OK, Let’s Get Real

“What can we actually do?”

That’s the big reader question right now, with an emphasis on interest rates. That reality was underlined for me in a recent call-in for Dallas Morning News subscribers. In normal times, reader questions cover a predictable universe:

*Should I retire now? Or later?

*Do I have enough to retire?

*Should I buy a house?  Should I sell my house?

*Should I refinance my mortgage?

*How about investing in (you name it)?

*Is it better to lease or buy a car? Etc.

Not today. Instead, the entire focus of reader questions was on what to do about low yields on savings. And the related danger of overvalued stocks with shrinking dividend yields. What does this mean for the future?

The instruction from uncertainty

First answer: I don’t know what’s going to happen. You don’t know what’s going to happen, either. Neither does your favorite politician, whatever his or her party affiliation. Ditto the blathering heads on TV.

Recognizing this isn’t a deep step into despair.

It’s actually very useful information.

When the future becomes less predictable, the loss of predictability is, by itself, instructive. It tells us that we need to be a lot more careful. It means we need to be attentive to the things in our lives that we can change on our own.

Don’t be bashful, batten down.

And since our worry is about money, our new prime directive is simple: Take as much control as you can of the arrival, and departure, of your money.

You may feel this is entirely out of your control.

It isn’t. There is a lot you can do.

Take control of the arrival of money.

• If you are about to retire, make a decision about when to take Social Security. As I pointed out in a recent column, Social Security benefits are the only substitute for investment returns available to a large majority of households. With a federal deficit for the, yes, month of June of $864 billion, discussions of the virtue of delaying benefits have become kind of silly.
• If you are about to turn 65, be profoundly thankful: You’ll be eligible for Medicare. Once signed up, your exposure to the Extortion Merry-Go-Round otherwise known as American health care will be limited.
• Sell some of your fixed-income mutual funds without a certain maturity. Instead, build a “ladder” of fixed-income securities that mature in specific years. You won’t get a very attractive yield, but you’ll know exactly when you’ll have your money back. That means you’ll know when your spending money will be available. You can do this with a small pool of fixed-term ETFs. One example is the iBonds from iShares, funds of corporate bonds that mature in a given year. (Full disclosure: I have used these ETFs for this purpose, limiting it to three years.)

You can also build a ladder with both conventional U.S. Treasury obligations and with inflation-protected U.S. Treasury obligations. Another alternative is to build your ladder with CD-like tax-deferred annuity contracts with specific maturity dates – just be certain you select a well-rated insurance company.

Take control of the departure of your money.

• The biggest lever available to everyone is controlling spending. Every after-tax $1,000 not spent is the equivalent of $1,178 of pre-tax interest if you are in the 15 percent tax bracket, or $1,389 if you are in the 22 percent tax bracket. To earn those dollar amounts you’d need $58,900 or $69,450, respectively, in savings earning 2 percent.
• For many, this won’t be hard to do. Repeated studies have shown that our consumption spending starts to decline once we reach age 55. The only thing that can get in the way is rising health care spending, if you have medical issues. This is not pie-in-the-sky: With no effort or deprivation, the basic expenses of the Burns household have declined by more than 10 percent over the last eight years as our preferences have changed with age. Pay attention and it can happen faster.
• Debt has never been our friend. Whether it is high interest rate credit cards, an old mortgage, or a car loan, the monthly payments consume money that could otherwise be spent on essentials. The payments commandeer an amount of your savings far larger than the actual loan balance. If you can possibly do it, dump the debt.

Related columns:

Scott Burns, “Social Security: The Last Source of Income,” 5/16/2020  https://scottburns.com/social-security-the-last-source-of-income/

Scott Burns, “The Amazing Value of Social Security Benefits,” 5/23/2020  https://scottburns.com/the-amazing-value-of-social-security-benefits/

Scott Burns, “Tend Your Own Garden,” 3/28/2020   https://scottburns.com/tend-your-own-garden/

Sources and References:

iBonds Ladder Tool on the iShares BlackRock website:   https://www.blackrock.com/tools/portfolio-analysis/ibonds

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Photo by Amol Mande from Pexels

(c) Scott Burns, 2020