Category Archives: Financial Literacy

Feeling Financially Secure

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Northwestern Mutual Planning & Progress Study found that 71% of Americans feel financially secure, yet US adults feel more cautious and risk-averse today
than they did 10 years ago.  Additionally, xx% of U.S. adults 18 and over say the economy will be better this year than in 2018, which is a considerable jump from the 31% who said the same last year.

Those are great signs for the future. But they’re also great reasons to focus even more on your finances. Being financially secure takes a lot of planning – and when you are feeling more optimistic about the future, it’s a great time to think about paying off debt and putting more into savings.

https://news.northwesternmutual.com/planning-and-progress-2019

2020 Investment Outlook

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Investors should expect heightened market volatility in 2020. History tells us that it’s not uncommon for three to four large-cap equity stock market pullbacks of at least 5% to occur each year and market corrections of at least 10% can occur every year. As a result, it may be prudent for investors to position their stock portfolios away from higher-risk asset classes for safer asset classes.

Portfolio Guidance:

  • Cash has an important place in a portfolio as a volatility dampener and a source of funds.
  • Focus on higher quality assets.
  • Go beyond traditional fixed income for yield. Investors may consider equity dividends as another source of income.
  • Defense can be a good offense. Given expectations for market volatility, suggest reducing exposure to riskier assets.
  • Focus on longer-term diversification, as shorter periods are likely to be more volatile

Deciding to retire or not | 3 preretirement phases | Fidelity

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Key takeaways

  • While financial and work-related factors are the primary reasons people continue to work, nonfinancial factors like family, health, and lifestyle ultimately cause people to pull the trigger to retire.
  • Wellbeing in retirement is not just about money, or even intellectual stimulation. It’s largely about the freedom to do what you want, when you want.
  • As you enter a stage of preretirement, consider working with an advisor to help shape strategies for Social Security, health care, and cash flow in retirement.

When will you be ready to retire? Particularly if retirement is still far away, you’re probably thinking in terms of dollars—how many you will have and how long they will last. But new research finds that for many people, the decision to retire is not just about money. It’s about life, and the freedom to enjoy it.

That’s the conclusion of an extensive survey of over 10,000 pre-retirees and recent retirees. The online survey was conducted by Fidelity Investments in collaboration with the Stanford Center on Longevity and Greenwald & Associates1 and only included respondents who believed they had some control over if and when they would stop working full-time.

While financial and work-related factors are the primary reasons people continue to work, with eligibility for Medicare and Social Security as key factors, the survey also finds that it’s often nonfinancial factors like family, health, and lifestyle that ultimately cause people to pull the trigger to retire. Among retirees, 72% chose leisure as a very or somewhat strong reason to retire, 64% pointed to stress at work, and 62% cited a desire to spend more time with grandchildren.

“We’ve seen a shift in values as people near retirement,” says Eliza Badeau, Director of Thought Leadership at Fidelity. “Many people seem to desire freedom over money. It’s less about the money and more about spending time where it matters most to them,” she adds. “Most people say they look forward to the freedom that retirement brings such as spending time with their family or doing hobbies they enjoy—ultimately trading in that job stress for leisurely interests.”

Research finds that for many people, the decision to retire is not just about money. Discover 3 preretirement phases that are influencing peoples decision to retire here.

— Read on www.fidelity.com/viewpoints/retirement/time-to-retire

Burton Malkiel says his passive investing idea was called ‘garbage’ | CNBC

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  • Burton Malkiel said an early review of his famous book blasted his ideas about passive investing.
  • Malkiel’s book, published in 1973, influenced the thinking of many industry leaders who pioneered index funds, including Vanguard’s Jack Bogle.
  • Malkiel said there are still not enough investors taking advantage of passive strategies.

Investing is a method of purchasing assets to gain profit in the form of reasonably predictable income like dividends, interest, or rentals, and appreciation over the long term. Investing involves time period for the investment return and predictability of the returns.

Burton Malkiel, author of “A Random Walk Down Wall Street,” said the investment community thought his passive investing idea was “ridiculous,” Burton Malkiel said an early review of his famous book blasted his ideas about passive investing.

Malkiel’s book, published in 1973, influenced the thinking of many industry leaders who pioneered index funds, including Vanguard’s Jack Bogle. Malkiel said there are still not enough investors taking advantage of passive strategies.

The father of passive investing told CNBC on Thursday that the shift toward index funds has vindicated his ideas and that there is still too much active management. According to Malkiel, passive investing has outperformed ninety percent of active investing over a fifteen year period.

Burton Malkiel is an emeritus professor of economics at Princeton University and author of the famous investing book, “A Random Walk Down Wall Street.” He said on CNBC’s “Squawk on the Street” that his idea that most investors should invest passively was originally met with ridicule.

He believes that each investment has a firm anchor of something called intrinsic value. It means that when market prices fall down, a buying or selling opportunity arises. The theory of Investment Value determines the intrinsic value of stock and then use the concept of discounting in the process.

He also believes that discounting basically involves looking at the income backward rather than seeing how much money an investor has in the next year; an investor looks at the money expected in the future and see how much less it is currently worth. Intrinsic value of a stock is equal to the present or discounted value of all its future dividends.

Burton G. Malkiel is the Chemical Bank Chairman’s Professor of Economics Emeritus at Princeton University. He is a former member of the Council of Economic Advisers, dean of the Yale School of Management, and has served on the boards of several major corporations, including Vanguard and Prudential Financial. He is the chief investment officer of Wealthfront.

— Read on www.cnbc.com/2020/01/02/burton-malkiel-says-his-passive-investing-idea-was-called-garbage.html

Emergency Savings

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Emergencies Do Happen

When things are going well financially and monthly bills are being paid, emergency savings can seem unimportant. But in addition to your regularly occurring expenses, like mortgage payments and utility bills, individuals often might deal with major unexpected costs such as car repair or medical bills.

Emergencies, by their nature, are unpredictable. When they happen, they can derail your financial stability. A sudden illness or accident, unexpected job loss, or even a surprise home or car repair can devastate your family’s day-to-day cash flow if you aren’t prepared. While emergencies can’t always be avoided, having an emergency fund can take some of the financial sting out of dealing with these unexpected events.

An emergency fund are savings used to cover or offset the expense of an unforeseen situation. It shouldn’t be considered a nest egg or calculated as part of a long-term savings plan for college tuition, a new car, or a vacation. Instead, this fund serves as a safety net, only to be tapped when financial crises occur.

Reasons why emergency savings are important:

  • Being prepared – Issues like car or home appliance repair are common occurrences. However, since they do not happen regularly, people often overlook these costs as they create a budget. By anticipating these costs, you can be prepared for these potentially expensive items.
  • Avoiding debt – Emergency savings give you the option of dealing with the unexpected without having to take on debt. Without the cushion of emergency savings, you may be unable to pay regular bills if you face an emergency, and are more likely to take on debt.
  • Having peace of mind – Having emergency savings will give you peace of mind. Even if you can’t save much, a little money set aside may make a big difference when you need it and reduce stress. Emergency savings give you the option of dealing with the unexpected without having to take on debt. Without the cushion of emergency savings, you may be unable to pay regular bills if you face an emergency, and are more likely to take on debt.

Emergency savings can help you handle unexpected events. With money set aside for emergencies like unexpected car repairs or sudden job loss, you can better take care of yourself and your family financially.

But saving anything, even small amounts, can prove helpful. Aim to set aside 3-6 months of expenses in your emergency savings fund, but with a start smaller amount if necessary. It may take months or years to build a sufficient emergency savings fund, so don’t worry if progress seems slow. Just keep at it! Since, emergencies do happen when least expected and often at the most inopportune time.

Tap your emergency savings only for expenses directly related to an unexpected emergency.

It is important to tap your emergency savings only for expenses directly related to an unexpected emergency. And when you do have to take money from this fund, it’s important to immediately start rebuilding it.

If you start saving now, the money you save today can go a long way towards meeting your needs when the next emergency occurs.

Source: Building Emergency Savings, UMBC

Beta

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Beta is an assessment of a stock’s tendency to undergo price changes, or its volatility, as well as its potential returns compared to a market benchmark.

Beta measures how volatile a stock’s price may be in relation to a market benchmark, such as S&P 500. Beta relies on past stock price information and past stock price performance is never a guarantee of stock performance in the future.

A good beta calculation requires that the benchmark must be as related to the stock as possible.

A stock with a beta greater than 1 may indicate that it’s more volatile than the market benchmark. This could also mean it has the potential for stronger returns. Stocks with a high beta are more prone to swings than the market benchmark and can have greater returns than the market average. Conversely, stocks with a high beta also mean that they are riskier investments.

A stock with a beta equal to 1 assumes its price moves hand-in-hand with the market benchmark.

A stock with a beta between zero and one means that they are less volatile than the overall market. This means that the stock is less excitable than the average market. Such stocks can be reliable investments, because they are unlikely to generate losses, but they also won’t create significant gains. Low stock beta scores are common for investments like utilities.

Betas below zero or negative indicate that the stock may respond in the opposite direction of the overall market. Investors should expect the stock’s price to go up if the market benchmark goes down and vice versa.

A beta of zero suggests that a stock acts independently of the overall stock market.

Beta can be a useful metric to determine how a stock’s price may move in relation to the overall market by examining its past performance. It can also be a useful indicator of risk.

Retirement Planning

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It’s not retirement planning. It’s life (financial, physical and emotional health) planning.

For many people, retirement is a reward for decades of daily work—a time to relax, explore, and enjoy the life they dreamed. For others, though, retirement can be a frustrating period marked by loss of identity provided by the workplace, declining health and increasing financial, physical and emotional limitations.

Once upon a time, the decision to retire was easy for most Americans and, in many cases it was encouraged. At some time between age 62 and age 66, often at age 65 which corresponds with Medicare eligibility, Americans pilled the plug and retired from the workforce. We retired with Social Security benefits, a healthy pension, and some form of employer-paid health insurance. The question was not whether we would retire by age 66, but when between age 62 and age 66.

Today, for most working men and women, the decision of when to retire from the workforce is more complicated and more difficult. For many, the question is not when to retire, but whether traditional retirement is feasible at all. 

Planning for Retirement

Life is ten percent what happens to you and ninety percent how you respond to it.  – Lou Holtz

While Individuals increasingly have to take responsibility for their financial security during retirement, the majority of Americans do not appear to have done much retirement planning. Forty-one percent of respondents to a FINRA Foundation survey have tried to figure out how much they need to save for retirement, while 54% have not. The act of planning for retirement is a strong positive indicator of retirement wealth. 

Recognizing that many Americans are not familiar with the technical terms and distinctions used to describe various types of retirement plans, the FINRA Foundation survey employs plain-language questions to assess whether respondents have a retirement plan through an employer, and if so, which type (specifically, a defined benefit plan or a defined contribution plan, such as a 401(k)). In addition, the survey asks whether individuals have retirement accounts they set up on their own, such as an Individual Retirement Account (IRA), Keogh Plan, SEP, or other type of retirement account. More than half of all non-retired respondents (58%) have some kind of retirement account, either employer-based (for example, 401(k) or pension) or independent (for example, IRA). Despite a decades long bull market, GDP and the considerable improvement in Americans’ ability to make ends meet relative to 2009, the percentages of those who have planned for retirement or have a retirement account have not shifted much over the past decade.

Source:  The State of U.S. Financial Capability: The 2018 National Financial Capability Study, FINRA Foundation page 17

Additionally. U.S. Census Bureau data show an upward trend over the past 20 years in the percentage of men and women who remain in the workforce over the age of 65. For example, in 2008, 72 percent of employed men age 65 to 69 were working full-time, compared with 57 percent in 1995 and 56 percent in 1990, an astonishing difference. 

Source:  (http://aging.senate.gov/crs/pension34.pdf)Cdc-pdfExternal.

As contributing factors, economists cite a decline in traditional pension plans, a drop in the percentage of employers that offer retiree health benefits, and the impact of the economic upheaval on individuals’ and families’ financial security. Retiring on a nest egg and a fixed income becomes increasingly less desirable when the nest egg is cracked, retirement benefits are calculated in large part on Social Security, and the prospect of medical bills looms. 

Source: Howard, John, M.D., Director, NIOSH, From the Director’s Desk: The Gold Watch Decision, Volume 8 Number 6 October 2010. 

People are supposed to relax when they retire, not worry about financial problems. They are suppose to kick back and enjoy life since everyday should feel like a Saturday during retirement, and for the first time, they are supposedly in control of their day-to-day leisure and non-leisure activities. 

Unfortunately, Studies show that millions of retirees turn to alcohol for relief from boredom, a limited lifestyle and loneliness, but there are better ways to “living the dream” lifestyles retirees desire than through booze and drugs.   

Additionally, there are no guarantees with your physical or emotional health, just as there are no guarantees with your wealth.  But, you can stack the odds in your favor by making sacrifices today that are worth the potential gains in the long term.

A survey conducted by Fidelity Investments in collaboration with the Stanford Center on Longevity 1 provided several significant insights regarding why people decide to retire from the workforce.  While financial and work-related factors were many of the primary reasons people continued to work, with the age of eligibility for to start receiving Medicare and Social Security benefits standing as key factors, the survey also finds that it’s often nonfinancial factors like family, health, and lifestyle that ultimately cause people to pull the plug to retire. 

Among retirees, 72% chose leisure as a reason to retire, 64% pointed to wanting to escape the stress at work, and 62% cited a desire to spend more time with family and grandchildren, if they had them.  

One additional reason people decide to retire, especially for those living in metro Atlanta, site frustration with Atlanta’s infamous traffic congestion and the desire to escape the daily grind of the morning and afternoon commutes.

And, there are shifts in Americans’ values as they near retirement. Many Americans seem to desire freedom over money. They value spending time where it matters most to them and look forward to the freedom that retirement brings such as spending time with their family, volunteering or doing hobbies they enjoy. The ultimate objective is to trade job stress for leisurely interests.

Footnote 1:  The Fidelity Investments Decision to Retire research represents insights from a series of in-depth interviews conducted in Boston, Chicago, and San Francisco and from an online survey of more than 12,000 defined contribution plan participants record kept by Fidelity, ranging in age from 55 to 80 across all industries and income levels, who felt they had some control over their decision to retire. The research was completed in 2015 by Greenwald & Associates, Inc., an independent third-party research firm. Fidelity also worked in collaboration with the Stanford Center on Longevity on the study.