Weekly Reflection for September 22, 2023

The Week - An Update in Charts

It was another tough week for the stock markets. After the Federal Reserve's much expected pause on another interest rate hike, investors' gloom over persistent high rates took a toll on prices. It is the third week in a row of net losses.

The 10-year U.S. Treasury note made news this week for hitting its highest yield in many years. The chart above is a 3-year look back at yields, which have risen from 0.65% to nearly 4.5% today.

Rates are not just high in the U.S. but also measure the highest since 1995 among 38 different central banks (when compared to their domestic gross product) according to Bespoke Investment Group.

The Federal Open Market Committee (FOMC) left rates steady this week in its only second pause since 2022. The FOMC still expects to cut rates next year and it will be like molasses. It projects just two rate cuts of 0.25% each, versus the previously projected four. At this slow pace, the reserve rate will be 5.1% by end of 2024.

Markets were mopey upon hearing that the Fed is going to take its time coming back down the steep mountain of rate hikes it created. In the past, including the early 1990s when a soft-landing was achieved, rates crashed back down.

Last week we noted that workers seemed more content to love the job they have, rather than that other job, over there, in the greener grass.

Not so for Certified Public Accountants (CPAs). CPAs are saying low money for the work, boring work and burnout have made the profession less rewarding than anticipated. They are also citing new technology, like generative AI, as a threat for the future of their profession.

If you are following the money, logistically this is where it is going. Millionaires, defined as having $1 million or more in net worth, are not just moving within a country, they are becoming ex-patriots. Australia is the largest (net) recipient followed by the U.A.E. China is the biggest loser, followed by India, Russia and the U.K.

Tomorrow, September 23rd, is National Public Lands Day. It is the 30th such celebration during which park entrance is free but all are encouraged bring work gloves and a volunteering state-of-mind. The agenda includes hundreds of ways for visitors to lend a hand in keeping our protected lands in top shape. Given that 88 million visitors entered a park in 2022, and it is projected to be just as many in 2023, there is probably a lot of housekeeping to do!

Stocks and Your Social Security

A recent Social Security report reminded Americans of a stark reality: the trustfund assets will become depleted in 2034. This trust fund is critical to paying the benefits shortage that current income from Social Security taxes does not cover for recipients. Because our law says that the Social Security Administration can only spend what it has coming in or available in reserve, only 77% of payments will be covered by 2034.

By that time the Social Security trustees will need to decide which retirees will bear the brunt of the cuts. Either all recipients will have benefits reduced (see chart with expected impact) or just the newly eligible recipients may have their payments reduced. Any decrease will be devastating for the one-third of current and future beneficiaries for whom the payments represent 90% or more of their income.

Although none of the candidates in the 2024 presidential election are making this a key campaign issue, the burden will fall heavily on the President’s desk during the next administration. Doing nothing is one choice. But quietly in the background a bi-partisan group has been working on something. For three years now, Senator Bill Cassidy (R-LA) and Senator Angus King (Ind–ME) have co-led a group that sources say will deliver a plan, however not until after the election.

The plan involves both the stock market and massive federal borrowing. The proposal requires the creation of a new fund to be overseen by professional managers appointed by Congress and the President. The fund would borrow $300 trillion in each of the next five years at the U.S. Treasury rate. Borrowed funds would then be invested in low cost index funds and similar stock investments with the goal to earn 3.5% annually, net of expenses like borrowing and management costs.

However, this is just one part of the puzzle and would not cover the entire shortfall. Other measures on the table include raising the full retirement age incrementally from 67 to 69½ over two decades, modestly increasing the wage cap on Social Security taxes (currently at $160,000), and reducingbenefits for high-income earners.

Everyone hopes to avoid a repeat of the 1980s when Social Security faced a similar cash flow crisis. Then measures were taken to extend the program's solvency for 75 years. It will barely make it to 50 years without significant changes, sacrifices and a Congress brave enough to even have the conversation.

Calculate Your Longevity

How long will you live? That is what every good financial plan will attempt to solve for, with the tendency to err on the high side. If you are paying attention to what the Social Security Administration thinks is within the realm of possibilities, 122 is the absolute oldest age. Only Frenchwoman Jeanne Louise Calment has lived that long and that's only if you believe her

remarkable story.

Back to the question though, how long and what number should you use for your retirement plan? Based on the most recent data available from 2021, the average male life expectancy is 74 and for females, 79, per the C.D.C. No one would recommend aiming for the average life expectancy though. So where to start, without being ridiculous like 122 seems.

First, consider the many factors that contribute to a life, like wealth. The wealthier tend to have better access to healthcare, high quality food, better living accommodations - all which contribute to longer lives. Marriage is also a big contributor. Married men and married women live on average two years longer. Relationships, including those that tie one to a community, tend to reinforce healthy habits and keep people motivated on a better path than their more lonely counterparts. Second, consider family history. Negative impacts like smoking, risky habits like skydiving, family history of cancer, mental illness or early death of parents are important.

But financial planners do not have a good track record of considering negative factors that would shorten a life. They also ignore the average. Planners tend to be very conservative. A review of over 30,000 Canadian financial plans found that 70% of them used age 90 as a final age and 20% of them used age 95, even when both of those ages are far outside the average and median.

What the averages and life characteristics are missing is what planners are considering, which is longevity risk. This is the likelihood that one will live long. The Social Security Administration has more

helpful information to contribute here. A healthy non-smoking male born in 1965 and reaching age 67 in 2032 will have a 47% chance of living to age 90, and a similar female would have a 57% chance. Now that's meaningful. While the stress of pulling

together a financial plan that works to make your money last for 30 years after a normal retirement (usually considered age 65) may seem silly, it is for good reason and now you see why!

Figure out your longevity by using this tool here! https://www.longevityillustrator.org/