Ask a CFP Pro: What Happens to Stocks if President Trump Loses?

Ask a CFP® Pro: What Happens to Stocks if Trump Loses the Election?

What happens to stocks if President Trump loses the election?  We’ll tackle that one and six others on this week’s Ask a CFP® Pro show.  Scroll down for a timeline of this episode, some useful graphs, and the full transcript of today’s show.

Listen Now: Ask a CFP® Pro: What Happens to Stocks if Trump Loses the Election? (29:20)

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Episode Timeline

Today we talk about:
Here are the questions:
  • The money in my checking account isn’t earning anything, and I probably have too much in that account anyhow.  What can I do to earn a better return on my cash? (5:02) Click here to read

  • How will the Charles Schwab – TD Ameritrade Merger affect me? (9:31) Click here to read
  • If we are setting up a college account for a grandchild, do we have to open the account in the state in which they live? Can we set it up in Ohio even though they live in North Carolina? (11:28) Click here to read and for links

  • What are some of the things people with lower income, who are just getting started invest in? (13:41) Click here to read
  • How do you select dividend producing stocks? (17:03) Click here to read and for links

  • What happens to stocks if Trump loses the election? (20:45) Click here for pictures!

  • What is the best way to invest for retirement about 10 years before you retire?  Is it best to pay off your house before retirement? (23:59) Click here to read
What Happens to Stocks if Trump Loses the Election
what happens to stocks if trump loses the election

Transcript: What Happens if Trump Loses the Election?

The Stock Market in the first half (0:46)

The first half of the year has been absolutely crazy. It’s as crazy as we’ve seen in our careers. And we’ve been doing this for a couple days. We’ve been through the dot com bust. We went through the Great Recession and now we’re doing the whole coronavirus thing. And that was the big story that affected the economy, our lives and the stock market in the first half of the year.

A big drop…

The S&P 500 experienced a near 34% drop in 33 days, mid cap stocks dropped 42% and small cap stocks dropped 43%. And you would expect that for the year the stock market would be in a deep hole. Here are total returns through June 29th. The S&P 500, which are large-cap stocks, were only down about five and a half percent. Mid cap stocks, represented by the S&P 400, were down about 8% and the small cap stocks were down about 12.5%. 

A big bounce…

We’ve had a stunning rebound. The prices for the S&P 500 have rebounded over 36% in a little over three months. It’s not something that I can ever recall seeing by memory. But when I look back at some things, I found something somewhat interesting.

Stock market trump loses
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Prior Recoveries at 98 Days

The dot com bust which happened In 2000-2003, lasted about two years to go from top to bottom, Prices dropped 50%. And if you look at the same 98 days following the bottom that we’ve done now, prices rebounded about 18% back in 2003. In order for that bear market to completely recover, it took about 56 months.

During the great recession in 2007 to 2009, the stock market dropped 57%. And it took about 18 months to get there. If you look at the 98 days that followed the bottom in 2009, stock prices recovered 36.5%—like they have this time. I found that interesting. The Great Recession did take about four years to recover from the bottom to a new high.

We’re not quite to a new high yet—we’re getting close. But, to me, it’s been amazing how quickly things have recovered in the stock market.

Trump loses election stock market
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Relief for Required Minimum Distributions (3:07)

We’ve talked in the past about required minimum distributions. Those were waived for 2020. If you had taken your distribution in January, you were unable to return that money to your IRA as a rollover. Rollover rules state you must return any withdrawal within 60 days.

Last week, the IRS issued a ruling. It said any distribution taken in January or February can now be returned by the 31st of August.

A New Tax Deduction (3:44)

The next thing we want to talk about is something we missed in the CARES act. It wasn’t a real prominent thing. The act allows an “above the line” tax deduction for charitable contributions up to $300.

A few years ago when they passed the tax law, there was a new standard deduction. For couples, it’s $24,800, and for individuals, it’s $12,400. It made it nearly impossible for folks to itemize. If you can’t itemize your deductions, you cannot deduct your charitable contributions.

It’s estimated by the IRS that 90% of filers now claim the standard deduction. So you didn’t get any tax benefit for some of those contributions to charity.

Part of the CARES act creates this above the line deduction. This means it comes off the front page of your tax return. You don’t have to worry about itemizing.

You can take a tax deduction of up to $300. It’s not a lot, but something you find beneficial as we go forward.

What happens to stocks if trump loses the election

Question 1: How Can I Earn More on My Cash? (5:02)

The Question:  The money in my checking account isn’t earning anything. I probably have too much in that account anyhow. What can I do to earn a better return on my cash?

How much cash?

We have two issues here. The first is how much cash do you need to have on hand? And how can you improve the returns on the cash you do hold?

So “the how much cash” question to us comes down to time frames? What are you going to need cash wise in the next 24 months? Any significant expenses need to be in those safe cash-type assets. Because those accounts aren’t going to decrease in value.

This would include:

  • your emergency fund, which is three to six months of expenses,
  • any planned major expenses you have over the next two years. Things like a vacation. If you know you’re going to have major home repairs, or a car purchase.
  • Anything over $1,000 like insurance deductibles

Then after you cover those first two years, you can start looking at the next two to five years. That’s an area where you can reach for more return. But, you still want to have some stability in the value of those funds. You want to cover any planned expenses and some cushion for any unplanned costs you might incur.

Anything beyond five years, you can start investing for growth. And we talked about the five-year threshold. The reason for this is the last two bear markets. We talked about the dot com bust and the Great Recession. Both took between four to five years to completely recover. If we have a another significant pullback in stocks, you can expect to recover in that time frame.

Where should You invest?

Cash

Where should you hold your cash? That’s the second question. A bank account is the obvious place. One of the problems we’ve seen is interest rates were cut to near zero. Most of the local banks aren’t paying anything at all.

One of the things that we’ve done over the last several years is use some of the online banks. We’ve used Capital One for a long time.   But they’re not as competitive. Right now they’re paying about a half a percent on their savings account.

We’ve moved most of our accounts to Synchrony Bank, and they’re paying about 1.05%.  heir big competitor is Ally Bank who’s paying about 1.1%.

The interesting thing about these banks is all three of them are big credit card companies. They’re loaning money out at 18 plus percent. This allows them to pay you a little bit more. You would think they would pay you more than 1.1%.

You link those online banks to your local bank account. You’re able to transfer money back and forth via their website. But you have to be aware, there’s a two to three day lead time for most transfers. You’ll need to think ahead a little bit.

Intermediate Term Money (2-5 Years)

When you start talking about that two to five-year bucket, you could consider CD’s. But there’s not much with any returns out there. Many times we’re using short term bond funds. They can help push your yields towards 2%.

If you’re using an exchange traded fund, there are typically no transaction fees to buy or sell those. You can also use mutual funds, but we’ve run into some issues with some of those. Some funds have short term trading fees. This means if you need the money inside of 30 or 60 days, you may have to pay an extra to sell them. You have to be aware of that before you use them.

You could look at some bonds with longer maturities or even preferred stocks to boost yields. But that comes with a trade-off. That trade-off is price movement. Anything you do to reach for more return, you introduce more market value risk.

Long Term Money (5+ Years)

Beyond five years, you’re looking for growth assets. This means common stocks, preferred stocks, or even high yield or junk bonds. Because there’s more growth involved, and there’s also a lot more price volatility.

Question 2: The Schwab-TD Merger (9:31)

Will the Charles Schwab merger with TD Ameritrade affect me?

In the financial industry, this was big news. Schwab is the largest custodian and it is buying the second largest custodian. A custodian is a company who holds your investment positions and hold your accounts. They also execute trades. It’s an important relationship in the grand scheme of things.

At Fleming Watson, we do not have custody of our clients assets. We selected TD Ameritrade to do that when we did this back in 2016.

The deal will be closing later this year. The government did not object to the merger. And shareholders of both companies approved it. We’re being told it’s going to take somewhere between 18 and 36 months for most of the accounts to be transferred. We understand that there won’t be any new paperwork required.

How will this impact you? If your account is at TD Ameritrade, your statements will look different. If you check your account balances online, you’ll go to a different website. And if you have a retail account, you’ll have a whole new interface to get used to.

If your account is at Schwab, it probably won’t change much at all.

It will have a bigger impact on the advisors who use TD Ameritrade. We considered Charles Schwab and TD Ameritrade along with Fidelity in 2016. We settled on TD Ameritrade because we felt they were the best fit for us.

Now, we’re going to be moving to Schwab, who was our second choice at the time. We have to get used to something completely different. It will impact how we do trades and other things with our custodian. But for our clients, it’s really not going to have a big impact.

Question 3: Which State's 529 Plan Do I Use? (11:28)

I’m setting up a college account for one of my grandchildren. Do I need to open the account in the state where they live? Or can I set it up in Ohio even though they live in North Carolina?

This refers to 529 savings plans. Those accounts have some tax benefits when the funds are used for education expenses. There are some tax benefits when you’re making contributions as well. That comes in the form of a state income tax deduction.

If you live in Ohio, you can deduct up to $4,000 of your contribution per beneficiary. And if you live in West Virginia, that amount is up to $15,000 per beneficiary per spouse. This means a couple can deduct up to $30,000 from their state income.

For more information on Ohio’s 529 Plan, Click Here

For more information on West Virginia’s 529 plan, Click Here.

If you would like information about another state’s 529 plan, please contact us.

You can use any state’s plan you want. It’s not like the old prepaid tuition plans. With those, you were buying the cost of a credit-hour at an Ohio institution. You would then redeem them as a credit hour going forward. Whatever you put in the account has cash value and whatever the value is, it is. That’s what you use to pay for those qualified educational expenses.

When you use those 529 accounts for qualified educational expenses, the distributions are not taxed.

Get your deduction

But here’s the deal. If you use another state’s plan, you don’t get to take the state income tax deduction—if you live in Ohio or West Virginia. If you live in Ohio and you use North Carolina’s plan, you miss out on the state income tax deduction. If you live in West Virginia and use Nebraska’s plan, you miss out on that current tax benefit as well.

But if you live in Ohio and use Ohio’s plan, you get to deduct your contribution against your state income. And if you live in West Virginia, and you use West Virginia’s plan, you get to deduct even more.

If you can get the current income tax deduction, use your state’s plan. If your kids want to set up their plan in another state and make contributions that’s fine, too. They’re not limited to how many 529 accounts you can have for a single beneficiary. But it makes sense that you get the tax benefit for making the contributions if you can.

Question 4: Getting started as an investor (13:41)

How can someone with a smaller income get started with investing?

Low Costs

This is an excellent question. I’m glad you’re thinking about doing something for your future. The good news is the costs to invest have come down a lot. We now live in a world where there are no commissions on stocks or ETFs. That means you can buy one share of a company and it won’t cost you any transaction fees.

Years ago, the cost to buy stocks was significant, maybe $200-$300 to buy 100 shares of stock. And when I started in 1996, I think we were charging probably somewhere between $75 and $150 for a stock trade. If you didn’t have a lot of money, it was difficult to start buying individual stocks. And if you wanted to buy an odd lot, which is something that is not divisible by 100, there were additional fees.

This is before a lot of things got highly computerized. Now everything is computerized. Now buying and selling a single share is no big deal. If you want to buy one share of something like Southwest Airlines, for example, it will cost you around $30 to $35.

The Challenges of Buying Individual Stocks or ETFs

Now, the downside to buying stocks and exchange traded funds is having enough to at least buy one share. If you were looking at something like Amazon, it’s trading over $2,600. To buy one share of Amazon, you still have to have $2,600. Netflix is over $450. Google is $1400. And even something like the exchange traded fund which tracks the S&P 500(SPY) trades for over $300 a share. You have to watch what you want to buy. If you only have $50, you’re not going to be able to buy shares of Amazon. You’re not even going to be able to buy a share of the SPY ETF.

Buying fractional shares is something that’s coming. And there are a few startups who are diving into this. But it isn’t mainstream yet. I’ve read where Schwab is investigating fractional shares. When that happens, you’ll be able to then buy fractional shares of something like Amazon. If you have $200, you’ll be able to buy a tenth of a share. 

Mutual Funds

This means you turn to the old handy-dandy mutual funds. You have no-load funds from Fidelity or Vanguard. If you have $50 a month, you can put that into an ultra-low cost fund. You can buy fractional shares with a mutual fund. You may only buy .526 shares this month.

There’s other online services like Robinhood and Betterment. They make it very easy to get started for very little cost. The good news is it’s never been easier or cheaper to invest in stocks and get started in investing for your future.

Question 5: Picking Dividend Payers (17:03)

How do you select dividend producing stocks?

Generally where I start is I look at the dividend aristocrats list. Their criteria comes down to two things. It’s got to be in the S&P 500. So that means it’s a very large company. And the company has grown their dividend for 25 consecutive years. Right now there are 66 companies who qualify.

Here’s the reason I like starting here. When companies who pay a good dividend reduce their payout, the impact on their share price is bad. In our experience, we’ve seen what happens when some of the drug companies cut their dividend. Their share price will drop a lot. People’s Bank is another example. Their dividend has been up and down through the years. And if they reduce their dividend, their price value has dropped significantly.

We like companies who at least have been able to maintain their dividends. We prefer companies who’ve been able to grow their dividends over time. From there, we generally start looking at the ones that pay a 2.5% to 3% yield or more. Owning that dividend that pays 1% isn’t quite as attractive. So we’ll trim that list of 66 down to those companies that are paying a little bit more.

The Next Step

Next, we look at the payout ratio. The payout ratio is how much is the dividend of that company’s profits. If a company is earning $2 per share in profit and they’re paying out $2.10 per share in dividends, that’s a real problem. It’s not something that you can maintain. If something happens that reduces earnings, they may not be able to maintain their dividend.

We generally like when the payout ratio is two-thirds of its earnings (or less). So if a company has $1 in earnings, we prefer they pay $.66 per share (or less) in dividends.

The other factors

Then we’ll look at some other subjective factors. How expensive is the stock relative to its earnings? What does the company do? Do we understand what the company’s doing and what’s happening in their industry? We want to understand what we own and we also want to make sure that we’re not paying too much for that stock.

We don’t exclude companies that are on that list. But if I’m asked to find some, that’s where I’m going to start.

Snow or rain, it’s all water. 

There’s one saying that, that stuck with me for a while, “Snow or rain, it’s all water.” Increases in value, are as good as dividends. It all benefits you in some way, shape or form. There are some good companies out there who have generated a lot of wealth, and they don’t pay a dividend. (Or if they do, the dividend is small.) We talked about Amazon earlier. Amazon is a perfect example of that. The return for Amazon over the last 30 years is astounding, and they’ve never paid a dividend.

You can generate income from your investments without dividend or interest payments. Systematic withdrawals have been around for years. We’ve used them for our clients for years.

Dividend paying stocks aren’t the end all-be all of investing. Some people like them. Sometimes dividend stocks, at least the reliable dividend payers, don’t have as much volatility. But you shouldn’t make that the only thing you want to do with your investment portfolio. Growth of principal is a good thing too.

Question 6: What Will Happen to Stocks if Trump Loses? (20:45)

If President Trump loses the upcoming election? What effect will this have on the stock market?

We like to steer clear of politics. We don’t want to get into who will win or lose. The election will happen this year, and you can’t hide from it. Depending on who you support, you’re going to feel differently about any answer we give to this question.

In general terms, most people would view republicans as more pro-business. They are a party that prefers less regulation and prefers lower taxes. And most people would categorize democrats as not as business-friendly. They prefer more regulation, and they’re not afraid to tax corporations.

You would think that the stock market would do better when a republican controls the White House. But there’s something interesting and surprising. The opposite of that is true.

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Looking at the numbers…

We went back to 1949— or 70 years—and started with Truman’s second term as President. We went through the end of last year. Here’s what we found. Using calendar years, the average total return for the stock market when a democrat was in the White House is 14.4% per year. The average total return for the stock market when a Republican was in the White House is 8.8% per year.

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Does that mean the stock market will do better under Joe Biden than it will for Donald Trump? Nobody knows. Whoever takes over in January 2021 is going to be dealing with a lot of interesting things. We still have this Coronavirus thing hanging over our heads. The economy is a long, long way from recovering. It could be a difficult situation for whoever’s in charge.

There’s nothing that says if Biden wins, the stock market’s going to do great. And nothing says if Trump wins, the stock market’s going to do great. Nothing in these numbers should be taken as a forecast for the future.

I don’t know if the stock market cares who occupies the White House. It does well under both parties. Companies find ways to make money no matter who’s in charge. I wouldn’t sell because Joe Biden wins. And, I wouldn’t sell if Trump wins reelection either. Find good companies, have a long term outlook when you buy stocks, and things will have a tendency to work out over time.

Question 7: 10 Years Until Retirement. What should we do? (23:59)

We want to retire in about 10 years. What’s the best way to prepare for that. And is it best or is it a smart move to go ahead and pay off our house before retiring?

Still in growth mode

If you’re 10 years away from retirement, you still should be in growth mode. This means you’re more heavily invested in stocks. You’re looking to pursue higher returns.

Over the next decade, bonds aren’t going to help you a whole lot. You’re looking at 1% to 2% returns going forward based on current yields.

If there is a major downturn in the stock market, you have some time to recover from that. Even though we’re not out of this bear market yet, there could be another one in the future. You’re still going to be able to recover. If we do have that downturn again, it becomes a great buying opportunity. You may never find prices that low again.

Volatility shouldn’t be a significant concern at this point. As you get closer, when you’re five years away, that story may change. But, right now, you still have the ability to enjoy those compounded returns. If you can save and invest for higher returns, it should pay off for you in the long term.

I wouldn’t have any problems being 100% invested in stocks for the next four or five years, if I were you. I think the benefits will outweigh the long term risk. It could be tough to do. When you have those volatile times, nobody likes to see their balances go down. But again, I think the growth will be significant for you.

Eliminate Debt

Should you pay off your house before you retire? If you can do so in a reasonable fashion? Absolutely—yes! In fact, you should try to have all your debts paid off by the time you retire. That means car payments, your mortgage, and credit card debts. The fewer expenses you have, the better your retirement is going to be.

Retirement is all about cash flow. In our experience, the biggest reason people run out of money is because they spend too much. And debt payments are a form of spending. So the more you spend to pay debts, the less you have to do other things. Or it could mean you have to take more money from your nest egg than you should.

Eliminating debt can be a huge boost to your retirement plans as a whole.

Here are some other things that you want to do

Know your Social Security numbers…

Get your Social Security earnings record and benefit estimates. This is going to be a key component in helping you plan for retirement. It will help you make good decisions about when to start your Social Security benefits. And for most of us, it’s still a key part of our income.

Get organized

Get things organized. Understand where all your accounts are and how they’re invested. This allows you to create a better plan.

What does retirement look like?

It’s too soon to do detailed budgeting. But at the same time, you can start thinking about what your retirement is going to look like. You can think about what you want to do in retirement. Then you can see how much it will cost.

Health insurance

Have a good idea of what your health insurance is going to be if you’re going to retire before age 65. This is huge. If you have to go out and buy your own health insurance, that’s a big expense that you’re going to incur. You want to know what that’s going to be because it will have an impact on the numbers.

Work on your current cash flow:

The last thing that I would suggest is get your current cash flow situation in order. Know where your money’s going. Know how you’re spending it. If you can rearrange things to focus more on saving and eliminating debt, you’ll be glad you did. You have to make those things a priority. When you do that, you’ll have some flexibility and freedom in your retirement.

what happens to stocks if trump loses the election
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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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3 Ideas to Plan For Lower Returns

3 Ideas to Help Plan for Lower Returns

What we earn on our nest egg is a key component to our future plans. Over the past month, we talked about the potential impact of both lower bond and stock returns. What can you do to prepare for this? Today we’ll share 3 ideas to help you plan for lower future investment returns.

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3 ideas to help plan for lower returns

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3 ideas to plan for lower returns

Check out the other episodes from this month...

All month long, we’ve talked about the possibility of lower future returns for both stocks and bonds.  

What happens if future returns are less than historical averages? Bond yields indicate the future results from those investments could be well below their averages. And many “experts” believe future stock returns could also be less. This combination creates some significant challenges as you head into retirement.

Here are 3 things you can do to plan for lower future returns.

1. Delay Your Retirement

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Delaying your retirement improves your Social Security and pension benefits (if you will receive a pension). This works three different ways.  It shrinks the discounts you face for early retirement.  It increases your primary benefit. Or, with Social Security, you can receive delayed retirement credits. 

Waiting to retire also helps solve a problem with health insurance in retirement.  You are eligible to receive Medicare at age 65.  This means you won’t have to buy an expensive individual health insurance policy. 

Delaying retirement also allows you to reduce debt, save more, and benefit from compounded returns.

2. Monitor Your Spending

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In my experience, the primary reason people run out of money in retirement is overspending. The more you withdraw from your nest egg, the higher the chance you deplete your savings. Take a good look at your retirement budget. Try to find expenses or costs you can eliminate.

3 ideas to help plan for lower returns

3. Own More Stocks

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Investing involves a trade off. Trying to earn more can mean the short-term shocks are more severe. But, it may be necessary to consider an allocation that provides more opportunities for long-term growth. This may be hard to do, considering we haven’t completely recovered from a pretty steep drop. But in the long-run, the risks could be worth it, even if it is for a short period of time.

Be Flexible

It is important to be flexible.  The plans you created may need to be adjusted as the world around us changes.  None of us know what future returns will be.  But we need to consider what happens if future returns are lower.  Making good decisions now can help improve your chances for longer term success.  And, if things turn out better than expected, everything will be fine.

3 ideas to help plan for lower returns
3 ideas to help plan for lower returns

 

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Is the 4 Percent Rule Dead?

Is the 4 Percent Rule Dead?

Over the past two weeks, we’ve discussed expected future returns for both stocks and bonds. Several experts feel the future results will be much lower than historical averages. So that makes us wonder, “Is the 4 percent rule dead?”

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4 percent rule

Lower expected future returns for both stocks and bonds can affect your retirement. Many “experts” expect stocks to produce below-average returns over the next decade. They forecast somewhere in the neighborhood of 6.5% per year. They also expect lower returns from bonds—somewhere between 1 and 2 % per year.

Lower Future Returns and the 4 Percent Rule

If these lower returns happen, it can create a major challenge for retirees. If these predictions hold, a well-balanced portfolio would earn somewhere between 4% and 5% per year.

Is the 4 percent rule dead

For the past 20 years or so, we’ve been big believers in the 4% rule for generating retirement income. This rules says you can take 4% of your retirement savings as income. So if you have a $500,000 nest egg, that translates to $20,000 per year or $1,666 per month.

Why Do We Believe in The 4 Percent Rule?

We use this guideline because it reduces the risk of running out of money during your lifetime. This has been back-tested during some of the biggest bear markets, and it has a high rate of success.

When you use historical return data, you can see why. Historical data shows a 60% stock-40% bond portfolio should grow by about 7% per year. So if you only take 4%, you would expect your account to grow by 3% per year. That’s enough to help your income grow each year to maintain your purchasing power.

What if Returns are Lower?

But what happens if the experts are right? What if those returns are less than average? Does the 4% rule still work?

In theory, if you earn at least 4% per year, you can take that much income and still maintain your principal. But there are a couple of things that come to mind. First, your odds of success will decrease a little. And, your ability to grow your principal to grow your income is also limited.

The second thing: what if you need to take more than 4% from your savings?  A lower return environment going forward means you will increase the risk of running out of money during your lifetime.

Balancing Risk and Reward

Financial planners always talk about balancing risks and rewards. And the amount of income you take from your retirement savings is a perfect example. The 4% rule is simply a guideline to help you think about that risk. And even with lower returns expected in the future, it still has merit.

No matter what future returns are, one thing remains true. The higher your withdrawal rate, the more you risk running out of money. If you are unsure of how this impacts you, talk to a financial planner.

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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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How Lower Interest Rates Affect Your Retirement

How Lower Interest Rates Affect Your Retirement

Lower interest rates create some obvious problems for retirees. Things like savings accounts and CD’s just aren’t earning much. But there is a longer-term problem with these low yields. Today, I’ll discuss how lower interest rates affect your retirement.

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How Lower Interest Rates Affect your Retirement

For many, bonds are a significant part of your retirement nest egg. And, in my mind, there are three reasons to use them.

Reason 1: Less Volatility

Bonds reduce volatility. Think about what happened in March. The stock market fell over 30%. If you were 100% invested in equities, your account went down a lot! If you had 40% in bonds, the drop was much smaller.

Reason 2: A Place to Invest Your Future Income

Bonds give you a source of funds to generate your income. Selling stocks when they are down 35% to get your monthly check isn’t ideal. Putting your future income in bonds solves this problem.

Reason 3: A Way to Rebalance

Bonds give you a source of funds to buy stocks at better prices. Let’s say we get another big drop in the stock market in the next few months. I’m not saying we will, but if we do, you have a source of funds to buy stocks at those lower prices.

How Lower Interest Rates Affect Retirement
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Lower Risk, Less Return

Owning bonds will reduce your future long-term returns. They just don’t generate the results stocks do. For example, the Vanguard Total Stock Market Index fund has averaged just over 9% per year over the past 15 years.  The Vanguard Total Bond Market Index fund has averaged 4.3% over the same time frame.  Adding more bonds reduces the impact of a bear market.  But it also reduces your future returns.

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Low Yields Translate to Lower Future Returns

Last week, we talked about lower expected returns for stocks and how that impacts your retirement.   The current low yield environment also means we should expect lower future returns for bonds too.

In fact, Vanguard recently said we should expect bonds to generate returns of about 1-2% per year over the next decade. 

So if we expect stock market returns of 6.5% and bond returns of 2% here’s what happens.

This is a real challenge when you need your savings to create income and grow to keep pace with inflation.

Lower interest rates and yields could have a major impact on your retirement plans.  It’s worth having a conversation with a financial planner to see how it could affect you.

What do you think?  Add your comments below!

Lower Interest Rates Affect Retirement

 

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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What if Future Stock Returns Are Lower?

What If Future Stock Returns Are Lower?

How many times have you heard this, “The long term average return of the stock market is 10% per year”?  What if future returns for the stock market are less than average?  How would that impact your retirement?

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What if....

One of the things we all set out to do is use our retirement savings to create income. That income has to last as long as we do, and it needs to grow over time to keep up with inflation. Historically speaking, owning stocks has been the best way to help us do that.

Future returns using historical data

A lot of people create retirement projections using historical return data. They might use 10% for stocks and 4% or so for bonds. In that scenario, you should expect an account with 60% stocks and 40% bonds to earn 7.6% per year. A 50/50 mix should earn 7%. A more conservative 40% stock, 60% bond mix should earn 6.4%.

What if future stock returns are lower?

But what if over the next decade, stock returns were well below historical averages? Say only 6.5%? How does that impact how you plan?

Now that 60% stock, 40% bond portfolio would only have an expected 5.5% return. The 50/50 portfolio projects to earn 5.25% and the 40% stock 60% bond mix earns 5%.

That changes things quite a bit when you start looking at the income you can take and the risks of running out of money.

How likely are lower future returns?

Companies like Charles Schwab, BlackRock, and Vanguard all believe future stock returns will be below the historical averages.

Schwab believes future stock market returns over the next decade will be around 6.3%. Vanguard believes the returns will be similar at 6.5%. BlackRock projects 6.9%. 

Of course, they could all be wrong. Returns from stocks could be closer to the long-term numbers. But, you need to prepare for the possibility they are correct. And you also have to realize their guess about the future could also be too optimistic.

By and large, I’m an optimist. I expect stocks to act like stocks. But as a planner, it is important to prepared for something like this, especially if you are nearing retirement or just recently retired.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Ask A CFP: Are You Pessimistic or Optimistic?

Ask A CFP® Pro: Are You Pessimistic or Optimistic?

Today is the first episode of our Ask a CFP series.  Each month we will answer your questions about money, investing, and retirement.  The big question today: “Are you pessimistic or optimistic about where we are going?”

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Today's Questions

Here are the questions we answer on today’s show:

  1.  Are airline stocks a good buy? What’s the best way to invest?
  2.  My employer stopped matching my 401(k), should I also stop my contributions?
  3. Since my IRA has decreased in value, is now a good time to convert it to a Roth IRA?
  4. With businesses starting to reopen, is now a good time to buy stocks?
  5. Do you think we’ve seen the end of the bear market? Are you pessimistic or optimistic about where we are going?

What is your pressing question?

Do you have a question about money, investing or retirement.  Here is your chance to get straight answers from a Certified Financial Planner­™ Pro.  Click on the button to send us your questions.  We’ll answer it on an upcoming episode of our Ask a CFP show.  

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You can also ask your question in the comments section below!

Are you pessimistic or optimistic

 

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Are Card Rewards Worth It?

Are Credit Card Rewards Worth It?

Are credit card rewards such as cash back or travel perks worth it? Should you use multiple credit cards to get better rewards? 

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Are Credit Card Rewards WOrth it

On May 9th, the Marietta Times ran an article written by NerdWallet. “Why Family Loyalty Shouldn’t Apply to Your Credit Cards.”  It encourages people to shop for things like cash back perks and travel rewards. It also encourages people to consider using multiple cards to maximize those rewards.

Are The Rewards Worth It?

Are credit card rewards worth it? You know those frequent flyer miles or cash rebates for your purchases. For some people, the answer is yes. I’ve personally benefited from using travel rewards on my credit card purchases.

But there is a caveat. The rewards are only worth it if you pay your full balance each month.

The Basic Math…

You buy $100 worth of groceries. Your card gives you 2% cash back, so you get a $2 reward. If you pay your bill, it’s $2 in your pocket. But if you only make the minimum $10 payment, you’ll spend more in interest than your perks are worth. And that will happen in two months or fewer too

Are Card Rewards Worth It?

Should You Use Multiple Cards?

I think this adds more complexity than it’s worth. You have to keep track of more things, make more payments, and stay more organized. From my experience, simple is better, cleaner, and reduces mistakes.

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The Verdict: Good for Some, But Not Everyone

You have to be very careful with these so-called perks. They can be a perverse incentive. They can give you the rationalization to use your credit card, even if you can’t pay the balance each month. And they can cause you to spend more than if you were using cash or a debit card.

Are the perks and rewards worth it? For some, yes. But you must do it responsibly. If you can’t pay for all your purchases each month, the rewards don’t matter.

Worth it Credit Card Rewards
Card Rewards Worth It
Credit Card rewards

 

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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3 Questions To Help Evaluate Your Cash Flow

3 Questions to Help You Evaluate Your Cash Flow

The COVID-19 Pandemic forced a lot of major changes to our lives. IT has also created a unique opportunity to gauge how we spend money. Today, we’ll pose three questions to help you evaluate your cash flow.

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Questions To help Evaluate Your Cash Flow
3 Questions to Evaluate Your Cash Flow

A week ago, we talked about the importance of building your financial safety net. One of the first steps was to take a hard look at your spending. Today, we have three questions to help you evaluate your cash flow.

Question 1

Evaluate Your Cash flow

The things you really enjoyed—the activities that added value to your life, you’ll find a way to do them again. Eliminating the ones you don’t miss and the costs associated with them, can help you get your budget back on track.

Question 2

Questions to Help Evaluate Cash Flow

Was it that fancy cup of coffee, or breakfast sandwich on the way to work? Could it be something bigger? If you haven’t missed it when you were forced to stop buying it, you don’t have to start just because you can. You may find that many of those little things can add up to a lot of money each month.

Question 3

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When things get tight, we start to look at the details. It’s easy to identify the line-items on your bank statement that cause you stress. It could be the amount you spend eating out. Or, that pesky gym membership you don’t need or use. And then there are all those subscriptions. It could be something even bigger like a car payment.

Weigh the stress of those expenses now that times are tight to see the true value they provide to your life. If those two things are “out of balance,” take some time to clean them up.

Remember, there are no wrong answers to those three questions.

This pandemic forced us to alter our spending habits. In the process, it revealed what was essential, important, and truly valuable to our lives. And that can help us make better choices about money going forward. It can help us build our financial safety net and save for our future.

evaluate your cash flow questions
evaluate your cash flow questions
Questions to Evaluate Your Cash Flow

 

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Creating Your Financial Safety Net

Creating Your Financial Safety Net

As America begins to reopen, we can set our sights on what we need to do to get our financial situation back in order. What should be at the top of your list? In my mind, creating your financial safety net should be a high priority.

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Create Your Financial Safety Net

Some Disturbing Numbers

America is starting to reopen. Hopefully that means we will all be able to get back to work soon and begin your own financial recovery. But as you begin to focus on what you need to do, what should be your top priority?

The best place to start: your financial safety net. By this we mean focus on building a cash reserve and eliminating debt.

When we look at the some of the numbers we see some very disturbing statistics.

Lack of Savings…

According to gobankingrates.com:

  • Over 2/3 of Americans don’t have $1,000 in a savings account.
  • 45% have no savings at all.

Massive Consumer Debt…

According to NerdWallet, Americans owe more than $14 trillion
  • $466 billion in credit card debt
  • $9.5 trillion in mortgage debt
  • $1.3 trillion in car loans
  • $1.5 trillion in student loans

The “Average American” has no safety net!

Financial Safety Net

A Major Financial Crisis

When 30 million people lose their jobs, and millions more see their pay reduced, it is going to cause real problems very quickly.  This time, the government stepped in to provide some relief.  Many banks and lenders have been very understanding too.  But the next time you face a financial crisis, you may not be able to depend on the same measures.

Having cash allows us to keep the lights on, food on the table, and a roof over our heads.

Eliminating debt means we have less money going out each month. And this means the money we do have can go for what we truly need.

How Do You Do This?

We need to focus on how to avoid these problems if or when there is a “next time.”

How do you do this?  It’s simple, but not necessarily easy.

1. Take a hard look at how you spend money.

The past few months should have revealed what expenses are truly essential.  You will need to make some hard choices and big changes in the expenditures that aren’t.

2. Make saving a higher priority.

As things return to normal, make it a point to save something from each paycheck.  Aim to have at least $1,000 in a savings account to start.

3. Create a plan to eliminate your debt.

Focus on your car loans, your credit cards, and student loans.  One of the best ways to do this is to use the debt snowball created by radio personality, Dave Ramsey.

Your Financial Safety Net

Be ready for the "next time"

We don’t know when the next financial crisis will happen, and it may only be YOUR financial crisis.  Your financial safety net will mean a whole lot less stress and a lot less pain.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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4 Ways The Pandemic Could Impact Social Security

4 Ways the Pandemic Could Impact Social Security

Social Security is the cornerstone of retirement income for many Americans.  Have you wondered if the Coronavirus outbreak will impact your benefits? Here are four ways the pandemic could impact Social Security.

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The Covid-19 Pandemic and the Economy

The Covid-19 virus has turned the world and the economy on its head. The financial impacts are being felt far and wide. We have record unemployment claims, with nearly 22 million people out of work–so far. And Pew Research estimates 27% of American workers have seen their pay reduced.  Government response has also been extreme.  All of that will impact the future.

Most of the media focus has been on how this outbreak has impacted current workers. But it can also affect retirees. Here are four ways the pandemic could impact your Social Security benefits.

pandemic social security impact

Social Security does provide an inflation-adjusted income stream. But over the past several years those average increases have not been all that great. In some years, it hasn’t been enough to cover the increase in Medicare premiums. 

According to the Federal Reserve Bank of Cleveland, the current 10-year inflation expectation is less than 1.2% per year. If those projections hold, it means small benefit increases. In some years, it could mean your net check decreases due to rising Medicare costs.

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Pandemic Impacts Social Security

Depending on how long the economic shutdown lasts, many older workers could be forced to retire earlier than they expected. For many, this forces them to start Social Security earlier than their normal retirement age. And those discounts could be close to 30%.  

Social Security Impact pandemic

Social Security uses Average Indexed Wages to compute your Social Security benefits. The economic downturn means total wages earned in 2020 will be less. They could be a lot less.

This could impact how they compute your Social Security benefits. The end-result could be a smaller monthly payment. This will most likely impact those who are close to age 60.

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Pandemic Impacts Social Security

Right now, fewer payroll taxes are being collected. This places an extra strain on an already stressed system.

Prior to the pandemic, Social Security looked to be solvent until 2034. This means they had enough to pay the promised benefits. But the reduced tax collections could mean the problems could happen a year sooner.

Unless there are major changes, when Social Security reaches this point, benefits will have to be reduced.

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Far Reaching Impact

The coronavirus pandemic has affected more than our health. It has had a significant impact on many areas of our economy. And this includes your Social Security benefits.

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Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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