Greece Votes No – What Does It Mean?

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Over the weekend, while we were all celebrating the 4th of July holiday, the voters in Greece came to the polls in a national referendum and voted no (or Oxi, if you’re Greek) against the latest proposed International Monetary Fund and European Central Bank bailout.

We certainly don’t know everything about what has happened or what will happen, but will do our best here to give an overview so you can better understand what is happening in the news and in your portfolios.

Some quick acronyms for easier reading:
IMF = International Monetary Fund
ECB = European Central Bank

How Did We Get Here?

On June 30th, Greece missed a loan payment to the IMF of 1.55 Billion Euros, putting the country in default.

Greece has been heading towards this moment for years.  They qualified for membership in the Euro with some questionable accounting from the Greek government (revisions in the economic numbers always seem to happen after a new government was elected, showing the previous government had been more optimistic with the books).  Membership in the Euro allowed their borrowing costs to decline substantially and the easy credit was too tempting for governments to pass up.  After the financial crisis in 2008-2009, problems started to creep in necessitating the first set of bailouts by the ECB.  Another bailout came into place in 2012 with more changes required by the international lenders that caused reforms to pension and tax systems within Greece that has ultimately led us to this weekend’s referendum.

(For a fascinating and fun read on Greece and other countries affected by the 2008 financial crisis – I highly recommend Boomerang by Michael Lewis.  If you’d like a copy we’d be glad to send you one.  Just let us know and we’ll send a copy over)

What Will Happen Now?

The first results will show up in the Greek Banks.  The Greeks have had capital controls placed on the banks for the past few weeks, limiting withdrawals from ATMs of 60 Euros per day, causing nervous greeks to stand in long lines to make their daily withdrawal.  With the No vote, the ECB is no longer providing ’emergency liquidity assistance’ so the deposits in Greek banks are dwindling.  A perfect storm of fear from depositors leads them to pull more of their funds from banks, further decreasing the stability of the Greek banks, which makes depositors more concerned, and the cycle continues.

This lack of liquidity isn’t the only reason to leave Greek banks.  The fear of the return of a devalued Greek Drachma could lead many to pull their funds in the more valuable, more stable Euro as quickly as possible.

Greeks, restricted now to a largely cash economy (with limited cash available), will likely fade further into economic recession as the long-term ramifications are sorted out.  The best news here is that Greece is a small part of the European Union’s economy and an incredibly tiny part of the global economy so

What Does This Mean For Your Portfolio?

We are not recommending any structural changes for clients based on this weekend’s events.  
Short Term: There will almost certainly be some snap reactions by markets today.  Even though nobody really knows what the future holds here, you can expect to see some extra volatility in equity markets.  Yields on Greek bonds, already high, will spike further as investors expect future losses.  Yields should also rise on Euro Bonds from other countries as investors ponder what the losses will be for the EU nations.  (Pre-market trading has the S&P and DJIA opening down roughly 0.75% and the yield on the 10 year treasury down 10 basis points).

Long Term: I don’t believe this truly changes any long-term fundamentals.  The biggest risk here is that global growth could be slowed by expectation rather than any real characteristics.

We do believe that growth will be limited in the Euro Zone for the next 18-36 months due to whatever comes after July 21st.  Investors seeking safety will continue to drive down the yield on U. S. Treasuries limiting yields on fixed income instruments in the United States from Money Markets through longer-term bonds.  Of larger concern is whether other troubled EU nations will try to negotiate their own packages based on whatever happens to Greece over the next several months.  If Spain or Italy starts to pursue a similar path then this question will need to be revisited.

What Comes Next for Greece and the Euro?

The Greeks are hoping to get back to the bargaining table as quickly as possible.  Strengthened by the weekend’s vote they will push to get further concessions from their creditors.  (In surprise news this morning, Greek Finance Minister Yanis Varoufakis has resigned, which is either an incredibly cowardly act of somebody who has brought their country to the brink of financial catastrophe, or a pragmatic political act of Prime Minister Tsipras knowing that the needed financing will be somewhat easier to come by with the flamboyant Varoufakis gone.)

To quote the New York Times the question for the European Union comes down to: “…whether they believe the goals of maintaining a united Europe are worth yielding to Greece’s demands: maintaining a spigot of cash (through E.C.B. bank lending programs) and ultimately a new bailout that lets the Greeks write down meaningful debt and relax some of the cuts to pensions and government worker pay of past deals.”

There’s a real line of thinking that the Euro can’t cave to Greece’s demands.  Italy, Ireland, Spain and Portugal would all like some debt relief and easing of their austerity requirements imposed by the ECB.  If Greece gets some concessions, you can be sure that these other member states will all be seeking their own deals.

July 20th is a critical deadline.  On that day Greece must make a payment of 3.5 billion Euros to the ECB.  If that payment is missed then the ECB would have little reason to continue the emergency assistance programs and claim their collateral.  This would cause Greek banks to collapse.  With no central bank support from the ECB, the government would have to create a new currency (ostensibly re-issuing Drachmas) and try to rebuild their financial system.

As always, please let us know if you’d like to have a call or a meeting around this or any other issue that’s concerning you about your financial future.  We’re here, monitoring markets and events, and thinking about you and your families everyday.  

Further Reading/Viewing

Greece’s Banks Are Its Biggest Weakness (WSJ Video)
Now Europe Must Decide Whether to Make an Example of Greece (New York Times)
What’s the timetable to a Grexit? (Wall Street Journal)
Greece debt crisis: Finance Minister Varoufakis resigns (BBC News)
18 key facts about Greece that will leave you totally up to date about a huge crisis (Washington Post)
Greek Business on Life Support (Politico)

Five Steps from Retirement Savings to Retirement Income

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For years, we’ve been talking to clients as an industry about the need to save.  Put money into your 401k, contribute to your IRAs, and one day you’ll be ready to retire and that savings will become income for you.

So when you get to retirement, how does that actually happen?

We’ve been talking clients through a structure that we like and that seems to work well, and here’s a general overview.

1 – Determine how much you need to spend to live a life you enjoy.  This is always our first question.  It requires breaking down some details, but ultimately it drives the rest of the decisions that need to be made.  How much money do you need each month to cover your essential expenses, and to also cover the fun things that you’d like to do in retirement?   Tracking this spending for the first few years of retirement is critical, since expenses can run higher than expected.  You’ll want to be aware of these fluctuations and make adjustments accordingly.

2 – Make the Most of your Income (Pensions, Social Security, Real Estate, etc.) – There’s a tremendous amount of benefit that some smart planning can do for you, particularly regarding Social Security income.  If you’re married and are within a few years of each other in age you can make the most of strategies like claiming spousal benefits prior to turning on your individual income stream, that can boost retirement income substantially.  Choices like taking Social Security at 62, 66, or 70 can cut your retirement income by 25% or boost it by an additional 32%, so run through the numbers in your personal situation and make the decision that’s right for you.  If your income comes in the form of rental properties, then do you need to factor in expenses for maintenance, and possibly hiring a property management company so you’re not taking those phone calls while you’re on vacation?  All income sources come with tradeoffs, and an exploration of those pluses and minuses is important when making a big transition.

3 – How much risk are you comfortable with taking in retirement?  Clients often express a concern about markets and fluctuation in retirement, yet the reality is that we’re probably planning for a 30-40 year retirement with inflating expenses every year.  It’s likely that some allocation to growth assets is helpful if not necessary to meet retirement goals, but every situation is different.

4 – How much income do you need your savings to generate every year?  The answer to this question and to the risk question above can help you determine how your portfolio can be allocated to meet your goals.  Once you know how much you need each year, you can then begin to formulate a distribution strategy, which we will cover in more detail in an upcoming post.

5 – How important is it to leave behind assets to heirs?  For some clients this is a top priority, for others they want to spend as much as possible while they can.  Like most planning questions there are no right or wrong answers, just the answer that fits your situation.  If you plan to leave behind a substantial inheritance, just be aware that it might place limitations on the amount of income your portfolio can generate.

Five simple steps but each with big impacts on your ability to live the life you want to live in retirement.

The Zorro Circle and Your Money

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(Today’s post comes from a concept in Shawn Achor’s excellent book The Happiness Advantage – I highly recommend it as the principles are applicable across so many areas of our lives)

The legend of Zorro begins with Zorro as an idealistic young man who wants to fight for others. However, he’s failing at his training because he’s trying to make progress on too many things at once. The legend states he ultimately becomes quite despondent and feels he will never reach his goal.

Eventually he meets Don Diego, the master swordsman, who helps Zorro become the sword fighter that he wants to be by using one primary principle – the Zorro Circle.  Don Diego places Zorro in the small circle in the ground. It wasn’t until Zorro could master his ability to fight and defend himself in that small circle that he could move to a larger space and ultimately a very larger space.

I think this principle is applicable to us with our financial lives as we often have the inclination to change things financially.  We start to work on our planning and we make a lot of progress in small ways on different fronts without really developing mastery in any specific area.

What’s your Zorro Circle?  In your financial life, what are the places that developing more expertise would provide you with the most benefit? Is it with your managing your regular cash flow on a weekly basis?  Is it developing some further expertise or strategies around your investments?  Is it creating an income strategy for approaching retirement?  Any of these pieces can have a major impact, and spending some focused time in one of those areas could bring you closer to the financial goals that you already have, much like Zorro’s circle helped him focus on his basics and ultimately allow him to be the help for the helpless that he wanted to be.

Money – Balancing Spending Now and Saving for the Future

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I’m very excited to have my first piece run for Money Magazine’s new website Money.com, about balancing spending now and saving for the future.  This is a fundamental struggle that I deal with in my own life, and the large majority of my clients have questions on this topic as well.

While I can’t repost the full article here, I will say the top advice I seem to give to clients is about having a clear vision, and using that to help filter your spending.  The more I understood about what was really important to me, the easier it became to change my behavior and to make the tough financial choices I needed to make every week.

I think there’s a lot of other good advice in the piece, so please head over to Money to read the full article!