This past month the retirement planners at Ruedi Wealth wrote five more “Finance 101” columns for The News-Gazette Business Extra Section. Make sure to look for them every Sunday, but in cased you missed any of the columns in January all five are below.
New Year’s Resolutions for Recent Retirees
Paul A. Ruedi
Three decades of helping people retire successfully has given me plenty of insight as to what many retirees need to work on. It is resolution season, and if you are a retiree struggling to find a resolution, I have a couple ideas for you.
My first suggestion for a resolution would be to get a financial plan or retirement income plan. Yes, that’s like the barber telling you that you need a haircut, but the peace of mind a lifetime retirement income plan can give a person, or a couple, makes this number one on my list of resolutions. As a retiree, you need to rely on your assets and income streams like Social Security benefits or pension income to make sure you always have money to fund the lifestyle you are accustomed to living. This requires a delicate balance, spend too much and you outlive your money, spend too little and end up the richest person in the graveyard.
This is made even more complicated by inflation, causing the cost of doing the same things to double or triple over a typical retirement. You need an explicit plan to address an increasing cost of living to ensure you don’t have to cut back your lifestyle in the future. Fortunately, there are many financial professionals here in town and also online services that can help you with this resolution.
My second resolution for retirees is to make sure to have an up-to-date estate plan. Estate planning is crucial, but it’s often put on the backburner. Review your will, and if you don’t have one, get one as soon as possible. If you need more control over how assets will be managed and distributed, you can consider different types of trusts. You will also want to make sure to check the beneficiaries on any accounts and make sure they still align with your wishes.
Fortunately, most estate planning is relatively simple and working with an estate planning attorney makes this process relatively easy and affordable. Just tell them what you want to happen if you become incapacitated or pass away, and they’ll draft the necessary documents.
Both a retirement income plan and an estate plan are essential pieces of the financial puzzle for retirees, but in my experience very few people have both. That is why they both make great New Year’s Resolutions for retirees. Make sure to seek out the appropriate professional if you need help with either of them.
Want to Retire in 2022?
Paul A. Ruedi
Would you like to retire in 2022? If so, you may want to begin the year with some back-of-the-envelope retirement planning to see if it is possible. This can be done in just a few steps.
The first step is to get an inventory of all your assets and income streams you can expect in retirement. This includes your investment accounts like 401(k)s, IRAs, and traditional brokerage accounts, as well as any other financial assets you plan to use to fund your retirement. You will also want to get a rough idea of the income streams you can expect, whether that be from pensions, Social Security, or other income streams like real estate rental income.
The next step is to get an idea of your spending needs throughout retirement. For many people, the best place to start is by getting a firm grasp on your current spending. I find that people often are more familiar with their monthly spending numbers, so it is often easiest just to take your monthly spending and multiply it by 12, then simply add in any extra annual spending items (holiday or present spending, or annual vacations for example).
The last step is to simply do the math to see if the assets you have can support the level of spending you need. This can be easy for inflation-adjusting income streams like Social Security, as every dollar provides for a dollar of ongoing spending. Income streams that don’t adjust for inflation, like fixed pensions, usually need to be adjusted downward to be more realistic. For example, I adjust a $3,000 per month pension that doesn’t adjust for inflation, down to $2,000 to account for the loss of purchasing power. You can then use the 4% rule and multiply the amount of your investment assets by 4% to approximate the annual spending you can expect from your investment portfolio.
If you tally up all your income streams and they exceed your required annual spending, you are on the right track. But as you can see, this is far from a perfectly precise process. It won’t tell you the exact dollar amount you can expect to spend in retirement. But it can tell you if have, for example, twice as much or half as much as you would need to retire. This can help set your expectations accordingly. If you want to find out exactly how much you can spend during retirement, you may want to talk to a retirement planner.
I Bonds
Ryan Repko, CFP®
Series I Savings Bonds or “I Bonds” for short, are designed to offer inflation protection to investors by providing a return that is made up of a fixed base rate, plus adjustments for inflation. With inflation on everyone’s minds recently, I have noticed a lot of renewed interest in I Bonds, but I have found many people aren’t really sure how they work.
I Bonds provide a fixed rate to investors, which is set by the government for all bonds issued over a certain period. This rate will not change over the life of the bond. In addition to this fixed rate, I Bond investors receive an interest rate equal to the rate of inflation, as set by the government every six months. The government bases this interest rate on the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy. This rate is constantly changing, which is what makes I Bonds so special, as they will adjust to whatever inflation happens to be.
I Bonds are considered a very safe investment, but for that reason the fixed rate component of I Bonds is usually very low, and has actually been 0% since May of 2020. However, with inflation running so high, the semi-annual inflation rate is currently 3.56% which means the composite annual interest rate for the bonds purchased over that period (and bonds purchased right now) is 7.12%.
Interest on I Bonds is paid semi-annually. Every six months the government will look at your bond principal value and provide you with an interest payment equal to the base rate plus inflation rate for that time period. This creates a new principal value that is then used to calculate the next interest payment. I Bond interest payments are not subject to state or local taxes, but are subject to Federal income taxes. You can choose whether to pay those taxes each year, or all at once when you sell the bond, or the bond matures.
Eventually investors will want to cash in their I Bonds, which they can do in as little a 12 months. However, if you cash the bonds in before they are 5 years old, you lose the last three months of interest as a penalty. I Bonds can be held for their maximum term of 30 years. Individuals can buy a maximum of $10,000 in I Bonds each year. This applies to each member of a couple, so couples can buy $20,000 each year. If you are thinking about investing in I Bonds but aren’t sure if they are right for you, you may want to talk to a financial advisor.
How Interest Rates Impact You
Paul A. Ruedi
Lately we have all heard a lot of concerned talk that the Federal Reserve seems poised to perform several rate hikes this year. Many types of credit are tied to the interest rate the Federal Reserve sets. For example, a mortgage may charge this rate (called the federal funds rate) plus a few percent. A credit card may use this rate but add more like 15%. Home equity loans, car loans, student loans, personal loans, loans on appliances – almost everything is tied to this interest rate.
When this rate rises, the cost to borrow money goes up across the board. This may not be a big deal for some types of credit. For example, if interest rates rise 1% and move credit card interest rates from 15% to 16%, that doesn’t really move the needle in people’s lives. But mortgage rates increasing from 3.5% to 4.5% can make a big enough difference to impact housing affordability.
Take for example a 30-year mortgage of $200,000, paid at the end of the month. At a 3.5% interest rate the monthly debt service (just principal and interest, not taxes and other costs that often get wrapped in) is $898.09. If you bump the interest rate up to 4.5%, that number increases to $1013.37. If you are looking for a home, higher interest rates, everything else equal, will make the same house less affordable. At the same time, rising interest rates may provide a silver lining in the form of cooling off a red-hot housing market.
When interest rates rise, all other things equal, the prices of bonds that are providing a lower interest rate must drop until they equal the rates of similar bonds in the market. Though this may seem like a disaster, rising rates enable bond investors to re-invest their money in bonds at higher interest rates, which can be a good thing in the long run. In fact, the historically low interest rates we have experienced lately have been considered a problem for retirees, as such low interest rates coming from the bond portion of their portfolio do not provide for very much spending.
Interest rates do have an impact on your life in direct and indirect ways. As interest rates are something investors cannot control, we have to play whatever hand we are dealt. If you aren’t sure how to play that hand, you may want to talk to a financial professional.
Catching a Falling Knife
Paul A. Ruedi
Financial people try to use cool jargon with everything. With the stock market falling lately, you may be hearing people suggest you should buy the dip, while others may caution that “you don’t want to catch a falling knife.” But what do they mean by this?
If a knife is falling and you try to grab it, it is imperative you grab it at just the right time. If you get overzealous and grab too early, you end up grabbing the blade of the knife and get cut. It is the same way with investing.
Catching a falling knife in the investment world is a difficult and dangerous game to play long term. That is because there isn’t a distinct floor at which a stock or other investment will stop falling. If you bought a stock when it had declined by 50%, that’s at a great discount, but there’s no saying that it can’t decline further.
So if the stock market is falling, when is the right time to buy to make sure you avoid getting cut by a falling knife? The answer is nobody really knows; but the good news is, you don’t have to know, to be a successful investor. The best thing you can do is remove yourself from the knife-catching game altogether by committing to a long-term, buy and hold strategy.
Invest money when you have money to invest, don’t worry about what the market has done recently, or will do in the near future. In the grand scheme of several decades of growth, these short-term price swings will wash themselves out. As I put it, I don’t know whether the next 3,000 points in the market will be positive or negative, but I take comfort in knowing that the movement of the next 30,000 points will almost certainly be positive.
If you have a large lump sum you have been waiting to invest, you may want to balance taking advantage of the opportunity to buy things when they are on sale vs. the possibility of things falling further. When our clients have a lump-sum to invest, we generally commit to investing small chunks over a specified period of time. But if we are gifted a decline in the price of the things we intended to buy anyway, we may speed up that buying process. If you find yourself struggling to invest because of the recent market decline, you may want to talk to a financial professional.
Disclaimer: Past performance is no indication of future results. You should not make any investment decisions without first performing your own due diligence and consulting your financial advisor.