Retirement gender differences

 

You may have read that women are far more likely to face poverty in retirement than their male counterparts—but you may not realize just how big the disparity is.  In fact, women are 80% more likely to fall into poverty toward the end of their lives, compared to men, according to a 2016 study by the National Institute on Retirement Security.

In an attempt to explain how this came about, the study’s researchers noted that women are more likely than men to engage in part-time unemployment due to starting a family and staying at home with the kids, and at the other end of their lives, they have much higher rates of caregiving for elderly parents.  Men, on the other hand, can enjoy an uninterrupted work career, making them more likely to receive promotions and career opportunities.

Even if you take away this disadvantage, there’s another one.  During their working years, women earn, on average, 80 cents for every dollar their male colleagues earn—for the same jobs.

But…. Isn’t this changing as we become a more gender-aware society?  Apparently not.  If you look at the accompanying chart, you’ll see that women were catching up to male pay scales from 1979 until about 1993, at which point the gains seemed to totally stall out.  And women still make up 66% of all caregivers for elderly parents.  Even when men provide assistance, the Family Caregivers Council estimates that women spend as much as 50% more time than the men do in caregiving activities.

 

 

And 2015 data adds that 48% of women above age 75 live alone, compared with less than a quarter (22%) of men at a comparable age.  After caregiving for others, women are less likely to receive it for themselves.

Sources:

https://www.bls.gov/opub/reports/womens-earnings/2016/home.htm

https://www.caregiver.org/women-and-caregiving-facts-and-figures

https://www.forbes.com/sites/karastiles/2017/11/01/heres-how-the-gender-gap-applies-to-retirement/#6d84cafd6519

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Strategies for Claiming Social Security

Claiming social security benefits is more than a rite of passage for the retiree.   It is actually one step in an overall strategy, that if not calculated into the entire retirement resource strategy, you may be leaving money on the table.

According to the Social Security Administration, Social Security benefits account for at least half of income for 50% of married couples (married couples should coordinate their claiming strategy) and 71% of unmarried individuals.  For 23 percent of married couples and 43 percent of unmarried individuals, those benefits represent 90 percent or more of income.

It’s important to factor this stream of income along with other income “buckets” that you may have in place.  Working with your financial advisor is beneficial.   It may be that social security is in fact one of the last spicket that you turn on as an income source in retirement in order to map out your best your most optimal claiming strategy.

The Social Security Administration would previously mail out statements however that is no longer the case.  You may obtain a statement by visiting www.ssa.gov.

They say that timing is everything and nothing could be more accurate when it comes to the necessary steps for claiming your social security benefit.  The Social Security Administration establishes a guideline that suggests that seniors not rely on Social Security benefits to replace more than 40% of their working wages come retirement, but in many instances, we are discovering that seniors and pre-retirees are paying little heed to this advice.

There’s an acronym worth memorizing when the subject of Social Security arises.   It is Full Retirement Age or FRA.  Your FRA is determined by the year in which you were born and when you are able to receive 100% of your Social Security benefit.  For those born between 1943 and 1954, your FRA is 66 years of age.   Each additional year one waits to draw on social security between the age of 62 and 70 translates to roughly 8% growth in monthly benefits.  Note the chart below.

Social Security GraphTHE SOCIAL SECURITY RETIREMENT BENEFIT SCHEDULE FOR PEOPLE BORN BETWEEN 1943 AND 1954. CHART BY AUTHOR. DATA SOURCE: SOCIAL SECURITY ADMINISTRATION.

This important component to your retirement planning needs careful consideration.   Please feel free to contact us with any questions you may have.  We look forward to continuing the discussion with you.

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Investments need to outpace inflation

 

Inflation Impact

We all know that inflation gradually erodes the value of our dollars, and you’re probably aware that this is one of the main reasons for investing in the stock market.  If you hide your money safely under your mattress, it becomes incrementally less valuable each year depending on the inflation rate.  To keep pace, you have to find ways to make it grow at least as fast as the value of a dollar is falling.

But you may not have heard about inflation as an argument against putting too much of your retirement money in a fixed annuity, which pays you a fixed amount for the rest of your life.  That safe, comfortable income stream may work perfectly for you today, but will it be enough to live on 20 or 30 years in the future?

If you’re curious how much damage inflation can do to you over longer time periods, look at a free online calculator available here: https://www.calcxml.com/do/ret05.  You can input your current age and the income you’re receiving, and the site will calculate what your future income would need to be at some point in the future, just to maintain your current lifestyle.

Let’s say you’re 65 today, receiving $100,000 a year from an annuity.  How much of your future lifestyle will that annuity pay you when you’re 90?

Assuming an inflation rate of 3% a year, you would need $209,378 in that year you turn 90 to afford the same things you do today.  So your other investments would have to contribute more, in that year, than what the annuity was paying you.  Put another way, the annuity would be paying less than half of what you need to maintain your current expenses into the later years of your retirement.  If inflation were to average 4%, the future income needed to match today’s $100,000 rises to $266,584.

This is not an argument that annuities are to be avoided in all cases; a guaranteed lifetime income may have its place in some financial plans.  But a few inputs into this calculator can go a long way toward making the case that investments that grow over time are vitally necessary to afford a comfortable future retirement.  The safety of a guaranteed fixed income is a false promise, because it doesn’t protect you against the near-certain, incremental danger of yearly inflation.

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Bank of Japan’s 75% ownership of ETFs and rising

 

False Positive?

We’ve all heard about as much as we can take about the U.S. Fed’s multi-part QE program, and similar stimulus programs instituted by the European Central Bank.  What they mostly have in common is the purchase of government and certain mortgage-backed bonds on the world markets, which has the effect of holding down bond rates and, therefore, borrowing rates.

But surely the strangest form of government intervention is taking place in Japan, where the Bank of Japan has embarked on an aggressive program of buying, not just  Japanese government bonds, but also stocks.  Having a buyer the size of Godzilla stomping into the equities market is bound to add to the demand side of the market, which will tend to raise stock prices—and, indeed, the Japanese Topix Index—the broadest measure of Japanese stocks—has risen from 1500 in May to 1813 recently.  The year-to-date return is a robust 19.78%.

But the question is: how long can the Bank of Japan keep adding to its stock portfolio?  A recent report shows that the Bank of Japan now owns 75% of the shares of Japanese ETFs (see chart), and some predict that it will own 80% by year-end.

The Bank of Japan’s aggressive buying up of Japanese government bonds has led to one of the more interesting anomalies in the global financial scene: bonds are now routinely issued at negative interest rates, meaning the Bank of Japan and other buyers are guaranteed to lose money when they buy the bonds.  In the stock market, the situation may not yet be quite as disruptive, since Japanese ETFs are not as dominant as they are in the U.S.; the Bank of Japan holdings currently amount to just over 5% of Japan’s Topix index stock market capitalization.  But nobody knows what will happen when (and it is not “if” but “when”) the central bank has to start selling off its positions.  The bull market that Japanese investors have enjoyed this year may not be sustainable on the metric merits, and could turn around fast if Godzilla decides to stomp in the opposite direction.

Source:

http://www.zerohedge.com/news/2017-09-11/wtf-chart-day-boj-now-owns-75-japanese-etfs

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Value of rebalancing portfolio – a very good idea

 

Why Rebalance?

You probably know that your investment portfolio is being rebalanced on a regular basis, but you might not know why.  Is it for higher returns?  Do we rebalance in order to maintain the agreed-upon balance of investments that is in your risk tolerance comfort zone?  Does rebalancing help manage portfolio risk?  Also, rebalancing may seem counter productive given that the markets are performing a record levels.

The answer to the above is “yes,” “yes,” and “yes,” but with a qualification.  Rebalancing an investment portfolio is most importantly a form of discipline, a way to reduce the impact of those dangerous emotions of greed and panic on the investment process.

Rebalancing is necessary because all of the moving parts in your portfolio rise and fall at different times and degrees.  During a bull market, stock prices rise faster than bond values, causing them to make up a larger percentage of the portfolio than you signed on for.  Similarly, when the bear growls, stocks will fall faster than bonds, causing your portfolio to become more conservative.  Real estate investments and commodities often rise or fall at different times than stocks or bonds, pulling your overall percentage allocations away from the target mix.

So what does rebalancing accomplish?  When you rebalance, you’re selling the assets that rose in price and buying the ones that went down.  This discipline results, over time, in consistently buying when an asset goes on sale, and selling when the asset becomes more expensive.

There are three ways to rebalance.  The easiest is to use whatever new money is coming into the portfolio, monthly or quarterly, to buy the assets that have gone down, allowing you to make consistently fine adjustments that keeps the portfolio at its prescribed allocations.

Another possibility is to rebalance at certain times of the year—every three, six or 12 months.

Or you could follow the most complicated process, and rebalance whenever assets deviate by more than certain set percentages from the baseline asset allocation.

A recent article on the Seeking Alpha website notes that rebalancing reduces portfolio volatility, because you are not allowing the stock allocation to rise in the portfolio during bull markets (which would set you up for a bigger drop when the market rise turns into a bear market).

An illustration in the article, using a simple mix of 60% stocks and 40% bonds shows that rebalancing using the percentage deviation method would have led to higher overall returns from the beginning of 2000 to January 2016.  It found that wider bands produced higher returns (and fewer rebalances), although of course there is no guarantee that this would be the case in the future.

But perhaps most importantly, rebalancing gives you back, over and over again, the portfolio that you expected when you started, the portfolio whose expected long-term returns are incorporated in your financial plan, the portfolio you were most comfortable with when the investment process was first discussed.  And when it comes to making decisions in a time of crisis, having a rebalancing policy in place ensures that they will be made with discipline, rather than emotion.

Source:

https://seekingalpha.com/article/4075169-value-tactical-rebalancing?page=2

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The Senate weighs in on tax reform

 

Senate Tax Bill

 

The U.S. House of Representatives passed its proposed tax “reform” bill last month, and now the Senate has followed suit.  Interestingly, the two bills are different enough that the two sides are going to have to meet and hammer out a compromise.

Here’s a quick glance at the provisions in the Senate bill and some of the differences.

First, the Congressional Budget Office created a quick report that assesses a variety of income levels, and whether they’ll come out ahead, tax-wise (blue and white cells) or will lose ground financially (pink cells) under the proposed bill.  (See graphic).

Under the Senate bill, there would be seven tax brackets (compared with four in the House version): 10%, 12%, 22%, 24%, 32%, 35% and 38.5%.  The threshold to reach the top rate would be raised from $418,000 (single) or $480,000 (joint) to $500,000/$1 million.

The Senate bill raises the standard deduction to $12,000 for singles and $24,000 for joint filers, compared with $12,200 and $24,400 in the House version.  The Senators decided to keep the mortgage interest deduction as it is today, rather than (House version) limit the amount of mortgage debt upon which interest can be deducted to $500,000.

Meanwhile, the House repealed the alternative minimum tax, but the Senate decided to keep it, although it did propose to raise the income exemption levels from $50,600 (single) or $78,750 (joint) to $70,600 and $109,400 respectively.  Both versions would raise the estate tax exemption to $11 million for individuals and $22 million for joint filers, but the House version would repeal the estate tax altogether in 2024, while the Senate version would not.

Like the House, the Senate bill would eliminate many popular deductions, including state and local income taxes, casualty losses and unreimbursed employee expenses.

It is possible that the final version will greatly reward taxpayers who own and receive income through so-called “pass-through entities;” that is, corporate arrangements where the taxes are calculated and paid by the owners rather than at the corporate level.  This includes partnerships, Subchapter S corporations and limited liability companies, which would, under the Senate bill, be taxed at a rate of about 29.6% rather than the top rate, whatever that turns out to be.

Interestingly, this lower rate is also extended to publicly-traded pass-through vehicles—which suggests that you might see a lot of new tax-advantaged investment products come on the market if the bill is passed.

Speaking of publicly-traded entities, companies with significant earnings outside the U.S. will also receive a generous tax break; they would, under the Senate bill, be able to bring their earnings home at tax rates ranging from 7.5% to 14.5%—lower than the proposed new 20% corporate tax rate.

The consolidated bill is expected to be signed before the end of the year—and of course the professional community is watching closely to calculate the impact on all of us.

 Sources:

 http://money.cnn.com/2017/12/03/pf/taxes/senate-house-tax-bills-individuals/index.html

 https://www.nytimes.com/2017/12/02/business/tax-bill-offers-last-minute-breaks-for-developers-banks-and-oil-industry.html

https://www.forbes.com/sites/anthonynitti/2017/12/02/winners-and-losers-of-the-senate-tax-bill/#79382054254d

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Not-so-social side of social media

 

The Antisocial Side of Social Media

Have you ever wondered whether social media was having a positive or negative impact on our mental well-being?  The American Academy of Pediatrics has issued a warning about the negative effects of social media on young kids and teens, and of course it mentions cyber-bullying.  But it notes that the same risks may be true for adults.  The key issues include:

1) Addiction.  It’s not clear that there is such a thing as internet or social media addiction, but a review study conducted by researchers at Nottingham Trent University concludes that high participation in social media is associated with such symptoms as neglect of personal life, mental preoccupation, escapism, mood-modification and a willingness to conceal addictive behavior.

Perhaps more tellingly, when people are asked to stop participating in social media, they seem to undergo a kind of withdrawal.  A study by researchers at Swansea University found measurable psychological and physiological changes in people who are separated from an intense social media habit.

2) Sadness and a lower sense of well-being.  Facebook use has been linked to less moment-to-moment happiness and less life satisfaction, and the more use, the more these symptoms appear to be present.  Researchers believe that frequent Facebook visitors experience social isolation, and that conclusion has now been extended to 11 of the most popular social media sites.

3) Negative comparisons of our lives with the lives of others.  Facebook users seem drawn to compare their lives with the idealized lives that people project with their profiles and pictures—and this can lead to depressive symptoms.

4) Jealousy.  Studies have shown that social media use triggers feelings of jealousy and envy, and you can see why: people make their lives look better than they actually are when they post happy updates or vacation pictures on Facebook and other media sites, and the users who see these posts will be motivated to defend themselves, making jealousy-inducing posts of their own. As they try to compete, they are triggering another round of social jealousy across the network.

The research also found, unsurprisingly, that having more friends on social media doesn’t make you more social; it takes actual social interaction to keep up real friendships.  A virtual friend doesn’t provide the psychological benefits of real friends who are there with you in person.  But you probably knew that already.

Source: https://www.forbes.com/sites/alicegwalton/2017/06/30/a-run-down-of-social-medias-effects-on-our-mental-health/#45dd0cd22e5a

 

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