Data Point– Fewer Shipping Containers Arriving at U.S. Ports

This month’s chart explores an alternative dataset, the number of shipping containers coming into U.S. ports. Alternative datasets like this are often used by institutional investors, such as hedge funds, to identify patterns and trends that may not be visible in traditional economic datasets. Why are shipping containers relevant? The volume of loaded container imports can act as a predictor of upcoming economic activity, as they represent expected demand for goods, which is closely connected to consumer spending and overall economic growth.

Figure 1 graphs the total loaded container imports across six major U.S. ports every month for the last five years. The years 2018 and 2019 establish a pre-pandemic baseline, including seasonal trends, for monthly container imports. Container volumes were normal in January 2020 but then plunged in February and March and remained weak for multiple months as the pandemic shut down the global economy. Import volumes rebounded in the second half of 2020 as the economy reopened and remained above-average in 2021 as consumers spent heavily on goods. Container volumes peaked in May 2022, but since then, have declined in seven of the last nine months. February 2023’s import volume was the third lowest month in the last five years, behind only February and March 2020 in the early months of the pandemic.

What is the data telling us? Fewer container imports indicate the economy is reverting to pre-pandemic norms. This drop could help alleviate supply chain bottlenecks and ease inflationary pressures, a positive development after inflation rose to a 40-year high during the pandemic. In addition, the decline in container imports may provide insight into upcoming economic trends. Businesses typically import less goods when demand is anticipated to decline, and declining imports could be an indication that businesses expect economic activity to slow. The question is whether the drop in shipping container volume is related to seasonal trends or the Federal Reserve’s interest rate hikes, which are designed to ease inflation by reducing demand.

Important Notices & Disclaimer

The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.

The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results. Investing involves risk, including the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.

No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.

READERS SHOULD VERIFY ALL CLAIMS AND COMPLETE THEIR OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS.

PFG Private Wealth Management, LLC is a registered investment advisor.

1Q 2023 Recap & 2Q Outlook

Financial Markets Start 2023 Strong But End the First Quarter on a Question Mark

First quarter economic data showed the U.S. economy entered 2023 with considerable momentum, even in light of the Federal Reserve’s interest rate hikes throughout 2022. Fourth quarter 2022 GDP data showed the U.S. economy grew at a +2.6% rate. The growth was largely driven by a resilient consumer, inventory restocking, and increased government spending, while businesses cut back their spending and the housing market remained weak. Additional economic data in Figure 1 highlights the broad economic trends. Jobs remain plentiful with job openings significantly above pre-pandemic trend, inflation is easing, and consumer spending remains above trend. The data shows growth is normalizing as the economy returns to its pre-pandemic trend but suggests the economy is withstanding higher interest rates thus far.

Financial markets turned rocky during the last month of the quarter. Three regional banks failed, and the U.S. Treasury bond market became more volatile as investors debated whether the Federal Reserve would continue to raise interest rates against an uncertain backdrop. This quarter’s recap discusses recent bank failures, including concerns about financial stability, and provides an update on year-to-date stock and bond returns.

Regional Banks Fail After Sudden Withdrawal Spree

Three regional banks failed in March as the banking industry faced a crisis of confidence and customers quickly withdrew deposits. The top chart in Figure 2 (next page) shows deposits at U.S. commercial banks rose from $13.2 trillion at the end of 2019 to a peak of $18.1 trillion in April 2022 as businesses and individuals flooded banks with new deposits during the pandemic. More recently, deposits at commercial banks decreased in 9 of the last 12 months. The bottom chart in Figure 2, which graphs the change in bank deposits from peak levels, shows total U.S. commercial bank deposits have declined -$607 billion since April 2022. The decline marks the biggest banking sector deposit outflow on record and is starting to stress bank balance sheets.

To meet withdrawal requests, banks maintain a portion of their assets as liquid reserves, such as government bonds and commercial paper, that can quickly be converted to cash. If banks exhaust the liquid reserves, they can either borrow from other banks and the Federal Reserve or sell assets, such as their bond holdings. This basic process helps explain why three banks failed.

Depositors overwhelmed the banks in early March with withdrawal requests. The banks exhausted their liquid reserves, could not obtain loans from other banks or the Federal Reserve in a time-efficient manner, and were forced to sell their most liquid assets, which consisted of U.S. Treasury bonds and mortgage-backed securities. The problem for the banks is interest rates are significantly higher than when the banks bought the bonds, and the bonds are now worth less. When the banks sold the bonds, the were forced to realize billions of dollars of losses, which drained their capital cushions and made them technically insolvent. State banking regulators and the FDIC immediately stepped in to take over the failed banks and protect depositors.

These recent bank failures have raised concerns about financial stability and drawn comparisons to 2008. However, there are important differences from 2008, including both regulatory changes and the causes of insolvency. Banking reforms after the 2008 crisis strengthened the overall financial system, and higher capital requirements now provide banks with a more robust financial cushion. In addition, regulators now possess greater authority to resolve issues in large, failed banks in order to avoid chaotic situations like the Lehman Brothers bankruptcy. In terms of cause, the 2008 crisis was primarily triggered by bad loans and complex securities. In contrast, recent bank failures resulted from the Federal Reserve’s rapid interest rate increases, which created paper losses for banks that made loans or purchased bonds at lower interest rates.

Navigating the Volatile Interest Rate Landscape

The Treasury market is experiencing more volatility and illiquidity because of conflicting signals about the strength of the U.S. economy and the Federal Reserve’s policy plans. Solid economic data in January showed the U.S. economy coping well with rising interest rates, suggesting the Federal Reserve may need to do more than anticipated to ease inflation. During early March congressional testimony, Federal Reserve Chair Jerome Powell spooked markets by suggesting the central bank would need to raise interest rates higher than initially thought and then keep interest rates higher for longer. The warning caused Treasury yields to rise and bonds to trade lower. Less than one week after Powell testified, multiple regional banks collapsed, causing worries about the U.S. financial system’s stability. Treasury yields reversed course and declined, causing bonds to trade higher. The two conflicting themes have resulted in wild price swings in the usually quiet Treasury market as traders place bets on the likelihood of future rate cuts.

Figure 3, which graphs the rolling 2-day percentage change in the 2-year U.S. Treasury yield, shows the recent spike in volatility. Taller bars indicate the 2-year Treasury yield experienced a bigger 2-day move. The chart looks like a heartbeat over the past 12 months, going up and down with occasional volatility as markets responded to new information. However, the far right of the chart shows a spike in both directions recently. The 2-year yield plunged -0.87% on March 13^th after two regional banks failed over the weekend, its biggest 2-day decline since the Black Monday stock market crash in October 1987. After banking regulators took over control of the banks and the Federal Reserve introduced lending programs to stabilize the banking sector, the 2-year yield surged +0.35% on March 21^st.

What is causing the volatility? Investors now fear the Federal Reserve faces a tough set of choices. The central bank must balance bringing inflation under control with minimizing damage to the U.S. economy. One factor complicating the central bank’s task and contributing to interest rate volatility is the lagged effect of monetary policy – it is difficult to model how 2022’s interest rate hikes already have and will impact the economy. As a result, there is little consensus inside the Federal Reserve on the path of monetary policy. The central bank’s Summary of Economic Projections, which provides forecasts for key economic indicators and offers insights into the future direction of monetary policy, shows a wide range of interest rate projections. Projections for interest rates at the end of 2024 range from 3.4% to 5.6%, while the 2025 projection range is 2.4% to 5.6%. With even the Federal Reserve uncertain about policy, interest rates could remain volatile in the coming quarters.

How does the volatility impact businesses, consumers, and investors? Treasury securities are considered safe-haven assets, used as collateral for loans and other debts, and serve as a benchmark for pricing other financial securities, such as corporate and municipal bonds, mortgages and other asset-backed securities, and money market instruments. Increased volatility and illiquidity can disrupt the flow of credit, making it more challenging to price loans and various other financial products. While current volatility is linked to uncertainty about Federal Reserve policy rather than financial system stress, the risk is interest rate volatility spreads to other corners of financial markets. For businesses and consumers, this could mean higher financing costs and more difficulty obtaining loans. For investors, this could mean borrowers are unable to refinance their maturing bonds and end up defaulting on their principal and interest payments.

Equity Market Recap – A Reversal in Performance Trends During the First Quarter of 2023

Stocks traded higher in January before giving up some of their gains in February and March. The S&P 500 Index of large cap stocks ended the first quarter up +7.4%, outperforming the Russell 2000 Index’s +2.7% return. Most of the S&P 500’s relative outperformance occurred in March as investors de-risked their portfolios following the bank failures. There was also a sizable shift in factor performance during the first quarter. The Russell 1000 Growth Index gained +14.3%, outperforming Russell 1000 Value’s +0.9% return. Like the S&P 500, the Growth factor’s relative outperformance occurred in March after the bank failures. Growth stocks tend to be higher quality businesses with stronger fundamentals, and recent bank failures may have motivated investors to rotate into higher quality companies. Regardless of the cause, Growth’s outperformance is a significant change from 2022 when the Federal Reserve’s interest rate increases weighed on expensive stock valuations.

The Growth vs Value performance reversal also shows up in first quarter sector returns, with Growth-style sectors outperforming. Figure 4 is a scatterplot that compares each sector’s 2022 return (vertical y-axis) against its first quarter 2023 return (horizontal x-axis). In general, the worst performing sectors in 2022 are the top performing sectors in 2023, while 2022’s top performing sectors are broadly underperforming to start 2023. Beyond the year-to-date performance reversal, there was no obvious preference for defensive or cyclical sectors.

Turning to global markets, international stocks posted positive returns during the first quarter. The MSCI EAFE Index of developed market stocks gained +9.0%, outperforming the MSCI Emerging Market Index’s +4.1% return. Europe was the top performing international region and boosted developed markets’ performance. The region managed to avoid a major energy crisis during the winter months thanks to unseasonably warm weather and efforts to secure alternative natural gas sources after Russia cut off most of its supply. Short-term gas prices have fallen from record highs, preventing severe shortages and rationing, although utility bills remain high. In Asia, all eyes remain on China as the country reopens after relaxing its Covid-zero restrictions. The reopening is expected to boost China’s economy, and potentially the global economy, but it is unclear how strong or lasting the growth will be.

Bond Market Recap – Riskier Bonds Underperform Due to Concerns About Refinancing Risk

Bonds traded in both directions during the first quarter, initially trading higher in anticipation of the end of the tightening cycle before trading back lower as the Federal Reserve hinted at higher interest rates for longer. Corporate investment grade bonds ended the first quarter with a +4.6% total return, outperforming corporate high yield’s +3.7% total return. Like equities, investment grade’s outperformance primarily occurred in March after bank failures raised concerns of increased default risk.

Tighter bank lending standards are becoming a concern in credit markets. For perspective, banks aggressively tightened lending standards during the last 12 months in anticipation of the Federal Reserve’s interest rate hikes slowing economic growth. With recent bank failures causing banks to question the stability of checking deposits, there is a risk that banks will adopt a more cautious approach to lending and reduce the total amount of credit they offer. The decreased credit supply and access to credit could have a domino effect, impacting the economy and financial markets over time. Borrowers, specifically high-yield issuers, could default on their debt if it becomes difficult and too expensive to refinance their maturing loans. Credit markets will be watching for signs of refinancing stress in the coming months.

Second Quarter Outlook – Back to the Fundamentals

The outlook is indecisive as financial markets close out the first quarter of 2023. Some investors believe the Federal Reserve’s actions will slow economic growth and tip the U.S. economy into a recession. This group points to recent bank failures as a warning sign that higher interest rates will have a negative impact. In contrast, some investors believe the U.S. economy is strong enough to withstand the Fed’s actions. This group points to first quarter economic data as a sign of strength and banking regulators’ actions as an indication the U.S. financial system is functioning as intended.

The back and forth is likely to continue until some of the market’s most pressing questions are answered. Key questions include the direction of Federal Reserve policy, the stability of the U.S. banking sector, inflation’s stickiness, corporate earnings growth, and the strength of the U.S. economy. Our team will be monitoring the answers to these questions in coming months to help guide investment portfolio positioning, with first quarter earnings season scheduled to start in mid-April.

As we have mentioned previously, the current investing environment requires a long-term outlook. Trend changes are frequent, fast, and driven by fluctuating market headlines, and keeping up with the day-to-day whims of the market can be emotionally taxing. Developing a financial plan and sticking to it are important steps to achieving your financial goals. Do not hesitate to reach out to our team if you have any questions or concerns about your financial plan or situation.

Important Notices & Disclaimer

PFG Private Wealth Management, LLC is a registered investment advisor.

A Simple Explanation of Recent Bank Failures

The banking industry is experiencing a crisis of confidence as checking deposits are withdrawn after businesses and individuals flooded banks with new deposits during the pandemic. Figure 1 shows deposits at commercial banks rose from $13.2 trillion at the end of 2019 to a peak of $18.1 trillion in the first half of 2022. The increase in deposits occurred as the Federal Reserve doubled the size of its balance sheet by $4.5 trillion, the federal government distributed multiple rounds of stimulus checks, and social distancing restrictions limited consumer spending on services. More recently, Figure 2 shows deposits at commercial banks decreased in 9 of the last 12 months. The decline in deposits is occurring as the Federal Reserve shrinks its balance sheet and inflation weighs on consumer savings. Banks complained about too many deposits in the past few years, but now declining deposits are starting to pressure some bank balance sheets.

Last week saw the failure of two California banks and one New York bank serving niche industries that benefited from the recent period of 0% interest rates. Silvergate and Signature Bank operated as bankers to the crypto industry, and Silicon Valley Bank (SVB) catered to the venture capital and startup ecosystem. All three banks experienced a surge in deposits during the pandemic for industry-specific reasons. Silvergate and Signature Bank took in deposits from crypto exchanges and other industry participants that lacked access to banks due to regulatory constraints. SVB’s deposits grew rapidly as startups raised money from venture capital firms and parked it at the bank.

Bank analysts point to the three banks’ business models and lack of diversification as the cause of their issues. From a business model standpoint, the banks quickly took in a surge of deposits. Instead of using those deposits to make new loans to consumers and businesses, the banks purchased U.S. Treasury bonds and agency mortgage-backed securities with relatively long maturities. The banks primarily purchased bonds with long maturities because the bonds offered significantly more interest income than short maturity bonds, which offered relatively low income due to the Federal Reserve keeping interest rates near 0% during the pandemic. The risk for the banks was that the Federal Reserve increased interest rates and the bonds lost value, which is exactly what happened.

Fast forward to the start of 2023, the three banks experienced a flood of withdrawal requests. To meet the deposit withdrawal requests, the banks were forced to sell assets, including the Treasury bonds and mortgage-backed bonds the banks bought when interest rates were lower. The problem for the three banks is interest rates are significantly higher than when the banks bought the bonds, which resulted in the banks realizing billions of dollars of losses. The realized losses drained the banks’ capital cushions, making the banks technically insolvent. Silvergate voluntarily ceased operations and plans to liquidate its assets, while Signature Bank and SVB were both taken over by the FDIC.

The three bank failures are a unique situation, because the banks did not have bad assets in the form of risky loans or complex derivatives. To the contrary, the banks primarily held safe assets in the form of U.S. treasuries and mortgage-backed bonds. The banks’ undoing appears to be related to a mismatch between their liabilities (which were the concentrated deposits from niche industries) and their assets (which were the bonds with long maturities). In our view, the lesson from the three bank failures is not that banks are sitting on risky loans and complex derivatives but rather that aggressively raising interest rates from 0% to above 4% stressed the banks balance sheets and could stress the wider financial system.

While the banks’ failures are concerning, it is important to note bank analysts believe this is a unique situation due to specific client bases and their balance sheets. Although other banks could face similar isolated issues, analysts believe most banks managed and matched their assets and liabilities better than the three banks that failed. However, investors, the Federal Reserve, and regulators will be watching for signs of stress across the financial system this year.

Important Notices & Disclaimer

PFG Private Wealth Management, LLC is a registered investment advisor.

Ep 58: Fore Your Retirement: What Golf Teaches Us About Financial Planning

On This Episode

Are you a golfer? Even if you’re not, the game of golf can teach us valuable lessons about retirement planning. For example, hitting a hole-in-one might be thrilling, but it won’t necessarily guarantee your overall success. And just like you need different clubs in your golf bag to play a round, you need a well-balanced approach to your investments in retirement. But perhaps the most important lesson from golf is the value of having a caddy. In retirement planning, a financial advisor can help you navigate the hazards and make the most of your financial “clubs.” Tune in to this episode to learn more about how the game of golf can help you plan for a successful retirement.

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Disclaimer:

PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

Marc: Back in for another edition of the podcast. Thanks for hanging out with John and Nick here with me. Talk investing finance and retirement here on Retirement Planning – Redefined. We’re going to have a little fun with this podcast conversation, a little golf lesson and tie-in to financial planning or retirement planning. So this will be fun. It’s right up your guys’ alley. John, just a few weeks back, you guys had your annual golf tournament, and we had talked on the prior podcast, it went really well. I should have had this ready for you. We could have talked about it then, but that’s okay.

John: Yeah, yeah. It’s all right. If you want to ask questions about it, I can definitely tell you. It was a great event and we donated to Boys and Girls Club of Tampa Bay and Tampa Hope, which provides homeless shelter stuff. So, yeah.

Marc: That’s awesome. Yeah.

John: Yeah.

Marc: All right, so are you a big golfer yourself?

John: No, I’d like to be when I can get back at it, but I’m not very good. It’s been on my to-do list to take some lessons and be able to get on the course, but I like-

Marc: Well, you don’t have to be good to like it. I think that’s most people.

John: Yeah, no, I like going on the cart and driving around and hanging out with my buddies.

Marc: There you go. Nick, what about you? Are you a golfer at all?

Nick: I wouldn’t call it golf, personally, I go out and I hack for-

Marc: Yeah, there you go.

Nick: … about seven or eight holes-

Marc: There you go.

Nick: … and then I’m pretty much done at that point.

Marc: You’re a hacker. Okay.

Nick: Yeah, maybe now that I’m in my forties it’ll be something that I reengage with, but I enjoy being out there when it’s the nicer time of year, the cooler time of year here. It’s fun to hang out with buddies and go and be out, but it tends to be a four to five hour chunk. So it just depends on my mood, I guess.

Marc: Yeah, it certainly can be fun. It can be a frustrating sport, but it’s easy to do, and of course it’s obviously a very popular sport for retirees and pre-retirees, so it’s easy to do some financial analogies with it. Since you guys just had that golf tournament and raised some money, which, again, is fantastic. This’ll be a little fun podcast conversation. So let’s jump in and talk about some lessons we can get from the game of golf financially speaking, and we’ll just have a little fun with this. So hitting a hole in one. I’ve actually seen this done live in person. I was playing with some friends a couple years back and we were playing with…. we got put with an older couple and she won the day, she was killing us. She was right down the fairway every time. We were all left and right around the sun. She was awesome, but her husband, on a par three, popped one up and lo and behold dropped it right in the hole. It was just totally awesome to see that happen. Thinking about this guys, I think about getting lucky in the market one time. Because this guy’s attitude changed when he got the hole in one. He was super excited. He obviously was very cool, but you could see the rest of the day he felt pretty cocky about his game. I would imagine that from a market standpoint, that could be the same thing. You do really well on one investment in the market and you think, oh, I got this whole financial thing figured out, and it might not be that easy.

Nick: Yeah. It can be interesting. Just in general, and you alluded to it, people like to talk about their wins more than their losses. That’s something that we see quite a bit. It’s a similar concept as when you have a friend that goes to Vegas and they talk about how they hit on a certain thing, but not necessarily that they came back less money than they started. It’s that concept. The goal when we’re focusing on financial planning, retirement planning, that sort of thing, is a long, well-thought-out strategy that encompasses multiple decisions, builds in options for different scenarios and really is just more strategic than having a single goal in trying to necessarily get lucky.

Marc: Well, and John, I was going to say, I think most golfers would agree that a hole in one is a little bit of skill, but a whole lot of luck. Maybe that’s the same thing to be said for the market, but you can strategize properly with your retirement and not just be wishing for luck, I suppose, in retirement, right?

John: Yeah, yeah, you definitely want to have a strategy and a plan versus just rolling it all in one event, unlikely event really happening. So you want to make sure that you put together the strategy, and again, you’re just trying to hit, bring it to baseball, those singles and doubles consistently, versus always trying to go for the home run.

Marc: Well, like I was saying, the gentleman’s wife, at the end of the day, he got cocky because of that fairly early, and he clearly was going to beat the two younger guys that he was playing with that day, me being one of them. I think he felt like the day was his because of the hole in one. But she wound up winning the day from having and shooting the best round because she was consistent. To your point with baseball there, she was right down the fairway, 150 yards every time. She ended up just kicking our tush because, like I said, we were all over the map, somebody else’s hole and everything else from slicing and all sorts of good stuff. So consistency, while a hole in one is sexy, consistency is probably the better idea for a strategy. So let’s talk about clubs in the golf bag. This is a fun analogy to think about too. You’re probably not going to go play golf and go Happy Gilmore and just show up with a driver and a putter. You need some more things in there.

John: 100%. This goes with your investments. You can’t just have just one tool in the bag there. You definitely need to have different investment vehicles doing different things so you really hit your goals. In case with golf, you make sure you get the best score possible. Same thing with your retirement planning and investments. You want to have different investments. Here’s the term everyone hears, diversify. You want to have different investments in your portfolio, investment portfolio, and different investments overall, whether that be some fixed income stuff, and then especially nowadays with the rates being the way they are, CDs are definitely a great option right now. So you want to have the different irons, different drivers, different-

Nick: Yeah. One thing that people tend to obsess about is, “What’s best, what’s best, what’s best? Should I have this or should I have that?” So frequently our answer is, “Well, it depends,” and or, “Yes, all of the above,” and it dovetails into this where, “Sure, you do want to have some funds that are going to be pre-tax and also some funds that’ll be tax-free later on,” and really focusing on the fact that just because something is better right now doesn’t mean it’s going to be better later. So the ability to be able to adapt and pivot and adjust to whatever the scenario is, is super important.

Marc: Yeah, and that’s the point of, “It depends,” sometimes with that answer because while it’s not the flashiest of answers, because it’s not a set it and forget it. Your strategy is going to change. Just like the club you’re going to have to pull out of the bag may change. You may think it looks like a simple 7 iron shot, but as you start to look at it and evaluate a little bit more, you might realize that it’s not, you got to go with a different club. So different clubs do different things, different investments do different things. Having that arsenal, I suppose, at your disposal is really what you want to do, versus, again, like I said, just trying to be Happy Gilmore out there and use a driver and a putter only. Probably not going to go the way you want to go. That comes to the final one here for this little fun analogy, guys, is listening to a caddy. Now, granted, when a lot of us go play golf, we don’t have the luxury of having a caddy, but you may have some friends who you’re doing a foursome or whatever and they’re giving you some advice or things of that nature. And while you don’t want to ask your friends necessarily for financial advice, if you ever have got the chance to play with an actual caddy, it’s pretty freaking cool. A true professional can really make the difference. I’d say that’s an easy analogy to what you guys do.

John: Yeah, 100%. I will say having an advisor in your corner, just someone to talk to, ends up having… people end up making better decisions with that. Just go back to the most recent thing, COVID here, where I would say the first month of that was really calming people down and talking them off a ledge. I’ll tell you how many times we heard, “Oh, I’m so glad we got the chance to talk because I was getting really nervous and thank you for your time.” So just having that resource of someone to bounce some ideas off of or just talk things through, ends up in the long run helping someone out financially more than they realize.

Marc: Yeah, definitely. Again, it’s the little things. It’s not always just the Xs and Os, sometimes it is having that sounding board, “Hey, I’m thinking about this idea. What do you think?” “Okay, this is a good idea because X, Y, Z,” or, “This is maybe not a good idea because X, Y, Z.” So it’s certainly important to have those conversations and if you need some help, reach out to the team. Obviously, as always, they’re here to help you with this, to help you get to and through retirement. Pfgprivatewealth.com is where you can find them online. Pfgprivatewealth.com, and drop us a line while you’re there, send an email in to the website if you’d like to have your questions answered. Of course, they’re going to certainly do that with each and every question, but we also take those from time to time here on the podcast. So yeah, let’s wrap up with one or two here guys. We’ll see how we can go, see how many we can get through. We got Claire, and she says, “I’m supposed to retire next month, guys, but I haven’t really done any planning at all.” Yikes. “I just realized that I still need to figure out Social Security options, pension options, Medicare options, and as well as what I’m just going to do with my time.” Wow. “Should I push my retirement date back until I figure this out?” Guys, that’s a interesting one and a tough one. Not trying to pick on her, but she’s done zero planning and thinking about retiring in a month.

Nick: Yeah, probably not a good idea. There’s two ways to address this. Well, what we would say to somebody in this situation is, “Okay, yeah, you need to focus ASAP on putting together a plan,” because usually when this happens, it’s because of anxiety of what the answer is going to be. It’s the concern that whatever the results are of the plan are going to say, “Hey, retiring is not a good idea,” or that the plan doesn’t look good or that sort of thing. So taking the action to do something is really, really important, and you can’t rewind time. So getting that plan in place. Would recommend holding off on the retirement until you can put the plan in place. Just there’s probably options in strategies that they’re not familiar with that can be put in gear sooner than later and could help to make that retirement more successful, because people’s ability to reenter the workplace after they have exited is often much more difficult than they realize.

Marc: Yeah, John, I’d say probably just call somebody, right? Get started. Don’t wait one more minute, right?

John: Yeah. Mistakes can be costly and it sounds like Claire has a lot of important decisions to make, especially with the Social Security and the pension there, one wrong move on that, you could be losing thousands of dollars, basically, is what I’m getting at.

Marc: Yeah, yeah. Yeah, so you got to get a strategy, Claire. Do you need to push off retirement? You’re just not going to know until you figure the two… Her question is, “Should I figure this stuff out?” Yeah, get in, sit down with a professional and find out where you stand and they’ll be able to help you determine is retirement next month even possible? I guess my question would be, how do you know that you could retire next month? She says, “I’m supposed to.” Maybe they’re going to retire her from the job. Maybe she’s been told. I don’t know. It could be one of those types of things, but either way I would get in to see a qualified professional, ASAP, and of course John and Nick are here to help. So 813-286-7776. All right, final question here. We’ll do one more. Lee says, “Guys, I don’t understand the Social Security spousal benefit. My wife worked for about five years before we had kids and hasn’t worked since, but she does have some benefit of her own. What is she entitled to? How does it work?”

Nick: This is a good question, and the reason that we wanted to review this with people is because sometimes the tricky part with dealing with planning, retirement planning, is the jargon or the terms that people use. Sometimes they mix up the terminology and that can lead to mistakes, which can lead to big problems. In this case, from a spousal benefit standpoint, in general, people are eligible either for a benefit of their own based upon their own work history, and that is only valid if they have 40 quarters of work. So 10 years of work. Now, if they are married, and there are some additional scenarios, if they were previously married but married for at least 10 years and are divorced, there are some options on spousal benefits at that point. There’s so many different scenarios that if somebody’s situation is complicated, we highly recommend that you reach out to an advisor that’s familiar with this space. But in this specific example, the spouse working for five years is not going to be eligible for her own benefit. She is going to be eligible for a spousal benefit, and that spousal benefit is a calculation factored on the primary earner’s income and how long they’ve paid into the benefit and that sort of thing. So this is something that we would tell, “Hey, we can help with this scenario. The main information we’re going to need is going to be the Social Security statements, and then we have some software that helps us pick, show what those numbers look like. But the spousal benefit is going to be a factor of the primary income earner’s benefit amount.”

Marc: Okay. Yeah, so definitely can get very complicated. Thanks for sending the question in. Hopefully that helps you out, but definitely have a conversation with a qualified financial professional. Reach out to John and Nick to talk more about Social Security and eligibility and all those good things and how it plays into it. 813-286-7776 is the number to call, or stop by the website, pfgprivatewealth.com. That’s pfgprivatewealth.com. Don’t forget to subscribe to the podcast on Apple, Google, Spotify, all that good stuff. As always, we appreciate your time. You can catch past episodes by subscribing or check out future episodes when they come out. Thanks for your time today, for John and Nick. I’m your co-host, Mark Kelly, and we’ll see you next time here on Retirement Planning – Redefined.

Ep 57: Retirement Expenses For Which You Forgot To Plan

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Are you preparing for retirement but feeling confident that you have covered all the expenses? Well, think again… It turns out that many retirees overlook some crucial expenses that can leave them financially vulnerable. In this episode, we explore the retirement expenses that most people tend to forget, including skyrocketing medical bills, unexpected travel costs, taxes, and much more. We’ll discuss practical tips and strategies to help you plan for these expenses and ensure a secure and comfortable retirement.

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Here is a transcript of today’s episode:

Marc: Hey everybody, welcome into the podcast. Thanks for hanging out with John, Nick and myself here on Retirement Planning Redefined as we talk, investing, finance and retirement with the guys from PFG Private Wealth. And this week we’re going to get into retirement expenses for which you might have forgotten to plan for, which certainly happens. So on this episode, we’re going to discuss some practical tips and strategies to help you plan for these expenses and maybe secure a more comfortable retirement. Guys, what’s going on Nick? How are you buddy?

Nick: Pretty good, pretty good. I got some friends coming into town next week and then family trickling in over the next month, so it’s going to be a hectic month.

Marc: Yeah, that’s not bad though.

Nick: That time of year.

Marc: There you go. And spring is upon us, so that’s always good. We’re into March, so that’s a good deal there. John, what’s happening buddy? How are you feeling?

John: I’m feeling okay. Getting there. Getting a little stronger each week so excited about that.

Marc: There you go.

John: But feeling pretty good. We just wrapped up our golf tournament, nonprofit charity golf tournament.

Marc: Oh, fantastic. Yeah.

John: And looking really good. It was a great time. Nick was out there helping me out because I couldn’t lift anything heavy, but it was a great turnout. And it’s year three and looking forward to year four. So.

Marc: That’s awesome. Yeah, fantastic. Always good to hear those success stories. So let’s share some things this week. Let’s get into the podcast here a little bit and talk about some expenses that we might encounter in retirement. And maybe we planned for them, maybe we haven’t. Hopefully we have. But let’s start with a big one obviously, medical expenses. I mean, typically they outpace normal inflation a lot of times. It seems like medical’s just constantly on the rise. So how do we address some of this stuff?

Nick: Yeah, what’s actually been probably at least most recently with a bunch of our clients, the dental expenses have been pretty wild. I know my parents have kind of run into this too. It seems like once you get into your sixties almost everybody has some sort of major dental work and it’s almost impossible to get out of there for less than 10 grand. So it’s interesting too because without going on a massive tangent, dental practices and offices seem to have really gotten down the financing aspect of things. And really they tend to run the businesses pretty tight and costs have gone up pretty substantially.

So yeah, those dental expenses can be a big deal. We tend to make sure that we have a fair amount of money budgeted each year for healthcare related expenses for clients and making sure that we’re allocating the right amount for insurance premiums in that sort of thing. But yeah, those numbers really do add up over time.

Marc: Yeah. They can get pretty staggering. I think it’s what is the average person what, $250,000, something like that in retirement and medical expenses. So I certainly can take off there for sure.

John, what about unexpected travel? Obviously that’s one that when we think about travel as part of our retirement strategy, but where would we find unexpected travel in that situation where it kind of creeps upon us and costs us more than we realize?

John: Yeah, so one thing we’ll always say is things are always going to come up, you can plan as best you can, but something’s always going to come up whenever life happens. So we’ve seen a lot of times where it could be funerals, long distance where people are having to go places they weren’t expecting to go, obviously. And just hotels stay, travel, whether they’re for a week or two, seeing some of that. Or caring for family members that don’t live in the state. So it’s traveling other sides of the country. We’ve seen that quite a bit.

Marc: I’d say, that’s probably a pretty big one, especially for as your retirees, you might have to go take care of a sibling or something who’s having a long-term care event, extended stay. I think my sister had to do that a while back as well. So that’s a great point.

John: And then there’s always the, which I think we’ve all experienced the destination wedding invite where it’s like, oh man, do I really want go to this place? And it’s just like, okay, all right, let’s start adding up the cost. And if it’s a family member, you typically feel obligated to go.

Marc: Yeah, so that’s good point.

John: Those are some of the top three we’ve seen in our practice.

Marc: Do I really want to go to Cabo? Yes. Do I really want to go for my niece’s wedding? No.

John: Sounds about right.

Marc: Yeah. or something like that. Right. So definitely some places where expenses can come up. The medical obviously certainly can get really costly, but then again, so can parental or child assistance. I mean, Nick, more people now are than ever are in the sandwich generation where they’re taking care of maybe an adult child to some degree, helping out and they’re also taking care of their own parent. That’s one thing I’ve heard about.

Nick: Oh yeah, yeah, so the child’s assistance thing, we saw it quite a bit like back in the years, immediately following the great recession, was kind of the first time I had seen that quite a bit where kids were getting out of school, graduating from college and having a hard time finding a job. So back to the parents and some help and that sort of thing.

Marc:

And then we got that again in the COVID too.

Nick: Yeah, exactly. That’s what I was going to say. From the standpoint of when COVID hit, that was something that impacted quite a bit. The job market’s still pretty good for a lot of fields, but have definitely seen that. And I would say a lot of our clients are also entering into that period of time where there’s more assistance needed for parents. My grandmother’s been living with my parents for, I want to say over 10 years now, but she just turned 90 and now it’s becoming even tougher. And we hear about that quite a bit from clients. And then if their parents are out of town, that’s some that have brought them into town or they travel fairly regularly to go see them. Yeah, it’s a lot on the plate.

Marc: And that’s an expense that can really derail your retirement. I imagine thinking using your parents there as an example, if they weren’t prepared for 10 years of taking care of grandma, I mean that’s an added expense that you just weren’t planning for.

Nick: Yeah, there’s the financial aspect and then even from the standpoint of we are focusing for this on the financial side of things, but even from a lifestyle and mental health standpoint or even just your ability to be able to do the things that you planned and wanted to do, whether it’s travel, that sort of stuff. It can be difficult, for sure.

Marc: Sure. Yeah, definitely affects the family dynamic along with personal relationship and everything because it’s a full-time gig. It can be, for sure.

Nick: Oh yeah.

Marc: So a lot of times we are focusing on the expenses here, but that’s a good point to bring up as well. So planning and strategizing for those things that can maybe be overlooked or forgotten, certainly important. Taxes, John, is the next one. Now we got a plan for taxes, hopefully we’re doing that. But are we thinking about the possibility of a tax hike because it sure does seem imminent.

John: It does, doesn’t it? You figure with all the spending happening, at a certain point, taxes we’ll have to go up. But that is definitely one that I know we cover quite a bit in our planning is making sure clients are flexible and to adapt in an environment where if tax rates do go up, we really try to make sure people have the ability to adapt to the situation. But I will say this is often overlooked where it’s, oh, you’ll have less income. So your funnel, lower tax bracket is kind of what you normally hear, but it’s definitely something that you want to be able to adapt. So perfect example of this, having some tax free money into retirement where tax brackets go up, you can basically say, Hey, this next three or four, five years, I have at least some Roth IRA money I can pull from where it’s not going to really impact my lifestyle too much. But taxes go up 7%. That’s a big, big dip in your nest egg or your living, your lifestyle,

Marc: Especially if your income stays the same. So your income stays the same when your tax rates jumps from you said what, 7%? So let’s say we go from 25 to 32, that’s not so great, you’re not going to feel so good about that.

John: Yeah, and something else I’ll say we see quite a bit with this is where there’s big expenses in a given year. So we talk about, I know I think we’re probably going to touch on it later, but if there’s like a home remodel expense or whatever it might be, or we had the recent years with COVID, like, hey, I want to buy an RV or whatever it might be, it’s big purchases can also affect those where you might be pulling out 50, 60 grand extra in a given year and if all your money’s pre-taxed, that’s going to be a pretty big hit to you in that year.

Marc: And that’s a good point. So Nick, I know you’ve got a list of a few things to think about in that department from maintenance or repair. Now again, we could strategize for the RV, we could strategize for, and I think this is maybe the point people missed, you tell me if I’m wrong here Nick, but if you’re getting close to retirement and somewhere in retirement, you’re going to probably have to replace your roof, start planning for that so that it’s not an unexpected expense versus just going, oh well now we found out the roof is damaged and we need to repair it. That’s a little different. So I don’t know, what do you think?

Nick: Yeah, for sure. From a planning perspective, the way that we typical typically handle that is we have home maintenance and repair expenses on an annual basis and then we will oftentimes every X amount of years add in an extra bump so that we can show people how we model that out and try to factor that in and build that in. But yeah, absolutely. One of the things that I’ve seen too is I guess and this is definitely not for everybody, but there’s a fair amount of people that like to purchase vehicles cash and just not having the car payment. And that’s something that has been a transition for a bunch of clients where just kind of emphasize with them, they may keep a vehicle for 10 years and so when they do make that new purchase, if we’re taking money out of qualified retirement accounts to do that, you’ve got to take out X amount more and then that hits you from a tax perspective, where really stretching out the payment, taking advantage of lower rates that dealers often offer. Just even little things like that where you may tweak how you’ve spent the funds on certain expenses in the past to just take into consideration what your new reality is in retirement.

Marc: Yeah, definitely.

Nick: It’s important.

Marc: Yeah, if you strategize again, you won’t be caught off guard by some of these expenses that you didn’t plan for. But John, the last one, I mean we got caught off guard for sure on the last one. Many people don’t plan for inflation normally, even when it’s in a normal 2% or 3%, let alone what we’ve just been going through.

John: So yeah, the last couple of years have been interesting for inflation. In a normal environment, it’s obviously not this type of hike in a given year. I mean coming out of a pandemic and then obviously with the Fed raising rates the way they have been doing to try to combat some of that. So normally it’s pretty slow and then all of a sudden it’s like you go to the grocery store and it’s like, whoa, what just happened? I’m paying almost 20% higher for milk or whatever it might be. COVID definitely made things interesting with the supply chain, everything like that, which added to it, which we’re starting to see come down a little bit. But this is a big one that you definitely want to put into your financial plan and you want to stress test the plan saying, Hey, what if inflation does hit 2%, 3%? It’s something that we typically do as well. And if you’re working with somebody, you should do is different categories have different inflation rates. So one thing with medical is historically that has been higher than the normal inflation, which you said would serve around 2%. We normally inflate that about 4%. And if you’re planning to pay for, at this point, most people when they retire aren’t paying for kids’ education but might be paying for grandkids because that’s what they want to do. So you got to pay, that has a different inflation rate. So it’s cool to be able to adjust each category with a different inflation rate when you’re doing planning. So if that’s something you are working with an advisor, you want to ask that question, is the inflation rate you’re giving me kind of general over everything or are we actually putting different inflation rates on different categories?

Marc: That’s a great point.

Nick: And just to jump in here on this one too, obviously inflation has been in the news so much lately. One of the conversations that we’ve been having with people is that really from the standpoint of news, the inflation that they report on, what CPI is really such a specific bundle of goods. Anybody that’s been paying attention to expenses over the last five, six, seven years, they’ve been going up. And so just kind of reminding people that this is happening every year. We just get really mad about it every 15, 16, 17 years, over and over again, rinse, repeat. And so really making sure that they understand that. And also just to another take on the inflation side of things is when they’re looking out over the nest egg and the plan and they kind of look to see, all right, well, I’m going to have X amount of dollars in 20 years, or I’m targeting to try to have X amount of dollars in 20 years or at life expectancy and making sure that they understand, hey, is that in present value? Is that in future value? Because 20, 25 years down the road, that number can start to seem a little, if things are going well, like unwieldy or super optimistic when in reality it could be just when you use the right and when you look at it the right way it’s similar to where you’re at today and stuff like that. So just not having that false sense of security if it’s not warranted is always important. But yeah, inflation’s an important topic.

Marc: Yeah, I mean you got to plan for these expenses. Some things we can’t plan for, but many can, or at least we can try to somewhat strategize for things we think are going to happen because inflation’s always going to be there, tax rates are always going to be there. We don’t always know what they’re going to be, but then some of those other items we can certainly try to strategize for. And by not having the conversation, you’re certainly not doing yourself any favor. Let’s finish off with an email question, guys, whoever wants to take this one and we’ll wrap it up. Thomas wrote in and he says, “Look, we’re retiring in two years and plan to sell the house and move to the beach, and values are still pretty high in my neighborhood to sell the house, so I’m wondering if I should sell it now even though we’re not ready to move and just rent a couple years.” His overall question is, “It a bad idea to rent at this stage of life?”

John: Yeah, that’s a great question. This seems to be coming up quite a bit with what we’re kind of seeing happening in the housing market right now. I wouldn’t say it’s necessarily a bad idea to rent at this stage of life. I’d more look at it from what’s going on in the housing market, the economy. So that type of strategy right now could be a pretty big risk depending on what happens. Example, if you were to sell your house and anticipate buying in a couple of years. If house prices, again, who knows what’s going to happen, dramatically go up over that next two year period, you could be putting yourself in a really bad position financially depending on what happens. I talked to someone who actually did something like this during COVID where they said, Hey, house prices went up a little. It was right when the boom kind of started where they looked at it and said, house prices are going up. They’re really high. I think they’re going to go down like they did in ’08 and this gentleman sold and then two years later, I mean they kept going up.

Marc: Right.

John: So now basically he’s caught in a tough spot where he was renting for a couple of years and for him to get back into the same house he just sold, I mean he’s paying almost $200,000 more. That’s a big swing. So I don’t know if it’s worth a risk, let’s put it that way, to do that type of strategy because none of us have that crystal ball.

Marc: Yeah, it’s an interesting proposition. A friend of mine did exactly this, Thomas. So he sold his house at the peak actually about eight months ago. I guess maybe that was the peak in this area or that area. But yeah, he decided he was going to get an RV and just drive around camping for a while and he is waiting for the housing price to come down before he goes and gets another place. So he banked on that strategy. He feels like he made the right decision. He’s enjoying the RV time. But every scenario is going to be a bit different with this, to John’s point. So I think it’s always worthwhile to kind of crunch some numbers, run some numbers, get a strategy put together and just stress test some things. Not only just that question from the email this week, but just a general topic that we talked about this week. Have a conversation with a financial professional like the guys at PFG Private Wealth. Get onto their calendar, have a chit chat with them. Stop by the website, check it out at pfgprivatewealth.com. That’s pfgprivatewealth.com to talk with John and Nick and the whole team at PFG Private Wealth. And don’t forget to subscribe to us on Apple, Google, Spotify, whatever platform you like to use. We appreciate your time, as always. Thanks for hanging out with us. For John and Nick, I’m your co-host, Mark. We’ll catch you next time here on Retirement Planning Redefined.