The Factors to Include on Your Retirement Readiness Checklist
Thursday, February 25, 2016

Before I start with this week’s commentary, I want to call your attention to two new posts on the AAII Blog. The first is about the advantages of do-it-yourself investing. In it, AAII President John Bajkowski explains how you can take advantage of being an individual investor to boost your long-term returns. It’s a great read. The second is an update about the changes to Social Security claiming strategies. The Social Security Administration recently made the April 29, 2016, deadline for filing and suspending benefits official. It also clarified the rules regarding claiming benefits on an ex-spouse’s earnings record.

A new study is highly critical of the retirement planning tools available online. The authors, including financial planning expert Harold Evensky, called the advice provided from the majority of these tools “extremely misleading.” We discuss the study in the online version of the March AAII Journal, which will be posted on AAII.com next week. For those who prefer not to wait, the full study can be downloaded from SSRN. The Wall Street Journal also has a good summary article (and is how I heard about the study).

Though the analysis of retirement planning tools is the primary focus of the study, there is something else of value to individual investors in it: the variables to consider when determining how financially prepared one (or a couple) is for retirement. The researchers relied on accepted financial theory and then considered suggestions from 297 financial professionals to determine what additional variables should be included. In total, 36 variables were identified as being important for judging retirement readiness.

It is a sizable list. Since many of the factors are related, the researchers grouped them in to five primary categories. They are:

  • Age: Current age, anticipated retirement age and estimated life expectancy (influenced by personal health, whether one smokes or not and the longevity of a person’s relatives)
  • Income and Expenses: Income includes current and future anticipated salary, likely pension income, Social Security benefits, trust income, disability income, pre-retirement asset withdrawals and other types of retirement income (e.g., part-time work, alimony, etc.); retirement living expenses should be prioritized based on both time (meaning when you expect to incur them) and dollar amounts
  • Assets and Debts: Taxable savings, tax-deferred savings (e.g. 401(k) plan, traditional IRAs, etc.), tax-free (e.g., Roth IRAs), whether a mortgage will be paid off or not, intended bequests, and possible windfalls
  • Rates: Future returns for stocks and bonds, future rates of inflation and future tax rates
  • Household Structure: The location of where one will live (impacts cost of living and tax rates), gender (women have longer average life expectancies), marital status, desired goals and tolerance for risk

As you can see, there are many assumptions to be made. Any analysis of your financial preparedness for retirement is going to be based on assumptions about unknown future events. Expenses and rates of return may be higher or lower than expected. Medical expenses are very much an unknown. Longevity is a right-tail risk in that the longer you live, the more money you will need.

In the ideal world of economics, you’ll have exactly the right amount to last you until death and no more, with the exception of any amounts deemed for bequests. Reality is far different.

Working through the above variables can give you an idea of how much you'll need for retirment, but it’s just an estimate. The best you can do is to save as much as is reasonably possible, retire later rather than earlier if possible and realize that even in retirement there are still actions you can take if you haven't saved enough. These actions include (but are not limited to) downsizing, working part-time and using your home’s equity.

During your working years, focus on the process. Save regularly, try to increase your savings each year, and invest in a disciplined, long-term manner. If you don’t do these basic things, no retirement planning calculator will help you be financially secure in retirement.

More on AAII.com

The Week Ahead

Just 10 members of the S&P 500 will report earnings next week as fourth-quarter earnings season winds down. Included in this group will be Costco Wholesale (COST), on Wednesday, and several other retailers as well as Medtronic (MDT) on Tuesday and Broadcom (AVGO) on Thursday.

It will be a busy week in terms of economic data. Monday will feature the February Chicago PMI and January pending home sales. The February ISM manufacturing index, the February PMI manufacturing index and January construction spending will be released on Tuesday. Wednesday will feature the ADP’s February employment report and the Federal Reserve’s periodic Beige Book. Revised fourth-quarter productivity, January factory orders and the ISM’s February non-manufacturing index will be released on Thursday. Friday will feature February jobs data (including the change in nonfarm payrolls and the unemployment rate), as well as January international trade data.

San Francisco Federal Reserve Bank president John Williams will speak on Wednesday.

March starts on Tuesday, which means we’re getting closer to springtime.

What’s Trending on AAII
  1. Five Steps for Gaining Control of Your Investments and Avoiding Mistakes

  2. John Maynard Keynes as an Investor: Timeless Lessons and Principles

  3. Social Security Strategies for Couples

AAII Sentiment Survey

Optimism among individual investors about the short-term direction of stock prices is above 30% for the first time since Thanksgiving, according to the latest AAII Sentiment Survey. Pessimism fell to its lowest level of 2016 as it continued to pull back from its recent highs. Neutral sentiment, meanwhile, rose.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 3.6 percentage points to 31.2%. As noted above, this is the highest level of optimism recorded by our survey since November 26, 2015 (32.4%). The rebound ends a streak of 12 consecutive weeks with bullish sentiment readings below 30%, the longest such streak since 1993. Even with the improvement, optimism remains below its historical average of 39.0% for the 16th consecutive week and the 49th out of the past 51 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 2.8 percentage points to 37.4%. This is the 56th time in the past 60 weeks that neutral sentiment is above its historical average of 31.0%.

Bearish sentiment, expectations that stock prices will fall over the next six months, plunged 6.4 percentage points to 31.4%. Pessimism was last lower on December 31, 2015 (23.6%). Even with the drop, pessimism remains above its historical average of 30.0% for an eighth consecutive week and for the 10th time in 11 weeks.

After nearly hitting a three-year high two weeks ago, bearish sentiment has fallen by a cumulative 17.3 percentage points. Over the same period, bullish sentiment has rebounded by a cumulative 12.0 percentage points. The shift has occurred as both large- and small-cap stocks appear to have set a short-term bottom.

The recent improvement in sentiment has only been enough to lift optimism to just above the lower end of its normal historical range. Many individual investors are still concerned about the pace of economic growth in the U.S., the pace of economic growth in China, tensions in the Middle East, the rate of earnings growth and prevailing valuations.

This week’s special question asked AAII members for their opinion about the current pace of economic growth. Nearly three out of every 10 respondents (29%) described the rate of growth as slow (several said "slow, but steady"), very slow or sluggish. About 8% said economic growth is too slow. An additional 8% describe growth as unacceptable, disappointing or terrible. Slightly more than 6% perceive the economy as getting weaker or at least experiencing a slowing pace of expansion. Just 5% think the economy is strengthening. Many respondents blamed Washington politics (both parties were criticized) for hampering growth.

Here’s a sampling of the responses:

  • “It’s too slow.”
  • “Seems to be slow, but steady.”
  • “Economic growth is sluggish.”
  • “Growth is disappointing.”
  • “It seems to be improving.”


This week’s Sentiment Survey results:

Bullish: 31.2%, up 3.6 points
Neutral: 37.4%, up 2.8 points
Bearish: 31.4%, down 6.4 points

Historical averages:

Bullish: 39.0%
Neutral: 31.0%
Bearish: 30.0%
Take the Sentiment Survey.

Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!