SHOW NOTES: 2019-05-23 MiM

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Last Week’s Question of the Week: What percentage can a spouse collect of their spouse’s Social Security benefit at their Full Retirement Age — Is it 50% or 100%?

ANSWER: You can collect a spousal benefit that will provide you 50 percent of the amount of your spouse’s Social Security benefit as calculated at their full retirement age (FRA).

HOST: I assume that one of the things that makes a lot of people nervous with their retirement planning is when they see volatility in the markets? How should people best work to deal with this?

KLAAS FINANCIAL: The short answer is to begin to educate yourself as to how the economy is really doing. If you have some of this knowledge, then you can often see that things are not always as bad as the media portrays.

So today, we thought that this might be a good time to discuss the meaning behind some of the top economic indicators. We think this will be of interest as these reports are the sources that “Experts” out there are usually drawing their opinions from. There are five GDP statistics that give you the best snapshot to measure the health of the United States economy.

  1. U.S. nominal GDP is the basic measure of economic output of the entire country. Currently, it stands at $21 trillion dollars.
  2. Real GDP corrects for changes in prices. The real GDP (which is the nominal GDP without inflation) is the market value of all goods and services produced in a nation during a specific time period. It is a comprehensive way to gauge the health and well — being of a society. Currently, this number is around $19 trillion dollars.
  3. The GDP growth rate measures how fast the economy is growing. Currently, our GDP for 1st quarter of 2019 was 3.2%.
  4. U.S. real GDP per capita describes the standard of living of Americans. Measures yearly percent increase of economic output each quarter, which is currently about $59,484.
  5. The U.S. debt to GDP ratio describes whether America produces enough each year (has enough yearly income) to pay off its national debt. Currently that stat is at 105%. The United States recorded a government debt equivalent to 105.40 percent of the country’s Gross Domestic Product in 2017. Government Debt to GDP in the United States averaged 61.70 percent from 1940 until 2017, reaching an all time high of 118.90 percent in 1946 and a record low of 31.70 percent in 1981.

HOST: I think I know that inflation is something that is talked about when discussing economic trends isn’t it?

KLAAS FINANCIAL: Yes, we discussed this recently, but it is an important concept.

Yes, the U.S. Department of Labor Bureau of Labor Statistics reveals the Consumer Price Index or CPI on a monthly basis, this remains the best indicator of inflation that we have to rely on. Currently, the inflation rate for the United States is 2% for the 12 months ended April 2019, as published on May 10, 2019 by the U.S. Labor Department. This data does provide us with a sampling as to whether the average consumer is facing inflation. Changes in inflation can spur the Fed to take action to change its monetary policy.

Lower inflation is beneficial for the economy as it encourages consumers to buy goods and services. Delaying will mean that they would have to pay more for the same product. Low inflation also makes it more appealing to borrow money, since interest rates are usually also lower during periods of low inflation.

HOST: What about current employment or unemployment figures?

KLAAS FINANCIAL: Yes, the current employment figures are very important. The data is based on a survey of 300,000 establishments across 600 industries which accounts for approximately 1/3 of all payroll employees. This statistic is the earliest indicator of economic trends released each month. Employment rates indicate the well-being of the economy and labor force.

The U.S. unemployment rate fell to 3.6 percent in April 2019 from 3.8 percent in the previous month, below market expectations of 3.8 percent. It was the lowest jobless rate since December 1969, as the number of unemployed persons went down by 387 thousand to 5.8 million while employment declined by 103 thousand to 156.6 million.

Unemployment Rate in the United States averaged 5.75 percent from 1948 until 2019, reaching an all-time high of 10.80 percent in November of 1982 and a record low of 2.50 percent in May of 1953.

Wisconsin Unemployment: According to the BLS current population survey (CPS), the unemployment rate for Wisconsin as of March 2019 was 2.9%. The state unemployment rate was 0.9 percentage points lower than the national rate for the month.

HOST: What about volatility and or a correction occurring when I am within a couple of years until retirement?

KLAAS FINANCIAL: Yes, that never is ideal. We would like to see our listeners backing off risk in their portfolios in the last couple of years prior to retirement. That doesn’t mean their monies are sitting in cash but that we would like to ideally keep what they have, while also providing the opportunity for more growth, with of course additional contributions.

If you haven’t backed down the risk, we would likely suggest that you remain in your positions vs. selling to cash and seek out a professional opinion. If you are selling out on the way down, you are likely not to be sitting well when the market does return.

A stock market correction defined: is when the market falls 10 percent from its 52-week high. A pullback allows the market to consolidate before going toward higher highs. Each of the bull markets in the last 40 years has had a correction. It’s a natural part of the market cycle. Corrections can occur in any asset class. Stock market corrections are an inevitable part of investing. Since 1932, declines of 10% to 20% (the traditional definition of a correction) have occurred an average of every two years, according to InvesTech Research.

One thing corrections can teach us, is to make sure that our financial house is in good order. Our debt really needs to be paid off, and we need to live within our means, especially if we are planning to retire in a few years, regardless of a potential correction. Diversification is REALLY KEY.

HOST: So, if the market spooks people, where should they invest and what should they be careful of?

KLAAS FINANCIAL: If there has been a correction, there are some best practices you can, and probably should, react. Some of these ideas are for those in the accumulation phase (pre-retirement), and some for those in the distribution phase (retirees).

  • Don’t panic. Remember your ABC’s: Always Be Cool.
  • Meet with a good financial planner that can keep you on track.
  • If you have dollars to invest, this likely is usually the best time to be investing. Don’t miss a stealth correction. If a correction has occurred, it is USUALLY a good time to look at good companies that are currently on sale.
  • Turn off the TV. If a decline starts to snowball, you’ll hear about it—over and over. Don’t become your portfolio’s worst enemy by allowing yourself to get caught up in the negative hysteria.
  • Remind yourself that the market has experienced 20 drops of 10% to 20% since World War II (plus 13 bear-market tumbles of at least 20%).
  • Have a strategy. You’ve probably heard of dollar-cost averaging, a strategy of investing a set amount in the market at periodic intervals. Consider a correction-market twist: Invest periodically but use decline thresholds instead of time intervals to determine when. For example, you might put a set amount into stock funds in your 401(k) after every 5% dip.
  • Anticipate better days. The effects of corrections don’t usually last long. After a drop of 10% to 20%, it typically takes just months to break even.
  • You should only invest in things you understand; and understand the fees that are associated with these.
  • Remember to Simplify, Consolidate, and Diversify your retirement investments.

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Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.