While writing this newsletter there are lovely fluffy snowflakes coming down – hopefully winter’s last hurrah before spring starts in earnest.
How the Markets Performed during the First Quarter
After a lackluster 2011, the New Year has started off with a bang:
For the first time in a while bonds had a negative return (only just by -0.09%). It seems that the Federal Reserve’s extended period of easy money and ultra low short-term rates are about to end. If the Federal Reserve does not raise rates soon, inflation could take off like a rocket as the economy improves. Most of the pundits did not predict the market performing so well this last quarter, which goes to show that market timing, is, extremely difficult to do. Those who were sitting on the sidelines missed out on quite a nice gain in the markets. Remember, it is very important to rebalance your portfolio to get it back in line with your target allocations, to reduce portfolio fluctuations and hopefully improve long term performance4. Let me know if you need any help with this very important process.
Don’t Rely on Living on Less in Retirement
While on vacation in February, I came across an interesting study completed by Megan Butler, a lecturer at my Alma Mater5. Here is a summary of her findings:
- Consumption did not decrease voluntarily at retirement and some households spent more,mainly due to healthcare.
- Single females need to have saved enough to replace 82% of pre-retirement income and 88% for males.
- Couples are more fortunate, especially if the younger partner continues working after olderpartner retires (not as much fun as retiring together…..!)
Butler’s conclusion is that there are 4 options:
- Delaying retirement and working part-time or full-time
- Increasing your retirement savings rate
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Increasing return on investments, while still carrying acceptable level of risk
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Younger partner continues working after older partner retire so I will add a 5th option: reduce your overhead, so you can live off less in retirement
Butler also advises to save at least 15% of income, swallow the disagreeable pill of working past 67 and avoid temptation of cashing in savings when changing jobs. Note: saving 15%is too low if you have a late start to savings.
Housing in Retirement
The ongoing housing crisis has put home ownership in a new light. During the gung-ho housing days, it was easy to forget that buying a home was the biggest purchase most people ever make, and that there are serious financial consequences to owning and keeping up a home.Here are some alternatives and options regarding home ownership:
- A home is a place to live. Rarely is it an investment, after mortgage interest, taxes,insurance, repairs and maintenance are taken care of.
- Consider pre-paying mortgage as long as you are also saving for retirement. Ideally you want to be debt free by the time you retire.
- Interest rates are still at historically low levels. Consider refinancing to a 20, 15 or even a 10 year fixed rate mortgage.
- Downsize and cut overhead with lower utility bills, taxes and insurance costs. Less stress of taking care of a large home and often multiple appliances like air conditioners, furnaces and hot water heaters.
- Renting is always an option. Let someone else take care of maintenance, repairs and taxes.
- Start getting rid of the clutter and toys now. It is painful to see retirees moving into retirement homes, not knowing what to do with their “stuff”.
- Clear out the garage – your second most valuable possession(s) would like to be protected from the elements and the ever-present thieves and vandals.
Increased Retirement Plan Limits
Limits on contributions to retirement accounts have gone up for 2012. Take note of them in the cover email of this newsletter.
Personal Notes
In February, we visited South Africa to see family and visit the spectacular game reserves. The highlight was a 3 day hike in the Kruger National Park, where we saw a multitude of birds and game. The experience we will never forget was when a large male rhino charged us – getting the attention of our vigilant rangers! Back home, we joined a running group that is keeping us on our toes, literally. Last week, we ran 14 miles, the furthest we have ever run in our lives. Now is the time to complete a half marathon, to check off on our “bucket lists” and then revert back to the more sedate sprint triathlons, before our legs give out on us.
Please contact me for a review meeting if needed. As I continue to welcome new clients,please feel free to pass this newsletter on as seems appropriate. Currently my new clients chedule is booked up till the end of June. My website at http://madeyskifp.com has information for those interested in my financial planning services.
1 Vanguard Total Stock Market Index 2 Vanguard FTSE All-World Ex-US ETF 3 Vanguard Total Bond Market Index 4 No one knows what the future will hold, so there is no guarantee this investment strategy will provide higher returns. 5 Megan Butler, a research actuary at Alexander Forbes & lecturer at the University of the Witwatersrand (Johannesburg, South Africa). Income & expenditures of 3,000 households were analyzed.