Bob’s Journal for 7/28/22
Some Notable Events That Grabbed My Attention This Week
I recorded a “Fun with Annuities” podcast this week with Stan Haithcock (Stan the Annuity Man). We discussed Social Security, the SECURE Act 2.0, inflation, a little about annuities and more.
Sequence of Returns Risk Upends Some Retirement Plans
The recent decline in stock prices and increase in inflation are upending many retirement plans.
About 48% of people who were expecting to retire in 2022 are putting their plans on hold or reconsidering them, according to a survey taken by Quicken. Another 22% of people who were planning to retire sometime after 2022 are considering delaying their retirement dates.
A survey by BlackRock found that the number of respondents who believed their retirement plans are on track declined from 68% last year to 63% this year. Another 42% of respondents said their retirement plans were changed by the pandemic.
This year is a good example of “sequence of returns risk” and how it can arise quickly and unexpectedly.
Many people build their retirement plans on long-term average financial data or on the assumption that recent performance will continue indefinitely. Events often don’t unfold that way.
A retirement plan can easily get off track when the early years of retirement coincide with a bear market in stocks or an inflationary surge. If those trends continue, it can be difficult to put the retirement plan back on track.
In the first edition of my book, “The New Rules of Retirement,” I discussed a study that found someone who retired in 1968 and didn’t adjust the retirement spending plan would run out of money about the time the great bull market began in 1982. Both stocks and bonds were in long-term bear markets for most of the 1960s and 1970s.
That’s an extreme case of sequence of returns risk. People who retired around 2000 had a similar experience.
There’s also a sequence of returns risk with inflation. Spending will be much higher than expected if the plan assumed the long-term inflation rate of 2% to 3% but in the early years of retirement inflation is well above that.
Sequence of returns risk is why it is a good idea to stress test a plan by looking at different economic assumptions. What happens if stock prices decline by 20% during the 10-year period that includes the five years before and after retirement? How quickly must stocks recover to put the plan back on track? What if inflation spikes and doesn’t recede for several years?
Then, consider actions that can be taken to reduce your sequence of returns risk.
You might decide to reduce stock exposure during the years just before and after retirement. You might move some money into annuities to generate guaranteed lifetime income. Or you could reduce fixed retirement expenses so that you are better able to adapt to changing economic circumstances.
Who’s Hurting the Most in 2022?
Which Americans are affected the most by declining asset prices and rising consumer prices?
Upper-middle-class Americans, those earning between $75,000 and $130,000, are feeling the most pain, according to a recent report from Moody Analytics.
Wealthy people are hurt by declining asset prices. But they have significant assets and saw their values soar during the pandemic bull market. The wealthy can withstand declines in stock prices. The wealthy also are hurt less by inflation, because essential goods and services that tend to have the highest price increases are relatively small portions of their spending.
Lower-income people don’t have much of their net worth in stocks, so they aren’t affected as much when stock prices decline. Also, during the pandemic many lower-income people experienced the highest wage increases, according to Department of Labor data, giving them some protection from rising prices.
But the upper middle class have a higher percentage of their assets in stocks and see a greater decline in their net worth when stock indexes fall. These households also are hurt by the price increases in gasoline, food and other essentials.
While most households increased savings during the pandemic, upper income households dipped into those savings earlier than others did and have spent more of the savings.
Moody’s also reports the upper-income households are taking on more debt this year to bridge the gap between their spending and cash flow.
That’s why consumer sentiment among the upper-income households has declined more than among other income groups in 2022 and has dragged the Consumer Sentiment Index to low levels.
Congress Starts to Work on Social Security
The Social Security retirement trust fund is forecast to run out of money in 2034. Congress finally is considering an overhaul of the program.
The House Ways and Means Committee is scheduled to consider legislation that would extend the life of the trust fund to 2038.
The main piece of the legislation would assess payroll taxes on earnings over $400,000. Currently, the Social Security payroll tax stops being assessed once annual income exceeds $147,000. (The number is increased for inflation each year.) The tax increase would be permanent.
The trust fund’s life would be extended even longer if that were the only change being considered.
But other proposed changes would increase benefits. One provision, for example, would temporarily increase benefits across the board for current Social Security beneficiaries.
The Ways and Means Committee had plans to consider Social Security changes several times in the last few years. But fears of backlashes by those who would be affected kept the committee from scheduling public discussions of legislation.
Most members of Congress don’t want to either increase taxes or reduce Social Security benefits. But the longer Congress waits to take action, the more significant the tax increases and benefit reductions have to be to restore the program to solvency.
The Data
Home prices are increasing, but at a lower rate. The S&P Corelogic Case-Shiller Home Price Index increased 1.3% in May, which is down from a 1.7% increase in April.
Home prices were 19.7% higher than 12 months earlier. That’s down from a 20.6% 12-month increase in April and is the second consecutive month the 12-month increase was lower than in the previous month.
The Federal Housing Finance Agency (FHFA) House Price Index was similar, registering a 1.4% increase in May from April and an 18.3% increase over 12 months.
Pending sales of existing homes declined by 8.6% in June from May’s level, according to the National Association of Realtors (NAR).
June’s pending sales were 20.0% lower than 12 months earlier. NAR calculated that buying a home in June was about 80% more expensive than in June 2019 because of higher interest rates and purchase prices. Nearly a quarter of people who purchased a home three years ago wouldn’t be able to do so today, according to NAR.
New home sales tumbled in June. They were 8.1% below the sales in May and 17.4% below the number of sales 12 months earlier.
This means new home sales in June were lower than before the pandemic.
The inventory of homes that are completed but not sold increased from a 5.6-month supply at the end of 2021 to a 9.3-month supply in June.
The median price of a new home increased to $402,400 in June, 7.4% higher than 12 months earlier. But the 12-month price increase had been in double-digit percentages for some time.
Durable goods orders increased 1.9% in June, which follows a 0.8% rise in May. Core capital goods, considered a good measure of business investment, increased 0.5% in June after rising the same amount in May.
The Philadelphia Fed Manufacturing Index declined to a negative 12.3 in July from negative 3.3 in June.
The shipments component of the index improved from June’s level, but other components declined, including new orders, inventories and unfilled orders.
The Dallas Fed Manufacturing Survey generated mixed results. The Production Index for July developed from the survey was largely unchanged at 3.8. That is well below average but indicates the sector is growing.
But the General Business Activity Index declined five points to negative 22.6. Most other measures developed by the survey were lower than in June or in negative territory.
The Richmond Fed Manufacturing Index increased to 0 in July from negative 9 in June.
The Leading Economic Indicators index from The Conference Board declined 0.8% in June, which follows a revised decline of 0.6% in May.
This is the fourth consecutive month the index declined, and the index declined 1.8% in the first half of 2022.
The Conference Board stated that the recent levels of the index indicate a recession is likely in late 2022 and early 2023.
Economic growth contracted in the first weeks of July, according to the PMI Composite Flash Index.
The Services Index fell from 52.7 to 47.0. The Manufacturing Index declined to 52.3 from 52.7. That gave the Composite Index for the economy a reading of 47.5, down from 52.3 at the end of June.
Any reading above 50.0 in these indexes indicates expansion, while readings below 50.0 indicate contraction.
The fall in the Services Index was the largest monthly decline since May 2020.
The Consumer Confidence Index from The Conference Board declined to 95.7 in July from 98.7 in June.
New unemployment claims increased by 7,000 to 251,000 in the latest week. That’s the highest level since November 2021. For some weeks new claims have been above the 2019 pre-pandemic average of 218,000.
Continuing claims rose to 1.4 million from 1.3 million the previous week.
The Markets
The S&P 500 fell 0.35% for the week ended with Tuesday’s close. The Dow Jones Industrial Average lost 0.18%. The Russell 2000 gained 0.36%. The All-Country World Index (excluding U.S. stocks) decreased 0.53%. Emerging market equities declined 0.73%.
Long-term treasuries gained 2.77% for the week. Investment-grade bonds increased 1.16%. Treasury Inflation-Protected Securities (TIPS) added 1.19%. High-yield bonds gained 0.75%.
On the currency front, the U.S. dollar rose 0.49%.
Energy-based commodities fell 1.19%. Broader-based commodities gained 2.79%. Gold rose 0.31%.
Bob’s News & Updates
My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.
The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.
A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”
If you’re interested in my books, check my Amazon.com author’s page.
I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.
