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Mixed Signals: Jean’s Journal March 12, 2018
As we review the current headlines, I reflect on how economics, politics and the capital markets continue to intersect but also give us mixed signals. Are we growing or are we peaking? Will inflation be a concern or no concern?  Will the impact of tax reductions balance a potential impact of tariffs or trade wars? As planners we are trying to find consistencies with investment and spending assumptions, one can realize that projecting results with changing assumptions can yield large differences over a 20 year time horizon.  With the latest comments on  tariffs, interest rates, GDP growth rates, and tax law changes, combined with ongoing changes to spending assumptions (your’s and the government’s) – we have to consider some very important parts of financial modeling.

Spending need and inflation adjustment.
Investment outcome- certainty and uncertainty.
Mortality and longevity assumptions.
A great first step in assessing spending need is tracking what your spending is today and adjusting based on some level of inflation as well as review of changing needs of spending in the future.  Many of you have heard my comments on my four categories of spending – Basic needs (gas, food etc.), Housing (carrying costs, depreciation), Health (insurance, copay, inflation rate) and Discretionary (fun and gifting). Tracking your spending is vital to make sure your current spending and inflation is realistic for your future needs.  By confirming your spending need and applying inflation rates on certain categories, we can project realistic numbers so no surprises impact you in retirement. Of course we also need your commitment to this spending number “promise”.  

Investment returns, income/yield and the certainty of investment outcome.  Bond investing does have better certainty in most cases (investment grade bonds with moderate maturity of 10 years or less) – you can be somewhat assured of some investment return and a high probability of principal protection. Stocks are not bonds –and we cannot assume the investment return in a stock no matter how high your personal conviction. Those with concentrated stock holdings likely understand this but after 9 years of economic growth, one has to remind all investors that the economic cycle may be longer than usual but that the cycle is not dead. Eventually a US and global economy recession will again apply.  As tariffs and taxes change, and rates move up – consider a changing landscape with investment strategies rotating out and in favor.  The article below discusses funding your spending with greater certainty:  PENSIONIZING’ YOUR SAVINGS

Mortality and longevity are the final parts of planning for time frame.  Oddly this planner understands a life cut short so attempt to live in the present as much as in the future.  Balance today’s spending with tomorrow’s needs. In consideration of your life expectancy, also consider the loved ones you wish to financially help and consider their life expectancy as well.


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