Around the nation
Some financial demons are real; others just dressed up that way
News from every state.
Ghosts and monsters come out this time of year. But it’s the financial demons that seem to keep more people up at night.
Almost as if on cue, the stock market in recent weeks has been very volatile, and that has raised fear and anxiety levels. But the things that really should worry Americans aren’t always obvious. Here’s what people seem to fear financially – and what they probably should spend more time worrying about.
Stock market downdrafts
On those big down days when the Dow Jones Industrial Average is shedding several hundred points, fear and anxiety spike. The point losses have been big lately after nine years of mostly upward momentum that elevated prices to record levels.
At such times, it’s easy to forget that volatility is a normal part of the cycle and that, over the years, the appreciation potential of stocks has greatly overshadowed the losses.
It’s also easy to forget that volatility can be a benefit, such as for investors who dollar-cost average and rebalance their holdings. Hardly anyone has all their money in the stock market, so periods of softness provide an opportunity to buy shares more cheaply.
Rather than volatility, what more investors probably should be worrying about is inflation. This is the subtle demon that can erode the value of your nest egg over many years, especially if you keep your money in low-yielding deposit accounts.
Stocks actually have an excellent record of outpacing inflation over the decades. In contrast, savers clinging to ultraconservative instruments are highly exposed to inflationary goblins.
Rising interest rates
After years of quiet and calm, interest rates have started to make funny noises, like something emerging from a graveyard. This has spooked the stock market, and bond investors also have reason for concern. Bond prices tend to fall when rates are rising, and those with long-term maturities are more susceptible to price declines.
In addition, people with various types of loans could be haunted by rising rates, especially those with large, lingering credit-card balances.
Yet rate increases also could prove beneficial, especially if the changes are gradual. Certificates of deposit and other ultraconservative accounts are starting to pay slightly more generous yields, and the trend should continue. This will help the millions of savers who lost ground to inflation over the past decade.
In truth, the prolonged stretch of hyper-low interest rates of the past several years was actually a scary, dangerous scenario.
“One of the good things about raising interest rates is that it gives the Federal Reserve some leeway to lower rates at some point in the future, when we have another recession,” said Harry Papp, managing partner at Phoenix investment firm L. Roy Papp & Associates. “It’s healthier for the economy to have interest rates ... at more traditional levels.”
Social Security’s solvency
There’s no question that the Social Security system faces considerable challenges ahead, with the trustfund surplus scheduled to be exhausted around the year 2034. At that point, in the absence of needed re- forms, the system will pay out less than its promised obligations. The latest projection by Social Security’s trustees is that retirees on average might receive only about 79 cents on the dollar.
Concern over the system’s solvency is one reason many people claim their retirement benefits as early as possible, at age 62. For some retirees, another motivation is not expecting to live all that long, while others are so financially tapped out by age 62 that they start benefits as soon as possible, to make ends meet.
While those are legitimate concerns, what many people likely underestimate is the risk of outlasting their retirement assets by living much longer than expected. Delaying Social Security can help here. Each year that you wait to claim Social Security, your benefits rise by 8 percent, up to age 70. So for people who wait until 70, the monthly checks could be 76 percent larger than for those starting at 62.
“We should worry less about dying early in retirement and more about living longer than we ever imagined,” wrote Jonathan Clements, a financial journalist and author of the book “How to Think about Money.” “Faced with that risk, most of us should delay Social Security to get a larger monthly check” and consider purchasing annuities that pay income for life, he suggests.
Bank fees and expenses
A lot of people distrust financial companies, and not without reason. Trying to navigate the fine print on mortgages and other loans is like whistling past the graveyard. Also, it can be easy to trigger various fees. With banks, these include late-payment fees, overdraft charges and more.
But it’s also true that most bank fees are avoidable, especially for people who budget, pay attention to their balances and watch out for expenses. Most banks offer free checking to customers who agree to make direct deposits of paychecks or other regular income. Many banks provide free bill-paying services, too. In addition, customers can sign up for messages alerting them to low balances and suspicious activity – and that can reduce the potential for problems.
One thing people perhaps should fear more, when it comes to banking, is not having an account at all. Regular customers are more likely to be financially successful, enjoy access to low-cost financial services, and avoid costly payday loans, check-cashing services, pawn shops and the like. Yet about one-quarter of U.S. households either don’t have traditional banking relationships or rely occasionally on higher-cost alternative services, the Federal Deposit Insurance Corp. found in a recent study.
In short, banks aren’t the money-sucking financial zombies that they’re often portrayed to be but actually can be beneficial to your finances.