Registered Investment Advisors (RIAs) deal with people at all wealth levels but most are upper income even if they are not billionaires. There is a retirement crisis and it’s not just hitting the working class.
The typical median wage earner making $50,000 a year and retiring at 67 can expect Social Security to pay him and his wife about $2400 per month. To maintain their previous spending levels this leaves a gap of about $1000 a month that has to be made up from savings. But many of these middle income people have not saved for their retirement. Which means working longer or reducing their lifestyle.
This problem is also hitting the higher income people. How well is the person earning over $200,000 a year going to do in retirement? The issues that even these so-called “rich” face are the same: increased longevity, medical care, debts and an expensive lifestyle are all issues that have to be considered.
“The $200,000+ executive expects a fine house, two cars, two holidays a year, private schools, to pay for his kid’s university tuition, and so it goes on. And this is not to mention the tax bill he’s paying on his earned income. A bunch of all this was really debt-funded, so effectively the executive spent chunks of his retirement money during his working days.”
When high income people are working, they usually don’t watch their pennies or budget. But once retired, that salary stops. That’s when savings are required to bridge the gap between their lifestyle and income from Social Security and (if they’re lucky) pension payments. At that point the need for advance planning becomes important.
Before the retirement date is set, the affluent need to create a retirement plan. He or she needs to know what their basic income needs are; the cost of utilities, food, clothing, insurance, transportation and other basic needs. Once the basics are determined, they can plan for their “wants.” This includes things such as replacing cars, the cost of vacation travel, charitable gifts, club dues, and all the other expenses that are lifestyle issues. Finally, there are “wishes” which may include a vacation home, a boat, a wedding, a legacy. The list can be a long one but it should be part of a financial plan.
If the plan tells us that the chances of success are low, we can move out our retirement date, increase our savings rate or reduce our retirement spending plans.
This kind of planning will reduce the anxiety that is typically associated with the retirement decision making.
The New Trump Economy
We have been talking about the “Plow Horse Economy” for quite a while now. Low interest rates designed to spur economic growth have been offset by other government policies that have acted as a “Plow” holding the economy back.
Market watchers have assumed that the November election would see a continuation of those policies. The general prediction was for slow growth, falling corporate profits, a possible deflationary spiral, and flat yield curves.
What a difference a week makes. The market shocked political prognosticators by standing those expectations on their heads.
Bank of America surveyed 177 fund managers in the week following the elections who say they’re putting cash to work this month at the fastest pace since August 2009.
The stock market has reached several new all-time highs, moving the DJIA to a record 18,924 on November 15th, up 3.6% in one week.
Interest rates on the benchmark 10-year US Treasury bond have risen from 1.83% on November 7th to 2.25% today (November 17th), a 23% increase. Expectations for the yield curve to steepen — in other words, for the gap between short and long-term rates to widen — saw their biggest monthly jump on record.
WealthManagement.com says that
Whether this new-found optimism is justified is something that only time will tell. In the meantime to US market is reacting well to Trump’s plans for tax cuts and infrastructure spending. Spending on roads, bridges and other parts of the infrastructure has been part of Trump’s platform since he entered the race for President. It’s the tax reform that could be the key to a new economic stimulus.
According to CNBC American corporations are holding $2.5 trillion dollars in cash overseas. That’s equal to 14% of the US gross domestic product. If companies bring that back to the US it would be taxed at the current corporate tax rate of 35%. The US has the highest corporate tax rate in the world. The promise of lower corporate tax rates – Trump has spoken of 15% – could spur the repatriation of that cash to the US, giving a big boost to a slow growth US economy.
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