Forget the 4% guideline in these low interst rate times

Based on past investment returns a 1994 study found one could expect their retirement assets to last 30 years if they took out no more than 4% each year, adjusted for inflation. If you aren't familiar with the 4% guideline for withdrawing assets in retirement, search for 4% rule in this blog. The problem with following this guideline today is that interest rates on bonds and stock returns are much lower than when the study was conducted.

The 4% rule doesn’t apply in today’s low-interest world, said retirement researcher Dr. Wade Pfau who is the author of several books on retirement planning and spending.

"The 4% rule is a rule of thumb that says you can withdraw 4% of your portfolio value each year in retirement without incurring a substantial risk of running out of money." “But interest rates are so low today that’s it’s tough to get up to the 4% withdrawal rate without risking running out of money,” Pfau said."
"Low interest rates are not the only risk to clients’ retirement today, Pfau said. Significant market losses as well as continuing market volatility and uncertainty also can destroy a client’s retirement portfolio. In addition, sequence of returns risk – or the timing of withdrawals from a retirement account – also is a factor in a client potentially running out of money. Withdrawing money early in retirement during a down market means that a retirement account balance may never recover."

Pfau listed four ways to manage volatility and longevity in retirement. They are:
1.    Spend conservatively.
2.    Spending flexibility.
3.    Reduce volatility.
4.    Use buffer assets – avoid selling at losses. Examples of buffer assets are cash, cash-value permanent life insurance and a line of credit on a reverse mortgage.

Annuities can be a good way for retirees to overcome low interest rates, Pfau said. “Annuity mortality credits are not affected by interest rates, and that makes annuities attractive in the low-interest rate environment,” he said.
Putting some of the retirement portfolio in an annuity can enable retirees to increase their withdrawal rate while managing risk, he added.


Get the details from writer Susan Rupe: https://insurancenewsnet.com/innarticle/low-interest-rates-challenge-retirement-investors#.Xqjgq5l7mCg

What to do if you lose your health insurance?

Too Many Americans are losing their health insurance along with their jobs. One of the many perils of our peculiar method of providing most health insurance (note that insurance is different from health care). Virtually all industrialized nations provide some form of health care to their citizens. The US stands alone.

Medicaid may be your best bet... if you can qualify. Every state is different. For your kids, the Children's Health Insurance Program (CHIP) is an option. You can apply for Medicaid at any time. To find out if you are eligible and to apply, go to https://www.healthcare.gov/
Or go directly to your state's Medicaid website.

Affordable Care Act If you lose your health insurance you may be able to sign up right away for ACA coverage without waiting for the annual enrollment period. You need to sign up within 60 days of losing your coverage so don't delay. In most states you can use the Healthcare.gov website https://www.healthcare.gov/ to enroll. While the premiums may seem high you may be eligible for a federal subsidy. Deductibles may be high as well.

COBRA allows you to stay on your employer's health plan for up to 18 months by paying the premiums yourself. Don't delay as you have 60 days to sign up after losing your job. Expect the premiums to be much higher than the share you were paying while your employer subsided your coverage.

A Family Member's Plan You may be able to get coverage under your spouse's health insurance. But jump on this quickly as you have only 30 days to sign up. Call the employer to get the details. If you are under 26 you can be added to a parent's health plan.

Short-term Plans If none of the above options works for you then consider private health insurers' short term plans. You will need to prove insurability (good health) and the cost may be high for meager coverage.

How to survive a bear market

"Investors can survive a bear market the same way hikers survive an encounter with a bear: Remain calm and don't make sudden moves" as Wall Street Journal writer Jason Zweig advised on April 4-5, 2020.
See: Staying safe around bears: https://www.nps.gov/subjects/bears/safety.htm

Consider your entire portfolio, including your human capital and Social Security benefits.
as Zweig explains: "your expected social Security payments are like a giant phantom annuity."  Any defined benefit pension plan is a similar (but not inflation-adjusted) annuity. Thus, your total portfolio is bigger than your 401(k) statement and less exposed to the stock market.

Don't know what an annuity is? Search this blog for the answers. 

Now may be a good time to consider converting  traditonal IRA to a Roth IRA, paying taxes now for tax-free income in the future.

How I learned to stop worrying and love the bear market

Spencer Jakab, writing for The Wall Street Journal (3/28-29/20) explains:

A surprising share of a new bull market’s returns pile up in its very early stages, when the average investor is at their most fearful 

"Investor psychology in a major bear market is a mirror image of what it was the past few years: The more false alarms there were on the way up, the likelier investors were to embrace risk, viewing dips as buying opportunities. On the way down, so-called suckers’ rallies... get our hopes up and then crush them."

"A surprising share of a new bull market’s returns pile up in its very early stages when people are most fearful. Take the one that ended last month. Putting $100,000 into an S&P 500 index fund on the day the bull began on March 9, 2009 and selling at last month’s peak would have seen that turn into $630,000 including dividends. Waiting just three months to make sure it wasn’t yet another head fake would have earned you only $450,000."

"If you wait for happy headlines or hopeful government statistics for a clue for when to pounce, you’ll be too late. Stocks typically rally before a recession is over." 

"Making lemonade out of the market’s lemons sounds tempting, but it isn’t easy. The old saw goes that the stock market is the only one where people run away when there’s a sale. Beforehand they crowd in when the wares are most expensive because they see everyone else getting rich. For example, in the 10 months leading up to the last market peak in October 2007, a net $84 billion flowed into equity mutual funds according to the Investment Company Institute. By contrast, a net $233 billion flowed out from June 2008 through March 2009, the heart of the bear market when stocks became screaming bargains."

"If the last month truly convinced you that you had too much money in stocks to sleep well at night then take your lumps and dial back your risk permanently. But if you’re merely waiting for a sign that it’s safe to buy again then just hold your nose, increase your allocation to equities, and learn to love bear markets."

So you think you're going to time the market and jump in when things look good

Forget about it! The stock market lurches up and down in dramatic gains and losses with no warning!
No bell rings at the bottom of the market signaling it's time to buy!
Some recent examples, among the gut wrenching downward drops:
March 27, 2020 the Dow Jones Industrial Average jumped 12.8%! in one day!
April 9, 2020: the DJIA leaped 12.7%.
This was the index's best rally since 1974 (before many investors were born).
there were only 7 days in all of the stock market history that the market rose at a faster rate.
The stock market (whether measured by the DJIA or the broader S&P 500 largest companies) can swing wildly in one day. It does not increase or decrease gradually. Due to computerized trading, it's NOT individual investors or individual professionals deciding to buy or sell on any given day. So much of trading is based on algorithms that automatically buy and sell based on computer models.

So... what does this mean for individual investors:
Don't have money in the stock market that you will need in the next 5 years.
Have a serious talk with yourself about your risk tolerance, time horizon, investment goals, and, especially for retirement investors, your capacity for risk.
Risk capacity is different from risk tolerance. How secure is your job? does your spouse/partner have a secure income? are you single? Do you have a mortgage? How much debt do you owe?
Besides, plenty of evidence has demonstrated that investor risk tolerance is NOT stable but increases with rising (bull) markets and plummets with falling (bear) markets. Those risk tolerance quizzes that investment pros require you to fill out... not worth the paper they are printed on.
What did you do with your investments during the financial crisis of 2008-09? 
Don't make short sighted decisions based on the hype of today's stock market report.

Remember that investment losses inflict twice as much pain as similar dollar amounts of gain provide pleasure. Losses hurt twice as much as gains feel good, even when the potential loss is relatively small and doesn't pose much risk.  This is the concept of Loss Aversion. Loss aversion explains why too many investors sell at the bottom of the market and wait to resume investing until prices have risen, often above what they sold their investments for in order to avoid a loss. They locked in a loss by not understanding their own risk tolerance and investment psychology.
A market decline is an opportunity to buy stocks when they are on sale. Why is it that individual investors love to buy when stocks are overpriced? Buy a case load when the product is on sale.

Instead of trying to time the market, invest a set amount each month to add to your portfolio, regardless of the price. Practice dollar cost averaging. 

Work with a trusted financial adviser who is a fiduciary and committed to putting the client's needs above their own.
Determine a realistic asset allocation for the long run and stay the course. 
P.S. Good luck with that!

Who manages the money in a relationship?

Common wisdom tells us that the partner who is most knowledgeable about money becomes the  money manager. Sounds logical.
But that's not what researchers Adrian Ward and John G. Lynch both psychologists and marketing professors found.
Examining 313 couples early in their relationship, they asked about financial literacy, credit score, income, and time spent on household work. They found NO correlation between financial abilities and who became the household chief financial officer (CFO). They found that the person who had more time and hated the task less was the one who took the responsibility.
In another larger study the researchers found that after 5 years the financial CFO develop significant financial literacy while the non-CFO deteriorated in their financial skills.

Other researchers have found that people develop financial expertise on a "need to know" basis more readily than through a formal course.

Many marriages of long duration end in widowhood or divorce, often leaving the less knowledgeable partner wishing they knew more about the couple's finances.

Source: "Deciding who becomes the CFO of the home" by katy McLaughlin, WSJ,4/10/10.

Coronavirus: How to help and why it's good for you

Writing for The Wall Street Journal (4/17/20) Michelle Ma writes: "When you're down, help others."
"Psychologists and stress researchers have long understood the mental and emotional benefits of doing good."
Research by Dr. Emily Ansell demonstrated that "performing compassionate acts, even small ones, can help mitigate the negative effects of stress on an individual's mood and mental health."
Benefits of helping others: 

• distract us from our problems
• increase our sense of purpose and meaning
• reduce the impact of stress on our bodies
• increase feelings of self-efficacy and control 

Things you can do to help in the time of coronavirus:
donate blood redcrossblood.org or americasblood.org
donate to your local homeless shelter or food pantry (they need $ more than canned food)
sew face masks to donate
donate PPE to your local health care facility (getusppe.org)
volunteer at your local food pantry
Check out: mutualaidhub.org

Be kind and generous to front-line workers who may be under presuure and putting themselves at risk!

• Tip more 
• Be patient
• Show empathy and gratitude

A Simple Global Market Portfolio

A Simple Global Market Portfolio consists of "all stocks, bonds and other assets that are readily tradeable. This is the mix of investments that’s owned by all investors worldwide and reflects our collective judgment of what different securities are worth" writes Jonathan Clements in the Humble Dollar weekly email. Sign up at https://humbledollar.com

You can build this portfolio with "five exchange-traded index funds: 40% Vanguard Total World Stock ETF (symbol: VT), 21% Vanguard Total Bond Market ETF (BND), 33% Vanguard Total International Bond ETF (BNDX), 5% iShares Global REIT ETF (REET) and 1% Invesco DB Commodity Index Tracking Fund (DBC). The Vanguard Total World Stock ETF currently has 57% in U.S. stocks and 43% in international markets."

According to Clements, "it’s the ultimate “neutral” investment mix and hence should be our starting point in designing a portfolio." Stray from this basic mix for  the following reasons: "time horizon, job security and stomach for market turbulence."

Worried retirement savers and retirees should consider annuities

Expert: Worried retirement savers should buy annuities

People planning to retire this year should buy an annuity to guarantee future income now because annuity payouts that have been falling because of declining interest rates could fall further, says retirement income expert Wade Pfau "The simple income annuity can fit in for anyone who's panicking about the stock market [and economy]," he says.

Full Story: ThinkAdvisor (free registration) (4/14) 

Why is US stock market doing OK while the economy is tanking?

Investors flock to US equities

Investors worldwide are looking past economic data and coronavirus statistics to seek haven in US equities. Emerging-market equities are the cheapest against the S&P 500 in 12 years, while the MSCI USA Index is near a 20-year high against the rest of the world.

Full Story: Bloomberg (tiered subscription model) (4/16) 

Skippiing mandatory RMDs... the details

Skipping a mandatory distribution from your IRA? Everything you need to know

Wed, Apr 8 2020 by Darla Mercado

"This year, the coronavirus relief law is letting savers bypass mandatory withdrawals from their retirement accounts."  The one-year reprieve enables those who can afford to leave the money invested a better chance of recovering losses.

Key Points

• The coronavirus relief bill allows savers to bypass any required minimum distributions they must take from their IRAs and workplace retirement plans in 2020.
• This RMD delay also applies to beneficiaries of inherited IRAs.
• A bonus: You don’t have to withdraw from the account during the current market rout.

Temporary relief applies to: traditional individual retirement accounts, 401(k), profit-sharing plans, 457 accounts, and 403(b) plans).

Additional details from the WSJ:
People who took required distributions since Feb. 1 may be able to use the so-called 60-day rule to return the money. To qualify, you normally have to put the money back within 60 days of receiving it. But the IRS allows anyone who took an RMD between Feb. 1 and May 15 to return the money by July 15.
The IRS reprieve doesn’t help retirees who took RMDs in January and want to put that money back in the accounts... unless the IRS issues more relief. Stay tuned.

In addition, the Secure Act, which took effect at the start of 2020, raised the RMD start age to age 72.

Get the details at: https://www.cnbc.com/2020/04/08/skipping-a-mandatory-distribution-from-your-ira-what-you-need-to-know.html

Excellent financial weekly email newsletter

Your Money: Every week, get tips on retirement, paying for college, credit cards and the right way to invest.

It's free so sign up today.

https://www.nytimes.com/newsletters/yourmoney?campaign_id=12&emc=edit_my_20190624&emc=edit_my_20200413&instance_id=17606&nl=your-money&nl=your-money&regi_id=83720664&segment_id=25000&te=1&te=1&user_id=bde4c6c63beab087f13b761e1ee9fe1e

Resources for Families During the COVID-19 Pandemic

Faculty members and graduate students in the University of Maryland Department of Family Science
have created several resource guides for families and children in the context of the COVID-19 pandemic. These guides aim to support parents who may be struggling with how to communicate to their children in an
age-appropriate way about this unprecedented global pandemic.

Resource guides include:

Department of Family Science-curated Online Resources for Families and Children
How to Talk to Toddlers and Preschoolers about Coronavirus
How to Talk to Your School-Age Child About Coronavirus
How to Talk to Teens About Coronavirus
Managing Family Stress During the COVID-19 Pandemic

Available at:
https://sph.umd.edu/news-item/resources-families-during-covid-19-pandemic

Investing Facts of Life

Facts of Life

Jonathan Clements  |  April 4, 2020

THE PLOT, THE SCRIPT and the characters may have changed. But we’ve seen this movie before.

The current stock market swoon strikes many folks as unprecedented: It’s the frantic financial sideshow to a devastating global tragedy—one that’s seen 1.1 million people fall ill and 60,000 die, with every expectation that the numbers will be many multiples worse before the COVID-19 pandemic is over.

Yet, on closer inspection, 2020’s bear market doesn’t seem so different from earlier market declines. Once again, we’re being reminded of some crucial facts of financial life. Here are seven of them:

1. Our risk tolerance isn’t stable.

2. Losses wreak havoc with compounding.

3. In Treasurys, we should trust.

4. Bonds are less risky than stocks—except when we go to trade.

5. If we wait for stocks to get cheap before buying, we’ll likely wait an awfully long time.

6. To earn handsome long-run returns, we must run the risk of severe short-term losses—and those losses occur with brutal regularity.

7. If an investment offers high expected returns, there must be high risk—even if we can’t figure out what that risk is.

Read Clements full comments on his blog which I highly recommend. 

Quoted directly from The Humble Dollar Blog:  https://humbledollar.com/2020/04/facts-of-life/?utm_source=mailpoet&utm_medium=email&utm_campaign=another-ses-test_7

Trying to decide when to claim Social Security retirement benefits?

The coronavirus has upended lots of financial lives and may result in job loss that will affect retirement plans. It is absolutely critical that you make a wise, informed decision about when to start collecting Social Security retirement benefits. Don't just jump to claim as early as possible, typically age 62. An excellent tool to help you decide costs only $40 and is well worth every penny.

Check out Maximize my Social Security at: https://maximizemysocialsecurity.com/

• Find the best strategy to maximize lifetime benefits
• Making correct decisions can mean tens of thousands in extra retirement dollars
• Our state-of-the-art software helps you choose the right benefits at the right time
• Developed by Laurence Kotlikoff, Boston University Professor of Economics 

Free "Your Money" newsletter from The New York Times

Your Money: Every week, get tips on retirement, paying for college, credit cards and the right way to invest. Trustworthy answers to all your financial questions in the time of coronavirus.

See sample: https://static.nytimes.com/email-content/MY_sample.html

F.A.Q. on Stimulus Checks, Unemployment and the Coronavirus Plan

‘This Isn’t a Dry Run’: How to Be Ready for More Financial Pain

Young Adults, Burdened With Debt, Are Now Facing an Economic Crisis

For Small-Business Owners, Hard Decisions Become Personal

Your Money: A Hub for Help During the Coronavirus Crisis

If your income has fallen or been cut off completely, we’re here to help. This guide will connect you to the basic information you’ll need to get through this, including on government benefits, free services and financial strategies

Can’t Pay Off Your Credit Card Because of Coronavirus? Your Bank May Be Able to Help.

More workers than usual might not be able to pay their credit card bills right now. Luckily, some banks are providing a sliver of relief to customers who are struggling financially, whether by waiving late-payment fees, deferring interest charges, or not reporting missed payments to the credit bureaus. Wirecutter has the details.

 

No help from Trump to sign up for subsidized health insurance

Obamacare Markets Will Not Reopen, Trump Decides

The move would have made it easier for people who have recently lost jobs to obtain health insurance.

Thanks Potus... always thinking about those who elected him...NOT.

Federal Income Tax Filing Deadline Extended 3 months

You Have an Extra 3 Months to File Your Taxes. Should You Wait?

If you’re owed a refund, it may be better to file quickly. 

You can also file your return now but wait until July 15 to pay any taxes owed.

Why postpone the inevitable. If you expect to owe taxes, file now and pay later. You may need time to figure out how you will pay.

If you expect a refund... file now and use the money for critical expenses if you've lost your job or expect to lose income. 

Now may be ideal time to convert a trditional IRA to a Roth

Investment losses in this unprecedented market decline have been brutal. But keep in mind that if you've been invested during the almost 11 year long bull market you may still be ahead.
To survive this coronavirus bear market consider converting part or all of a traditional IRA to a Roth IRA. Any amount that you convert will increase your taxable income for 2020 but the market decline and possible job loss or income decline may have reduced what you expected to earn this year. The benefit is that you will pay taxes now on a much reduced value of your traditional IRA and the Roth IRA will NOT be taxable when you withdraw funds in retirement.

Due to the 2017 income tax cuts many people will pay lower taxes this year than in the future after they retire.
Asset values are greatly reduced from the peak in mid-February 2020.
Income tax rates are scheduled to increase in 2026 when the 2017 tax cuts expire. Remember? A sunset provision was written into the 2017 tax law.
So now is a good time to consider a Roth conversion.
A few reminders: once you hit age 59 1/2 and have held the Roth for at least 5 years, future withdrawals are tax-free and penalty-free. Plus you won't have to take required minimum distributions (RMDs) from a Roth IRA account in retirement.
Roth withdrawals in retirement can be used to reduce the portion of Social Security payments that are subject to income taxes and avoid Medicare premium surcharges (on individual incomes above $87,000 and joint incomes above $174,000).

Ideally you should have money from outside the IRA to pay the additional tax on the conversion. Ideally you should convert only enough from a traditional IRA to make full use of your current income tax bracket. You don't want to convert so much that you are pushed into the next highest tax bracket at the margin.

For retirees, the best time to convert to a Roth is before claiming Social Security and taking RMDs (which start at age 72 for taxpayers born July 1, 1949 and later).
You may want to do the conversions over a period of years to avoid a higher tax break.
By reducing RMDs from traditional IRAs, retirees with after-tax incomes of $40-$90k may also eliminate or reduce taxes on their Social Security benefits. Up to 85% of Social Security may be subject to income tax.

Consult your tax adviser to help minimize taxes while converting a traditional to a Roth IRA.

Financial hardship and stress due to Coronavirus?

Which bills to pay during the coronavirus pandemic

Government help may be weeks in coming; in the meantime your bills are due...

The coronavirus pandemic has led to layoffs and financial hardships for some consumers and those who feel like they can't pay their bills should call their bank directly, said Consumer Bankers Association spokesman Nick Simpson. "Once you do that, there are a variety of options available on a bank-by-bank basis, ranging from grace periods, delaying payments, forbearance and making late payments" without credit penalty, Simpson said.

Whether you are concerned about rent, mortgage, vehicle, credit card, student loan or other bills this article provides guidance on how to deal with lost income:
https://www.cnbc.com/2020/03/31/in-the-pandemic-some-of-your-bills-can-wait-and-some-cant.html

Donate your stimulus check to someone who needs it more

While the $1200 that most of us expect within the next few weeks is a critical lifeline (but not enough) for people who have lost their jobs, many of us who are still employed or retired with a reliable income, myself included, don't need the $1200. By staying home and not buying gas, not eating out at restaurants (but ordering take-out) we are spending less than we normally would.

So I encourage you to consider donating the funds to a 501(c)3 nonprofit organization. There will be a delay of a few weeks before the funds arrive in our bank accounts but the demand on food pantries and other non-profits addressing the needs of the unemployed are already escalating. So I just donated my $1200 in advance of receiving it to my local homeless shelter/food pantry.
Check out how you can contribute time to your local non-profit.