Now What: A Guide to Retirement During Volatile Times

Markets trying to figure out where the economy is headed

A recent article from the New York Times that was reprinted by CNBC, likened the late-2000s recession to an earthquake, and recent volatility to aftershocks. The article said: “Like earthquakes, financial crises seem to be accompanied by aftershocks, like the one we’ve been living through this week.
They can feel every bit as bad as the crisis itself. But economic history and academic research suggest they can set the stage for a sustainable recovery — and eventual sharp stock market gains.” We found this to be a particularly fitting illustration, and a valid point.

It’s no secret that dizzying stock market moves in recent weeks have been difficult to stomach. Think of all the events we’ve had to face leading up to this – controversy in Washington over the debt ceiling, Standard & Poor’s downgrade of America’s prized credit rating, renewed fears about European debt, and a gut-wrenching plunge in the stock market. The uncertainty of everything culminated in the wild ride we took last week.

To recap: On Monday the Dow Jones Industrial Average fell almost 635 points, then rose nearly 430 points on Tuesday, only to see another drop of almost 520 points on Wednesday. Helped by some positive earnings results, the Dow soared 423 points Thursday and another 125 points on Friday. By week’s end, the benchmark index had closed at 11,269 and shed only 1.5% for the week. The S&P 500 Index logged similar performance.
You might want to take a deep breath after reading this paragraph.
Do we expect a measure of volatility to continue? There is a good possibility that it will, at least for a time. As long as confidence in the global economy and government policymakers remains shaky, markets are likely to be volatile. Even so, we still believe that fundamentals are strong, and we know that successful investing is a long term project undertaken with risk and uncertainty. Equity markets do not move in a straight line, and neither do economic recoveries. Despite being painful, volatile periods like this historically run their course and then come to an end. To quote an ancient proverb, “this too shall pass.”

ECONOMIC CALENDAR: Monday – Empire State Mfg Survey, Housing Market Index
Tuesday – Housing Starts, Import and Export Prices, Industrial Production Wednesday –Producer Price Index
Thursday – Consumer Price Index, Jobless Claims, Existing Home Sales, Philadelphia Fed Survey, Leading Indicators

Data as of 08/12/2011 1-Week YTD 1-Year 5-Year 10-Year
Standard & Poor's 500 -1.72 -6.27 8.79 -1.39 -0.10
Dow -1.53 -2.66 9.20 0.33 0.82
NASDAQ -0.96 -5.46 14.5 4.38 2.82
MSCI EAFE -1.56 -7.37 6.98 -1.45 2.06
10-year Treasury Note (Yield Only) 2.56 NA 2.73 4.97 5.02

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. NA means not available.

HEADLINES:
Italy's government has approved sharp budget cuts demanded by the European Central Bank despite regional opposition to the move. Italian officials said Friday the austerity measures include $28 billion in cuts next year and $35 billion in 2013.
The number of Americans claiming new jobless benefits fell to a four-month low last week, the Labor Department said in its weekly report, providing a ray of hope for the nation’s battered economy. Initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 395,000, the Labor Department said, the lowest level since early April. Economists had expected a reading of 400,000.

The tumbling price of crude oil this month and signs of falling fuel demand point to lower U.S. gasoline prices ahead, though consumers will have to wait for savings to trickle down to the pump. After reaching an almost three-year high of $3.97 a gallon in early May, U.S. retail gasoline prices have fallen nearly 30 cents on a combination of lower oil prices and flagging sales in the important summer-driving season.

The Securities and Exchange Commission has asked credit rating agency Standard & Poor’s to disclose who within its ranks knew of its decision to downgrade U.S. debt before it was announced last week, as part of a preliminary look into potential insider trading, people familiar with the matter say.


Important Perspective on Recent Market Events

As you are surely aware, following Tuesday’s debt ceiling compromise, attention quickly shifted to whether the government has what it takes to solve its budget problems. Add to this the fact that Italy is now in the forefront of debt problems in Europe and anemic economic news has been pushing investor sentiment downward, and you have a near-perfect recipe for a stock market correction. And a correction – defined as a 10% drop from recent highs – is exactly what we experienced last week as major indexes erased their gains for the year. At times like this, we are wise to view events in the proper context and avoid letting brief periods of negativity derail our long-term strategies.

Market corrections are not unusual events. From the market lows of July 2010 to the highs of April 2011, the S&P 500 was up over 26% without experiencing a correction. To put that 26% run-up in perspective, the best 20-year time period for the stock market was 1948-1968, and the market only returned an average of 8.4% annually during that period. This illustrates that we were overdue for a correction. During recovery periods, stocks are prone to sudden declines in value. Unexpected drops in the market can be painful, but they are part of the healing process.

In our assessment, the turmoil of recent weeks reflects the fact that fear is still dominating investor sentiment. What are people afraid of? While there are several factors that could be cited, we believe debt problems domestically and abroad are in the forefront.

While it is true that European countries have spent themselves into a corner, correcting this mistake will be good for long term growth, not bad. While some financial institutions may face losses in the process, the minimal level of European exposure U.S. banks have, makes them well equipped to face this challenge. Our research tells us that the odds of significant damage to the U.S. economic system resulting from European debt failures are very low.

Closer to home, although S&P downgraded the nation’s bond rating from AAA to AA+, Moodys Investors Service took the opportunity to reaffirm the United State’s AAA rating. The U.S. now has a split rating from the two largest ratings agencies. The third-largest ratings agency, FitchRatings, also agreed with Moody’s AAA rating.

In confirming the AAA rating, Moody's recognized that the budget compromise is a first step toward achieving long-term fiscal improvement. The legislation passed on August 2nd calls for $917 billion in specific spending cuts over the next decade and established a congressional committee charged with making recommendations for achieving a further $1.5 trillion in deficit reduction over the same time period.
Successful investing is a long term project undertaken with risk and uncertainty. Equity markets do not move in a straight line, and neither do economic recoveries. We wish we had the ability to trade every move, but that just isn’t possible. We encourage you to tune out the media fanfare and remember that we have been through much worse. Please try to see recent events in context and do not allow them to disrupt your long term financial objectives.

ECONOMIC CALENDAR: Tuesday – Productivity and Costs, FOMC Meeting Announcement Wednesday – EIA Petroleum Status Report, Treasury Budget
Thursday – International Trade, Jobless Claims Friday – Retail Sales, Consumer Sentiment, Business Inventories
Data as of 08/05/2011 1-Week YTD 1-Year 5-Year 10-Year
Standard & Poor's 500 -7.19 -4.63 6.53 -1.25 -0.12
Dow -5.75 -1.15 7.21 0.36 0.89
NASDAQ -8.13 -4.54 10.4 4.29 2.26
MSCI EAFE -8.47 -5.90 3.19 -1.36 1.91
10-year Treasury Note (Yield Only) 2.81 NA 2.91 4.90 5.16

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. NA means not available.

HEADLINES:
Treasury Secretary Timothy F. Geithner will not be stepping down, a Treasury Department official said Sunday, ending speculation that the key Obama administration advisor was preparing to resign.

It was announced Friday that the Postal Service lost $3.1 billion in the April through June period and could be forced to default on payments due to the federal government when the fiscal year ends in September. Several bills designed to change the law governing the post office, an independent government agency, are pending in the House and Senate.

After reaching a near-record $3.98 in May, tumbling in June, and rising throughout the month of July, gasoline prices finally settled around $3.70 a gallon in early August.

The job market strengthened in July, a welcome piece of good news that sharply contrasted other recent data pointing toward an economic slowdown. Employers added 117,000 jobs last month, easily topping the 75,000 gain economists surveyed by CNNMoney had predicted. And the unemployment rate improved slightly to 9.1%.


AN EXCERPT FROM MY LATEST BOOK, CAN I RETIRE
LIVING BETTER FOR LESS

Since you’re a few years off from retiring you should begin enhancing your savings by reducing your expenses, this way you can also lower the amount required after you retire. The less you need for your retirement income, the more you can save for the unexpected. Knowing by how much you can lower your living expenses all depends on your needs but you can reduce your expenses three different ways:

- Find a cheaper alternative to getting what you already need. This refers back to the section on comparison-shopping, as it’s not just for food or clothing, it relates to car insurance, travel, vehicles, and gasoline as well. If you can get what you require for a lower price than your retirement income will be lower than what has been estimated thus far.

- Eliminate debts and unnecessary expenses. As already discussed, it is important to reduce your debts as far down as they can go and cut costs on expenses that are not needed. What counts as an unnecessary expense all depends on the person. Most people like to drink beer or wine but that doesn’t mean you have to drink the most expensive bottle out there. Find a cheaper made beverage that still
tastes just as good and save what’s left over for other, more important things.
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Move to where the cost of living is cheaper. Moving from a big city is an expense in and of itself, especially if you rely on public transportation. However, it can end up costing you more to live there than in the boonies, especially since the cost of homes in smaller places is nowhere near as high as they are in the city. This is because there are more people per square inch living in cities than there are living in towns or the boons. There’s a reason people prefer living in Brooklyn and commuting to New York City each day, and it’s not because they love the hassle of public transit.

Living on a modest income as a retiree is doable. The average amount recorded as of late that those retired are living off of is about $25,000 a year, which is 50% less than the normal family living on an estimated $47,000 per year. The problem is that those of heading into the luxury of retirement are living in a much different economy that your grandparents or even your own parents. The recession has made things more challenging for all, thus why even those who had planned for contingencies had to find a way to increase their retirement income and some had to go back to working for a while before things settled back down.

Although not intending to frighten anyone when I say this, the fact of the matter is that the economy is still not yet fully recovered from the recession and another one is a possibility in the future. That is why it is important to try and live off of as little as you actually need right now and plan for the possibility of needing more after you retire than originally thought of. You’re retirement budget should be realistic and factor in any possible contingencies from needing long-term medical care, to being pulled back into an economic slump.