Do Women Face Greater Retirement Challenges than Men?

Do Women Face Greater Retirement Challenges Than Men?
If so, how can they plan to meet those challenges?
Provided by Joe Occhipinti

A new study has raised eyebrows about the retirement prospects of women. It comes from the National Institute on Retirement Security, a non-profit, non-partisan research organization based in Washington, D.C. Studying 2012 U.S. Census data, NRIS found that women aged 65 and older had 26% less income than their male peers. Looking at Vanguard’s 2014 fact set on its retirement plans, NRIS learned that the median retirement account balance for women was 34% less than that of men.¹

Alarming numbers? Certainly. Two other statistics in the NRIS report are even more troubling. One, a woman 65 or older is 80% more likely to be impoverished than a man of that age. Two, the incidence of poverty is three times as great for a woman as it is for a man by age 75.¹²  

Why are women so challenged to retire comfortably? You can cite a number of factors that can potentially impact a woman’s retirement prospects and retirement experience. A woman may spend less time in the workforce during her life than a man due to childrearing and caregiving needs, with a corresponding interruption in both wages and workplace retirement plan participation. A divorce can hugely alter a woman’s finances and financial outlook. As women live longer on average than men, they face slightly greater longevity risk – the risk of eventually outliving retirement savings.

There is also the gender wage gap, narrowing, but still evident. As American Association of University Women research notes, the average female worker earned 79 cents for every dollar a male worker did in 2014 (in 1974, the ratio was 59 cents to every dollar).

What can women do to respond to these financial challenges? Several steps are worth taking.  

Invest early & consistently. Women should realize that, on average, they may need more years of retirement income than men. Social Security will not provide all the money they need, and,  in the future, it may not even pay out as much as it does today. Accumulated retirement savings will need to be tapped as an income stream. So saving and investing regularly through IRAs and workplace retirement accounts is vital, the earlier the better. So is getting the employer match, if one is offered. Catch-up contributions after 50 should also be a goal.

Consider Roth IRAs & HSAs. Imagine having a source of tax-free retirement income. Imagine having a healthcare fund that allows tax-free withdrawals. A Roth IRA can potentially provide the former; a Health Savings Account, the latter. An HSA is even funded with pre-tax dollars, as opposed to a Roth IRA, which is funded with after-tax dollars – so an HSA owner can potentially get tax-deductible contributions as well as tax-free growth and tax-free withdrawals.4

IRS rules must be followed to get these tax perks, but they are not hard to abide by. A Roth IRA need be owned for only five tax years before tax-free withdrawals may be taken (the owner does need to be older than age 59½ at that time). Those who make too much money to contribute to a Roth IRA can still convert a traditional IRA to a Roth. HSAs have to be used in conjunction with high-deductible health plans, and HSA savings must be withdrawn to pay for qualified health expenses in order to be tax-exempt. One intriguing HSA detail worth remembering: after attaining age 65 or Medicare eligibility, an HSA owner can withdraw HSA funds for non-medical expenses (these types of withdrawals are characterized as taxable income). That fact has prompted some journalists to label HSAs “backdoor IRAs.”4,5

Work longer in pursuit of greater monthly Social Security benefits. Staying in the workforce even one or two years longer means one or two years less of retirement to fund, and for each year a woman refrains from filing for Social Security after age 62, her monthly Social Security benefit rises by about 8%.6

Social Security also pays the same monthly benefit to men and women at the same age – unlike the typical privately funded income contract, which may pay a woman of a certain age less than her male counterpart as the payments are calculated using gender-based actuarial tables.7  

Find a method to fund eldercare. Many women are going to outlive their spouses, perhaps by a decade or longer. Their deaths (and the deaths of their spouses) may not be sudden. While many women may not eventually need months of rehabilitation, in-home care, or hospice care, many other women will.

Today, financially aware women are planning to meet retirement challenges. They are conferring with financial advisors in recognition of those tests – and they are strategizing to take greater control over their financial futures.

Joe Occhipinti may be reached at 714.823.3328 or Joe@warrenstreetwealth.com

www.warrenstreetwealth.com

 

 

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – bankrate.com/financing/retirement/retirement-women-should-worry/ [3/1/16]
2 – blackenterprise.com/small-business/women-age-65-are-becoming-poorest-americans/ [3/18/16]
3 – tinyurl.com/jq5mqhg [6/8/16]
4 – bankrate.com/finance/insurance/health-savings-account-rules-and-regulations.aspx [1/1/16]
5 – nerdwallet.com/blog/investing/know-rules-before-you-dip-into-roth-ira/ [1/29/16]
6 – fool.com/retirement/general/2016/05/29/when-do-most-americans-claim-social-security.aspx [5/29/16]
7 – investopedia.com/articles/retirement/05/071105.asp [6/16/16]

 

Black April: The Twitch Partner Reckoning

April 2016 may have seemed like just another month on Twitch.tv, but the volume of Twitch partners struggling with the complexity of taxes on social media was louder than ever.

 

People are continuing to take their hobby of streaming video games and turning it into careers, many with great success. These successful careers are creating lives for many people that they haven’t experienced before, getting paid to do what they love. With this new found success and income came an increase in payments to the outstretched hand of the tax man, Uncle Sam. While for a majority of the people who have experienced this before, their thought may be: “Seems standard.” In this case, many who were impacted the most were not prepared for the impending tax bill and did not know what steps to take to soften the blow. Successful streamers in the past got away with standard tax preparations in their first year of business, but they did not anticipate the increase in the complexity of their taxes with the increase in their annual pay. This has always been a problem for those making a significant amount of money, a relatively new situation in the Twitch world.

 

Obviously, some may allude to the fact that tax preparation should be common knowledge. It’s hard to disagree with that statement, but many of these young entrepreneurs look at themselves as employees taking home a paycheck instead of as small business owners looking to manage their tax burden. Streamers who grew their respective gaming communities were thrust into a new position that some were not prepared for from a financial standpoint.

 

What is the glaring issue here? The main issue was the lack of knowledge on the streamer front as to how to handle taxes proactively. This was a first time experience for many, and for someone working under the 1099 independent contractor banner, it can be easily forgotten that taxes are a looming liability. The even more forgotten concern is the full 15.3% payroll tax that becomes the liability of the streamer versus only paying half as a W2 employee. If taxes are not adequately addressed in the current tax year, it can create years of future problems, additional payments, and more time spent dealing with the IRS.

 

The silver lining to this story is the viability of the interactive media market as a career for professional players, streamers, or content creators. This growing market is a breeding ground for sponsors to find new users of their products and create lifetime customers. Each micro-community on Twitch represents a unique opportunity for streamers to leverage their audience.

 

With taxes continuing to be an annual problem for streamers, there are solutions. Individual firms, consultants, and even pro-bono counseling groups are being formed for the sole purpose to better educate, prepare, and potentially offer professional services to those in need. One example is the Player Resource Center being developed by esports lawyer Bryce Blum and former professional gamer Stephen “Snoopeh” Ellis to fill this exact void. The growing interactive media environment needs professional infrastructure to help it continue to thrive into the future.

 

Outside of being able to generate a living via streaming, the biggest financial problem that streamers face is proper consideration towards taxes at the end of the year. With many firms looking to help and resources becoming available to those in need, there is hope that these entrepreneurs will continue to increase their efficiency and make the most of their success for years to come.

warrenstreetadvisors006
Joe Occhipinti
Joe@warrenstreetwealth.com
714.823.3328

You Retire, But Your Spouse Still Works

That development may mean lifestyle as well as financial adjustments.
Provided by Joe Occhipinti

 Your significant other may retire later than you do. Sometimes that reality reflects an age difference, other times one person wants to keep working for income or health coverage reasons. If you retire years before your spouse or partner does, you may want to consider how your lifestyle might change as well as your household finances.

How will retiring affect your identity? If you are one of those people who derives a great deal of pride and sense of self from your profession, leaving that career for life around the house may feel odd. Who are you now? Who will you become next? Can you retire and still be who you were? Hopefully, your spouse recognizes that you may have to entertain these questions. They may prompt some soul-searching, even enough to affect a relationship.

How much down time do you want? That is worth discussing with your spouse or partner. If you absolutely hate your job, you may want weeks, months, or years of relaxation after leaving it. You can figure out what to do next in good time. Alternately, you may see every day of retirement as a day for achievement; a day to get something done or connect with someone new. Your significant other should know whether you prefer an active, ambitious retirement or a more relaxed one.

How will household chores or caregiving be handled? Picture your loved one arising at 6:30am on a January morning, bundling up, heading for work and navigating inclement weather, all as you sleep in. Your spouse or partner may grow a bit envious of your retirement freedom. One way to offset that envy is to assume more of the everyday chores around the house.

For many baby boomers, caregiving is also a daily event. When one spouse or partner retires, that can rebalance the caregiving “equation.” One or more individuals have to provide 100% of the eldercare needed, and retirement can make shared percentages more equitable or allow a greater role for a son or daughter in that caregiving. Some people even retire to become a caregiver to Mom or Dad.

Do you have kids living at home? Adult children? Right now, in this country, every fifth young adult is living with his or her parents. With so many new college graduates having to accept part-time or low-paying service industry jobs, and with education loan debt averaging roughly $30,000 per indebted graduate, this situation will persist for years and, perhaps, even become a new normal.1

You and your loved ones may find yourself on different timetables. Maybe your spouse or partner works from 8:00 a.m. to 5:00 p.m. in a high-stress job. Maybe your children attend school on roughly the same schedule. How do they get to and from those places? Probably through a rush-hour commute, either in a car or amid the crowds lined up for mass transit. If you have abandoned the daily grind, you may have an enthusiasm and a chattiness in the evening that they lack. Maybe they just want to unwind at 6:30pm, but you might be anxious to reconnect with them after a day alone at home.

Talk about retirement before you retire. What should your daily life look like? What are the most important things you want out of the retirement experience? How do your answers to those questions align or contrast with the answers of your best friend? As you retire, make sure that your spouse or partner knows your point of view, and be sure to respect his or hers in the bargain.

Joe Occhipinti may be reached at 714.823.3328 or Joe@warrenstreetwealth.com.

www.WarrenStreetWealth.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

   

Citations.

1 – chicagotribune.com/business/success/savingsgame/tca-boomerang-children-affecting-parents-retirement-plans-20160413-story.html [4/13/16]

Should You Downsize for Retirement?

Some retirees save a great deal of money by doing so; others do not.
Provided by Joe Occhipinti

 

You want to retire, and you own a large home that is nearly or fully paid off. The kids are gone, but the upkeep costs haven’t fallen. Should you retire and keep your home? Or sell your home and retire? Maybe it’s time to downsize.

Lower housing expenses could put more cash in your pocket. If your home isn’t paid off yet, have you considered how much money is going toward the home loan? When you took out your mortgage, your lender likely wanted your monthly payment to amount to no more than 28% of your total gross income, or no more than 36% of your total monthly debt repayments. Those are pretty standard metrics in the mortgage industry.1

What percentage of your gross income are you devoting to your mortgage payments today? Even if your home loan is 15 or 20 years old, you still may be devoting a significant part of your gross income to it. When you move to a smaller home, your mortgage expenses may lessen (or disappear) and your cash flow may greatly increase.

You might even be able to buy a smaller home with cash (if finances permit) and cut your tax liability. Optionally, that smaller home could be in a state or region with lower income taxes and a lower cost of living.

You could capitalize on some home equity. Why not convert some home equity into retirement income? If you were forced into early retirement by some corporate downsizing, you might have a sudden and pressing need for retirement capital, another reason to sell that home you bought decades ago and head for a smaller one.

The lifestyle reasons to downsize (or not). Maybe your home is too much to keep up, or maybe you don’t want to climb stairs anymore. Maybe a condo or an over-55 community appeals to you. Maybe you want to be where it seldom snows.

On the other hand, you may want and need the familiarity of your current home and your immediate neighborhood (not to mention the friends close by).

Sometimes retirees underestimate the cost of downsizing. Even the logistics can be expensive. As Kiplinger notes, just packing up and moving a two-bedroom condominium’s worth of furniture will cost about $1,500 if you are resettling locally. If you are sending it across the country, the journey could take $5,000 or more. If you can’t sell or move everything, the excess may go into storage, and the price tag on that may be well over $100 a month. In selling your home, you will probably pay commissions to both your agent and the buyer’s agent that add up to 6% of the sale price.2

Some people want to retire and then sell their home, but it may be wiser to sell a home and then retire if the real estate market slows. If you sell sooner instead of later, you can always rent until you find a smaller house that could save you thousands (or tens of thousands) of dollars over time.

Run the numbers as accurately as you think you can before you make a move. Downsizing always seems to have a hidden cost or two, but for many retirees, it can open a door to long-term savings. Other seniors may find it cheaper to age in place.

 

Joe Occhipinti may be reached at 714.823.3328 or Joe@warrenstreetwealth.com.

www.WarrenStreetWealth.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – nerdwallet.com/blog/mortgages/two-ways-to-determine-how-much-house-you-can-afford/ [2/3/16]
2 – kiplinger.com/article/retirement/T010-C022-S002-downsizing-costs-add-up.html [4/1/16]

 

Reduce your Tax Bill: ESPORTS & Streamer Edition

Co-Authored by:
Blake Street CFP® & Joe Occhipinti

 

The world of eSports has turned a hobby into a full time profession for many people around the world. Streamers, professional players, and YouTube stars have been able to take their specific talents and turn their passion into a career.

However, with this newly found cash flow comes a new liability in the form of taxes. The knock from Uncle Sam will only get louder as revenue streams, prize pools, and sponsorship deals increase.  Many eSports professionals find themselves scratching their heads come tax time, trying to sort through W2 wages, 1099 income, and even how to handle income from organizations that didn’t report it in the first place.

The burden remains on the the individual to accrue cash to pay taxes, keep their books, properly report income, and make sure they are in compliance with the IRS. The IRS, as always, does no favors in helping you make your tax bill small.

If you’re a streamer, influencer, or competitor there is a high likelihood that you yourself are considered a small business in the eyes of the IRS. This means you’re liable for the 15.3% payroll tax on your earnings that you might only otherwise be liable for half of as a W2 employee. In addition, you may have liabilities from your business activities and even employees or contractors you may hire to do work for you.  From what we’ve found thus far, few have addressed these variables with adequate intent.

 

How do you fix this problem?

 

1) Keep Good Books

First things first get setup to adequately track  business related expenses and any deductions that may reduce your tax burden.  This is the first and easiest thing to control. A good start is separate banking for your business efforts and a solid piece of accounting software.

2) Incorporation

Next, how are you incorporating your business? Sole proprietor? LLC? S-Corp? Each classification has its own nuances that will impact the bottom line dollars you keep and the liability you bare. It is important to look at not only the amount you make, but also the consistency of earnings, and the amount of liability your services or content generate before choosing a type of incorporation.

3) Build Cash Reserves

As money comes in the door, aside from saving for goals, you need to save for taxes. Companies should be withholding taxes on your W2 wages, but any other forms of income the burden is on you. Generally our clients set aside 20-30% of every dollar of revenue aside for potential taxes. The struggle is real!

4) Tax Deferral & Planning

Still have lots of profits left and nothing to spend it on? Why pay taxes on those dollars now? Consider opening a tax advantaged savings plan. Depending on your need, one might consider a Traditional IRA, ROTH IRA, SEP IRA, SIMPLE IRA, or Solo 401(k). All of these plans allow for tax deferred or tax advantaged savings and investing but each offers a different level of complexity and contribution limits.

5) Hire the Right People

Find folks with the expertise to guide you through the setup and management of each step we detailed above. This person or firm will need to network with their CPA’s and attorney’s or even your existing team to make the most of your new found success. The goal is to minimize your tax bill, grow your net worth, and protect you from some of the common financial pitfalls seen in both traditional and eSports.

 

More About Us

Warren Street Wealth Advisors was founded by a retired Counter-Strike: Source professional, and we are well aware of the challenges you face. We offer services that give streamers, professional esports players, and interactive media talent the ability to transform themselves from just a  revenue generating entity to a well rounded and tax efficient business. If you’d like to learn more, feel free to contact Blake Street or Joe Occhipinti directly.

 

Disclaimer
Blake Street and Joseph Occhipinti are Investment Advisor Representatives of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

Could Social Security Really Go Away?

Just how gloomy does its future look?

Provided by Joe Occhipinti

 

Will Social Security run out of money in the 2030s? For years, Americans have been warned about that possibility. Those warnings, however, assume that no action will be taken to address Social Security’s financial challenges.

 

Social Security is being strained by a giant demographic shift. In 2030, more than 20% of the U.S. population will be 65 or older. In 2010, only 13% of the nation was that old. In 1970, less than 10% of Americans were in that age group.1

Demand for Social Security benefits has increased, and the ratio of retirees to working-age adults has changed. In 2010, the Census Bureau determined that there were about 21 seniors (people aged 65 or older) for every 100 workers. By 2030, the Bureau projects that there will be 35 seniors for every 100 workers.1

As payroll taxes fund Social Security, the program faces a major dilemma. Actually, it faces two.

 

Social Security maintains two trust funds. When you read a sentence stating that “Social Security could run out of money by 2035,” that statement refers to the projected shortfall of the Old Age, Survivors, and Disability Insurance (OASDI) Trust. The OASDI is the main reservoir of Social Security benefits, from which monthly payments are made to seniors. The latest Social Security Trustees report indeed concludes that the OASDI Trust could be exhausted by 2035 from years of cash outflows exceeding cash inflows.2,3

Congress just put a patch on Social Security’s other, arguably more pressing problem. Social Security’s Disability Insurance (SSDI) Trust Fund risked being unable to pay out 100% of scheduled benefits to SSDI recipients this year, but the Bipartisan Budget Act of 2015 directed a slightly greater proportion of payroll taxes funding Social Security into the DI trust for the short term. This should give the DI Trust enough revenue to pay out 100% of benefits through 2022. Funding it adequately after 2022 remains an issue.4

 

If the OASDI Trust is exhausted in 2035, what would happen to retirement benefits? They would decrease. Imagine Social Security payments shrinking 21%. If Congress does not act to remedy Social Security’s cash flow situation before then, Social Security Trustees forecast that a 21% cut may be necessary in 2035 to ensure payment of benefits through 2087.3

   

No one wants to see that happen, so what might Congress do to address the crisis? Three ideas in particular have gathered support.

 

*Raise the cap on Social Security taxes. Currently, employers and employees each pay a 6.2% payroll tax to fund Social Security (the self-employed pay 12.4% of their earnings into the program). The earnings cap on the tax in 2016 is $118,500, so any earned income above that level is not subject to payroll tax. Lifting (or even abolishing) that cap would bring Social Security more payroll tax revenue, specifically from higher-income Americans.3

 

*Adjust the full retirement age. Should it be raised to 68? How about 70? Some people see merit in this, as many baby boomers may work and live longer than their parents did. In theory, it could promote longer careers and shorter retirements, and thereby lessen demand for Social Security benefits. Healthier and wealthier baby boomers might find the idea acceptable, but poorer and less healthy boomers might not.3

 

*Calculate COLAs differently. Social Security uses the Consumer Price Index for Urban Wage Workers and Clerical Workers (CPI-W) in figuring cost-of-living adjustments. Many senior advocates argue that the Consumer Price Index for the Elderly (CPI-E) should be used instead. The CPI-E often gives more weight to health care expenses and housing costs than the CPI-W. Not only that, the CPI-E only considers the cost of living for people 62 and older. That last feature may also be its biggest drawback. Since it only includes some of the American population in its calculations, its detractors argue that it may not measure inflation as well as the broader CPI-W.3

 

Social Security could still face a shortfall even if all of these ideas were adopted. The Center for Retirement Research at Boston College estimates that if all of these “fixes” were put into play today, the OASDI Trust would still face a revenue shortage in 2035.3

In future decades, Social Security may not be able to offer retirees what it does now, unless dramatic moves are made on Capitol Hill. In the worst-case scenario, monthly benefits would be cut to keep the program solvent. A depressing thought, but one worth remembering as you plan for the future.

 

Joe Occhipinti may be reached at 714.823.3328 or Joe@WarrenStreetWealth.com.

www.WarrenStreetWealth.com

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations
1 – money.usnews.com/money/retirement/articles/2014/06/16/the-youngest-baby-boomers-turn-50 [6/16/14]
2 – fool.com/retirement/general/2016/03/20/the-most-important-social-security-chart-youll-eve.aspx [3/20/16]
3 – fool.com/retirement/general/2016/03/19/1-big-problem-with-the-3-most-popular-social-secur.aspx [3/19/16]
4 – marketwatch.com/story/crisis-in-social-security-disability-insurance-averted-but-not-gone-2015-11-30 [11/30/15]

Are We Done Yet?

February 12, 2016 by Marcia Clark, CFA

On January 26, 2015, I wrote an article questioning the relationship between falling oil prices, slowing Chinese GDP, and the precipitous decline in the U.S. stock markets. I counseled readers to take a breath, that the stock market turmoil was overdone and the U.S. economy was secure.

Shortly after my article, the S&P 500 index rebounded from 1903.63 to 1949.24 as on January 29th the Bureau of Economic Analysis announced 4th quarter GDP growth at a modest 0.7%, slightly below analyst expectations of 0.8%.

U.S. Real Gross Domestic Product and Civilian Unemployment Rate

 U.S. Real Gross Domestic Product and Civilian Unemployment Rate

Stock Markets Stabilize with 4th Quarter GDP Report

Why did the stock market react so well to such modest GDP growth? Perhaps because, if you look deeper into the GDP components, the slow growth was primarily due to weak exports and low oil prices, while consumer spending and residential construction remained strong. When considered in light of positive trends in disposable income and job growth, investors seemed fairly content with the 4th GDP results. Concern about specific sectors of the economy are well-founded, however, as low oil prices are indeed causing an increasing number of shale oil drillers to default on their debt obligations. But lenders prepare for this type of risk by diversifying their investments, and there is little evidence that distress in the oil patch will spread throughout the broader economy.

S&P 500 Stock Market Index, February 2015 – February 2016

S&P 500 Stock Market Index, February 2015 - February 2016

http://www.msn.com/en-us/money/indexdetails/fi-33.10.!SPX?ocid=INSFIST10

Do Stock Markets Really Predict Economic Recessions?

To twist a common phrase, every silver lining has a cloud, and in the days following the GDP announcement oil prices continued their downward trend and talk of an economic slowdown began to circulate in the financial press. By February 11, the S&P 500 index had plummeted to a low of 1829.08, before recovering a bit to end the week at 1864.78. Clearly, the turmoil was not over!

But does a falling stock market really foretell an economic decline in the U.S.? Let’s take another look at the evidence. The Brookings Institute published an article by George L. Perry on February 2, 2016[i] reviewing the relationship between stock market declines and economic recessions. Mr. Perry concludes that significant stock market declines – say 20% or so – do indeed tend to precede economic downturns. However, more moderate declines in the stock market happen much more frequently than do recessions. And when such declines are accompanied by decent economic figures, the predictive power of the stock market is unreliable.

In fact, the most recent Conference Board Leading Economic Index published January 22 shows a strong positive trend, despite the U.S. stock market being a component of the index. It’s important to note, however, that the index fell slightly in December due to weaker growth in housing and manufacturing. Also of note, the latest Leading Indicator Index does not include January’s stock market decline.

Leading Economic Index as of December 2015

Leading Economic Index as of December 2015

So, Where Do We Go From Here?

As articulated by Fed Chairman Janet Yellen in her testimony to Congress on February 11, the U.S. economy remains on an upward trend at present, though the future is uncertain. On the positive side, employment gains, low interest rates, and falling oil prices provide consumers with more disposable income to support domestic businesses. On the negative side, slowing Chinese and commodity-based economies, combined with the strong dollar, continue to depress U.S. exports.

On balance, I reiterate my earlier advice. CaptionStay strong, hold on tight, and wait for smoother sailing ahead. Investors with a tolerance for volatility might even consider buying into the distressed oil and gas sector.  Be warned, however! A risky endeavor such as this requires an abundance of fundamental analysis and healthy skepticism when forecasting future earnings. Such a venture is best left to the boldest among us with the ability to withstand the choppy voyage ahead.

 

Marcia K. Clark, CFA

Warren Street Wealth Advisors

Senior Research Analyst, Wealth Advisor

marcia@warrenstreetwealth.com

[i] http://www.brookings.edu/research/opinions/2016/02/02-stocks-and-the-economy-perry

Are You Retiring Within the Next 5 Years?

are you retiring in the next five yearsAre You Retiring Within the Next 5 Years?

What should you focus on as the transition approaches?

Provided by: Warren Street Wealth Advisors

 

You can prepare for your retirement transition years before it occurs. In doing so, you can do your best to avoid the kind of financial surprises that tend to upset an unsuspecting new retiree.

 

How much monthly income will you need? Look at your monthly expenses and add them up. (Consider also the trips, adventures and pursuits you have in mind in the near term.) You may end up living on less; that may be acceptable, as your monthly expenses may decline. If your retirement income strategy was conceived a few years ago, revisit it to see if it needs adjusting. As a test, you can even try living on your projected monthly income for 2-3 months prior to retiring.

 

Should you try to go Roth? Many pre-retirees have amassed substantial retirement savings in tax-deferred retirement accounts such as 401(k)s, 403(b)s and traditional IRAs. Distributions from these accounts are taxed as ordinary income. This reality makes some pre-retirees weigh the pros and cons of a Roth IRA or Roth 401(k) conversion for some or all of those assets. You may want to consider the “Roth tradeoff” – being taxed on the amount of retirement savings you convert today in exchange for the ability to take tax-free withdrawals from the Roth IRA or 401(k) tomorrow. (You must be 59½ and have owned that Roth account for at least five years to take tax-free distributions.)1

 

Should you downsize or relocate? Moving to another state may lessen your tax burden. Moving into a smaller home may reduce your monthly expenses. In a perfect world, you would retire without any mortgage debt. If you will still be paying off your home loan in retirement, realize that your monthly income might be lower as you do so. You may want to investigate a refi, but consider that the cost of a refi can offset the potential savings down the line.

 

How conservative should your portfolio be? Even if your retirement savings are substantial, growth investing gives your portfolio the potential to keep pace with or keep ahead of rising consumer prices. Mere gradual inflation has the capability to erode your purchasing power over time. As an example, at 3% inflation what costs $10,000 today will cost more than $24,000 in 2045.2

 

In planning for retirement, the top priority is to build savings; within retirement, the top priority is generating consistent, sufficient income. With that in mind, portfolio assets may be adjusted or reallocated with respect to time: it may be wise to have some risk-averse investments that can provide income in the next few years as well as growth investments geared to income or savings objectives on the long-term horizon.

 

How will you live? There are people who wrap up their careers without much idea of what their day-to-day life will be like once they retire. Some picture an endless Saturday. Others wonder if they will lose their sense of purpose (and self) away from work. Remember that retirement is a beginning. Ask yourself what you would like to begin doing. Think about how to structure your days to do it, and how your day-to-day life could change for the better with the gift of more free time.

 

Many retirees find that their expenses “out of the gate” are larger than they anticipated – more travel and leisure means more money spent. Even so, no business owner or professional wants to enter retirement pinching pennies. If you want to live it up a little yet are worried about drawing down your retirement savings too fast, consider slimming transportation costs (car and gasoline expenses; maybe you could even live car-free), landscaping costs, or other monthly costs that amount to discretionary spending better suited to youth or mid-life.

 

How will you take care of yourself? What kind of health insurance do you have right now? If your company sponsors a group health plan, you may as well get the most out of it (in terms of doctor, dentist and optometrist visits) before you leave the office.

 

If you retire prior to age 65, Medicare will not be there for you. Check and see if your group health plan will extend certain benefits to you when you retire; it may or may not. If you can stay enrolled in it, great; if not, you may have to find new coverage at presumably higher premiums.

 

Even if you retire at 65 or later, Medicare is no panacea. Your out-of-pocket health care expenses could still be substantial with Medicare in place. Long term care is another consideration – if you think you (or your spouse) will need it, should it be funded through existing assets or some form of LTC insurance?

 

Give your retirement strategy a second look as the transition approaches. Review it in the company of the financial professional who helped you create and refine it. An adjustment or two before retirement may be necessary due to life or financial events.

 

Warren Street Wealth Advisors

190 S. Glassell St., Suite 209

Orange, CA 92866

714-876-6200 – office

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

   

Citations.

1 – turbotax.intuit.com/tax-tools/tax-tips/Retirement/The-Tax-Benefits-of-Your-401-k–Plan/INF22614.html [5/7/15]

2 – investopedia.com/articles/markets/042215/best-etfs-inflationary-worries.asp [4/22/15]