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Financial Wellness and You: Q & A

Financial Wellness and You: Q & A

With Robert Sinnaeve, CFP, AIF, of SSH Advisors

Question: Is Inflation coming back, and if so, what does that mean to my investments?

Answer: Investopedia defines Inflation as the decline of purchasing power of a given currency over time.   Economists simplified it down to “too many dollars chasing too few goods”.  The multiple stimulus packages over the past year have certainly increased the money supply, while demand has been subdued by covid restrictions.  This week, the Consumer Price Index revealed that inflation may be picking up.  This should not be a surprise, as anyone who has been to the grocery store or gas station has seen prices on the rise.   Just head over to the lumberyard where prices are up over 300% year over year.

Many economists believe that as the economy continues to reopen the availability of goods and services will broaden thereby alleviating some of the inflationary pressures.  I am in this camp.  Inflation is on the horizon; however, I think we will not see it until later this year or into 2022.

Equity investors are concerned about inflation for a variety of reasons.

•  The strong performance of markets over the past year and potential tax law changes made investors are more apt to realize gains.

•  The stock market has been propped up by the constant influx of capital from the Federal Reserve.  Inflation could push the Fed to scale back its easy-money policies sooner than expected.

•  Higher interest rates mean the cost to do business increases, which will lower companies’ growth rates

•  Higher inflation pushes bond yields up, which means investors will find fixed income more attractive.  At some interest rate level investors will find comfort in the safety and security of bonds and will rotate out of stocks.

The return of inflation, when it does happen, should not panic investors.  If anything, it will offer more opportunity to add diversification to your investments

Question: How much do I need for retirement?

Answer: This is perhaps the most often asked questions to financial professionals.  And of course, there is no easy answer.   For every retiree, the biggest concern is running out of money before running out of birthdays.  Planning involves looking at expenses to help determine what everyone will need to maintain their lifestyle in retirement.  Budgeting and planning will help determine a range you will need before leaving the workforce.

Financial planners have come up with some distribution strategies to estimate safe withdrawal rates.

  • 80% of your pre-retirement income.  If you make $100,000 annually at retirement you will need at least $80,000 to maintain a comparable lifestyle.  That income can come from a variety of places, Social Security, Pensions, Annuities, or earnings from savings.
  • The 4% Rule.  The rule is you can withdrawal up to 4% of your savings in the first year of retirement then adjust the withdrawals each year based on inflation.  In this scenario you would need $2,000,000 in savings to generate $80,000 in your first year of retirement.  Thereafter your withdrawals should only increase at the rate of inflation.
  • Dynamic Withdrawal Strategy.  Dynamic withdrawals change each year based on the value of the account at year-end.  Under this plan you could set up a scenario to withdrawal 5% of your saving each year.  If your investments do well next year, you could withdrawal more.  If your value declines though you may need to reduce withdrawals in some years.

Everyone will have different needs in retirement.  Travelers may need more in retirement than homebodies.  While these guidelines can give you an estimate of what your target should be, the best calculation will come from delineating what your goals for retirement are.

Question: How has the pandemic impacted my 401k?

Answer: The coronavirus has touched everyone to some degree.  For most it has been a struggle to adjust to living and working while quarantining.  For others, the financial loss will be long lasting.  When considering how the pandemic has affected 401ks, the answer lies in the Asset Allocation.   

Over the last several years 401k participants have benefited from expanded government oversight.  Plan sponsors have been pressured to provide a broader range of investments, provide more guidance, and have new requirements to detail and minimize all expenses related to administering the plan.  Participants typically can answer some basic questions online to help determine a target Asset Allocation to help them choose the investments that are right for them.   

Market fluctuations whether from a Black Swan event such as the pandemic or from normal business cycles happen all the time.  An appropriate Asset Allocation will give the investor the confidence to stay the course.  Taking the time to review your Asset Allocation throughout your investing life will keep you panic selling if the market falls.  Retirement plan participants can benefit from market downturns thanks to automatic contributions.  Investing every month regardless of market fluctuations is a significant wealth building process.

This past year some employers have taken steps to reduce or eliminate 401k matching in an effort to offset some of the costs of Covid-19.  Hopefully, this is temporary, and companies will resume matching once business returns to normal.  This happened after the 2008 financial crisis.  In the meantime, that is no reason to stop contributing, in fact participants may need to increase their contributions to offset the lost match. 

Every participant should review their plan offerings at least annually to ensure their hard-earned savings are working as hard as they are.  Fortunately, studies show most Americans have not changed their retirement contributions during the pandemic.  For those that did, now is the time reevaluate that decision.   The key to a wealthy retirement is to be diligent in saving each month.

Robert Sinnaeve, CFP, AIF, is the owner of SS&H Financial Advisors, Inc. and is responsible for portfolio management, equity research and compliance.  Portfolio management is his primary function with particular attention to implementation of investment programs. Bob has always enjoyed the personal aspect of investment management. "working with our clients to help them meet their financial goals is the most rewarding part of being a financial advisor."

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