Bob’s Journal for 6/29/23

Five Overlooked, Underestimated Expenses That Can Derail Retirement

Many people’s greatest retirement fear is running out of money, and they develop plans designed to make that unlikely.

But those plans often overlook expenses that frequently are underestimated and can drain a nest egg over time. Most people are aware of the potential for significant medical expenses or long-term care costs, but those expenses can be planned for with insurance, reverse mortgages and other tools.

But what about transportation? Many people don’t give much thought to transportation costs in their retirement planning. But transportation is the third-highest cost for most retirees, according to the Department of Labor.

Transportation costs vary, of course, depending on location and how much you drive in your daily life. They also vary with the type and number of vehicles you have. But they’re higher than many people realize, and you can’t control the prices of gasoline and insurance.

Also, at some point, many people are likely to be unable to drive or be able to drive only short distances. Then, you have to pay for transportation or rely on friends and relatives.

All these factors make transportation a wild card in retirement planning.

Another overlooked expense is home maintenance, renovation and repair. Surveys show these expenses often bite many retirees. Anecdotally, I hear many stories from retirees about large, unexpected home expenses.

Some people find, as they age, they no longer can do the home maintenance they used to handle. They have to hire people.

Another surprise expense is the financial help many retirees provide to family members, especially children and grandchildren. This assistance often is more than they planned. Once family members are used to receiving financial help, they’re likely to ask more often.

It is important to know how much you safely can help family members. Then, adhere to the limit so your retirement independence and security aren’t threatened.

Travel expenses (which are different from regular transportation expenses) often are higher than many retirees planned. All that time no longer spent working has to be filled. It is easy to fill some of that time with travel and to spend more on each trip than anticipated.

If you plan to travel in retirement, it’s a good idea to assume you’ll overspend. The best protection is to ensure there’s flexibility in the rest of your spending plan so adjustments can be made for extra spending on travel.

Dining out also increases during retirement. Many retirees find they enjoy dining out more than during the working years, and they’re likely to dine out more the longer they are retired. It is important to monitor this spending and have the flexibility to increase it over time by reducing other expenses.

Why Oil, Commodity Prices are Falling

Many people are surprised by the price declines in commodities, especially oil, so far in 2023.

The iShares S&P GSCI Commodity-Index Trust (GSG), which is about 80% energy commodities, rose more than 38% in 2021 and 24% in 2022.

Expectations were that energy prices would continue rising in 2023.

Russian oil continues to be subject to sanctions from most western nations. Saudi Arabia reduced oil production twice so far this year and says it wants to maintain oil’s price. The U.S. economy continues to grow, and U.S. oil firms are reducing production and exploration. Inflation has been persistent in the United States and Europe, which typically boosts commodity prices.

Yet, prices of oil and other commodities continue to fall. GSG is down 9.42% so far this year and 19.67% over 12 months.

The price of Brent crude oil peaked at over $133 in March 2022. After a brief pop higher in early 2023, it resumed a decline and has been trading between $75 and $80.

China seems to be the major reason for the doldrums in commodities.

When China lifted its zero-Covid policies, most analysts expected the country’s economic growth to bounce higher. That hasn’t happened for several reasons.

The country has a lot of debt that was accumulated during its boom years and is hampering growth now. China also has economic imbalances because of significant overbuilding in real estate and overinvestment in some other favored sectors.

Trade restrictions around the world impede the country’s growth.

China’s leadership also shifted its priorities from economic growth to other goals. It no longer wants an annual growth rate of 8% or higher.

China’s economic growth has been the main driver of commodity demand for some time. The likelihood China’s growth will be lower than 5% reduces demand for commodities and makes steady price increases unlikely.

Harry Markowitz, R.I.P.

Whether you know his name or not, Harry Markowitz had a major influence on how your investment portfolio is managed, especially if you use a professional investment advisor.

While a graduate student at the University of Chicago, Markowitz was studying investment literature and hit upon the idea now called Modern Portfolio Theory.

One of Markowitz’s basic insights was that investors care about potential risk as well as potential return. That apparently was a new thought at the time.

Another insight was that a diversified portfolio can deliver a return that is the same as or higher than the return of a non-diversified portfolio and have less risk, or volatility.

Another insight was that individual investments might or might not be correlated with each other. The volatility of the overall portfolio depends on the extent to which its individual investments move up and down together.

From there, Markowitz developed the Efficient Frontier. This shows the levels of risk and return for different portfolio allocations. The investor’s goal is to find the point on the efficient frontier that maximizes the potential return for the level of risk the investor is willing to take.

Markowitz published his thoughts in a 1952 article in the Journal of Finance simply titled, “Portfolio Selection.” It took a while, but eventually Markowitz’s methodology was widely adopted in the investment business. As computing power and data became faster and cheaper, investors became able to build efficient portfolios with ease.

Today, many investment advisors, pension funds, and robo-advisors use the Efficient Frontier to develop portfolios.

Markowitz shared the 1990 Nobel Memorial Prize in Economic Sciences for developing Modern Portfolio Theory.

The real trick in developing an efficient portfolio is that future returns, risk and correlations need to be estimated and updated.

Markowitz said some people misuse his insights by assuming that past returns, volatility and correlations will be replicated in the future. Markowitz said that’s not necessarily true, especially when the investor is concerned about returns during a particular time frame that’s shorter than “the long term.”

Markowitz said what he really was trying to do was explain how to make decisions when there’s a high level of uncertainty using probability and statistics.

Markowitz had a long career at the University of Chicago and died June 22 at age 95.

The Data

New home sales increased 12.2% in May, the largest monthly percentage increase since August 2022. The number of new homes sold in May was the highest since February 2022.

The median sale price of a new home in May was $416,300, down from $450,700 12 months earlier. The average sale price of a new home in May was $487,300, compared to $521,500 a year earlier.

Sales of existing homes increased by 0.2% in May after declining 3.2% in April, reversing two months of declines. Over 12 months, existing home sales are down 20.4%.

The median sale price of existing homes in May was $396,100, down 3.1% over 12 months.

Home prices increased 1.7% in April after increasing 1.6% in March, according to the S&P Corelogic Case-Shiller Home Price Index. April was the third consecutive month of price increases.

The index is down 1.7% over 12 months through April. That’s the first 12-month decline since April 2012.

The House Price Index from FHFA increased 0.7% in April and 3.1% over 12 months. The 12-month increase is the lowest since July 2012.

The Consumer Confidence Index from The Conference Board reached a 17-month high in June. The index was 109.7, up from 102.5 in May.

Consumers’ assessments of present conditions increased significantly.

The expectations component of the index also increased, though it remained below 80. A reading below 80 for the expectations index usually precedes a recession in the following 12 months. The expectations index has been below 80 every month except one since February 2022.

About 69% of consumers said a recession is somewhat or very likely within the next six to 12 months, but that is down from 73% in May.

The Kansas City Fed Manufacturing Index declined in June to negative 10 from negative 2 in May.

The Dallas Fed Manufacturing Index improved to negative 23.2 in June from negative 29.1 in May. That’s the best level in three months but still indicates the sector is contracting.

The Richmond Fed Manufacturing Index also improved to negative 7 in June from negative 15 in May.

Economic growth slowed a little in the first half of June from the end of May, according to the PMI indexes.

The PMI Manufacturing Flash Index declined to 46.3 from 48.4 at the end of May.

The PMI Services Flash Index for June was 54.1, down from 54.9 for May.

The PMI Composite Flash Index fell to 53, as of mid-June, from 54.3 at the end of May.

Durable goods orders increased 1.7% in May, and April’s rise was revised higher to 1.2%, making three consecutive months durable goods orders increased.

A major portion of the May increase was in transportation. After excluding transportation orders, it increased 0.6% in May after declining 0.6% in April.

Excluding both transportation and defense orders, which is a good measure of business investment, orders increased 0.7% in May and 0.6% in April.

New unemployment claims were unchanged at 264,000 in the latest week, but the previous week’s initial estimate was revised higher.

Continuing claims, which lag a week behind new claims, decreased to 1.759 million from 1.772 million.

The Markets

The S&P 500 lost 0.23% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 0.36%. The Russell 2000 declined 0.96%. The All-Country World Index (excluding U.S. stocks) retreated 0.85%. Emerging market equities retreated 0.95%.

Long-term treasuries lost 0.14% for the week. Investment-grade bonds fell 0.35%. Treasury Inflation-Protected Securities (TIPS) declined 0.33%. High-yield bonds dropped 0.33%.

In the currency arena, the U.S. dollar rose 0.07%.

Energy-based commodities lost 3.07%. Broader-based commodities fell 2.56%. Gold declined 1.17%.

Bob’s News & Updates

My latest book is “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here, respectively. You can be among the first to write a review.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

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A recent five-star review of my book, “The New Rules of Retirement” 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.”

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