Some people are good budgeters, and some people hate the concept of budgeting. Just the word budget can bring up strong feelings in many people.
This is why I prefer the term “Spending Plan”. A budget feels restrictive. Most of us like to spend.
Regardless of what you call it; it is important to forecast your spending needs in retirement. It can take a bit of work if you haven’t done it before. If you were a good budgeter in your working years, this will be a piece of cake.
A monthly plan should suffice in retirement.
FIXED EXPENSES VS. DISCRETIONARY EXPENSES
A best practice is to sort all your spending into two buckets – fixed or discretionary. Let me show you how easy it is to plan your expenses this way.
Fixed expenses are the items that you are obligated to pay each month. This includes:
· Mortgages or rents
· Utility bills
· Car payments
· Car insurance
· Health insurance premiums
· Food
· Phone, cable, internet, etc.
· Subscriptions
· Taxes
Most of the items on your fixed expense list cost the same amount every month. Some things like your electric bill may vary seasonally, but using an average is good enough.
All you need to do is to add up your fixed expenses monthly. As an example, your monthly fixed expenses might be $3,000.
Everything else falls into the discretionary category. Things like:
· Entertainment
· Travel
· Charitable Contributions (some put this into fixed expenses)
· Gifts for others
· Clothing (may be fixed for some)
· Furnishings
· Repairs and Maintenance
· Uncovered medical expenses
· Other purchases
These spending plans are highly personalized. You can organize your spending in the way that works best for you. There is no one-size-fits-all template.
Let’s look at a simple example.
This person needs about $30,000 to cover three months’ worth of expenses. They are collecting $2,500 per month in Social Security or $7,500 for three months. They would need to withdraw roughly $22,500 ($30,000 less $7,500) quarterly from their 401K account to cover their expenses.
In this example, this individual will need to withdraw $87,000 annually ($117,000 less $30,000 Social Security) from their retirement account.
The next step is to compare this number to your 401K retirement income forecast to see how they match up. Hopefully, the retirement forecast supports an annual withdrawal of more than $87,000.
Now that you know how to do this, you should create your own spending plan and see if your 401K forecast covers your spending needs.
IDEAL VS. MINIMUM SPENDING
In your first several years of retirement there is a risk factor called the Sequence of Returns. If your investment returns are below average in the first 5 years or retirement, it can potentially reduce your retirement income by as much as 15%.
A way to mitigate this risk is to create two versions of your spending plan– your ideal plan and your minimum spending plan.
Your ideal plan includes your fixed expenses plus your ideal discretionary spending – all the travel and other purchases. Your minimum spending plan would include your fixed expenses and a bare minimum of discretionary spending.
The example above would be an ideal spending level of this person. It includes $14,400 in discretionary spending for this three-month period. A minimum discretionary spending plan might be $10,000 for this three-month period. The minimum amount might reduce the amount of your travel or other purchases over this time period.
To be sure that you don’t run the risk of running out of money in retirement you need to know your minimum spending needs.
If you get lucky in the early years of your retirement and participate in a strong bull market, you can spend closer to your ideal spending level. If stock market performance is weak in the first several years of retirement, you can offset the risk by sticking to your minimum spending plan.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
The market survived Phase One of the Tariff wars intact. After the big decline in stock prices in March and April, stock prices have climbed all the way back to even for the year. As of Friday June 13th, the S&P 500 was up 1.9% for the year and the Nasdaq was up 0.6%.
In the chart below you can see the extreme price volatility in April and the steady move higher over the last six weeks.
Unfortunately, the period of shifting tariff policies is not over although the stock market thinks it is over. The various 90-day pauses are not up yet and there have been no major trade deals completed. The stock market believes that the Administration will back off of their most extreme tariff positions but it remains to be seen.
Economic news has been mostly positive over the last month.
Inflation reports have been positive although the impact of the tariffs has not shown up in the data yet. July and August inflation readings will be the first indications of the impact of tariffs on inflation. The Fed is waiting on those readings to make their decisions on interest rates.
Unemployment claims have been rising gradually but the overall numbers are still at levels that indicate a healthy job market.
Corporate profit reports for the First Quarter have been positive which has contributed to the stock market rebound in May and June.
The Israel-Iran conflict caused a slight pullback in stock prices at the end of last week. Hopefully, cooler heads will prevail, and the conflict can be contained.
It was a wild ride to nowhere in March, April and May. Discipline and patience paid off over the last two months. Following a disciplined system in times of volatility always produces better results than letting emotions drive your investing decisions.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
When you invest in the stock market through an index fund representing the S&P 500, you can be extremely confident that the value of that investment will grow significantly in the long term. You can be much more confident in the value of your stock market investment increasing than you can be in the value of commodities or real estate increasing in the long term. You can be much more confident in the value of the S&P 500 increasing than you can be of the value of any specific individual stock. But why is that true?
When we refer to the “stock market” in this article, we are referring to the S&P 500 – the 500 largest and best companies in the world. We are not referring to individual stocks or specific mutual funds or sector funds. The S&P 500 is the best representation of the broad stock market because of its size and its diversity.
The first factor to consider is the history of asset prices. The stock market has delivered higher investment gains than all other asset classes over long periods of time (50 years, etc.). The S&P 500 has returned between 9% and 10% per year over the last 50 years when you include dividends. Bond yields have averaged around 4% and 6% per year for the last several decades. No commodity has consistently returned anywhere near 10% per year over the past several decades. Gold has shot up recently but it had gone nowhere for the prior twenty years.
But as we are often told, past performance is no guarantee of future results, right? How can we be so sure of the gains from the stock market in the future? What do stocks have going for them compared to the other asset classes?
Our entire political and socio-economic system is designed for the companies in the stock market to succeed. Let’s look at the incentives that help to propel the stock market higher:
All 500 companies in the S&P index have tremendous incentives to grow. The management, the board members, the shareholders, and the employees have huge incentives in place for those companies to be successful.
Local, state, and national governments are incentivized for those companies to grow. Tax revenues and job opportunities benefit all government entities.
The general population (voters) wants good paying jobs in their communities.
Investment capital flows to growing and successful companies.
While the same incentives are there for individual companies to succeed, the same argument doesn’t hold up when we are talking about the stocks of individual companies. Diversification allows us to be extremely confident in the S&P 500. In any year or any time period, we see a mix of company performance and stock performance within the 500 companies in the S&P index. The growth of the market in any period is typically driven by only about 25% of the companies in the index. That means that 75% of the companies in the market typically underperform the market average. And in different time periods, we see different companies driving the growth. Looking out 30 years or more, history suggests that half the companies in the S&P 500 will not be around. No one can be certain about which companies will survive and which one will not.
The S&P 500 contains companies from all the biggest and most important sectors of our economy. The index has a nice mix of financial companies, industrial companies, technology companies, consumer goods companies, health care companies, pharmaceutical companies, etc. When one major sector struggles there is typically another sector that performs very well. When you own an index fund representing the S&P 500, you get both individual company diversification and you get industry sector diversification.
The same incentives that drive the stock market are not in place for bonds, or commodities, or real estate. Most people would prefer that the price of commodities and real estate remain constant or even go down. Consumers and governments don’t like price increases. Most people would prefer that interest rates on bonds were lower rather than higher. Higher rates limit borrowing which inhibits growth in the economy. There are plenty of people who benefit when prices increase but they are in the minority.
The market seems to be very comfortable with bond rates around 4% over the long term. Investors are comfortable with this return rate for the level of risk associated with bonds. Since there is much higher risk associated with stock investments, investors seem to be comfortable with a two-to-one rate (stock returns of 9% to 10% vs. bond returns of 4% to 5%). If stock returns get too close to bond returns, there is no incentive to invest in stocks.
The other factor to consider is innovation. It is innovation and productivity that drive the increase in value in companies and, therefore, the stock market. We have created a highly innovative and productive economy and I see no reason for that to slow down in the future. One could argue that innovation is accelerating rather than slowing down.
The only thing that could get in the way of the 9% to 10% continued annual growth of the stock market is a collapse of our political system. Given the events of the last five years, one can’t totally rule that out. But even in the most extreme situation of political upheaval, the same incentives for market growth will still be in place. There is way too much money at stake. Major political disruption would have a big, short-term effect on the stock market but after a period of time, the stock market will continue growing.
Our Beyond Buy & Hold system protects investors from major, short-term collapses regardless of the reason. Everyone needs an investing strategy like our Beyond Buy & Hold system to protect against the inevitable, short-term disruptions to the stock market. People need a better approach than simply “Riding it Out”.
The best investment strategy for long term growth is built upon investments in index funds representing the S&P 500 and the Nasdaq. Our entire political and economic system is designed to support the healthy growth of the stock market. You can be extremely confident in achieving long-term returns 8% to 9% per year even accounting for short-term bear market collapse like the one we are going through right now. Combining a market index investing strategy with a risk-based trading strategy like our Beyond Buy & Hold system will get you even higher returns.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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