Scott M. Peterson, ChFC®, Author at Peterson Wealth

Don’t Make Retirement Investing Decisions Based on a Headline

Posted on December 31, 2018June 13, 2023 by Scott M. Peterson, ChFC®

The other day I saw a headline that read “Cancer overtaking heart disease as leading cause of death in many states”. The headline grabbed my attention and I continued to read to see if my state was one of the states where cancer was on the rise. Upon further investigation, I found that cancer deaths per capita are lower now than at any time in recorded history. What is really happening is that with fewer smokers and healthier lifestyles, heart disease is killing fewer people thus making cancer, with the lowest death rate in history, the number one cause of death in certain states.

I don’t think there was any attempt to deceive the reader in the headline about cancer and heart disease, but I see on an almost daily basis attention grabbing headlines from the financial media that will say anything to capture the reader’s or listener’s attention no matter how deceptive their headlines might be.

CNBC ended 2018 with the following headline: “US stocks post worst year in a decade as the S&P 500 falls more than 6%”. Then my radio told me we just had the “worst December for stocks since 1930”.

These factually true, yet misleading headlines are quite shocking if historical perspective is not provided and historical perspective is never provided. Historical perspective destroys the “shock and awe effect” and frankly, shock and awe sells. Historical perspective also destroys the credibility of any person or entity that sells shocking headlines about equities to the public. So, you aren’t going to see much historical perspective from the financial media any time soon.

Let’s put some historical perspective with those truthful yet misleading headlines. Money invested into the S&P 500 at the beginning of 2018 would have lost 6% for the year but a prudent investor would not invest short term money (one year) into a long-term investment such as equities.

What would be the current value of $10,000 if it were invested into the S&P five years ago or in December of 2013? Today’s value would be worth $14,894 or an annualized return of 7.4%.

How about $10,000 invested ten years ago or in December of 2008? That $10,000 would have grown to $32,771 today representing an annualized return of 12.6% for the decade.

How about investing over a long period, say since the end of WWII? $10,000 invested into the S&P 500 since May of 1945 would be worth more than $18 million averaging an annualized return of 10.76% per year.

What is the moral of this story? Ignore the shocking short-term headlines when it comes to your long-term investments.

If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!

Creating Retirement Income from your Investments

Posted on October 17, 2018June 13, 2023 by Scott M. Peterson, ChFC®

At retirement once you have made thoughtful decisions about how to get the most out of your Social Security and pension, the balance of your retirement income will have to come from your investments. The distribution of your investments will need to be coordinated with these other streams of income for tax purposes, as well as to help you stretch your income out to last a lifetime.

We liken the accumulation and distribution of retirement funds to what a skier experiences at a ski resort. Riding the chairlift up the mountain is the easy part of skiing. It takes no skill, and even the most inexperienced skier can ride the lift without running into too many difficulties. The skier simply must stay on the lift and they will get to the top of the mountain. Just a warning: abandoning the lift could prove to be fatal.

Having a 401(k) is like riding the lift. A certain percentage of the worker’s check is systematically deducted by an employer, oftentimes matched, and then deposited directly into an investment portfolio. It is easy, even automatic. But, as abandoning the ski lift could prove to be fatal, not participating in a 401(k), or failing to invest into an IRA, will have catastrophic consequences.

New skiers once off the lift, are bound to have difficulties. Getting down the mountain can turn into a frustrating and even a dangerous endeavor to the novice skier. Help from an experienced instructor is invaluable.

Likewise, new retirees often make mistakes as they begin retirement, crashing, so to speak, as they make poor choices regarding their Social Security and pensions benefits. These mistakes can be compounded if investment accounts are not properly managed and distributed. The key is choosing a proper mix of investments and then properly liquidating those investments to provide an income stream that will last throughout retirement.

Accumulation Vs. Distribution

So, why is distributing retirement funds so much more difficult than accumulating funds? One only must go back to the decade 2000-2010 to understand how volatility in the stock market impacts the accumulator, versus someone who is retired and is distributing retirement funds. 2000-2003 were awful years for equities. The stock market declined by 49% before recovering. From 2004-2007, the stock market finally gained some momentum, then the worst market downturn since the Great Depression occurred in 2008-2009 (declining by 57%). The net result for the U.S. stock market was that it ended the decade in 2010 at about the same level as it started in 2000. Ten years without growth.

You might ask, how did this volatility and ten years of no growth affect the accumulator? Well, it was a wonderful blessing! Those of us who were systematically contributing to 401(k)s and IRAs from 2000-2010 were able to purchase greater quantities of equities as the price of stocks plummeted during the decade. Certainly, our account balances suffered temporarily, but as the share prices dropped, the number of shares we were able to purchase rose as we systematically purchased beaten-down shares of stock month by month. Once we had accumulated a bunch of cheap shares over the decades, the stock market shot up to record highs. Those downtrodden stocks we purchased so cheaply during the “lost decade” have now caused our account balances to explode with value.

Contrast this with what happened to the unfortunate retiree who was distributing investments during the first decade of the century. Many of those investors were forced to sell their equities at the worst possible time. They had no choice; they had to sell at a loss to provide the income necessary just to pay the bills. Many well-funded retirement accounts were devastated during this turbulent time.

Systematic purchasers of equities do well investing in volatile, down markets, while systematic liquidators of equities are crushed during down-market cycles. During 2000–2010, buyers were blessed, and sellers suffered. This decade perfectly illustrates the difficulty of accumulating retirement funds versus simply managing and distributing retirement funds. The good news is that there are plans that can be implemented to help protect future retirees from having to liquidate equities at a loss to create income, should you be unfortunate enough to begin your retirement at the beginning of a bear market. The Perennial Income Model which we created is such a plan and is further explained in other blog posts and in the video below.

The Need for Growth

Given the history of 2000-2010, you may think that you will just avoid equities altogether, so you will not be forced to liquidate those volatile investments in a down market. That will not work. Keeping ahead of inflation is essential to having enough income to last throughout retirement and equities are one of the few investments that will be a necessary component of your portfolio.

As we see things, there are only two categories of investments: fixed-income investments and rising-income investments. Fixed-income investments are characterized as slow-growing and non-volatile investments such as bank deposits and certain types of bonds. Certainly, there is an appropriate time to own fixed-income investments. They should be the investment of choice when you have a limited time for your money to grow (less than five years) and you can’t afford to wait out a stock market correction. Fixed income investments protect us from short-term volatility but are damaging to own over the longer term, as they offer little protection against the erosion of purchasing power.

In the long run, the only rational approach to protect against the erosion of purchasing power is to invest in rising-income type investments, in other words, owning equities. As a shareholder, or the partial owner of some of the greatest companies in America, you have the rights to the profits those companies make. These companies pay their shareholders their proportional share of the profits in the form of the dividends. Historically, the dividend rate of the greatest companies in the world, or the S&P 500, has increased about one and a half times faster than consumer prices have gone up. In other words, their dividends have managed to stay ahead of inflation. Besides the growth of dividends, historically, stocks have additionally experienced a tremendous amount of growth in their value.

Stocks, Bonds, and Compound Interest

Government bonds are the classic fixed-income investment. They are very stable and are backed by the federal government. For the last thirty years, these bonds (as measured by the ten-year treasuries) have had an average annual return of about 5%. If $100,000 were to have been invested into these bonds in 1987, the value of that investment would be $460,000 today.

Meanwhile, stocks, the classic rising-income investment, have averaged more than 10% during the same time. $100,000 placed into an investment that mirrors the S&P 500 for the past thirty years would be worth $1,650,000 today. Inflation-beating growth is necessary to maintain your purchasing power over retirement, and that kind of growth is achieved by investing into equities.

When you purchase a share of stock, you become a partial owner of the company whose stock you purchased. As an owner of the company, you are entitled to all the profits and growth associated with that company, according to the proportional amount of the company that you own.

Land, cars, homes, and essentially anything that can be bought and sold on the open market will have a price that fluctuates. Buying and selling partial ownership or shares in corporations is no different than buying and selling anything else, but somehow the simplicity of the concept is lost when it comes to buying shares of stocks.

Far too many times we have had people tell us after a market downturn that they were not going to buy equities until things stabilized a bit and prices rebounded. That is like saying, “I’m not interested in buying that cabin for a 30% discount; real-estate prices are just too uncertain. When cabin prices stabilize, and the price goes back up 30%, I will write you a check.” We wouldn’t conduct any of our other business in this manner. Why do we treat our equity purchases differently?

Certainly, the daily selling prices of corporations fluctuate, but being an owner of a diversified portfolio of these corporations over a long period of time has been and will continue to be the recipe for success. The key to investment success throughout retirement is to have a plan. A plan that overcomes the effects of inflation as well as takes into account the occasional bouts of stock market volatility. You need a plan that matches your current investment portfolio with your future income needs.

If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!

The World’s Worst Investments – Gold and other precious metals, and Index Annuities

Posted on July 31, 2018June 13, 2023 by Scott M. Peterson, ChFC®

In past blogs, we have offered you some insight into the very temporary nature of a bear market as well as the illusion that equities are a dangerous place to invest. With these two blogs as a foundation, we would like to warn about certain types of investments that could do serious damage to your retirement. These investments not only have horrendous track records, but they are almost exclusively purchased as a result of an emotional reaction to a short-term downturn of the stock market or as an emotional reaction to the mere possibility that the stock market will decline. As we have seen again and again, when emotions and investing combine, there is seldom a good outcome.

In our estimation the worst types of investments you can buy are precious metals and index annuities. You may be very familiar with these products because these industries are the predominate advertisers on the cable news networks. One can surmise, from the sheer volume of these industry’s advertisements, that they must be very successful. First, they are successful in convincing the unwary public of the virtues of fleeing the stock market and also in duping the public into buying their perennially underperforming products.

The argument against buying Gold and Precious Metals

The thinking is that if, for whatever reason, countries and their currencies cease to exist, then precious metals will be one of the few items that will hold value and preserve purchasing power. The question is, “To purchase what?”

If all the currencies of the world had no value, the world would be in utter chaos. Anarchy and revolution would rule. This has never happened on a large scale in the history of our world, so nobody has a credible idea of what a world without currency would look like. There would be no manufacturing, no food production, and no police or armies to protect us. There would be no commerce—that’s right, stores would be shuttered. Why would anybody choose to work if there was not a way to be paid for labor rendered?

So, even if your ounce of gold held its value, what could you buy with it? Where? How? In our estimation, a homemade meal would be worth more than an ounce of gold, if you were fortunate enough to locate the food and a willing cook to put it together for you.

Doomsday predictions and conspiracy theories have never been a friend of the disciplined investor and at Peterson Wealth Advisors, we simply refuse to fan that flame. If, however, you are one of those who thinks that chaos and revolution are the destiny of our society, you might as well step away from the computer and get back to building your bunker. But before you go, we would like to share with you one important thought. The richest men in the world, from every generation, did not get that way by betting against the ingenuity and indomitable spirit of the human race to create a better life for itself. Successful investors have always been richly rewarded for their willingness to invest in the future. This generation is no exception. Today’s optimists, or those willing to invest in a better tomorrow, are thriving.

For those of you who are not planning on living in a bunker, but are considering owning some gold, perhaps as an inflation hedge, let us share with you some facts.

First, although touted as an inflation beater, gold does not keep up with inflation. In 1980, the price of gold was $850 an ounce. The price started a decline over the next twenty years and bottomed out at less than $300 per ounce at the start of the new millennia. It then shot up during the first decade of the century, peaking at over $1,800 per ounce in 2018, and now has settled back to about $1,300 per ounce.

With all its volatility, gold has gone from $850 an ounce to $1,300 an ounce over thirty-seven years. That works out to be a rate of return of less than 1% per year. Meanwhile, the cost of goods and services, or inflation, grew by 3.1% annually. The price of gold does not keep up with inflation and no matter how many times the lie that “gold is an inflation fighter” is repeated on your cable news network doesn’t make the lie anymore true.

Precious metals are advertised as safe havens from the turmoil of the stock market, yet they are neither safe nor dependable. The price of gold, and other precious metals is extremely volatile. In fact, the price of precious metals has historically been more volatile than the stock market. It is hard to understand why anyone would want to own any investment that fluctuates wildly in price, never pays a dividend, has a dismal track record and can’t keep up with the inflation.

So, when well-known actors advertise that they buy gold because they are “good Americans concerned about the future,” please try to see through the deception. They tell you to buy gold because they are actors who get paid to tell you to buy gold.

Index Annuities are insurance products

They advertise that you can participate in some of the returns of the stock market in the good years but that you will not lose money in the years when the stock market retreats.

The sales pitch of these products is enticing, but the devil is in the details. First, these products have caps or limits on how much they will pay when the stock market goes up. So, when the stock market goes up, earnings within these products are limited to the prevailing cap of the product. If the stock market goes up 10, 15, or even 30% in a given year, these products will pay to you only the prevailing market cap. In most instances, these caps can be changed by the insurance companies without warning. The consumer has no say. The prevailing market cap currently is 5%.

Second, these products have severe penalties if you liquidate your investment before the surrender period expires. Surrender periods are imposed because the insurance companies that create these products pay a large upfront commission to the insurance agent who sell these products. If an index annuity owner cancels their annuity before the surrender period expires, the insurance company can recoup the commission paid to the agent from the surrender charge assessed to the annuity owner. The surrender periods typically last seven to ten years. Surrender charges can run as high as 10% of the value of the annuity.

Third, index annuities don’t participate in the dividends of the underlying indexes they follow. This is significant. Almost half of the returns of the S&P 500 can be attributed to the dividends of the companies that make up the S&P 500 index. So, if you choose to invest into the stock market via an equity index annuity, you automatically cut your profits in half by foregoing future dividend payments.

To better illustrate the absurdity of these products, let’s apply the same investment criteria used in an index annuity to a real-estate transaction.

The deal would go something like this: “We will take your money and invest it into a rental property. Your investment is guaranteed to never lose money, as long as you leave the money with us for at least ten years. If you liquidate prior to ten years, you will be subject to a surrender charge as high as 10% of your initial investment. Additionally, you will not receive any rental income stemming from your investment, but we will pay you a portion of the annual increase of the value of your property each year, and the amount we will pay you will be completely up to our discretion. Oh, and by the way, thank you for paying us an upfront commission of 7% of your purchase. It’s been a pleasure doing business with you.”

Of course, nobody would agree to a real-estate deal like this! Why would we agree to similar terms with our other investments? There are hundreds of index annuities to choose from, and they all have variations on how they credit earnings and apply surrender charges. Even though all index annuities are different, they share a common trait. Index annuities are complicated products. Few owners of index annuities really understand how their annuities really work. People buy these products because they know that there is some type of guarantee associated with them. However, it is our belief that if the consumer really understood index annuities, they would never purchase one.

Before investing any money into an equity index annuity, do your homework and understand how these products are structured. The Securities and Exchange Commission has issued alerts to the public regarding the potential pitfalls of index annuities. The only advocates of index annuities that we come across are those companies that create them and the insurance agents who sell them.

What About the Guarantees?

The draw to these products is their guarantees. The only positive guarantee is that index annuities offer is that you won’t lose money when the stock market goes down. Since every market downturn is temporary, that isn’t much of a guarantee when you consider all that you lose by owning these products.

Owning an index annuity will certainly provide additional guarantees—undesirable guarantees.

Owning an Index Annuity Guarantees:

That you will never get stock market–like returns. Market caps ensure this will never happen.
That you will never be paid a dividend. Dividends historically account for almost half of the growth of the stock market.
That you will never be able to beat inflation over the long run by investing into their annuity, again thanks to market caps and no dividend payments.
That you just paid one of the highest commissions in the investment universe to the insurance salesman who sold you the annuity.
That the bulk of your money will be locked up inside one of these products for as long as a decade. Certainly, lump-sum distributions are available to you if you are willing to forfeit as much as 10% of your principal to access your money earlier than what is allowed by the annuity contract.

So, why are index annuities so prevalent? Unfortunately, they pay some of the highest commission of any product in the investment industry. Need we say more? Index annuities are sold by insurance agents, and for many agents, index annuities are the only product in their quiver that could loosely be called an “investment.”

Frightened, unwary investors purchase precious metals and index annuities because they fail to distinguish the difference between volatility and risk. Those who purchase these products have been duped by the emissaries of gloom that promote an irrational fear of equities, and fear is a powerful tool. A tool so powerful that the impressive weight of historical evidence manifesting the inflation-fighting power of equities is ignored and traded for the false promise that your money can “safely and dependably grow and beat inflation” while invested in precious metals and index annuities. Thankfully, knowledge is likewise a powerful tool and as you continue to investigate, you will become increasingly aware of the foolishness of owning precious metals and index annuities.

If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!

What role will Social Security play in my retirement income plan?

Posted on July 23, 2018June 13, 2023 by Scott M. Peterson, ChFC®

Social Security is the anchor of a retirement income plan

Past generations took little thought regarding how they would maximize their Social Security benefits. After all, it really didn’t matter how and when benefits were claimed if the retiree lived only a short time after retiring. Today, with the real possibility of living three decades without a job or paycheck, retirees need to do all they can to squeeze the most out of Social Security.

Over its almost eighty years of existence, Social Security has evolved. It now consists of hundreds of codes, and tens of thousands of pages of rules and regulations. Because of this, most eligible recipients do not understand the benefits they are entitled to receive. Consequently, there are millions of dollars of Social Security benefits left on the table each year.

While Social Security is complicated, it is essential to make informed choices regarding both when and how to apply. This will ensure you will get the most from the system. After all, you and your employers have contributed to this future source of monthly income since the day you started working. Understanding how the system works and creating an individualized plan to maximize this valuable benefit could mean the difference in hundreds of thousands of dollars of retirement income.

Five important benefits of Social Security:

1. Predetermined amount of income

By the time you come to the end of a career, your Social Security income amount is pretty well known. The benefit amount is based on both your earnings history and when you decide to apply for benefits. The accuracy of the benefit estimation makes it easy to build the rest of your retirement income plan around a reliable number.

2. Reliable income

Once you start getting Social Security benefits, the amount of income you will receive is set. It is highly unlikely that reforms to the system will cause benefit cuts.

3. Income that lasts for a lifetime

Social Security is one of the few sources of income that can be relied upon for a lifetime. It is an especially valuable benefit considering the long life expectancies of today’s retirees.

4. Inflation-adjusted income

Social Security benefits are increased each year based on the previous year’s inflation rate, which is measured by the consumer price index. These cost-of-living adjustments help retirees keep up with the ever-increasing cost of goods and services.

5. Survivor benefits

Although Social Security checks stop at the death of the recipient, monthly benefits can continue to be paid to surviving spouses and minor dependents.

The Sustainability of Social Security

There is a lot of misinformation that surrounds the sustainability of Social Security, but the boring truth is that Social Security is not going away anytime soon. Each year, the Congressional Budget Office (CBO) reports to Congress the fiscal status of Social Security. The latest report states that if no changes are made to the system, the Social Security Trust Fund, along with income collected from our taxes, will allow Social Security to pay all its obligations until the year 2034. If no adjustments are made to the Social Security system between now and 2034, there will only be enough money in the system to pay 79% of the promised obligations after 2034.

Minor adjustments to the system now could extend the viability of Social Security for years into the future. Raising the age requirements of future claimants, changing how the cost of living adjustment is calculated, or raising the maximum earnings subject to the Social Security tax are all viable measures that should be considered to strengthen Social Security. To date, these common-sense solutions have not been implemented because anytime a politician has suggested a change to Social Security it has proven to be a political boondoggle. Like any financial problem, the sooner the future projected shortfall is addressed, the easier it will be to manage. Making decisions about claiming Social Security benefits based on the false assumption that these benefits are disappearing is both dangerous and irresponsible.

With the ever-changing rules and regulations of Social Security, a list of commonly asked questions such as how much you can expect to receive, spousal benefits, and when to apply can be found here. The answers to these questions will frequently be updated to help you navigate the minor changes to the current Social Security system.

You can also visit the government Social Security website and select the ‘Retirement’ tab to receive assistance on things such as estimating your benefits, requesting a Social Security Statement, and applying for benefits online.

Social Security is responsible for 42% of today’s retirees’ income. While it does not provide enough income to retire on, it does provide a solid foundation upon which a sound retirement income plan can be built. A little time and effort can pay significant dividends when deciding when, and how, to receive Social Security benefits.

If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!