Sitting on Cash

Both the S&P 500 Index and the Dow Jones Industrial Average closed this week at record highs, as financial markets have continued their impressive run in 2024.  The Nasdaq also finished in positive territory for the week and is only about 2% from its all-time high.  Some investors tend to fear an election year because of the perceived market volatility; however, 2024 has proven to be a boon, especially for the S&P 500.  According to data from First Trust Advisors, the return on the S&P 500 through the first three quarters of this year is the highest ever in an election year.  Additionally, the 22.1% total return through September is the best start to a year since 1997 for the index.  It’s also interesting to note that the S&P 500 attained new all-time highs an astonishing 43 times during the first three quarters of this year.  So, while the election is still several weeks away, investors in U.S. equities have been nicely rewarded thus far in 2024.

In economic news, the Labor Department reported this week that the consumer price index (CPI) for the month of September was up 2.4% from the prior year.  It marked the sixth consecutive month that the year-over-year number has declined which can be attributed to the decline in energy prices over the past six months.  The core CPI number, which excludes energy and food, is up 3.3% from a year ago and was the highest reading in four months.  Both numbers came in slightly above the consensus expectations of economists; CPI was expected to be 2.3% and the core number was up 0.3% on the month versus an expected rise of 0.2%.  While inflation has been trending down, September marked the 43rd consecutive month that it was above the Fed’s target of 2.0%.  This is the final CPI number before the U.S. election in November.

The Social Security Administration declared its cost-of-living adjustment for next year and recipient’s benefits are set to increase by 2.5% in 2025.  This number marks the smallest increase since 2021 when benefits rose 1.3%.  The cost-of-living adjustments from 2022 to 2024 were 5.9%, 8.7%, and 3.2%, respectively, owing to the higher levels of inflation experienced during that time.  From a dollar perspective, a monthly check will increase about $50 for the average recipient according to the Social Security Administration.  It’s also important to note that the standard premium for Medicare Part B is projected to increase to $185 per month, up from $174.70 in 2024.

Vanguard recently released a detailed study that purports that many individuals who change jobs can lose out on tens of thousands of dollars and sometimes more concerning their retirement savings.  It has nothing to do with their particular investments, but rather, they neglect to sign up for their new company’s retirement plan or the automatic enrollment level is at a lower savings rate versus the percentage they had been contributing at in their prior job.  The research report stated that a worker who earns $60,000 at the beginning of their career and switches jobs eight times over 40 years could lose out on an estimated potential retirement savings of approximately $300,000.  The arithmetic works like this.  An individual is auto-enrolled in a retirement plan at 3% and increases that 1% a year to a 10% maximum until retirement.  After 40 years, the account value would be about $800,000 which includes a 50% employer match on the first 6% of employee contributions.  Contrasting that is an individual whose savings rate defaults back to 3% when they switch jobs.  That person would have under $500,000 at retirement using the same matching and annual increase metrics.  Vanguard used administrative data on over 54,000 workers who changed employers and found that although the median job switcher had a 10% pay increase, the savings rate in their new retirement plan dropped 0.7% compared to their prior workplace plan.  Another pratfall that can hinder retirement savings amounts occurs when people rollover their workplace retirement account money to an individual retirement account (IRA) but simply forget to invest it.  A separate study found that 28% of Vanguard IRA investors who conducted rollovers from 401k accounts in 2015 remained invested in cash for at least seven years.  The obvious risk with this is foregoing potential market gains and accruing retirement wealth.  Additionally, sitting in all cash for such a prolonged period erodes purchasing power because the growth in your IRA is not even keeping up with inflation.  These two studies are an excellent reason as to why professional money management can be beneficial from an investment management perspective and ensuring the actual investment of dollars.   

Matt Savoti, MBA