Long Term Outlook

(Please be aware that the following information is part professional opinion of our financial advisor, and part decisions based on our personal financial situation. In no way should this be considered expert advice on which to base your own financial decisions.)

We just had a quarterly call with our financial advisor (I’ll refer to him as J.S.). As always, we look at our current situation, the performance of our investments, our future needs, and the outlook of the economy. I have to say that this session wasn’t as upbeat as some we have had, although we still have confidence in our plan.

Many indicators have bounced around in 2010, but J.S. anticipates that we may have a little positive “pop” at the end of the year. Expected tax increases (or the lapsing of the Bush tax break) will likely cause tax-free municipal bonds to become more popular. Investing in municipal bonds carries some risk – municipalities could conceivably default on their bonds. But the yield from our municipal bond investments is running at about 6%, compared to about 1% for safer U.S. Treasury Bonds. It’s a calculated risk.

One possibility is that the U.S. economy is in a prolonged “sideways” situation that could cause the market to be flat for from 5 to 10 years. J.S. compared the stall in the U.S. economy to what happened to Japan’s economy after their boom years in the 70’s and 80’s. We are about 10 years behind (remember our boom in the 80’s and 90’s?). There is still money to be made, if investments are targeted into growth areas. The silver lining is that this climate is keeping inflation rates low (between 1-2%, when we projected 3-3.5% in our model). We have to hope we don’t slip into a deflationary period, resulting in a double-dip recession, which would be bad for the economy.

When we retired, we rolled over our 401K’s into an annuity, back when their guaranteed return rates were really good. ING doesn’t even offer the plan we have any more, and it’s producing well for us. We have to thank J.S. for that investment. We can’t tap into that fund until I am at least 59 and ½ (about 5 years from now).

After buying the house in Prescott, we will be dual home owners for from one and a half to two years, with increased expenses. We’ve asked J.S. to help us look at our cash flow (income) needs between 2011 and when Social Security kicks in. We sent him our Social Security Statements and the payout info from my Hilton Pension. He’s hoping to find a way to keep our investment principle intact until we are in our 70’s. (As an aside, read your Social Security Statement. This is in black and white, “In 2016 we will begin paying more in benefits than we collect in taxes. Without changes, by 2037 the Social Security Trust Fund will be exhausted and there will be enough money to pay only about 76 cents for each dollar of scheduled benefits.” Depending on your age, you may need to consider this looming issue in your financial plans.)

It’s still really important to plan for your financial future, and we believe it helps if you have a knowledgeable and trusted financial advisor. Ours has come up with some ideas and plans that we might not have unearthed ourselves.

What have you done on your plan lately?

Project Management Drill

Now that we’ve gone and purchased another home, we have a lot of planning and re-planning to do. Our original retirement blueprint had us selling the condo and buying a new home in 2013. Now we are going to own 2 homes for about 2 years, so we have substantially jostled the financial apple cart. It’s all manageable – just a matter of timing and adjusting cash flow – but our decision created some work for Ron and our financial advisor.

My head is spinning with the logistics of setting up a new household without dismantling our current one. But it’s not unlike what we did when we purchased the condo while still owning the home in Memphis. After we closed in Chicago, we “camped out” here for a week. We slept on an air mattress, used paper plates and plastic utensils, and had a folding table and chairs. It was almost like setting up house for the first time after college, except this time we had money! Much of the furniture we had in Memphis wouldn’t work for Chicago, so we bought a lot of new things to establish our smaller, urban home.

The Prescott situation is different in some ways. We’ll want to use quite a few of our Chicago belongings in Arizona. In my mind, I’m already shopping and decorating, and trying to figure out what our “camping out” period in Prescott will entail over the coming months. Here are some of the things clanging around noisily in my head:

• We’ll need a new sofa, because the one in Chicago is too small for the great room in Prescott. Besides, we need something to sit on when we’re there.
• Although we’ll sleep on an air mattress at first, we need to shop for a bed for the master bedroom. Our current master bedroom furniture will eventually be the guest room suite.
• A few essentials need to be shipped ahead of us, including the air mattress and bedding.
• I’m making shopping lists for things like towels, dishes, utensils, glasses, cleaning materials, etc.
• Some clothes will travel with us and stay in Prescott, streamlining packing for future trips.
• I must call and put the utilities in our names.
• We need cell phones that work there (AT&T doesn’t have coverage on the fringes of Prescott).
• Our car (we only have one) will relocate to Prescott, to eliminate the expense of parking in Chicago. Now we need a plan for getting from PHX Sky Harbor Airport to Prescott when we visit…

It goes on and on. I am equipped with a brand new spiral-bound notebook, a fresh yellow highlighter, and project management skills. Who needs Microsoft Project?!

Financial Pulse Check

At least once a quarter, Ron and I review our investments with our financial advisor. We’ve been working with the same professional for over 15 years, and have a great relationship. Our most recent call took place yesterday.

(Please be aware that the following information is part professional opinion of our financial advisor, and part decisions based on our personal financial situation. In no way should this be considered expert advice on which to base your own financial decisions.)

Our portfolio is split between diversified stock funds, bonds, and cash. Last year’s decline in the stock market certainly affected us adversely – but as our financial advisor says, “It’s not a loss until it’s realized”. As long as the money stays invested for now, there is an opportunity to recover the value. Fortunately, during this volatile period we have had cash available, so have been able to leave our stock funds untouched. The market has improved 8 to 9% since the beginning of the year, but we were warned to expect a pullback in September or October (at least before the holidays), from profit-taking selloffs in the fledgling Bull Market.

Since retirement has actually begun for us, the specific distribution of our investments is pretty conservative. Our tolerance for risk is fairly low, since we no longer have an income to replenish losses. But we hope to be retired for a long time (the rest of our lives), so still need to be invested in stocks to get the type of returns required to fund our retirement. Every investor needs to determine their own tolerance for risk. High risk stock funds can generate anything from high reward to significant loss, and this sort of gamble is not for us at this point in our lives.

One decision we did make is to refinance the mortgage on our condo. Originally, we planned to pay the mortgage off early in 2010 when our ARM (Adjustable Rate Mortgage) resets to a new rate. But we can get a 15-year fixed-rate mortgage at 4.75%, and if we invest the money with which we would have paid off the note, we should get better than a 4.75% return on it. Our bank, UBS, will charge no points and no origination fee, so the fees (title search and appraisal) will be minimal and worth it in the long run.

We always feel more confident after a pulse check with our financial advisor. He provides expert advice and perspective, and gives us a chance to ask questions and discuss our ideas and concerns.