The Fed Makes Its Move

The Federal Reserve recently announced that for the first time in three years, it would increase short-term interest rates by a quarter of a percentage point. In addition, the Fed has stated that it would like to see short-term interest rates near 2% by the year’s end, which would mean a hike at each of the remaining central bank meetings this year.¹

Many investors have been cheered by the Fed’s aggressive move to combat inflation, but even Fed officials acknowledge that higher rates could slow economic growth this year. This cautious stance is no doubt due to the upward pressure on inflation the ongoing invasion of Ukraine has caused.

There’s no surefire way to anticipate what the future will bring, but these recent moves by the Fed indicate that interest rates are heading higher. Let us know if you have any questions or concerns about these announced interest rate hikes. We’re always here to help.

Social Security: The Elephant in the Room

For most Americans, Social Security has represented nothing more than some unavoidable payroll deduction with the positively cryptic initials of “FICA” and “OASDI” (Federal Insurance Contributions Act and Old Age, Survivors and Disability Insurance). It hinted at a future that seemed both intangible and far away.

Yet, many Americans now sit on the cusp of drawing on the promise that was made with those payments.

As the growing wave of citizens approach retirement, questions and concerns abound. Is Social Security financially healthy? How much will my income benefit be? How do I maximize my benefits for my spouse and myself? When should I begin taking Social Security?

Questions & Elephants

Answering these questions may help you derive the most from your Social Security benefit and potentially enhance your financial security in retirement. Before you can answer these questions, you have to acknowledge the elephant in the room.

The Social Security system has undergone periodic scares over the years that have inevitably led many people to wonder if Social Security will remain financially sound enough to pay the benefits they are owed.

Reasonable Concern

Social Security was created in 1935 during Franklin D. Roosevelt’s first term. It was designed to provide income to older Americans who had little to no means of support. The country was mired in an economic downturn and the need for such support was acute.¹

Since its creation, there have been three basic developments that have led to the financial challenges Social Security faces today.

1. The number of workers paying into the system (which supports current benefit payments) has fallen from just over 8 workers for every retiree in 1955 to 3.3 in 2005. That ratio is expected to fall to 2.2 to 1 by 2037.^2,3
2. A program that began as a dedicated retirement benefit later morphed into income support for disabled workers and surviving family members. These added obligations were not always matched with the necessary payroll deduction levels to financially support these additional objectives.
3. Retirees are living longer. As might be expected, the march of medical technology and our understanding of healthy behaviors have led to a longer retirement span, potentially placing a greater strain on resources.

Beginning in 2010, tax and other non-interest income no longer fully covered the program’s cost. According to the Social Security Trustees 2020 annual report, this pattern is expected to continue for the next 75 years; the report projects that the trust fund may be exhausted by 2035, absent any changes.⁴

Social Security’s financial crisis is real, but the prospect of its failure seems remote. There are a number of ways to stabilize the Social Security system, including, but not limited to:

• Increase Payroll Taxes: An increase in payroll taxes, depending on the size, could add years of life to the trust fund.
• Raise the Retirement Age: This has already been done in past reforms and would save money by paying benefits to future recipients at a later age.
• Tax Benefits of Higher Earners: By taxing Social Security income for retirees in higher tax brackets, the tax revenue could be used to lengthen the life of the trust fund.
• Modify Inflation Adjustments: Rather than raise benefits in line with the Consumer Price Index (CPI), policymakers might elect to tie future benefit increases to the “chained CPI,” which assumes that individuals move to cheaper alternatives in the face of rising costs. Using the “chained CPI” may make cost of living adjustments less expensive.

Reform is expected to be difficult since it may involve tough choices—something from which many policymakers often retreat. However, history has shown that political leaders tend to act when the consequences of inaction exceed those taking action.

The Utility of Sector Investing

There is a growing popularity among individuals to broaden their investment strategy beyond conventional allocations and investment styles. Some see sector investing as a way to seek new opportunities for enhanced portfolio performance.¹

Because of its narrow focus, a sector investing strategy tends to be more volatile than an investment strategy that is diversified across many sectors and companies. Sector investing also is subject to the additional risks that are associated with each particular industry. Sector investing can be adversely affected by political, regulatory, market, or economic developments.

Sectors are made up of companies grouped by similar businesses that range from natural resources to financial services and from technology to consumer staples. In any given year, one sector may outperform another. For example, in 2020, materials rose 17.9%, while utilities fell -4.1%.²

Successful sector investing depends on an individual’s ability to consistently and accurately determine when to rotate in and out of the various sectors, which may be a challenge for most investors.

Investors are further cautioned that some sector mutual funds are capitalization weighted, meaning that they can be very concentrated in a few stocks, so you need to do your homework.³

Remember that mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

Sector Investing Strategies

There are a number of ways to implement sector investing, depending upon your objective.

Portfolio Carve-Out: This approach dedicates a portion of your portfolio to seek opportunities in a specific sector. For example, if you think a rebounding economy may increase consumer spending, potentially a Consumer Discretionary sector would be a consideration.

Risk Management: Because the correlations between different sectors can be lower than those between general categories (e.g., value vs. growth or large vs. small cap), investors may be able to build a portfolio of sectors that potentially may reduce overall investment risk.

Portfolio Completion: This strategy targets sectors that may be underrepresented in a current portfolio. For instance, if precious metals or real estate exposure is lacking, you can use sector investment to gain that exposure.

Successful sector investing may be a challenge for most investors, but it could present an opportunity for those who do their homework.

^{Because of its narrow focus, a sector investing strategy tends to be more volatile than an investment strategy that is diversified across many sectors and companies. Sector investing also is subject to the additional risks that are associated with each particular industry. Sector investing can be adversely affected by political, regulatory, market, or economic developments.}

And the Executor Is

U.S. Supreme Court Justice Warren Burger is famous for more than just his time on the bench. When he died in 1995, he left a 176-word will that gave no specific power to his executors.¹ As a result, he reportedly cost his estate tens of thousands of dollars in attorney’s fees.

Judge Burger’s case shows that even law-savvy individuals can make mistakes when it comes to writing their own legal documents. But giving executors the proper power is only one piece of the puzzle. How do you choose an executor? Can anyone do it? What makes an individual a good choice?

Many people choose a spouse, sibling, child, or close friend as executor. In most cases, the job is fairly straightforward. Still, you might give special consideration to someone who is well organized and capable of handling financial matters. Someone who is respected by your heirs and a good communicator also may help make the process run smoothly.

Above all, an executor should be someone trustworthy, since this person will have legal responsibility to manage your money, pay your debts (including taxes), and distribute your assets to your beneficiaries as stated in your will.

If your estate is large or you anticipate a significant amount of court time for your executor, you might think of naming a bank, lawyer, or financial professional. These individuals will typically charge a fee, which would be paid by the estate. In some families, singling out one child or sibling as executor could be construed as favoritism, so naming an outside party may be a good alternative.

Whenever possible, choose an executor who lives near you. Court appearances, property issues, even checking mail can be simplified by proximity. Also, some states place additional restrictions on executors who live out of state, so check the laws where you live.

Whomever you choose, discuss your decision with that person. Make sure the individual understands and accepts the obligation – and knows where you keep important records. Because the person may pre-decease you – or have a change of heart about executing your wishes – it’s always a good idea to name one or two alternative executors.

The period following the death of a loved one is a stressful time, and can be confusing for family members. Choosing the right executor can help ensure that the distribution of your assets may be done efficiently and with as little upheaval as possible.

Consumer Confidence at the Pump

The latest Consumer Price Index (CPI) report was recently released and confirmed what economists anticipated: consumer inflation has risen 7.9% over the past year, the largest spike since 1982— none of which is a surprise for anyone who has visited a gas station lately.¹

With the price of gasoline trending higher, it may be tempting to attribute these prices to the global economic disruptions caused by Russia’s aggression toward Ukraine. However, the latest CPI reflected the 12-months ended in February and didn’t include most of the oil and gas price increases that followed Russia’s invasion of Ukraine on Feb. 24.²

There is a slight silver lining within the CPI, however. The food away from home index, which tracks restaurant purchases, rose 0.4 percent in February after increasing 0.7 percent in January. This could indicate strengthening consumer confidence despite inflation, as consumers continue to eat out.³

What does this all mean for consumers? It’s hard to say, but some predict further inflationary pressures, while others wait and see what the Fed says at its meeting next week.

If you have any questions or concerns regarding recent events and your portfolio, let us know. We’re always ready to help.

Women and Financial Strategies

Forty-four percent of American women are the primary breadwinner in their house.¹ Yet only 10% of women feel very confident in their ability to fully retire with a comfortable lifestyle.²

Although more women are providing for their families, when it comes to preparing for retirement, they may be leaving their future to chance.

Women and College

The reason behind this disparity doesn’t seem to be a lack of education or independence. Today, women are more likely to go to college and graduate than men.³ So what keeps them from taking charge of their long-term financial picture?

One reason may be a lack of confidence. In one recent study, less than half of the more than 2,000 women surveyed said they felt satisfied with their knowledge of finances.⁴ Women may shy away from discussing money because they don’t want to appear uneducated or naive and hesitate to ask questions as a result.

Insider language

Since Wall Street traditionally has been a male-dominated field, women whose expertise lies in other areas may feel uneasy amidst complex calculations and long-term financial projections. Just the jargon of personal finance can be intimidating: 401(k), 403(b), fixed, variable.⁵ To someone inexperienced in the field of personal finance, it may seem like an entirely different language.

But women need to keep one eye looking toward retirement since they may live longer and could potentially face higher health-care expenses than men.

If you have left your long-term financial strategy to chance, now is the time to pick up the reins and retake control. Consider talking with a financial professional about your goals and ambitions for retirement. Don’t be afraid to ask for clarification if the conversation turns to something unfamiliar. No one was born knowing the ins-and-outs of compound interest, but it’s important to understand in order to make informed decisions.

Compound Interest: What’s the Hype?

Compound interest may be one of the greatest secrets of smart investing. And time is the key to making the most of it. If you invested $250,000 in an account earning 6%, at the end of 20 years your account would be worth $801,784. However, if you waited 10 years, then started your investment program, you would end up with only $447,712.

This is a hypothetical example used for illustrative purposes only. It does not represent any specific investment or combination of investments.

A Challenging Start to 2022

2022 is off to a challenging start for most investors.

Stock prices have been down 6 of the past 9 weeks, and the major averages are either in or teetering on correction territory.

Bond prices are lower, and yields are higher, which has created an opportunity for some but has resulted in losses for others.

The Fed is expected to raise interest rates at its March meeting, where they may attempt to thread the needle of cooling inflation while maintaining the economic recovery.

Geopolitical events have added a layer of uncertainty and are one of the main drivers of volatility. Energy prices continue to move higher as events unfold in Eastern Europe.

Corporate earnings are a bright spot. The job outlook is improving, and it appears that we’re moving past the pandemic. But these green shoots tend to be overlooked.

Add it all up, and you could be thinking, “I just want to sit this one out.” But that’s exactly the time when you should remind yourself about investment strategy. Call me if you’re worried about what lies ahead. We can talk over what’s on your mind.

Healthcare Costs in Retirement

In a 2021 survey, 32% of all workers reported they were either “not too” or “not at all” confident that they would have enough money to pay for their medical expenses in retirement. Regardless of your confidence, however, being aware of potential health care costs during retirement may allow you to understand what you can pay for and what you can’t.¹

Health-Care Breakdown

A retired household faces three types of health care expenses.

1. The premiums for Medicare Part B (which covers physician and outpatient services) and Part D (which covers drug-related expenses). Typically, Part B and Part D are taken out of a person’s Social Security check before it is mailed, so the premium cost is often overlooked by retirement-minded individuals.
2. Copayments related to Medicare-covered services that are not paid by Medicare Supplement Insurance plans (also known as “Medigap”) or other health insurance.
3. Costs associated with dental care, eyeglasses, and hearing aids – which are typically not covered by Medicare or other insurance programs.

It All Adds Up

According to a HealthView Services study a 65-year-old healthy couple (male living to age 87; female, age 89), can expect their lifetime health care expenses to add up to around $662,156.²

Should you expect to pay this amount? Possibly. Seeing the results of one study may help you make some critical decisions when creating a strategy for retirement. Without a solid approach, health care expenses may add up quickly and alter your retirement spending.

Prepared for the Future?

Workers were asked how much they have saved and invested for retirement – excluding their residence and defined benefit plans.

Source Employee Benefit Research Institute, 2020

The Fed Has An Eye On Ukraine

The Russian invasion of Ukraine has made the Fed’s interest rate decision a little more complicated.

The Fed appears set to raise interest rates by 0.25% at its March meeting. Up until recently, there was talk by Fed officials that the economy needed a 0.5% bump to help manage inflation.

Energy prices have been rising since Russia began to assemble forces at the Ukraine border. As prices rise, consumer discretionary spending trends lower as businesses take on higher costs. (Remember, consumer spending accounts for a big chunk of our overall economy.)

Higher energy prices, higher commodity prices, and the prospect of slower economic growth due to lower spending place the Fed in a bit of a pickle; the inflationary impact of these factors could be considerable.

Fed Chair Jerome Powell testified before Congress that he still sees interest rate hikes ahead but acknowledges that geopolitical events have interjected uncertainty into the Fed’s outlook.

I work with a team of professionals who monitor the Fed and help me interpret its signals about the economy. If you’re feeling a bit unsettled, please reach out. Some think that it’s best to be proactive at times like this. We can discuss your thoughts and compare them with your overall strategy.

Russia Attacks Ukraine Q&A Videos

Thanks to everyone who attended our first Live Q&A session.

Wall Street’s main benchmarks tumbled after Russian President Vladimir Putin launched a military invasion of Ukraine. This fuels uncertainty in the way we handle our finances. That is why we held a Live Question & Answer session.

If you missed this event we are happy to provide you with these videos of the event.We have broken these up based on each question.

We also want to provide you with a list of verified charities, in case you want to support the people of Ukraine. Click on each name for the link.

UNHCR 

Razom’s Emergency Response i

Save the Children 

Voices of Children 

Doctors Without Borders

Sunflower of Peace  

CARE Crisis Fund