The Chicago Fed publishes a nifty monthly index that is a snapshot of national economic activity. It’s called the CFNAI and for May the index moved slightly lower compared to April. Industrial and manufacturing production moved higher, but employment, consumption and housing were lower. The three-month trend is still positive and above its historical trend, yet there are many dark economic clouds swirling around in the U.S. and abroad.
What does this mean to you and me? My take is that we are still in the midst of a long, slow climb out of the Great Recession and it’s likely to go on longer than most of us realize. Bill Gross, the bond guru from PIMCO, was quoted recently as saying he believes we’re facing investment returns in the 5% range for the next 10 years.
If that’s the case, then you may need to revisit your long range saving assumptions and adjust accordingly. For example, if your projection for college savings assumed 7% college cost inflation and 10% earnings, you may need to save more or expect junior to pay more for his own college costs. Similarly, if your retirement income goals require you to earn 8% on your pre-retirement investments, you may need to save more, work longer, live on less in retirement or some combination of these.
In sum, now at the mid-year point is a good time to review your financial planning assumptions and adjust if necessary. Financial planning is not a one-time effort; rather, it requires regular monitoring and making adjustments if long term trends require it.