T Rowe Price Retirement Survey

I recently found this survey done by T. Rowe Price, the mutual fund company, asking 2,500 recently retired or soon to be retirees about their experience. Please view the slides here. A couple quick takeaways:

1. The average household replaces 66% of pre-retirement income.(slide 17)

2. Nearly 60% of respondents say "minimizing risk and producing income is more important than keeping upside market potential." (slide 18)

3. 89% of retirees say they are somewhat or very satisfied in retirement. (slide 28)

4. For retirees being asked --"Do you expect to spend down all or most of your assets to live on in retirement, or do you expect to leave a significant sum to heirs?"-- 59% expect to spend assets. (slide 24)

Margin Debt Number

Margin debt collated by the New York Stock Exchange peaked in February at $466bn and stood at $463bn in August. The peak in 2007 was $381bn. It hit a low of $173bn in early 2009. Margin debt is always a factor when the market corrects or goes into a bear market.

Valuation

With the Dow Jones Industrial average negative for the year, I thought it would be a good time to highlight valuation. Doug Short recently updated a post on what he calls the Buffet Valuation Indicator. Doug starts the update with this:

Market Cap to GDP is a long-term valuation indicator that has become popular in recent years, thanks to Warren Buffett. Back in 2001 he remarked in a Fortune Magazine interview that "it is probably the best single measure of where valuations stand at any given moment."

He goes on to write:

In a CNBC interview earlier this spring CNBC interview (April 23rd), Warren Buffett expressed his view that stocks aren't "too frothy". However, both the "Buffett Index" and the Wilshire 5000 variant suggest that today's market is indeed at lofty valuations, now above the housing-bubble peak in 2007. In fact, the more timely of the two (Wilshire / GDP) has risen for eight consecutive quarters and is now approaching two standard deviations above its mean -- a level exceeded for six quarters during the dot.com bubble.

He ends with a chart showing this indicator compared to the S&P 500 with this:

One final comment: While I see this indicator as a general gauge of market valuation, it it's not useful for short-term market timing, as this overlay with the S&P 500 makes clear.

Read the whole post and review the graphs. Making a financial plan involves discussing how you'll react to downturns in the market and planning for 10% corrections and bear markets. When markets decline I feel the people who start deviating from their plan are the people who misunderstood their risk tolerance and do not have adequate emergency savings and/or cash flow. There are market forces that scare everyone, if you feel overly concerned when your portfolio declines you probably need to revisit your plan with yourself, your loved ones, or a qualified financial planner. Please also review some perspective from Barry Ritholtz who writes the Big Picture blog and recently wrote this piece for Bloomberg. He has 8 data points in his article and more wisdom at the end. I'll share two:

1. U.S. stock markets haven't experienced a 10 percent correction since October 2011.

2. As the "Stock Traders Almanac" is fond of pointing out, the six months that follow October are on average the best half of the year for equities. Whether that is because October affords a better entry price or is due to some other factor is both hotly debated and unresolved.

Diversification Matters

Walter Upgrave at the Wall Street Journal shares his thoughts about diversification. As we cross 17,000 on the Dow let's look at what we can do to diversify portfolios (click on the chart below to learn more):

Please read the article (subscription required) or google search How Much Diversification is Too Much by Walter. Another take on the case for diversification is made by Paul Merriman with the portfolio he calls the ultimate buy and hold portfolio. Here is his article and the graphs. As is obvious, please consult a financial advisor before making any financial decisions. We only provide education, not personal recommendations.

The Path to Financial Prosperity and Security

1. Don't spend beyond your means

2. Educate yourself

3. Pick the right field

4. Save (and invest) early

5. Don't swing for the fences

6. Keep yourself covered

7. Be wise about a windfall

8. Hang onto cars (and houses)

9. Avoid debt

Source Kiplinger Read what they mean for each item and see if you meet their criteria.

Debt in America

This is an update on debt in America from the Urban Institute:

Debt can be constructive, allowing people to build equity in homes or finance education, but it can also burden families into the future. Total debt is driven by mortgage debt; both are highly concentrated in high-cost housing markets, mostly along the coasts. Among Americans with a credit file, average total debt was $53,850 in 2013, but was substantially higher for people with a mortgage ($209,768) than people without a mortgage ($11,592).

Source: Urban Institute Complete Study

U.S. Household Net Worth Drops

The NY Times brings us this update from the Russell Sage Foundation:

The inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36 percent decline, according to a study financed by the Russell Sage Foundation. Those are the figures for a household at the median point in the wealth distribution — the level at which there are an equal number of households whose worth is higher and lower. But during the same period, the net worth of wealthy households increased substantially.

“The housing bubble basically hid a trend of declining financial wealth at the median that began in 2001,” said Fabian T. Pfeffer, the University of Michigan professor who is lead author of the Russell Sage Foundation study.

Here is the study.