ProVise Management Group
By Ray Ferrara
September 28, 2012
- The median household income adjusted for inflation is now around $50,000 for a “typical” American family. This is 8% below the all-time high, which was set in 2007. Driving these results, as reported by the Census Bureau, was the fact that 80% of Americans saw their household incomes decline, or at a minimum, remain the same, while the top 20% saw their incomes increase by 1.6%. Depending upon which side of the political spectrum you are on, an argument could be made for the policies of either President Obama or Governor Romney. Here’s our take on these results, however: Those who have the skills, and therefore the greatest opportunity for income, enjoyed an increase of 1.6%, and significantly lower unemployment, than those who do not. This speaks not only to the training of the American workforce and its need to be upgraded, but also equally to the importance of increasing the education of America’s children. A few weeks ago we reported about a shrinking middle class and this report only adds consensus to that discussion. (Source: U.S. Census Bureau)
- The election is about five weeks away and almost all the news will be focused on it, but as soon as it is over, Congress needs to deal with a myriad of issues during the lame duck session. The White House recently sent Congress a line item explanation of what will happen should the automatic budget cuts go into play on January 1st. This should be enough to give everyone in Congress something to think about. The automatic cuts will drop the military budget by 9.4% and domestic programs by a total of 8.2%. The following are just a few of the anticipated reductions. Various education programs would be cut by $2.3 billion and hospital insurance would fall $5.6 billion, including a 2% cut in Medicare. Military spending will be cut by something just north of $11 billion. While there are a lot of arguments that can be made to support any of these cuts, it’s the arbitrary nature in which they are applied which has most people worried. Of course, it doesn’t trouble us that salaries and expenses in the House of Representatives alone would fall by about $101 million.
CORRECTION: Election Day is Tuesday, November 6th – NOT November 7th. We apologize for any confusion caused by including the wrong date in our September 14th Bullets.
- For the past several months we have talked about the confidence that is growing among home builders in the U.S. That trend is not waning, as the National Association of Homebuilders/Wells Fargo Sentiment Index hit 40 in September, making it the highest it has been since June of 2006, even before the economic downturn. There are still those who argue that conditions are not great – but that is slowly changing and the change could be happening at a very important time for the economy. In fact, the Index not only went up, but many of its component parts are accelerating quickly. The decision by the Federal Reserve to buy $40 billion per month in mortgages is not going to hurt things going forward. Having said that, according to a recent Associated Press article, new home purchase loans declined by 5% in 2011 and re-finance loans declined 13%. This is the lowest level of home mortgages being originated in 16 years.
- So, is there an easy formula to determine the size of the nest egg you need when you enter retirement? The answer obviously is “no”, but there are some rules of thumb you can follow. Let’s assume you want to increase your spending power by a 3% rate of inflation and that your portfolio achieves an annual return of +5%, (ignoring any taxes and not illustrative of any specific investment or portfolio). Obviously, none of this is guaranteed. For every $1,000 per month you would like to have for a 20 year period of time at the end of which the portfolio would be zero, you would need a lump sum of $196,000. Thus, if you wanted $10,000 per month, it would require you to have a lump sum of $1.96 million. If you feel like you have really good genes and expect to live 30 years in retirement, then the present value of that stream of money would need to be $269,000 per $1,000, or $2.69 million for $10,000 per month. If you keep everything the same, but assume a 6% positive return, the lump sum required is $179,000 per $1,000 for a 20 year pay-out and $237,000 for a 30 year pay-out. (Source: BTN Research)
- Among all of the other things retirees need to worry about are student loans. No, we don’t mean personal student loans – we mean the ones they co-signed for their children or grandchildren. According to the New York Federal Reserve, $36 billion of student debt is owed by Americans age 60 and over. While it only represents about 4% of the $914 billion of outstanding student loans, it is enough to cause a delay in retirement plans or make retirement less fun.
- So the rich really do get richer, at least if you are listed in the Forbes 400 Richest People in America. According to Forbes, the average net worth for these 400 people increased $400 million to a record $4.2 billion, with two-thirds of them adding to their wealth. Leading the list was Bill Gates with $66 billion, an increase of $7 billion this past year. Warren Buffett was in the number two spot, with $46 billion. In third place was Larry Ellison of Oracle, who enjoyed a gain of $8 billion, increasing his total to $41 billion thanks mainly to the performance of Oracle stock.
- Is the stock market a predictor of who will win the White House on November 6th? If we go back to 1928, encompassing the last 21 Presidential elections, we find that the results were split about evenly between the Democrats, who won 11 times, and the Republicans, who won 10 times. Interestingly, in the years that Republicans won, on a total return basis, the S&P 500 gained 14.8% on average. When the Democrats won, the S&P gained only 4.9% on average. Given that we are up about 16% as of the end of September, does it bode well for the Republicans? Obviously, the year is not over and there are definitely headwinds to be overcome during the last quarter of the year. (Source: BTN Research)
- Because of the debacle of 2008 and early 2009, many investors have become much more conservative than they were before that time. This is not surprising. On the other hand, some investors have become too conservative, especially those who are near or in retirement. With today’s low interest rates, after taxes and inflation, those retirees are likely moving backwards in purchasing power. If we ignore taxes and only look at inflation from 1991 to 2011, we see that, over this two decade period, there has been a 39% loss of purchasing power. For those living on a fixed income or whose investment portfolios are too conservative this causes a reduction in their standard of living. (Source: Department of Labor)
As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon. Proudly and successfully serving our clients for over 25 years.
RAY, KIM, ERIC, BRUCE, LOU, NANCY, TINA, and JON
©9/28/12 ProVise Management Group, LLC
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