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2018 Crystal Ball

While we wrap up another year it is time once again to throw out the traditional “Forecast” report for the up coming year. But before we look ahead we do need to do a quick review of some of the relevant details from 2017.

The Stock Market

Many pundits and  articles are predicting a fairly imminent correction because the market valuation is at record highs. First a quick primer, when valuations are mentioned, unless stated otherwise typically refer to the markets Price to Earnings ratio – simple dividing the markets “price” (I am using 2700 for the S&P 500) and the sum of the earnings for the constituent companies.

The market valuation is based on (anticipated) corporate earnings, specifically the growth rate of said earnings as the market is forward looking. Below is a chart from Ed Yardini & Associates blog that shows the level of corporate earnings since 2003. While much has been made of the low volatility, high growth stock market in 2017, such a year is hardly surprising when looked at while comparing to earnings growth to recent years. 2017 earnings, both anticipated and actual, have accelerated sharply  from flat growth in 2016. While the “P” or price of the S&P 500 has risen sharply, so have earnings.

2018 earnings

Below are the projected P/E ratios based on a level 2700 for S&P 500 and consensus projected earnings and earnings growth rates from

2017 – 20.54 P/E

2018 – 18.46 P/E    +11.2% YoY Growth

2019 – 16.80 P/E  +9.9% YoY Growth


While pundits like to cry that the sky is falling…it makes great headlines, the fact is that the market valuation is getting cheaper, not more expensive. If we maintain the current valuation or P/E then based on earnings projections the market can appreciate by 11.2% and 9.9% in 2018 and 2019 respectively. Granted earnings projections are guesses, but the market moves on those guesses, and will correct as necessary when actual results are disclosed.

As far as I have read earnings projections have not factored in the economic boost from the tax packages being proposed. Any economic boost from tax cuts could serve to bolster stock returns or bring down the market valuation. However expect a return of normal volatility as earnings projections will be difficult with simultaneous fiscal stimulus and Fed tightening.

Looking at the chart below it is easy to see that 2017 was a much less volatile year than 2016 for the market. The top and bottom white lines showing the price range for the SPDR S&P 500 ETF (SPY) in 2016 and the two middle white trend lines showing the price volatility for 2017.

S&P volatility

In 2018 expect at least one 10% decline through the year, if not more. Do not be scared out. Remember that historically 10% declines are normal every year! With the magnitude and timing of the effect of tax cuts expect that earnings estimates will be far less accurate in 2018. The market trades on earnings and uncertainty will create volatility, but an overall positive return in 2018.

Interest Rates

In the latter part of this year short term interest rates have moved up coincident with the Fed’s tightening. The black area showing where rates have come from and the red line depicting current rates. Interestingly, long term interest rates have come down, beginning to move toward an inverted yield curve. When truly inverted short term rates are actually higher than long term rates. Such a setup typically precludes an economic slowdown, possible recession and a bear market or serious correction.

2017 yield curve


My feeling is that the yield curve will continue to flatten in the first half of the year with short term rates rising and long term rates flat or falling. But by the end of the year the curve will start to normalize with long term rates reversing course and heading up as the positive affects of tax cuts, and possibly Congress re-looking at Obamacare.

This is one the only time that I can recall that fiscal and monetary policies are in synch… by moving in opposite directions. While Fed tightening alone would likely cause a recession in 2019 as indicated by the yield curve, fiscal stimulus via tax cuts will (hopefully) offset Fed action and keep the expansion going. Without tax cuts a recession is a strong probability. But the Fed does need to normalize rates. With 3%+ economic growth short term rates should be significantly higher.

Longest Expansion in History?

Besides being irrelevant, it is far from accurate. Secular, or long term cycles have defined the stock market since its inception. In the modern era, a bull market started in 1940 during WWII and didn’t end until 1965 – 25 years later. More recently the biggest bull market yet, started in 1980 and finished 20 years later in 2000. From 2000 to 2013 the market was stuck in a 13 year secular bear market, punctuated by two separate 50% declines. A secular bull market is defined as one in which the start is when the market reaches a new all time high…and stays there. By that measure, this secular bull started just 5 years ago, short by any measure.

While true that bear markets begin at extreme valuation levels, as pointed out earlier, valuations are trending down not up. Although U S earnings growth rate may be slowing, globally the earnings expansion is still early. In the U S earnings will depend on who wins out in the tug of war between Fed policy of rising interest rates (negative) vs. fiscal stimulus of tax cuts (positive). By 2019 my money is on the fiscal stimulus prevailing.


The first rule of successful investing is to determine what you will do if you are wrong. The worst investment mistakes many times come from being so over confident in an investment that the investor doggedly sticks to it even when expectations are not being met. Even with what may seem to be an obvious trade, there are always exogenous uncontrollable events that can sink the best of plans. With what I anticipate to be a rocky road in 2018, if you are risk adverse you may want to stick with lower volatility investments.

The other strategy is to focus on long term trends that can prevail regardless of the results of government policies. Robotics, artificial intelligence, data use and collection are unstoppable trends. Health care has not had an overall good year in 2017, but globally the developed world is aging and money will continue to be spent to prolong and increase the quality of life as we age. Wile this doesn’t mean such investments won’t be volatile, they are industries that will grow over time.




Will Tax Cuts Matter?

In my inbox today was a report from Zacks Investment Research and their take on the recent tax package. I couldn’t say it better myself, so I won’t try! Here is all you need to know…as an investor. I will note that Zacks has not, in general been a fan of President Trump which I think adds credibility to their position.

“Sadly, there’s been a lot of partisan bickering about whether it’s a good deal or not. But politics aside and focusing just on the impact for stocks, it’s definitely a win for the market.

Corporate tax rates will be cut to the lowest level in 68 years, going all the way back to 1949. It also provides incentives to repatriate accumulated profits from overseas (estimated at more than $2.5 trillion dollars).

And what will businesses do with all of those profits?


There’s no doubt some of that will go to stock buybacks. But with the US suddenly becoming one of the most business friendly countries in the world, you will see massive new corporate investment. This includes relocating foreign operations back to US soil; building new plants to expand; and the purchase of new equipment and technology to see it all through.

All of this economic activity means more new jobs. And with more jobs comes a stronger consumer, which means more consumer spending. That, of course, is good for business, and the whole virtuous circle is reinforced, leading to decades of new prosperity.

As for the individual tax cuts, the vast majority of filers will see a benefit. And with more money in people’s paychecks as early as next February, you should see already robust consumer spending increase even more. And since 70% of GDP is tied to consumer spending, that’s another boost for the economy.”

Next week I will post my 2018 Outlook in which I do point out, that although the tax cut is a big positive, the Fed will likely continue to raise interest rates under the cover of expanding GDP. The combination will certainly bring volatility back to the markets.

What’s Your Uncertainty/Humility Score?

401 Advisor, LLC
Published by Bill DeShurko · 

As the market moves higher, individual investor confidence tends to rise as well…unfoundedly so. Great article from Morningstar by Christine Benz. As I have said before, the time to prepare for a storm is when the sun is shining! From the article,

“Look for humility in your financial helpers. If you’re interviewing financial planners or advisors (or if you have one already), do they acknowledge that there’s a lot that they couldn’t possibly know? Does the recommended plan include accommodations in case something doesn’t play out as planned–stocks lose money for an extended period…”…/whats-your-uncertaintyhumilit…

So much of the investment world is based on educated guessing; the sooner we all realize that, the better.

Good Article on Debt

In the following article by Ellen Chang, I offer some suggestions on when and when not to use and pay off debt.

the-streetThe Street

Market View – Time to be All In

The markets have shaken off the effects of politics and global turmoil and have once again taken off into new bull market territory. As it should. The Recent news bodes well for a continuation of growth in corporate earnings, which should fuel the market’s continued rise.

In addition, President Trump and Senate Majority leader Mitch McConnell held a press conference reiterating their commitment to getting tax cuts/reform done by year’s end. The parade of optimism regarding tax cuts is energizing the market. While politicians will debate the pros and cons of tax cuts, as an investor, make no mistake about it, a tax cut will add fuel to an already growing economy. The big negative; that should take years to play out, is that the Federal Reserve will face very little resistance to raising interest rates well into the foreseeable future.

  • Q3 earnings results are not only clear and present, but results are better than expected among most household name stocks. Goldman Sachs (GS) tore the cover off the ball, figuratively speaking. The Wall Street investment giant easily surpassed top and bottom-line estimates. This marks the fourth quarter in the last five that Goldman Sachs has beaten earnings estimates, for a 4-quarter trailing average of 11.6%.

    Morgan Stanley (MS) also beat expectations for both earnings and revenues. Investment banking revenues, in particular, grew 18.4% in the company’s Q3.

    Johnson & Johnson (JNJ), Netflix (NFLX), and United Healthcare (UNH) also beat earnings estimates. Pharma sales in the quarter grew an impressive 15.4% for JNJ.

    Economic numbers also add support.

    Crude Inventories decreased by 2.8 million barrels
    •       CPI, Core CPI increased by 0.1%
    •       Retail Sales increased by 1.6%
    •       September results for both import and export prices beat expectations

But always remain cautious. The stock market doesn’t raise a flag saying “I’m done, time to get out”! People lose money, lots of money in Bear markets because they are unexpected. Make a plan now, for both up and down markets…and stick to it!


Is a Market Correction Imminent?

The following commentary was first posted on my other business site – FTP is a robo (online) advisor that provides specific investment recommendations for individual’s 401k plans. Recommendations are specific to the investments available to each plan. If you, or someone you know is looking for investment help with their 401k please suggest they check out our site:

I was watching the investment news the other day, and in an interview a well-known money manager was asked when he expected a 5% correction. I honestly didn’t expect him to take the bait, but instead he responded that a 5% market drop could happen at any time; it could be imminent, could be weeks, could be months away. News sites across the internet then blasted out headlines like, “Top Money Manager Says Stock Market Correction is Imminent”. My answer would have been, “A 5% market drop is not a correction, it’s just a couple of bad days!” But this is the stock market world we now live in. ANY drop of any kind, even just 5%, is met with Chicken Little’s coming out of hiding and screaming about the beginning of the next great selloff.

For perspective, a real correction is a drop of at least 20%. Drops of 40% or more typically come once a decade (note: financial crisis was 10 years ago). !0% drops are normally once or even twice per year. Point being is that volatility is the norm for the stock market. It is not to be feared, but planned for and taken advantage of.

The reality is that, yes the market is very highly valued by any and all measurements of value. But high values do not mean an imminent correction. Major bear markets, the -40% kind are precipitated by a slowdown in corporate earnings. The tech wreck came because technology advancement finally started to slow. PC’s and laptops had the speed and memory to match most needs; the internet while slow, was at least capable of providing access to countless new web oriented services; millions of miles of fiber optic cable had been laid… Earnings started to slow. An overvalued market started to crash in the spring of 2000. While the 2007 bear market is termed the “financial crisis”, it was the effect that the financial crisis had on corporate earnings that caused the market to crash. Earnings crashed…stock market crashed.

We are just not there in today’s economy. Corporate earnings are growing. Europe is growing. China is at worst, no longer a drag on the global economy. Deregulation, tax cuts and maybe a premium break for the middle class and small businesses saddled with Obamacare all bode very well for the future of the economy and earnings. A 5% “correction”? Sure, anytime and it won’t be a problem. But the next big one? Still a ways off, but with valuations so high it would be wise to have your exit strategy planned.

At Fund Trader Pro many of the 401(k) plans will be reviewed at the end of the month. Barring a big change in two weeks we expect plans to remain fully invested and allocated aggressively – foreign, emerging markets and U S Growth oriented funds have dominated this year. We expect that to continue…but are plans are at the ready should we be wrong.

For 401 Advisor, LLC clients we are staying true to our dividend income strategies. While yields are getting harder to  come by, the market keeps throwing us a few bones here and there. We’ll be looking to pick up a few unloved, but higher yielding gems over the next few weeks.


Investopedia Q & A

Below are some questions and answers that I received on this past week. Links are provided to the full answer.

Why aren’t there advisor fee structures that are more fair to the client?
There are two answers to your question. First, perfomance based fees are prohibited except for accredited investors by the SEC. While there are several categories of accredited investors, like institutions… Read More
Are bond funds a good investment choice for the risk averse?
Understand a couple things about bonds: the market value of a bond will fluctuate with interest rates – value goes down when interest rates go up, and vice a versa…. Read More
Should I consider investing in Target Date Funds with later target dates?
In my opinion target date funds are not a good choice. Once you get out past 20 years for the target date these funds are nearly 100% in stocks. I… Read More


This Bull May Still Have Room to Run

The following article was originally posted at

This may seem like a cop-out, but let me explain. I am not necessarily saying that this bull market will continue to run, (and anyone who thinks they actually know whether it will or not is a fool), but what I am saying is that I am sick and tired of all the talking head talk that this bull must be near its end because 1. It has gone on for so long, or 2. We are at new highs, so market must go down.

First let me touch on a real basic physics lesson. If you are trying to measure how far something has gone, like a bull (market) you need to know two things. Both the time involved and the speed at which it has travelled. Think of it this way. After two hours of running participants will be scattered all over the course during the Boston Marathon. Simply calling the race after two hours would leave many slower runners with plenty of race yet to run while the top runners have finished.  Current market analysis seems to ignore the speed factor.

If we apply this to the market let’s see how far we have really come during this “extended” rally. In the graph below we are looking at GDP after four separate recessions. Thinking of speed as the rate of GDP growth, this rally is made up of amateur runners vs. the Kenyan runners of the 1934 – 1940 recovery!

Chart 1. Economic Recoveries

Post Recession GDP Recoveries


While annual change in GDP is not correlated to the stock market, over the long term the two are coincident if not causal. From the above it can be seen that the economy has not yet grown substantially over the last seven years. Below is a chart comparing total GDP growth over each period in constant inflation adjusted terms.

Table 1. GDP Growth Comparison

GDP $ Growth Post Recession Total growth in GDP
1934 – 1940 47%
1976 – 1982 14.30%
1983 – 1989 29%
2010 – 2016 12.70%


Based on the data above the economy grew at more than twice the recent amount in the ’83 – ’89 recovery, nearly 4 times as much in the ’34 – ’40 recovery and even outpaced growth from ’76 – ’82. Keep in mind that was the time of “stagflation” and 1982 was the second year of the Great Recession!

It seems to me that the current economy has substantial room to grow and by extension the stock market as well.

A Look at the Stock Market

There is also a discussion point made that says that the above analysis maybe correct, but the stock market is way ahead of the economy. Therefore a stock market correction is overdue, even if we avoid an economic recession. Balderdash! It is all a matter of perspective.

The chart below shows the return on an investment in SPY, the SPDR’s S&P 500 Index ETF from 8/31/2000 – 06/05/2017. The start date is the market high before the start of the “Tech Wreck” – 9/11 market crash from 2000 – 2002. The horizontal white line shows a level 0% return from the start.

Chart 2. SPY Total Return

SPY from 2000

Source: / Bill DeShurko

The bull has run its course argument looks at the market performance from the bottom in 2009 to the present. And in fact the market has had a cumulative return of 320% since then. However, the early returns off the lows only resulted in an investor recapturing their losses from the tech wreck and the financial crisis as the return since the breakeven point from 2000 is only 135%.

[Author’s Note: Let me summarize that for you. An investor in a low cost ETF Index Fund (SPY) from 8/31/2000 – 9/26/2011 would have lost about 50% of their money twice and made absolutely zero money for 11 years! Nice strategy….]

But measuring a bull market from the bottom of a bear market seems disingenuous to me. A bull is about making money. For any investor from before the bear market, the bottom back up to the previous level (the 0% line above) is just a matter of a recovery of losses. Recovery is not a bull market. Defining a bull market from a market low is akin to saying a cancer patient starts their recovery from the day of surgery or start of treatment. That is not recovery! Recovery starts after the treatment is over and barring a relapse ends when the Doctor gives the “cancer free” pronouncement. Similarly bull markets don’t start until after the treatment  period.  As seen above bear markets can relapse too. A better definition of stock market recovery is to start when the market reaches its previous high and stays above that level. By that definition this Bull started in September of 2011 and has provided us with a 135% gain.

The question is, “How does this stack up historically?”

Since 1900 the stock market has gone through bull and bear cycles. Unless the market drops by some 60% or so we broke the old high in 2000 and have stayed above it since 2011. An 11 year bear market. About average since WW II.

Chart 3. Secular Stock Markets




Looking at bull markets by comparison from 1940 – 1965 the market gained a cumulative 955%! And during the great bull from 1980 – 2000 another 1099%. By comparison our current 135% gain seems rather paltry! We certainly aren’t at the end of this bull market just because we are at record highs!

So What Does Matter?

Earnings, earnings and earnings. S&P 500 corporate earnings growth has been anemic since 2011, with a fairly rare non recessionary drop in 2015. With growth returning in 2016 and expected into 2018 it would be rare for a bear to start as earnings are growing. But without an economic jolt from corporate and personal tax cuts all bets are off. Deregulation will certainly help smaller businesses but I’m not sure it is enough to spur wage growth. If wages and earnings can grow simultaneously I would not bet on an early end to this Bull Run.

And one final note: a 10% drop is not a correction, it used to be a one or even two time annual event. A real bear means a 40% drop or more, and likely over a multi-year period.

Sell Off?…Really?

For decades the iconic bull of Wall Street has symbolized the spirit of the American charging_bull_new_york_city_566247entrepreneur. Risking their own wealth to make fortunes by creating new businesses with the help of the financiers of Wall Street. Hard charging traders and investors became legendary making and losing fortunes. The likes of Jesse Livermore, George Soros, Jim Rogers and even Jordan Belfort, made famous by Leonardo DiCaprio in the movie “The Wolf of Wall Street”.

This past Friday the NASDAQ exchange dropped about 2.5% in a day. Let me remind readers, the NASDAQ is the home of the technology leaders Amazon, Face Book, Google, Apple and many more. The “Teck Wreck” from 2000 through 2002 saw the NASDAQ drop 90% in value!!! Since the NASDAQ is typically where growing and emerging companies list their stocks, the index is typically very volatile as many stocks are very sensitive to the ability of the company to generate an ever increasing stream of earnings. Any risk to these earnings can cause volatility. So when the market dropped 2.5% on Friday I yawned, went out and played golf and went about my normal weekend activities.

The financial pundits had a very different reaction. I saw and heard comments like: “Slammed”, from the Wall Street Journal; “Sell off Wrecks Tech” at; and “Rout” at The TV media was in a frenzy with topics on hedging, managing portfolios in a crash, debates on whether to sell and go to cash or not…

Again, the NASDQ only dropped 2.5%! And it was just one day! (editor’s note: one day does not create a trend).

I was left a little embarrassed. And would like to suggest that maybe the Wall Street Bull be replaced by a new figure that better represents the new modern “Wall Street”…

Sta Puff Man          ….the Stay Puft Marshmallow Man!

Common Risks in Retirement

The following article was recently updated at 

My comments are under the Interest Rate Risks sub head. If you are considering an annuity, you may want to read this first.


The most careful plans and preparation for retirement can fall apart due to an unexpected death, illness, a stock market crash or a pension plan that goes bankrupt. In addition, it is not unusual for people to live more than 30 years in retirement, due to increased rates of early retirement and rising life expectancy – which, in itself, presents a major risk that retirees will outlive their assets.

The longer the time spent in retirement, the harder it becomes to be certain about a retiree’s financial outcome. In planning for retirement – or living it – you must understand the risks that lie ahead and how they could undermine your financial security.

Types of Post-Retirement Risks

The Society of Actuaries (SOA) in the United States identified a number of post-retirement risks that can affect retirees and their financial security. They’re grouped into four categories. People preparing for retirement or already in retirement should consider them carefully:

  • Personal and family – Changes in your life or the life of a loved one could affect your retirement income stream.
  • Healthcare and housing – These include the risk that failing health will require moving to a facility with professional caregivers.
  • Financial – These risks revolve around inflation, investments and stock market activities.
  • Public policy – Government can make decisions that could affect retirees.

“There are many unexpected demands for a retiree’s funds. For that exact reason every one needs a realistic emergency fund. If a retiree needs to take large amounts of tax-deferred money early in retirement, it may result in future dollars being spent today. It not only decreases the amount of lifestyle money available; the money is gone, along with the potential to earn a return (compounding effect) that was to assist the retiree in the future. Spending dollars today takes away the future growth of that money, which may have been critical to maintaining a certain lifestyle or not outliving your money,” says Peter J. Creedon, CFP®, ChFC, CLU, chief executive officer, Crystal Brook Advisors, New York, N.Y.

Personal and Family Risks

Employment Risk

Many retirees plan to supplement their income by working either part-time or full-time during retirement. In fact, some organizations prefer to hire older workers because of their stability and life experience. However, success in the job market may also depend on technical skills that retirees cannot easily gain or maintain. Employment prospects among retirees will vary greatly because of demands for different skills and may change with health, family or economic conditions.

Choosing the point at which you want to retire is integral to retirement planning. Later retirement is an alternative to increased saving, but there is no certainty that appropriate employment will be available. Working part-time is an alternative to full-time employment, and part-time jobs may be easier to obtain. (Read more about working past retirement age in Stretch Your Savings by Working into Your 70s.)

“Not having employment at any point can reduce your retirement income from Social Security as well as if you have a pension from your employer. It may also take longer to collect your pension if there is a stipulation regarding years of service,” says Allan Katz, CFP®, president, Comprehensive Wealth Management Group, LLC, Staten Island, N.Y.

Longevity Risk

Running out of money before you die is one of the primary concerns of most retirees. Longevity risk is an even larger concern today as life expectancies have risen. The life expectancy at retirement is just an average age, with about half of retirees living longer and a few living past age 100. Planning for only enough income to live to your supposed life expectancy will be, happily, inadequate for about half of retirees. But the downside of living longer is increased exposure to other risks that are listed below.

Those who are managing their own retirement funds over a lifetime have to perform a difficult balancing act. Being cautious and spending too little might needlessly restrict your lifestyle – especially in early retirement when you are the healthiest and most mobile – but spending too much increases the danger of running out of money.

A pension or annuity can mitigate some of the risk because it provides an income stream for life. However, there are some disadvantages, including loss of control of assets, loss of ability to leave money to heirs and cost. Although it’s unwise for people annuitize all their assets, annuities should be considered in retirement planning. (For more information on how annuities can provide steady income in retirement, read Inflation-Protected Annuities: Part of a Solid Financial Plan and Personal Pensions: Repackaging the Annuity.) But also carefully investigate any company where you’d place an annuity, be cautious of fees and consider other options, such as laddering bonds. There are also interest rates to consider when buying an annuity (see below).

Death of a Spouse

The grief over a spouse’s death or terminal illness contributes to high rates of depression and suicide among the elderly. Then there’s the financial impact: A spouse’s death can lead to a reduction in pension benefits or bring additional financial burden, including lingering medical debts. Also, the surviving spouse may not be able or willing to manage the finances if they were usually handled by the deceased spouse.

Financial vehicles are available to protect the income and needs of survivors after the death of a partner or spouse, such as life insurance, survivors’ pensions and long-term care insurance. Estate planning is also an important aspect of providing for survivors. (For information about estate planning, see Top 7 Estate Planning Mistakes.)

Change in Marital Status

Divorce or the separation of a cohabiting couple can create major financial problems for both parties. It can affect benefit entitlement under public and private retirement plans, as well as individuals’ disposable income. (For more information, read Divorcing? The Right Way to Split Retirement Plans.)

Splitting the marital assets will almost certainly lead to an overall loss in standard of living, especially if it was necessary to pool income and resources to maintain the standard of living to which both parties had become accustomed. Some experts believe that an individual may need about 60% to 75% of a cohabiting couple’s income to maintain his or her standard of living. This is because some expenses, like rent and utilities, remain the same, regardless of the number of people living in a household.

Although divorce rates among older couples are far lower than for younger couples, it is not uncommon for a retirement-age couple to get a divorce. Prenuptial agreements may be used to define each party’s right to property prior to marriage. (Read more about prenuptial agreements in Marriage, Divorce and the Dotted Line. Or maybe a postnuptial agreement is for you – read Create a Pain-Free Postnuptial Agreement to find out.)

Unforeseen Needs of Family Members

Many retirees find themselves helping other family members, including parents, children, grandchildren and siblings. A change in the health, employment or marital status of any of them could require greater personal or financial support from the retiree for that individual. Examples of financial assistance include paying healthcare costs for an elderly parent, paying higher-education fees for children or providing short-term financial assistance to adult children in the event of unemployment, divorce or other financial adversities.

“Bailing your adult kids out of their repeated financial mistakes can derail your retirement. For some people it’s like taking an unexpected cruise every year with all of the expense and none of the fun. It’s important to set boundaries on excessive gifts or emergency checks when you leave your steady paycheck behind. Or, if you think this may be an issue, tell your financial advisor about it so you can work those expenses into your retirement income plan,” says Kristi Sullivan, CFP®, Sullivan Financial Planning, LLC, Denver, Colo.

Retirement planning should recognize the possibility of providing financial support for family members in the future, even if this does not seem likely at or before retirement.

Healthcare and Housing Risks

Unexpected Healthcare Needs and Costs

These are a major concern for many retirees. Prescription drugs are a major issue, especially for the chronically ill. Older people usually have greater healthcare needs and may need frequent treatment for a number of different health-related issues. Medicare is the primary source of coverage for healthcare services for many retirees. Private medical insurance is also available, but it can be costly. (Read Getting Through the Medicare Part D Maze and 20 Ways to Save on Medical Bills for tips on managing prescriptions and other healthcare costs.)

The Society of Actuaries (SOA) says that healthcare costs can be mitigated to some extent by committing to a healthy lifestyle that includes eating right, exercising on a regular basis and using preventive care. In addition, long-term care insurance can pay for the cost of caring for disabled seniors.

Change in Housing Needs

Retirees may need to change from living on their own to other forms of housing, such as assisted living, which combines care with housing, and independent living, which combines some assistance with housing. Housing that includes care can be quite costly, and the most appropriate form of housing for an individual in a given situation may not be available in the chosen geographic area or may have a long wait for entrance.

The likelihood of requiring day-to-day assistance or care rises substantially with age. When this will need to happen is often hard to predict because it depends on one’s physical and mental capabilities, which themselves change with age. Changes can occur suddenly, due to an illness or accident, or gradually, perhaps as a result of a chronic disease. (Read more about your options in Long-Term Care: More Than Just a Nursing Home.)

Lack of Available Facilities or Caregivers

Facilities or caregivers are sometimes not available for acute or long-term care, even for individuals who can pay for it. Couples may be unable to live together when one of them needs a higher level of care. For people who have lived together for decades, this can result not only in increased costs, but in emotional stress.

In general, little advice is available from the state or the financial-services industry on planning for long-term care costs. This may lead consumers to make uninformed decisions or to defer them and hope for the best.

Financial Risks

Inflation Risk

Inflation should be an ongoing concern for anyone living on a fixed income. Even low rates of inflation can seriously erode the well-being of retirees who live for many years. A period of unexpectedly high inflation can be devastating for those living on a fixed income.

According to the SOA, retirees and would-be retirees should consider investing in equities, a home and other assets, such as Treasury inflation-protected securities (TIPS) and annuity products with a cost-of-living adjustment feature. These types of products help offset inflation. In addition, would-be retirees can choose to continue working – even if it is only on a part-time basis. (Learn how inflation-protected securities can help in Curbing the Effects of Inflation.)

Interest Rate Risk

Lower interest rates reduce retirement income by lowering growth rates for savings accounts and assets. As a result, individuals may need to save more in order to accumulate adequate retirement funds. Annuities yield less income when long-term interest rates at the time of purchase are low. Low real interest rates will also cause purchasing power to erode more quickly.

“In today’s interest rate environment, an annuitant is locking in a payout based on today’s interest rates for the rest of their life. The interest rate used for calculating your payout will be in the 2% range. The question to ask is, ‘Are you really willing to lock in that low an interest rate for the rest of your life?’” says William DeShurko, chief investment officer, Fund Trader Pro, LLC, Centerville, Ohio.

Lower interest rates can reduce retirement income and can be particularly risky when people are depending on drawdown from savings to finance their retirement. On the other hand, a problem also exists if interest rates rise, as the market value of bonds drops.

“With interest rates so low, retirees need to understand the impact higher inflation and rates will have on their bond investments. Bond prices move inversely to interest rates. For example, if a bond has a duration of seven years and rates jump 1% higher, they could see the value of their bond fall by about 7%,” says Dan Timotic, CFA, managing principal of T2 Asset Management in Oakbrook Terrace, Ill.

Increases in interest rates can also negatively impact the stock market and the housing market, thereby affecting the retiree’s disposable income. As such, high real interest rates, over and above rates of inflation, make retirement more affordable. (See Why do interest rates tend to have an inverse relationship with bond prices? for related reading.)

Stock Market Risk

Stock market losses can seriously reduce retirement savings. Common stocks have substantially outperformed other investments over time, and thus are usually recommended for retirees as part of a balanced asset allocation strategy. However, the rate of return that you earn from your stock portfolio can be significantly lower than the long-term trends. Stock market losses can seriously reduce one’s retirement savings if the market value of your portfolio falls.

The sequence of good and poor stock market returns can also impact your retirement savings amount, regardless of long-term rates of return. A retiree who experiences poor market returns in the first couple of years in retirement, for example, will have a different outcome than a retiree who experiences good market returns in the first couple of years of retirement, even though the long-term rates of return might be similar. Early losses can mean less income during retirement. Later losses can have a less-negative impact, as an individual may have a much shorter period over which the assets need to last.

Business Risks

Loss of pension funds can occur if the employer that sponsors the pension plan goes bankrupt or the insurer that is providing annuities becomes insolvent.
Defined-contribution plan accounts are not guaranteed, and plan participants bear losses directly. However, unlike pension plans, the balances in these accounts usually do not depend on the financial security of the employer, except for the employer’s ability to make future contributions and in cases where plan balances include employer stocks. Depending on an individual’s allocation, the risk of such losses is based on the market performance of the investments or on possible failure of the employer’s business if the account is concentrated in employer stock. Ultimately, most investments will always be subject to business risk.

Public Policy Risk

Government policies affect many aspects of our lives, including the financial position of retirees. These policies often change over time along with government policy. Policy risks include possible increases in taxes or reductions in entitlement benefits from Medicare or Social Security.

Retirement planning should not be based on the assumption that government policy will remain unchanged forever. It is also important to know your rights and to be aware of your entitlements to state and local authority benefits.

The Bottom Line

Even the best-laid retirement plans can fail as a result of unexpected events. Although some risks can be minimized through careful planning, many potential risks are completely out of our control. However, understanding what the potential post-retirement risks are and considering them in the retirement planning stage can help to ensure they are mitigated and properly managed.

“The number one risk is the lack of a plan for the course of retirement. Without a plan, the journey will not have a chance to be what you envision,” says Kimberly J. Howard, CFP®, founder of KJH Financial Services, Newton, Mass. • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.