Retirement strategies for 2019: Buckle up for bumpy ride
Financial projections for the new year are abundant this time every year. This year is no different, except the predictions are much harder to make because we have such a mixed bag to analyze.
While the economic fundamentals under the Trump economy are strong and stark in contrast to the sluggish recovery years of the Obama administration, threats from multiple other directions abound. Overall, this year will likely prove quite a bumpy ride, so it’s time to buckle up.
The great news
Let’s start with the numerous positives. First, the labor market. The U.S. gained a very healthy 312,000 new jobs in December to bring total employment gains in 2018 to a three-year high of 2.64 million. Average hourly wages grew 3.2%, the fastest pace since 2009.
On the GDP side, we can see the effects of President Trump’s deregulatory actions and tax reforms, as manufacturing hit a 14-year high and we have had quarterly GDP growth exceed 4%. We had the best real wage growth since 2009, and consumer confidence also hit an 18-year high in 2018, which gave us the best retail holiday season in six years -- ringing in $850 billion.
President Trump also had the gumption to take on America’s uneven trade deals and renegotiate them with our immediate neighbors and even call out the mammoth, China. Against this backdrop, why isn’t it all smooth sailing from here?
Well, because the negatives – the headwinds we are facing so to speak – are also numerous.
After nearly a decade of market upside, we have a very aged bull market – in fact the oldest in our history and unchartered territory is never fun. This Bull is showing its age, with the Dow down overall 5.6% in 2018, the S&P 500 down 6.2%, and Nasdaq down 3.9% -- and 2018’s record corporate earnings will be quite difficult to repeat.
We also have geopolitical risks with North Korea, Russia, Iran and Syria, among others, while we balance new trade tensions by challenging the status quo that has enabled China to become the dominating-global-industrial monstrosity it is.
More than all of that though, is the slow u-turn the Federal Reserve must take from nine years of cheap monetary policy. Raising/normalizing rates and deleveraging our national balance sheet at a rate of $50 billion per month changes the game, especially when Americans have been lulled into thinking easy credit terms were ours forevermore (as seen by record levels of consumer debt and student loans).
And lastly, in addition to all of these issues, we presently have a partial federal government shutdown, with a divided government starting this week. Can you see the storm clouds churning?
How it affects you
So, what to do with all of this? That answer depends on you and where you are in your personal investment horizon.
Conventional financial advisors will tell you that investing is for the long term, that the market is cyclical and even if it goes down, it will come back up again. They will also say that attempting to time the market is next to impossible - if you get out too early, you will miss out on upside. If you don’t get back in soon enough, you will overpay by buying back in late.
I agree with SOME of this conventional wisdom, but I believe math trumps here. The truth is, if we had a crystal ball, it would ALWAYS be better to avoid a loss, especially when you are 10 years or less from retirement. When you are that close to retirement, we need the time left to grow what you have, not simply recover it.
It took over four years for the S&P 500 to recapture its pre-Great Recession level – over four years on the hamster wheel – thus the reason Warren Buffett’s Rule No. 1 is to “Never Lose Money,” and his 2nd rule is never to forget rule No. 1.
If you are close to retirement, assuming you have built enough to retire on, safety is more important than growth. A move towards a higher cash/cash equivalent balance as a percent of the total, along with a shift to a goal of safety through interest and dividend paying holdings instead of capital appreciation, could be a strategic move.
For those with a 401(k), this is an excellent time to consider leveraging a smaller balance from market losses for Roth conversions, especially under our now more welcoming lower tax brackets.
Overall, even with our strong fundamentals, you should probably level set your 2019 expectations for rough seas ahead.
Rebecca Walser is a tax attorney, a certified financial planner, and the author of Wealth Unbroken, who specializes in the strategic planning of maximizing lifetime wealth while minimizing tax through her practice, Walser Wealth Management (www.walserwealth.com). She earned her juris doctor degree from the University of Florida and her Master of Law degree in taxation from New York University. She is a frequent national media contributor.