Does a new market high signal that it is too late to invest?

As we close out the first half of 2014, the U.S. equity market (represented by Russell 1000® Index) is positioned near an all-time high.  Market highs are often seen as times to rejoice, but there appears to be as much trepidation as enthusiasm this time around, leading many investors to delay committing additional assets to their investment portfolios until the “inevitable” market correction occurs.

It may be that the last two bear markets (March 2000 – September 2002 and October 2007 – March 2009) are weighing heavily on investors’ psyches. While there is no magic elixir to help people forget those difficult experiences and feel better about investing today, maybe addressing a few common concerns can help ease the apprehension.

Buying near the market high

Timing investment purchases sounds great on paper, but is very difficult to accomplish in reality. When times are good, investors can be concerned about buying in too late. When times are bad, investors tend to hesitate due to fears of things getting worse.You can always find excuses not to invest, but generally markets tend to move in an upward direction over a moderate period of time.

For instance, as shown in the chart below, the U.S. equity market (represented by the Russell 1000®Index) hit 432 new daily market highs between the beginning of 1995 through May 27, 2014. You could argue that hitting a high almost doesn’t feel special anymore. But, when you consider that the market had a cumulative return of over 600% during that period – the equivalent of a 9.9% return per year – it doesn’t look so shabby. In fact, it’s in line with longer-term averages for U.S. large cap equities. We can’t predict the future, but reasonable expectations are that this pattern could continue over the long term.
Russell 1000 Index

Source: Russell Investments. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Worries about valuation levels

Astute investors recognize that price levels alone are not a good indicator of relative market attractiveness. The relative cost an investor pays for each dollar of earnings, book value or cash flow also impact future market returns.  When current valuation measures are lower than past norms,history suggests that future market returns may be higher than historical averages. When valuation measures are higher than historical averages, it suggests that future returns may be lower than long-term averages.

Today’s price-to-earnings (P/E), price-to-book (P/B) and price-to-cash-flow (PCF) for the Russell 1000® Index suggest that valuations are slightly higher than average, but relatively close to historical norms. These results could suggest that future returns may be tempered, but do not foretell a looming market correction.
Russell 1000 index valuations

Source: Russell Investments. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Concerns about the economy

Although markets don’t move in lock-step with economies, markets tend to be heavily influenced by current and anticipated economic conditions. Last year’s strong global equity returns were heavily influenced by the anticipation of positive global economic growth in 2014. This year is anticipated to be the first year since 2010 where positive growth will be experienced across Europe, Japan, the United States and the emerging markets. Delivery on that growth expectation will help to justify 2013’s strong results and hopefully enable markets to keep moving forward.
Imf projected growth

Source: IMF.org

The bottom line

Is the market overvalued? Is it too late to invest? Is a correction coming?

If you are asking these types of questions, consider the following:

  • Although U.S. equity markets (represented by the Russell 1000® Index) are at or near all-time highs, that doesn’t necessarily indicate they’ve peaked. Since January 1995, the U.S. equity market has seen 432 new daily highs and has eventually moved higher after each one.
  • Market valuations are a good indicator to help set future return expectations. At today’s levels, markets appear to be slightly more expensive than historical averages. This does not suggest a correction, but helps establish a reasonable expectation for more modest positive results.
  • The global economic recovery continues to move forward. 2014 is the first year since 2010 where there is an expectation for positive growth across all the major economic regions. Positive economic growth tends to bode well for capital market results.

Source: Russell Investments

 

 

The Big 60! Are You Retirement-Ready?

10 considerations for getting retirement-ready

By Rand K. Gordon, CFP®

As you approach your 60’s, time starts moving fast.  Sixty-five, the age most think of as normal retirement, is just around the corner and finally within your grasp.

Or is it?

As they approach age 60, many folks are so eager to leave the workplace that they don’t focus enough attention on the details of how, or if, their personal retirement plan will actually work.  They start counting down the days until they put in their notice, prepare for the retirement party, and eventually sail off into the sunset.

This could be a costly mistake.  It’s too late to find out, after you turned in your notice, that you don’t have enough resources to pay for retirement.  In most cases, once you leave the workplace, you can’t return.

Now may be your last chance to get retirement-ready.  Following are 10 things to consider for turning 60:

Pick a retirement date – In order to make the retirement calculations, you’ll need to have a target date.  How much money you will need and how much you will receive from Social Security, pensions, etc. will depend on this date.  You will need to be flexible, however, in case the date you would like to retire turns out to be too soon.  Working even a year or two longer could greatly increase your retirement savings and how long they will last.

Where will you live in retirement? – Will you live in your current home that’s paid off or will you still have a mortgage?  Will you move to a less expensive area or downsize to a smaller home?  Will you move to a retirement village, the beach or perhaps the mountains?

Where you live in retirement can have a huge impact on how much retirement income you’ll need.  If your personal retirement plan doesn’t work out one way, you may need to consider another.  Although most retirees live in the same house in which they retired, moving to a less expensive area or downsizing to a smaller home could reduce costs and possibly free up home equity for investments or income.

Long-Term Care costs – Planning how to pay for the care you might need if you become ill or disabled as you age is a daunting task.  It’s not the sort of thing we even want to think about.  Yet studies estimate that up to 50% of 65 year-olds will probably need nursing-home care in the future.  Without long-term care insurance, a nursing home will cost on average about $83,179 a year according to Long-Term Care Tree (www.ltctree.com).  Assisted living facilities are a little cheaper, though still expensive at $45,000 a year.  Care directly in the home is about $39,784 a year.

Although expensive, you may want to consider long-term care insurance to cover at least a portion of the possible costs you may incur.   Unfortunately, the longer you postpone the decision, the greater your chances of suffering an illness or developing a condition that will disqualify you from coverage or cause the premiums to be too expensive.  Regardless of how it’s paid for, you need to at least consider long-term care costs as you plan your retirement years.

Health Care costs – Paying for health insurance before age 65, when you don’t qualify for Medicare, can be extremely expensive.  But even once you qualify for Medicare, your expenses aren’t over.  A couple in their 70s, who are in relatively good health, can pay as much as $1,200 a month for health care insurance, deductibles, co-pays and prescriptions.  You can learn more about healthcare costs, benefits and options at www.medicare.gov.

Rising medical costs, longer life spans, and possible shortfalls ahead for Medicare all add up to make health care costs a critical challenge for you in retirement.

Nail down a retirement budget – Forget about the old rules of thumb (i.e., you’ll need about 75% – 80% of your pre-retirement income) and get busy laying out exactly what your living expenses are.  Consider pulling out your checkbooks, bank and credit card statements for the past 12 months to see where your money is going.  Take into account your lifestyle and goals, identify which expenses are essential (must have) with those that are discretionary (nice to have).

Ideally, you’ll enter retirement with no debt, but you definitely want to take care of any credit card balances or other consumer loans before you get there.

Review Social Security and pension options – You can start receiving Social Security as early as age 62, but the longer you wait the bigger your benefit payments will be.  You can check on your benefits by going to www.socialsecurity.gov for the amount expected at various starting ages.

Starting benefits at age 62 means locking in a lower benefit amount for life.  If you don’t expect to live very long or you can’t work and need the money, then by all means, sign up.  Otherwise, think twice.

If you plan to continue working past age 62, definitely hold off on starting Social Security payments unless you won’t be earning much.  If you start taking Social Security payments before your full retirement age and earn more than $15,120 (2013), your payment will be reduced by $1 for every $2 you earn.

Along with reviewing your Social Security options, you also should check if you qualify for a pension benefit from your current or former employer.  You may have the option of taking either a monthly pension amount or a lump sum equivalent.

Don’t forget about inflation and your withdrawal rate – When thinking about your retirement planning; don’t forget about factoring in inflation.  Inflation increases the future cost of goods and services and potentially erodes the value of the assets you set aside to meet those costs.

For example, $50,000 of income today may only be worth $37,205 in 10 years at a 3% inflation rate.  At a 4% inflation rate, that $50,000 would only be worth $33,778.

Another factor to consider as you prepare for retirement is the withdrawal rate of your savings.  The withdrawal rate you decide on can dramatically affect how long your money will last.  This is a variable that’s largely in your control.  The consensus among financial planners is that the safe withdrawal rate is somewhere between 3% – 5% of your retirement savings.

The earlier you retire and the longer you expect to live, the more conservative you’ll want to be about tapping your retirement savings.  Given improved medical technology and longer life expectancies, you should consider planning for income to last well into your 90s.

Estate planning considerations – Your chances of being mentally or physically incapacitated rise as you age.  Make sure you have updated durable powers of attorney for finances and health care with someone you trust to take over for you.

You should also review your wills, trusts, and beneficiary designations for your retirement, bank, investment and life insurance accounts.  If you haven’t updated your will for the last five years or more, now’s the time to do it.  Consider the guidance of an estate attorney.

Put your plan to the test – With the facts and figures you now have, it’s time to see if your plan will work.  If you have access to retirement planning tools through your current 401k provider or with other resources, take advantage of them.  If not, you can start by going to www.fidelity.com and utilizing the retirement planning tools and calculators at this site.  Use a post-retirement rate of return of no more than 5% – 6% on your investments.  That’s a relatively conservative assumption for a portfolio of stocks, bonds and short-term investments.  Fidelity’s tools can even give you a probability of success.

If your plan falls short, see what happens if you work a little longer, save a little more prior to retiring, and/or adjust your budget.

Consider working with a Financial PlannerThe decisions you’re about to make are too important to your future not to get a second opinion.  A Financial Planner can help you examine the realities and possibilities of retirement, and plan accordingly, no matter whether you’re self-employed, work for an employer, have retirement benefits or are on your own.  An advisor can evaluate if you have enough resources, how they are invested, and help you plan when is the best time to retire.  Look for an objective planner who’s experienced in personal retirement planning.

Rand Gordon is a CERTIFIED FINANCIAL PLANNER at Harbor Capital Management, Inc.