Bob’s Journal for 11/19/20

Some Notable Events That Grabbed My Attention This Week

Earlier today, I taped an interesting and well-attended teleconference with my readers.

These teleconferences are a bonus feature of your Retirement Watch membership. One highlight of the teleconferences is that participants submit questions for me to answer.

A number of good questions were submitted, more than we could cover in the call. This week, and probably next week, in Bob’s Journal, I answer some of the questions submitted for the teleconference.

What about inflation, gold and TIPS?

Several questions were about the outlook for inflation and how to invest based on that risk.

Regular readers know that, even before the pandemic, I argued that the Federal Reserve will maintain an easy monetary policy for years with a goal of pushing inflation higher. The Fed stepped up that policy once the pandemic began.

Now, the Fed and other central banks clearly state that monetary policy will be easy indefinitely and the banks would be comfortable with higher inflation.

Yet, the markets clearly don’t believe the central banks will be effective. The markets are pricing in low inflation for years to come.

I recommend investing with an expectation of higher inflation.

That’s why I’ve been recommending gold in the portfolios for a couple of years and recently added TIPS (Treasury Inflation-Protected Securities). These are the best ways to profit from higher inflation. I recommend buying them through exchange-traded funds (ETFs). More details are in the monthly issues of Retirement Watch and in the April 2020 edition of Spotlight Series.

What’s the worst mistake a retiree can make?

The answer to this question surprises many people. Most people expect that the biggest retirement mistakes are related to investing. That’s not often the case.

There are two mistakes a lot of retirees and pre-retirees make that are costly in the long run.

The first mistake is to underestimate longevity. Both anecdotal evidence and various surveys indicate many people underestimate the average life expectancy for their age group. In addition, average life expectancy increases with education and income levels. So, most of my readers have above-average life expectancies.

When life expectancy is underestimated, there’s a greater risk of running out of money in retirement. The retiree is more likely to spend too much in the early years of retirement and make other decisions that maximize short-term benefits instead of long-term benefits.

To be safe, a married couple should assume at least one spouse lives into his or her 90s. On average, each spouse of a couple age 65 today is likely to live into their 80s.

A related mistake is to underestimate inflation.

When many people retire, their income matches their expenses, and they feel secure. The problem is the prices of most of the things you buy in retirement are likely to increase. Also, inflation for retirees tends to be higher than for the general population.

Your income needs to increase in retirement, because your expenses are likely to increase. Inflation is a silent, steady threat to retirement security that too many people overlook.

Will the government tax Roth IRA distributions?

Congress surprised a lot of people in 2019 by ending the Stretch IRA to pay for a number of benefits in the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Congressional leaders already proposed another bill that would increase retirement plan tax breaks. The bill doesn’t include a way to pay for the benefits, not to mention the growing federal debt.

Some financial advisors have said since the Roth IRA was created that at some point Congress would change the rules and tax Roth IRA distributions.

I think that’s unlikely in the near future. What’s more likely is that Roth IRA distributions will be indirectly taxed for higher-income taxpayers much the way tax-exempt bond interest is.

The Roth IRA distributions wouldn’t be included in gross income. But they would be added back to adjusted gross income when computing the Stealth Taxes, such as the Medicare premium surtax and the amount of Social Security benefits to include in gross income.

I think that’s more likely than simply ending the tax-exempt status of most Roth IRA distributions. I have no idea when that might happen. Like the end of the Stealth Tax, it’s likely to be slipped into legislation without committee hearings or other warnings.

The Data

New unemployment claims unexpectedly rose by 31,000 in the latest week to 742,000. The number of continuing claims in the regular unemployment programs decreased to 6.37 million from 6.8 million in the previous week.

But the number of people collecting extended benefits under the federal program after their regular unemployment benefits expired increased to 4.38 million from 4.1 million the previous week.

The total number of people receiving some kind of unemployment benefit declined by 841,245 to 20.32 million.

Retail sales increased for the sixth consecutive month in October. But October’s increase was only 0.3%, compared to a 1.6% jump in September.

The October increase was the lowest since May. Sales declined for grocery stores, clothing and restaurants.

In the past 12 months, retail sales increased 5.7%. Also for the last 12 months, non-store retail sales (primarily internet sales) soared 29.1%.

The Producer Price Index (PPI) increased by 0.5% in October, the sixth consecutive month of increases in the PPI. Excluding food and energy, the PPI was unchanged in October. The major price increases in October were in food and energy, especially fresh and dry vegetables.

During the past 12 months, the PPI increased 1.0%. Excluding food and energy, PPI increased 1.5%.

Consumer Sentiment, as measured by the University of Michigan, declined in the first half of November. Sentiment declined to 77.0 from 81.8 at the end of October.

The current conditions segment of the index was unchanged, but expectations declined to 71.3 from 79.2. The change was partisan. Expectations among Republicans declined sharply, while increasing slightly among Democrats.

The Empire State Manufacturing Index for November declined to 6.3 from 10.5. That indicates growth but at a lower level than in October.

The Philadelphia Fed Manufacturing Index also declined in November to 26.3 from 32.3 in October. But the November reading continues to indicate strong expansion in the sector.

Industrial Production increased by 1.1% in October, bouncing back from a revised 0.4% decline in September. The manufacturing component increased 1.0% in October following a revised 0.1% increase in September.

Existing home sales continue to benefit from low interest rates. Sales increased by 9.4% in October from September’s level. Over 12 months, sales are up 20.9%.

Optimism increased among new home builders. The Housing Market Index from National Association of Home Builders (NAHB) increased to 90 in November from 85 in October. The October reading was the previous all-time high, so the latest reading increases the high by a significant amount and is the third consecutive month in which a new high was reached in the index.

The reasons for that optimism were reflected in the latest report on housing starts.

Total housing starts in October were higher than expectations, and the starts initially reported for August and September were revised higher.

Housing starts increased 4.9% in October and 14.2% over 12 months. More importantly, single-family home starts increased by 6.4% in October and 29% over 12 months. This is the highest 12-month increase for single-family home starts since 2007.

The Leading Economic Indicators Index from The Conference Board increased by 0.7% in October. That matches September’s rise. This index isn’t finding any slowing in economic growth.

The Markets

The S&P 500 declined 0.11% for the week ended with Wednesday’s close. The Dow Jones Industrial Average rose 0.22%. The Russell 2000 increased 1.93%. The All-Country World Index (excluding U.S. stocks) added 0.80%. Emerging market equities gained 1.44%.

Long-term treasuries rose 2.28% for the week. Investment-grade bonds increased 1.38%. Treasury Inflation-Protected Securities (TIPS) added 0.34%. High-yield bonds gained 0.07%.

In the currency arena, the U.S. dollar lost 0.56%.

Energy-based commodities increased 0.45%. Broader-based commodities lost 0.15%, while gold gained 0.39%.

Bob’s News & Updates

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.