Retiring Early?

This is a stressful time in many ways for many people. The nature of work may be changing, and a lot of folks don’t have a clear idea on what the future will look like. A job may have been lost or might be at risk. It could be a coronavirus-induced temporary lay-off that winds up being permanent. Or maybe it’s simply that the current environment is making it harder to think about going back to the grind.

While we shouldn’t make major decisions out of fear, all this uncertainty can be difficult to bear. The Wall Street Journal recently reported that about 80% of Americans feel like the country is spinning out of control, so it’s natural to feel uncertain about retirement as well.

Research shows that almost half of folks retire earlier than planned, often because they’re forced into the decision by getting downsized, or health problems make it too challenging to work as they did before. If you’re thinking about (or being forced into) retiring early, here are some financial planning considerations:

Look at your income sources.

You can start drawing Social Security anytime between age 62 and 70, so that’s an obvious first place to look for income. About 1/3rd of retirees claim their benefits at 62 and roughly 60% start taking benefits prior to their full retirement age (FRA, currently somewhere between 66 to 67 for most folks).

The problem with starting before FRA is that your benefits get reduced for life, perhaps by as much as 32% (an 8% hit per year). And if you’re married the reduction isn’t just for your life, but your surviving spouse’s life as well. Ideally, you’d wait at least until FRA, but longer is better because under current law your benefit grows by 8% per year up until age 70.

Instead, the best place to look for income early in retirement is probably your investment portfolio. You’ve been saving money in your 401(k), IRA, and brokerage accounts for decades, so it cuts against the grain to start drawing it before Social Security. As counterintuitive as this sounds your investments, at least on average, aren’t likely to outperform the 8% reduction/bump from Social Security. They might have in the past, but our best guess is that they won’t in the future. Maybe it’s more like 5-6% for a balanced portfolio. Essentially, we want to try to maintain the 8%-earning asset (Social Security) as long as possible, ideally until age 70.  

What are you currently spending?

If you haven’t been tracking your spending now is the time to start. Lots of folks retire without understanding their current cash flow and find themselves coming up short. You’ll want to take a sober look at your spending and decide what can be cut if necessary. Maybe you can shave off a chunk each month to help fund your early retirement. Maybe nothing can be cut. Either way it’s critical planning information that you really don’t want to guess at.

There are apps to help with this of course, but I favor pouring over bank and credit card statements. I feel closer to the information that way. Six months of statements is a good start. Just be sure to look at enough so that you feel it represents reality.

What about healthcare?

Assuming you’re retiring before enrolling in Medicare at age 65, you’ll likely need to pay for your own health insurance until then. You’ve probably already guessed that it’s expensive, but you’ll want to find out how expensive.

Your soon-to-be former employer will likely allow you to stay on their health plan if you pay full price. This lasts at least 18 months and is part of the government’s COBRA legislation from years ago. COBRA might not be your best option, however. You might qualify for government subsidies or simply choose to enroll in a more modest plan. Either way, you’ll want to do so within 30 days (or 60 in some cases) to avoid a lapse in coverage.

Once you determine your options, you’ll want to give this information to your humble financial planner for inclusion in your plan. Then you’ll mark your calendar for age 65 and Medicare enrollment, an event that almost always offers a sizeable savings.

Ponder how long you’ll be out of work.

While obviously tough to know for sure, it’s important to ask yourself how long this retirement phase could last. Will it mean no more work forever? Or, maybe you plan to go back to work part-time after taking a breather? Planning on absolutely zero income for the rest of your life is much more expensive than planning to have income at some future point. People often go back to work in some capacity and doing so later in life can help “pay” for retiring earlier than planned. Don’t limit your options by thinking you’ll never earn money again.

Stress-test your retirement plan.

All the above and more gets added to your plan and then the whole thing gets stress-tested multiple ways. Then we tweak it some more and test it again. Doing so let’s us understand how likely your new plan is to be successful. It also helps answer questions regarding when to start Social Security, the importance of going back to work at some point and what you need to earn, how well your investments need to perform, and so forth. It takes work but it’s doable.

The bottom line is that even with all the uncertainty we’re experiencing, you may have more flexibility than you realize if you plan well.

Have questions? Ask me. I can help.

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The Changing Face of Planning?

It’s been a little more than three months since the stock market craziness began and just over two months since the lockdown started. So much has happened since then it seems like a year already. I recently heard someone with an impending birthday joke that they’re skipping this year because they didn’t use it. I don’t know about you, but although I’m optimistic about the rest of this year part of me agrees with that sentiment.

These have been some of my most challenging months in business. Challenging not just in the sense of day-to-day work, but also mentally. As I’m sure has been the case for you, the last few months have been stressful and worrisome for me. So much uncertainty and so many mundane aspects of life upended. Following virus news has been a task all by itself, not to mention all the market and economic updates. But while much of this has been negative, enough has been positive that I’m hopeful about the future.

There are signs, although some are only barley flickering, that we’ve passed through the worst of the market impact of the virus and maybe also “the bottom” for our economy. If history is any guide there’s a strong possibility for a second shock to stocks in the coming months, but hopefully not nearly as bad as we saw in late-February and March.

The economy may also be starting its long slog out of the hole we’re in. Some have referred to their expectations for a “V-shaped” recovery, but it’s likely to look more like what others have termed a “Nike Swoosh” recovery. If you think about it a moment that makes intuitive sense: a deep drop followed by a long and hopefully steady ascent toward normalcy. I don’t know anyone reasonable who expects this process to be quick. And that’s just the financial aspects of recovery.

As markets and eventually the broader economy recover the social impacts of the pandemic will take longer to play out. We’ve been told to expect a “new normal”, but what will that look like? Will everyday life experience a V-shaped recovery, or will something like social distancing linger long after the effects of coronavirus wear off?

From my own little corner of the world I’m wondering how concepts like this will ultimately impact the nature and business of financial planning. Surely, planning has never been more important, even in the face of extreme uncertainty. Recent events may have forced your plans to change, or your perspective may have shifted during this crisis. One of the many things our current predicament has revealed to me is that the way we work together needs to be more flexible.

I’ve never been one to drag clients into my office so they can hear about things that are important to me but less so to them. This is why I don’t make clients come in every quarter, or even every year, if there isn’t a specific reason to do so. So much these days can be accomplished through phone, email, and now video conversations, that coming into the office seems less essential.

Though nothing beats in-person communication, the way we accomplish it is changing. If you had not heard of video conferencing before, you now know all about it. Tens of millions of Americans have been getting a crash course in the technology during this crisis. Face-to-face communication through the medium of your smartphone or computer monitor is now so popular and convenient that its likely to stick around. The trend had been growing steadily in recent years but, as with so much else these days, coronavirus has accelerated adoption.

Case in point, I’ve sparingly used screensharing and video with clients for a while but have been generally slow to adopt the technology. I’ve now used it more in the last few months than in the last five years combined. It’s just too convenient and helpful. We get to meet from wherever you are, with no concerns about traffic or parking. We can see each other’s screens to share information and, as the mood strikes you, can even see each other.

As it turns out this morning marks the second conference I’m attending virtually this month. In recent years I would have spent today and tomorrow in San Francisco and the other conference would have been in Denver. Both are now in the comfort of my office, my house, even I my car. While I have no intention of going entirely virtual with clients and hope to get to physically go to a conference again soon, video is a powerful and convenient way for us to communicate that should make your life easier.

I love financial planning and working with you to ensure your long-term success. The difficult times in my career have only served to confirm this, and the current crisis is no exception. As we move forward out of this pandemic together, I want to ensure that I’m being flexible enough to meet your changing needs. Leveraging video is a natural outcome of this.

Additionally, here’s a mildly optimistic article from The Wall Street Journal. As stated at the end, our ultimate path forward is dependent on the path of the virus, but it’s good to see economic activity perking up a bit.

Have questions? Ask me. I can help.

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What to Sell for Cash

This week let’s look at a question I’ve received from a number of clients recently. The question has several variations but revolves around a central theme: What do we sell to generate cash when stocks are down?

This question isn’t about trying to time markets or reacting to media-driven uncertainty and fear. Instead, it’s a practical one where folks are trying to fund their living expenses in retirement, or perhaps they have larger expenses coming up and will soon be in need of cash.

As we all know, stocks plunged mid-February through April, but an upsurge has followed. Some stocks have recovered half (or more) of their losses, so thinking about selling and taking a breather from risk can seem obvious. But while this might make good intuitive sense it’s probably a bad idea for the long term.

We never want to be forced to do anything and it’s no different when it comes to investing. I’d much rather have options and asset allocation (your preferred mix of stocks, bonds, and cash) provides some good ones at times like these. While the stocks in your portfolio have been taking a hit lately, your bonds have likely been performing well, even for the last year or more. This provides a good opportunity to do something counterintuitive: not selling stocks when they’re down – selling bonds instead.

The typical core bond fund is up around 4% this year and perhaps 10% over the past 12 months. There are several reasons for this, but the bottom line is that if you’re looking for cash to spend from your portfolio, bonds are probably best to sell first. Longer-term bonds have been up the most, followed by medium-term and then short-term. You can pick from these funds in that order to help meet your spending needs. An exception to this would be high-yield, or “junk bonds”. This category tends to behave like stocks during volatile times and have done poorly lately. These would be the last bonds to sell.

If you’re retired, hopefully you have at least a few years’ worth of spending needs stored in bonds. But assuming you end up spending all your bond money, then you might be forced to sell stocks before a full recovery. If you’re finding yourself in this situation now, as with deciding which bonds to sell, there’s a priority to consider.

Small-cap stocks have performed the worst in recent months, followed by mid-caps. This is mostly due to these smaller publicly traded companies being local (domestic, not large multinationals) and investors assuming these businesses would be hit hardest by national lockdown orders, cratering consumer demand, and so forth. Large-cap stocks (the multinationals) have fared the best lately, with the Large Cap Growth category being the best performer by far.

So, which category of stocks do you think you’d pull cash from first? You might look at small-caps and want to unload those because they’ve done poorly, but it’s likely better to sell large-cap funds first, especially the growth-oriented funds. This latter category has many of the big healthcare and tech names that have been able to weather this storm best. They’re the cleanest dirty shirt, so to speak, in your stock portfolio and would be the best to sell first should there be a need.

If you’re selling bonds and stocks in your retirement account, you don’t need to worry about capital gains taxes. But if you’re selling in your non-retirement, or brokerage account, then capital gains taxes are a consideration. Assuming you “harvested” losses during the past couple months, you can use those losses to offset any gains from selling bonds. If you haven’t yet harvested, maybe now is a good time.

Additionally, you may notice that aggressively selling bonds and then picking off your stock funds also upsets your asset allocation. If you started out with 60% of your portfolio in stocks and the rest in bonds and cash, you could find yourself getting ever closer to having 100% of what’s left invested in stocks. While that’s not something you’d necessarily sign up for initially, it’s sometimes what you need to do if you’re living off your money and stocks are down for a prolonged period (which is certainly possible moving forward from here).

The idea with this more practical take on asset allocation would be to let yourself get off track with your preferred allocation but then rebalance back to normal when markets have stabilized. Since we’d hopefully only be pulling money from your bonds, we’d be able to leave your stocks alone and let them fully recover, even if it takes multiple years. This is absolutely preferable to feeling forced to sell stocks when they’re down. Doing do, as we all know, locks in your losses and makes it much more difficult to recover from a market downturn.

Have questions? Ask me. I can help.

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Challenging Times Indeed

Greetings from your humble financial planner. While everything is still steady as she goes here at Ridgeview Financial Planning, we all sure have a lot to be concerned about these days. But as I trust is also the case for you, I have hope that before too long we’ll all be feeling a sense of normalcy and optimism again.

With all that’s going on out there in the world, and even in our hometown, it simply doesn’t feel right spending this week’s blog diving into planning and investing topics. I plan to be back next week with our regularly scheduled programming.

Until then, I wish you and yours the best during these challenging times.

If you’re interested in the meantime, here’s a link to a good article from Schwab’s Chief Investment Strategist, Liz Ann Sonders. Liz Ann touches on the market’s seeming disconnect with Main Street and provides a general outlook for stocks. I’d summarize as follows: The stock market is not the economy, so it often behaves differently. The stock market also doesn’t care very much about civil unrest or social issues unless and until it impacts corporate earnings. Stocks are a little overextended given how much prices have come up following their coronavirus lows in late-March. As I suggested recently, a short-term pullback should be expected.

Take care out there.

Have questions? Ask me. I can help.

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Tapering Into Retirement

There’s a slow but growing trend of workers thinking about a phased approach to retirement. The idea is that instead of working full tilt to some predetermined age and then quitting cold turkey, you start backing off from the 40+ hour work week earlier. Maybe you cut your week down by a day for a few years, followed by another and another until you’re eventually fully retired. You’d get more time with family, friends and your favorite activities, but also more years of income. I refer to this as tapering into retirement, but you can call it whatever you like.

While this might not meet the standard definition of retirement, and certainly not the “corporate” definition, it’s what would probably work best for most people. Many folks haven’t saved enough to retire early but don’t necessarily want to work full-time forever either. Part-time jobs during retirement can help with this, but people aren’t looking for just any job. Many simply would like to keep doing what they’re currently doing, only for less time and with less stress. Having three-day and then four-day weekends on a regular schedule would be nice, right? Maybe it helps strike a balance between wanting to slow down a bit while also remaining relevant and engaged in the workforce.

Tapering would also probably work best for most companies, even though it cuts against the grain. Employers large and small would get to keep their intellectual capital around longer while also making room for the next generation. Employers could (and probably should) keep these tapering employees on their benefit plans. The cost would likely be covered by the pay differential between those tapering and the younger staff members taking their place.

The tapering concept also makes sense from a technical planning perspective. While there would be less income during the beginning of the tapering process, the worker would probably continue working longer by avoiding burnout. This leads to more income for the household over time, fewer draws from retirement savings, delaying taking Social Security, and so forth, all of which helps shore up one’s retirement plan.

Perhaps the massive reconsideration of work and the workplace going on right now will cause Corporate America to wake up to new thinking about transitioning employees into retirement. Only time will tell, but at least one concept seems clear: the slow shift to virtual work has accelerated dramatically. This might help pave the way for would-be taperers.

Along the lines of tapering into retirement, check out the following article, “Losing the Retirement Assumption”, by Mitch Anthony, a thought leader in the financial planning industry.

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Filtering Out the Noise

There is a ton of information flying around out there. Understandably, it all seems to be tied one way or another to the social and economic predicament we’re all in. This makes sense given how uncertain things are right now. The information that gets under my skin a bit, however, comes from those seeking to profit from the uncertainty and fear that permeates the minds of many investors. They get folks riled up and then offer a pre-packaged solution… an age-old trick that does more harm than good.

An example comes from writers of investment letters that seem to perpetually peddle doom and gloom. They write about the fall of the global financial system, how the stock market will eventually crash, or how the dollar will no longer be the world’s currency of choice. They write this so often, and for so long, that eventually some aspects of their predictions are bound to come true, even if by pure coincidence. Some even go so far as to claim they saw the current pandemic and economic impacts coming. They point to years of negative commentary and predictions to say, see, I told you so! What they don’t tell you, or at least not clearly, is that their commentary and recommendations often line their own pockets, either through sales of proprietary products or referral fees.

My problem with this kind of thing is that the information may have entertainment value, but it’s not very helpful for guiding investors through a crisis. Instead, I’ve found perseverance easier to muster when we rely on thoughtful evidence-based analysis and strategies that have been proven over long periods of time. This route is less sexy and can be harder to “sell” but is probably going to work out better than latching onto whatever the latest investment fad is.

Along these lines, the following is a thoughtful piece providing perspective on the current situation and the prevalence of doom and gloom soothsayers. It’s geared toward financial advisors, but I think the content and messaging is appropriate for all investors. The author does call out an investment letter writer by name. I don’t think it’s necessary to the overall tone of the article, so I’ve removed reference to it. A link to the full article is available at the end should you want more information.

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