Happy New Year! - A&I Wealth Management

Happy New Year from A&I!

Optimism for the year ahead!

happy new years 2022 a&i assets and income — Happy New Year from A&I 2022

“2021 was marginally better than 2020…at least it was different. A variant, so to speak. And like any year, it had both highs and lows.”

–Dave Berry

First, I want to wish you all a happy new year, and acknowledge that we are living in the middle of tremendous change. From the pandemic to the political, drama has been omnipresent and inescapable for the past two years. We enter 2022 full of optimism for many reasons. Join me on January 20 at 11:30 am for our 2022 Investment Outlook event, held via Zoom.

Our families, schools, communities and businesses are navigating Covid and the prevalence of the Omicron variant. Many of our client families are also impacted by the Marshall fire. As the new year begins, our office is also impacted by Omicron. Our team is committed to supporting you and each other as we navigate the terrain.

Facing inflation and sequence of returns risks in retirement

Last week, we learned that volatility is not the same as risk. This week, let’s discuss two risks the long-term investor faces: they may need to pull income from the equities during a decline. More on a simple, straight-forward solution for that problem in a minute. The bigger problem for a long retirement is inflation.

Inflation is a real long-term risk

There is a greater risk to investing than the risk of a short-term decline, and that is the risk of inflation. As we age, almost everything we buy gets more expensive. Inflation eats away at purchasing power. To overcome this risk, the investment needs to provide an income that grows faster than the rate of inflation. Over long periods of time, equities historically provide both income and growth. Perhaps most importantly, dividend paying equities provide growth on the income.

Because of the volatility, an investor might want to choose an investment that pays a fixed income, like a bond or bond fund. The problems are twofold: an immediate problem and a long-term problem. Right away, a fixed income investment, in today’s low interest rate world, may pay an income too low for most investors. And over the long haul, inflation is going to make the income even lower. Hence, equities likely provide the long-term retiree a better chance for real-life success. Odds favor an investor who can focus on the total return of the investment—the long-term growth plus dividends provided by equities.

Sequence of returns—the next big stock market crash!

The most common, largest risk that an equity investor faces today is the risk that we are right on the precipice of another huge stock market crash. Early retirees fear turning off the income-from-work faucet and depending entirely upon income from investments because it “just seems like we are due for a stock market crash.”

Indeed, it is easy to recall stories of the “lost decade” after the dot-com crash and similar stories in the years after the 2008 financial crisis. However, much less published, are the returns equities provided in the years since that time. What’s more, the long-term growth in equities inclusive of these “terrible stock market crashes” has exceeded other asset classes.

One practical way that an early retiree can overcome these risks is through the prudent use of cash, or the equivalent. Set aside two to four years of expenses, depending upon your ability and your level of concern. Leave that money alone and do not worry about its rate of return. Especially in today’s low interest rate world, the return will be negligible. Instead, this money will enable the vast majority of your nest egg to earn the historically superior, long-term rates of return provided by equities.

When you need to make a withdrawal, pull from the cash. Annually, replenish the cash bucket with the growth from equities. In bad years, skip the replenishing and pull again from the cash bucket. This way, you keep the equities working in your favor. The more years of cash you have in the cash bucket, the more likely you are to be selling stocks after gains, and not have to worry about pulling money out during the temporary declines.

2022 Investment Outlook

Join Karl Frank, CFP ® as he discusses the 2022 Investment Outlook. Karl will discuss key takeaways from 2021, and themes to watch in the year ahead.

Thursday, January 20, 2022

11:30 am– 12:30pm

Event Held Via Zoom

RSVP to [email protected] or call (303) 690-5070.

E-mail questions ahead of the Zoominar to [email protected]