on family ties.

This article originally appears here.


 

What’s Really Going On In The World: Misperceptions About Global Demographics And Economic Trends

It’s interesting how we tend to get stuck in a negative outlook on the world. This is not a criticism of any person or group of people; it seems to be human nature. Our tendency towards pessimism is egged on by the 24-hour news media, which bathes us a steady stream of emergencies, crimes, disasters, scandals – you name it, so long as it’s terrible news.

Let me use an example here to demonstrate my point. How would you answer the following question: In the past 20 years, has extreme poverty doubled, stayed the same, or been cut in half? Take a moment to think about it.

The correct answer is that extreme poverty has been cut in half globally. It’s astounding. Significantly more families across the world have access to clean drinking water, nourishing food, transportation and a safe place to sleep at night than they did just two decades ago.

I’ll bet you didn’t hear this story on the news. That’s probably why only 10% of people who are asked that question can give the correct answer.

As an aside, we Americans aren’t the only Eeyores. Residents of 30 other countries, ranging from Russia to the UK, also believe the world is getting worse.

Now, I’m not here to dispute facts you hear on the news. They are often from reliable sources. But always remember that facts and statistics can be manipulated to serve a purpose or agenda. As the old saying goes, “figures don’t lie, but liars figure.”

The fact is, contrary to what you see, hear and read, we are not spiraling into a world rampant with crime, poverty, natural disasters, and energy crises. In fact, global numbers show that quite the opposite is true.

Let’s talk about the good stuff that you don’t hear on the news. And by doing this, we’re going to talk about what’s really going on in the world.

Crime  According to Gallup Polls going back to 1990, the vast majority – about 70 – 85% – of Americans believe that crime is getting worse in this country. Not so. Since 1990, the number of crimes reported in the US has dropped from 14.5 million to under 9.5 million, representing a significant 5 million fewer crimes.

Clean Water – In 1980, about 58% (just over half) of the world had access to clean drinking water. Today, almost 88% of people across the planet have access, representing a tremendous improvement.

Plane Crash Fatalities  In the early 1930s, there was an average of 2100 deaths per 10 billion passenger miles. Today, that number is has decreased dramatically, down to only one death per 10 billion passenger miles.

Number of Nuclear Warheads – In 1986, there were about 64,000 nuclear warheads. Today, there are only 15,000. Yes, it only takes one or a few to wreak havoc, but this is a positive direction.

Fatalities from Natural and Technological Disasters – Back in the 1930s, about 971,000 deaths per year happened as a result of natural or technological disasters – from things like earthquakes, malaria, locusts, tsunamis, gas leaks, fires, explosions and building collapses. Today, that number has dropped to 72,000, representing a 92% drop.

Mobile Phones and Internet – In 1980, 0.003% of folks had a mobile phone. Today, 65% of people across the globe have one. As for web access, in 1980 0% of folks could get online, while 48% had access as of 2017.

Immunizations – In 1980, only 22% of the globe’s population had been vaccinated against major diseases. In 2016, that number leaped to 88%.

Hunger – As of 1970, 28% of the people on earth were malnourished. Today that number is only 11%.

Extreme Poverty – Living in extreme poverty means today (after adjusting for inflation) that you have less than $2 a day on which to subsist. Back in 1800, 85% of the world lived in extreme poverty. In 1966, things were better, with only 50% of the world in extreme poverty. Today, poverty of this magnitude only touches 9% of our globe’s population.

Our list of amazing improvements goes on and on. Why did we not know how much our world has changed for the better? Perhaps because these upticks are simply too slow and methodical to be noticed at the moment. Perhaps, again, because we don’t hear these types of stories on the news.

Still, there’s power in understanding what’s really going on in the world around us, and in the bigger picture. Don’t let a gloomy attitude influence you for the next decade, year, or even day. There is so much progress happening; I’m sure you won’t want to miss it.

After all, demographics largely determine the tide of our global economy. Today, the world has 7.6 billion people. It is estimated that, by 2100, we will swell to a population of 11 billion. The composition of that population is shifting as well. On a percentage basis, we will have fewer children and more working adults as we head towards 2045.

And let’s not forget that, when it comes to the economy, our feelings as investors come into play. We can’t be blinded by the barrage of bad news and expect that things are only going from bad to worse. Imagine if you had let this misperception and the accompanying fear dominate you over the past decade when it comes to your money. You would have missed out on a more than 200% positive market move. In the end, you would have been misled by bias and misinformation, and unable to see the incredible progress that has been (and continues to) happen before your very eyes.


The original article appears here.


 

8 Habits Of People Who Become Millionaires

It’s the question of the century: How do people become millionaires? My radio callers ask me, my friends ask me, and, heck, even my kids ask me. It seems we all want to know just what it takes to accumulate seven-digit net worth.

Of course, it’s not easy; if it were, we’d all be millionaires. Sure, some folks come into inheritances, while others rocket ahead by stumbling upon that super-performing investment, while others still may hit it big in the lotto. But these, of course, are the outliers.

Most millionaires are self-made, and they’ve built their net worth just like we build anything else — teaspoon by teaspoon, brick by brick. It takes discipline and a process to reach this level of wealth. Millionaires set their eye on the prize, and work tenaciously, through advantages and adversity, to achieve their goal. “Success is nothing more than a few simple disciplines, practiced every day,” according to millionaire Jim Rohn.

Thomas Stanley, who penned “The Millionaire Next Door,” showed the reality of what it takes to become super wealthy. Stanley related something I see firsthand every day: There are multiple paths and seemingly endless formulas to build wealth.

Over the course of my profession, I’ve seen doctors, lawyers and CEOs become millionaires. I have also seen teachers, midlevel corporate managers, salespeople, janitors, and small-business owners become millionaires.

While the particular details of the road taken may differ, there are common themes. Here are eight habits that folks who achieve millionaire status all seem to have in common.

1. They set (and stick to) goals.

Millionaires don’t merely hope to make more money and wait for the windfall to happen. Instead, they plan and work toward financial goals that they’ve outlined for themselves. These individuals have a clear vision of what they want, and they take the necessary steps to get there.

2. They have job stability.

Interestingly, millionaires often have been with the same company for 30 or 40 years. These days, we hear so much about high employee turnover rates, but there are still many people who have this level of job stability, such as teachers and other government workers. Staying with an employer for the long haul can result in significant rewards, like a hefty ending salary, considerable pension benefits and healthy 401(k) balances.

3. They steadily save and invest.

More than half of wealthy retirees began maxing out their contributions to their 401(k)s in their 20s or 30s. As a reminder, the money you put in your 401(k) is pretax, which both reduces your overall tax burden and adds to your growing nest egg. Plus, many companies offer a percentage match of your contributions, which can be a substantial bonus over time.

4. They even save their raises.

Instead of seeing a pay raise as extra spending money, millionaires view this step up as greater ability to grow their overall wealth. Sure, it’s tempting to spend that extra money on a vacation or a new car. But I’ve seen that many millionaires instead choose to save at least half of their raises. These dollars end up in retirement or brokerage accounts, where they compound for an even more significant return later.

5. They are mortgage free.

According to the research for my book, “You Can Retire Sooner Than You Think,” the happiest retirees retire without a mortgage, or at least knowing they’ll pay it off within five years. Additionally, the average price of my happiest retirees’ homes was only $355,000, proving you don’t need a sprawling mansion to be happy.

6. They have good credit.

We all know the better our FICO scores, the lower the interest rates we will pay for our mortgages and car loans. The “rich” take advantage of this reality by carrying low debt loads to keep their credit scores healthy.

7. They don’t splurge often.

Millionaires don’t necessarily own the latest Mercedes-Benz, a drawer full of Rolex watches, or a closet of suits from Bergdorf. Almost 40 percent of these “rich” folks buy their cars used. As a general rule, many millionaires spend their money conservatively and thoughtfully.

8. They’re not afraid to ask for advice.

The majority of millionaires aren’t do-it-yourself investors or tax preparers. Instead, they know what their strengths are and work within them. If investing, taxes, financial planning and estate planning aren’t in their wheelhouse, these folks seek guidance and assistance from professionals. Particularly with the new tax codes, CPAs are everyone’s new best friend. As for financial and investment advice, Vanguard has reported that a good advisor can add 3 percent to your annual return over if you were to go it alone. Services from financial advisors can include things like creating a sound strategy, conducting systematic rebalancing, making a plan for withdrawals, and providing objective advice when navigating choppy markets. All of these factors can lead to more sound investment results. And when it comes to estate planning, asset protection and business planning, millionaires don’t hesitate to seek the help of a lawyer to achieve their individual goals.

As you can see, the secret, or more aptly secrets, to becoming a millionaire are not as mysterious as some people believe. By just making small tweaks in your goal setting and long-term financial planning, you could move closer to hitting that seven-figure mark.


The original AJC article appears here.

DISCLOSURE

This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.


 

What You Need To Remember When Navigating Choppy Markets

I recently got a question from a listener to my radio show that I believe is relevant to just about every investor out there. For the sake of this article, we’ll call her Debbie.

Debbie is retired and in her early 60s. For years, she kept a significant portion of her retirement savings in cash, waiting to put it to work when the time was right. We all know that the current return on money market accounts is relatively paltry, so Debbie expressed some frustration. Because of this year’s volatility, she has seen some losses and wanted to know when would be a good time to make some changes. Is now the time to get more invested in the market by diversifying her assets into more aggressive holdings?

Here, it seems Debbie’s question is about diversification. But it’s not. This is a question about timing. In essence, she was asking if now is a good time to put more money in stocks.

This is always a delicate question to answer, because none of us know exactly what the future holds over the next week, month or even year. But what we do know is that participation is more important than perfection when trying to time the market. So, my advice always is to aim for participation (preferably long-term participation) over perfect timing.

Believe me — I know why folks ask about timing. We watch the market seesaw, and we want to ”buy low” and ”sell high.” In our recent economic climate, folks seem especially concerned about “getting in at the right time.”

Think about it. Over the course of the year, we’ve watched the market rally to record highs in January and then spend the next three months in and out of correction mode. Here we are almost to summer (it already feels like it outside), and markets are dancing around the flat line year-to-date, despite the tremendous volatility the market has endured in 2018.

The reasons for investors’ current unease are abundant. There’s the fear of rising interest rates from the Fed, which could make borrowing more expensive and lead to an economic slowdown. There’s lingering concern about a trade war with China that likely won’t be resolved until much later in the year. And there’s the good news of peak earnings, with the attendant worry that the extra boost tax reform gave corporations this year has made earnings top out, with only slower growth going forward.

I want to point out that Debbie’s question, or some variation of it, is the most common query I get about investing for retirement. Sometimes, folks ask how they should get started in the market. Other times, they ask whether they should wait for another correction. Or they wonder if they should be more aggressive or more conservative in the current climate. No matter how they’re couched, these questions boil down to, “Is it time yet? Is it time yet?”

The truth is, no one, and I repeat, no one knows for sure when the “best” time is to buy into the market.

Let’s talk history, for a moment.

The data below illustrate how an investment of $10,000 in the S&P 500 would grow over a particular period of time. Each period given reflects a time when we saw major stock market corrections. As it takes time to recover from any downturn, the data show what you would have as of 2016 if you had invested your $10,000 during each period.

The data give growth values for “perfect” market timing (meaning when the correction is at its bottom), the “worst” market timing (meaning right before the market dipped), and simply holding your money in cash or CDs.

Here’s how the numbers compare for the time periods of a 25-year long run, 17- and 15-year intermediate runs, and eight- and five-year short runs.

Long Run — 25 Years — Investing in 1990

The year 1990 saw a four-month bear market.

Investing at the “perfect” time (the bottom of the correction) shows growth to $113,000.

Investing at the “worst” time (right before the correction) shows growth to about $100,000.

Holding cash showed growth to $20,000.

Intermediate Run — 17 Years — Investing in 1998

In 1998, the market saw a 20 percent correction.

“Perfect” timing yielded growth to $29,000.

“Worst” timing yielded growth to $25,000.

Cash grew to $14,000.

Intermediate Run — 15 Years — Investing in 2000

Ah, the tech crash. We all remember it; indeed, it was massive — the S&P 500 went down 49 percent.

Getting in the market with “perfect” timing yielded growth to $30,000.

Getting in with the “worst” timing yielded growth to $18,000.

Cash grew to nearly $13,000.

Here, investing at the “worst” time still bested cash by 42 percent.

Short Run — Eight Years — Investing in 2008

The Great Recession/Financial Crisis market period is also fresh in our memories.

During this time, “perfect” timing yielded growth to $29,000.

The “worst” timing yielded growth to $16,000.

Cash was practically flat, as interest rates were near zero during this span.

Investing at the “worst” time beat cash by 54 percent.

Short Run — 5 Years —  Investing in  2011

This time period again saw a near 20 percent correction.

“Perfect” time investing yielded growth to $18,000.

“Worst” time investing yielded growth to $16,500.

Again, cash was practically flat, garnering growth of a mere $13.

This time, the “worst” timing beat cash by 66 percent.

Understanding market history helps us reinforce our investment mantra: Participation, not perfection. In every single scenario outlined above, investing at the “worst” time bested holding cash by a long shot.

So, there we have it — the best answer to the question that’s been nagging you. Participation, and the discipline to do so, is a more practical strategy than trying to perfectly time the market. And we as investors would do well to shift our thinking from “timing” to “time.” We want to buckle in for the long haul, be it five years, 15 years or 50 years.


The original AJC article appears here.

DISCLOSURE

This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.


 

How The Retail Life Cycle Is Hitting Stocks

I’ve noticed something about my shopping habits — I’m spending less money in big-box stores and buying more stuff from smaller outfits that specialize in just one or two product lines. Based on data from the retail marketplace, I’m not alone. It appears that we are in what might be called the decentralizing phase of the retail life cycle.

When we get most of what we need from a couple of large stores, our shopping is centralized. If we instead use six or eight specialty stores (or online retailers) to complete our shopping list, we are engaged in decentralized shopping. Ultimately, the way Americans choose to shop can influence the stock market.

Let me share an example from my personal life.

For the past three years or so, when I needed undershirts, I went to my local mid-price chain department store (I’ll let you guess the chain). This place strives to offer everything necessary for a life well lived — clothing, home goods, toys, small appliances, toiletries, sporting goods, you name it.

But every time I needed undershirts, they were out of my size. Every. Time. My solution: I started buying my undershirts from an online store that, get this, sells only undershirts. They always have my size, the products are well-made, and they arrive at my doorstep in two or three days.

It was a short jump from that undershirt website to other online stores that sell products that I buy a few times a year — sites like Bonobos (men’s clothing) and Bombas (socks, just socks). Such online specialty retailers offer the same quality products as brick-and-mortar department stores and are often better about stocking a range of sizes.


 

Inverted Yield Curves Have Been Found To Be Predictors Of Recession

If you’ve heard the term “inverted yield curve” floating around the financial world recently and were left scratching your head, you’re not alone. Inverted yield curves sound so much more complicated than they really are, and while news outlets are quick to throw this term around, they seldom explain what the term means, and why they matter to investors.

So, let’s talk about exactly what inverted yield curves are. (Hint: they’re not why Tom Brady was sidelined last year.)

An inverted yield curve is a way of describing an interest rate environment where long-term bond interest payouts are lower than they are for short-term bonds.

Why do we care? Because inverted yield curves have been found to be predictors of recession.

Let’s break it down.

A “yield curve” is a visual description of what bonds should pay at various maturities – they’re what you get if you plot bond yields along a timeline for one, two, five, ten and 30 years and connect the dots.

The line is supposed to slope up, meaning you should get more interest the longer you tie up your money. So, 30-year yields should be higher than ten, ten higher than five, and so on. Typically, we see this trend in corporate bonds, treasury bonds, and even CDs. In a “normal” world, a one-year bond would pay say 1%; a two-year bond would pay 2%, a three-year bond would pay 3%, and so on down the line.

When these values get out of whack, we could head into an inverted yield curve territory.

Consider now that a one-year bond pays 1%, a two-year bond pays 3%, and a three-year bond pays only 2%. This longer-term bond is yielding less than its shorter-term cousin.

This scenario is rare, but it signals that something is not quite right with the economy. This is why we care about inverted yield curves.

Think of it this way: if you could get more interest on a shorter-term bond than one with a longer term, this could mean that bond investors believe we’re going into a recession and rates will, sooner or later, go lower. Hence, the longer-dated bonds paying out less is a reflection of this concern about the future of the economy.

Over time, inverted yield curves have proved a pretty accurate signal of economic trouble. The real indicator comes when we take the ten-year yield and subtract the two-year yield. Normally, this is a positive number, as the ten-year number should be higher than that of the two-year. Imagine 3% for the ten-year and 1% for the two-year. Here, we get positive two. That’s good stuff.

Today, however, the ten-year is at 3%, and the two-year is at 2.25%. Under our formula, we are left with only 0.75 in the positive.

The bottom line is that these rates and the difference between them are worth watching, and we will continue to do so.

For more context on the predictive potential of inverted yield curves, let’s look back at some economic history. Five out of the last five times we’ve gone inverted, or negative in our ten-year minus two-year formula, the US economy has gone into recession. This has happened in an average timespan of between 12 and 18 months.

Consider these data points:

  • In 1978 we inverted, and 500 days later we hit the recession of the 1980s.
  • In 1988 we inverted, and 550 days later, recession hit.
  • In 1999 we inverted, and 400 days later came recession.
  • In we 2005 inverted again, and 700 days later we saw another recession.

If we average the number of days from the above, we get a little over 530, or about one-and-a-half years that a recession strikes after the yield curve inverts.

Oh, and by the way, the market usually does well in this interim period, during this time, with stocks rising an average 12% until we enter recession territory.

So, as we’ve illustrated, it’s good to know what inverted yield curves are and why they’re important. Of course, tides ebb and flow, and there is no sure-fire predictor of how the economy will perform in the future. Still, inverted yield curves are like an earthquake in the ocean – the tsunami may not happen right away, but you’ll likely feel it coming.


 

Washington’s Recent Policy Moves Are Driving The Markets

The epicenter of American business has long been marked by the giant bronze bull statue in the middle of Wall Street in New York City. The muscular creature is reared back, ready to charge forward, its horns gleaming in the sun. It’s an iconic symbol of our capitalist economy.

It might be time to move that gorgeous piece of art to Pennsylvania Avenue in Washington, DC.

Right now, the White House is largely driving the markets. That was especially true in the tumultuous first quarter of this year. In early January, stocks soared on the implementation of President Trump’s tax cuts. But fallout from the President’s March decision to impose tariffs on steel, aluminum, and other imported products sent the market on the financial version of Mr. Toad’s Wild Ride, adding to market volatility fueled by concern over wage inflation.

The result: the once-promising first quarter of finished with markets down 1%.

But here’s the good news. Washington’s recent policy moves, taken as a whole, are a net positive for the market going forward. More importantly, the stock market is most influenced by investors’ collective sense of how the economy will fare in the near-term future; right now, that outlook is good.

Washington’s Impact

President Trump’s tariffs roiled the markets on fears of a global trade war. In fact, the international response has been mixed and muted, with China even announcing a reduction in tariffs on American automobiles. The relative calm has survived through President Trump’s recent public musings about adding even more tariffs on a wider range of foreign products. For now, at least, a trade war seems unlikely.

But the new tariffs aren’t harmless. The levies are expected to cost businesses and consumers $80 billion a year in higher prices for products. Some suppliers of steel and aluminum items raised prices just days after the tariffs took effect. But we need to put that $80 billion in perspective.

The GOP tax cut is expected to inject $200 billion into the economy. We’re already seeing companies use some of their cut to invest in facilities, boost training, and increase worker compensation.

As a result of changes in the tax code, corporations are also expected to return to the U.S. about $500 billion currently stashed in overseas accounts for – well, yes – tax reasons.

Finally, the new federal budget includes $100 billion in new infrastructure spending.

Those three items alone provide an $800 billion boost to the economy, ten times the drag created by the tariffs. And that doesn’t even factor in the economic activity generated by a $61 billion hike in military spending – 14 new Navy ships, 90 airplanes, dozens of helicopters, and pay raises for all military personnel. That money, by the way, must be spent in the next six months, by order of Congress.

So, bottom line, I don’t believe we should be overly concerned about the tariffs. Washington’s other recent actions have dwarfed them.

The Economy

The stock market doesn’t move in lockstep with the economy. You can have a good economy and a bad market. But rarely will you have a good economy and a terrible market.

We are living in the former. We have a good economy, but a not-so-great market. But as long as economic underpinnings stay strong, the markets generally avoid falling off a cliff.

Corrections happen. They are part of the market’s circle of life. We’ve seen the market drop lower than 10% on more than one occasion in 2018. Even if the economy stays strong, it doesn’t mean we won’t see another drop of 15% or 20%. But it’s difficult to stay negative if the economy remains solid and corporate earnings move higher.

That’s precisely what’s happening today.

We’ve now been in an economic expansion for 105 months – the third longest on record. There’s reason to believe we could set a record by extending into at least next summer.

Despite its length, the current expansion has been shallow in terms of real GDP growth. In fact, to reach the level of growth/expansion seen during the 1990s record, the US would need to grow real GDP another 25%. And here we are hoping to return to just 3% annual growth!

Still, at the moment, all is well in the U.S. economy. Consumer confidence sits at all-time highs, wage growth is steadily improving, and the unemployment rate of 4.1% is well below the historical average of 6.2%.

And the fundaments (stock earnings, and their ability to stay solvent, and expand) remain encouraging despite the extreme choppiness we’ve seen.

This year’s market has been unnerving for most folks. Nobody loves 1000-point stock market drops. But, think about it: what fundamentally has really changed? The economy continues to plow ahead, trade war threats are (for the moment) dwarfed in size by fiscal stimulus in 2018.

Here’s something else that doesn’t get a lot of press: Stock valuations and investor sentiment can get much more favorable during these pull-back periods.

  • The S&P forward multiple (valuation, the Price we pay for stocks, divided by what they earn as a group) now sits roughly in-line with its long-term average after being slightly elevated for much of the past year.
  • Investor sentiment, which was too frothy last year, is back to a pessimistic zone. When that happens, it’s a very bullish sign.

Bottom Line: when the market experiences a correction in an otherwise solid economy, stocks get cheaper in two ways. Yes, prices drop, but more importantly, lower valuations mean earnings are actually increasing.

We’re in an environment where stock prices have declined while earnings are still ratcheting higher. From where I come from that’s called a “good deal.”

But don’t get greedy. Stay diversified in many stocks. Stay balanced by allocating your assets properly across US stocks, international shares, a variety of bonds, and other main sectors, like real estate. If you follow this, you should sleep well at night.


 

Steps You Can Take During Your Career To Boost And Protect Your Social Security Payments

I’m a big believer in funding retirement with multiple income streams. Your retirement nest egg will last much longer if it’s swaddled in money from a part-time job, rental properties, and Social Security.

Interestingly, when I share this strategy with some people, they push back. Not about getting a part-time job, or becoming a landlord. Instead, they insist, often with a sigh, that Social Security will be gone “by the time I retire.”

Well, maybe. But probably not. Social Security is a wildly popular and important social program.

Among retired Social Security beneficiaries, 50% of married couples and 71% of unmarried persons receive 50% or more of their income from Social Security, according to the Social Security Administration. Roughly 23% of retired married couples and about 43% of unmarried persons rely on Social Security for 90% or more of their income.

Even when we factor in people who have other sources of retirement income, Social Security looms large. The benefit provides about 33% of the income received by America’s retirees.

Given those figures, I find it hard to believe Washington will ever allow the program to go bust.

But, Social Security does face some serious funding issues. So, here’s what I tell my clients: If you are 50-plus, you will very likely receive Social Security benefits on par with today’s payments. If you are a 20-something, it’s entirely possible you will receive a scaled-back monthly payment. You may also have to wait well beyond the current age of 62 to become eligible for benefits.

Now that we’ve established that Social Security will most likely be a revenue stream for you let’s talk about maximizing its flow. As you probably know, the later you start taking benefits, the larger your monthly payment. But there steps you can take during your career to boost and protect your Social Security payments.

– Work for 35 years. Your monthly benefit will be based on your 35 highest-earning years. If you retire after 32 years, the Social Security Administration will factor in three goose eggs. That will seriously depress your final earnings number. When I was a kid, one of my relatives worked part-time at a gas station for a year to make up for the time he worked a federal government job and was not eligible to contribute to Social Security. It’s that important.

– Make more money. Most of us earn our highest salaries in our later years. So, by working a couple more years at, say, $72,000, you will bump out two years when you made considerably less. If you can earn overtime, you might consider racking up lots of golden time in the final few years of your career to goose the Social Security equation.

– Time your divorce. If you are mulling divorce after eight or nine years, consider waiting until the 10-year mark. Divorcees can sometimes claim benefits based on their ex-spouse’s earnings – even if the ex is remarried.

While this is all good, important stuff, the most critical decisions regarding Social Security center on when you start taking benefits.  Again, the longer you wait – between ages 62 and 70 – the higher your monthly benefit.  If you start at 62, you’ll get just 70% or 75% of your benefit, depending on your full retirement age. Wait until age 70 and that benefit soars to as much as 132%.

There is no “right” answer to this question of when to start taking Social Security. Every situation is different. If you are in pressing need of income at the outset of retirement, by all means, take that benefit on Day One. Similarly, if you face a severe medical condition that may shorten your retirement, consider starting your Social Security early. Conversely, if you have plenty of income, it might be advisable to delay taking your benefits.

These charts will help you navigate the when-and-how-much of Social Security benefits. Step one is to determine your Full Retirement Age. Spoiler: it’s probably not 65.  The government in recent years has slowly and slightly raised the Full Retirement Age to bolster Social Security’s finances.

Once you’ve determined your Full Retirement Age, use this chart to see how much you’ll receive at various Social Security start times. The reality is all right there in columns and rows.

This chart can’t make your decision for you, but you can’t make an informed decision without it.


 

Risk-Free Investments Don’t Exist: The Key to Building a Healthy Portfolio

Investors know the adage that diversification is crucial to maintaining a healthy portfolio. But did you know it may also be critical to your health?

A sudden and significant loss of wealth after age 50 can result in serious health issues and increase the risk of premature death by 50%, according to a recent scientific study. Such “negative wealth shocks” are defined as the loss of 75% of one’s net worth over two years.

Researchers believe that divorce, serious illness, and death of a spouse are the leading causes of negative wealth shock.

In my opinion, failure to diversify a portfolio should be added to that list as a risk factor, just as smoking puts you at risk of lung disease. And, just as chain-smoking is riskier than puffing three butts a week, the more your portfolio relies on one stock, the higher the risk of catastrophic loss.

But it can be hard to quit, whether we’re talking about cigarettes or a well-performing equity.

Let me share the story of one guy who is hooked on a good stock.

Rob was a recent caller to my radio show. In 2012, Rob (not his real name) inherited $250,000 worth of Sherwin Williams (SHW) stock, then valued at $100 per share. Now those shares are at $400-plus, making his holdings worth over $1.0 million – the lion’s share of his portfolio.

Rob is savvy enough to be nervous. Sherwin Williams has done well over the last five or so years, but he wanted an assessment of the risk this imbalance poses to his portfolio, a sense of SHW’s near-term prospects and advice on the tax implications of selling part of his SHW stake.

Whew! Let’s take it from the top.

What do no-risk stocks have in common with unicorns and leprechauns? That’s right; they don’t exist. Even the oldest, biggest, most venerable companies can dip, tumble, even crash and burn. Take for example the stalwart stock of GE. In September of 2000, GE was at an all-time high. But, for a variety of reasons, the company hit the skids and is currently down 77% from that 2000 heyday.

GE is a great example of a company that’s still around, that’s still in the DOW but has dropped dramatically in value. Our lesson here is that a company doesn’t have to go out of business to lose tremendous value – in this case, 75%. Of course, this data doesn’t count dividends people received along the way, but a dividend is little consolation when your value is down nearly 80%.

And, of course, established, once-high-flying companies do go out of business. Toys-R-Us and Blockbuster were once fixtures on the exchanges and in our lives. No more. Innumerable tech companies were swept under after years of success and solid share prices.

As for Sherwin Williams, it has indeed been a phenomenal stock of late, and it might be an OK stock going forward. SHW appears to be a somewhat cyclical stock, with its value tied very closely to the ups and downs of the housing market. Makes sense, right? New houses need to be painted.

SHW took a beating during the financial crisis and housing collapse, with its share price falling 36% from early 2007 to early 2009. (This wasn’t as bad as the S&P 500’s loss, but still ugly.)

As housing started to come back, Sherwin Williams rallied. It’s up 682% since the recovery began. You won’t be surprised to learn that Home Depot has a similar story.

SHW investors should be happy with the current housing market. We need to add about 1 million houses per year to achieve equilibrium in the market. We’re getting close, but we’re not there yet. Demand is still outpacing supply as evidenced by all those real estate agent ads screaming, “We want your house!!”

Given all of the above, I recommended that Rob begin diversifying away from Sherwin Williams. I would probably start by selling the basis – one-quarter of the SHW shares – and reinvest the proceeds across other sectors.

Based on the household income information Rob shared with me, these long-term gains would be taxed at 29.8%. That will sting, for sure. But, in my opinion, that pain should not stop him from diversifying. If the tax hit is more than he can bear, Rob might consider selling 10% of his SHW share this year and 10% each year going forward until he reaches his diversification target.

This will result in a healthy portfolio and a healthier Rob. When he goes for his next check-up, Rob will be able to tell the doctor, “I’m exercising, cutting back on fat, and I’m diversifying my portfolio.”


 

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