Each year, the Journal for Financial Planning prepares a compilation of important events and statistics revolving around the topic of personal finance. We wanted to share a few of these with you as well as some commentary to go with them.
Retirement age. Using data from the Social Security Administration, researchers found that despite an increase in full retirement age (FRA), most workers continued to retire at 65; some claimed later with an FRA of 66. Retirement ages exhibit “persistent stickiness” at the old FRA of 65.
The age that you decide to retire will play a big role in planning. For one, the age to receive full benefits from Social Security has increased to 67 for those born after 1960. So, taking benefits at age 65 would lead to a reduction. Another factor is the impact on a few more years of earning salary and benefits has on the duration of assets. Be sure to take these things into account when planning your retirement.
Life insurance. Utilizing a Survey of Consumer Finances dataset, researchers found that the proportion of households owning a life insurance policy decreased from 72 percent in 1992 to 60 percent in 2016
While we do not sell insurance, we believe it plays a role in clients financial plans. However, we strongly recommend keeping insurance and investing separate (i.e. Variable universal life policies). Instead, we favor appropriate term policies or second-to-die-policies used for estate planning.
Debt and delayed retirement. Researchers used the Survey of Consumer Finances (SCF) dataset to examine the effects of debt on retirement. They found that doubling of debt reduced the likelihood of receiving Social Security (by 1.3 percent) and being retired (by 1 percent) and increased the likelihood of working (by 1.1 percent).
Debt has always been looked at as a negative and while true it mostly depends on the kind of debt. Credit card debt, student loan debt, and home equity lines of credit are likely to carry higher interest rates and should be paid off. Mortgages should not be viewed as always negative with interest rates close to all-time lows. If you are carrying a higher interest rate on your home loan we recommend looking into refinancing before rates rise again.
Long-term low interest rates. The Federal Reserve signaled interest rates near 0 percent at least through 2023 to help support a post-pandemic economic recovery. This policy impacts savers (slim yields), homebuyers (attractive interest rates), life insurance buyers (higher premiums charged to offset low bond yields), and pension plans (lower yields) as a result.
The current low yield environment has impacted more than just homebuyers. Savers face difficult decisions on what to do with large amounts of cash as money market and savings accounts are paying next to nothing. We recommend having enough cash to cover 3-6 months of expenses and anything beyond that should be invested in assets with higher expected long-term returns. Of course, everyone’s situation is different, so speak to your advisor before acting on this.
Stock market volatility. The Dow Jones Industrial Average (DJIA) crossed 29,000 several times during 2020, for the first time in January and again in September and November upon news that the 2020 presidential election was settled and a COVID-19 vaccine was inching closer to reality. An 11-year bull market officially ended on March 11, followed by the shortest bear market in DJIA history.
While 2020 was certainly unprecedented, stock market volatility is not. Markets can be unpredictable in the short-term, but it should not affect those with a long-term plan. Volatility can be the worst enemy to those without a plan leading to costly mistakes.
Social Security benefits. Many unemployed older workers collected permanent actuarily reduced benefits earlier than planned to make ends meet following COVID-19-induced job losses. As a result of earlier benefit claiming and reduced contributions by workers due to widespread unemployment, Social Security is dipping into its reserves and is projected to run out of money in 2032 rather than 2036 as estimated before the pandemic.
We should expect to see some changes in Social Security soon to account for this. An increase/removal of the earnings cap increase in retirement age, and higher payroll taxes are on the table to compensate for the sheer amount of baby boomers expected to draw the benefit.
Health insurance. In its annual estimate of health care costs for older adults, Fidelity Investments estimated lifetime out-of-pocket medical expenses for a couple age 65 at $295,000, excluding long-term care.
Health care expenses are often ignored when planning for retirement. Many forget that although most are covered by Medicare there are still costs that needed to be funded out-of-pocket. Having what-ifs built into your retirement plan can help elevate some of the stresses that comes with the unknown.
COVID-19-related studies. A National Endowment for Financial Education/The Harris Poll conducted in April 2020 and again in September 2020 found that 88 percent/84 percent, respectively, of Americans say COVID19 is causing stress on their personal finances. The top stressors are not having enough saved (41 percent/40 percent) and job security (39 percent/33 percent). Half (46 percent) of American households are facing “serious financial pain” with little or nothing to fall back on. Americans are shifting their financial priorities to paying down debt (36 percent) and building an emergency fund (33 percent).
The financial related impact of Covid-19 has been felt by most people. And while the impact is mostly negative, we hope that some positives can come from it. Things like saving, investing, and planning have proven their importance. These should be done by all Americans not just the wealthy.
No matter what your personal financial situation is it is always beneficial to have a sound financial plan. A plan helps you articulate your goals and set the path to achieving your goals. If you are interested in putting a plan together, give us a call at 610-825-3540 and one of our Certified Financial Planner™ Professionals will be happy to help you.