Decision Time

2012 is starting off very well for investors and accounts are starting to grow. It was about 6 months ago when we last saw the Dow Jones Industrial Average at this level. This means that it is decision time for investors, more on this later. First is the weekly recap from Vanguard. At the end is something that I found on preparing for retirement.


Vanguard

The economy continues its modest forward pace, without stoking higher inflation. In fact, this week's data show price increases decelerating, easing fears for the moment that the Fed's accommodative monetary policies are sowing the seeds of high inflation down the road. For the week ended January 20, the S&P 500 Index rose 2.0% to 1,315.38 (for a year-to-date total return—including price change plus dividends—of about +4.7%). The yield on the 10-year U.S. Treasury note rose 16 basis points to 2.05% (for a year-to-date increase of 16 basis points).


Decision Time

Since the Dow Jones Industrial Average has approached the previous high from July 2011, this suggests that investors have a decision to make. The decision is to either take some profits at this time or to let it ride. An investor probably has about 1-2 weeks to make this decision as the news of positive earnings report tends to move stocks for about a month.

To make this decision an investor has to answer 1 question. Is the stock market in a trading range or a new leg up? This is a relatively simple question to ask but perhaps difficult to answer as it depends on risk level, time horizon, and perception of the future. If you believe that it is a trading range then you want to take some profits and smile. If an investor believes that it is a new let up then it is time to stay put.

I will be asking some clients this question this week.


Five Things Before You Retire (Tom Lauricella | The Wall Street Journal EG)

1. Start keeping close track of your spending.

During the planning phase for retirement finances, much of the math was based on guesswork. Now is the time to get real.

Start by going back over the past few months of bills and expenses to get a detailed picture of your spending and expenses. Plan on keeping close tabs on a continuing basis, remembering that some spending may be seasonal — such as holiday presents or greens fees for golf.

Budgeting tools, such as Mint.com, will enable you to highlight certain spending that won't continue after retirement, such as commuting costs.

Keep in mind this will be a work in progress even once you stop working. For many people "it's going to take a year or so before you really get the hang of it, knowing what you are spending your time doing, how you are spending your money," says Jonathan Guyton of Cornerstone Wealth Advisors in Minneapolis.

2. Fine-tune your income expectations.

Recent years haven't been kind to savers. A lousy decade for stocks has been compounded by interest rates that are at historically low levels and seem likely to remain low for years.

Unfortunately, 401(k) calculators typically don't rely on current yields when projecting your income during retirement. Instead, they usually rely on historical patterns.

That means some people nearing retirement may be in denial about how much money they can earn from safe investments such as bonds or certificates of deposit, says Lawrence Glazer, a managing partner at Mayflower Advisors in Boston. "You have to be realistic about today's income environment," he says.

3. Start thinking about Social Security.

Central to your income planning will be Social Security benefits. You won't know the exact size of the check until the first one arrives, but the Social Security Administration can provide an estimate that should be relatively close. You can get an estimate at SocialSecurity.gov, on the phone or in person at your local office. Be sure to check if you're due additional benefits if you are widowed or divorced.

All this leads to one of the most important decisions regarding retirement planning: when to start taking Social Security benefits. Delaying benefits means larger checks in the future, but it may require eating into your savings upfront. Sit down with an adviser to do the math.

4. Build a cash reserve.

One thing you want to avoid in retirement: being forced to sell during a steep selloff in the stock or bond markets in order to raise cash to pay bills.

The solution is to keep enough cash on hand that you can sell investments when you are comfortable. Many advisers recommend at least a year's worth of money.

At Evensky & Katz in Coral Gables, Fla., advisers have long recommended that retirees hold two years of money in a separate account. A retiree then cuts himself a "paycheck" once a month which goes into a checking account for day-to-day living.

"In a perfect world, an investor would begin developing the reserve prior to retirement," says Harold Evensky, president of Evensky & Katz.

A dedicated cash reserve is especially important if you are delaying taking Social Security. "The idea is that this is a bridge account that will deplete itself by the time Social Security kicks in," says Mr. Guyton.

5. Get emotionally ready.

Amid the focus on financial planning, don't lose sight of the fact that for most people, retirement is a completely new and different experience that can be challenging on an emotional level.

While many people can't wait to get out of the 9-to-5 grind, there are those for whom a career was more than a job. It was an identity.

"You've got the executive who has worked 24-7... and has always identified his self worth with that paycheck," says Mayflower's Mr. Glazer. "Without that paycheck, he feels a little empty."

Cornerstone's Mr. Guyton urges those approaching retirement to think in terms of "retiring to something" and not "retiring from something."

"If your definition of retirement is framed in terms of what you are leaving, you are setting yourself up for a much more difficult transition emotionally," he says. "Even if it's just some relatively small thing that you are energized about and this is something you get to do right now…you generally do much better."