If You Could Do It Over Again…

…Would you do it the same? Think about a financial decision you made during the past week – something you decided to buy or not, an investment decision you made, or maybe a dinner out. Now that you made the decision, are you happy with what you did? Or would you make a different decision? Did you consider alternatives? Or did you decide on its own merits without looking at alternatives? Chances are, the way you went about making that decision is similar to the way you make most of your decisions. After all, if you are reading my blog, you are likely in your 40’s or older and are relatively entrenched in your ways. You can’t teach an old dog new tricks, right?

New Tricks

Well, if you are not happy with a financial decision you made recently, perhaps you should think about using “new tricks”, or a new methodology for your own personal financial decision making. Maybe if you take your time to be analytical and look at alternatives, perhaps you will make a better decision or at least a decision you will be happy with, next time. Take your time – is there really a rush or a deadline for you to make your decision? If you feel like there is a rush, maybe next time you need to start the process earlier so that you won’t feel as rushed when the deadline comes? Start with a small decision, perhaps about where to get your morning coffee. You like Starbucks, but is Starbucks really worth the money for you? Could you be just as satisfied with a lower-cost alternative such as McDonald’s? Or can you brew it yourself, even if it means you need to wake up 10 minutes earlier? If you are happy with your Starbucks, then great! You have made a good financial decision for yourself and the cost of Starbucks is a good value for you.

Is Trendy Good?

Take it to the next level of how you invest your money. If you like trendy places like Starbucks (although I know there may be other coffee shops that are trendier), maybe you like to have your money invested in trendy stocks as well. Maybe Facebook, Alphabet/Google, Apple, or Netflix – all trendy high-tech stocks in companies that are still mostly growing. If you like those stocks, be prepared to pay a premium for them in the form of high price/earnings ratios. Does that fit your personality? Or would you be just as happy (or happier) owning less trendy stocks that cost less relative to their earnings? Unless you thrive on volatility (and some people do), less trendy stocks tend to be less volatile and therefore allow you better to sleep at night. In addition, the future earnings potential for these less glamorous stocks (such as high dividend stocks, for instance) may be just as rosy as for the aforementioned high tech stocks.

IMO

Step back and be honest with yourself about a recent financial decision you made, whether it involves big money or small. Are you happy with your decision? If not, then perhaps you need to look (honestly, again) at the way you made that decision. Maybe next time you need to be more careful with how you decide things that involve your money. Maybe part of being careful involves hiring a financial planner like me who will help you with that decision. If so, please let me know and I would be happy to help!

Fourth Quarter Repeat of 2018?

As of October 1, we are now into the 4th Quarter of 2019. Will it be a repeat of the 4th Quarter of 2018 for stocks? Q4 2018 was really bad. The S&P 500 index was down over 14% for the quarter, and other indexes were similarly down. Moreover, two of the biggest stock market crashes – 1929 and 1987 – both occurred in October of those years. Could history repeat itself this year?

Beware The Fourth Quarter!?

Maybe…

There certainly could be a 4th Quarter correction. The stock market recovered nicely from its 4th Quarter 2018 slump. As I write this, the S&P 500 is within 3% of its all-time high, despite a number of big issues out there that have a lot of investors concerned, such as:

  • Global trade, especially between the US and China;
  • An apparent worldwide economic slowdown excluding the US, at least at the present time;
  • Geopolitical uncertainty, including heightened tensions involving Iran due to tightening sanctions;
  • Flat to slightly inverted yield curve;
  • The longevity of the stock market rally, with the belief we are in the “late innings” of a 10 year plus rally; and
  • Increased discussion in the press about a possible recession.

All of these are valid points. A recession can be a self-fulfilling prophecy if enough businesses scale back because they think everyone else is gearing up for a recession. Stocks are considered to be a leading indicator, and it is the time leading up to an official recession (6 months of negative GDP growth) that have been the worst for stock performance.

…Or Maybe Not?

On the other hand, there is a lot of evidence that we will not be heading into recession and that growth will continue, albeit at a somewhat slower pace. These include:

  • Declining overall interest rates, and the inability of the yield curve to actually invert despite weeks of trying. For example, one year ago, on 10/1/18, the 10 Year US Treasury rate was 3.09%, vs. about 1.6% now. The 2 Year rate was 2.8% a year ago vs. 1.4% now. Rates across the board are much lower now.
  • An accommodative Federal Reserve, which has lowered short-term rates and looks to continue to do so, though perhaps not as quickly as our President wants.
  • Corporate earnings remain strong.
  • Does the US economy necessarily weaken because the rest of the world does? Or might the US economy continue to strengthen in order to take up the slack?
  • US Unemployment remains low at 3.5%, meaning there don’t appear to be layoffs in the face of a potential upcoming recession.

IMO

My opinion is that there will not be a recession at least for the next 18 months. That doesn’t mean the stock market won’t correct due to the volatility and uncertainty out there. It does mean that any correction should be looked at as a potential buying opportunity. I think rates are too low and the Fed is too accommodative for there to be the basis for a repeat of 2018 and a 14% correction in the stock market for the 4th Quarter. As for now, hold your current equity positions (assuming you are well diversified), and potentially look to add to them if you have the cash and you see a dip you can buy.

Are You Aware Of Your Surroundings?

Recently I was walking on a crowded sidewalk and found myself behind a big man wearing a gray suit. Mr. Gray Suit was carrying a large backpack that hung to his side. He was wearing headphones and seemingly lost in whatever he was listening to. And, he was walking slowly. In short, he was taking up the entire sidewalk and holding up pedestrian traffic. Lost in his own world, and seemingly unaware of the other people whose lives he affected at that moment. Have you ever encountered this type of person? Mr. Gray Suit was just the latest example for me. In this era of smartphones, Google Maps, Apple Music, podcasts, audiobooks, and headphones, I find more and more examples of people lost in their own space and unaware that they are having an impact on other people’s space, even at a moment in time.

Are You Aware Of Your Finances?

All of this got me thinking about people and whether they are similarly unaware of their financial place on the sidewalk. (How’s that for a transition from a sidewalk encounter to a financial blog topic? Smooth? Or not very?) Do you think you are big, move slowly, and therefore block other people from achieving their goals? Are you small and nimble and able to pick your way through the crowded space? Perhaps you are a “tour guide” and hold a small flag high or wear a crazy shirt so that others in your group will always know where you are? Or are you always on your Maps app on your phone, unsure of yourself and needing constant direction and reinforcement for your actions? As an adviser and financial planner, I see all of these types. None is better or morally superior to another.

What Is Best For You?

The goal is to find the method that works best for you, as long as you don’t become Mr. Gray Suit and block others (perhaps in your own company or family) from achieving their own goals. Most of the time, unless you are really on top of things and know exactly where you want to go and how you want to get there, it is best if you have some outside guidance along the way. Maybe you don’t need constant guidance in the form of an in-person tour guide or your favorite Maps app, but it is highly advisable to look at your route before you set off on a trip.

IMO

Making your plan before you start your trip is where I come into the picture. As a CFP® Professional, I can help you develop your destination and plan your route. I can also make sure you are aware of where you are and that you don’t get in the way of other people while you are on your journey. It is really hard to get somewhere if you don’t know where you want to go! This is especially true with your finances. Contact me so I can help you with your goals and your route to get there.

What Will My Insurance Cost If I Quit Work?

Are you thinking about quitting our job but you don’t know what your health insurance will cost (or not sure if you can even obtain it) if you quit? You’re in good company. It is hard to estimate your health insurance costs because the exchanges aren’t geared to let you do that.

The Exchange

If you quit or lose your job for whatever reason, you have the option of keeping your current health insurance for 18 months through COBRA. After the 18 months is up, or if you decide not to use the COBRA option at all, the most likely case is that you will purchase your insurance through your state’s exchange website. What will that cost, you might ask? You might visit your state’s exchange to find out. Problem is, the exchange won’t give you an accurate answer unless you are in the Open Enrollment period. The exchange will give you the cost of various plans if you want to purchase them today under the Special Enrollment provision. Are the Special Enrollment terms indicative of what it will cost during open enrollment? Possibly, but unlikely.

Open Enrollment Is Coming

The good news is that the Open Enrollment period on the health exchanges is coming soon. Depending on your state, Open Enrollment starts in October or November and lasts for 30-60 days. During Open Enrollment, you will get a much better estimate of what type of health insurance you can obtain and what it will cost. You will need to answer a few questions online and perhaps act like you really want to buy the insurance right then, but at least it will provide you a better sense of what your health insurance will cost.

IMO

Use the upcoming Open Enrollment period to daydream about quitting your job. Take the information you can find on your state’s exchange during Open Enrollment and plug it into your cost spreadsheet to calculate what it might cost for you to quit your job. It won’t be 100% accurate but it will give you a decent estimate of what your health insurance will cost.

Social Security and Time Value of Money

Someone recently asked me to comment on this article that was recently posted on Motley Fool and Nasdaq.com. The article takes issue with analyses that conclude that one should delay filing for Social Security until Full Retirement Age (FRA) or later. According to the article, if one takes the time value of money into account, one might conclude that they should file early because money today is worth more than money delayed until a later date. Said another way, if, instead of spending their monthly Social Security check, the recipient invests their check and earns a “reasonable” 5% return on their money, the breakeven point is delayed by several years, making it better to file early. This is true especially if the filer has health issues and does not expect to live long after their FRA.

Research By the SSA

It turns out that the Social Security Administration was aware of this issue well prior to this new Motley Fool article. This dissertation, posted in 2016 on the SSA.gov website, concludes after lengthy iterations and analysis that claiming at age 62 maximizes lifetime benefits at a discount rate of 3.8% or higher for men and 4.6% or higher for women. If you are able to invest your Social Security and earn those annual returns rather than spend it, you are better off filing as soon as you can at age 62 rather than wait until FRA (67 years old in my case) to file for your monthly benefits. Instead of a breakeven of 5-7 years (which would translate roughly to Age 72 to 74), the breakeven would be several years later, making it better to file early despite receiving reduced monthly benefits.

My Problems

One problem I have with this is that most people aren’t able to invest their Social Security. Instead, they spend it. If they spend it, the discount rate (or reinvestment rate) goes to 0%, meaning that the standard breakeven analysis is valid. Instead of 3.8% or 4.6% or 5%, most people do not derive any reinvestment value from their Social Security benefits because they need that money to live on.

Another problem that I have is that if one is healthy and able to work during their Age 62 to 67 years (or at least for a portion of that time), they should continue to do so because those years could be prime earning years. Instead of a time value of money discussion, it would be an opportunity cost discussion of foregoing years of earning the highest salary of a lifetime vs. filing early for Social Security. Which do you think will net you out with the most money over time? If you guessed that you would take in more by staying at work, you are correct.

Lastly, there are spousal benefits to consider. The dissertation on ssa.gov states that their analysis works for single filers but not as well for married filers. The SSA has tightened up on spousal benefits (no more File and Delay), but the decision is not black or white for most people due to their spouses.

IMO

I still advocate waiting to file until at least FRA if one is able to do so and is in relatively good health. It would require an unordinary amount of discipline to receive a monthly Social Security check and invest it and not just spend it.

When Should You Retire?

When to retire is the essential question that most people who seek financial planning help want to have answered. People of a certain age want to know if they have enough money to retire now, or, if not, how long they have to work and how much more they have to save before they can retire. Entire software programs are designed just so such people can have these questions answered with an adequate degree of certainty. What do I think? Read on.

Quit When You Suck

Now-retired NFL quarterback Peyton Manning, while he was still playing, said, “I’ll quit when I suck.” Peyton has found a second career as a TV pitchman. Nevertheless, there is wisdom to the notion that you should continue to work until you are no good at it anymore. Of course, Peyton made that statement from the standpoint that he really enjoyed being an NFL quarterback and was being paid millions of dollars per year to be one. Not all of us are in that position. However, if you are getting on in years and have been building your career, you hopefully are in a job you like (or are at least ok with) and you are likely making more money per year than you ever have. If you feel like you are still good at what you do and are making a contribution to your employer, and if you still basically like going to work every day, then keep doing it. Most financial planners will tell you that your retirement finances will continue to improve the longer you continue to work.

What Do You Want To Do When You Are Retired?

If you aren’t going to work every day, what do you want to do with yourself? Without a job in the picture, that will be a lot of hours every day that you need to fill up with activities. Do you get bored easily on the weekends? If so, you should probably keep working because every day is Saturday when you are retired. The point is that you need to have a plan for what you will do with your time once you retire. Do you think you will travel constantly? Maybe, but travel costs money. Ideally, you should find something to do that either makes you or saves you money or that doesn’t cost much. Taking care of grandkids or working in your garage shop (as long as you already have all of the tools you need because new tools are expensive) can be good activities that can put some coin in your pocket.

Unexpected Retirement

This article posted at money.usnews.com says that a survey has found that 48% of retirees were forced to retire unexpectedly due to their own health, a loved one’s health, or job redundancy. The point is that you may not get to choose when you retire when retirement chooses you. Unexpected retirement is one reason why you have been contributing to your retirement accounts all of these years, and why there is a disability insurance element to Social Security. Consider yourself fortunate if you can choose when you retire rather than having retirement foisted upon you.

Health Insurance

As the cost of health insurance continues to go up and its future availability remains at least in question, some people stay working substantially so that they and their families can continue to have health insurance. I believe that health insurance is an issue to consider but should not be the only reason why you should continue to work. I believe that there will always be health insurance available to you, even if you have complicated pre-existing conditions that may involve expensive medications. You may have to pay up for it but consider its cost versus continuing to work and have your insurance through your job – it still may be worth it to retire and pay for your insurance through COBRA and, eventually, the exchanges.

IMO

If you notice, none of the considerations I outline here involve a financial projection or a Monte Carlo analysis of how much money you have now and whether it will be enough to retire on. Instead, I believe the qualitative factors should be more important considerations. Do I still like my job and am I still good at it? Do I want to do something else with my time once I retire? Will my employer still allow me to work? It is probably better off for your finances if you keep working, but there comes a time for all of us when we have had enough. If and when you come to that place and you have run the numbers and you have enough money to live on, then go ahead and take the leap into retirement. If you want reinforcement for your decision, contact me so I can help you think it all through.

Don’t Do As the Government Does

This article by economist Brian Wesbury makes the case that the high level of US Government debt (about $1 Trillion annually and about $22.5 Trillion in total) isn’t killing us because interest rates are low, which means the amount of interest we have to pay to bondholders to service the debt remains low (about 1.8%) relative to our country’s GDP. Wesbury goes on to say that the real issues are government spending, the pending insolvency of Social Security and Medicare, and the ramifications of increased entitlement spending on the working populace.

Don’t Make the Logical Leap

You might read this and think, Ok, if the government can pile on debt and not suffer the consequences, then why can’t I? After all, interest rates are low for me, also, right? My job situation is good and I anticipate increasing salary in the future, so why not take advantage of these low rates and buy anything I want now? Why not borrow all I need to send my child to an expensive private college?

The problem with that line of thinking is that You Are Not the US Government. That means that you do not print money, and you do not have the ability to 100% roll over your debt and not make principal payments. Instead, banks who lend to you for your home, car, or credit card, expect that their loans will be paid back. Interest rates may be low, but it is the principal payment requirements that crush people and hold them hostage to their lenders. Also: You can’t borrow at the same rates that the US Government can. At present, the US Government can get a loan for 10 Years at a rate of about 1.7% interest-only. It’s called a 10-Year US Treasury Bond. You can’t get that deal. The best you can get on a home loan is a 30-year loan in the low 3%-range, principal and interest included, with a 20% down payment, collateralized by your house. This is a good deal at a low rate, but it isn’t as good as what the US Treasury can get.

IMO

Don’t do as the government does. Don’t decide, “Hey, rates are low, so let’s borrow up to the hilt!” That’s a poor decision that will keep you in hock for years. Not that the US Government isn’t also in hock for years, but they print the money, and they don’t have to pay back the principal. Don’t look to the US Government as an example of good financial discipline. Instead, be your own example, and avoid adding to your debt pile.

The Perils of Student Debt

In its September 14, 2019 edition, the Wall Street Journal published a multi-page expose on the financial situation of people in their 20’s. The Journal described the lives of several people from various places in the US and discussed what issues they have and what might be preventing them from getting to where they want to be.

Student Loans Are a Drag

If you didn’t read the expose, I can sum up its findings for you: Having student loans can put a real drag on one’s finances. Student debt causes people to stay in jobs they don’t like because they need to pay the bills. People are reluctant to buy cars and homes because they don’t have enough money remaining to do so after paying off student loans. Savings rates are low because it is hard to save if one is making student loan payments. People feel forced to go into credit card debt because they feel they don’t have enough to live on after paying student loans. The Journal uses the word “crushing”, and I believe that accurately describes student debt.

Changes in Thinking

I believe there are a couple of notions that must change going forward:

  1. Student loans are not “good” debt. Getting an education and earning a degree are great goals, but it is not great to go into debt to do so because it restricts one’s flexibility. Debt may work to impose discipline if lack of discipline is an issue, but I don’t know that the concept of discipline resonates with the teenage college student who is thinking about taking out more student debt. Student debt is unsecured debt, meaning there is no collateral, so there is no asset that the debtholder could conceivably sell in order to pay off the debt. Instead, paying off student debt is a long, hard slog.
  2. As a society, we need to become more accepting of kids who decide to pursue alternatives to an education that would necessitate them going into debt. Going the community college route, or taking online classes, or getting certificates or accreditations from trade schools make much more sense than being burdened for years with college debt.

Don’t Allow Your Kids To Go Into Debt

My advice here is aimed more at parents than it is at debtholders, who are just kids: Don’t allow your kids to go into major student debt just because you want them to go to a prestigious college or because they want to keep pace with their friends. Instead, work with them to look for alternatives that still can open doors for them while keeping them out of debt so they can do what they want when they complete their education.

IMO

Avoiding student debt is an excellent early lesson one can learn and live by. John might be envious of Bill’s expensive private college education while John is going to community college, but Bill will likely be envious of John when John graduates from State College U debt-free while Bill graduates with $70,000 of student debt. It might be a hard sell for young people at the time, but the future rewards for student debt avoidance are high.

Beware of Subscription Creep!

Apple just announced its Apple TV+ service will go live on November 1 and will cost a mere $4.99 per month. Sounds like a good deal! Does your kid also want in on Apple’s streaming video game service? That will be another $4.99 per month. What about Apple Music? Apple News? All of these offer something worthwhile but each charges a monthly subscription fee. Then there are the non-Apple subscriptions: Netflix, Hulu, HBO, Showtime. Probably you still pay for Cable TV or DirecTV on top of these. All have monthly fees. Then there is your home WiFi and phone service. Do you still have a landline to go with your cell phone? (Tired of answering robocalls on both? That’s another can of worms!) All of these cost you money every month.

Subscription Creep

Subscription Creep is what happens when you continue to add new, fun-sounding services on top of services that you previously purchased, without paring back on those previous services. Subscription Creep can add up to multiple hundreds of dollars per month. It may not seem like much money while you are still working and have enough monthly income to pay for it all. And, if you really enjoy all of these services on a regular basis, then have at it and more power to you! However, don’t spend yourself into the poor house just because you can’t wait for the next season of The Handmaid’s Tale on Hulu.

Be Careful

If you already subscribe to some subscription services, be very careful before you add additional services. Ask yourself first of all if you really have extra time and will use this service. Understand what content this new service currently offers. If you aren’t so big on the service’s current offerings, don’t opt-in. Wait a year or so and reassess – perhaps the service has improved. You can always opt-in at a later date.

Like Your Closet

I often hear people say, “My closet is full, so I’m not buying any more clothes until I have a chance to give some old clothes away.” Good concept, and one that I recommend for these subscription services. Do you truly have a gap of unused time that is just waiting to be filled by a new subscription service? Or is your “closet” of entertainment options already full? If it is, you should consider cleaning it out before you buy something new. Unfortunately, you can’t donate to the needy as you can with old clothes, but you can rid yourself of some serious overhead by purging your unused or little-used services.

Kondo Your Services

Marie Kondo wrote “The Life-Changing Magic of Tidying”. In a nutshell, Kondo says to hold an item you own and think, “Does this item spark joy for me?” If it does, keep it. If it does not, toss it. This turned her name into a verb. You should use that verb with respect to your subscription services. If it sparks joy for you, meaning that you actually use it and derive value from it, then keep it. Otherwise, don’t. And, don’t add anything new until you can “kondo” what you already have.

IMO

There are so many subscription services out there including for entertainment as well as for many other services. Watch out for Subscription Creep and don’t get oversubscribed because it could cost you hundreds of dollars per month that you might like to have back!

Data vs. Narrative

This blog post by Brian Wesbury, chief economist of First Trust Advisors, illustrates that the data do not confirm some of the narratives that the economic media are running with. Instead, the data has been positive and point toward continued economic growth in the US and away from a recession. Wesbury addresses 3 narratives and shows that the data do not support the narrative. Here is a summary of Wesbury’s blog:

Narrative: Tariffs are causing trade uncertainty which will cause the US economy to slow, perhaps into recession.
Fact: US worldwide trade has grown by 16.3% since 2016. Trade with China is down about 12% but trade with Vietnam is up 33% and trade with Taiwan is up 20%. Other countries are picking up the slack due to the drop in trade with China. As Wesbury points out, trade is dynamic.

Narrative: Business investment is weak, meaning the stimulus from the 2017 tax cuts has ended.
Fact: Business fixed investment (including equipment plus structures and intellectual property) has grown at a 4.5% annual rate, and real business investment in equipment only has grown at 3.4%. These do not suggest a slowdown, much less a recession.

Narrative: The jobs report last week was weak and this points to the end of the “sugar high” and a looming recession.
Fact: Private sector job growth was strong. Civilian employment grew by 590,000. Wages and labor force participation grew and initial jobless claims remained low. Again, no indication of a recession.

IMO

I believe the outlook for the US economy is good and that we are not about to be in a recession any time soon. We have a mountain of debt but rates remain low so it is manageable for now. Data in the private sector particularly point to continued growth. This is bullish for stocks as well as for real estate.

First Trust is a leading manager of mutual funds and ETF’s