Summertime Checkup

Summer’s here, and the time is right for vacations, outdoor activities, and fun. It’s also a good time to consider a few financial matters. Here are some questions to ask yourself mid-year.

• Goals still the same for 2022? Has market volatility affected your goals? Note any changes since the first of the year that may warrant reviewing your goals.
• Credit score looking good? Double-check your credit score for any red flags. This can be a good way to catch issues like identity theft early.
• Contributions on track? Consider increasing your contributions to any personal or workplace-sponsored savings plans if it suits your goals.
• Scheduled spending still make sense? Look at any impacts you’ve felt due to market volatility. Do your plans for the rest of the year align with reality?

If these tips have you thinking, please feel free to reach out. I’m happy to discuss your financial picture at summertime or any time.

The Sequence of Returns

What exactly is the “sequence of returns”? The phrase describes the yearly variation in an investment portfolio’s rate of return. But what kind of impact do these deviations from the average return have on a portfolio’s final value?

Let’s take a closer look at a few different investment scenarios. The first few scenarios focus on how market volatility affects a portfolio while assets are accumulating, and the last scenario focuses on how market volatility affects a portfolio from which distributions are being taken.

One study found the sequence of returns appears manageable during accumulation. An analysis from BlackRock compared three model investing scenarios: three investors start portfolios with lump sums of $1 million, and each of the three portfolios averages a 7% annual return across 25 years.

In two of these scenarios, annual returns ranged from a hypothetical -7% to +22%. In the third scenario, the return is simply 7% every year. In all three situations, each investor accumulates the same total of $5,434,372 after 25 years. This is because the average annual return is a hypothetical 7% in each of the three portfolios.¹

It’s important to remember that investing involves risks, and investment decisions should be based on your own goals, time horizon, and risk tolerance. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.

The BlackRock study assumes that the three hypothetical investors evaluated their financial ability to continue making purchases through periods of declining and rising prices.

When you shift from asset accumulation to asset distribution, the story can change. There is the risk that your distribution strategy could coincide with a period of declining prices, which may present a challenge.

In an extreme illustration, consider the 2007-2009 bear market. In this example, a hypothetical investor entered 2008 with a $1 million portfolio and held 60% in equities and 40% in fixed-income investments. The investor was preparing to retire in 12 months, on December 31, 2008.

During 2008, the bond market, as measured by the S&P U.S. Aggregate Bond Index rose 5.7%, but the stock market, as measured by the S&P 500 Index, lost 37.0%. The $1 million portfolio ended the year with a balance of $800,800.^2,3

If the hypothetical investor started taking distributions in January 2009, they would be starting from a smaller portfolio balance and they may not have the opportunity to rebuild the principal that was lost in the prior 12 months.

If you are preparing to retire, having an understanding of the sequence of returns may help you ask important questions about your overall investment strategy.

When Bears are Loud, Consider This

Some gloomy headlines are coming out of Wall Street lately. Have you noticed?

In recent days, I’ve read things like “Brace yourself for economic hurricanes” and “Wall Street investor survey paints a dire outlook.” It makes you wonder where the bullish thinkers have gone.

While negative headlines are eye-catching, a gloom-and-doom perspective misses some finer details. For example, look at how positively the financial markets reacted when the Fed’s May meeting minutes were released. What does this indicate? To start, investors feel confident in the Fed’s plan for interest rates. Also, three out of four companies posted positive earnings and strong revenue in the first quarter. It’s important to remember that companies are healthy, even if that doesn’t make for the most sensational news.

Bearish sentiment may be trendy, but keeping a broad perspective never goes out of style.

Why Medicare Should Be Part of Your Retirement Strategy

Medicare takes a little time to understand.

As you approach age 65, familiarize yourself with its coverage options, costs, and limitations.

Certain features of Medicare can affect health care costs and coverage.

Some retirees may do okay with original Medicare (Parts A and B), others might find it lacking and decide to supplement original Medicare with Part C, Part D, or Medigap coverage. In some cases, that may mean paying more for health care than you initially figured.

How much do Medicare Part A and Part B cost, and what do they cover?

Part A is usually provided with no charge; Part B is not. Part A is hospital insurance and covers up to 100 days of hospital care, home health care, nursing home care, and hospice care. Part B covers doctor visits, outpatient procedures, and lab work. You pay for Part B with monthly premiums.¹

It’s best to prepare for the copays and deductibles linked to original Medicare. In addition, original Medicare does not cover dental, vision, or hearing care, nor prescription medicines or health care services outside the U.S. It pays for no more than 100 consecutive days of skilled nursing home care. These out-of-pocket costs may lead you to look for supplemental Medicare coverage as a way of paying for extended care.^2,3

Medigap policies help Medicare recipients with some of these copays and deductibles.

Sold by private companies, these health care policies can pay a share of certain out-of-pocket medical costs (i.e., costs greater than what original Medicare covers for you). You must have original Medicare coverage in place to purchase one. The Medigap policies being sold today do not offer prescription drug coverage.⁴

Part D plans cover some (but certainly, not all) prescription drug expenses.

Monthly premiums are averaging $33.37 this year for these standalone plans, which are offered by private insurers. Part D plans currently have yearly deductibles of no more than $480.⁵

Creating a Medicare strategy is integral to your retirement preparation.

Should you try original Medicare for a while? Should you enroll in a Part C HMO with the goal of managing your overall out-of-pocket health care expenses? There is also the matter of eldercare and the potential need for interim coverage if you retire prior to 65. Discuss your concerns about Medicare in your next conversation with your financial professional.

Care for a COLA with Your Social Security?

As you might have heard, people are talking about a big bump in Social Security benefits next year.

The Senior Citizens League says payments could rise by as much as 8.6 percent in 2023, compared to an increase of 5.9 percent in 2022. That would mean an average benefit of $1,658 for the 70 million Social Security recipients on January 1.

To arrive at the cost-of-living adjustment (COLA), the Social Security Administration looks at third-quarter prices and compares them to a year prior. According to the Bureau of Labor Statistics, living costs are up about 8 percent.

What does this mean for you? Stay tuned as these numbers become more clear in the coming months.