Halftime! A Wild Start to 2020

Halftime! A Wild Start to 2020

The coronavirus dominated the headlines.  It disrupted our lives, the economy and the stock market.  Today we’ll take a look back at what happened in the first quarter.  One thing is certain, It was a wild start to 2020.

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Episode outline:

Stocks

  • Both the first and second quarters were extreme
  • The first quarter:  Bad
  • The second quarter: Good, but not good enough
  • Stocks are still down year to date

Bonds

  • It’s where investors go when stocks struggle
  • Remember, when interest rates and yields go down, bond prices go up.
  • Long term bonds have bigger moves—much bigger

Gold

  • Gold is the “fear asset”
  • It shined in the first half

Pictures!

Stocks

US Stocks and International Stocks featured some extreme moves in the first half of 2020.

Bonds

Investors perceive bonds as a “safe haven” when there is trouble in the stock market.  Interest rates and yields dropped significantly in the first half, which means bond prices go up.  It was a good period for the bond market.

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Gold

Many people consider gold a fear asset. As a result, demand for the metal helped push prices higher in the first half.

Wild start to 2020

Comparing Year to Date Results

Bonds and Gold all generated positive results in the first half of 2020.  Unfortunately, stocks did not. 

A Wild Start to 2020
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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 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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4 percent

 

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Financial Planning

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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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Things continue to improve…

Things continue to improve

The pandemic shut down our economy earlier this year. Now America is slowly reopening. Here are some charts and data showing that things continue to improve.

From Liz Ann Sonders of Charles Scwaab…

From economist, Scott Grannis….

Airline passengers

things are continuing to imrpove

Gasoline Sales

things are cointuing to improve &nbsp

Service Sector Activity

things continue to improve Scott Grannis writes an outstanding blog, he uses a very data driven approach.  Check it out here.

From Economist Brian Wesbury of First Trust Portfolios…

 

Retail sales and food services

 
things are starting to improve

 

 

Industrial Production and Manufacturing Output

things are starting to improve

Mr. Wesbury also believes the recession is over. Read more here.

From Thomas Lee of fundstrat.com

And although this tweet is a little older, I still thought this was very interesting.      

There are still risks...

There are still risks ahead.  The pandemic isn’t over, and the risk of a second wave of infections remains a threat.  But every now and then, it is important to look past the bad news that dominates the media.  While we aren’t back to normal, things continue to improve.

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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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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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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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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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Are you pessimistic or optimistic

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pessimistic or optimisic

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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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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What the Heck is a V Shaped Recovery?

What the Heck is a V-Shaped Recovery?

With many states creating plans to reopen the economy, we keep hearing about the recovery. Experts continue to weigh in on what it may look like. But it leaves people wondering, “What the heck is a V-shaped recovery?” 

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If you hadn’t noticed, the American economy has come crashing down. Some people are estimating this will be one of the worst quarters since the Great Depression.

Now, the investment experts and economists are starting to focus on the recovery. And when they get on TV, you start to hear them say things like a V-shaped, or U- shaped recovery. I’ve even heard some talk about a “W” shape or an “L.”

What the Heck is a V-Shaped Recovery?

If you visualize the letter “V”, you see a steep decrease that comes to a point, followed by a steep increase. Think of this as a graph representing important economic data, like GDP, sales, or corporate profits. We’ve seen a rapid decrease in those data points.

V shaped recovery

Many hope that these numbers recover and improve just as quickly as they fell. And we’ll look back at those key statistics and see a “V” shape. This is the most optimistic scenario.

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The U-Shaped Recovery

A U-shaped recovery would see a sharp decrease followed by a gradual bottom. On the other side, the recovery would start slowly and accelerate as time moves on.

Recovery V Shaped

This would make the graph of those data points look more like a “U”. Not as good as a whole, but still not awful either.

A W-Shaped Recovery

V Recovery shape

You have some people worried about a “W” shape. And this wouldn’t be ideal. This would happen in this scenario. We reopen the economy, and things begin to recover quickly. As a result, we see the virus infections spike, which leads to another shutdown. And then the economy would restart at some point in the future.

This would not be ideal, but there is a risk of this happening.

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The L-Shaped Recovery

V shaped recovery

Perhaps the worst possible outcome is an L-shaped recovery. We’ve already seen the rapid decline. But in this scenario, the economic recovery would be long and very slow. A recovery like this could take years to return to where we were before this all started.

What Do I See?

I believe a U-shaped recovery is the most likely scenario at this point. The elected officials are going to reopen the economy at a very measured pace. People are going to be hesitant to spend, and it will take a while for demand to recover.

As much as I would like to see the V-shaped recovery, I don’t see it happening at this point. I am hopeful that we won’t experience a W-shaped curve. In that scenario, the governors would be a lot slower to reopen the economy a second time. And the damage from that would be even worse.

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What Do You Think?

What do you think?  We’d love to hear from you.  Leave your comments down below.

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Financial Planning

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors. 

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Is The Bear Market Over?

Is the Bear Market Over?

On March 23, the S&P 500 closed 34% lower than it’s all time high. Since then, we’ve seen prices rebound nearly 27%. It has many people wondering,  “Is the bear market is over?” Today we’ll pose 4 questions that will help us determine if the new bull market has started.

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From February 1 to March 23 we saw the stock market reach bear market levels at a rapid pace. It was enough to rattle even the most disciplined investor. Since then, we have seen prices race higher. The gain has been roughly 27%. It has us all wondering, “Is the bear market over”

Bear Market Over - prices

Today the official answer is “maybe.” In my view, there are still 4 questions which need answered before we know if it is “officially over” or not

1. Has the Market Priced in the Bad News?

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The stock market is forward-looking—to a point. The price movements factor in a lot of projections about economic and earnings data. But how do you project something this extreme and unprecedented? We’ve never seen the economy forced to an almost immediate halt before now.

2. How Bad Will The Data Be?

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Standard and Poors projects earnings for the companies in the S&P 500 Index. Their most recent data shows an 18% reduction in profits for the first quarter of 2020. And that number was lowered from a week ago.  How much will the actual numbers differ from those estimates?

Gross Domestic Product—that’s the value of output from an economy—will almost certainly be worse this quarter. But how much worse? Some predict the worst quarter since the Great Depression. Will it be that bad?

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3. How Will Investors React?

Is the bear market over

As a group, investors rarely react the right amount. There is a tendency to overreact on both extremes. In the dot-com era, we saw prices pushed irrationally higher. You could argue prices fell too far during the Great Recession too. How will people react this time?

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4. How Long Do We Suppress The Economy?

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The longer we keep the economy in an induced coma, the longer it will take to revive it. When do we reach the point where there is significant long-term damage to our economy? This may be the most important question to answer.

The End of the Bear Market

The bottom of this bear market could have been on March 23. If it was, we can celebrate—we are on our way to recovery. But we need to brace for the idea the worst of this downturn is yet to come. The market could drop further. If the data is worse than expected, it could drop a lot further.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.  

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Should I Take Money From My 401k Plan

Should I Take Money From My 401k?

“Should I take money from my 401k to help me get through these tough times?” That’s a question we received from a listener.  The CARES Act made some changes to these distributions.  But there are still some things you should consider. Let’s dig into the answer. (Read more below)

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It’s a tough time right now. We’re all trying to stay healthy. That has led to some very extreme measures. And those measures have created some financial hardships for people.

Mark sent us a question. He asked, “should I take money from my 401k to help me get through these tough times?”

How the CARES Act changed 401k distributions

Recently the federal government passed the CARES Act. It is a $2 trillion stimulus designed to help Americans weather this storm created by the Covid-019 virus.

One of the provisions of this act was to provide some tax relief for distributions from 401k plans and other retirement accounts like IRA’s.

Should I Take Money from my 401k

Normally, if you are under age 59 1/2 there is a 10% penalty for early distributions. The CARES Act now waives this penalty for those early withdrawals up to $100,000.

The act also allows you to spread the taxes from any of those distributions over 3 years.

Lastly, you can return those distributions to your IRA or 401k inside the three-year period as well.

Check Your With Your Employer!

Not every 401k plan allows for in-service distributions. Please check with your employer.

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But, should you take money from your 401k?

Now, this doesn’t answer Mark’s question. It shows that it is an option. Should you tap into your 401k (or IRA) to help you through these tough times?

Here are some things to consider?

Should I take money from my 401k

Your distribution is taxable…

The distributions are still taxable. Even though you can spread the tax bill over three years, and there is no penalty, there are still taxes due. Think of it this way, for every dollar you take out, at best you’ll only keep 85 cents.

You’re selling at lower prices…

The stock market is down significantly. Selling now, means you’re going to lock in those losses.

There is a future cost…

You worked hard to save it. Taking those funds from your account not only has a current cost, it has a potential future cost as well. You’ll miss out on the future growth. Over time that could be significant.

A last resort…

Withdrawing from retirement accounts should be a last resort. Unfortunately, a lot of people could reach those extreme situations. The government has at least provided a little relief if it gets that far.

Make sure you dig into your numbers before you make these tough decisions. If you need some guidance, talk to a financial planner.

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Is Retirement On Your Mind?

If you are 50 or older and you are thinking more about your retirement, we can provide a free Retirement Assessment.

  • No cost or obligation to you.
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  • A plan to make your retirement better.

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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.    

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