How to Protect Yourself in Today’s Scary Economic Environment

I recently taught a class with the same title as this post. It began with a summary of recent “scary” economic events: recession fears, rising interest rates, bank failures, volatile stock prices, increased costs of basic expenses due to inflation, layoffs, low savings rates, increasing credit card APRs and household debt, housing unaffordability, and more. 

The remainder of the class described ways for people to protect themselves during uncertain financial times. Below are some key take-aways:

 

Self-Assess Your Fears- Admit that you are nervous. Then write down your biggest financial fears (e.g., unemployment, homelessness). Next, ask yourself how realistic they are. Also, tune out market “noise” (e.g., daily financial reports on television) if this triggers financial anxiety.

 

Understand Historical Investment Returns- Avoid market timing, which is generally futile. When people jump in and out of stock investments, they tend to miss key “up days” when markets (and stock prices) rebound. Investment volatility is normal and to be expected.

 

Control What You Can- Spend less on discretionary expenses to offset higher fixed expenses due to inflation, accelerate debt repayment (snowball or avalanche method), get estate planning documents in order, diversify investments, and develop healthy living habits (e.g., exercise).

 

Earn More on Your Money- Take advantage of the higher returns from online bank savings and money market accounts and money market mutual funds available through investment companies. To hedge uncertainty about future interest rates, purchase a laddered portfolio of certificates of deposit (CDs) with staggered maturity dates and different interest rates.

 

Rebalance Your Portfolio- Set target percentage weights for asset classes (e.g., stocks, bonds, cash equivalents) and rebalance periodically by selling over-weighted assets and buying what is underweighted. Sign up for free automatic investment rebalancing services, if available.

 

Annual Financial Check-Up- Keep tabs on your finances with the following check-up metrics: net worth statement, cash flow statement, spending plan (budget), credit report and score, consumer debt-to-income ratio, and income tax withholding review.

 

Learn From Your Tax Return- Review your latest tax return and identify changes from previous years. Change withholding and/or quarterly estimated payments if changes are needed. Do a mock-up 2023 tax return each Fall to identify tax-saving opportunities before year-end.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

Money After 70: Financial Opportunities and Challenges-Part 2

As noted in last week's post, I am creating a new Money After 70 course for older adults. Below are 10 more changes, opportunities, and challenges for septuagenarians (people aged 70 to 79):

Lasts and ROLE Calculations- As people age, their time orientation changes. As I wrote in my book, Flipping a Switch, people start doing return on life expectancy (ROLE) calculations. In other words, “mental math” comparing how long things might last in relation to their age and life expectancy and whether certain expenses (e.g., an expensive dental crown) are “worth it.”

 

Spending Down- Another topic in Flipping a Switch is switching from a saver to a spender in later life. A difficult challenge for “super savers” is spending down accumulated wealth and seeing account balances decrease as withdrawals are made for taxes on RMDs and health care.

 

Increased Risk of Diminished Capacity- The risk of mild cognitive impairment (MCI) or dementia increases with age and accelerates rapidly in the mid-70s. By age 82, the chance of MCI or dementia is over 50%. Therefore, a thorough estate planning review is warranted.

 

Shortened Investment Time Horizon- There is a frequently cited “100-age formula” for the percentage of stocks in someone’s portfolio, as well as 110-age (higher risk tolerance) and 120-age (aggressive risk tolerance). With each one, stocks are half or less of 70+ year olds’ portfolio to reflect the fact that they don’t have much time for market “bounce backs” to replenish losses.

 

New Housing Considerations- Throughout their 70s as life events (e.g., health issues, income loss, widowhood) occur, some people may reconsider where they live and explore options such as a reverse mortgage, continuing care retirement community (CCRC), and living with family.

 

RMD Withdrawal Increases- As a taxpayer’s age increases, the percentage of their tax-deferred account balance that must be withdrawn increases. At age 73, the RMD divisor of 26.5 is 3.78% of an account balance and at age 79, it is 21.1 (4.74%). At ages 80, 90, and 100, the taxable account withdrawal percentages increase to 4.96%, 8.20%, and 15.63%, respectively.

 

Communication With Loved Ones- Many people put off conversations about “hard topics” (e.g., dying, feeding tubes, care-giving expectations, bequests in a will) for decades. One’s 70s are the time to open up with family members and personal representatives (e.g., executor). Current U.S. life expectancy is 79.11, although it averages in the mid 80s for those at age 70.

 

Long-Term Care (LTC) Planning- At age 70+, LTC insurance is prohibitively expensive or may be unavailable due to health issues. As a result, many 70-year olds address LTC needs “on the fly” with strategies such as self-insurance, selling assets, moving, and Medicaid divorces.

 

Simplification and Downsizing- An eighth decade of life increases the urgency to do this. Strategies noted in Flipping a Switch include creating a financial inventory, closing subpar accounts, consolidating “like” assets (e.g., IRAs), and shredding unnecessary documents.

 

Getting Help- Even the most dedicated “do it yourselfers” may need help in their 70s due to inexperience or physical challenges. Examples include tax preparation after RMDs start, financial planning, legal assistance, house cleaning, lawn mowing, and in-home care. 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

Useful Information from Recent Webinars- Part 1

 

Every so often, I review my personal “learning journal” and summarize notes taken from various webinars.

Below are six information nuggets that caught my eye:

 

Impact Investing- This is a big growth area in the investment world and is expected to grow. The stated intention is to have investments create change and generate a positive impact on the world- as well as a high return. Acronyms associated with impact investing include SRI (socially responsible investments) and ESG (environmental, social, and governance). Investors need to be careful about “greenwashing” (unsubstantiated claims about a company’s positive impact).

 

Widowhood Challenges- Part of many older adults’ later life will be spent living as a single person, but few couples proactively plan for this. “One size does not fit all” when it comes to a surviving spouse’s financial needs. Common challenges that affect many widows/widowers are aloneness, a lower income, increased taxes/higher tax rate filing as an individual vs. a couple, loss of services that a deceased spouse used to perform, and no longer spending time with couples.

 

Financial Infidelity- This is the term used to describe financial cheating on a partner. It includes lying about finances and debt and hiding purchases. “Red flags” to spot it include a change of status (a spouse is no longer on a joint credit card), changed passwords to online accounts, new credit card statements, a spouse no longer willing to discuss financial issues, and unexplained documents to sign. Effects include a loss of trust and broken relationships.

 

The Rise of Neobanks- Sometimes called “challenger banks,” these are fintech companies that offer banking services (checking and savings accounts) in a non-traditional (i.e., digital) way. They typically provide checking and savings accounts via a website or app. The #1 neobank is Chime, with over 13 million customers. Other neobank names are Aspiration, Current, and Varo. Most neobanks partner with chartered banks, which provides access to FDIC insurance.

 

Taxes in Retirement- Tools for tax control in later life (read: to avoid being clobbered by taxes on RMDs- required minimum distributions) include charitable giving, Roth conversions, and tax diversification (i.e., placing savings in taxable, tax-free, and tax-deferred accounts). Placing every dollar of retirement savings in tax-deferred plans can be expensive in later life as RMDs get added to other ordinary income sources such as W-2 income from a job, a pension, Social Security, interest and dividends, mutual fund capital gains distributions, and more.

 

Roth Conversions- Between now and the end of 2025 is a good time to do Roth conversions (e.g., convert a traditional IRA to a Roth IRA) because the Tax Cuts and Jobs Act was “time-boxed.” As a result, tax rates (applied to converted IRA dollar amounts) are scheduled to increase in 2026. Market downturns are also a good time to make Roth conversions. When market values bounce back later, subsequent growth in value will take place in a tax-free investment.

 

Financial knowledge is power. I hope that you found this information useful.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.