The U.S. Economy; Rebound In a Global Economy

Sometimes the economy is what we think it is. In April, the University of Michigan’s preliminary index of sentiment, which climbed to an eight year high, showed that many Americans are feeling better about what the nation is doing. This is an important macroeconomic variable.

The economy grew at just a 0.2 percent annual rate in the first quarter. That was down from the pace seen in the second half of 2014.

When things seem good, consumers loosen the purse strings and spend money. Gas prices, which more than doubled from 2008 to 2014, dropped back enough to make Americans feel like they had more disposable income. Labor Department figures also show a small gain in hourly pay during the first quarter. Retail sales, on the other hand, have not reflected these improvements and have fallen short of economist’s expectations.

Then, there is always the possibility of the Fed raising interest rates. Fed members have speculated that they would be willing to pull the trigger as job numbers improve. The jobless claims have captured some recent headlines and appear to be falling. The reported figures do not include those who have left the workforce and who can no longer file new claims for benefits. These people, who are still of working age, may be permanently out of the workforce.

The Rest of the World
How does the U.S. economy compare with its neighbors over the pond? By one measure, not as good, and by many others, much better.

We have read much about the troubles in Greece, Spain, Ireland, and Portugal. These countries have had to borrow heavily, while their balance sheets and debt rating have suffered.

In the fourth quarter of 2014, the euro zone economy grew by 0.3 percent. The European Commission is anticipating growth of 1.6 percent for 2015. That would be the best rate in four years.

France and Italy saw a reversal of fortune in the last quarter of last year. Deflation has been a concern across the eurozone and that is only recently been abating as of April somewhat. Unemployment in the eurozone stands at 11.3 percent.

Spain has seen some success with growth of 0.9 percent in the first quarter of 2015. That has fueled speculation that the eurozone, as a whole, saw growth of 0.5 percent during the first quarter; better than the U.S.

The rich in Great Britain have fared very well since 2009. They have seen their wealth increase by 112 percent. The average British middle class citizen has not fared as well, with most not yet recovering from the recession.

Russia cut interest rates and French consumer spending is on the wane. Greece continues to see its debt rating downgraded while it contemplates an exit from the Euro. But it may agree to a deal that would provide the €7.2 billion it needs to avoid default. Greek savers, afraid of the impact of not striking a deal, pulled funds from banks, leaving deposits at a 10-year low.

Even China, the primary source of consumer goods in the U.S., has seen its economic growth stagnate compared to its recent historical gains. Growth in China, saw expansion of 7 percent in the first quarter. The last quarter of 2014 was a slightly more robust 7.3 percent. China has seen double-digit annual growth for decades. Many economists believe that growth for 2015 and 2016 will likely be below 7 percent.

Don’t let the economy affect your retirement plan.  Be certain that if you work with our firm, we our watching things very closely.  If you do not have a comfort level with your retirement income plan and you want a second opinion, please contact our office, today!

Market Update – How to Handle This (Painful) Sideways Market

bull bearAfter three strong market years, the last six months has been downright frustrating for many investors. The S&P 500 has come close to breaking into new all-time highs on three occasions the past few months, only to fail each time and retreat.

To many, this feels like the end of the bull market, and the start to a bear market.

History, however, tells us a different story. It tells us that sideways markets are pretty normal. And more importantly, it tells us that the exit from a sideways market is more often than not, the same direction it was prior to the sideways market.

In today’s video, (see link below) by Formula Folios Chief Investment Strategist, Jason Wenk, he shares three very important charts that should help investors stay smart in this rather frustrating market. The last thing we want to do here is panic (you’ll see why in the video), or to start chasing the latest hot market (never wise).

Rather, what we really need to do is be patient. It’s boring, but it works. It’s frustrating, but it works. It won’t be long and the next market direction (other than sideways) will likely be revealed.

Enjoy today’s update…and stay tuned on the breakout from this sideways market in the coming months (or sooner)

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Phil Calandra and Jason Wenk

Should You Worry About Your Social Security Check?

LKR042533Social Security:  Stronger Than Most Realize

I recently told a prospective client that he may have to work longer than he intended, at a job that he really didn’t like, this gentlemen was dismayed.  He knew he had meager savings stashed away in an IRA, but he had been counting on his Social Security benefits to make up the shortfall.  He was told by a prior advisor that it’s possible that when he is in his 80’s, Social Security might only be able to pay 75% of the benefits he was expecting to get.

News stories predicting the demise of Social Security, or that the program’s $2.6 trillion trust fund will run out in 2033 are numerous.  Many often warn that they shouldn’t count on anticipated Social Security benefits as part of their retirement package.

But there are also experts who say that rumors of the program’s death have been greatly exaggerated.  They argue that Social Security, a program that began back in 1935, and that has never missed a payment is unlikely to be left short of funds by Congress.  In fact, the same boomers who are seen as taxing the system’s ability to pay are the very ones who will make the already influential senior lobby about 50% larger and significantly bigger as a share of the total electorate in 15 years.  That suggests Social Security will have an increasingly powerful lobby working on its behalf as time goes by.

If people genuinely doubt Social Security’s ability to pay promised benefits, they should be discounting those benefits when planning their saving and investment strategies.  But if they’re wrong to worry, and Social Security is actually a sound bet, such a strategy could be encouraging folks to save more than they need or work longer than they have to.

While benefits are probably secure for people already retired or nearing retirement, Congress might not fit the projected shortfall that would hit in 2033, when without any fix, the program would only be able to pay 77% of promised benefits.  Another worry?  That politicians might fix things by reducing benefits for future retirees who are younger.  That is taking a lot of money off the table when planning for most people’s retirement needs.  The average Social Security benefit in 2015 is $1,218 per month, or $14,616 per year:  $29,232 per year for couples.

A Little Tweaking

The idea of telling people of any age that Social Security won’t be around for them when they retire is very misguided.  And even the idea that benefits are going to be cut when the trust fund has run out is absurd.  It’s not political reality.  Just a 3% increase in the payroll tax – 1.5% for employees and 1.5% for employers – fixes the system for the next 100 years.

Learning From The Past

Problems with Social Security in the past were even more drastic yet were fixed in time.  In 1983, Social Security’s funding was up against a wall.  It was within a year of running out of money, which would have meant benefits would have to be paid just from the money coming in from the payroll tax of current workers.  President Reagan and Congress fixed things by gradually raising the full retirement age from 65 to 66 and eventually, for those born after 1960, to 67, and increasing the payroll tax in steps.

I’m confident Congress will eventually do something this time too.  I certainly wouldn’t tell anyone to count on a reduction in benefits in 2033, but I encourage young clients to focus not on Social Security, but on saving.

Peter Diamond, emeritus professor at MIT and Nobel Laureate in economics, has, together with a colleague, Pete Orszag, vice chairman of corporate and investment banking and chairman of the Financial Strategy And Solutions Group at Citi, assembled a list of ways that Congress could fix Social Security.

Diamond acknowledges the system does need some Congressional tinkering, but says a solution needn’t be that costly or disruptive.  Among the suggestions the two have made:

  • Raising the FICA tax by 1.2% on employers and employees each, a small bump which would fully fund Social Security for the next 75 years.
  • Raising or eliminating the cap on income subject to the payroll tax – currently set at $118,500 and adjusted annually.
  • Raising the full retirement age slightly to account for increases in longevity.
  • Lowering benefits slightly for wealthier Americans.

The important thing is that the sooner Congress acts, the smaller the fixes have to be, since there is a longer time for those fixes to rebuild the trust fund.  Experts note that Social Security, since its inception in the New Deal, has always operated in crisis mode.  When Social Security was created, Republicans were heavily opposed.  When President Clinton proposed putting some trust fund monies into an index fund, Alan Greenspan said it “threatened our freedom.”  So whatever we do with Social Security will be the usual compromise between what people want as beneficiaries, and those who are ideologically opposed to the program.

In terms of how we should deal with the issue of Social Security’s future benefits, anyone who would significantly discount the value of estimated Social Security benefits or count them as zero is misguided.  If you’re going to make predictions about your portfolio, the stock and bond markets dwarf any risk concerns about Social Security benefits.  And it’s not as if your 401k or IRA are totally reliable either.

Stephen Goff, chief actuary at the Social Security Administration, notes that company pension are almost gone, and personal savings have also taken a hit this century, with a “lost decade” in 2000-2010 for stocks, and a decline in home equity values.  That makes Social Security more critical for the nation’s elderly and disabled.

The Best ROI

Social Security is secure enough that, far from discounting future benefits, Alicia Munnell, director of Boston College’s Center for Retirement Research, argues that advisors should recommend to any clients who are feeling financially strapped and thinking of taking their benefits early, to draw on other investments, even 401k or IRA funds, and wait until 70 to get the maximum benefit.

Simply waiting until 70 to collect can be the best long-term return money can buy.  To the extent that Social Security can cover a client’s or couple’s expenses, they are free to take more risk with their investment assets.  For married Social Security recipients, failure to utilize the multiple filing strategies and collect maximum benefits is an epic failure.

Please contact our office for a personalized Social Security Maximization Report and Retirement Income Plan… Today!  Stop worrying about your Social Security check, it’s in the mail.