Risk is everywhere. Most of the time we don’t realize it. But it’s there.
It’s always present and it’s everywhere.
Let’s think about just a few things that seemly come out of nowhere, but probabilistically we should expect several "unexpected" life events to happen to us and the people we love.
Here’s a short list of just some of the “risks” we might experience:
But most of us don’t think about all the things we will very likely experience in our lifetime. Some more serious than others, and depending on the nature of the circumstance, it can change our immediate plans or impact our life indefinitely.
With the COVID-19 pandemic, people the world over received an awful reminder of how risky life really is. Most of us were affected all at once, the risk of our health, our freedom of movement, our incomes, and in a period of just 4 weeks, the stock market wiped out the previous 4 years of returns. The precipitous drop provided a hard reminder of the nature of risk and uncertainty.
During the good times, it’s easy to forget that.
What’s the best way to predict the future?
The best way to predict the future, is to plan for it.
How do we do that?
Take a step wise approach to planning.
Example: What are the various health issues that you or a family member might experience? What would you do in each case? Who would do what? How would it be paid for? etc.
What are the various contingencies if you lose your job? How do you plan for this? What needs to be done today and in the near term to ensure that you can withstand this possibility?
Never forget the future is always unknowable. But with some thoughtful planning, you can dramatically reduce the impact of these various risks. You can also reduce your anxiety by having a well-designed process for dealing with these life events. Part of reducing the stress that some of these risks can bring, is understanding that it’s part of living and even with proper planning, somethings are just out of our control.
-Paul R. Rossi, CFA
You hear it all the time: You should make sure your retirement savings at least keep pace with inflation.
But what is inflation and how does it really affect your retirement savings?
Let's explore. In simple terms, inflation is defined as an increase in the general level of prices for goods and services.
If inflation is relatively high, say 10%, as it was in the late 1970's and early 1980's, then a loaf of bread that costs $3.00 this year will cost $3.30 the next year, $3.63 in two years, and $4.00 in three years. Historically, inflation in the United States has averaged 3.24% from 1914 through 2021. However, over this more than 100-year period, it has varied quite a bit, it reached an all–time high of 23.70% in June 1920 and a record low of -15.80% in June 1921.
In 2021, inflation went up every single month, which you no doubt already know. While moderately high inflation never is enjoyable, it’s still nowhere near what some other countries have experienced. Venezuela averaged 32.47% from 1973 until 2017, reaching an all–time high of 800% in December of 2016. Hyper-Inflation what Venezuela experienced is absolutely crippling.
So how does inflation affect your retirement savings?
The answer is simple: Inflation decreases the purchasing power of your money in the future, lowering your standard of living.
Consider this: at 3% inflation, $100 today will be worth $67.30 in 20 years, a loss of 1/3 its value. Said another way, that same $100 will only buy you $67.30 worth of goods and services in 20 years. And in 35 years? Your $100 will be reduced to just $34.44, which means you are losing almost 2/3 of your purchasing power.
How is inflation calculated?
Every month, the Bureau of Labor Statistics (BLS) calculates indexes that measure inflation: Consumer Price Index (CPI), a measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of the purchaser.
Producer Price Indexes (PPI), a family of indexes that measure the average change over time in selling prices by domestic producers of goods and services. PPI's measure price change from the perspective of the seller.
How the Federal Reserve Attempts to Control Inflation
Believe it or not, up until the early part of the 20th century, there was no central control or coordination of banking activity in the United States. In fact, the US was the only major industrial nation without a central bank until Congress established the Federal Reserve System in 1913 with the enactment of the Federal Reserve Act. With the Federal Reserve Act, Congress set three very specific goals for the Fed:
In order to help the Federal Reserve stabilize prices, Congress gave the Fed a very powerful tool: The ability to set monetary policy. And one way the Fed sets monetary policy is by manipulating short–term interest rates in an effort to control inflation. If the Fed believes that prevailing market conditions will increase inflation, it will attempt to slow the economy by raising short–term interest rates, reasoning that increases in the cost of borrowing money are likely to slow down both personal and business spending and therefore bring demand down which eases inflation.
On the flip side: If the Fed believes that the economy has slowed too much, it can lower short–term interest rates in an effort to lower the cost of borrowing and stimulate personal and business spending. The most recent example being the pandemic, the Fed stimulated the economy by lower rates to help stave off a major recession.
As you might imagine, the Fed walks a very fine line.
If it does not slow the economy soon enough by raising rates, it runs the risk of inflation getting out of control. And if the Fed does not help the economy soon enough by lowering rates, it runs the risk of the economy going into recession.
More recently the Fed has been targeting an "inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Fed's mandate for price stability and maximum employment."
What Investors Need to Remember
Understanding the powerful affect that inflation can have on your retirement nest egg, it is imperative that your long-term retirement strategies account for inflation. You should prepare for a decrease in the purchasing power of your dollar over time and should strongly consider assuming that inflation will be at least 3.24%. If you're wrong and you find that the inflation rate for the next 10, 20, or 30 years turns out to be less than 3.24%, then you'll be in even better shape than you had planned.
For some things in life, it pays to be conservative.
-Paul R. Rossi, CFA
Your portfolio may be designed to give you the best chance of achieving your financial goals but...
Unfortunately, the market doesn’t care about your goals and your risk tolerance.
Because the Market Has a Mind of Its Own
And a lot of the time, it can feel like the market is out to get you personally. Of course it's not, but it sure can feel that way. A key characteristic of a well-designed financial plan is the consideration of market volatility— and for good reason. It can shake even the most unflappable people. Building wealth over time may seem like a futile effort, but a well-designed financial plan can help you brave the ever-changing ebbs and flows of the markets.
A Living, Breathing Plan
A financial plan can give you a better idea of how to meet your goals. Any good financial plan is dynamic. People often see their financial plans as fixed in stone. You don’t want to wander too far away from your goals—but goals change. As your goals evolve, your plan must change too. Life changes can affect your financial goals as much as market changes. You may get a new job, enter a new tax bracket, buy a home, inherent money, need to care for an aging family member, have a baby or get a divorce, among the countless other life changes. What you can do is build a plan that accounts for the different scenarios that life could throw at you.
What Should You Do?
Your best first defense is to be aware of current trends by using the resources you have around you. With a prudent financial plan and the right supporting resources, you decrease the risk of being blindsided by unexpected factors that could negatively impact your financial situation. Focus on what you want to do with your money—not the trends and noise that could pull you off track. Having a clear vision of how you intend to invest and why. This is essential for making decisions that serve your larger financial goals. Knowing your investment philosophy will keep your eye on the big picture instead of market highs and lows.
Another thing that can derail your best-laid plans:
Y O U R E M O T I O N S
Emotions can distract from goals by driving you to deviate from your plan. Instead of letting market gyrations dictate your actions, always look to your plan for guidance. A good plan that’s carefully laid out in partnership with a good financial professional should walk you through various simulations, so you make rational decisions well before emergencies arise.
Sleep Better by Having a Financial Plan
There’s no way to see into the future, but there’s one thing you can predict: Markets will always be unpredictable.
It’s a financial advisor's job to collaborate with you on a thoughtfully designed plan that accounts for any issues that could derail your plan. This allows you to endure the inevitable bad times with confidence. So, if you have a plan, stick with it, and make sure it’s updated as your goals shift. If you don’t have a plan yet and are just focusing on investing advice, you’re missing out on the sense of security that a quality financial plan can provide.
The best way to predict the future, is to prepare for it.
-Paul R. Rossi
Planning Ahead Can Help You Live Your Life on Purpose.
The day before the AFC and NFC Championships were played on Sunday, ESPN broke the news that Tom Brady was retiring from football. Although, by the time Sunday night ended and football fans knew that the Los Angeles Rams and Cincinnati Bengals would play each other in Super Bowl LVI it was reported that Brady told the Tampa Bay Bucs he’s still not sure what he will do next year. He subsequently has confirmed that he is retiring, and many would argue at the top of his game. In his last year playing, he led the league in passing yards, passing touchdowns, and completions. He's won 7 Super Bowl Championships and is considered by many to be the best quarterback of all time. Impressive, and especially impressive for an athlete now in his 40's.
When planning for retirement, whether you’re a decorated NFL quarterback or not, believe it or not, similar concerns can arise. Planning ahead can spell the difference between a successful retirement with enough money and being in a healthy mental state, or a stressful retirement with difficult decisions and limited options.
As such, in a nod to Tom Brady’s seven Super Bowl rings, here are seven suggestions that anyone contemplating retirement should think about.
You may be close to retiring, but it doesn't mean that your planning stops, in fact it can become more important than ever. Talk to your financial advisor to make sure you are accurately planning for retirement, whatever that looks like for you, so you can sleep better at night. Especially on Sunday nights if there is no football for you.
-Paul R. Rossi, CFA
Paul R. Rossi, CFA