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Retirement Roundup | December 2018

December 4, 2018

Retirement Roundup | December 2018

Articles and ideas to help you live a fulfilled and financially secure retirement! 

In this month’s Retirement Roundup, we’ve curated our favorite articles from around the web to help you live a fulfilled and financially secure retirement!

We start off with an interesting article about the growing pessimism among investors on the economy and the stock market, and why that’s driving money flows out of stocks.

Then, we switch gears to talk about why it’s almost never a good idea to tap your retirement savings to pay for your kids college, yet 1/3 of Americans would consider doing this.

Next, we discuss how you can avoid getting burned by a market downturn if you happen to retire during a recession.

We then move on to what the experts think about social security’s future – will your checks keep coming after 2034, when the trust fund is projected to run out?

We also look at how you can use the collective wisdom of the U.S. military to make better decisions.

Lastly, we summarize how retirement contribution limits are increasing in 2019. Good news…you’ll be able to contribute more to your 401(k) and IRA accounts in 2019!

Enjoy this month’s installment of the Retirement Roundup!

As stocks skid, worries mount for 401(k) investors who can’t ‘stand the pain’

(Adam Shell | USA Today)

With the S&P 500 down nearly 7% in October, and stocks continuing their bumpy ride in November (up 2% during the month), investors are becoming increasingly nervous about the state of the markets and the economy.

According to the article: “The stock market’s latest drop, which has knocked Apple – the most valuable stock in the U.S. – down more than 20 percent from its recent high and pushed the Dow down nearly 7 percent below its peak – is causing investors to question the staying power of a bull market that turns 10 years old in March. At its peak, the broad market’s bull gain totaled 333 percent.”

Even though the economy is still moving forward, and the stock market is still in positive territory for 2018, investors are increasingly worried about the looming risks – notably the trade fight with China and rising interest rates. In fact, in a recent survey by the American Association of Individual Investors, only 35% of respondents think that stocks will be up in the next 6 months.

The money flows have reflected this pessimism. The net money flow (money in minus money out) out of stocks is currently negative. According to the article, “Money also returned to bond funds, seen as a safer play for investors. In the latest week of data, there were net inflows of $777 million into fixed-income funds.”

While we agree that risks are mounting, and the likelihood of a recession and market downturn are growing, it’s no time to panic. The time to reduce your risk and rebalance your portfolio is when the market is still stable.  Despite the recent downturn, the stock market is still in positive territory for the year, so it appears that with recent outflows to stocks, that’s exactly what many investors are starting to do.

Do Your Kids a Favor and Pick Retirement Savings for You Over Tuition for Them

(The Associated Press | Barron’s)

About one-third of Americans with college-bound kids would consider using their retirement savings to help pay for their kid’s college. Even though college costs are rising and student loan debt is ballooning, it is almost never a good idea to draw from retirement savings to help pay for college.

Here’s how drawing from an account like a 401(k) or an IRA to pay for your kid’s college could hurt you:

  • Potential tax penalties on early withdrawals
  • Higher reported income due to withdrawals
  • Loss of tax-deferred or tax-free growth of retirement funds
  • Erosion of long-term growth potential

And here’s something else you may not have considered: “Tapping your retirement savings can boomerang to hurt your kids if they need to provide financial help for you in your later years,” according to the article.

Many people considering different funding sources for their kid’s college don’t consider the long-term possibility that they are now more likely to run out of money in retirement if those 401(k) or IRA accounts were tapped to pay for college.

Beyond the long-term implications of withdrawing retirement funds to pay for college, there’s an immediate blow too: “Using your retirement funds could hurt your child’s ability to qualify for student aid. Why? The cash is considered “ordinary income” and may put your total wages for the year beyond what qualifies for assistance.”

If you haven’t saved enough for college in a traditional college savings plan (i.e. 529) consider some other creative ways that you can help your kids keep their student loan debt in check. Too many alternative paths to pay for college exist to justify withdrawing those precious retirement funds.

Retiring Within the Year? 3 Ways to Avoid Getting Hurt by a Market Downturn

(Maurie Backman |The Motley Fool)

Are you retiring within the next 2-3 years? If so, you’ll want to be especially cautious, since a retirement that coincides with a market decline “can be a recipe for disaster.”

The biggest problem with retiring right into the teeth of a downturn in the stock market is that your portfolio withdrawals start at the same time your portfolio is dropping in value, worsening the impact of the downturn on your portfolio.

And those downturns hurt much more in the early years of retirement, because your nest egg that is supposed to last for the next 25-30+ years is 10-25% lower than what you were planning on when you transitioned into retirement.

All hope is not lost, though, because there are a few ways that you can minimize the impact of a major market downturn in the early years of retirement:

  1. Have cash on hand to prevent you from withdrawing funds at the same time your portfolio is dropping in value. 18 months’ worth of cash on hand is a good target.
  2. Be open to getting a job in retirement to provide some extra cash while you reduce or stop portfolio withdrawals.
  3. Apply for a home equity line of credit. According to the article: “The beauty of having a HELOC is that if your emergency fund, Social Security benefits, and part-time earnings aren’t enough to cover your bills in retirement, you can access cash from that HELOC instead of tapping your nest egg at a time when the market is down, thereby allowing yourself to reduce or minimize losses.

While retiring during a downturn in the markets can be devastating for some, it doesn’t have to be if you can remain flexible with your portfolio withdrawals in the early years of retirement.

Will Social Security Run Out Before You Retire? Here’s What the Experts Think

(Christy Bieber | The Motley Fool)

Over half of working Americans doubt they will receive social security benefits, according to a Gallup poll. That’s a grim public opinion. However, social security’s prospects might not be quite so grim.

The social security trust fund is in big trouble, and is projected to run out by 2034, but the social security administration will still be sending out checks in 2035. Here’s why: “Even though the Social Security trust fund is likely to be broke come 2034 if no changes are made, most of the money for benefit payouts does not come from the trust fund. The money comes from taxes paid in by current workers.”

According to the article, “Payroll taxes are projected to cover around three-quarters of promised benefits when the trust fund runs out as projected in 2034. That means, as a worst-case scenario, if you retire after the trust fund goes broke, you’d still get around 75% of the benefits you expect.”

A 25% cut in benefits is still a big problem, so it’s important that you stress test your portfolio to see if you could absorb a 25% cut in social security benefits in 2034 and later. Could your other assets pick up the slack and provide the income you need if social security cuts become a reality?

4 Ways to Pressure-Test Strategic Decisions, Inspired by the U.S. Military

(Rick Lynch & Jay Galeota, Harvard Business Review)

How do you avoid mistakes when making big decisions?

The key, according to the article is the ability to “poke holes in one’s own strategies, [which] is something the U.S. military has practiced and refined over centuries”.

“In the heat of battle, strategic planning that’s incomplete or simply wrong causes leaders to revert to on-the-spot decision making. While sometimes necessary, making it up as you go is more often associated with failure — and loss of life — and is often a symptom of ineffective or inaccurate anticipation of competitive moves or environmental shifts.”

How can you take the collective wisdom of the U.S. military, developed over centuries, and apply that to your own decisions? Here are a few ideas:

  1. Build situational awareness, where you consider various vantage points and perspectives. One way to build this type of awareness is to consider several alternatives – i.e. “We think X will happen, but what if Y or Z happens?” It’s also important to understand “triggers” to determine if Y or Z is actually happening, so you can then move on to what to do about it.
  2. Develop an outside-in perspective. Whether you’re a business leader or a retiree, knowing how outsiders perceive you or your organization can help you improve.
  3. Game it out. Maybe video games can play a role in developing critical skills for today’s adolescents. War-gaming exercises around critical decisions and intense training are important for military success, and equally important for making important decisions. How can you “game it out” or role-play to train yourself and improve your response to challenges and adversity.
  4. Form diverse, strategic groups. “Form strategic initiatives groups and populate them with people who can analyze problems from various perspectives.”

What these ideas have in common is that they emphasize the importance of stepping outside of yourself in order to prepare for adversity, make sound decisions, and keep mistakes to a minimum. But stepping outside of yourself involves more than just asking a mentor or a trusted friend for advice. Instead, it’s about developing different perspectives, planning for contingencies, and getting input from a variety of outside sources.

You can contribute more to your 401(k) and IRA in 2019

(Alessandra Mailto | MartketWatch)

In case you were starting to think this month’s Retirement Roundup was all doom & gloom, I do have some good news for you: you can now contribute more to your retirement accounts in 2019!

What’s changing:

  • 401(k), 403(b), 457, and TSP contribution limit = $19,000 (Catch-up contributions stays the same at $6,000)
  • Overall limit for defined-contribution plans increased to $56,000, up from $55,000, in 2019
  • Traditional and Roth IRA contribution limit = $6,000 (Catch-up contributions stays the same at $1,000)
  • Phase-out limits are increasing. For example, for married couples filing jointly, the income phase-out range to contribute to a Roth IRA is $193,000 to $203,000.

Be sure to review your planned 401k and IRA contributions for 2019. Adjust upwards if you plan to max out and consider the increase in income limits for various phase-outs of IRA and Roth IRA accounts as well.

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Disclosure: 

The views outlined in this newsletter are those of True North Retirement Advisors (TNRA) and should not be construed as individualized or personalized investment advice or tax advice. TNRA are not licensed tax consultants, please contact your CPA for advice on your specific tax situation. Any economic and/or performance information cited is historical and not indicative of future results. Economic forecasts set forth may not develop as predicted.

Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for a given client or portfolio.

Investing in stocks includes numerous specific risks including the fluctuation of dividend, loss of entire principal and potential illiquidity of the investment in a declining market. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.

Any questions regarding the applicability of any specific issue discussed above should be addressed with TNRA. All information, including that used to compile charts and/or tables, is obtained from sources believed to be reliable, but TNRA has not verified its accuracy and does not guarantee its reliability.

Moreover, you should not assume that any discussion or information contained in the newsletter serves as the receipt of, or as a substitute for, personalized investment advice from TNRA or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed above to your individual situation, you are encouraged to consult with TNRA or the professional advisor of your choosing. All information, including that used to compile charts, is obtained from sources believed to be reliable, but TNRA has not verified its accuracy and does not guarantee its reliability.

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Ashley M. Micciche, CEO

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