The sharp market selloff in the fourth quarter of last year was partially caused by investor concern over an inverted yield curve. Just last week we saw another big drop as the curve inverted again. What is the yield curve and why are people worried about it? More importantly, how could it affect your plans if you’re at or near retirement and what can you do to protect yourself?
What is the yield curve?
When you get a loan, the interest rate you pay is based (in part) on how long you need to borrow the money. All else being equal, the longer you borrow, the higher the interest rate will be. The same is true when the government borrows. They pay higher interest on 30-year bonds than on 30-day bonds. If you plot out government bond rates (e.g. 1-year, 2-year, 5-year, etc.) and connect them with a line, that is the yield curve. In a normal economy, the curve slopes up and to the right, because as we just discussed, rates rise along with time to maturity.
Why is everyone worried about it?
As we just saw, a normal yield curve slopes up and to the right because long-term rates are typically higher than short-term rates. Once in a while, however, conditions are such that short-term rates rise above long-term rates. This is a warning sign that the markets are anticipating trouble for the economy and they expect the Federal Reserve to cut rates. When short-term rates rise above long-term rates, that graph we talked about earlier shifts from upward sloping to downward sloping. In short, it becomes inverted. This is concerning, because it turns out that an inverted yield curve is a pretty good predictor of recession.
Does an inverted curve guarantee a recession?
Not every inverted yield curve has led to a recession, but every recession we’ve had since World War II has been preceded by an inverted yield curve. So when the yield curve inverts, it’s worth paying attention to.
Is the yield curve inverted now?
The yield curve flattened for most of 2018 as the Fed raised short term interest rates and long-term rates stayed low. Then, during the fourth quarter, portions of the yield curve inverted. It wasn’t entirely inverted, but even having portions inverted is a red flag. Rates normalized a bit earlier this year (and the markets rallied), but last week portions of the curve inverted again when 10-year rates fell below 3-month rates.
If a recession follows an inversion, how long does it usually take?
An inverted curve is a good predictor of recessions, but they generally don’t happen right away. The average time between inversion and recession is about a year.
What does the stock market typically do after the curve inverts?
Markets will usually continue to rise for a period of time after an inversion. For example, markets rose an average of 35% after the last 3 inversions (1989, 1998 and 2006), before ultimately falling as the economy went into recession. And returns on the S&P tend to be above average for many months after an inversion. So yes, an inverted yield curve can signal a potential recession, but it can also signal a period of strong stock returns before the recession arrives.
What should investors be doing?
A yield curve inversion isn’t a perfect indicator and it’s by no means the only economic indicator. There are plenty of signs that point to a strong U.S. economy and as we saw above, markets usually continue to rise for a period of time even after an inversion. That said, it’s a red flag, as are signs of slowing economic activity in Europe and China. The best thing you can do is to make sure that you are invested in a way that is consistent with your risk tolerance, time to retirement, goals and overall financial situation. Then, even if things get choppy, you’ll be able to ride out the storm. For further ideas on what to do, read: Should you prepare for a deeper downturn?
The general idea behind retirement is to reach a point of financial independence where work is optional and you control your time. How fast you get there depends largely on how much you save and how much you need to live on during retirement. The math is pretty simple. The more you save and the less you need, the faster you will be financially independent. How can you ratchet up your savings and reach your goals faster? For some ideas, let’s look at the habits and tactics of super savers (people who save 30-50 percent of their take home pay).
How to save half your
First, let’s address the elephant in the room. “Wait Joe, Did you say 50 percent!?!” Indeed I did.
That might sound ludicrous to most of you, but let me prove to you that
it’s possible. Think about how much
money you make. Got it? Ok. No
matter what number you have in your head right now, there are millions of
people in the U.S.—some of whom no doubt are your friends, neighbors and
co-workers—living on half that. Say
your income is $100,000. Almost half the
country is currently living on half that.
Or maybe your income is $50,000.
There are tens of millions living on half of that. So living on half of whatever number you have
in your head right now is not only possible, it’s apparently pretty easy. Millions of people are already doing it. The trick is to spend like them, even though
you’re making twice as much. Do that and
your savings rate will skyrocket. Let’s
look at how super savers do it and then consider how to apply those lessons.
Strategies of Super
They focus on maximizing income. Super savers focus on income, not just expenses. They realize that the more money they make, the easier it will be to cover a comfortable lifestyle and still have plenty left over to save.
They avoid lifestyle bloat. Most people allow lifestyle bloat as they get older. As income grows, so do expenses. Bigger paychecks mean better houses, cars, vacations, wardrobes and gadgets. If you spend everything you make, you’ll never be financially independent. Super savers try to buy their freedom as soon as possible by capping their lifestyle and saving the rest.
They have clear priorities
and goals. Super savers understand
what’s important to them and what’s not.
They have clear retirement goals.
They have a vision for their future.
They know what they really want out of life and they are taking those
plans very seriously.
They are self-aware
and secure. Because super savers
take the time to think about what’s important to them, they are less likely to
make purchase decisions based on expectations, peer pressure, vanity, a pushy
salesperson or the need to keep up with the Joneses. Instead, they spend liberally on things that
provide them with a solid ROI and miserly on things that don’t.
They make things
simple and automatic. Super savers
automate their savings by having the money automatically deducted from their
paychecks and/or bank accounts.
They are organized
and intentional. Saving large chunks
of your income doesn’t just happen. In
fact, the path of least resistance is to spend everything you make. Super savers are disciplined and intentional
about earning, saving and spending. They
track their progress and regularly try to improve.
They have aggressive goals. I have a theory. Our collective failure to adequately prepare for retirement is partly due to the fact that our target (mid 60s) is so far out in the future when we start our careers. There’s no sense of urgency. Super savers have aggressive goals that don’t allow for complacency.
They use debt
sparingly. Debt allows you to bring
future purchases into the present. You
get the fancy doodad now in exchange for the promise to keep working so you can
pay for it over time. Super savers
understand this calculus. They realize that
you don’t add debt, you exchange future years of your life for it. And since they hold those future years dear
and want to control their time, they use debt very sparingly.
It’s not about the
job. For the most part, super savers
aren’t trying to quit working. They’re
trying to get to the point where work is optional and they have greater
leverage in choosing the type of work or other activities that they do.
How to buy your
I wrote this article, of course, in the hopes that it would
inspire some of you to ratchet up your savings rate and thus buy your freedom
faster. Here are a few simple ways to
apply the strategies discussed above.
Inventory. The first step is a quick inventory of your
current financial situation. The goal is
to get an overview of how much you earn and where that money is going. Grab a pay stub and calculate your annual
after-tax income. Make a list of what
you’re currently saving in your different accounts (e.g. 401k, IRA, etc.). Review your budget to see where you’re
currently spending. Again, the idea with
this is just to get a clear picture of how much money is coming in and where
priorities. Next, think about what’s
important to you. What do you actually
want to do in this life? When would you
like to retire and how much money do you need to fund that lifestyle? What goals do you have? What types of purchases do you view as most
worthwhile? The idea here is to define
your priorities and goals so you can allocate your resources more efficiently. You want to invest in things that are
important to you and stop spending on things that aren’t.
Set an audacious savings
goal. How much are you saving? Nothing?
3 percent? 10 percent? Whatever the number, set a stretch goal to
drastically improve your savings rate. Something
that will give you a sense of urgency and force you to put forth major
Track. I’ve been experimenting with savings rates myself for the last two years. To help, I created a simple spreadsheet that has a column for my income, columns for each of my accounts and a column for my mortgage. Then each time I get a paycheck, I list my after-tax income in the income column and then enter the amount of savings in each of the other columns (e.g. 401k, IRA, HSA, etc.). I’m trying to pay off my mortgage quickly, so I count extra payments there as savings.
Reallocate. Increasing your savings rate takes time because the extra money you want to save is already allocated somewhere else. In some cases, it will be easy to reallocate it. If you eat out regularly, but that isn’t a high priority, then stop eating out and send that money to savings instead. Other things take a little more time (e.g. paying off credit card bills) or more effort (e.g. lifestyle changes like downsizing your house). As you get rid of past indiscretions and reorder your priorities, your savings rate will rise and you’ll reach your goals faster. Not only that, but you’ll also be less stressed about money and more satisfied with your lifestyle because you’re spending on things that matter to you.
I’ve seen some disturbing data points recently:
- 78 percent of American workers report living paycheck to paycheck. This became very visible during the recent government shutdown.
- 40 percent of Americans said they couldn’t cover a $400 unexpected expense without going into debt. That number jumps to 60 percent for a $1,000 expense.
- A record 7 million Americans are 3 months delinquent on their car loans.
- In 2018, student loan debt hit $1.46 trillion and $166 billion of that is seriously delinquent. Both record highs.
- People in their 60s with student loans owe an average of $33,800 in student debt. They owe $86 billion total which is a 161% increase since 2010.
- People over 60 owed $615 billion in credit cards, auto loans, personal loans and student loans as of 2017. That’s an 84% increase since 2010 and the biggest increase of any age group.
- The percentage of bankruptcy filers older than 65 is higher than it’s ever been.
Whatever the reasons, we’re spending too much, saving too little and living on the bleeding edge of financial insecurity. Sure, everyone on Facebook looks like they’re #LivingTheirBestLife, but peer behind the curtains and there’s trouble. To make matters worse, all of this is happening at a point in time when the economy is in relatively good shape, unemployment is at multidecade lows and the stock market is near all-time highs. What happens if/when we have another recession?
I’m going to spend the next several posts discussing these worrisome trends and talking about how you can overhaul your expenses, save more and improve your retirement security. Today, however, I’m just giving you a friendly reminder. The general idea behind retirement is to reach a point of financial independence where work is optional. If you’re not on track for financial independence, you’re doing it wrong. Stay tuned over the next few weeks and I’ll give you some practical ideas on how to get there.
In January I wrote a lot about health. You can’t be unhealthy—mentally, emotionally, physically—and have a great retirement. While that’s true, it’s also true that you are fighting a losing battle.
No matter how much kale you eat or how many marathons you
run, your body is gradually breaking down.
Mine too. In science, this is
called entropy. Everything is moving
from order to disorder. You can slow the
process through your actions and decisions, but you can’t stop it. How should this affect how you live?
First, don’t let it depress you. Yes, your time is limited, but to paraphrase Seneca, you have plenty of time if you use it wisely. Second, stop waiting. Delayed gratification is overrated. Decide what you really want out of life and start taking those plans very seriously. Retirement isn’t about how many birthdays you’ve had or whether or not you punch a time clock. It’s an intentional way of living that prioritizes freedom, fulfillment, purpose and relationships. It starts today and is an incremental process of aligning your lifestyle and actions with your highest priorities.
Bottom line? Do
everything you can to get and stay healthy, but don’t stop there. Make the most of those extra years. Start today.
“We have two lives. The second begins when we realize we only have one.” – Confucius
Quick summary: Loneliness and depression are growing problems with the baby boom generation. In this article I talk about why that is, the problems that it causes and a few ideas on how to fix it.
Loneliness is the sadness you feel when there’s a gap (in
quality or quantity) between how much social interaction you have and how much
you want to have. Unfortunately, it’s a
growing problem among retirees. According
to the American Journal of Geriatric Psychiatry, loneliness affects between 25%
and 60% of all older adults. The baby boomer
generation reported the highest levels of loneliness and isolation. This is a serious issue because it not only affects
quality of life, but can also have severe health consequences. Why are retirees particularly susceptible to
loneliness (and depression) and how can you keep it from ruining your
As you age, there are a number of things that can affect the
quality and quantity of your relationships.
Death. Divorce. Leaving the workforce. Moving.
Physical changes, like arthritis, can affect your mobility and keep you
homebound. Common ailments like hearing
loss can make it harder to engage socially.
Women are especially vulnerable because they live longer and are
therefore more likely to be impacted by one or more of the previous risk
factors. What are some of the problems
that loneliness causes?
Loneliness affects more than just your happiness and quality
of life. It increases the risk of
depression, cognitive decline and dementia.
It weakens the immune system. It
increases blood pressure. In short, it
is linked to poor health and early death.
So let’s re-cap. Loneliness is
more common among older people and the side-effects are no bueno. How can you keep it from ruining your
retirement? I put several ideas below.
Work on your social
circles. A large study by Julianne
Holt-Lunstad of Brigham Young University found that those with greater social
connection had a 50% lower risk of early death.
Retirement is an amazing time, but it’s also a time where your social
network can undergo serious change. Some
of those are by choice (e.g. leaving work, relocating). Some not (e.g. death of a close friend or
spouse). Either way, you need to be very
intentional about making and maintaining relationships.
Use technology to maintain
your independence. Loss of
independence can have a huge impact on social interaction. If you can’t drive, you can’t meet a friend
for coffee. Thankfully, there’s
Uber. If you can’t hear very well, you’re
unlikely to attend social functions or join groups or organizations that
require you to interact and converse with others. Thankfully, hearing aid technology has improved
dramatically. Take advantage of it. I could give a hundred more examples. Unfortunately, some people are reluctant to
use these technologies because it’s like admitting that they’re “old.” That’s nonsense. We all grow old. We all experience health changes. Don’t let stubbornness or pride prevent you
from using technology to improve your quality of life.
Consider senior housing, an assisted living facility or CCRC. People understandably want to age in place and stay at home. It’s familiar. It gives a sense of independence. I get it. But if your physical limitations mean that your home becomes a place of isolation, maybe it would be better to move into a facility that is designed to provide social interaction, regular activities and assistance with issues that get harder as you age. People in these types of facilities report being happier and having higher levels of physical, social and emotional wellbeing. Most clients I’ve worked with over the years have viewed a move into one of these facilities as a positive, even if they were reluctant at first. In fact, I moved into one myself to see what it was like. You can read more about that here: So…I moved into an assisted living facility. Here’s how it went.
mentioned this in my article last week, but it bears repeating. Several large studies show that volunteering
can have positive effects on your health and well-being. One reason it’s so good for you is because it
provides lots of social interaction. Not
only that, but doing good deeds can reduce stress and lower cortisol levels
which can strengthen your immune and cardiovascular systems and ultimately
lengthen your life. Use some of your
extra time during retirement to volunteer.
Chances are it will make you healthier and happier.
Evaluate social media
use. Sometimes social media is a helpful
way to stay connected with your friends and supplement your in-person
interactions. Sometimes it’s a vortex of
negativity that breeds discontent and FOMO (fear of missing out). If it’s making you happier and more
connected, great! If not, don’t be afraid
delete your profiles and invest your energy elsewhere.
Join a local group related to your hobbies or interests. Like to garden? See if there’s a local gardening club. Like to golf or play pickleball? Join a league. Like to dance? There’s a group for that. Like to travel? Consider group trips through organizations like Road Scholar. As with most things, hobbies are better when you can add others into the mix for friendship and fun.
Entertain. Everyone wants and needs social interaction,
but too often they just sit at home waiting for the phone to ring. They’d jump at the chance if someone took the
initiative. You can be that
someone. As our daughter has gotten
older, we’ve invested a little money in our house so it will be a place where
her and her friends will want to hang out.
I’m guessing many of you did the same thing for your kids. There’s no rule against doing that same thing
in retirement. Be the person that has
dinner parties, back yard barbeques or movie nights. Take the initiative and you’ll likely have
plenty of people excited to participate.
Get professional help. If you’re lonely or depressed, get some
professional help. There’s no shame in
that. I’m not a doctor, but I have had
several close friends and family members who have struggled with loneliness,
anxiety or depression. In each case they
sought help (counseling and/or medication) and saw drastic improvements. For some reason, there is a stigma associated
with mental health in the U.S. No one
blinks an eye when someone seeks treatment for cancer or diabetes, but there is
reluctance to treat depression like the disease that it is. There are a number of effective
treatments. “Cheer up!” is not one of
them. If you need help, get help.
If you have any other thoughts or ideas, feel free to share
them in the comments section. Thanks for