March 2018 Newsletter to Clients

Enjoy this month’s edition that features notes on the market’s performance in 2018 and options for retirement saving later in life. 

 

That happened so fast you may not have even noticed… The stock market just experienced its first correction (price decline of 10% or more) since 2015-2016. The correction was quite quick. It lasted from 1/26/18 through 2/8/18, or 13 days. The S&P 500 Index posted a total return of -10.10% over that period. Technically, it is not over because the index has not fully recovered the losses sustained in the sell-off. As of 2/26/18, the index had rebounded 7.84% from its 2018 low established on 2/8/18. While no one knows the short-term trends of the markets we remain optimistic long-term due to the strength of the economy and rising corporate earnings.

 

55 And Behind on Retirement Saving: It isn’t at all unusual for someone in their 50’s or even early 60’s to ask us for advice as they approach retirement with too little savings. As you might guess, there are as many reasons for being behind as there are people: a late start saving, frequent job changes, personal student loan debt, college expenses for their children, or just plain bad luck. Our first advice? Forgive yourself, your predicament is not about the past, it’s about the future. Let’s consider Joey’s story:

 

Joey is 55 years old and makes $80,000 per year. Joey spends almost all his money on clothes and sandwiches but decides he should probably get ready for retirement in 10 years. He has saved $150,000 in a retirement account and decides to save 10% of his salary, $8,000 per year, over the next ten years. Projecting average annual returns of 7% from a diversified portfolio, when Joey turns 65 he will have accumulated wealth of about $405,000. Using a reasonable withdrawal rate of 5% per year, Joey will have $20,000 per year for his expenses. Let’s add in Social Security: Joey will be eligible at age 67 and will draw $2,360 per month, approximately, at that age - $28,320 per year. 

 

Uh, oh, at age 65 can Joey live on that $20,000 rather than $57,600 per year in take-home income he is used to ($80,000 – $8,000 in retirement contributions - 20% for taxes = $57,600)? He will have to do that for 2 years until he can take that $28,320 per year in Social Security. 

 

At age 67, his income will be approximately $48,320 ($20,000 from his retirement plus Social Security) – still well below (16% below) that $57,600 per year he needs. So, how much will Joey need in retirement savings at age 65? He will need a total of about $585,000 plus Social Security to maintain his current lifestyle of $57,600 per year. That’s $180,000 more than he is projected to have in 10 years. 

 

Joey has four broad options: 

The power of compounding is real and is a great reason to start saving and investing at as young an age as possible to be able to achieve your financial independence as soon as possible. But, as Joey shows us, life doesn’t always go according to plan. So, if you find yourself in Joey’s situation, estimate how much you will need to have saved when you retire and develop a plan to get there…and start today!