How to Avoid Fumbling Your Retirement Money

NFL football player Marion Henry retired from football at age 28.  Professional athletes usually begin a second career after they give up the game, most because they have to.  Here’s his admission:

Eighty percent of retired NFL players go broke in their first three years out of the league, according to Sports Illustrated.

I was one of them.

Out of football and money at age 28, I saw the financial woes of big-money ballplayers as symptomatic of a larger problem plaguing average Americans – a retirement problem. Experts say many people are inadequately prepared or poorly advised when it comes to retirement planning. As a result, they outlive their funds.

 

He goes on to make the point that:

When I played football, we practiced against the worst-case scenario that we could face on game day. Many Americans are not planning for those worst-case scenarios in the fourth quarter of their lives, and some who believe they are prepared may have a false sense of security.

 

People often have a false sense of security because they have not really priced out all the expenses that they will incur during retirement, or considered the effects of inflation on the cost of living as they get older.  They also assume that their investments will continue to grow at the same rate as they have in the past.  And few retirees really plan for how they will pay for long-term care if they should develop serious long-term illnesses not covered by Medicare.

A good retirement planning program will take these issues into consideration.   Visit an dependent RIA who will prepare a retirement plan for you and take the guesswork out of retirement.

 

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Don’t Fear Higher Interest Rates

Here’s some weekly commentary from Brian Wesbury of First Trust 

The Federal Reserve has a problem.  At 4.1%, the jobless rate is already well below the 4.6% it thinks unemployment would/could/should average over the long run.  We think the unemployment rate should get to 3.5% by the end of 2019 and wouldn’t be shocked if it got that low in 2018, either.

Add in extra economic growth from tax cuts and the Fed will be worried that it is “behind the curve.”  As a result, we think the Fed will raise rates three times next year, on top of this year’s three rate hikes, counting the almost certain hike this month.  And a fourth rate hike in 2018 is still certainly on the table.  By contrast, the futures market is only pricing in one or two rate hikes next year – exactly as it did for 2017.  In other words, the futures markets are likely to be wrong for the second year in a row.

And as short-term interest rates head higher, we expect long-term interest rates to head up as well.  So, get ready, because the bears will seize on this rising rate environment as one more reason for the bull market in stocks to end.

They’ll be wrong again.  The bull market, and the US economy, have further to run.  Rising rates won’t kill the recovery or bull market anytime in the near future.

Higher interest rates reflect a higher after-tax return to capital, a natural result of cutting taxes on corporate investment via a lower tax rate on corporate profits as well as shifting to full expensing of equipment and away from depreciation for tax purposes.

Lower taxes on capital means business will more aggressively pursue investment opportunities, helping boost economic growth and the demand for labor – leading to more jobs and higher wages.  Stronger growth means higher rates.

For a recent example of why higher rates don’t mean the end of the bull market in stocks look no further than 2013.  Economic growth accelerated that year, with real GDP growing 2.7% versus 1.3% the year before.  Meanwhile, the yield on the 10-year Treasury Note jumped to 3.04% from 1.78%.  And during that year the S&P 500 jumped 29.6%, the best calendar year performance since 1997.

This was not a fluke.  The 10-year yield rose in 2003 and 2006, by 44 and 32 basis points, respectively.  How did the S&P 500 do those years: up 26.4% in 2003, up 13.8% in 2006.

Sure, in theory, if interest rates climb to reflect the risk of rising inflation, without any corresponding increase in real GDP growth, then higher interest rates would not be a good sign for equities.  That’d be like the late 1960s through the early 1980s.  But with Congress and the president likely to soon agree to major pro-growth changes in the tax code on top of an ongoing shift toward deregulation, we think the growth trend is positive, not negative.

It’s also true that interest on the national debt will rise as well.  But federal interest costs relative to both GDP and tax revenue are still hovering near the lowest levels of the past fifty years.  As we’ve argued, sensible debt financing that locks in today’s low rates would be prudent. However, it will take many years for higher interest rates to lift the cost of borrowing needed to finance the government back to the levels we saw for much of the 1980s and 1990s.  And as we all remember the 80s and 90s were not bad for stocks.

Bottom line: interest rates across the yield curve are headed higher.  But, for stocks, it’s just another wall of worry not a signal that the bull market is anywhere near an end.

 

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Harsh Lessons In Modern Con Art

There have been a lot of articles about the fact that Seniors are often the subject of financial fraud, and it’s true.  But you don’t have to be old to get scammed.  Most of Bernie Madoff’s victims were rich, successful and relatively sophisticated.

Here is the story of financial writer, public speaker and financial thought leader, Mitch Anthony, who was scammed out of $1 million and whose mother lost her life savings.  It’s an object lesson.

As I sit down to write this article, I know it will likely be the most difficult composition of my writing career—difficult because it dredges up a miasma of regret, embarrassment, sadness and anger like nothing else I’ve experienced in life. I was conned out of almost a million dollars.

I will survive. But my mother was also conned—out of every penny she had. Her journey would prove much more difficult. The recollection of what I’m about to detail makes me feel stupid and gullible, like a sucker who should have known better. Then there’s the exasperation and indignation of watching someone skirt justice for one simple reason: There wasn’t ample time to hold him accountable for the fortunes he destroyed and the lives he crushed.

The federal statute of limitations on financial crimes is five years. Once you discover you have been defrauded, very likely two to three years have passed. Legal proceedings will chew up a year or two. By the time prosecutors decide there is merit in proceeding, the time has almost run out, and they will cease their efforts knowing they are up against the statute. This was our exact experience. By the time I brought the fraud to the attention of the FBI, they informed me that the perpetrator was already “on their radar”—but at this point, there wasn’t enough time left to do anything, and they couldn’t afford the time and resources to waste their efforts.

The man’s name is Wendell Corey, and he touted himself as a “developer.” Continue reading

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Consuming doesn’t produce wealth, production does.

Our favorite economist, Brian Wesbury of First Trust just published and article discussing the Christmas shopping season and “Consumer Fundamentals.”  We changed his headline because there is something fundamentally more important in his comments, and it’s this:  consuming doesn’t make people wealthy, producing does.  No one ever got rich by sitting around consuming; people producing stuff is what makes communities, nations and cultures rich.

Now on to Brian’s commentary on the economy:

Now that Black Friday has come and gone and Cyber Monday is upon us, you’re going to hear a blizzard of numbers and reports about the US consumer. So far, these numbers show blowout on-line sales and a mild decline in foot traffic at brick-and-mortar stores. Both are better than expected given the ongoing transformation of the retail sector.

But Black Friday isn’t all that it used to be. Sales are starting earlier in November and have become more spread out over the full Christmas shopping season, so the facts and figures we hear about sales over the past several days are not quite as important as they were in previous years. Add to that the fact that this year’s shopping season is longer than usual due to an early Thanksgiving holiday.

But all this focus on the consumer is a mistake. It’s backward thinking. We think the supply side – innovators, entrepreneurs, and workers, combined – generates the material wealth that makes consumer demand possible in the first place. The reason we produce is so we can consume. Consuming doesn’t produce wealth, production does.

Either way, we expect very good sales for November and December combined. Payrolls are up 2 million from a year ago. Meanwhile, total earnings by workers (excluding irregular bonuses/commissions as well as fringe benefits) are up 4.1%.

Some will dismiss the growth as “the rich getting richer,” but the facts say otherwise. Usual weekly earnings for full-time workers at the bottom 10% are up 4.6% versus a year ago; earnings for those at the bottom 25% are up 5.3% from a year ago. By contrast, usual weekly earnings for the median worker are up 3.9% while earnings for those at the top 25% and top 10% are up less than 2%.

Yes, that’s right, incomes are growing faster at the bottom of the income spectrum than at the top. A higher economic tide is lifting all boats and helping those with the smallest boats the most. This is not a recipe for stagnating sales.

And so the voices of pessimism have had to pivot their story lately. Just a short while ago, they were still saying the economy really wasn’t improving at all. Now some are saying it’s a consumer debt-fueled bubble.

It is true that total household debt is at a new record high. But debts relative to assets are much lower than before the Great Recession. Debts were 19.4% of household assets when Lehman Brothers went bust; now they’re 13.7%, one of the lowest levels in the past generation. Meanwhile, for the past four years the financial obligations ratio – debt payments plus the cost of car leases, rents, and other monthly payments relative to incomes – has been hovering near the lowest levels since the early 1980s.

Yes, auto and student loan delinquencies are rising. But total serious (90+ day) delinquencies, including not only autos and student loans, but also mortgages, home equity loans, and credit cards are down 61% from the peak in 2010.

The bottom line is that investors should be less worried about consumer debt today than at any time in recent decades. Some think this could change if the Fed continues to raise interest rates, while selling off its bond portfolio. But interest rates are still well below normal levels and the U.S. banking system is sitting on trillions in excess reserves.

The US economy is less leveraged and looking better in recent quarters than it has in years. And better tax and regulatory policies are on the way. The Plow Horse is picking up its pace and consumer spending is in great shape.

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The Economy is Accelerating

Economic commentary from Brian Wesbury, Chief Economist at First Trust

The Economy is Accelerating

We’ve called it a “Plow Horse” economy, which was our metaphor invented to counter forecasters who said slow growth meant a recession was on its way. A Plow Horse is always slow, but that slowness hides underlying strength – it was never going to slip and fall. Now, the economy is accelerating.

Halfway through the fourth quarter, monthly data releases show real GDP growing at a 3%+ annual rate. If that holds, it would make for three consecutive quarters of growth at 3% or higher. Believe it or not, the last time that happened was 2004.

Last week saw retail sales, industrial production, and housing starts all come in better than expected for October, the latter two substantially better.

And while retail sales grew “just” 0.2% in October, that came on the back of a 1.9% surge in September. Overall sales, and those excluding volatile components like autos, gas and building materials, all signal a robust consumer.

Meanwhile factory output surged 1.3% in October, tying the second highest monthly gain since 2010. Production at factories is now up 2.5% from a year ago, and accelerating. By contrast, factory production was down 0.1% in the year ending October 2016 and unchanged in the year ending October 2015. The current revival is not due to the volatile auto sector, where output of motor vehicles is down 5.9% from a year ago while the production of auto parts is down 0.3%.

The last piece of last week’s good economic news was on home building: housing starts surged after a storm-related lull in September. Single-family starts, which are more stable than multi-family starts – and add more per unit to GDP – tied the highest level since 2007. Housing completions hit the highest level since 2008.

As a result of all this data, the Atlanta Fed’s “GDP Now” model says real GDP is growing at a 3.4% annual rate in Q4. The New York Fed’s “Nowcast” says 3.8%.

Of course, if we get anything close to those numbers, some analysts will claim the fourth quarter is just a hurricane-related rebound. But the conventional wisdom has been way too bearish for years, and Q3 is likely to be revised up to a 3.4% growth rate from the original estimate of 3.0%. Put it all together, and things are looking up. It’s no longer a Plow Horse economy. In fact, after years of smothering the growth potential of amazing new technologies, the government is finally getting out of the way.

The Obama and Bush regulatory State is being dismantled piece by piece, and spending growth has slowed relative to GDP. Tax cuts are moving through Congress. These positive developments have monetary velocity – the speed at which money moves through the economy – picking up. “Animal spirits” are stirring. We don’t have a cute name for it, but growth is accelerating.

This reduction in the burden of government would be easier, and much more focused on growth, if Republicans had fixed the budget scorekeeping process when they first had the chance back in 2015, or even in the mid-1990s, after having gained control of both the House and Senate.

Instead, they took a cowardly pass. As a result, when assessing the “cost” of tax cuts, Congress still ignores the positive economic effects of tax cuts on growth. Oddly, while refusing to “score” better GDP growth, we understand the budget scorekeepers assume tax cuts lead to higher interest rates, which add to the cost of the tax cuts. In effect, the scorekeepers will use dynamic models to count the negative effects of tax cuts on the overall economy, but not the positive ones!

This kind of rigged scoring system is why the current tax proposals don’t cut tax rates on dividends or capital gains, and why some of the tax cuts are temporary. It’s also why the top tax rate on regular income for the highest earners is likely to end up near the current tax rate of 39.6%.

We were never satisfied with Plow Horse growth, but we always thought it showed the power of innovation. The power of new technology caused the economy to grow since 2009, despite the burden of big government.

Now with better policies, growth is on the rise. We haven’t fixed enough problems to get 3% real growth in every quarter, and maybe not even as the average growth rate over time. That would probably take some major changes to entitlement spending programs. But the recent improvement is hard to miss and signals that entrepreneurship is alive and well in the United States.

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Investing vs. Trading

Market commentary from Brian Wesbury of First Trust.
Are you an investor or a trader? Investors think long-term, while traders focus on short-term price movements.
Trading furs, cloth, commodities, or tulips, has gone back centuries, if not millennium, but was about adding value and moving goods to markets. In other words, through trading many ran businesses that looked a great deal like investing.
The “ticker tape” allowed the trading of financial products, but after the Great Depression many wouldn’t touch stocks for decades. Now, financial market news and quotes are on TV all-day and pushed out over smartphones. This can encourage “trading” over “investing.” Or another way of saying the same thing, the short-term over the long-term.
For example, many people have zero idea what Bitcoin is, why it is needed, or what gives it value, but they are mesmerized by it nonetheless. It’s just digital scrip – an alternative to sovereign currency. It pays no dividend and isn’t widely accepted. No one knows if it will last.
In the meantime, there are monumental events taking place that get missed if one focuses on the trees and not the forest. Horizontal drilling and fracking are one of those.
Remember when the world was about to run out of natural gas and oil? Remember when the Middle East and Russia, because of their energy reserves, could dominate geopolitics?
Well, all that has changed. The US is now the world’s biggest energy producer and, by 2020, the US is likely to become a net energy exporter to the rest of the world. This explains the political upheaval in Saudi Arabia as the royal family moves slowly toward a more free-market friendly environment. Russia faces similar forces that, in the end, will create more global stability.
Because of US supplies, Europe can become less dependent on Russian oil and natural gas. In addition, just like when Ronald Reagan was president of the US, as the pendulum swings toward less regulation, lower tax rates and smaller government, Europe must follow suit.
The combination of these developments causes stronger global economic growth, which is great news for investors. However, the dominance of governments in recent decades, and the reporting of every utterance of Federal Reserve or foreign central bankers, creates anxiety among many investors. Some investors are worried about a flattening, or inversion, of the yield curve as the Fed tightens.
But these concerns are overdone. It’s true that an inverted yield curve signals tight money, but inversions typically don’t happen until the Fed pulls enough reserves out of the system to push the federal funds rate above nominal GDP growth. Right now, that’s about 3.5%, which means the Fed is likely at least two years away. And, the banking system is still stuffed with over $2 trillion in excess bank reserves. Monetary policy, by definition, is not tight until those excess reserves are gone.
Focusing on trading, and not investing, misses these longer-term developments and highlights short-term fears.  Patience, persistence and optimism help avoid the pitfalls of short-term thinking. The current environment will continue to reward those who stay focused on investing.
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2017 Top 40 Under 40 Honoree: Stephen Korving

Stephen 40 under 40

At work: President of Korving & Company, a financial planning and investment management firm focused on helping families plan for a secure retirement.

“I love helping people create their financial plan, working with them to implement the steps and follow the plan, and then being there to see their excitement and sense of accomplishment when they achieve their goals.”

Home and family:

“I live in Western Branch with my wife, Megan, and our three kids who make every day an adventure and an amazing learning experience: Madeline, Mason and Ty.”

Volunteer activities:

“I’m fortunate to serve on the boards of local organizations whose missions I get excited about and that make a direct impact on the areas where I live, work and play:”
• Portsmouth Museums Foundation (vice president),
• Portsmouth Partnership (secretary),
• Southeast Virginia Community Foundation (development committee chair),
• LEAD Hampton Roads,
• Portsmouth Assembly.

Motivating factor:

“I strongly believe in loyalty, respect, integrity and doing what I can to try to make my little part of the world better.”

Advice for young people:

“Two simple things: treat others the way that you want to be treated, and if you say that you will do something, do it.”

Professional goal in five years:

“To continue growing our practice without losing focus on what’s made us successful – getting to know our clients very well and providing fair, honest unbiased financial advice.”

One thing I’d change about Hampton Roads:

“Instead of competing against one another, it would be nice for the cities of Hampton Roads to work together, sharing resources to compete against other regions in order to grow and attract new business.”

Region’s biggest asset:

“It’s a tie: the people and the location. Having lived in other parts of the country, these two things are what set this area apart and what drew me back home.”

Downtime:

“I spend most of my downtime with my family. I like to be outside, so when the weather is nice I like to work in the yard, head to the beach or go for a run.”

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The Weekly Market Review

Week of 10/30/17 – 11/03/17:
Last week wrapped up the busiest part of the earnings season with most companies having now reported.  Large caps continued the recent stretch of gains extending the streak of new record highs for the S&P 500, Dow, and Nasdaq.
The Nasdaq led the way last week adding nearly 1% while the S&P and Dow a gained 0.29% and 0.45% respectively.  Small stocks didn’t fair quite as well, own 0.87% as benchmarked by the Russell 2000.
Global stocks recorded gains led by emerging markets, which rallied back from a couple lackluster weeks to add 1.45%.  The ACWI and EAFE closed the week up 0.67% and 0.92%
respectively.
While headlines were primarily focused on earnings releases, investors also continued to monitor the political landscape, especially the announcement of a new Fed chairman –
Jerome Powell.
Rates decreased for the first time in several weeks while the dollar added to it’s recent rally.
The 10 year closed just north of 2.3% while munis and corporates also rallied.  Energy and Technology stocks responded the best to last week’s earnings releases,
while telecoms saw a major decline.
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