Ann was facing her next chapter in life. She was recently widowed and had been considering retirement. She wanted to live near grandchildren and downsize her home.
Almost all of Ann’s assets were in a company retirement plan, advised by the plan’s financial advisor. Because they told the advisor that they “didn’t want to lose money”, Ann’s allocation was 55% short-term bonds and 45% cash. She was eligible for a widow’s Social Security benefit but was reluctant to retire, fearful that she didn’t have enough money.
Ann’s fear stemmed from her thinking that she needed to preserve the capital and live off the interest. Our philosophy is that retirees don’t need to preserve all their capital for their heirs, they just need to not run out of money. Ann actually had enough to retire but it was too conservatively invested to meet all of her spending needs throughout retirement. Our layered risk approach allows clients to feel more peace spending in retirement. This is because we take modest risk with investments for the next several years of spending, then capture market returns with the majority of assets that can now remain invested long enough to go through market cycles. This also allows for greater spending over time to account for inflation.
Ann has since moved into her new home and is spending more time with her grandkids. She has the peace of mind to enjoy life knowing that her investments will continue to provide supplemental income with minimal short-term risks.
If you’re interested in discussing how we might help you, please give us a call at (404) 941-2800, or reach out to us here.
The S&P 500 Index® gained 15% in the first half of 2024. However, this gain was not as healthy as it appeared on the surface. The top 10 stocks represent more of the S&P than they have at any time in the last 25 years. Without the top 10 stocks, the remaining 490 names were up only 4%. We’ve written about performance disparities in several of our quarterly commentaries – large vs. small companies, growth vs. value, domestic vs. international. These types of disparities can’t last forever – either the rest of the market catches up or the top of the market cools down. We were happy to see some of the former this month, but we still find ourselves in a very concentrated market.
Many newer investors begin with index funds, such as those tracking the S&P 500. The S&P 500 is market-cap weighted, which means the largest companies in the index determine most of its performance. Today, the stock prices of these largest companies tend to move together – they are driven by similar factors such as enthusiasm over AI. So, a decline in one big name often drags the others down. Career Builders should think about broadening their investments (beyond the largest U.S. companies) to gain exposure to additional factors that tend to reward investors over time. Career Builders have the power of time on their side. Investing early in your career is always a good idea.
In addition to the issue of market concentration, there are beginning signs of a cooling economy. We can’t say that a recession is around the corner. U.S. economic growth continues, inflation is crawling lower, and consumer spending on services (travel, etc.) is strong. However, unemployment claims are rising. Broad consumer spending and housing sales are both slowing. Disinflationary forces are beginning to be felt and the earnings growth needed to support stock prices could become challenged. We advise Established Professionals to keep safer investments for money needed in the shorter term. But it is important to keep a long-term perspective for your retirement savings. Fear of the short-term and the emotional investment responses it can cause can be a major detriment to meeting your goal.
In a market trading at 24x earnings, some healthy caution is in order, but we’re not reducing stock exposure at this point. Despite the market’s concentration risks, overall corporate earnings should strengthen the remainder of this year and beyond. Over long periods, markets trend higher, even with downturns and corrections along the way. Our portfolios are structured to withstand these downturns, with money needed in earlier retirement years invested most conservatively.
There is still the question of how long interest rates will remain elevated. We expect to see inflation moderate, and the Fed lowering interest rates as early as September. This should allow capital-intensive businesses and commercial real estate borrowers to refinance at lower rates – feeding economic activity and supporting those smaller-cap stocks that have underperformed the largest companies.
Most 401(k) and other retirement plans offer Target Date Funds (TDFs) as a default choice. They have become increasingly popular for a few good reasons but are rarely the best solution once your accounts achieve some size.
Let’s look at how they work and whether they are the most efficient choice for you.
TDFs are a great choice for beginners, or when you join a new employer plan. There is usually a lineup of funds targeting retirement dates in increments of five or so years. The concept is that the fund becomes increasingly conservative as the target date approaches, but that is a one-size-fits-all approach that can’t take your unique needs into account.
So, when are TDFs not the best investment choice?
To start, all of your money is invested with one fund family, instead of getting different approaches and methodologies. These funds are also usually invested across all asset classes and industries instead of those best suited to the current economic environment. They also evenly spread bond exposure instead of actively selecting the most appropriate bond sectors.
The biggest challenge with TDFs is that you don’t want all your investments too conservative as you enter retirement.
Yes, you want to make sure that you have some conservative assets to draw from during rough patches, but you still need growth during retirement to keep pace with inflation.
Here are a few things to consider:
· Do you actively rebalance your accounts?
· Does your plan have tools to evaluate your allocation vs. your goals and timeframes?
· Do you compare what you own against what’s available?
· Have you considered the advantages of an IRA for funds in an old employer plan?
· Are you layering investment risks to match your goal timeframes?
Inflation is one of the major risks to retirement. We’re all living longer, and the things we spend more of our money on in our older years (healthcare, senior housing) have the biggest price increases.
The recent inflationary environment is fresh in everyone’s mind, but even 2% inflation (the Fed’s current goal) is a risk to a retiree’s spending power over time. In a simple example, a $100,000 lifestyle when you initially retire would cost you over $148,000 in 20 years, assuming prices rose at a constant rate of 2%.
Inflation can’t be controlled, but evaluating it within your retirement plan can help identify ways to mitigate it. Here are a few ways inflation can be considered.
Investment Allocation: Investing too conservatively may mean that your investments won’t meet your spending needs long term. You want to make sure that you have enough invested for growth to keep up with inflation. This is not a static allocation. Integras Partners’ investment strategies are designed to align with anticipated inflation-adjusted spending needs over time.
Investment Selection: Investment selection within your portfolio is also a consideration. For example, there are types of investments that typically keep ahead of inflation, such as companies with a history of dividend growth and real estate.
Social Security Claiming Strategies: Delaying social security can give you higher lifetime benefits, but factors such as health and longevity must also be considered.
Strategies to Offset Healthcare Costs: Healthcare costs can be significant at older ages, and costs inflate at higher rates than other spending categories. Evaluate long-term care insurance or how to best make use of an HSA.
Withdrawal Strategies: Withdrawing too much in early retirement years, or having to sell assets to meet withdrawals during down markets are major risks to the longevity of a portfolio. We dedicate a portion of investments to near-term spending needs (spending expected to occur within 2-3 years) using relatively conservative, liquid investments. Drawing from that portion of the portfolio allows longer-term assets to remain invested for growth, with the time needed to recover from market downturns.
Reaching certain ages can be meaningful for financial planning. Age can affect contributions and withdrawal rules from retirement accounts, social security and pension options, and even taxes as many aspects of the tax code are linked to age.
Here are a few significant ages and planning considerations.
50: Eligible to make catch-up contributions to retirement accounts
55: Eligible for penalty exceptions for certain withdrawals from employer retirement accounts
59 ½: Eligible for retirement account withdrawals without early distribution penalty; Potentially eligible to move money from an employer plan to an IRA while still working
60: Beginning in 2025, additional catch-up contributions allowed
62: Earliest age to claim social security (at a reduced benefit amount)
65: Eligible for Medicare coverage (pay attention to enrollment period, which opens prior to 65th birthday); Increase in standard deduction
67: Full retirement age for social security for most people (depends on birth year)
70: Maximum social security benefit is reached
70 ½: Eligible to make Qualified Charitable Distributions
73 or 75: Required minimum distribution age from retirement accounts (depends on birth year)
Integras Partners provides financial planning and investment management to our clients. We have a deep relationship with our clients and understand their needs and goals. The planning process is integral to investment allocation decisions.
