Longevity of Retirement Income

In early May, we attended an “Inside Retirement” conference sponsored by Financial Advisors magazine; the topics were centered on “income and longevity.” Various nationally known speakers discussed pertinent items related to those themes. We found some presentations worthy of discussion here. Some presentations were individual speakers; some presentations, panel discussions. Various concepts were presented for discussion; we don’t necessarily agree with all ideas presented but did find most of them thought provoking.

 

The World Today

 

Interest rates today are at historic lows. The 10-year US Treasury note yields approximately 1.8%, and some overseas developed countries have negative interest rates for their sovereign bonds. Low interest rates mean lower earnings available from an investor’s bond portfolio to supplement retirement income. Also, since bond prices relate inversely to currently low interest rates (as interest rates increase, bond prices decrease), bond prices are currently high.  The Federal Reserve Governors have continuing discussion about when (not if) to raise interest rates.

 

The stock market also poses some interesting challenges. Volatility in the market is significant, and some market analysts feel that stocks may be overvalued. Low interest rates have made some investors move into dividend yielding stocks in search of return—taking increased risk in the stock market in exchange for a higher current yield. Note that this higher current yield could be offset by loss in value if the stock prices decrease.

 

Other sources of retirement income have come into question. Social Security, a major source of retirement income for many Americans, faces funding shortages in the not too distant future. Changes are needed; however, the nature of those changes is still to be decided.

 

Finally, retirement life spans appear to be increasing. As life expectancies increase (and people are not working significantly longer), the length of time spent in retirement increases. Couple that increased longevity with potentially higher health care costs, and we face increasing pressure for financial longevity.

 

What to Do?

 

Much has been written and discussed about retirement planning (or the lack thereof) of Americans. We believe that retirement should also have a defined plan. Such planning should include planning for contingencies, structuring an investment portfolio, and a distribution strategy from any qualified plans. Since our major discussion above was related to investments, that’s what we will discuss here.

 

Market volatility is a fact of life. Stock market downturns will occur: the questions are when and how much. A retiree needs a stock component in a retirement portfolio. Stocks provide the long term growth necessary to preserve buying power over the long term—especially given the longevity previously discussed. Consequently, an investment portfolio should be structured to provide several characteristics.

 

1. Liquidity--enough liquidity to cover necessary expenses over years when the stock market is down. This structure implies cash equivalents and bonds to cover 4-5 years of needed income without having to sell stock in a down market. Liquidity also means the ability to readily convert a portfolio holding into cash. In the 2008 downturn, some securities (auction rates) could not be readily sold at a fair market price.
2. Total Return—low interest rates practically guarantee that an investor cannot meet all income needs from interest income only. Therefore, consider an investment plan that encompasses interest/dividend income with harvesting some of the investment gain in the portfolio. That’s “total return” investing where the income needs from the portfolio are met from a combination of dividends, interest, and gain from appreciated securities.
3. Diversification—much has been made of the need to diversify assets. That diversification should include asset classes that may not have been utilized in the past. Use of alternative investing strategies (hedging techniques, conservative option strategies, etc.) and asset classes (commodities, etc.) may be warranted in selected portfolios. Note that alternative investing may be used to reduce risk, not just as a yield enhancement.

 

Investing for long term income in the current environment poses special challenges. Not all items mentioned here are necessarily advisable for all investors. We at Paragon Financial Advisors assist our clients in building portfolios that match that particular client’s goals and objectives. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

 

 

The Student Debt "Bubble"?

About 25 years ago, federal government policies were implemented to encourage students to get a higher education—including borrowing the funds for that education if necessary. It was assumed that college graduates could afford the debt because they would be earning more from better paying jobs. However, the law of unintended consequences reared its ugly head. College expenses have been increasing much faster than the general rate of inflation. In addition, especially since the 2008 recession, jobs created have not been ones that paid exceptionally well.

 

An Associated Press article, written by Josh Boah in early October of 2015, gave some statistics about the student debt incurred for a higher education—and how it can have a multi-generational affect. Student debt in America now totals approximately $1.2 trillion. An Associated Press analysis of that data provided the following statistics:

1. Americans over age 40 account for approximately 35% of the education debt. Extended loan repayment schedules, mid-career changes, and signing for children’s educational borrowing have driven the increase from its 25% proportion in 2004.
2. Adults in the age 35-50 year old bracket owe about the same amount (an average of $20,000) as those students in the age 34 and younger bracket.
3. Parents who still have college debt and teenage children have more difficulties in providing education assistance for their children. Such parents have an average of $4,000 for children’s education savings vs. the $20,000 average for children whose parents have no student debt.
4. Student debt repayments are surpassing the cost of food for the average college educated head of household under age 40 (who has student debt outstanding)--$404 for debt repayment vs. what the family spends per month at the grocery store.

Student debt levels are causing potential problems in an already weak economy. Older graduates are delaying or foregoing some spending which would benefit the economy (such as housing and related purchases). Some graduates are accepting employment (usually at lower paying jobs) which would qualify them for student loan forgiveness.  Second generation student debtors will be looking at greater debt levels to continue their education.

There are some planning opportunities for pre-college students on how to handle the costs of continuing education. We, at Paragon Financial Advisors, can assist parents (and grandparents) in the best way to proceed on college funding. However, stay tuned—we haven’t heard the last of the student debt “bubble."  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

5/29: National 529 College Savings Plan Awareness Day

School Yourself Before You Invest


May 29^th is National College Savings Plan Awareness Day. This annual day celebrates the importance of preparing for future college expenses and the advantages of 529 College Savings Plans. Did you know that an alarming 70% of students who graduated from college in 2013 left college with an average of $28,400 in debt per borrower¹? It’s shocking how quickly tuition rates have risen and how expensive the price tag of a college degree has become.  Planning for future expenses has become a crucial necessity. See: Shocking Trends in College Expenses and College Debt Necessitate Earlier Planning for Families


College Savings 529 accounts have been getting a lot of exposure nationally and are starting to get the positive recognition they deserve. 529 plans offer a simple, affordable way to save for rising higher education expenses. These investment accounts allow tax-deferred growth, high contribution limits, and unique ownership features. See: School “Daze”


Characteristics of 529 College Savings Accounts:

• Anyone, regardless of income, can open a 529 account to save for their dependents or even their own educational expenses.
• Individuals can contribute annually up to the federal gift-tax exclusion ($14,000 for 2015 or $28,000 if married) per beneficiary. Keep in mind these contributions are made with after tax dollars.
• Under a special election you can combine up to five years’ worth of contributions into one contribution of up to $70,000 ($140,000 for married couples).
• Anyone (i.e. family) can also contribute until the account value reaches $350,000.
• Money from a 529 plan can be used for tuition, fees, books, supplies, and equipment required to study at any accredited college, university, or vocational school here in the United States.
• The money can also be used for room and board, as long as the beneficiary is enrolled as at least a half-time student.
• A distribution from a 529 account that is not used for the above qualified educational expenses is subject to ordinary income tax and maybe an additional 10% distribution penalty on the gains unless other conditions are met.
• Accounts are transferable: unused amounts are able to transfer to other qualified members of the beneficiary’s family without incurring any tax penalty.

Do you know how much do you need to save to send your child to college? Will your children need to take out student loans? See: Student Loan repayment and Forgiveness Programs

 

* Numbers are rounded for illustrative purposes and are not intended to portray an actual investment. Values are in today’s dollars and are not adjusted for inflation

 

May 29^th is recognized as ‘National 529 College Savings Day’ and we invite you to celebrate with us the importance of setting aside money for higher education. A little preparation to put money aside today could mean a lower financial burden for your children down the road and greater freedom for those of the next generation to pursue their own financial goals.

 

Do you have a child attending college this fall? Do you have questions about saving for future college expenses and how that fits into your overall financial picture? Contact us today and schedule a consultation. We, at Paragon Financial Advisors, are happy to have a more in-depth conversation with you about your personal circumstances.

 

Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.