Three Strange Stages of Retirement Spending

Aug 26, 2019 David Kennon

Now that hundreds of locals have already joined the Retirement Revolution, I’ve noticed some interesting consequences.

Remember that the Revolution encourages you to spend the money that your money is making — beginning the very first year of retirement.

So what happens in the real world for those of you who have embraced this concept? I see a similar pattern with most of you, and I couldn’t be more thrilled.

1. You step out into the world.

I find that many retirees plan to travel during their retired years. Once it’s discovered that it is okay to spend some of you savings, the immediate first step is almost always a trip somewhere.

Let’s say you start with a road trip across the country, and then a cruise to Alaska. Next up in a river cruise through the middle of Europe. How about an African safari? Or driving around Ireland searching out family members and history?

Some people go on multiple trips, or become cruise junkies. But I’ve found you can only take so many vacations before Home Sweet Home appears more and more appealing.

2. Home is where your heart is.

Once the traveling bug has been satisfied (or maybe at the same time) many of you start work around the house.

Remodeling your kitchen and bathroom. Resurfacing your pool. Getting a new driveway. Putting in some professional landscaping. New carpets, new flooring. New air conditioner. New roof. New appliances.

After a little while you seem to run out of home improvement ideas. Remember, I’m not asking you to become materialistic, nor just spend for spending’s sake. Once the basics are done it is time to move on.

3. You pay it forward.

This is where it gets tricky, and it’s the part I’m so excited to share with you. Members of the Retirement Revolution know they should spend the money that their money is making. So, once you’ve done the traveling and the home repairs, what’s next? Do you go out and buy fancy cars and jewelry? Not usually. Do retirees start new businesses with their extra cash flow? That can be a little too much hassle.

Generally step number three involves a wonderful new use for the money: generosity.

1. A mom buys her 30-year-old daughter a new car, so that her child and her grandchild could travel in a safer vehicle.
2. Retired parents organize a family vacation — all expenses paid.
3. An aunt gives some money to her niece, who is going through a nasty divorce.
4. A man extravagantly tips his breakfast waitress.
5. A retired woman buys a neighborhood kid a bike.
6. A mother supports a local battered women’s shelter.

You see, once you no longer fear that you’ll run out of money, your outlook on life will slowly change. Instead of feeling a wave of worry whenever you spend some of your savings, you can be confident and empowered knowing that you have done the proper planning. You’ll know that the investment plan you have in place has stood the test of time, and you’ll know exactly how much money you can safely spend — or give! —  each month.

Be creative! Giving feels great. For both the giver and receiver.

I have one of the most rewarding jobs in the world, because I get to see these transformations. I get to witness, first hand, retirees who once viewed their financial future with dread, now get excited not about how much they have, but by how much they can give.

Be Blessed,

Dave

Presidential Elections’ Effects on the Markets

Aug 19, 2019 David Kennon

Quick Market Note:  The markets have been volatile this week.  These are short term, temporary fluctuations that have been happening on and off for a hundred years.  And it always works out in the end. 

Moving on....

I get a ton of questions from readers. Luckily, I have lots of good answers! Today, I am going to share a few of the most common questions and my answers. 

Question #1: Do presidential elections affect the stock market? 

While the election is still a little over a year away, I still sit down with skittish and concerned investors at least once a week. So what is it? Do presidential elections make the markets go up? Down? Is it better if a Republican is elected, as opposed to a Democratic administration? Do markets generally go up or down before an election? What about after the election?

There are actually several academic studies on the subject. Going all the way back to George Washington, the trend is remarkably clear. In fact, presidential elections have had the same effect on the markets for hundreds of years.

So, in the end, what is the answer? What kind of effect does an election year have on your investments?

None. Literally. 

There is no correlation between presidential elections and the stock market. There might be some elevated volatility, but from a long-term perspective, no one can find any positive or negative connection between presidential elections and the stock market. Strong capitalist economic systems have shown incredible resilience under all presidential administrations, be it Martin Van Buren or Millard Fillmore. 

By the way, during the presidency of Chester A. Arthur in 1886, the Dow Jones Industrial Average was at 30 points. Yesterday the Dow Jones closed at over 25,000.

Question #2: How do you know that the stock market will continue to average around 10% per year?

Some people accuse me of being an optimist, but I prefer to look upon myself as a realist. For 240 years people have been betting against America and for 240 years they have been wrong.

But the American economy has reached its limit. The last century may have been great, but most of the innovation has already occurred.... 

It's like when your dad told you that music was doomed after Elvis Presley, or how you said the same thing to your kids except your reference was The Beatles. We have been doomsdaying the economy for centuries. And we've been wrong every time.  

Here’s some perspective. There have been more improvement to the human condition in the past century than all the previous centuries combined since man first appeared on the Earth.

• A gallon of milk costs 90% less today than it did in 1900 (accounting for inflation). 
• In fact, 50% of American incomes went toward food in 1900, compared with 10% now.
• In 1900, the life expectancy in the U.S. was 47. Now it is 79.
• Penicillin, by itself, has saved more lives in the past 50 years than all of medical treatment and medicines during the rest of human history.
• In 1900, ten Ph.D.'s in physics were awarded each year. Now that number is 6,000 per year.

I could go on.

What is my point? We are living in the most affluent and free society in all of human history. Of course we need to be vigilant to keep this country strong, but can you imagine what the next 100 years could bring?

Probably not. I know I can’t. Because it is going to bring advancements we can’t even imagine now. 

Maybe curing cancer will be as simple as taking an over-the-counter pill. Maybe solar energy technology will advance to the point where we have unlimited, free, clean, renewable energy. Personally, I’m excited to see where human innovation takes us next!

What does that mean for the stock market? Innovation fuels a healthy economy and a healthy stock market. It's been that way for over a hundred years, and there's no indication it's going to change anytime soon. 

Question #3: Once I retire, am I too old to invest?

The life expectancy of a healthy 65 year-old is around 90 years. Without utilizing growth investments, such as stocks, you are missing out on a powerful tool. I’m not promoting that you put all of your money in the stock market, but a diversified portfolio of stocks and bonds is usually appropriate throughout your entire lifetime. Whether you are 19 or 91. 

Question #4: Do I need to have my house paid off before I retire?

While it might feel nice to be debt-free, it is not a prerequisite for retiring. Thirty-six percent of Boomers still have a mortgage once retired. As long as your retirement budget can handle the payment, many people retire with a mortgage. 

I often hear, “Dave, I’m going to do everything I can I pay off my house by the time I retire.” While I love the enthusiasm, this attitude usually means that 401k contributions stop and emergency cash funds might be reduced to a couple thousand dollars. Make sure your cash reserves and retirement accounts are being funded, and then you can put some extra money toward the house. 

Question #5: Can I lose all my money in the stock market?

I guess. Anything is possible. World War III? Planet is hit by a meteor? I'm only half-joking. While it’s true you could lose all of your money by investing it all in a single stock or a single bond, a diversified portfolio of stocks and bonds has never gone to zero. In fact, in the past fifty years, the WORST year for an investor with a 50/50 stock/bond portfolio was 1974. You would have lost about 12% overall for the year. By the way, the same portfolio would have been up 20% the following year.

Gotta question for me? Email me at david@kennonfinancial.com. 

Be Blessed,

Dave

A Crash Course on Market Crashes

Aug 12, 2019 David Kennon

Quick Market Update: The markets have been very volatile recently. It is no way will affect your long term financial health. Pay no attention. It is completely normal (and irrelevant).

A Crash Course on Market Crashes

Did you know that real people in real situations actually lost much less money during market “crashes” than the media reports?

I’ve been doing some historical digging and I’ve discovered some shocking truths. I hear a lot of horror stories about how much money people have lost during past crashes. You never know! You might be next! Get ready to live in a cardboard box!

The markets have had five significant crashes in the past 100 years.

The Great Depression (1929)
World War II (1939)
Oil Embargo/Nixon Resignation (1973)
The Dot Com/Technology Bubble (2000)
The Great Recession/Real Estate Bubble (2008)
It may come as a surprise to many of you that there were decades-long periods without any major ‘’corrections” in the markets. But I want to point out another interesting statistical curiosity.

Crashes typically cause short-term damage.
Allow me to explain through an analogy.

If you invested all of your money at the beginning of 1929 or 1940 or 1973 or 2000 or 2008, you would have had a bad time. But in the real world, you generally don’t suddenly invest all of your money at once. It is usually a gradual process as you save money and contribute to retirement accounts over the years. We need to look at the years preceding the crashes to get a true sense of how damaging they were to real people’s financial lives.

Let’s start with the years preceding the Great Depression.

1926: +11.6%

1927: +37.5%

1928: +43.6%

This means that if you had $100,000 invested in 1925, you saw it grow to $220,000 by the time the markets faltered. Over the next four years, your value dropped to $80,000. The markets then skyrocketed upwards again. By the end of 1936 your account was worth $241,000.

This means that over ten years (1925-1935) your investment in the S&P 500 would have increased from $100,000 to $241,000. That’s an increase of 141%.

This was during the worst downturn in the history of the stock market.

The World War II crash saw a similar phenomenon. From 1935-1945 (with the markets dropping significantly in 1937, 1940, and 1941) your $100,000 investment would have turned into $242,000. How?

1936 had a 34% return.

1938: 31%

1942: 20%

1943: 26%

1944: 20%

1945: 36%

Who cares if you had a few bad years in between?

The years preceding and following the crash in 1973-74? Same thing. If you invested money from 1970 to 1980 (with the markets dropping 40% during the downturn), your $100,000 turned into $170,000.

The years leading up the dot com bubble in the early 2000s is the best example of this concept. The 1990s was the best decade the markets have ever seen. Your $100,000 investment turned into a whopping $530,000 during the 90s. Did you lose 40% from 2000-2002? Yes. But you would have still been WAY ahead.

Lastly, the crash nearest and dearest to our hearts; the real estate bubble was possibly the worst economic event since the Great Depression. But the 37% lost in 2008 was mitigated by solid returns before and after. If you invested $100,000 in 2005, today it would be worth $327,000.

I think you get my point by now. Stock market crashes do not occur in a vacuum. We need to look at returns before and after to get a better understanding of the true cost of downturns.

What does all of this mean for you?

Keep calm and carry on.
What this means to you is that you can stop worrying. Turn off the financial news notifications on your phone. Change the channel from financial reporting. What is happening today in the stock market is not what will be happening a year from now.

Which means, if you are retired and have over $200,000 invested in a diversified portfolio of stocks and bonds right now — you can start spending the money the money is making.

Hmmm … let me say that again. Louder for those in the back this time.

You can start spending the money that your money is making!
Let your retirement savings turn into a machine that sends you a check each month. Back in the good ol’ days many workers received a pension when they retired in additional to social security. Since most of those plans are now gone, you need to turn your investment accounts into a sort of pension.

How do we do this? We spend 5% of the account value each year. Historically speaking, this kind of withdraw is a conservative assumption.

Even if there is a market “crash,” folks who plan for the long game are most likely going to be fine. So stop worrying and start living!

If you’re thinking to yourself right now, “Hmmm … that’s interesting. I’ll have to think about that.” Stop! The time for action is NOW. It starts with a retirement plan you can understand and believe in. Know how much money your money is making so you can decide how much you can spend.

Imagine: helping grandkids pay for college, financing that dream family vacation, helping to renovate your church, or investing in an exciting business opportunity. Retirement is supposed to be about living. This new mindset — the switch from saving to spending — makes it possible.

Here’s one more statistical fact for you: the older people get in this country, the more their net worth grows. Every study out there agrees on this fact. That means retirees die with more money in the bank than when they started retirement. Why? You can’t take it with you, so why not enjoy it while you can?

Kennon Financial is dedicated to helping you get the most life out of your money. If you want to go through the process yourself, give us a call.

Be Blessed,

Dave

Annuities and Free Steak Dinner Seminars

Aug 5, 2019 David Kennon

I’m sure you’ve heard the term thrown around before. Maybe you’ve looked into purchasing one yourself. Retirees are often pitched annuities at “free” steak dinners from financial advisors. But, if you don’t have a clear idea of what annuities are, or if purchasing one would fit into your financial plan, how do you know if you’re making the right decision?

Annuities come in all kinds of flavors, sizes, and colors. I would argue that annuities are the single most complicated product I see on the consumer financial market. My mom was a 2nd grade teacher, so I am going to try to channel her teaching ability and make this as simple as possible.

The definition of a pure annuity is actually pretty straightforward. An annuity is a contract that guarantees you a set amount of money each month for the rest of your life. Social Security is a great example of an annuity. The federal government is guaranteeing you a check for the rest of your life. Once you die, the check stops. That is the very definition of an annuity. A teacher’s pension is another example of an annuity.

But the financial industry likes to take very simple concepts and make them incredibly complex. Here are some products insurance companies have created:

Immediate annuity

Fixed annuity

Variable annuity

Equity Indexed Annuity

An immediate annuity is just like Social Security. Say you give an insurance company $100,000. They will then look at your age and gender and make a determination of how much money they are willing to give you each month for the rest of your life. If you are 65 you might get $400/mo. If you are 75 it might be $500 a month. The older you are, the larger the payment, due to the fact that you will probably not be collecting the benefit as long.

A fixed annuity is very similar to a CD. It will pay you a fixed amount of interest for a specified amount of time. For example: A fixed annuity from XYZ insurance company will pay you 3% per year for 5 years. After the five years are up you have access to your money again.

Variable annuities are complex products that allow you to invest in variable accounts —  similar to mutual funds. A variable annuity allows you to have certain monthly income guarantees while still investing your money in the markets. The prospectuses for these things are hundreds of pages long.

Equity indexed annuities are a hot topic, as I see them being sold at nearly every “free” steak dinner seminar in town. The sales pitch is: you can’t lose any money if the stock market goes down, and if the stock market goes up, you get some of the gains. I’ve found that these products can have some issues. While you won’t lose any money if the markets go down, you are very limited in the amount of money you make if the market goes up.

Before you buy an annuity, read this.

So now you know what annuities are. The bigger question is: Is one right for you? Here are a few things you should know about annuities before deciding.

Taxes. 

Annuities are taxed in a rather inefficient manner. All growth in an annuity is taxed as regular income. Generally speaking, income taxes are higher than capital gains rates. Growth in stock prices are taxed as a capital gain.

Surrender Penalties. 

Want some money out of your annuity? Not so fast. Many annuities charge you a significant penalty if you take more than 10% of your money per year. Most penalty periods can last anywhere from 5 to 12 years. Penalties for withdrawals in excess of 8% are common.

Fees.

Variable annuities have significantly higher fees than index funds and exchange-traded funds.

Age Restrictions.

You must be at least 59-½ to withdraw money from an annuity or the IRS assesses a 10% penalty.

So what do you do if you are pitched an annuity at a free steak dinner? Be wary, chew your food, and take your time. Of all the annuity owners I’ve met, about 5% of them actually understand what they own. Try not to listen to the hype.

Dave’s final take on annuities: meh.

Should you buy an annuity? My opinion, after 18 years of research is: probably not. It goes without saying that everyone is in a different situation, and for some it might be a good fit, but I’ve found there are much better alternatives to achieve similar goals. It drives me nuts that annuities are generally sold using fear-based sales tactics. (Markets are going to crash horribly, you might run out of money, Wall St is rigged).

You want to make your financial decisions based on facts and data — not on fear.

My Type-A personality loves to understand investment options backward and forward. I can’t help but go back to the fact that a diversified portfolio of stocks and bonds has unparalleled historical success. Why reinvent the wheel? Why make something more complicated than it needs to be? Is it just so advisors can pitch those free steak dinners?

In the Retirement Revolution, we serve up facts, not fear. No steak knife required.

Be Blessed,

Dave