If you had a time machine, what would you do?

Aug 31, 2020 David Kennon

Let’s play a little game. Let’s all get into a time machine and go back twenty-five years to 1995.   -zrrrrrrrrrrrrr……pfft……..bop- Ok, we made it. So here we are in 1995. You are retiring today and you have $100,000 to invest. With that $100,000 you place 30% in bonds and 70% in stocks (the Barclay’s Aggregate Bond Index, and the S & P 500 index).   This is a somewhat generic portfolio mix. You then decide to start taking out $5000 a year from your $100,000 investment. Remember, it is 1995 and you have just retired. You decide to go live on a secluded island in the Caribbean. The island you choose has no internet, TV, radio, or newspapers. In fact, you have absolutely no idea what is happening in the outside world. For 25 years you stay there; enjoying your tropical “off-the-grid” lifestyle. The only connection you have to the outside world is that each year $5,000 shows up in your Bahamian bank account from your initial $100,000 investment. Ok, fast forward to July of 2020. You have returned to the United States for the first time in 25 years, tan, sporting gray dreadlocks… I am using this specific time period on purpose. In hindsight, those were a rough 25 years in the economy. Remember, in this time-traveling example, you have no idea what is happening to the world economy. You don’t know that the market crashed in 2001 due to an internet bubble. You don’t know that 2008 experienced one of the worst economic disasters in history. You have never once looked at a financial statement. All you know is that over the past 25 years you have received $5,000 each year for a total of $125,000 from your investments. You go online to check your investment account. You are more than a little nervous. Is there any money left? Your hand trembles as it clicks on the ‘login’ button. What is the account balance remaining?? Are we broke?! Should we have been keeping an eye on our portfolio- obsessively checking the stock ticket every hour over the past 25 years? The remaining balance: $415,000 Started with $100,000. Took out $125,000. Now you have $415,000. You may be thinking, “Dave, are you actually telling me I don’t have to be hyper-vigilant with my accounts? Are you saying that ‘staying on top’ of my investments is unnecessary? Are you saying that I should put a good plan in place and then trust the process?  Are you saying I don’t need to worry at all?” Yes, that is exactly what I’m saying. Plan. Invest. Live.   Dave

 

What do Ronald Reagan and Barack Obama have in common?

Aug 24, 2020 David Kennon

What’s the hot topic of the day?  The election of course.  It’s drowning out everything else.  So, do you need to worry about the stock market?  Should you get out of the market until the presidential election mess gets out of the way? There has been lots of academic research on Democratic vs. Republican administrations in regard to the stock market.  Their conclusion?  Whoever wins presidential elections have little bearing on the markets (if any at all). There has also been lots of academic research about particularly contentious elections like this.  The conclusion?  Nothing.  It is little to no bearing on the market. You really need to accept this fact:  The stock market is absolutely and fundamentally unknowable and illogical.  If it made sense, we would all make a fortune.  Just because something seems ready to happen doesn’t mean a darn thing.  (How in the world is the stock market going up during a global pandemic?!) Let’s get back to the presidential election fears.  No matter which side of the aisle you fall, this is the cold hard data. Ronald Reagan (with total market return during four-year term) 1st term  +30% 2nd term   +67%   George H. W. Bush 1st term  +51%   Bill Clinton 1st term  +79% 2nd term  +73%   George W. Bush 1st term  -12% 2nd term  -31%   Barack Obama 1st term  +85% 2nd term   +53%   Donald Trump 1st term   +47%   Random note:  Can you believe how much the stock market grew during those four year periods?!  That’s incredible. You need to remember though; presidents inherit economies.  If the economy is doing crappy right before they become president, it is not necessarily fair to judge them on that fact.  For example, the is nothing George Bush could have done about a huge internet/technology bubble or a real estate crash. You also need to remember that politics and business do not walk lockstep with each other.  Huge technological advances can overcome any political administration. “Presidents get far too much credit, and far too much blame, for the health of the U.S. economy and the state of the financial markets,” says Capital Group economist Darrell Spence. “There are many other variables that determine economic growth and market returns and, frankly, presidents have very little influence over them.”  (source) A little more data:  Since 1900, Democrats have been slightly better for stocks, with the Dow up an average of nearly 9% annually when the Democrats are in control, compared with nearly 6% per year during Republican administrations. (source) But again, those numbers are misleading because economies work in cycles are some administrations get stuck with a bad situation. According to USA Today, “Since 1952, the Dow Jones Industrial Average has climbed 10.1% on average during election years..” Hmmm…that’s interesting.  What has the stock market returned overall in the past twenty, thirty, fifty, and one hundred years?  10%.  In other words, election years have zero bearings on long term performance. What is the point of all of this? Is doesn’t matter. It doesn’t matter in two ways. 1st-  There is no evidence that elections swing the markets one way or the other. 2nd-  You are investing long-term.  Even if there are temporary fluctuations.  It does not matter.  The research is extremely clear.  The more you try to time the markets the less money you will make. There is no way to beat the market by having access to information other people don’t have. Maybe this was possible in the 1940s, but today with technology, everyone knows exactly the same thing at exactly the same moment.  Don’t fool yourself into thinking that you are the first person to think successful vaccine companies are going to go up. Don’t buy into the emotional buying and selling.  You will get burned. Be Blessed, Dave

 

Have You Done Your Homework?

Aug 17, 2020 David Kennon

You need $1,000,000 to retire, right? Not in my experience. Many people are surprised how little money is needed monthly in order to afford a comfortable lifestyle once you retire.

I have done retirement budgeting with hundreds of people in the Sarasota area, and today I am going to review some of my conclusions.

First, let’s take a look at a normal retirement budget.

Here are items (and approximate cost) that I see on almost every budget.

Assumptions:

• Married couple
• No mortgage
• Live in single family home
• Have one car they are still paying on
• Go out to eat once a week at a nice restaurant
• Annual expenses are shown monthly
• Take a nice vacation each year

Budget Item	Cost
Mortgage	n/a
Property Taxes	$300/mo
Home Insurance	$200/mo
HOA Fees	n/a
Electricity	$250/mo
Water/Sewer/Garbage	$70/mo
Cell Phone	$100/mo
Cable/Internet	$200/mo
Pest Control	$50/mo
Lawn Service	$100/mo
Maintenance/Repair	$200/mo
Car Payment+Insurance	$500/mo
Gas	$100/mo
Auto Insurance	$150/mo
Groceries	$500/mo
Eating out	$400/mo
Clothing	$100/mo
Beauty/Barber	$150/mo
Vacations	$400/mo
Gifts/Tithes/Charity	$200/mo
Medicare Premium	$134/mo per person ($268)
Medicare Supplement	$200/mo per person
Dental	$50/mo
Miscellaneous	$200/mo
Total	$4700/mo

Surprised? Most people are.

I know some of you are going to fight me on those numbers, but hopefully you get the idea.

If you don’t have a mortgage, almost everyone falls into the category of needing $3000-$6000 a month once they are retired. And this pays for a nice life! You’re not staying at home with the air conditioner set to 80 degrees. You are not eating beans out of can for dinner. You are leading a full and active retired life.

Of course, your situation may be different. If you still have a mortgage, add that to the total. Maybe you don’t have cable. Maybe you spend more money on eating out.

The point I’m trying to make is this: Most Baby Boomers nearing retirement have no budget and no real idea of what their expenses will be once they retire. I hope this gives you a better handle on the numbers.

Quick note- Remember that it is important to have an emergency fund.  Your roof may need replaced, your air conditioner will break down, and dental work can be ridiculously expensive.  These expenses are not included in this budget.

Retirement financial facts you need to know.

Let’s speed-round a few points about retirement and money that you absolutely need to know so you can retire with confidence.

#1 You don’t need $1 million to retire. I know I say this constantly.  But I’m going to say it again. Most people can retire comfortably with far less than a million bucks in the bank.

Glad we got that one out of the way up front. Here are a few more.

#2 Social security is more than you think. The average social security check is around $1500 a month. So if you are married, that $3000 could cover more than half of your living expenses. In fact, I’ve met many frugal people who are living a very full life on $3000/mo.

#3 It can be fun reducing your expenses.  Seriously.  Look for restaurant specials.  There are all kinds of ways to save money on clothing, furniture, and food.  Be creative. Make a game out of it.  You never need to pay retail again.  🙂

#4 Budgeting is a lifelong habit.  Many of you with modest incomes have adjusted to living below your means over the years.  People like you often have a much easier transition into retirement.

I’ve found six-figure earners often have a much more difficult time adjusting.  Most people who bring home $10,000 a month are used to living on $10,000 a month.  You would need a huge amount of savings to continue that kind of lifestyle.

Your homework assignment: A retirement budget.

So now it is time for you to make your retirement budget. I would encourage you to go through the same exercise I just took you through and use your real numbers.

Making a budget for retirement can be incredibly empowering, and for most people, it gives them relief. Relief knowing that maybe you don’t need to worry so much about money. And if your budget needs a little trimming, at least you know.

Be Blessed,

Dave

 

Do You Really Have All the Answers?

Aug 10, 2020 David Kennon

Do you think you’ve learned stuff from my weekly emails? This week I’m going to test your memory and your smarts. Only of few of you will know all the answers (let me know if you get 100%). Are you up to the challenge? Good luck.

Note: I tried to put the answers under each question but I don’t want you to cheat. So under each question, you will see a string of letters like this: abccdba. The THIRD letter is the correct answer (“c” in this example).

1. What is a mutual fund?

A. An individual stock.
B. A vehicle that contains lots of stocks and bonds all in one place.
C. A way beneficiaries get around the law to change who gets the money.
D. A stock that you “mutually” agree on with a financial advisor.

Answer: babcbdab

2. What is the average return of the stock market over the past 20, 50, and 100 years? (They are all around the same number)

A. 10%
B. 6%
C. 4%
D. 2%

Ebadcba

3. What year was the last stock market crash?

A. 2001
B. 2020
C. 1762
D. 2008

Ccdbcda

4. Once on Medicare, what is the maximum out-of-pocket cost you could pay for medical expenses in any given year?

A. $30,000,000
B. $10,500
C. $6,700
D. There is no limit.

Ddcdabca

5. How much money should you save in an “emergency fund” of cash at the bank?

A. One month’s expenses
B. One year of expenses
C. Three months of expenses
D. Six months of expenses

Abdcdba

6. The average lifespan of a healthy 65-year-old man is:

A. 85
B. 80
C. 90
D. 110

Dbadbadba

7. Which investment is the most volatile?

A. A single bond
B. A single stock
C. A bond mutual fund
D. A stock mutual fund

Adbdatry

8. How do taxes work on Roth IRA’s?

A. You get a tax deduction when you add money and then a tax deduction when you take the money out.
B. You don’t get a tax break upfront and you have to pay taxes when you take the money out.
C. You don’t get a tax break but you can take the money out tax-free.
D. You get a tax deduction but when you take the money out you have to pay income taxes.

Aacabda

9. How do taxes work on 401k’s and IRA’s?

A. You get a tax deduction when you add money and then a tax deduction when you take the money out.
B. You don’t get a tax break. You have to pay taxes when you take the money out.
C. You don’t get a tax break but you can take the money out tax-free.
D. You get a tax deduction upfront but when you take the money out you have to pay income taxes.

Ddddecba

10. When you have to start taking money from your IRA?

11. 59 ½
    B. 65
    C. 72
    D. 75

    Cacdadca

    11. What is the most important variable for your retirement finances?

    A. The amount in your 401k
    B. Whether or not you have a mortgage
    C. Have much you have in the bank
    D. Your budget

    Dcdadcz

    12. How much money can you take with you when you die?

12. $1000
    B. $150,000
    C. $350,000
    D. $0

    Ddddacbc

    13. If Mr. Smith is getting $2000/mo from Social Security and Mrs. Smith is getting $1400, what happens to Mrs. Smith’s benefit if Mr. Smith dies?

    A. She starts getting $2000/mo
    B. She keeps getting $1400/mo
    C. She gets to add them and get $3400/mo

13. She stops getting Social Security altogether.

    Adacads

    14. Day trading is a good idea if…

    A. You have time to pay attention to the markets.
    B. You have the expertise.
    C. Never. It’s almost always a loser in the long term
    D. You have fancy software you bought off the internet for $1500.

    Adcdaba

    15. If you invested $100,000 in the stock market from 1979 to 1999, what would it have grown to?

    A. $223,500
    B. $150,700
    C. $1,840,000
    D. $940,300

    abcdea

    16. Does your Social Security ever increase after you take it?

    A. No.
    B. Yes. It grows by 8% per year.
    C. Yes. It grows by 2% per year.
    D. Yes. It increases at the rate of inflation.

    aadcedjg

    17. If you invest in a diversified portfolio of stocks and bonds with at least half of the money in stocks- what is a reasonable amount of money to take from the account each year?

14. 5%
    B. 2%
    C. 8%
    D. 3%

    Dbabdacz

    18. What percentage of the country die with more money than ever?

15. 10%
    B. 20%
    C. 30%
    D. 50%

    Cdcbea

    19. On average, how much money do 75-year-olds spend, compared to those age 60?

A. 40% less
B. 20% more
C. 10% less
D. 30% more

Bbabdadlkj

20. What is my favorite ice cream flavor?

A. Vanilla
B. Chocolate
C. Mint Chocolate Chip
D. Cookie Dough

Dbbdbadba

How did you do? As for myself, I got 100%, but I made the quiz.

Be Blessed,

Dave

Is Social Security Going Bankrupt?

Aug 3, 2020 David Kennon

The solvency of Social Security is, understandably, a hot topic. The program supplies the majority of retirement income to the majority of retirees. In fact, 21% of married couples and about 45% of unmarried persons rely solely on Social Security. The fear that Social Security may disappear makes it even harder for Baby Boomers to spend a little bit of their savings once they retire. Many people have the attitude of: “If Social Security goes bankrupt I will need as much in savings as possible to survive. I better not spend a penny or I could be in big trouble if  the system crumbles.” To make matters worse, I have been seeing an increase in scary articles on the internet about Social Security going broke. Why the increase? Because you click on the articles. News outlets are going to keep producing headlines that grab your attention. It doesn’t really matter if the articles have any academic merit. Here are some doozies: Social Security isn’t going broke- it’s already broke.  Report: Social Security Will Bankrupt America Faster Than We Thought 5 Signs Social Security Is Going Insolvent Please don’t click on those links. You will just stress yourself over inflammatory rhetoric that has no basis in reality. I want you to make your financial decisions based on the facts, not some random guy’s opinion. According to the annual trustee’s report, social security is fully funded until 2034 at which point it will be 75% funded until 2093. (source) Proactive steps are already being taken to keep the system afloat for as long as you are alive. By increasing payroll taxes from 6.2% to 8.2%, the system would be 100% funded for 75 years. Congress has already begun increasing the earnings limit on social security taxes. It has been increasing incrementally for years. In the year 2000, you had to pay payroll taxes on the first $76,000 of income. Today the limit is $128,400. (That means Lebron James only pays Social Security taxes on the first $128,400 of his income). Increasing the limit is a powerful and popular way to increase revenue and keep the system rolling along. There are several proposals to increase the retirement age to 70. But this does not apply to you. Cutting Social Security benefits is absolute political suicide. Can you imagine the politician who comes out and says, “If elected I will cut your Social Security and your parents’.”? Luckily Baby Boomers are the largest and most powerful voting block in the history of this country. As Dwight Eisenhower once famously said: “Should any political party attempt to abolish Social Security…you would not hear of that party again in our political history.” Social Security is backed by the full faith of the U.S. Government. What does this mean? The federal government has all kinds of ways to increase funding for any sort of program. Social Security is the financial bedrock for most people in this country. Cutting benefits would cause widespread bankruptcy, foreclosures, and other economic devastation. Social Security is one of the last programs the government will ever cut. It is just too important to the fabric of our society. According to Boston College’s Center for Retirement Research, “Don’t start benefits early because Social Security has money problems….you won’t get more if you do. Nearly all proposals to fix Social Security would also protect those age 55 and older.” To summarize: You will get what your Social Security statement says you are going to get. And you will get it for the rest of your life. Don’t let this common misconception sabotage your retirement. Many Baby Boomers in this country need to stop saving money once they retire. Be comforted by the fact that you don’t need to obsessively save until your dying day because “you never know” if Social Security will still be there. It will be. Be Blessed, Dave