Inflation Creeping Into Personal Finance

If you have a balance on a credit card or an adjustable rate mortgage, you might be noticing changes in your payments. Higher interest rates are starting to ripple through the personal finance landscape, and it doesn’t look like that trend will change anytime soon.

The Federal Reserve has indicated it plans to keep raising short-term interest rates to help manage inflation, which is at its highest level in 40 years. You’re likely seeing the effects of inflation when buying gas or groceries, and you’ll notice it if you are shopping for a new or used car.

The Federal Reserve’s job is to control inflation. By raising interest rates, the Fed hopes to slow spending, bringing down consumer prices.

Time will tell whether higher interest rates will prompt us to consider changes to your portfolio. Remember, your overall strategy considers that there will be transition periods in the economy.

In the meantime, you may want to look at I Bonds, which are issued by the U.S. government and earn a fixed interest rate plus a variable interest inflation rate that’s adjusted twice a year. I Bonds have certain purchase limits, restrictions, and tax treatments, so they generally play a limited role in your financial picture.

If you have any questions about inflation or interest rates, please reach out. We’re always here to help put things into perspective.

Your Changing Definition of Risk in Retirement

During your accumulation years, you may have categorized your risk as “conservative,” “moderate,” or “aggressive” and that guided how your portfolio was built. Maybe you concerned yourself with finding the “best-performing funds,” even though you knew past performance does not guarantee future results.

What occurs with many retirees is a change in mindset—it’s less about finding the “best-performing fund” and more about consistent performance. It may be less about a risk continuum—that stretches from conservative to aggressive—and more about balancing the objectives of maximizing your income and sustaining it for a lifetime.

You may even find yourself willing to forego return potential for steady income.

A change in your mindset may drive changes in how you shape your portfolio and the investments you choose to fill it.

Let’s examine how this might look at an individual level.

Still Believe

During your working years, you understood the short-term volatility of the stock market but accepted it for its growth potential over longer time periods. You’re now in retirement and still believe in that concept. In fact, you know stocks remain important to your financial strategy over a 30-year or more retirement period.¹

But you’ve also come to understand that withdrawals from your investment portfolio have the potential to accelerate the depletion of your assets when investment values are declining. How you define your risk tolerance may not have changed, but you understand the new risks introduced by retirement. Consequently, it’s not so much about managing your exposure to stocks, but considering new strategies that adapt to this new landscape.¹

Shift the Risk

For instance, it may mean that you hold more cash than you ever did when you were earning a paycheck. It also may mean that you consider investments that shift the risk of market uncertainty to another party, such as an insurance company. Many retirees choose annuities for just that reason.

The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contract. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).

The march of time affords us ever-changing perspectives on life, and that is never more true than during retirement.

The Fed Plans For Higher Rates

The Federal Reserve, in recent years, has been committed to being open about its policy on interest rates. And that commitment was on full display in recent weeks.

In an early April speech, Fed Governor Lael Brainard said the central bank needs to act “quickly and aggressively” to drive down inflation. She indicated that upcoming interest rate increases could be higher than the Fed’s traditional 0.25 percentage point bump.

On the same day, San Francisco Fed President Mary Daly expressed her concern about inflation and suggested that higher prices are “as harmful as not having a job.”

In a speech to the Delaware Chamber of Commerce the following day, Philadelphia Fed President Patrick Harker said higher interest rates are needed to help manage rising prices.

There’s an old saying, “one’s a dot, two’s a line, three’s a trend.” Based on these most recent comments, it’s pretty clear there’s a trend among Fed officials.

Our team watches what Fed officials are saying and keeps an eye on how the markets interpret the news. If we see the need for a portfolio change, we’ll explain why we are charting a new course.

“Unretiring” To Stay in the Game

Knowing when it’s the right time to retire can be difficult, especially if you love your job. Even professional athletes have a hard time knowing when to walk away!

These athletes thought they were ready for retirement but “un-retired” and returned to seek new challenges or extend legendary careers. Let’s look at their non-traditional retirement stories.

After the 2022 NFL season (and after missing out on another Super Bowl), Tom Brady announced his retirement, only to roll it back about a month later. His “retirement” barely lasted 40 days! After reflecting on his decision, he stated that the time will come when he is ready to retire, but it’s “not now.” Instead, fans can expect to see him playing for the Tampa Bay Buccaneers for his 23rd season in the NFL.¹

Michael Phelps is one of the most decorated Olympic athletes and claimed 22 medals (18 gold) when he announced his retirement in 2012. But, he dove into the pool one more time for the 2016 Summer Olympic games and went on to win six more Olympic medals, including five gold medals. After 16 years of competing in the Olympics, Phelps announced his official retirement. He’s still close to Team USA and served as part of the NBC commentary team at the 2020 Summer Olympics in Tokyo.

Earvin “Magic” Johnson led a superstar NBA career and retired in 1991 after announcing that he was HIV-positive. He then went on to play in the 1992 NBA All-Star Game (and earned the MVP award). He wanted to play in the 1992-1993 season, but the comeback got scrapped in the preseason. He then went on to play 32 games in the 1996 season and then retired for good. At least, from basketball. Today, Johnson is an entrepreneur, and you often read of his involvement in a number of high-profile deals in a wide variety of industries.

The good news about retirement is that it’s far from the end. It’s merely a change in circumstances and might even be turned around if you miss the action or are offered the right deal. Retirement isn’t necessarily about leisure but about using your time to pursue what moves and motivates you. Next time we speak, let’s chat about what you want to get out of retirement and paths you might consider.

Choices for Your 401(k) at a Former Employer

One of the common threads of a mobile workforce is that many individuals who leave their job are faced with a decision about what to do with their 401(k) account.¹

Individuals have four choices with the 401(k) account they accrued at a previous employer.²

Choice 1: Leave It with Your Previous Employer

You may choose to do nothing and leave your account in your previous employer’s 401(k) plan. However, if your account balance is under a certain amount, be aware that your ex-employer may elect to distribute the funds to you.

There may be reasons to keep your 401(k) with your previous employer —such as investments that are low cost or have limited availability outside of the plan. Other reasons are to maintain certain creditor protections that are unique to qualified retirement plans, or to retain the ability to borrow from it, if the plan allows for such loans to ex-employees.³

The primary downside is that individuals can become disconnected from the old account and pay less attention to the ongoing management of its investments.

Choice 2: Transfer to Your New Employer’s 401(k) Plan

Provided your current employer’s 401(k) accepts the transfer of assets from a pre-existing 401(k), you may want to consider moving these assets to your new plan.

The primary benefits to transferring are the convenience of consolidating your assets, retaining their strong creditor protections, and keeping them accessible via the plan’s loan feature.

If the new plan has a competitive investment menu, many individuals prefer to transfer their account and make a full break with their former employer.

Choice 3: Roll Over Assets to a Traditional Individual Retirement Account (IRA)

Another choice is to roll assets over into a new or existing traditional IRA. It’s possible that a traditional IRA may provide some investment choices that may not exist in your new 401(k) plan.⁴

The drawback to this approach may be less creditor protection and the loss of access to these funds via a 401(k) loan feature.

Remember, don’t feel rushed into making a decision. You have time to consider your choices and may want to seek professional guidance to answer any questions you may have.

Choice 4: Cash out the account

The last choice is to simply cash out of the account. However, if you choose to cash out, you may be required to pay ordinary income tax on the balance plus a 10% early withdrawal penalty if you are under age 59½. In addition, employers may hold onto 20% of your account balance to prepay the taxes you’ll owe.

Think carefully before deciding to cash out a retirement plan. Aside from the costs of the early withdrawal penalty, there’s an additional opportunity cost in taking money out of an account that could potentially grow on a tax-deferred basis. For example, taking $10,000 out of a 401(k) instead of rolling over into an account earning an average of 8% in tax-deferred earnings could leave you $100,000 short after 30 years.⁵

Inverted Yield Curve + Inflation = Stay the Course

Last week, the yield curve inverted for the first time since August 2019 (as
a refresher, a yield curve inversion means that long-term interest rates have dropped below short-term rates).

Why do we pay attention to this?

Because this inversion suggests that investors believe the near-term economy to be riskier than the long-term.

This recent inversion in the yield curve and inflation soaring above 7% have left some investors wondering whether to adjust their investment strategy. While it can be tempting to worry and want to rush and make changes, the current environment is cause for monitoring, not cause for panic.

Yes, rising interest rates, high inflation, surging oil prices, and geopolitical tensions have helped contribute to economic uncertainty. And because financial markets don’t like uncertainty, they have been performing accordingly.

U.S. inflation clocked in at 7.9% for the 12 months ended February 2022 — the highest rate since December 1981. Energy prices, already on the rise, jumped when Russia invaded Ukraine. In response, the Federal Reserve started raising interest rates, hoping to slow the economy without triggering a recession.

Higher interest rates can be negative for the stock market, as the cost of doing business rises for some companies, potentially impacting their growth rates. However, Bloomberg data shows that in each of the last eight hiking cycles, stock prices were higher a year after the first increase. Of course, past performance is never a guarantee of future results.

Fixed-income securities can be particularly sensitive to interest rate increases due to the inverse relationship between bond yields and prices. Despite increased short-term volatility, it’s important to remember the role fixed-income plays in your portfolio – diversification, preservation of capital, and income.

So in a nutshell = Stay the Course

As your financial advisor, I’m here to help you navigate these choppy waters and keep you on track to pursue your goals. Rest assured, I will continue to monitor your investments and make adjustments if necessary.

If you have questions, you know I’m just a phone call or email away.

Talk to you soon.

What’s This Talk About a Recession?

In recent weeks, the word recession has started creeping into business news and financial market coverage.

Is that cause for alarm or just another attention-grabbing headline? There’s no simple answer.

A recession is defined as two consecutive quarters of negative economic growth as measured by gross domestic product (GDP). But GDP is a lag indicator, so we may not know until sometime in 2023 if we lived through a recession in 2022.

One lead indicator that has signaled a recession may be on the horizon. It’s called the yield curve.

In an expanding economy, the yield curve slopes upward to the right. But in a slowdown, the curve can invert, and the yield on short-term Treasuries is higher than longer-term ones. An inverted yield curve suggests that investors have lost some confidence in the economy and have started shifting money around.

Some swear by the yield curve, pointing out that it’s inverted preceding every recession in recent memory. Others are not so certain. They explain that while today’s “nominal curve” did invert, the “real curve,” adjusted for inflation, tells a different story.

It’s not easy sorting through the economic noise these days. That’s why our team examines various indicators, including the yield curve. If we see the need for a portfolio change, we’ll explain why we are charting a new course.

April is Financial Literacy Month

April marks the start of Financial Literacy Month, a nationally recognized movement to promote and support financial understanding in children and teens. For many, it’s a fantastic opportunity to teach and connect with their children or grandchildren, and these kids are ready to learn! Recent data shows that nearly 74% of teens desire to be financially literate, and 86% want to learn how to invest.¹

Teens tune in
Every parent has questioned if their child is actually paying attention. But rest assured, our children and grandchildren are listening: 75% of teens in America identify their family as their most trusted source of financial education. In other words, our youngest savers and investors are looking to us for their financial education.²

How to start
It all begins with a frank conversation regarding finances. By demonstrating your openness to discussing what many consider a “taboo” topic, you’re also modeling how to approach finances for your young learner. In time, they’ll learn to view financial issues and goals clearly with as little unnecessary stress as possible.

A bright future
Financial literacy month has been shown to have a lasting, positive impact on our future investors. Children who are taught personal finance from a young age are more likely to secure lower-cost loans and grants when paying for college and less likely to rely on private loans or high-interest credit cards.³

If you decide to put your “teacher” hat on this month, let us know! We’re always happy to help educate and support our future generations.

9 Facts About Retirement

Retirement can have many meanings. For some, it will be a time to travel and spend time with family members. For others, it will be a time to start a new business or begin a charitable endeavor. Regardless of what approach you intend to take, here are nine things about retirement that might surprise you.

1. Many consider the standard retirement age to be 65. One of the key influencers in arriving at that age was Germany, which initially set its retirement age at 70 then lowered it to age 65.¹
2. Every day between now and the end of the next decade, another 10,000 baby boomers are expected to turn 65. That’s roughly one person every 8 seconds.²
3. The 65-and-older population is the fastest growing age group in the United States, and has grown by 34.2% over the past decade.³
4. Ernest Ackerman was the first person to receive a Social Security benefit. In March 1937, the Cleveland streetcar motorman received a one-time, lump-sum payment of 17¢. Ackerman worked one day under Social Security. He earned $5 for the day and paid a nickel in payroll taxes. His lump-sum payout was equal to 3.5% of his wages.⁴
5. Eighty percent of retirees say they are confident about having enough money to live comfortably throughout their retirement years.⁵
6. The monthly median cost of an assisted living facility is over $4,000, and 7 out of 10 people will require extended care in their lifetime.²
7. Sixty-two percent of retirees are dependent upon Social Security as a major source of their income. The average monthly Social Security benefit at the beginning of 2021 was $1,543.^5,6
8. Centenarians – in 2020 there were 92,000 of them. By 2060, this number is expected to increase to 589,000.⁷
9. Seniors age 65 and over spend over 4 hours a day, on average, watching TV.⁸

Conclusion

These stats and trends point to one conclusion: The 65-and-older age group is expected to become larger and more influential in the future. Have you made arrangements for health care? Are you comfortable with your investment decisions? If you are unsure about your decisions, maybe it’s time to develop a solid strategy for the future.

Inflation Overreach

What do The Dukes of Hazzard, M*A*S*H, and The Love Boat all have in common? They were top-rated television programs in 1982; the last time inflation was hovering in the 7% range.

When inflation is running hot, you can feel its overreach in almost every corner of the economy. People see it when they buy gas or buy food at the grocery store, but its influence touches mortgage rates, credit card debt, and overall consumer confidence.

Managing inflation is the job of the Federal Reserve, and the Fed’s approach with monetary policy reflects its near single-minded focus on higher prices in 2022. The Fed raised short-term interest rates at its March meeting, and Fed Chair Powell signaled more is needed before the Fed can wrestle control of inflation.

It may be only a matter of time before the Fed’s policies temper inflation. Some see a change in the second half of the year, while others say 2023 is more likely. But in the months ahead, it’s possible inflation reports will bring back memories of Laverne & Shirley and Magnum, P.I.

If you’re feeling an inflation pinch, please reach out. We’d welcome the chance to hear your story. In the meantime, our team of professionals will monitor the situation and keep you updated if we believe any portfolio changes are needed.