How to Retire Early

Fed Boosts Key Interest Rate 0.75%

What an “interesting” week. In a move unseen since 1994, the Federal Reserve has taken an aggressive stance toward inflation by raising the key interest rate by three-quarters of a percentage point.

Investors initially seemed cheerful, but stock prices soon fell as the reality emerged that interest rates would continue to rise.

With consumer prices soaring, pushing short term rates higher is an attempt to slow economic growth while attempting to avoid a recession. Fed Chair Powell said that he expects rates to go up again at the July meeting and indicated that the Fed would take future decisions as they come.

In times like this, it’s good to remember that we’ve considered volatile markets when designing your financial strategy. Meanwhile, I’m always on hand to answer your questions.

The Long Run: Women and Retirement

Wise Words From Warren Buffet

During periods of market turbulence, I take comfort in one of my favorite Warren Buffett quotes:

“Don’t watch the market closely.”

The Oracle of Omaha gave this sage advice in 2016, when Brexit, China’s economic issues, and the Federal Reserve’s interest rate policy roiled markets.

Now here we are in June 2022 and facing turbulent markets again, thanks to inflation, global growth, and uncertainties over the Fed’s interest rate policy.

Buffett’s words remind us that pullbacks, corrections, and bear markets are an expected part of the investing process. Please reach out if you have any concerns, but in the meantime, take a break from watching too closely. That’s why we’re here.

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.

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