The US dollar has become the strongest currency in the world for a lot of good reasons. A strong dollar benefits such things as international travel and imported goods and materials. Our dollar strength is primarily due to the fact that the US economy is the stronger than South America, Europe, Asia and Emerging Markets. As our Fed (central bank) is ending our Qualitative Easing, places like Europe’s ECB is just talking about starting theirs to boost the economy. The Russian Ruble has all but collapsed and inflation is already running at 10%.
So how can you invest in something to take advantage of this situation? One simple way is to invest in the PowerShares DB US Dollar Bullish ETF “UUP”. Behind the scenes this stock index is made up of long futures contracts. These contracts are long (betting the price will go up) the US Dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. The UUP can be easily bought and sold just like any other stock. It has plenty of liquidity, trading over a million shares per day on average so there is no problem buying or selling.
In Part 1 we discussed some of the financial challenges many people face as they prepare to retire. In this post we’ll discuss some actionable items that can help you prepare for your retirement
One of the biggest shocks in your life will be the 1st day you retire and realize that you will no longer get a pay check next week. There will be no more “pay checks”. If you have a good plan in place you’ll be celebrating instead of fretting.
Here are some things you can do when you are within a few years or so of retiring.
- Accelerate your investments. We assume that as you are getting closer to retirement you’ll be in your peak earning years, and hopefully not peak spending years. Now is the time to max out all possible avenues of investments. Take full advantage of both employer 401K contributions and the maximum contributions you can make including all “catch-up” amounts. If you qualify contribute a maximum to your IRA or even better a Roth IRA. If you have the option of a healthcare HSA account, take it and fund it to the max. Unless you are a great stock-picker put this money into low fee S&P Index Funds or ETF for now.
- Substantially reduce then eliminate debt. Many people can’t afford to retire not because of their core daily survival expenses but their payment on debt. Parents might still owe on college education for their children. Some carry massive credit card debt, car loans, home equity loans, etc. You just can’t afford to retire with this debt overhang. Why, because the interest expense say 8 – 20% far exceeds any investment growth one can count on. What to do: develop a plan to completely eliminate all debt ASAP. Stop spending on all non-critical items until all debt is paid off.
- House mortgage payments need some discussion. The best situation is to retire with no house payments. Typically mortgage payments are your largest monthly expense. If you are carrying a large mortgage seriously consider downsizing to reduce or eliminate your mortgage. Consider moving to a much lesser cost of living location that will allow you to get much more value and maybe a meet your retirement dreams. For example, we moved from Philadelphia area to Tampa which eliminated our local and state income tax, substantially reduced our property tax and meet our retirement dreams.
- Build substantial cash reserves. Once debt is gone you’ll need to build cash, completely separate from your accelerated investments. You should have one full year of expenses in cash at the time you retire. You need an emergency fund and really don’t want to start withdrawals from your investments immediately upon retirement.
- Start building a retirement budget that considers you no longer have a “pay check”. The old adage is that you’ll need 80% of your former annual income to live on in retirement. However you may not have this money available to you for the next 30 years.
In summary, in the years leading up to retirement it is time to eliminate debt, accelerate investments and build cash.
In our next post we’ll discuss how much you’ll need in investments, pensions and Social Security to retire.
you’ll need in investments, pensions and Social Security to retire.
Many of us are looking for great investments, opportunities where we can make money while minimizing risks. In an environment where US Treasury’s are yielding 1-3% and CD’s about 1% where can you get a risk-free, tax-free 8% yield along with an annual cost of living increase that is guaranteed by the US Gov’t?
It’s real simple, just delay getting Social Security from age 66 to age 70. That’s right, here is how it works. If you haven’t set up an on-line Social Security (and Medicare) account yet and over 62 years old you should do so immediately. You’ll have to at least have your account set up 3 months before reaching 65 to sign up for Medicare, even if you are employed and don’t need benefits.
If you were born between 1943 and 1954 your Full Retirement age is 66. If you start Social Security at age 62 you’ll get 76% of your monthly benefit, if you start at age 65 you’ll get 93% of your benefit. However, if you start at age 66 you’ll get 100% of your benefit.
So how do you get the 8% yield, tax free, simple, just delay Social Security payments until you are age 70. You will get an additional 8% a year for those 4 years on top of your normal monthly benefit. Another benefit is that if you wait till age 70, in general survivor benefits will also be based upon this higher amount. Spousal Benefits however will be capped at your Full Retirement age 65 amount.
If you just started getting Social Security within the last year you can stop payments, pay back the amount you’ve been paid and then wait until you are age 70.
Where else can you get this kind of guaranteed return?
Many investors are looking for well diversified investment portfolios and most own the S&P 500 index in their retirement accounts. Investors should however beware that standard S&P funds or ETF’s like SPY are market cap weighted, meaning that the bigger a company is (its market cap) the more of its shares are in the index. For example, recently Apple was 4+% of the SPY, however Apple is only 1 of 500 companies in the index. Today the top 10 (of 500) companies in the SPY account for over 18% of the index. This may not be the diversification you are looking for.
Here is a great tool from Finviz.com that displays the cap weighting of the S&P Index.
There are other choices for the S&P 500 that are market weighted, like the Guggenheim S&P 500 Equal Weight ETF (RSP). This ETF has been around for over 10 years and is a very safe investment. Whereas half of SPY’s total capitalization is made up of mega-cap stocks (companies with market values in excess of $200 billion), these giants only make up 11 percent of RSP’s line-up.
Here is a comparison of the holdings between the two ETF’s.
Also the RSP has consistently outperformed the SPY (S&P 500 index), see below.