by Joe Hearn | Jun 21, 2013 | Investing
Quick note on a sale we’re having: You may have noticed that I recently opened a store at Intentional Retirement. Almost everything I do at the site is free, but I do have a few things for sale (and several new products on the way). To celebrate the opening, I’m having a sale on the current flagship product, the If Something Happens to Me Kit. Thousands of people have purchased the kit over the years as a tool to fill holes in their planning and organize their financial, legal and insurance affairs. Through Friday of next week (June 28), if you purchase the kit, I’ll throw in a free copy of my book The Bell Lap: The 8 Biggest Mistakes to Avoid as You Approach Retirement (normally $14). A few questions you might have:
Q: If I buy multiple copies of the kit, do I get multiple free copies of the book?
A: Yep. Buy some for friends and family.
Q: Can I forward this email to anyone I know who might be interested?
A: Absolutely.
Q: Will the free book show up in my order details when I place the order?
A: Nope, but it will be in the box when your order arrives
Q: What if I have some other question?
A: Just email me at joe@intentionalretirement.com or give me a call at 1-888-391-4344
And now a look at rising interest rates…
How rates got so low
In response to the global financial meltdown in 2007-2008, the Federal Reserve lowered short-term interest rates to historic lows in an effort to stimulate the economy. When that didn’t seem like enough, they started a program of “Quantitative Easing” where they began buying bonds in an effort to lower rates further.
As you might imagine, when a buyer shows up and says “Give me a few trillion dollars of those” the price of “those” tends to rise (more demand = higher prices). With bonds, when prices rise, rates fall. So as the Fed artificially pushed up prices, rates fell further. That was good news if you were borrowing money for a house. Bad news if you were trying to earn a little interest on your money market or CDs.
Investors responded to the 2007-2008 crisis by shifting a disproportionate amount of their money from stocks to bonds. Seeing your stock portfolio drop by half can go a long way toward making you a lover of all things fixed income. With everyone buying bonds, prices rose further and rates fell further. So that brings us to today, where rates are extremely low and most investors are overweight bonds.
What happens when rates rise (as they have started to do)?
Of course the Fed can’t keep printing money and using it to buy its own debt forever. “Wouldn’t be prudent” as Bush 41 would say. When the economy gets better, Bernanke has promised to take away the punch bowl. When that happens, the biggest bond buyer in the market will put away its checkbook and those artificially high bond prices will start to fall. As prices fall, rates will rise. Said another way, all those bonds that people have bought over the last 5 years could start to lose money.
How can I protect myself?
Chairman Bernanke came out this week and said that the economy is looking healthy enough that the Fed will likely wind down its QE program by the middle of next year. Right on cue, rates started to rise and bond prices fell. So how can you protect yourself against rising rates?
First, review your asset allocation. As I said earlier, many investors swore off stocks after 2007 and shifted most of their money to bonds. That could expose them to significant losses if bond prices fall. Look at your portfolio and see what percentage is in things like bonds, stocks and cash. Work with a trusted adviser to make sure that the balance is appropriate for your circumstances and risk tolerance.
Second, review the duration of your bonds. Not all bonds respond the same to rising and falling interest rates. Duration measures how sensitive a bond is to a change in rates. The higher the duration, the more sensitive the bond. If a bond (or bond fund) has a duration of 10, it will typically fall in value by 10% if rates rise by 1%. If it only has a duration of 3, it will fall by 3% if rates rise by 1%. It stands to reason then, that if you expect rates to rise, you should gravitate toward lower duration bonds.
Third, don’t panic. Markets tend to overreact. Rather than focusing on the daily headlines, the best recipe for a good night’s sleep is to make sure that you have a well balanced, diversified portfolio that is appropriate for your circumstances and goals.
Any other questions about bonds? Put them in the comments section below and I’ll do my best to answer them. Have a great weekend!
~ Joe
by Joe Hearn | Mar 21, 2013 | Happiness, Investing, Lifestyle Design
The retirement question most people seem intent on answering is “How am I going to pay for it?” That’s an important question, of course, but retirement is more than just a math problem.
In my opinion, we spend too much time thinking about how to get there (math) and not enough time thinking about what we’re going to do once we arrive (meaning). If you focus solely on your finances, you risk having a retirement that is cash rich and lifestyle poor.
Cash is great, but it’s not the end goal. Your money is nothing more than fancy paper that our government has created to make commerce and exchange easier. The end goal is not to have money. It’s to use that money to do things that you really care about; things that provide joy, meaning and fulfillment. If you do that, then money (contrary to popular opinion) CAN buy happiness. Let me show you what I mean. I’m assuming you’re all familiar with the mathematical proof: If A=B and B=C then A=C.
Applying that to our discussion:
- If money=control
- And control=doing what fulfills you
- And doing what fulfills you=happiness
- Then money=happiness.
Of course that transitive logic only holds true if you use the time you control to do what fulfills you. Which brings me back to my original point: If you want a meaningful retirement, then you need to treat your planning like more than just a math problem. You need to decide what it is that you really want out of life and use whatever resources you have and time you control to pursue those things. Are you doing that? If so, great. If not, spend some time thinking about what it is you actually want to do with all that money you’re saving.
Have a great week.
Joe
by Joe Hearn | Jan 7, 2013 | Asset Allocation, Debt, Investing, Retirement
Just like it’s a good idea to get a health checkup every year, it’s a good idea to get a financial checkup as well. Doing so can help you detect problems early (while they’re still treatable) and will also help you gauge your progress and make sure you’re on track for a healthy retirement.
To help, I put together this Financial Checkup Checklist with areas that you should be reviewing. Go through it and then touch base with me if you have any questions or there’s anything I can help you with. Have a great week!
~ Joe
by Joe Hearn | Dec 17, 2012 | Asset Allocation, Investing, Retirement
If you work with a financial adviser, it’s a good idea to get together at least annually to review your accounts. As we get ready to transition into a new year and as our government grapples with the issues surrounding the “Fiscal Cliff,” now may be a good time to call your adviser and schedule that meeting. Below are seven questions you can ask to make sure that your retirement planning stays on track.
Are there any actions I need to take before the end of the year? Most of the questions below can wait until next year, but for obvious reasons, you need an answer to this one before December 31. With changes expected to both dividend and capital gains taxes in 2013, review your holdings and ask your adviser what actions, if any, you should be taking before yearend. Also, if you are 70 ½ or older you will likely need to make a Required Minimum Distribution (RMD) from your retirement accounts before the end of the year.
How did my investments perform relative to their peers? It is difficult to gauge performance by returns alone. If your stock mutual fund drops 20 percent does that mean that it’s bad? Not if similar funds dropped 40 percent. When monitoring performance, it’s important to have either a benchmark or peer group that you’re measuring against. Your adviser should be able to review your holdings and see if the managers you’ve hired are earning their fee. If so, great. If not, changes may be in order.
Is my asset allocation still appropriate? Your portfolio is likely made up of a variety of different asset classes such as U.S. stocks, foreign stocks, small cap stocks, government bonds, corporate bonds and municipal bonds. How much you have in each area is referred to as your asset allocation. The balance will vary based on a number of factors such as your age, risk tolerance, goals and outlook for the global economy. As your circumstances change and as market movements alter your allocation, it is important to meet with your adviser and rebalance your holdings to get them back in line.
Is the amount of risk I’m taking still appropriate? Investing too aggressively can result in significant losses to your portfolio. Investing too conservatively can mean that your investments don’t keep pace with inflation. Either of those outcomes will reduce the purchasing power of your money in retirement. Work with your adviser to make sure that the amount of risk you’re taking is still appropriate for your circumstances.
Am I saving enough? There are a number of assumptions that go into calculating how much you need to save in order to retire. Even small errors in those assumptions can have drastic changes in the predicted outcome. Rather than making a plan and then waiting 20 years to see if it works, it’s important to make small adjustments along the way. With each new year, you have new information relating to things like investment returns, savings rates and taxes. It’s important to evaluate that new information and ask your adviser “Based on these new realities, am I still on track to reach my retirement goals.” If the answer is no, talk through any needed changes.
Is my withdrawal rate sustainable? Of course, this question is only appropriate if you’re already retired and drawing income from your portfolio. Running out of money is a major fear for many retirees. To avoid that problem, it is important to have a sustainable withdrawal rate. A suitable rate depends on a number of factors including investment returns, inflation, longevity and even luck. A popular rule of thumb is to limit withdrawal rates to 4 percent, but everyone’s circumstances are different, so work closely with your adviser to make sure your income lasts.
Do you recommend any other changes? A good adviser is realistic and honest. Rather than telling you what you want to hear, he or she is paid to give you straightforward advice that will help you accomplish your goals. Not only that, but a good adviser should be able to look at your total financial picture and offer comprehensive advice. Take advantage of that knowledge and experience and ask what, if any, other changes are necessary.
The annual review is an important element to the client-adviser relationship. It is an ideal time to evaluate performance and make necessary adjustments to help you reach your retirement goals. Pick up the phone and schedule a meeting today so you can start the New Year off right.
~ Joe
I originally published this article at www.fpanet.org.
by Joe Hearn | Oct 23, 2012 | Estate Planning, Investing, Retirement
As we age, our brains don’t work as well as they used to. This is particularly true when it comes to making financial decisions.
A recent study by the Texas Tech Financial Literacy Assessment project showed that our ability to understand financial concepts and make good decisions based on that information peaks in our 50s. After age 60, our abilities decline by about 2 percent per year. By age 90, the typical person has about half the cognitive financial abilities that they had at 65.
Ironically, the study also showed that our confidence in our financial decision making ability rises as we age. In other words, we get more and more confident even as we become less and less able. How does the old saying go? Often wrong, but never in doubt?
Since aging is a reality for all of us, what can we do to protect our finances from self-inflicted wounds? Here are a few suggestions:
- Hire a financial adviser that is trustworthy and younger than you.
- Have a trusted family member that you can take to meetings with you.
- As much as possible, have your finances on autopilot after 60.
- Have a financial power of attorney in place so that someone can step in to help you if needed.
In short, surround yourself with people you trust and don’t be afraid to use them as a sounding board as you make decisions with your money. Come to think of it, that’s good advice for any age.
~ Joe
by Joe Hearn | Aug 8, 2012 | Estate Planning, Investing, Retirement
“Plans fail for lack of counsel, but with many advisers they succeed.” ~Proverbs 15:22
As you approach retirement, there are five people who can make a big difference when it comes to your health, financial security, and overall quality of life. They are:
1. Your doctor
Getting old is inevitable, but aging doesn’t automatically need to be accompanied by poor health. Your doctor can be a great resource when it comes to maintaining a healthy lifestyle. He (or she) can advise you on eating habits and exercise routines. He can provide screenings, tests or procedures recommended for people in your age group. Should you have a colonoscopy? Should you start an aspirin regimen? Your doctor will know. He can also offer advice on how to prevent certain illnesses and can catch small problems before they become big problems. Of course, none of this will happen if you either don’t have a doctor or never go to see him, so make sure to schedule regular check-ups. Be proactive with your health and you will be in much better shape to enjoy retirement.
2. Your lawyer
You probably won’t need to see your lawyer as often as your doctor, but you should still be on a first name basis. Your attorney can help you draft a will (or trust) as well as legal and financial powers of attorney. Everyone needs those documents no matter how much or how little they have. Having your legal affairs in order will ensure 1) That your property passes to the correct people, 2) that the correct people take charge if you die or become disabled and 3) that things like expenses, hassles and taxes are minimized. Use this checklist to review your estate plan annually.
3. Your accountant
Your taxes in retirement will be significantly different than they were during your working years. Will working part time result in your Social Security benefits being taxed? How will distributions from certain retirement accounts be taxed? Does the state you’re planning on moving to tax retiree benefits favorably? How will owning property in two different states affect your tax bill? What if you plan on moving overseas? Your accountant can advise you on all these issues.
4. Your financial adviser
Because finances are the number one concern for most retirees, having a good financial adviser is a must. A recent study by LIMRA showed that people using an adviser were more likely to be saving for retirement and saved a higher portion of their income. A good adviser can boost confidence and provide guidance, education and planning to make sure you meet your retirement goals.
Even if you didn’t use an adviser in your pre-retirement years, you should consider hiring one during retirement. That’s because the issues facing a retiree are much different than the issues facing someone prior to retirement. Most people are familiar with pre-retirement issues like saving. They are usually less familiar with issues like cash flow management, pension payouts, retirement plan distributions, long-term care planning, dealing with Social Security and the tax consequences of certain distribution strategies. Those are post-retirement issues and most people would benefit from the help of a competent professional when dealing with them.
5. Your spouse
Chances are good that, without a job or kids competing for your time, you’ll be spending a lot more time with your spouse during retirement than you did during your working years. With that in mind, it’s a good idea to have some things in common and to always be nurturing that relationship. It’s also a good idea to make sure that you are on the same page with your spouse when it comes to plans for retirement. Here are some questions to get the conversation started.
How did you do? Do you have those key relationships in place? If so, great! If not, get to work. Having a good team in place will greatly increase your odds of a secure, healthy, rewarding retirement.
Touch base if I can ever help.
Joe
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