It was a bumpy week for stock
markets. Early on, markets in many countries were negatively affected by the
outcome of Italian elections. Italy’s anti-establishment Five-Star Movement,
led by comedian Beppe Grillo, won about one-fourth of the votes in both the
country’s upper and lower houses. Markets lost value as investors anticipated
political gridlock could delay Italian economic reforms. Since Italy is the
third largest economy in Eurozone and its public debt is significantly higher
than its Gross Domestic Product, political stalemate in Italy could negatively
affect the Eurozone.
As the week progressed, events
in Italy were eclipsed. Ben Bernanke reiterated the U.S. Federal Reserve’s intention
to keep monetary policy loose until unemployment levels drop. This helped stock
markets recover some lost ground. Positive economic news, including higher
pending home sales and a rise in consumer sentiment helped push the Dow Jones
Industrials, NASDAQ, and Standard & Poor’s 500 Indices even higher, and
they finished the week in positive territory.
Concerns about Italian
election results affected bond markets, too, pushing yields on 10-year
Treasuries lower during the week. Lower yields were also driven by uncertainty
about the potential impact of sequestration – $85 billion in automatic spending
cuts – on America’s economic growth.
Despite great political
hullaballoo, no action was taken to prevent or modify the spending cuts and
they took effect on Friday, March 1. Over the next decade, sequestration is
expected to cut government spending by about $1.5 trillion. The cuts will reduce
defense discretionary spending, including weapons purchases, base operations,
construction work, and more. Cuts also will shrink mandatory and discretionary
domestic spending. Two of the domestic programs affected are the unemployment
trust fund and Medicare (specifically, Medicare’s provider payments).
The National Retirement Risk Index
(NRRI) measures whether Americans will be able to maintain
the same standard of living they enjoy today after they retire. When it was
updated for 2012, the index showed the number of “at risk” households had increased
by nine percentage points – from 44 percent to 53 percent – between 2007 and
2010. In its explanatory comments the Center for Retirement Research at Boston
College (the group that compiles the index) attributed the change to the
combined effects of the financial crisis, poor investment returns, low interest
rates, and the continuing rise in Social Security’s full retirement age.
Americans are not
unaware of the situation. The 2012 Retirement Confidence Survey found almost
one-half of working Americans are ‘not too’ or ‘not at all’ confident they’ll
have enough money to live comfortably throughout retirement. If you fall into
either of these categories – and even if you don’t – it’s important to evaluate
your current retirement plan in light of key risks that may influence its
effectiveness. These include:
·
Longevity
risk. A recent headline suggested that 72 is the new 30. The
scientists who made the determination meant that modern man, at age 72, has the
same chance of dying as primitive man did at age 30. That makes longevity risk
– the chance you'll outlive your savings – an essential consideration when
planning for retirement. One way to address longevity risk is by developing a retirement
income plan that will allow you to generate income for as many years as you may
need it.
·
Inflation
risk
is the chance your savings and investment will grow more slowly than inflation,
reducing your purchasing power. For example, a gallon of milk that cost about
$2.00 in 1990 would have set you back $3.50 in 2012 – and that was after a
period of relatively low inflation. One way to address inflation risk is to
consider investing in a well-allocated and well-diversified portfolio that may
have the potential to outperform inflation over time.
If
you have any questions about saving for retirement, or would like to review
your retirement plan, please give us a call.
Weekly Focus – Think About It
When planning for a
year, plant corn. When planning for a decade, plant trees. When planning for
life, train and educate people.
--Chinese proverb
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