Q2/2008 Market Review ~ Independence Day Revisited
July 16, 2008
Welcome to the Kalorama Wealth Strategies Quarterly Market Review. Our quarterly
review updates the performance of the financial markets and provides commentary
on topics affecting investments.
After staging a bit of a rebound in April and May, stocks were hammered in June.
The Standard & Poor's 500-Stock Index suffered its worst June performance since
1930, sinking by 8.4%, and retreated 11.9% at mid year. Record-high oil prices,
weak employment, and continued turbulence in credit markets weighed heavy.
Nevertheless, results for the quarter were mixed for domestic indexes, while
international barometers were all down. Year-to-date, the declines for all
equity indices are in the high-single or double-digit range.
Soaring gas prices are finally influencing driving habits. According to the
Federal Highway Administration, for the first time since 1979, estimated vehicle
miles traveled for March 2008 dropped 4.3% compared with 2007. It was the
biggest yearly decline for any month since recordkeeping began.
To improve credit market conditions, during the quarter the Federal Reserve
increased its term auction facility by $50 billion, expanded its term securities
lending to include "AAA"-rated asset-backed securities as collateral, and lifted
the amount of its swap lines with the European Central and Swiss National Banks.
In addition, at its two regularly scheduled Open Market Committee meetings, the
Fed lowered its discount rate by 25 basis points to 2.0% at the first and held
steady at the second.
Inflation concerns led bond prices to reverse course from first-quarter gains.
The 10-year Treasury Note rose above 4.00% during the second quarter and at
quarter end the yield was 56 basis points higher to close at 3.98% (the yield as
of July 15th was 3.83%).
Second-quarter bond-index returns flipped from the first quarter. Global
Aggregate sagged 2.9%, U.S. Aggregate slipped 1.0%, International Emerging
Markets fell 0.4%, and TIPs shed 0.3%. On the upside, U.S. Corporate High Yield
added 1.8% and Municipals picked up 0.6%. At mid year, only U.S. Corporate High
Yield and International Emerging Markets are under water, at -1.3% and -0.2%,
respectively.
Below are rates of return for selected market indices for the second quarter of
2008, year-to-date 2008, and the three, five, and 10-year compound annual
returns as of December 31, 2007.
Independence Day Revisited
In last quarter's newsletter we covered Independence Day from the perspective of
taxes: the day on which Americans have earned enough money to pay all their
federal, state, and local taxes for the year. This article will focus on
Independence Day from the standpoint of retirement: the day on which you have
obtained enough assets and sources of income to no longer work. After all, with
the dictionary defining "retirement" as the withdrawal "from office, business,
or active life, usually because of age," doesn't Independence Day sound much
better?
The turn of the calendar to 2008 marked the beginning of the so-called "silver
tsunami," when the leading edge of the baby boom is eligible to begin collecting
Social Security. Last year, New Jersey-grandmother Kathleen Casey-Kirschling,
born January 1, 1946, was the first of nearly 80 million boomers born from 1946
to 1964 to apply for Social Security. Approximately 50% of eligible recipients
are choosing early retirement benefits at age 62 and begin receiving 75% of the
Social Security income they would get if they were to wait four years to
collect. Hopefully they have a plan!
Results of the Retirement Confidence Survey® released in April 2008 reveal that
American workers' confidence in being able to afford a comfortable retirement
decreased in the past year. Highlights of the survey, conducted by the Employee
Benefit Research Institute (EBRI) and Mathew Greenwald & Associates through
random telephone interviews with 1,322 individuals, include the following about
workers and retirees:
-The percentage of workers "very confident" about having enough money for a
"comfortable retirement" fell sharply, from 27% in 2007 to 18% in 2008, the
biggest one-year drop since the survey was begun 18 years ago. The percentage of
"somewhat confident" workers was unchanged at 43%. The share of workers who are
"not too confident" and "not at all confident" they can save enough to retire
comfortably jumped to 37% from 29%.
-Retiree confidence in having a "financially secure" retirement decreased from
41% to 29% in 2007. The portion of retirees who think they are likely to live
long enough to use up their entire savings rose to 39% from 29%.
-Almost half of workers (47%) disclosed that they and/or their spouse have tried
to calculate how much money they will need for a comfortable retirement, up
considerably from the low point of 29% found in 1996.
-Preparing a retirement savings calculation is effective in changing worker
behavior: 44% who calculated a goal changed their retirement planning, and of
those, 59% started saving or investing more.
-Of those workers who have performed a retirement needs calculation, 27% expect
they will need to accumulate at least $1.0 million before retirement and 60%
think they will require less than $1.0 million, compared with 12% and 70%,
respectively, for those who have not attempted the calculation. (Percentages do
not add up to 100% as the balance of respondents did not know or remember.)
-However, overall savings are modest: nearly one-half (49%) of all workers
reported total savings and investments (not including value of primary residence
or defined benefit pension plans) of less than $25,000. Only 27% indicated
savings and investments of more than $100,000, of which 12% had accumulated
$250,000 or more.
-As expected, older workers age-55 and up have saved more: 41% report savings of
more than $100,000, of which 23% have amassed $250,000 or more. Nevertheless,
36% reveal savings of less than $25,000.
Commenting on the survey, EBRI president Dallas Salisbury said: "If there is a
silver lining, it's that Americans finally may be waking up to the realities of
being able to afford retirement." The survey revealed that more workers are
saving for retirement: 72% report that they and/or their spouse are saving,
compared with 66% in the prior year.
Just how critical is it to for you to get a handle on the state of your
retirement capital needs? Here's what Christopher Cox, Chairman, U.S. Securities
and Exchange Commission, told this year's graduates at Northeastern University's
May 2nd commencement:
"Most Americans do a poor job of planning their finances for the future. And
given the daunting demographics facing Social Security, you're going to need a
plan. You'd better start now."
Due to the importance of planning for yet-to-come Independence Days, in future
articles we will explore related topics such as how to develop retirement
confidence, avoid mistakes, and make sure retirement is a happy adventure. And
along the way we'll check in with the Retirement Confidence Survey® to get
updates on how the rest of Americans will be spending their Independence Days!
If you are not confident about having enough money for a comfortable retirement,
Kalorama Wealth Strategies can help you prepare a plan to determine the capital
you will need for your Independence Days. For more information, please see our
web site at www.kaloramawealth.com.
Thank you for your business, trust, and referrals. Please feel free to forward
this email to friends and colleagues who can benefit from information about
investing and financial planning. If I can be of any assistance to you or anyone
you know, please do not hesitate to contact me.
Sincerely,
David
David M. Taube, CPA, CFA, CFP®, CRI
Founder and President
Kalorama Wealth Strategies
202-550-7262
