Economic Updates & Financial Articles
- Weekly Economic Update - 3/12/2018
- Monthly Economic Update - March 2018
- Quarterly Economic Update - 4Q 2017
Retirement in Sight Newsletter:
- Retirement In Sight - February, 2018
- Catching Up on Retirement Saving - 3/12/2018
- How Retirement Spending Changes With Time - 3/12/2018
- 2018 Retirement Account Limits - 3/12/2018
- Are Your Beneficiary Designations Up To Date? - 3/12/2018
- Why You Want a Retirement Plan in Writing - 3/5/2018
- Less SALT for Taxpayers to Subtract - 3/5/2018
- The Value of a Stop-Loss Strategy - 2/26/2018
- Why You Should Have an Online Social Security Account - 2/26/2018
- Wise Money Moves Young Women Can Make - 2/26/2018
- Good Reasons to Retire Later - 2/19/2018
- Cybercurrencies, A Risky Choice - 2/12/2018
- Keeping This Correction in Perspective - 2/12/2018
- The Wild Ride of Bitcoin - 2/12/2018
- The Dow Dropped. Do Not Drop Out of the Market - 2/12/2018
- The Blended Retirement System Rolls Out - 2/5/2018
- The Retirement Mindgame - 2/5/2018
- Try the Bucket Approach - 2/5/2018
- Managing Student Loan Debt - 2/5/2018
- For Retirement, Income Matters as Much as Savings - 1/29/2018
- A New Day for 529 Plans - 1/29/2018
- Bad Money Habits to Break in 2018 - 1/22/2018
- The Major Retirement Planning Mistakes - 1/22/2018
- Retirement Questions That Have Nothing to Do With Money - 1/22/2018
- Think Total Return - 1/22/2018
- A Look at HSAs - 1/15/2018
- What Do You Have in Reserve for 2018? - 1/8/2018
- Things to Consider if You Plan to Retire Before 60 - 1/1/2018
- Ways to Fund Special Needs Trusts - 1/1/2018
- The Risk of Being a Suddenly Single Woman - 1/1/2018
- Everyone Is Talking About Bitcoin - 1/1/2018
- The Many Benefits of a Roth IRA - 1/1/2018
- The Importance of Equitable Estate Planning - 12/25/2017
- How the Tax Reforms Will Take Effect - 12/25/2017
- Tips for Starting a Business - 12/25/2017
- You Will Probably Pay More for Medicare in 2018 - 12/25/2017
- Why Regular Rebalancing Makes Sense - 12/25/2017
- Congress Passes the Tax Cuts & Jobs Act - 12/20/2017
- Avoiding the Money Pitfalls of Past Generations - 12/18/2017
- Comprehensive Financial Planning - What It Is, Why It Matters - 12/18/2017
- Now 64? Prepare to Sign Up for Medicare - 12/18/2017
- Fear Must Not Inhibit a Financial Strategy - 12/11/2017
- Talking to Your Heirs About Your Estate Plan - 12/4/2017
- Should We Reconsider What Retirement Means? - 11/27/2017
- When Will the Business Cycle Peak? - 11/27/2017
- Can We Afford to Live to 100? - 11/20/2017
- Crowdfunding & Taxes - 11/20/2017
- Year-End Charitable Gifting - 11/20/2017
- Your 2018 Financial To-Do List - 11/13/2017
- End-Of-The-Year Money Moves - 2017 - 11/13/2017
- Why Life Insurance Will Always Matter in Estate Planning - 11/13/2017
- Refrain from Tapping Your Retirement Funds - 11/6/2017
- The Republican Tax Reform Plan - 11/6/2017
- Retirement Plan Contribution Limits Rise for 2018 - 11/6/2017
- Examining the 2018 Social Security COLA - 11/6/2017
- A Look at Jerome Powell - 11/6/2017
- Are Too Many Baby Boomers Too Indebted? - 10/30/2017
- Enjoy the Rally, But Prepare for the Retreat - 10/30/2017
- How to Avoid Buying a Flood-Damaged Car - 10/30/2017
- Your Social Security Benefits & Your Provisional Income - 10/30/2017
- Life Insurance Is Probably Cheaper Than You Think - 10/23/2017
- Understanding Inherited IRAs - 10/16/2017
- Retirement Plan Trusts - 10/16/2017
- Are There Blind Spots in Your Insurance Plan? - 10/9/2017
- Will Debt Spoil Too Many Retirements? - 10/2/2017
- Questions After the Equifax Data Breach - 10/2/2017
- Millennials, Do Not Imitate Your Parents - 10/2/2017
- Is Your Company's Retirement Plan as Good as It Could Be? - 10/2/2017
- Health Care Costs Are Cutting Into Retirement Preparations - 10/2/2017
- How Much Should You Save By Age 30, 40, 50, or 60? - 9/25/2017
- Retiring Before 60 - 9/18/2017
- Is a Home an Investment? - 9/18/2017
- The Financial Toll of Addiction - 9/18/2017
- Avoiding the Cybercrooks - 9/11/2017
- The Equifax Data Breach - 9/11/2017
- An Estate Plan or a Wealth Transfer Strategy? - 9/4/2017
- Why You Should Stay Invested Through Tense Times - 8/28/2017
- Are You Really Saving Enough for Retirement? - 8/21/2017
- Getting Kids Excited and Ready for the School Year - 8/21/2017
- Financial Priorities Young Families Should Address - 8/14/2017
- Translating Stock Market Jargon - 8/14/2017
- Preventing a Debit Card Hack - 8/7/2017
- Bitcoin Splits in Two - 8/7/2017
- Before You Claim Social Security - 7/31/2017
- Cybercurrencies, A Risky Choice - 7/31/2017
- Medicare Enrollment Options for 2017-18 - 7/31/2017
- Getting (Mentally) Ready to Retire - 7/24/2017
- Saving More Money, Now and Later - 7/17/2017
- Life Insurance Products with Long-Term Care Riders - 7/17/2017
- A Look at Self-Directed Brokerage Accounts - 7/17/2017
- Talking to Your Kids About Your Wealth - 7/10/2017
- Japan and the European Union Forge a Major Trade Deal - 7/10/2017
- Will You Really Be Able to Work Longer? - 7/3/2017
- Should Millennials Be Your Money Models? - 6/26/2017
- Will You Be Prepared When the Market Cools Off? - 6/19/2017
- The June Rate Hike - 6/19/2017
- Having the Money Talk With Your Children - 6/12/2017
- One Couple, Two Different Retirements - 6/5/2017
- The Real Cost of College - 5/29/2017
- Beware of Emotions Affecting Your Money Decisions - 5/22/2017
- Keep Calm, Stay Invested - 5/22/2017
- Why Retirees Need Good Credit Scores - 5/15/2017
- What Are Your Odds of Being Audited? - 5/15/2017
- The Rough Consequences of Not Saving for Retirement - 5/8/2017
- The Importance of Financial Literacy - 5/1/2017
- Insurance and Investments - 4/24/2017
- Have a Plan, Not Just a Stock Portfolio - 4/17/2017
- How Will You Spend Your Retirement Savings? - 4/17/2017
- Combining Your Finances When You Marry - 4/10/2017
- Tax Rules on Rental Property - 4/10/2017
- When Someone Dies Without a Will - 4/3/2017
- Could Insurance Rescue You in Retirement? - 4/3/2017
FEBRUARY SAW A HIRING SURGE
Payroll growth was truly impressive last month. According to the latest Department of Labor report, employers added 313,000 net new jobs, including 61,000 in the construction industry; economists polled by Reuters projected a total February gain of 200,000. With the labor force participation rate reaching a 6-month high, the headline jobless rate stayed at 4.1% and the broader U-6 rate at 8.2%. Yearly wage growth declined to 2.6%.1
SERVICE BUSINESSES ARE THRIVING
The Institute for Supply Management’s February snapshot of service industry growth was quite positive. ISM’s non-manufacturing purchasing manager index did wane slightly, losing 0.4 points to 59.5, but the reading shows a very healthy service sector. January’s 59.9 mark was the best seen since August 2005.2
WTI CRUDE TOPS $62
As Wall Street’s closing bell sounded Friday, oil settled at $62.04. A 3% Friday gain left the commodity up for the week, even after the Energy Information Agency said that daily U.S. output had increased to nearly 10.4 million barrels, a record.3
Do you fear you are saving for retirement too late? Plan to address that anxiety with some positive financial moves. If you have little saved for retirement at age 50 (or thereabouts), there is still much you can do to generate a fund for your future and to sustain your retirement prospects.
Contribute and play catch-up. This year’s standard contribution limit for an IRA (Roth or traditional) is $5,500; common employer-sponsored retirement plans have a 2018 contribution limit of $18,500. You should try, if at all possible, to meet those limits. In fact, starting in the year you turn 50, you have a chance to contribute even more: for you, the ceiling for annual IRA contributions is $6,500; the limit on yearly contributions to workplace retirement plans, $24,500.1
Look for low-fee options. Lower fees on your retirement savings accounts mean less of your invested assets going to management expenses. An account returning 6% per year over 25 years with an annual expense ratio of 0.5% could leave you with $30,000 more in savings than an account under similar conditions and time frame charging a 2.0% annual fee.2
New retirees sometimes worry that they are spending too much, too soon. Should they scale back? Are they at risk of outliving their money?
This concern is legitimate. Many households “live it up” and spend more than they anticipate as retirement starts to unfold. In ten or twenty years, though, they may not spend nearly as much.1
The initial stage of retirement can be expensive. Looking at mere data, it may not seem that way. The most recent Bureau of Labor Statistics figures show average spending of $60,076 per year for households headed by Americans age 55-64 and mean spending of just $45,221 for households headed by people age 65 and older.1,2
Affluent retirees, however, are often “above average” in regard to retirement savings and retirement ambitions. Sixty-five is now late-middle age, and today’s well-to-do 65-year-olds are ready, willing, and able to travel and have adventures. Since they no longer work full time, they may no longer contribute to workplace retirement plans. Their commuting costs are gone, and perhaps they are in a lower tax bracket as well. They may be tempted to direct some of the money they would otherwise spend into leisure and hobby pursuits. It may shock them to find that they have withdrawn 6-7% of their savings in the first year of retirement rather than 3-4%.
In 2018, you have another chance to max out your retirement accounts. Here is a rundown of yearly contribution limits for the popular retirement savings vehicles.
IRAs. The 2018 limits are the same as in 2016: $5,500 for IRA owners who will be 49 and younger this year and $6,500 for IRA owners who will be 50 or older this year. These limits apply to both Roth and traditional IRAs.1
What if you own multiple IRAs? This $5,500/$6,500 limit applies to your total IRA contributions for a calendar year. So, for example, should you happen to have five IRAs, you could make an equal contribution of $1,100 (or $1,300) to each of them in 2017 or unequal contributions to them not exceeding the applicable $5,500/$6,500 limit.2
Here’s a simple financial question: who is the beneficiary of your IRA? How about your 401(k) or annuity? You may be saying, “I’m not sure.” It is smart to periodically review your beneficiary designations.
Your choices may need to change with the times. When did you open your first IRA? When did you buy your life insurance policy? Was it back in the Nineties? Are you still living in the same home and working at the same job as you did back then? Have your priorities changed?
While your beneficiary choices may seem obvious and rock-solid when you initially make them, time has a way of altering things. In a stretch of five or ten years, some major changes can occur in your life and may warrant changes in your beneficiary decisions.
In fact, you might want to review them annually. Here’s why: companies frequently change custodians when it comes to retirement plans and insurance policies. When a new custodian comes on board, a beneficiary designation can get lost in the paper shuffle. (It has happened.) If you don’t have a designated beneficiary on your retirement accounts, those assets may go to the “default” beneficiaries when you pass away, which might throw a wrench into your estate planning. An example: under ERISA, your spouse receives your 401(k) assets if you pass away. Your spouse must waive that privilege in writing for those assets to go to your children instead.1
THE MONTH IN BRIEF
Investors certainly received a wake-up call in February. A correction hit Wall Street for the first time in nearly two years, and benchmarks overseas were also challenged. Two weeks later, though, the S&P 500 had gained back more than half of what it had lost in the dive. Prices of important commodities sank early in the month, but recoveries followed. While the latest readings on fundamental indicators were largely upbeat, reports on retail sales and home sales disappointed. As the Jerome Powell era began at the Federal Reserve, investors wondered if four rate hikes would occur this year rather than the three the central bank had envisioned, given inflation pressure.1
DOMESTIC ECONOMIC HEALTH
While the rollercoaster ride taken by equities dominated the news stream last month, inflation was also a hot topic. According to the Department of Labor, the Consumer Price Index advanced 0.5% in January, leaving annualized inflation at 2.1%. The monthly number was the concern: the half-percent gain represented the largest single-month inflation jump in a year. The core CPI rose 0.3% in a month, which it had not done in nearly 13 years. Producer prices climbed 0.4% in January, with their year-over-year increase at 2.2%. Did the January numbers amount to an aberration, or was inflation pressure now stronger than it had been in some time? February’s data, due in mid-March, may shed further light on the matter.2,3
The Conference Board’s monthly barometer climbed another 6.5 points to a remarkable reading of 130.8. Also rising, the University of Michigan’s consumer sentiment index posted a mark of 99.9 during February; it had been at 95.7 when January ended. Consumer spending advanced 0.2%, and consumer income, 0.4%, in the opening month of 2018; retail sales, on the other hand, weakened 0.3%. The federal government’s final estimate of Q4 growth also came in at the end of the month: 2.5%.3
CB: PLENTY OF CONFIDENCE IN THE ECONOMY
The Conference Board’s monthly consumer confidence index soared to 130.8 in February – the highest reading seen since November 2000. In January, the gauge was at 124.3. (In the middle of the Great Recession, the index hovered near 25.)1
SOLID READINGS ON SOME KEY INDICATORS
Further fundamental economic data released last week looked strong. Personal incomes improved 0.4% in January, according to the Bureau of Economic Analysis; that matched the December increase. Personal spending advanced 0.2% last month. The Institute for Supply Management’s manufacturing purchasing manager index reached 60.8 in February, up 1.7 points from its impressive January level. Lastly, the BEA made its third, concluding estimate of Q4 GDP last week: 2.5%.2
NEW HOME SALES RETREATED 7.8% IN JANUARY
This decline occurred even as new home inventory reached a 9-year high. With mortgage rates reaching 4.4% and the median new home price up 2.5% in a month to $323,000, prospective buyers were deterred. The Census Bureau says the rate of new home purchases was down 1.0% year-over-year through January.3
Many people save and invest vaguely for the future. They know they need to accumulate money for retirement, but when it comes to how much they will need or how they will do it, they are not quite sure. They will “wing it,” hope for the best, and see how it goes. How do they know they are really contributing enough to their retirement accounts? Would they feel less anxious about the future if they had a written plan?
Make no mistake, a written retirement plan sharpens your focus. It can refine dreams into goals and express a strategy to pursue them. According to a Charles Schwab study, just 24% of Americans plan their financial futures according to a written strategy. Here is why you should join their ranks, if you are not yet among them.1,2
You can figure out the “when” of retirement planning. When do you think you will retire and start drawing income from your taxable and tax-advantaged accounts? At what age do you anticipate you will start to collect Social Security? How long do you think you will live? No, you cannot precisely know the answers to these questions at this point – but you can make reasonable assumptions. Your assumptions may be altered, it is true – but a good retirement plan is an evolving document, one that can be revised with changing times.
Have you routinely itemized your federal tax deductions? In 2018, you may decide to take the standard deduction instead. One possible reason: the new limit on state and local tax deductions set by the federal government.
The SALT deduction is now capped at $10,000. The standard deduction is now $12,000 ($24,000 for a married couple). So, your incentive to take the SALT deduction might be gone. Even if you live in a wealthy suburban area, a high-tax state, or a state that charges no income tax, you might not see any point in claiming it. The Tax Policy Center estimates that 3.5 million households will quit itemizing in 2018 simply because of this one revision to the Internal Revenue Code.1,2
High-earning households have usually claimed SALT deductions. Research from the TPC’s Briefing Book shows that 93% of households earning $200,000-$500,000 took the deduction in 2014. In fact, more than 40% of taxpayers in Connecticut, Maryland, and New Jersey made use of the tax break that year. In 2015, the average SALT deduction for taxpayers in California and New Jersey was around $18,000; in New York, it topped $22,000.1,3
FEWER HOMES ARE SELLING
Demand is high, prices are high, and inventory is slim. In view of these factors, the 4.8% year-over-year fall for existing home sales just reported by the National Association of Realtors is not surprising. It represents the largest annual decline seen since August 2014. Other January NAR data showed homebuying down 3.2% from December levels and a median sale price of $240,500, up 5.8% in 12 months.1
FED MINUTES EMPHASIZE THE “GRADUAL”
Minutes from the January Federal Open Market Committee meeting appeared Wednesday, and while FOMC members saw “substantial underlying economic momentum,” they also stated that “gradual policy firming would be appropriate.” To many investors and economists, that hinted at a March rate increase. The CME Group’s FedWatch tool puts the odds of a quarter-point March move at 83.1%.2,3
OIL ADVANCES FOR A SECOND STRAIGHT WEEK
A 1.2% Friday climb left WTI crude 3.3% higher than it had been seven days earlier on the NYMEX. Oil settled at $63.55 a barrel Friday, still down 1.8% for February.4
What is a stop-loss strategy, and how can it potentially aid an investor? Savvy investors use stop-loss orders as a kind of “insurance” against stock market losses. Simply explained, a stop-loss order is an order you give to a brokerage to sell a stock when the share price falls to a certain level.
A stop-loss strategy may be used to preserve gains and alleviate downside risk. Say you buy 10 shares at $60 a share, and eight months later the price is at $68 a share. You place a stop-loss order with your broker, telling your broker you want to sell if the share price dips to $66. One day, the share price falls to that level, and the stop-loss order becomes a market order authorizing a trade. If the market (or market sector) dives quickly, you may not be able to sell your shares for $66, but you will likely be able to sell them near that price.1
You can also employ trailing stops as part of a stop-loss strategy. This can be useful with a growth stock. As an example, suppose you buy into a company at $20 a share, and two years later, the share price stands at $35 and seems poised to rise further. Is it time for profit-taking, or should you hang on to those shares a bit longer?
Could your personal information soon be stolen? The possibility cannot be dismissed. Sensitive financial and medical data pertaining to your life may not be as safe as you think, and thieves may turn to a vast resource to try and mine it – the Social Security Administration.
Consider three facts, which in combination seem especially troubling. One, Social Security’s databases contain sensitive personal information on hundreds of millions of Americans, both living and dead. Two, more than 34 million Americans interact with the SSA online. Three, nearly 100% of Social Security benefits are disbursed electronically.1
The more you reflect on all this, the more you realize that cybercrooks could take advantage of you by creating a bogus online Social Security account in your name, in order to steal your benefits and/or your personal data.
As a young woman, you have an opportunity to make some major financial strides. You truly have time on your side when it comes to investing, saving, and harnessing the power of compounding. Now is the time to pay yourself first and do those things that could make you wealthy in the future.
Your first move should be debt reduction. This frees up money for the other moves you can make and lessens the amount of money you pay to others, instead of yourself, each month.
Consider attacking your highest-interest debts first rather than your largest debts. If you have big credit card balances, high-interest car loans, or similar financial obligations, that borrowed money may be extremely expensive. Credit bureau Experian says that monthly household credit card balances in this country hover around $6,375. According to personal finance website NerdWallet, the average interest rate on a credit card right now is 14.87%, and the average U.S. household pays out $904 a year just in credit card interest. A constant debt of $6,000 is bad enough, but having to pay roughly another $1,000 a year just for the opportunity to borrow? That really hurts.1
INFLATION SUDDENLY INTENSIFIES
The Consumer Price Index rose 0.5% in January, its greatest month-over-month advance since January 2017. Core inflation (minus food and energy prices) increased 0.3%, marking the largest monthly gain in almost 13 years.1
RETAIL SALES PACE SLOWS
Contradicting perceptions that the economy might be overheating, retail purchases fell 0.3% in January. Minus car buying, retail sales would have been unchanged for a second straight month, as a Department of Commerce revision rendered the previously announced December gain flat.2
DEVELOPERS BUILT MORE IN JANUARY
Groundbreaking increased 9.7% last month, according to a Census Bureau report. The first month of the year also brought a 7.4% rise in building permits.3
Are you in your fifties and unsure if you have enough retirement savings? Then you have two basic financial choices. You could start saving and investing more of your pay than you currently do, or you could work longer so you have fewer years of retirement to fund.
That second choice might be more manageable, and it may also work out better financially.
Research suggests that working longer might be a good way to address this shortfall. Last month, the National Bureau of Economic Research (NBER) published a paper on this very topic, and its conclusions are significant. The four economists writing the report maintain that when you reach your mid-sixties, staying on the job just one more year could help you greatly. Waiting a little longer to file for Social Security also becomes a plus.1
What was the most noteworthy finding? By the time you are 66, staying on the job just an additional three to six months will do as much for your standard of living in retirement as if you had contributed 1% more to your retirement plan for 30 years.1
After 55, Double-Check Your Preparations for Retirement
When you enter your mid-fifties, your retirement plan enters its countdown phase. This is the time to examine key aspects of your retirement strategy.
As you near retirement age, you want to evaluate your risk exposure. If a market downturn leads to a couple of years of investment losses starting when you are 60, your portfolio may have only a few years (or less) to recover by the time you retire. It may be time to shift from your longtime investment approach to another. This is also the ideal time to crunch numbers with the help of a financial professional and determine how much you have saved, how much income you think you will need once retired, and how much income may be produced from those savings, Social Security, and optional part-time work. A projection of your income tax rate is also vital. Lastly, while you may not be able to enter retirement debt-free, you want to pay off as many high-interest debts as you can, or at least transfer balances on high-interest credit accounts to accounts with smaller interest charges. Recent Federal Reserve data shows that households headed by those aged 55-64 have average total debt of about $131,900.1
Should You Look at a Life Plan Community?
Affluent couples and individuals do not always have a chance to “age in place” near family caregivers and convenient medical services. Life plan communities have emerged to respond to that reality. About 2,000 of these developments can be found in North America, designed to help seniors age nicely in a resort-style environment.
WALL STREET SEES ITS FIRST CORRECTION SINCE 2016
On Friday, the S&P 500 settled at 2,619.55, down 5.16% for the week. Thursday, it entered correction territory just nine days after its January 26 record close. The Dow Jones Industrial Average made even bigger headlines last week by taking two 1,000-point drops within four days, the second occurring Thursday.1,2
Last Monday, U.S. equities took their largest single-session fall in more than six years as higher interest rates for bonds and inflation concerns strengthened selling pressure. To add to the anxiety, two of the financial industry’s top ‘roboadvisor’ websites crashed during Monday’s rout, frustrating individual investors. The Dow retreated 5.21% for the week to 24,190.90, while the Nasdaq Composite slid 5.06% to 6,874.49.1,3
SERVICE SECTOR GREW RAPIDLY IN JANUARY
At a mark of 59.9, the Institute for Supply Management’s latest purchasing manager index for the service sector bettered the forecast of analysts polled by Briefing.com, who expected a small climb to 56.7. The index was at 56.0 for December.4
EARNINGS LOOK STRONG
FactSet’s latest analysis of corporate profits shows a 14% Q4 earnings growth rate and a Q4 sales growth rate of 8.0% for the S&P 500. Through Friday, 65% of S&P 500 companies had reported quarterly results.5
Bitcoin. Ethereum. Litecoin. Ripple. Ether. As 2017 ended, the prices of these cybercurrencies were soaring. In early 2018, they have plummeted. Opportunistic investors have been left to wonder: Are these digital currencies really the next big thing, or the scariest investment around?
The answer to that question may vary per day, week, month, or year. These altcoins are classified as commodities, not currencies, by the Commodity Futures Trading Commission. Like all commodities, their value can quickly change.1
Since last spring, bitcoin has been on a wild ride. On May 1, 2017, a single bitcoin was worth $1,402.18. On December 1, the value had soared to $10,859.56. Fifteen days later, it hit a peak of $19,343.04.2
Are you upset by what is happening on Wall Street? It may help to see this pullback within a big-picture context. Corrections have become so rare as of late that when one occurs, emotion threatens to influence investment decisions.
So far, February has been a rough month for equities. At the close on February 8, the Dow Jones Industrial Average was officially in correction territory after a slide occurred, which included two 1,000-point descents within four days. Additionally, nearly every U.S. equity index had lost 7% or more in the past five trading sessions.1,2
This drop is troubling, yes – but not as unsettling as it may first seem. The market has been up for so long that it is easy to dismiss the reality of its occasional downs. Last year’s quiet trading climate could legitimately be characterized as “abnormal.”
The ups and downs of bitcoin have amazed investors. Back on April 1, 2017, one bitcoin was valued at $1,089.51. Five months later, the price had risen to $4,950.72. On December 16, the price hit a historic peak at $19,343.04.1
With the price of bitcoin jumping nearly 1,800% in less than nine months, the air in the commodities markets grew thick with hype: bitcoin was “unstoppable.” Well, not quite. By December 30, bitcoin’s price had sunk to $12,629.81. After rebounding to $17,135.84 a week later, it then stair-stepped down to $6,914.26 on February 5. Who knows what a bitcoin will be worth by the time you read this?1
We do know one thing: bitcoin is one of the riskiest investments around.
On February 5, the Dow Jones Industrial Average took an unprecedented fall. The benchmark dropped 1,175 points, and it was down 1,500 points at one moment during the trading day.1,2
Monday’s Dow loss was severe, but not as catastrophic as certain headlines trumpeted. The index fell 4.6%, which is today’s equivalent of a 652-point dive back in October 2007 when the Dow reached its pre-recession closing peak of 14,164.43. For some recent perspective, consider that the Dow took a 610-point dive the day after the United Kingdom voted for the Brexit in 2016 – and over the following 20 months, it ascended to record heights.1,2,3
The Dow actually witnessed an intraday correction Monday. At the bottom of the plunge late in the trading session, it was at 23,923.88, which was 10.1% beneath its last record close of 26,616.71 on January 26. It finished Monday’s trading day off 8.5% from that January peak.1,3
THE MONTH IN BRIEF
Bulls took charge of Wall Street as 2018 began: the Dow Jones Industrial Average rose 5.79% in the first month of the year, even with a mild selloff on the verge of February. Foreign equity benchmarks largely advanced as well. Oil and gasoline futures surged, while bitcoin continued to rollercoaster. Personal spending, manufacturing, and consumer confidence data encouraged investors. Home sales weakened as home prices surpassed a pre-recession peak and mortgage rates increased. Analysts kept warning that Wall Street was overdue for a pullback; while indices did slip late in the month, optimism was little shaken.1
DOMESTIC ECONOMIC HEALTH
America’s economy is largely driven by the consumer, and as the Bureau of Economic Analysis noted, consumers spent generously in December. There were 0.4% improvements in both personal income and personal spending. Retail sales rose by 0.4% in the last month of 2017, even with vehicle and gasoline purchases factored out. The BEA released its first estimate of fourth-quarter GDP in late January – a respectable 2.6%.2
Consumer confidence index readings varied from extremely impressive to above average. The Conference Board’s monthly index rose from 123.1 to 125.4 in January. In contrast, the University of Michigan’s gauge of consumer sentiment weakened from a final December mark of 95.9 to 94.4. (It was four points higher a year earlier.)2,3
WAGE GROWTH PICKS UP AT LAST
In January, average hourly pay was 2.9% higher than it was a year earlier. That was the key takeaway from the Department of Labor’s latest jobs report, which noted the addition of 200,000 net new workers last month. In January, the headline unemployment rate stayed at 4.1%; the broader U-6 rate, which counts the underemployed, ticked up to 8.2%.1
ISM: FACTORY SECTOR IN GREAT SHAPE
The Institute for Supply Management released its January purchasing manager index for the manufacturing industry last week, and the reading of 59.1 surpassed the forecast, made by economists surveyed by MarketWatch, by half a point. A reading approaching 60 indicates significant expansion.2
HOUSEHOLDS SPEND MORE, REMAIN OPTIMISTIC
Personal spending and incomes rose 0.4% in December, according to a Department of Commerce report. The Conference Board’s consumer confidence index climbed 2.3 points to 125.4 in January, while the University of Michigan’s final January consumer sentiment index came in at 95.7 Friday, 1.3 points above its prior reading.2
The U.S. military has made a major change to its retirement program. Many active duty, Reserve, and National Guard members are eligible to choose between two retirement savings and pension options: the new Blended Retirement System (BRS) and its predecessor, now termed the Legacy Retirement System (LRS). Service members who have spent fewer than 12 calendar years in uniform have until December 31, 2018 to make their decision.1,2
Why was the BRS introduced? The military needed to update its longstanding retirement system to acknowledge a reality; few service members have military careers exceeding 20 years.1
Generally speaking, service members can count on a pension equal to at least 50% of their base pay under the LRS, provided they serve for at least 20 years. If they leave the military sooner, they say goodbye to that possibility.1,3
What kind of retirement do you think you’ll have? Qualitatively speaking, what if the success or failure of your retirement begins with your perception of retirement?
A whole field of study has emerged on the psychology of saving, spending, and investing: behavioral finance. Since retirement saving is a behavior (and since other behaviors influence it), it is worth considering ways to adjust behavior and presumptions to encourage a better retirement.
Delayed gratification or instant gratification? Financially speaking, retiring earlier has its drawbacks and may lead you into the next phase of your life with less income and savings.
If you don’t love what you do for a living, you may see only the downside of working longer rather than the potential boost it could provide to your retirement planning (i.e., claiming Social Security later or tapping retirement account balances later and letting them compound more). If you see work as a daily set of unfulfilling tasks and retirement as an endless Saturday, Saturday will win out, and your mindset will lead you to retire earlier with less money.
Stocks sometimes retreat. That reality can be overlooked in a long bull market. Bear markets do appear, and a deep downturn could force you to sell securities in retirement, so you can pay for necessary expenses.
Right now, you might have too much money in stocks. Years of steady gains may have unbalanced your portfolio and heightened your risk exposure. If you are 60 or older, that constitutes a warning sign, especially given this bull market’s age. What would a downturn do to your retirement fund and your retirement income?
If you are wondering how to respond to this risk, consider the bucket approach to retirement income planning.
The bucket approach may help you through different market cycles in retirement. This investing strategy, credited to a Florida financial planner named Harold Evensky, has simple and complex variations. It assigns fixed-income and equity investments to different “buckets” with the goal of providing sufficient cash flow to retirees during different stages of their “second acts.”1,2
Are you dealing with student loan debt? Have you explored ways to try and restructure it or have it forgiven?
No one wants to carry five figures of education debt into middle age or retirement, but some do. The burden is not just financial. Last fall, the Madison Capital Times asked student loan borrowers in the state of Wisconsin how they felt about their education debt. Sixteen percent said they were “terrified” of it, and another 30% indicated they felt only slightly less so. Fortunately, you may have possibilities to manage and reduce the debt load and the anxiety it breeds.1
For a better chance of refinancing a student loan, lift your credit score. The average credit score for borrowers able to refi in 2017 was 764, according to online education loan marketplace LendEDU. A 764 score means you have excellent credit; 850 is as high as you can go, and 700 is considered an “average” FICO score. If you are offered new terms, you may or may not like them; LendEDU says that the average interest rate on a newly refinanced loan last year was 5.56%.2
THE ECONOMY EXPANDED 2.6% IN Q4
The Department of Commerce’s first estimate of fourth-quarter gross domestic product was 0.6% below the Q3 number, but still well above the 2.1% rate the nation has averaged in the recovery from the Great Recession. America saw 2.3% economic growth in 2017, according to the report.1
HOME SALES RETREATED DURING THE HOLIDAYS
Winter chill possibly encouraged the decline as much as high prices and low inventory. The National Association of Realtors noted a 3.6% slump in resales in December, while the Census Bureau said that new home purchases fell 9.3% last month. Existing home sales improved 1.1% during 2017; new home sales, 8.3%.2
OIL REBOUNDS, REACHES $66
WTI crude advanced 4.5% in five trading days, settling at $66.14 Friday on the NYMEX. That was its highest close in more than three years. Crude prices have risen for five of the past six weeks.3
Steady income or a lump sum? Last year, financial services firm TIAA asked working Americans: if you could choose between a lump sum of $500,000 or a monthly income of $2,700 at retirement, which choice would you make?1
Sixty-two percent said that they would take the $2,700 per month. Figuring on a 20-year retirement for today’s 65-year-olds, $2,700 per month comes to $648,000 by age 85. So, why did nearly 40% of the survey respondents pick the lump sum over the stable monthly income?1
Maybe the instant gratification psychology common to lottery winners played a part. Maybe they ran some numbers and figured that the $500,000 lump sum would grow to exceed $648,000 in twenty years if invested – but there is certainly no guarantee of that. Perhaps they felt their retirements would last less than 20 years, as was the case with many of their parents, making the lump sum a “better deal.”
Do you have a 529 college savings plan? Have you thought about opening a 529 plan account? If the answer to either question is “yes,” you should know about two major changes that broaden the possibilities for 529 plans. They may give your family some new options.
You may be able to pay K-12 tuition with 529 plan funds. The legislation popularly known as the Tax Cuts & Jobs Act authorized this change: under federal law, up to $10,000 of 529 plan assets can be withdrawn for this purpose annually, for each of the named beneficiaries of a 529 plan account. The funds may be used for tuition at both secular and religious schools. (While 529 plan assets can pay for a variety of “qualified” higher education expenses, tuition is considered the only “qualified” expense at the K-12 level.)1,2
Unfortunately, not all states are on board with this change yet. 529 plans are administered at the state level, and at present, less than half the 50 states (and the District of Columbia) treat 529 plan assets in a way that conforms to federal tax law.1
CONSUMER SENTIMENT READING COOLS
The initial January University of Michigan consumer sentiment index came in at 94.4 last week, 1.5 points beneath its final reading of 2017 and 4.1 points under its level of one year ago. Without prompting, 34% of respondents to the latest UMich survey brought up the subject of the recent federal tax reforms; 70% of them felt the reforms would have a positive effect on their lives; 18%, a negative effect.1
WINTER WEAKENS HOUSING STARTS
New Census Bureau data shows groundbreaking decreased 8.2% in December after a (revised) 3.0% November gain. Building permits ticked down 0.1% last month.2
BITCOIN PLUMMETS & RECOVERS; OIL DESCENDS
Commodity investors watched the premier digital currency crest above $14,000 Monday, sink under $10,000 Wednesday, and rebound to a price of $11,400.35 as Wall Street’s trading week ended. Friday, the International Energy Agency predicted U.S. oil output would near a 50-year peak in 2018. That hurt prices and left WTI crude 1.5% lower for the week; it fell to $63.37 at Friday’s closing bell.3,4
Do bad money habits constrain your financial progress? Many people fall into the same financial behavior patterns year after year. If you sometimes succumb to these financial tendencies, the New Year is as good an occasion as any to alter your behavior.
#1: Lending money to family & friends. You may know someone who has lent a few thousand to a sister or brother, a few hundred to an old buddy, and so on. Generosity is a virtue, but personal loans can easily transform into personal financial losses for the lender. If you must loan money to a friend or family member, mention that you will charge interest and set a repayment plan with deadlines. Better yet, don’t do it at all. If your friends or relatives can’t learn to budget, why should you bail them out?
#2: Spending more than you make. Living beyond your means, living on margin, whatever you wish to call it, it is a path toward significant debt. Wealth is seldom made by buying possessions; today’s flashy material items may become the garage sale junk of 2027. That doesn’t stop people from racking up consumer debts: a 2017 study conducted by NerdWallet determined that the average U.S. household carries $15,654 in credit card debt alone.1
Much has been written about the classic financial mistakes that plague start-ups, family businesses, corporations, and charities. Aside from these blunders, there are also some classic financial missteps that plague retirees.
Calling them “mistakes” may be a bit harsh, as not all of them represent errors in judgment. Yet whether they result from ignorance or fate, we need to be aware of them as we plan for and enter retirement.
Leaving work too early. As Social Security benefits rise about 8% for every year you delay receiving them, waiting a few years to apply for benefits can position you for greater retirement income. Filing for your monthly benefits before you reach Social Security’s Full Retirement Age (FRA) can mean comparatively smaller monthly payments. The FRA varies from 66-67 for people born between 1943-59. For those born in 1960 and later, the FRA is 67.1,2
Retirement planning is not entirely financial. Your degree of happiness in your “second act” may depend on some factors you cannot quantify. Here are a few of those factors as well as the questions they may end up provoking in your mind.
Where will you live? This is a major factor in retirement happiness. If you can surround yourself with family members and friends whose company you enjoy, in a community where you can maintain old friendships and meet new people with similar interests or life experience, that is a definite plus. If all this can occur in a walkable community with good mass transit and senior services, all the better. Moving away from the life you know to a spread-out, car-dependent suburb where anonymity seems more prevalent than community may be a bad idea.
How will you get around in your eighties and nineties? The actuaries at Social Security project that a quarter of today’s 65-year-olds will live to age 90. Some will live longer. Say you find yourself in that group. What kind of car would you want to drive at 85 or 90? At what age would you cease driving? Lastly, if you do stop driving, who would you count on to help you go where you want to go and get out in the world?1
More than a century ago, an American financial archetype emerged – the household that lived on the interest earned by its investments, never touching its principal.
Times have changed. While the Vanderbilts, Carnegies, and Rockefellers could do that back in the Gilded Age, you will likely face a tough challenge trying to do the same in retirement. The reason? Low interest rates.
The federal funds rate has not topped 3% since the winter of 2008. In fact, the nation’s benchmark interest rate has been under 2% since October 2008. In today’s interest rate environment, you will need a substantial investment portfolio to live solely on income and dividends in retirement. In some parts of the country, a million-dollar portfolio might not generate enough income and dividends to help you maintain your lifestyle.1
RETAIL SALES ROSE IN DECEMBER
Consumers spent freely during the holidays: the latest Census Bureau report shows a nice advance for retail purchases. They improved 0.4% last month, with core retail sales up by the same amount.1
PRODUCER PRICES UNEXPECTEDLY RETREAT
In December, wholesale inflation declined for the first time in 18 months. Even with that 0.1% dip, the Producer Price Index advanced 2.6% for 2017, compared with 1.7% in 2016. Households contended with 2.1% inflation during 2017 according to the Consumer Price Index, which ticked up 0.1% last month. Core consumer prices rose 0.3% in December, so the 2017 core CPI gain was 1.8%.1,2
OIL CLIMBS AGAIN
Last week, prices benefited from reduced reserves and extensions of U.S. sanctions relief against Iran. West Texas Intermediate crude settled at $64.30 Friday on the NYMEX, advancing 4.7% across five trading days. That was its highest price since December 2014.3
Why do higher-income households inquire about Health Savings Accounts? They have heard about what an HSA can potentially offer them: a pool of tax-exempt dollars for health care, a path to tax savings, even a possible source of retirement income after age 65. You may want to look at this option yourself.
About 26 million Americans now have HSAs. You must enroll in a high-deductible health plan (HDHP) to have one, a health insurance option that is not ideal for everybody. In 2018, this deductible must be $1,350 or higher for individuals or $2,650 or higher for a family. In exchange for accepting the high deductible, you may pay relatively low premiums for the coverage.1,2
You fund an HSA with tax-free contributions. This year, an individual can direct as much as $3,450 into an HSA, while a family can contribute up to $6,900. (These contribution caps are $1,000 higher if you are 55 or older in 2018.) Some employers will even provide a matching contribution on your behalf.1,2
3 Important Retiree Tax Considerations
After you retire, your tax situation will change. Recognizing that oncoming change is crucial. Some ideas that may seem smart from a pre-retiree standpoint might be ill-advised once you have transitioned into retirement. Other retiree tax concerns may not yet be on your mind.
For example, tax-loss harvesting can be handy when your capital losses outdo your capital gains – when that occurs, you can use up to $3,000 of losses annually to offset ordinary income. You can also carry forward losses exceeding $3,000 to upcoming years to offset future income. If a bear market strikes when you are 40, this tactic has great merit – but if you incur, say, a $60,000 bear market loss in your seventies, it will take you 20 years to get the full tax benefit from harvesting since you can only carry forward a maximum of $3,000 in losses, annually. Consider that Social Security income is partly taxable once your provisional income (adjusted gross income + tax-free interest + 50% of Social Security benefits) tops thresholds of $25,000 (single filer) and $32,000 (joint filers). Lastly, while most retirees never withdraw more than the Required Minimum Distribution from a traditional IRA each year, you may want to if your IRA is large, out of concern for your heirs. They might face a big tax bill if they withdraw an entire Inherited IRA balance.1
LOW UNEMPLOYMENT, BUT LESS HIRING
The Department of Labor’s latest jobs report announced a headline unemployment rate of only 4.1% in December, but it also showed companies adding just 148,000 net new workers last month. Even so, net payroll growth averaged 204,000 during the last three months. In hiring terms, the health care sector grew more than any other industry in 2017, expanding by 300,000 jobs. Wages rose 2.5% last year. The broader U-6 jobless rate, encompassing the underemployed, ticked up a tenth of a point to 8.1%, which was still half a percent below its level of a year ago.1
MORE FACTORY ACTIVITY DURING THE HOLIDAYS
December saw U.S. manufacturers pick up their pace. The Institute for Supply Management’s purchasing manager index for the factory sector surprised to the upside with a fine reading of 59.7. Economists polled by Briefing.com had projected the PMI to decline 0.2 points to 58.0. ISM’s non-manufacturing PMI fell in December, weakening 1.5 points to a reading of 55.9.2
WTI CRUDE CONTINUES TO RALLY
Finishing at $61.41 on the NYMEX Friday, it advanced 1.7% last week. Investor concern over anti-government protests in Iran and stateside data showing smaller crude reserves helped. Oil settled at $62.01 Thursday, which was a peak unmatched in roughly three years.3
How much does the average American household have in the bank? Estimates vary, but the short answer to this question is “not enough.”
Last year, a GoBankingRates poll discovered that 57% of U.S. households had less than $1,000 in deposit accounts (although, 25% reported having at least $10,000). A 2017 analysis from Moebs Services, a research firm consulting banks and credit unions, noted that the average U.S. checking account contained around $3,600.1,2
Eyeing these numbers, you get the sense that – in an emergency – most households have less than a month before their liquid savings run out. Is this true for your household? Hopefully, your cash reserve is much larger; if that is not the case, now is as good a time as any to bolster your emergency fund.
THE MONTH IN BRIEF
Financially speaking, the last month of 2017 was also the year’s most newsworthy. Congress reformed federal tax law to a degree unseen since the 1980s, the Federal Reserve raised the benchmark interest rate, and bitcoin took its investors for a wild ride. Hiring, retail sales, and personal spending numbers were all impressive, as were consumer confidence index readings. The residential real estate market showed more momentum. Oil closed above $60 again. Emerging stock markets rallied; European equity benchmarks struggled. As all this transpired, the S&P 500 gained nearly 1%.1
DOMESTIC ECONOMIC HEALTH
On December 22, President Trump signed the Tax Cuts & Jobs Act into law. The new legislation amounted to a dramatic rewrite of key federal tax code provisions: it doubled the individual estate tax exemption to $11.2 million, raised the standard income tax deduction to $12,000, and eliminated the personal exemption as well as scores of deductions favored by taxpayers who itemize. The law also cut the corporate tax rate to 21% and permitted most pass-through businesses to take a 20% deduction on earnings. Most of these changes are scheduled to expire after 2025, unless Congress preserves them.2
THE QUARTER IN BRIEF
The final quarter of 2017 was a great one for stocks: the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all posted 3-month gains of better than 6%. Landmark federal tax reforms were approved and signed into law. Bitcoin was welcomed to two major futures exchanges, and it surged and plunged crazily. Oil and gold prices rose. Home buying accelerated, even though mortgages grew more expensive and listings remained thin. Domestic indicators showed continued strength in consumer spending and hiring as well as a pickup in economic growth. The Federal Reserve made another interest rate hike and started to reduce its balance sheet, while the European Central Bank prepared to wind down its long-running stimulus. All in all, it was an eventful and positive quarter for investors.1
DOMESTIC ECONOMIC HEALTH
Without question, the fourth quarter’s major story was the passage of the Tax Cuts & Jobs Act. The new law created night-and-day changes in the Internal Revenue Code, nearly all effective January 1. Its most dramatic changes were arguably the ones benefiting businesses: it slashed the corporate tax rate to 21% and let the majority of pass-through companies deduct the first 20% of income. The legislation also took the individual estate tax exemption north to $11.2 million, put the standard deduction at $12,000, and did away with dozens of longstanding deductions, plus the personal exemption. In 2019, it removes the individual mandate for health insurance. Most of the above changes are set to expire after 2025, barring renewal in Congress.2
CONSUMER CONFIDENCE DECLINES
In December, the Conference Board’s monthly index fell sharply from its lofty November reading of 128.6. That number was a 17-year high. Economists polled by Bloomberg expected a retreat to 128.0; instead, the gauge dropped to 122.1, which was still one of its best readings in the past 15 years. Lynn Franco, the Conference Board’s director of economic indicators, noted that consumer expectations remain at “historically strong levels, suggesting economic growth will continue well into 2018.”1
OIL ENDS 2017 ABOVE $60
The yearlong comeback of light sweet crude culminated in a December 29 NYMEX close of $60.42, marking the commodity’s best settlement since the spring of 2015. Signs of reduced output and supply disruptions helped oil rally last week.2
HOME PRICES UP 6.2% IN 12 MONTHS
That is the conclusion of the October S&P CoreLogic Case-Shiller home price index, a survey of home values across 20 U.S. regions released last week. In other housing news, the National Association of Realtors pending home sales index rose 0.2% in November, taking its annualized gain to 0.8%. The small advance is understandable; across the 12 months ending in November, existing home inventory thinned by nearly 10%.3
By choice or by chance, some people wrap up their careers before turning 60. If you sense this will prove true for you, what could you do to potentially make your retirement transition easier? As a start, you may need to withdraw your retirement funds strategically.
The I.R.S. wants you to leave your retirement accounts alone until your sixties. To encourage this, it assesses a 10% early withdrawal penalty for most savers who take money out of traditional retirement accounts prior to certain ages. For a traditional IRA, the penalty applies if you withdraw funds prior to age 59½; for a workplace retirement plan, the penalty may apply as early as age 55.1
You may be able to avoid that 10% penalty by planning 72(t) distributions. Under a provision in the Internal Revenue Code, you can withdraw funds from a traditional IRA prior to age 59½ in the form of substantially equal periodic payments (SEPPs) over the course of your lifetime. The schedule of payments must last for at least five years or until you reach age 59½, whichever period is longer. Once the schedule of periodic payments is established, it cannot be revised – if the payments are not taken according to schedule, you will be hit with the 10% early withdrawal penalty. All 72(t) distributions represent taxable income.1,2
If you have a child with special needs, a trust may be a financial priority. There are many crucial goods and services that Medicaid and Supplemental Security Income will not pay for, and a special needs trust may be used to address that financial challenge.
In planning a special needs trust, a pressing question must be answered. When it comes to funding the trust, what are the options?
There are four basic ways to build up a third-party special needs trust. One method is simply to pour in personal assets, perhaps from extended family as well as immediate family. Another possibility is to fund the trust with permanent life insurance. Proceeds from a settlement or lawsuit can also serve as the core of the trust assets. Lastly, an inheritance can provide the financial footing for this kind of trust.
On average, women outlive their husbands. According to the Social Security Administration’s estimate, the average 65-year-old woman will outlive the average 65-year-old man by more than two years, dying at age 86½. Averages aside, it also estimates that about a quarter of today’s 65-year-olds will live into their nineties. Around 10% will live to age 95 or beyond.1
Eyeing these figures, it is easy to deduce that some women may outlive their spouses by five years or longer and contend with complex financial issues after age 85. There is one detail, however, that all these facts and figures leave out.
The average age of widowhood in the U.S. is 59. A widow might spend 30 or more years managing her finances. Is she prepared for this possibility?2
Investors are excited about bitcoin – perhaps too excited. Their fervor is easy to understand. On December 18, bitcoin closed at $17,566. Back on September 22, bitcoin was valued at only $3,603.1
Yes, you read that correctly – the price of bitcoin jumped nearly 500% in three months. Thanks to this phenomenon, investors everywhere are asking if they should buy bitcoin or invest portions of their retirement funds in the cybercurrency. The air is filled with hype: bitcoin is “unstoppable,” it is “the answer,” it is “the future.”
It may also be heading for a crash.
Bitcoin has crashed before. It is highly volatile. On Thanksgiving 2013, a single bitcoin was worth $979; by April 2014, the price was at $422. In late August 2017, it settled at $4,673; by mid-September, it was back at $3,783 immediately before its amazing fourth-quarter climb.1
The Roth IRA changed the whole retirement savings perspective. Since its introduction, it has become a fixture in many retirement planning strategies. Here is a closer look at the trade-off you make when you open and contribute to a Roth IRA – a trade-off many savers are happy to make.
You contribute after-tax dollars. You have already paid income tax on the dollars going into the account, but in exchange for paying taxes on your retirement savings contributions today, you could potentially realize greater benefits tomorrow.1
You position the money for tax-deferred growth. Roth IRA earnings aren’t taxed as they grow and compound. If, say, your account grows 6% a year, that growth will be even greater when you factor in compounding. The earlier in life that you open a Roth IRA, the greater compounding potential you have.2
LANDMARK FEDERAL TAX CHANGES SLATED FOR 2018
Congress passed the Tax Cuts & Jobs Act last week, and President Trump signed the bill into law on Friday. The new legislation authorizes major changes to the Internal Revenue Code. On January 1, 2018, the corporate tax rate will be reduced to 21%, most pass-through businesses will be allowed to claim a 20% deduction on earnings, the estate tax exemption will double, the individual standard deduction will rise to $12,000, and personal exemptions will disappear. At the start of 2019, the health insurance requirement for individuals set by the Affordable Care Act is scheduled for repeal. Most of the reforms are slated to sunset at the end of 2025.1
HOME SALES STRENGTHEN
The National Association of Realtors reported a 5.6% rise in residential resales in November, complementing last month’s 17.5% gain in new home buying announced by the Census Bureau. In a separate report, the Bureau found housing starts up 3.3% for November, with building permits down 1.4%.2
CONSUMER SPENDING JUMPS 0.6% IN NOVEMBER
Beside this noteworthy gain, the Department of Commerce also documented a 0.3% rise in personal income last month. Turning to consumer sentiment, the University of Michigan’s final December index declined 0.9 points from its preliminary reading to 95.9. In further consumer-linked news, the Bureau of Economic Analysis issued its last estimate of Q3 GDP, reducing it 0.1% to 3.2%.2
Suzanne is widowed and has four adult children. Her investment portfolio is worth $1 million, and she owns a bed-and-breakfast inn worth $1 million as well. Can she conveniently and equally bequeath these assets to her kids to give each child a $500,000 share of her wealth?
This may not be as easy as it seems. “Suzanne” and her estate planning dilemma are hypothetical; the above scenario genuinely illustrates why “equal” estate planning is not necessarily equitable.
Some estates are hard to divide fairly. This problem often surfaces when successful individuals or families have much of their net worth in illiquid assets, such as investment properties, collectibles, or private company interests. An illiquid asset can be hard to sell, and its price may need to be reduced to make a sale or exchange work. Once sold, the illiquid asset may not represent an “equal” share of the estate, only a devalued one.
President Donald Trump signed the Tax Cuts & Jobs Act into law on December 22, and on January 1, some key details of the Internal Revenue Code will abruptly change.1
There will be night-and-day change, both figuratively and literally. On January 1, the federal estate tax exemption will double; the standard federal income tax deduction will nearly double. The top corporate income tax rate will fall from 35% to 21%. Most business owners who make pass-through income will be able to deduct the first 20% of that income tax-free.2,3
Workers may not see changes to their paychecks until February. This is because the Internal Revenue Service needs to release new withholding tables. Those tables are slated to appear in January.2
Two provisions of the TCJA may also apply retroactively for some taxpayers. A larger federal tax deduction for out-of-pocket medical expenses is allowed not just for 2018, but also for 2017. Taxpayers who itemize may write off qualifying medical expenses exceeding 7.5% of income in 2017, instead of 10% of income. Businesses that bought new capital equipment after September 27, 2017 will be permitted to fully and immediately expense those purchases for the 2017 tax year.2
Aiming to start a business? What steps could you take that might promote success and longevity for your company? Here are several.
Write a business plan. You will have a tough time attracting an investor without one. Potential hires may want to see your business plan as well. Your plan should establish milestones for your company and include metrics by which you can judge your success. It should detail your revenue model, incorporate an analysis of your competition and the changes that may affect your industry, and contain a marketing strategy.
Make sure your business meets legal standards. That means registering your company with your state if needed, adhering to federal and state labor laws, and managing tax liabilities. Your business will likely be a sole proprietorship, but consider other business entities. The form of ownership you choose will directly affect your tax situation.
Was your monthly Medicare Part B premium less than $110 in 2017? Next year, you may pay considerably more for the same coverage. In 2018, more than 40% of Medicare recipients will pay monthly Part B premiums of $134.1
What is prompting this 23% increase? The biggest factor is the 2.0% cost-of-living adjustment to Social Security benefits for 2018.1
Social Security is getting its first significant COLA since 2015. There was no COLA in 2016, and benefits grew just 0.3% in 2017.1
When the federal government’s Consumer Price Index measures only minor yearly inflation, Social Security receives little or no COLA for the following year. In such instances, Medicare’s “hold harmless” clause helps many of its enrollees.1
Is 80% of your portfolio held in equities? Perhaps it is without you realizing it. You could invite this risk, and others, if you go too long without rebalancing your portfolio.
Some investors stick with the same asset allocation in their investment portfolios (and retirement accounts) for decades: they “set it and forget it.” The longer the initial (target) asset allocation goes unreviewed, the greater the potential divergence between the target allocation and the actual allocation.
Just how off-kilter can a portfolio become without rebalancing? Some research from the respected financial analytics firm Ibbotson Associates provides an answer. Looking back, a portfolio with a 50/50 split between equities and fixed-income investments in 1926 would have had 96.7% of its assets held in equities and 3.3% in fixed-income vehicles by 2010 without rebalancing. Even a portfolio with only a 10% stake in equities in 1926 would have become 76.3% equities by 2010 with the same inattention.1
On December 20, Congress passed the Tax Cuts & Jobs Act, sending the final version of the GOP tax reform bill to President Trump’s desk. The legislation alters the Internal Revenue Code to a degree unseen since the 1980s, altering income tax brackets, marginal tax rates, key deductions and exemptions, and the taxation of corporations and pass-through businesses. These are just some of the adjustments.1
How many taxpayers could benefit from all this reform in 2018? Earlier this month, the financial website Business Insider ran some numbers to see how single, childless taxpayers earning $25,000, $75,000, and $175,000 a year would fare in the wake of the reforms. It did so for both the House and Senate versions of the bill. The final Tax Cuts & Jobs Act is based on the Senate version, and under the Senate tax plan, Business Insider projected 2018 tax savings of $369 for a childless taxpayer at the $25,000 level, $2,129 at the $75,000 level, and $5,240 at the $175,000 level. The calculations assumed these taxpayers would use the standard deduction in 2018, rather than itemize.2
Using the same three income levels, and again assuming use of the enlarged standard deduction, it also projected 2018 federal income tax savings for families of four with children no older than 16. With the Senate bill as the model, the projected 2018 tax savings were $100 for such a family at the $25,000 level, $2,244 at the $75,000 level, and $3,095 at the $175,000 level.3
FED MAKES ITS FINAL RATE MOVE OF 2017
As expected, the Federal Reserve raised the benchmark interest rate by 0.25% last week. The Federal Open Market Committee voted 7-2 to take the target range for the federal funds rate up to 1.25-1.5%. Fed officials made little change to their dot-plot chart – they still see three rate hikes in 2018, and their consensus projection has the federal funds rate at 2.1% a year from now. They did elevate their 2018 GDP forecast from 2.1% to 2.5%.1
CORE INFLATION LAGS HEADLINE CPI ADVANCE
According to the Department of Labor, consumer prices rose 0.4% in November – but the core Consumer Price Index, which removes food and energy costs, only saw a gain of 0.1%. This left the 12-month increase in the core CPI at 1.7% compared with 2.2% for the headline number, a gap that may complicate matters for the Federal Reserve as it considers the pace of 2018 interest rate adjustments.2
BUYING, BUYING, AND MORE BUYING
Retail sales climbed an impressive 0.8% in November following a strong 0.5% rise for October. Factoring out auto purchases, the November gain was 1.0%. Recent Department of Commerce data shows core retail sales (which do not include building materials, gasoline, and food) advancing at their best pace in three years.3
You have a chance to manage your money better than previous generations have. Some crucial financial steps may help you do just that.
Live below your means and refrain from living on margin. How much do you save per month? Generations ago, Americans routinely saved 10% or more of what they made, either depositing those savings or investing them. This kind of thriftiness is still found elsewhere in the world. Today, the average euro area household saves more than 12% of its earnings, and the current personal savings rate in Mexico is 20.6%.1
In 1975, the U.S. personal savings rate hit an all-time peak of 17.0%; it has been below 4% since June. Easy credit is one culprit; the tendency to overspend in a strong economy is another. Remember to pay yourself first, not credit card companies. Collect experiences rather than possessions.1
Just what is comprehensive financial planning? As you invest and save for retirement, you may hear or read about it – but what does that phrase really mean? Just what does comprehensive financial planning entail, and why do knowledgeable investors request this kind of approach?
While the phrase may seem ambiguous to some, it can be simply defined.
Comprehensive financial planning is about building wealth through a process, not a product. Financial products are everywhere, and simply putting money into an investment is not a gateway to getting rich, nor a solution to your financial issues.
Comprehensive financial planning is holistic. It is about more than “money.” A comprehensive financial plan is not only built around your goals, but also around your core values. What matters most to you in life? How does your wealth relate to that? What should your wealth help you accomplish? What could it accomplish for others?
Age 64 is the age when you are reminded that you are a baby boomer growing older. Regardless of how young or old you feel at 64, you should make sure to sign up for Medicare.
The sign-up period will be here before you know it. In fact, you might already be within it, so act quickly if you are. Medicare gives you a 7-month window in which to enroll. That initial enrollment window opens three months prior to the month in which you turn 65 and closes three months after the month in which you turn 65.1
If you fail to enroll within that 7-month period, the chances are good that you will end up paying a late-enrollment penalty for not signing up for Part B coverage on time. That penalty is permanent. You will also have to wait until the next general enrollment period (January 1-March 31) to sign up.1,2
Are You Really Saving Enough for Retirement?
On your way to retiring, you may question whether you have saved enough. Three factors promote this anxiety, and you can take steps to counter them.
Many people approach retirement with only a vague notion of how much money their “second acts” will require. You may need to amass as much as $1 million for a 30-year retirement; in some metro areas, you might need even more. Replacing the ambiguity with a goal, a target number determined in a consultation with a retirement planner, at least gives you an idea of how much to save. If your employer partly matches your retirement plan contributions, do all you can to bring that free money into your account. If you earn the median annual U.S. salary (about $51,270), an average employer match of 2.7% of your salary would mean an extra $1,380 or so per year into your plan. Even over five or ten years, that additional contribution could grow and compound profoundly. You may be concerned that you are contributing too little to your retirement fund each year. Vanguard says that the median deferral rate for the standard workplace retirement plan is only about 5%. A 10-15% annual contribution is widely recommended; strive to fund your retirement account at that level to respond to your concern.1
ANOTHER MONTH OF SOLID HIRING
According to the Department of Labor, the U.S. workforce gained 228,000 more jobs than it lost during November. Annualized wage growth improved from 2.5% to 2.7%. The headline jobless rate held at 4.1% last month, while the U-6 rate, that includes the underemployed, ticked up a tenth of a percent to 8.0%. Even though October’s net job gain was revised down to 244,000, October-November 2017 represents the best two-month hiring period in more than a year.1,2
ISM INDEX MISSES EXPECTATIONS
The Institute for Supply Management’s gauge of service sector activity fell 2.7 points to a still-impressive reading of 57.4 in November. Economists polled by Briefing.com expected a retreat, albeit a lesser one: they projected a reading of 59.3.2
A SMALL DECLINE FOR CONSUMER SENTIMENT
There was just a bit less optimism in households in early December, at least by the measure of the University of Michigan’s twice-monthly Surveys of Consumers. The preliminary December edition of the university’s consumer sentiment index fell 1.7 points from its final November reading to a mark of 96.8.2
Fear affects investors in two distinct ways. Every so often, a bulletin, headline, or sustained economic or market trend will scare them and make them question their investing approach. If they overreact to it, they may sell low now and buy high later – or in the worst-case scenario, they derail their whole investing and retirement planning strategy.
Besides the fear of potential market shocks, there is also another fear worth noting – the fear of being too involved in the market. People with this worry are often superb savers, but reluctant investors. They amass large bank accounts, yet their aversion to investing in equities may hurt them in the long run.
Impulsive investment decisions tend to carry a cost. People who jump in and out of investment sectors or classes tend to pay a price for it. A statistic hints at how much: across the 20 years ending on December 31, 2015, the S&P 500 returned an average of 8.91% per year, but the average equity investor’s portfolio returned just 4.67% annually. Fixed-income investors also failed to beat a key benchmark: in this same period, the Barclays Aggregate Bond Index advanced an average of 5.34% a year, but the average fixed-income investor realized an annual return of only 0.51%.1
THE MONTH IN BRIEF
In November, the S&P 500 gained 2.81% and advanced for a thirteenth straight month – an unprecedented milestone in the index’s long history. Consumer confidence and investor confidence were both abundant, as further evidence arrived that the economy was growing at an impressive rate. Solid fundamental indicators, upbeat earnings announcements, and hopes for 2018 tax cuts motivated stock gains in the U.S.; though many foreign benchmarks slumped. Oil took steps toward $60. Home sales picked up after a late-summer lull. Wall Street anticipated a year-end rate hike from the Federal Reserve.1,2
DOMESTIC ECONOMIC HEALTH
Consumers were feeling very optimistic in November. The Conference Board’s much-watched consumer confidence index nearly hit 130; its 129.5 reading was 3.3 points higher than its October mark. As for the University of Michigan’s gauge of consumer sentiment, it hovered near a 13-year high, achieving a final November mark of 98.5. (Even so, that was beneath the 100.7 reading at the end of October.)3,4
The Department of Labor’s October jobs report satisfied Wall Street. Companies added 261,000 more jobs than they shed in the tenth month of the year. While annual wage growth fell sharply to 2.4%, the headline jobless rate declined to 4.1%, and the U-6 rate, including the underemployed, declined 0.4% to 7.9%. (The U-6 rate was 1.3% higher a year earlier.)5
CONSUMERS ACT ON THEIR CONFIDENCE
A new factoid points out just how well the economy is doing: the federal government just upgraded its estimate of third-quarter growth to 3.3%. New data on consumer spending and confidence hints at fourth-quarter strength. Personal spending improved 0.3% in October following the 0.9% leap in September, and household wages were up 0.4% in October for a second straight month. At a mark of 129.5, the Conference Board’s consumer confidence index reached a YTD peak in November, having soared 9.1 points in two months.1,2
TWO VERY POSITIVE HOUSING SIGNALS
New homes are selling strongly. October saw a 6.2% advance for new home buying according to the Commerce Department, with sales up 30% in the Northeast; the annualized rate of new home purchases was the best in a decade. In addition, the National Association of Realtors announced a 3.5% gain in its pending home sales index for October, a turnaround from the 0.4% September decline.1,3
MANUFACTURING SECTOR MAINTAINS A HECTIC PACE
The Institute for Supply Management’s October factory sector purchasing manager index came in at 58.2 last week – a sign of significant expansion. That was half a point below its September reading, but still far above the 50.0 dividing line between sector growth and contraction.4
Talking about “the end” is not the easiest thing to do, and this is one reason why some people never adequately plan for the transfer of their wealth. Those who do create estate plans with help from financial and legal professionals sometimes leave their heirs out of the conversation.
Have you let your loved ones know a little about your estate plan? This is decidedly a matter of personal preference: you may want to share a great deal of information with them, or you may want to keep most of the details to yourself. Either way, they should know some basics.
Having this talk can become easier when it is a values conversation, not a money conversation.
Values driven estate planning. You can let your heirs know that your values are at the core of the decisions you have made. You need not tell them how much they will inherit. You may let them know about the planning steps you have taken to make a difficult time a bit easier.
CONSUMER SENTIMENT DECLINES FOR NOVEMBER
The University of Michigan’s monthly gauge of how households perceive current and future economic conditions ended the month at a mark of 98.5. Compared to the 100.7 final October reading, this was a disappointment. Still, the index was up 5.0 points year-over-year. Richard Curtin, the economist in charge of the consumer survey, noted that the index has hovered near “the highest levels since 2004” since January.1
HOME BUYING GETS A FALL BOOST
Existing home sales rose 2.0% in October, surpassing the consensus 0.7% gain forecast by analysts polled by Investing.com. Elsewhere in its latest monthly report, the National Association of Realtors revised September’s minor advance in home buying down to 0.4%.2
LEADING INDICATORS TAKE A MAJOR LEAP
After a decline of 0.2% in September, the Conference Board’s index of leading economic indicators soared 1.2% for October. This was double the gain forecast in a Reuters survey of economists. This surge in the 10-component index may signal an impressive fourth quarter.3
An executive transitions into a consulting role at age 62 and stops working altogether at 65; then, he becomes a buyer for a church network at 69. A corporate IT professional decides to conclude her career at age 58; she serves as a city council member in her sixties, then opens an art studio at 70.
Are these people retired? Not by the old definition of the word. Our definition of “retirement” is changing. Retirement is now a time of activity and opportunity.
Generations ago, Americans never retired – at least not voluntarily. American life was either agrarian or industrialized, and people toiled until they died or physically broke down. Their “social security” was their children. Society had a low opinion of able-bodied adults who preferred leisure to work.
This decade has brought a long economic rebound to many parts of America. As 2017 ebbs into 2018, some of the statistics regarding this comeback are truly impressive:
*Payrolls have grown, month after month, for more than seven years.
*The jobless rate is lower than it has been for more than a decade.
*Business activity in the service sector has not contracted since the summer of 2009.
*The economy just grew 3% or more in back-to-back quarters, a feat unseen since 2014.1,2
In the big picture, the American economy is booming. These statistics, and others, are so noteworthy that analysts are asking: when will the business cycle peak? Has it already peaked? Or are we experiencing a remarkably great exception to the norm?
YEARLY INFLATION BACK AT 2.0%
Consumer costs ticked up just 0.1% in October, according to the Department of Labor. The marginal monthly gain left the annualized increase in the headline Consumer Price Index at 2.0%, down from 2.2% a month earlier. The core CPI has risen 1.8% in 12 months. Gasoline prices influenced the October headline number: they fell 2.4% in October after a 13.1% September leap.1
RETAIL SALES BEAT EXPECTATIONS
Analysts surveyed by MarketWatch thought retail sales would be flat for October after their huge surge in September. That was not so. They surprised to the upside with a gain of 0.2%. Minus auto buying, the advance was 0.1%.2
DEVELOPERS PICK UP THE PACE AS FALL BEGINS
Newly released Census Bureau data shows a 13.7% monthly increase in housing starts in October as well as a 5.9% rise for building permits. Single-family home construction strengthened 5.3% last month.3
Some of us may retire at 65 and live to 100 or 105. Advances in health care may make this a strong possibility. The corresponding question is: will we outlive our money?
More people are spending more of their lives in retirement. According to the actuaries at Social Security, today’s 65-year-olds have roughly a 25% chance of living into their nineties, and about one in ten will live to 100 or longer. Clearly, this puts a strain on Social Security. When it first sent out retirement benefits in 1940, the average life expectancy for a 65-year-old was 79. It was not designed to fund 30-year retirements.1,2
Social Security aside, many Americans are retiring with inadequate savings. A Vanguard study says that retirement savers aged 65 or older have average balances of just $197,000 in their workplace retirement accounts. IRA distributions, home or business sale proceeds, and pension and Social Security income may help them out in the first decade of retirement, but what about the decades that might follow?3
Have you donated money to a crowdfunding campaign this year? You probably have. You may be wondering how the Internal Revenue Service treats these donations. Do the common tax rules apply?
The I.R.S. may or may not define such donations as charitable contributions. It depends not only on who the crowdfunding is for, but also who has organized the campaign.
A donation to a qualified non-profit organization – a 501(c)(3) – is tax deductible if it is properly documented and itemized on Schedule A. Donations to crowdsourcing efforts administered by 501(c)(3)s are, likewise, tax deductible.1
Are you making charitable donations this holiday season? If so, you should know about some of the financial “fine print” involved, as the right moves could potentially bring more of a benefit to the charity and to you.
To deduct charitable donations, you must itemize them on I.R.S. Schedule A. So, you need to document each donation you make. Ideally, the charity uses a form it has on hand to provide you with proof of your contribution. If the charity does not have such a form handy (and some charities do not), then a receipt, a credit or debit card statement, a bank statement, or a cancelled check will have to suffice. The I.R.S. needs to know three things: the name of the charity, the gifted amount, and the date of your gift.1
From a tax planning standpoint, itemized deductions are only worthwhile when they exceed the standard income tax deduction. The 2017 standard deduction for a single filer is $6,350. If you file as a head of household, your standard deduction is $9,350. Joint filers and surviving spouses have a 2017 standard deduction of $12,700. (All these amounts rise in 2018.)2
CONSUMER SENTIMENT INDEX DECLINES
The University of Michigan’s monthly gauge of U.S. household sentiment fell to 97.8 in its initial November edition; analysts polled by Bloomberg estimated it would tick up to 100.8. While the 2.9-point dip from its final October level was the largest drop in a year, the index remained near a 13-year peak. Sixty percent of the consumers surveyed felt that stocks would rise in 2018.1
Q3 EARNINGS: A LOOK AT THE SCORECARD
As of Friday, 87% of S&P 500 companies had reported third-quarter earnings. An analysis from Zacks Investment Research reveals that 73% have topped earnings forecasts; 67% have surpassed revenue estimates. So far, the earnings growth rate for S&P 500 firms in the third quarter is 6.8%, with revenues rising 6.2%. Zacks expects total earnings for the quarter to be 6.2% higher than Q3 2016, with year-over-year income growth at 5.7%.2
OIL CAPS OFF A STRONG WEEK
Light sweet crude rose to its highest level in 28 months last week before settling slightly lower: $56.67 was the NYMEX price at Friday’s NYSE closing bell. At that time, WTI crude was up 1.8% from its November 3 close.3
What financial, business, or life priorities do you need to address for 2018? Now is a good time to think about the investing, saving, or budgeting methods you could employ toward specific objectives, from building your retirement fund to lowering your taxes. You have plenty of options. Here are a few that might prove convenient:
Can you contribute more to your retirement plans this year? In 2018, the contribution limit for a Roth or traditional IRA remains at $5,500 ($6,500 for those making “catch-up” contributions). Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA: singles and heads of household with MAGI above $135,000 and joint filers with MAGI above $199,000 cannot make 2018 Roth contributions.1
For tax year 2018, you can contribute up to $18,500 to any kind of 401(k), 403(b), or 457 plan, with a $6,000 catch-up contribution allowed if you are age 50 or older. If you are self-employed, you may want to look into whether you can establish and fund a Solo 401(k) before the end of 2018; as employer contributions may also be made to Solo 401(k)s, you may direct up to $55,000 into one of those plans.1,2
What has changed for you in 2017? Did you start a new job or leave a job behind? Did you retire? Did you start a family? If notable changes occurred in your personal or professional life, then you will want to review your finances before this year ends and 2018 begins.
Even if your 2017 has been relatively uneventful, the end of the year is still a good time to get cracking and see where you can plan to save some taxes and/or build a little more wealth.
Do you practice tax-loss harvesting? That is the art of taking capital losses (selling securities worth less than what you first paid for them) to offset your short-term capital gains. If you fall into one of the upper tax brackets, you might want to consider this move, which directly lowers your taxable income. It should be made with the guidance of a financial professional you trust.1
Every few years, predictions emerge that the estate tax will sunset. Even if it does, that will not remove the need for life insurance in estate planning. Why? The reasons are numerous.
You can use life insurance proceeds to equalize inheritances. If sizable, illiquid assets make it difficult to leave the same amount of wealth to each heir, then the cash from a life insurance death benefit may financially compensate.
You can plan for a life insurance payout to replace assets gifted to charity. You often see this move in the planning of charitable remainder trusts (CRTs).
People use CRTs to accomplish three objectives. One, they can remove an asset from their taxable estate by placing it into the CRT. Two, they can derive a retirement income stream from the trust’s invested assets. Three, upon their death, they can donate a percentage of the assets left in the CRT to charities or non-profit organizations.1
Ways to Possibly Produce More Retirement Income
Your income determines your level of financial comfort in retirement more than any other factor. Some mid-life financial moves may help to boost it.
One important move is to max out retirement accounts. Yearly contributions of $5,500 to an IRA starting at age 45 will grow to $214,460 by age 65 at a 6% annual return. At an 8% annual return, that becomes $271,826. (This does not even take catch-up contributions into account.) You can also delay retiring. At an 8% annual return, annual investments of $10,000 in the typical tax-deferred employee retirement plan will grow to $35,061 in just three years, and $63,359 in five years. You can also strategize when to claim Social Security and transform non-earning assets (such as your home, collectibles, and vehicles) into income-producing assets. If you are “house rich and cash poor,” consider the potential of downsizing: $300,000 in freed home equity invested at a 7% yearly return could produce $21,000 in annual income. Some retirees arrange sale-leaseback agreements with their adult children: they sell their home to their kids, then rent it back. The retirees stay in their home and get a little more cash to spend, while the younger, higher-earning generation makes the most of homeowner tax breaks.1,2
HIRING REBOUNDS, INDUSTRIES EXPAND
According to the Department of Labor, October brought a net gain of 261,000 jobs. (Last month’s net loss of 33,000 was revised to a net gain of 18,000.) The headline unemployment rate ticked down to 4.1%, while the broader U-6 rate fell to 7.9% (down 1.3% in 12 months). Wages were up 2.4% year-over-year. The Institute for Supply Management’s purchasing manager indices alternately rose and fell in October. The readings were strong: 58.7 for the factory PMI (down 2.1 points), 60.1 for the service sector PMI (up 0.3 points).1,2
CONSUMER SPENDING, CONFIDENCE IMPRESS
Personal spending rose 1.0% in September, helped by households replacing vehicles and goods damaged in hurricanes and floods. This was the largest monthly advance in more than eight years. Personal wages improved 0.4%. The Conference Board’s consumer confidence index climbed 6.1 points to 125.9 in October; economists surveyed by MarketWatch expected a reading of 121.3.2,3
JEROME POWELL NOMINATED TO LEAD FED
If his nomination is approved, the Federal Reserve governor and former investment banker will become chairman when Janet Yellen’s term ends in February. He is expected to maintain the Fed’s current strategy for normalizing monetary policy. The central bank held interest rates steady at its November meeting. Bloomberg puts the odds of a December rate hike at 85%.4,5
Retirement accounts are not bank accounts. Nor should they be treated as such. When retirement funds are drawn down, they impede the progress of retirement planning, even if the money is later restored.
In a financial crush, a retirement account may seem like a great source of funds. It is often much larger than a savings account; it is technically not a liquid asset, but it can easily be mistaken for one.
The central problem is this: when you take a loan or an early distribution from an IRA or a workplace retirement plan, you are borrowing from your future self. In fact, you may effectively be borrowing more money from your future than you think. Even if you put every dollar you take out back into the account, you are robbing those dollars you removed of the tax-deferred growth and compounding they could have realized while invested.
Major changes may be ahead for federal tax law. At the start of November, House Republicans rolled out their plan for sweeping tax reforms. Negotiations may greatly alter the content of the bill, but here are the proposed adjustments, and who may and may not benefit from them if they become law.
The corporate tax rate would fall from 35% to 20%. Wall Street would cheer this development, perhaps with a significant rally. Sole proprietorships, partnerships, and S corporations would also see their top tax rate drop to 25% (although W-2 wages for business owners who invest in these pass-through entities would still be taxed at the owner’s marginal tax rate).1,2
The estate tax and Alternative Minimum Tax would be eliminated. The AMT would die immediately, saving more than 5 million high-earning taxpayers from an annual bother. Death taxes would sunset within six years, and in the interim, the estate tax exemption would be doubled, leaving the individual exemption at about $11 million. This would be a boon for many highly successful people and their heirs.2
You will able to put a little more into your workplace retirement account in 2018. The federal government has boosted the annual contribution limit on some of the popular qualified retirement plans thanks to inflation and made other adjustments worth noting.
Contribution limits for 401(k)s are rising by $500. This is the first increase seen in three years. In 2018, you can direct up to $18,500 into one of these accounts; $24,500, if you are age 50 or older.1
This $500 increase also applies for three other types of retirement plans – the 403(b) plans in place at schools and non-profit organizations, the Thrift Savings Plan for federal employees, and most 457 plans sponsored by state and local governments.1
Seniors got a little good news this fall. Next year, monthly Social Security income payments to retirees will increase by 2.0%. That will mean an extra $326 – roughly $27.40 a month – for the average Social Security recipient in 2018.1
This is the largest cost-of-living adjustment (COLA) to Social Security benefits since 2012. In that year, retirees received 3.6% more in benefits than they had in 2011.2
Unfortunately, the 2.0% increase may not make much of a difference. After all, the COLA does not constitute a gain on inflation, but merely a response to it.
The Senior Citizens League, an advocacy group for retirees, thinks that rising Medicare premiums could absorb the 2.0% COLA for 70% of Social Security beneficiaries. Whether that happens or not, some analysts think retirees deserve larger Social Security COLAs than the ones they receive.2
On November 2, Jerome “Jay” Powell was nominated to lead the Federal Reserve. The announcement in the White House’s Rose Garden was not a surprise; in recent days, he had emerged as the front-runner for the chairmanship.1
Three things stand out about Jay Powell’s nomination, and the change of leadership presumably ahead at the Fed in 2018.1
The choice of Powell does much to affirm the status quo. In fact, Powell has sided with the majority in every Fed policy vote since he became a Fed governor in 2012. Former White House budget director David Stockman calls him “Janet Yellen with a tie.”1,2
Analysts widely expect Powell to try to maintain the accommodative stance of his predecessor, along with the Fed’s current strategy for normalizing monetary policy. He has shown an interest in scaling back some of the banking regulation put in place by the Dodd-Frank Act, such as the prohibition on proprietary trading by commercial banks.1,3
THE MONTH IN BRIEF
October saw the S&P 500 rise 2.22% in response to results from the fall earnings season, encouraging fundamental indicators, and anticipation of tax reforms. An impressive jump in personal spending complemented excellent readings on consumer confidence and purchasing manager indices; although, hiring suffered a setback. As the European Union contended with disunity in Spain, the European Central Bank revealed its exit strategy for its bond-buying campaign. Asian and European stock exchanges witnessed major gains. Home sales numbers improved, and sugar, unleaded gasoline, and oil made major advances in the commodities sector. Investors, traders, and consumers maintained a bullish view.1
DOMESTIC ECONOMIC HEALTH
As summer ended, household spending was boosted by the need to replace cars, SUVs, and trucks damaged by floods and hurricanes. Personal spending rose 1.0% in September, the largest monthly gain since August 2009. Household incomes rose a sizable 0.4% in the ninth month of the year. Retail sales, correspondingly, soared as well: for September, the increase was 1.6%.2,3
The Conference Board’s consumer confidence index hit a spectacularly high 125.9 last month. Economists surveyed by MarketWatch expected a 121.3 reading; in September, the index was at 119.8. The University of Michigan household sentiment index ended the month at 100.7.3,4
THIRD QUARTER SAW SOLID ECONOMIC GROWTH
Friday, the Bureau of Economic Analysis issued its first estimate of Q3 GDP: 3.0%. Its report showed increases in personal spending and business stockpiling offsetting a dip in home building. The economy grew 3% or more for a second straight quarter for the first time since 2014. Growth has averaged 2.2% per quarter since the end of the recession in 2009.1
NEW HOME SALES LEAP UP
Unexpectedly, new home buying increased by 18.9% in September; the Census Bureau said that the sales pace reached a ten-year peak. The surge put the year-over-year gain for new home purchases at 17.0%.2
CONSUMERS RETAIN THEIR OPTIMISM
The University of Michigan’s consumer sentiment index finished October at 100.7, just 0.1 points beneath the forecast of economists polled by MarketWatch. That very high reading was below the initial October mark of 101.1, however.3
Imagine retiring with $50,000 of debt. Some new retirees owe more than that. Outstanding home loans, education debt, small business loans, and lingering credit card balances threaten to compromise their retirement plans.
How serious is the problem? A study from the University of Michigan’s Retirement Research Center illustrates how bad it has become. Back in 1998, 37% of Americans aged 56-61 shouldered recurring debt; the average such household owed $3,634 each month (in 2012 dollars). Today, 42% of such households do – and the mean debt load is now $17,623.1
Are increased mortgage costs to blame? Partly, but not fully. Quite a few homeowners do trade up or refinance after age 50. The Consumer Financial Protection Bureau notes that between 2001-2011, the percentage of homeowners 65 and older carrying a mortgage went from 22% to 30%. The data for homeowners 75 and older was more alarming. While 8.4% of this demographic had outstanding home loans in 2001, 21.2% did by 2011.2
Will the current bull market run for another year? How about another two or three years? Some investors will confidently say “yes” to both questions. Optimism abounds on Wall Street: the major indices climb more than they retreat, and they have attained new peaks. On average, the S&P 500 has gained nearly 15% a year for the past eight years.1
Stocks will correct at some point. A bear market could even emerge. Is your investment portfolio ready for either kind of event?
It may not be. Your portfolio could be overweighted in stocks – that is, a higher percentage of your invested assets may be held in equities than what your investment strategy outlines. As your stock market exposure grows greater and greater, the less diversified your portfolio becomes, and the more stock market risk you assume.
How many cars and trucks were damaged by floodwaters in 2017? Perhaps as many as a million. Some estimates say as many as 500,000 vehicles were waterlogged in the wake of Hurricane Harvey alone. Were all those cars junked? No. Some are being sold.1
It is not illegal to sell a flood-damaged car. Some auto auctions routinely do, while disclosing that the cars have been soaked. Unethical sellers, however, put these cars on the market with no such admission and scam buyers in the process.1
Water damage can be masked, but not undone. When you shop for a used car, you should look for hints of its impact.
You may be shocked to learn that part of your Social Security income could be taxed. If your provisional income exceeds a certain level, that will happen.
Just what is “provisional income”? The Social Security Administration defines it with a formula.
Provisional income = your modified adjusted gross income + 50% of your total annual Social Security benefits + 100% of tax-exempt interest that your investments generate.1
Income from working, pension income, withdrawals of money from IRAs and other types of retirement plans, and interest earned by certain kinds of fixed-income investment vehicles all figure into this formula.
If you fail to manage your provisional income in retirement, it may top the threshold at which Social Security benefits become taxable. This could drastically affect the amount of spending power you have, and it could force you to withdraw more money than you expect in order to cover taxes.
SEPTEMBER SAW SLIGHTLY MORE HOME BUYING
Existing home sales advanced 0.7% last month, according to a National Association of Realtors report. This gain broke a 3-month streak of retreats. Single-family home sales rose 1.1%. Housing inventory increased 1.6% last month, but it was still 6.4% under year-ago levels.1
GROUNDBREAKING FALLS TO A 12-MONTH LOW
Housing starts slumped 4.7% in September, the Census Bureau reported last week. Building permits also declined, decreasing 4.5%. Fall hurricanes may have slowed construction activity, but investment in homebuilding was also down 7.3% year-over-year during the second quarter.2
DOW SURGES ABOVE 23,000; GOLD DROPS
Across last week, the Dow Industrials climbed 2.00% to 23,328.63. The Nasdaq Composite advanced 0.35% to 6,629.05, while the S&P 500 gained 0.86% to 2,575.21. Gold had its worst week in a month, slipping 1.9% to a Friday COMEX settlement of $1,280.50.3,4
According to a new study, 41% of Americans lack life insurance coverage. The 2017 Insurance Barometer Study, conducted by the non-profit organizations LIMRA and Life Happens, also discovered that while 84% of Americans felt life insurance was appropriate for most people, just 70% thought it was a good idea for them.1
What is preventing so many people from insuring themselves? Perhaps outdated perceptions about the cost of the coverage and the process of securing it. Most people think life insurance is more expensive than it really is and assume there will be a long, drawn-out path to obtaining a policy. The reality is different.
Life insurance is easier than ever to buy and not as costly as many believe. A life insurance shopper may be pleasantly surprised by the data contained in the next three paragraphs.
How much would a healthy, non-smoking 35-year-old man pay per year to maintain a whole life policy offering a $250,000 death benefit? According to LifeHappens.org, the average yearly premium is actually just under $3,000.2
RETAIL SALES, SENTIMENT NUMBERS IMPRESS
Two economic indicators stood out last week. Retail purchases rose 1.6% during September as households and businesses replaced cars and trucks damaged in hurricanes. This was the best monthly advance recorded by the Department of Commerce since March 2015, and the gain was 1.0% even with auto buying removed. The University of Michigan’s initial October consumer sentiment index displayed a reading of 101.1, which was nearly a 14-year high. Economists polled by Briefing.com had forecast just a half-point improvement to 95.6.1,2
GAS PRICES DRIVE UP INFLATION
A 13.1% spike in retail gasoline costs accounted for 75% of the 0.5% September increase in the Consumer Price Index. Not since January has the CPI risen so much in a month. Still, the core CPI was up just 0.2%. In yearly terms, headline inflation now stands at 2.2%; core inflation, at 1.7%.3
SOCIAL SECURITY BENEFITS TO INCREASE 2% IN 2018
Friday, the Social Security Administration announced the largest cost-of-living adjustment to retirement benefits since 2012. Next year, Social Security payments will get a 2.0% boost, meaning the average retired Social Security recipient will receive $27.40 more per month.4
At first glance, the rules surrounding inherited IRAs are complex. Here are some questions (and potential answers) to consider if you have inherited one or may in the future.
Who was the original IRA owner? If the original owner was your spouse, you have a fundamental choice to make. You can roll over your late spouse’s IRA into an IRA you own, or you can treat it as an inherited IRA. If the original owner was not your spouse, you must treat the IRA for which you are named beneficiary as an inherited IRA.1,2
What kind of IRA is it? It will either be a traditional IRA funded with pre-tax contributions or a Roth IRA funded with post-tax contributions.
Inherited IRA assets are vulnerable in bankruptcy proceedings. Many older IRA owners and their beneficiaries do not realize this, but it is true.
In Clark, et ux v. Rameker (2014), the Supreme Court ruled 9-0 that inherited IRAs cannot be defined as “retirement funds” under federal bankruptcy law. They now lack the protection that retirement savings accounts commonly get in bankruptcy courts.1
So today, a longstanding estate planning dictum is being reevaluated. If you have non-spousal heirs who seem at risk for bankruptcy, you might want to leave your IRA to a trust.
When IRA owners make this move, it is usually because they want a legal and financial firewall in place, i.e., the potential heir to the IRA is a minor or someone who is bad with money. Add protecting inherited IRA assets against creditors and lawyers to the list of objectives. Spouses can inherit IRA assets and receive creditor protection for those assets when they roll them into IRAs of their own, but federal tax law does not yet give other heirs that perk.2
A Retirement Plan… or a College Plan?
Some parents feel they should pay for all or part of their children’s college education. They make it a financial priority and put saving for retirement further down on their to-do list. If their kids can graduate without any student loan debt, the thinking goes, they will be better positioned to provide financial support to mom and dad one day.
This assumption may be hazardous to retiree financial health. One, the kids may not be inclined to provide such support in the future. Cultural or familial expectations may not be realized. Two, students can receive financial aid; retirees cannot. Three, consider these numbers: a couple retiring today may have to pay $275,000 or more in future medical costs, the current average annual Social Security benefit is less than $16,000, and according to a recent PWC survey, half of baby boomers have less than $100,000 saved for retirement. The takeaway here? Unless you are impressively wealthy, you should be regularly funding retirement accounts first, without interruptions, reductions to contributions, or drawdowns to pay for college. Your young adult children should recognize that their college years mark the start of their financial lives, with attendant financial responsibilities.1,2
HURRICANES HURT SEPTEMBER JOB NUMBERS
For the first time in seven years, the economy went a month without payroll growth. The Department of Labor’s September employment report revealed the impact of Hurricanes Harvey and Irma: it showed 33,000 fewer people working. Average hourly wages rose 0.5% to take the annualized gain to 2.9%, but this may have been an effect of the net loss of 105,000 lower-paying bar and restaurant jobs. In a statistical fluke, the headline jobless rate fell to 4.2%, and the U-6 rate, counting the underemployed, declined to 8.3%, even as slightly more Americans looked for work.1
ISM FACTORY PMI TOPS 60
Rising 2.0 points for September, the Institute for Supply Management’s factory purchasing manager index hit 60.8, its best mark since May 2004. ISM’s service sector PMI also made a nice leap in September, ascending 4.5 points to 59.8, its highest result since August 2005. Analysts polled by the Wall Street Journal expected the services PMI to tick down to 55.2 last month.2
OIL HAS FIRST DOWN WEEK IN MORE THAN A MONTH
WTI crude settled at $49.29 on the NYMEX Friday, slipping 4.6% lower for the week. While Tropical Storm Nate put a drag on Gulf Coast oil production, traders also sensed OPEC members may retain caps on crude output through 2018.3
Many households and businesses are insufficiently insured. The problem is not necessarily the quality of coverage, but the breadth and depth of it. Your own business or household may be more vulnerable than you realize.
Too many people go without disability insurance. If you work in a physically demanding field, your employer may provide short-term disability coverage – but many companies do not. According to the Bureau of Labor Statistics, just 39% of workplaces offer employees short-term coverage, and only 33% offer long-term coverage.1
If you are disabled and cannot work, your income soon disappears. Short-term disability insurance, which may last anywhere from 10-26 weeks, commonly replaces around 60% of it. Not ideal, but better than 0%. About 8% of the time, however, a short-term disability lasts more than six months and extends into a long-term disability. Long-term disability coverage can replace 50-70% of your salary for a period of 2-10 years, perhaps even until you turn 65.1,2
THE MONTH IN BRIEF
In August, investors witnessed a terrible natural disaster and heard threats of war on America, and the S&P 500 still managed to gain 0.05%. September brought two terrible natural disasters and more threats of war on America, and the broad benchmark rose 1.93% and topped 2,500 for the first time. In other words, the bulls remained firmly in charge. European stocks rallied impressively last month, and oil went back above $50. U.S. economic indicators were a mixed bag, and home sales seemed to be cooling off. In what may be the month’s most important development for investors, the Federal Reserve detailed its plan for reducing its vast securities portfolio.1
DOMESTIC ECONOMIC HEALTH
On September 20, the Federal Reserve announced a strategy to trim its $4.2 trillion balance sheet. The quantitative tightening will be gradual. Starting this quarter, the Fed will let $10 billion of bonds mature each month; in Q1 2018, that will increase to $20 billion a month. The monthly runoff rate will keep climbing by $10 billion each quarter until hitting a ceiling of $50 billion. According to Fed Chair Janet Yellen, this strategy is fixed, barring a “sufficiently great” threat to U.S. economic stability. At last month’s Fed meeting, three-quarters of the central bank’s policymakers forecast another rate hike before the end of the year.2
Three of the latest economic indicators to appear were underwhelming. Consumer spending only rose 0.1% in August, the Department of Commerce noted, with wages up 0.2%. July had seen a 0.3% increase in both categories. Retail sales slipped 0.2% in August, with core sales registering the same monthly decline.3,4
THE QUARTER IN BRIEF
Encouraging economic data and a series of unsettling news headlines vied for Wall Street’s attention in the third quarter, and ultimately, investors were not shaken. The S&P 500 rose 3.96% over three months, getting a lift from upbeat manufacturing and consumer confidence readings as well as earnings news. Away from our shores, the economies of China and the euro area showed improvement, and foreign stock benchmarks rallied along with ours. A slumping dollar offered no big spark for the commodities markets. The residential real estate market looked to be cooling off. The quarter was filled with major news stories, yet the bulls sauntered through the disruptions.1
DOMESTIC ECONOMIC HEALTH
Consumer confidence barometers were among the most impressive economic indicators last quarter. By August, the Conference Board’s index topped 120, far above its origin score of 100; it was at 119.8 in September. The University of Michigan’s consumer sentiment gauge ended Q3 exactly where it ended Q2 – at a solid mark of 95.1, rebounding from a July dip to 93.4.2,3
The economy’s two key purchasing manager indices were also elevated well above the 50 level, which also cheered Wall Street. In September, the Institute for Supply Management’s factory PMI jumped to 60.8 – rising above 60 for the first time in 13 years, after readings of 58.8 in August and 56.3 for July. ISM’s service sector PMI came in at 53.9 for July and 55.3 for August (at this writing, the September reading was pending).4,5
PERSONAL SPENDING BARELY IMPROVES
Consumer spending increased by only a seasonally adjusted 0.1% in August, while consumer incomes rose 0.2%. Those gains precisely matched the projections of economists surveyed by the Wall Street Journal. Factoring in inflation, household spending actually retreated 0.1% during August. Hurricane Harvey may be partly to blame for these numbers.1
ROUNDING UP REAL ESTATE INDICATORS
Census Bureau data shows new home buying down 3.4% in August; this dip comes on the heels of a (revised) 5.5% fall in July. Pending home sales, as measured by a National Association of Realtors index, slipped 2.6% in August after retreating 0.8% a month earlier. The 12-month gain for the S&P/Case-Shiller home price index improved 0.2% to 5.8% in the July edition (released last week).2
CONSUMER OUTLOOK WEATHERS STORMS
The University of Michigan’s consumer sentiment index and the Conference Board’s consumer confidence index both declined for September, but not drastically. The university’s gauge fell 1.7 points to a reading of 95.1, right where analysts polled by MarketWatch thought it would land; that left it 4.3 points above where it was in September 2016. At a mark of 119.8, the CB index was just 0.6 points lower than its August reading.2,3
The key points of retirement planning are easily stated. Start saving and investing early in life. Save and invest consistently. Avoid drawing down your savings along the way. Another possible point for that list: pay off as much debt as you can before your “second act” begins.
Some baby boomers risk paying themselves last. Thanks to lingering mortgage, credit card, and student loan debt, they are challenged to make financial progress in the years before and after retiring.
More than 40% of households headed by people 65-74 shoulder home loan debt. That figure comes from the Federal Reserve’s Survey of Consumer Finances; the 2013 edition is the latest available. In 1992, less than 20% of Americans in this age group owed money on a mortgage. Some seniors see no real disadvantage in assuming and retiring with a mortgage; tax breaks are available, interest rates are low, and rather than pay cash for a home, they can arrange a loan and use their savings on other things. Money owed is still money owed, though, and owning a home free and clear in retirement is a great feeling.1
How long should you worry about identity theft in the wake of the Equifax hack? The correct answer might turn out to be “as long as you live.” If your personal data was copied in this cybercrime, you should at least scrutinize your credit, bank, and investment account statements in the near term. You may have to keep up that vigilance for years to come.
Cybercrooks are sophisticated in their assessment of consumer habits and consumer memories. They know that eventually, many Americans will forget about the severity and depth of this crime – and that could be the right time to strike. All those stolen Social Security and credit card numbers may be exploited in the 2020s rather than today. Or, perhaps these criminals will just wait until Equifax’s offer of free credit monitoring for consumers expires.
Equifax actually had its data breached twice this year. On September 18, Equifax said that their databases had been entered in March, nearly five months before the well-publicized, late-July violation. Its spring security effort to prevent another hack failed. Bloomberg has reported that the same hackers may be responsible for both invasions.2
A new generation of investors is coming to the forefront: your generation. Millennials have witnessed a fantastic bull market, one of the longest on record. Any given week, scary headlines may generate some volatility, but the bulls just keep on running.
It is easy to be lulled into a false sense of security in this market climate. Bearish arguments can be effortlessly dismissed. Innovation, consumer-friendly technologies, and new social media platforms are turning heads and sending share prices higher. TD Ameritrade says that the five most-owned stocks among its millennial accountholders are Apple, Netflix, Amazon, Tesla, and Facebook. Snap and Twitter are also on the radar. Trading shares via phone is routine. So what if these stocks pay no dividends? (Currently, only Apple does.) These companies seem invincible.1
Twenty years ago, another generation of investors worshipped tech stocks. In the Web 1.0 era, baby boomers and Gen Xers salivated over the potential of Yahoo, Cisco, Lycos, Broadcast.com, E*TRADE, GeoCities, and other emerging tech firms. They were all so hot. Then came the dot-com crash of 2000.
At times, running your business takes every ounce of energy you have. Whether you have a human resources officer at your company or not, creating and overseeing a workplace retirement plan takes significant effort. These plans demand periodic attention.
As a plan sponsor, you assume a fiduciary role. You accept a legal responsibility to act with the best financial interests of others in mind – your retirement plan participants and their beneficiaries. You are obligated to create an investment policy statement (IPS) for the plan, educate your employees about how the plan works, and choose the investments involved. That is just the beginning.1
You must demonstrate the value of the plan. Your employees should not merely shrug at what you are offering – a great opportunity to save, invest, and build wealth for the future. Financial professionals know how to communicate the importance of the plan in a user-friendly way, and they can provide the education that “flips the switch” and encourages worker participation. If this does not happen, your employees may view the plan as just an option instead of a necessity as they save for retirement.
You may have seen this statistic before or one resembling it: the average 65-year-old retiring couple can now expect to pay more than $250,000 in health care expenses during the rest of their lives.
In fact, Fidelity Investments now projects this cost at $275,000, up 70% from its initial estimate in 2002. The effort to prepare for these potential expenses is changing the big picture of retirement planning.1
Individual retirement savings strategies have been altered. How many people retire with a dedicated account or lump sum meant to address future health costs? Very few. Most retirees end up winging it, paying their out-of-pocket costs out of income, Social Security benefits, and savings.
The older retirees are, the heavier this financial burden seems to be. According to a study from the Employee Benefit Research Institute, people aged 85 and older devote an average of 19% of their household expenses to health care, compared to 11% of household costs for those 65-74.1
FEDERAL RESERVE: UNWINDING WILL BE GRADUAL
Last Wednesday, the country’s central bank detailed how it would shrink its mammoth balance sheet. During the fourth quarter, the Fed will unload $10 billion of maturing bonds per month; in each subsequent quarter, the monthly runoff will increase by $10 billion until reaching a limit of $50 billion. Fed chair Janet Yellen said that this schedule is set in stone, barring a “sufficiently great” economic threat. The Fed made no interest rate move last week, but 12 of 16 Fed officials do project a hike before 2017 ends.1
HOME SALES RETREAT AGAIN
In August, existing home sales fell for the fourth time in five months. Resales decreased 1.7% to a seasonally adjusted annual pace of 5.35 million, a 12-month low, according to the National Association of Realtors. Two factors hindered would-be buyers: a median house price of $253,500 and a 2.1% monthly reduction in inventory (the supply of homes for sale was 6.5% greater in August 2016).2
BUILDING PERMITS UP 5.7% IN AUGUST
This good news was countered by last month’s 0.8% reduction in groundbreaking. The Census Bureau’s report on August construction activity showed the rate of issuance for permits 8.3% above where it was a year earlier; the pace of starts was 1.4% improved. Starts for single-family homes were up 17.1% in 12 months.3
It is agreed that the earlier you start saving for retirement, the better. The big question on the minds of many savers, however, is: “How am I doing?” This article will show you some rough milestones to try and reach. (Keep in mind that you may need to save more or less than these amounts based on your objectives and lifestyle and income needs.)
At age 30, can you have the equivalent of a year’s salary saved? Some 30-year-olds have the equivalent of a year’s salary in debt, it is true; the thing is, you can probably manage debt and save and invest to build wealth simultaneously. One way to plan to reach this goal is to save (and invest) about a fifth of your after-tax income beginning at age 25. That assumes you start at 25 with no savings; if you start saving and investing earlier, the goal may be easier to attain.1
At age 40, will your savings be triple that of your yearly earnings? The average American currently saves about 3.5% of his or her income. Can you save 3.5% of what you earn at 25 or 30 and build a six-figure retirement fund by your 40th birthday? Perhaps, if you are an absolute investing wizard or start your career with a salary north of $100,000. Otherwise, saving and investing 10-15% of what you earn annually will be crucial in planning to reach this goal.1,2
INFLATION SPIKED IN AUGUST
Economists had long assumed consumer prices would rise abruptly at some point, and they certainly did last month. The Consumer Price Index increased 0.4% in August, its biggest one-month advance since its 0.6% gain in January. Higher gas prices were a major influence: they rose 6.3% for August. Core inflation was up 0.2% after four straight 0.1% monthly gains. Yearly consumer inflation is now at 1.9%. Wholesale inflation, as measured by the Producer Price Index, rose 0.2% in August to an annualized pace of 2.4%.1,2
RETAIL SALES STAGE A LATE-SUMMER RETREAT
Americans cut back on retail purchases during August. Retail sales declined 0.2%, a disappointment after the 0.3% July gain. The silver lining: the core number, minus gasoline and auto buying, rose 0.2%.2
CONSUMER SENTIMENT INDEX DIPS SLIGHTLY
The University of Michigan’s twice-monthly barometer of the American consumer’s mood fell 1.5 points in its initial September edition. At a mark of 95.3, the index was still 4.5% above where it was a year earlier. While the index’s current conditions component hit its highest level in nearly 17 years, 9% of survey respondents believed that Hurricanes Irma and Harvey had hurt the overall economy.3
How could you retire in your fifties by choice? You will need abundant retirement savings and ways to access your retirement assets that lessen or avoid early withdrawal penalties. You may also need to have other, sometimes overlooked, components of retirement planning in place.
There are ways to tap retirement savings accounts before 60. True, the I.R.S. discourages this with 10% penalties on traditional IRA withdrawals prior to age 59½ and withdrawals from many employee retirement plans before age 55½ – but those penalties may be skirted.1
An IRA or workplace retirement account funded with pre-tax dollars can be converted to a Roth IRA funded with post-tax dollars. While the conversion is a taxable event, it allows a pre-retiree more potential to retrieve retirement savings early. Before age 59½, you are permitted to make tax-free, penalty-free withdrawals of the amount you have contributed to a Roth IRA (as opposed to the Roth IRA’s earnings). After age 59½, you can withdraw contributions and earnings tax free provided you have owned the Roth IRA for five years. For Roth IRA conversions, the 5-year period begins on January 1 of the year in which the conversion happens. Roth conversions may be a good move for some, but a bad move for those who live in high-tax states with plans to retire to a state with lower income taxes.1,2
When you buy a home, are you investing? If you buy it to flip it or buy it as a rental property, the answer is yes. If you buy a home simply to live in it, the answer may be no.
Your home is an expression of your lifestyle, a wonderful setting for your life, and a place you can enjoy in privacy and comfort. As an investment, though, it is essentially illiquid, and its rate of return is no sure thing.
Home values do not automatically increase with time. Buyers learned that lesson in the Great Recession. Simply using the S&P/Case-Shiller home price index as a barometer, house prices today are roughly where they were in 2007 – it has taken the residential real estate market that long to recover from the mortgage meltdown.1
Imagine your retirement dreams put on hold or compromised, your savings and investment accounts reduced, and your loved ones incommunicative or at odds with each other. This terrible state is reality for families ravaged by addiction.
OxyContin, heroin, and other opioids can cost an addict hundreds of dollars per day. Where will an addict find the thousands of dollars needed, over time, to pay for their habit? No family wants to consider the possibilities.1
Treating opioid addictions can take money equivalent to a year’s salary. A stay at a first-class treatment center can cost $30,000-$65,000 a month. Even outpatient counseling can cost $5,000-$10,000. The drugs may still exert their grip on the addict afterwards.2,3
Retirement Calculators May Not Add in Everything
You may turn to an online retirement calculator for a simple snapshot of your retirement income needs and your retirement savings progress. These calculators are everywhere and so easy to use – but just how realistic are their projections?
In truth, not very. They fail to consider many variables. While they may have you enter your present salary, the percentage of income you want to replace in retirement, your estimated retirement date, and the rate of return for your investments, they ignore things like taxes (especially with regard to retirement account withdrawals), relocation expenses, health care costs, inflation, and your Social Security claiming strategy. Even their basic calculations can vary: input the same data into three different calculators, and the amount that you are supposed to save for retirement can vary by as much as $300,000-$400,000. So, use one or more retirement calculators to run some numbers, but confer with a financial professional you trust to tackle planning for the factors these basic tools cannot address.1
EQUIFAX BREACH MAY IMPACT 44% OF AMERICANS
Thursday evening, credit reporting agency Equifax disclosed that hackers had raided its databases this spring, accessing the personal information of up to 143 million people. Equifax believes that about 209,000 credit card numbers may have been collected in the process, plus numerous Social Security and driver’s license numbers. Consumers can visit equifaxsecurity2017.com to see if they may have been affected by the breach. Equifax is offering a free year of identity theft insurance and credit monitoring for those at risk.1
SERVICE SECTOR EXPANDS FASTER
At an August reading of 55.3, the Institute for Supply Management’s service sector purchasing manager index was 1.4 points improved from its July mark, indicating a quicker pace of expansion for non-manufacturing firms in the eighth month of the year. Readings above 50 indicate sector growth.2
DEBT CEILING RAISED, WITH DECEMBER 15 DEADLINE
Congress passed a bill to lift the federal borrowing limit Friday, after the White House and congressional leaders agreed to extend the prior, late-September deadline. This measure approves two-and-a-half more months of funding for the federal government. A $15 billion aid package for hurricane victims was also included in the legislation.3
Imagine finding out that your computer has been hacked. The hackers leave you a message: if you want your data back, you must pay them $300 in bitcoin. This was what happened to hundreds of thousands of PC users in May 2017 when they were attacked by the WannaCry malware, which exploited security flaws in Windows.
How can you plan to avoid cyberattacks and other attempts to take your money over the Internet? Be wary, and if attacked, respond quickly.
Phishing. This is when a cybercriminal throws you a hook, line, and sinker in the form of a fake, but convincing, email from a bank, law enforcement agency, or corporation, complete with accurate logos and graphics. The goal is to get you to disclose your personal information – the crooks will either use it or sell it. The best way to avoid phishing emails: stick to a virtual private network (VPN) or extremely reliable Wi-Fi networks when you are online.1
On September 7, credit reporting agency Equifax dropped a consumer bombshell. It revealed that cybercriminals had gained access to the personal information of as many as 143 million Americans between May and July – about 44% of the U.S. population. The culprits were able to retrieve roughly 209,000 credit card numbers, in addition to many Social Security and driver’s license numbers.1
How can you find out if you were affected? Visit equifaxsecurity2017.com, the website Equifax just created for consumers. There, you can enter your last name and the last six digits of your Social Security number to find out. (Having to enter the last six digits of your SSN hints at how significant this breach is.)2
If you are among the consumers whose data was hacked, Equifax will ask you to return to equifaxsecurity2017.com to enroll in an identity theft protection product, TrustedID Premier. This program will provide you with free credit monitoring for a year. (The lingering question is whether your data could be used easily by criminals afterward.)1,2
THE MONTH IN BRIEF
August brought an overwhelming natural disaster, a threat of war from a foreign dictator, and violence in the streets – so it is little wonder stocks went sideways. The S&P 500 eked out an advance of 0.05% for the month. Economically speaking, there were some positives: improvements in consumer confidence and consumer spending, continued strength in manufacturing, and a comeback for retail sales. The economies of the eurozone and the Asia-Pacific region showed more upside. In the commodities market, gold and gasoline grew more valuable, while the price of oil fell. A seller’s market seemed firmly in place in residential real estate. Investors hung on through the turbulence.1
DOMESTIC ECONOMIC HEALTH
Americans spent more this summer and felt optimistic about the state of economy. The evidence? The July gain in personal spending and the lofty reading on the Conference Board’s August consumer confidence index. Consumer spending improved 0.3% in July as consumer incomes rose 0.4%. That seemingly had an effect on retail sales, which, in July, had their best month in some time: they advanced 0.6%. The CB index went north to a mark of 122.9, up 2.9 points from its notably high July reading. (The University of Michigan’s consumer sentiment index finished August at 96.8, above its final July reading of 93.4, but slightly lower than its preliminary August mark of 97.6.)2,3
Another important index registered an impressive reading in August: the Institute for Supply Management’s purchasing manager index for U.S. manufacturing. Already at 56.3 in July, it improved to 58.8 last month, indicating strong expansion for the factory sector. At the start of August, ISM’s non-manufacturing sector PMI bore a July reading of 53.9, 3.5 points lower than its June mark; that was still well over the 50-level, delineating growth from contraction.2,4
SEPTEMBER BRINGS A MEDIOCRE JOBS REPORT
The Department of Labor’s latest employment snapshot shows payrolls expanding by 156,000 net new jobs in August. This was a retreat from the job gains of 200,000+ reported in both June and July. The headline jobless rate ticked up to 4.4%; the U-6 rate, which factors in the underemployed, held steady at 8.6%. Annualized wage growth remained stuck at 2.5%.1
POSITIVE NEWS FROM MAIN STREET
Climbing once again, the Conference Board’s consumer confidence index ascended 2.9 points to 122.9 in August. That topped the forecast of economists surveyed by MarketWatch, who anticipated a 122.5 reading. Additionally, the Department of Commerce said that consumer spending advanced 0.3% in July, up from 0.2% in June. Household incomes rose 0.4% in July; they were unchanged in June.2
ISM: FACTORY SECTOR IN FINE SHAPE
Can the Institute for Supply Management’s manufacturing purchasing manager index top 60 soon? It rose 2.5 points to 58.8 in August, indicating a high degree of expansion. This was the best reading on the index since April 2011. So far in 2017, the factory PMI has averaged a reading of 56.7.3
There are three degrees of estate planning: advanced, basic, and none at all. Basic is better than none, but elementary estate planning can still leave something to be desired. While appropriate documents may be in place, they may not be able to fully convey what you really want to do with your estate.
Have you communicated your wishes to your heirs, in writing? Cut-and-dried, boilerplate legal forms will hardly do this for you.
In a wealth transfer strategy (as opposed to a basic, generic estate plan), you share your values and goals in addition to your assets. You hand down your wealth with purpose, noting to your beneficiaries and heirs what should be done with it. You also let them know how long the transfer of assets may take. This way, expectations are set, and you reduce the risk of your beneficiaries and heirs being unpleasantly surprised.
SUMMER SLOWDOWN HITS HOUSING MARKET
Low inventory and high prices are taking a toll on existing home sales. They declined 1.3% in July, according to the National Association of Realtors, making a second straight monthly retreat. In the past 12 months, the number of existing homes on the market has shrunk 9.0%, while the median sale price has risen 6.2% to $258,300. While resales were up 2.1% year-over-year, the seasonally adjusted annual sales rate reached a 2017 low in July. Census Bureau data showed new home sales falling 9.4% last month.1,2
GASOLINE FUTURES RISE, BUT OIL FUTURES FALL
On the NYMEX, unleaded gasoline gained 2.6% last week, with prices briefly reaching a 5-month peak. Even as oncoming Hurricane Harvey posed a threat to Gulf Coast oil output, crude lost 1.6% last week to settle at $47.87 Friday.3
ORDERS FOR DURABLES DECLINE
Hard goods orders retreated 6.8% for July; the decrease was 7.8% with defense orders factored out. However, core orders (which do not include transportation equipment purchases) were up 0.5% last month.1
We have seen some uneasy times lately. Uneasiness impacts the financial markets. When it does, we all need to keep some long-term perspective in mind. Those who race to the sidelines and exit equities may regret the choice when crises pass.
Wall Street loves calm. Traders literally want “business as usual,” every day. If breaking news disrupts that calm, it can rattle the market – but every investor must realize that these disruptive events are exceptions to the norm. (If the major Wall Street indices rollercoastered dramatically every day, who would invest in stocks to begin with?)
History shows how the market has bounced back in the past. You probably know the old financial industry saying: past performance is no guarantee of future results. That is certainly true, but it is also true that the major indices have staged some impressive recoveries when confronted with turbulence.
RETAIL SALES RISE IMPRESSIVELY
In July, they were up 0.6% – the largest monthly increase seen so far in 2017. This gain suggests the economy has gathered momentum in the third quarter. Core retail sales (which do not include food, construction, gas, and auto buying) advanced 0.6% for July as well. The Department of Commerce also revised some spring numbers: retail purchases improved 0.3% in June and were flat a month earlier.1
AN UPTURN FOR CONSUMER SENTIMENT
The University of Michigan’s monthly gauge of how U.S. households view current and future economic conditions rose 4.5 points in its preliminary August edition to 97.6. Not since January has the index been so high. In the past 12 months, it has gained 8.7 points.2
HOUSING STARTS RETREAT
Groundbreaking decreased 4.8% in July, according to the latest monthly Census Bureau snapshot of American construction activity. Building permits were also down for the month, with the pace of permits issued declining by 4.1%.3
Are you on track to save $1 million or more for retirement? If you are 50 or younger, you may need that much in savings to generate the kind of retirement income you prefer.
Personal finance website NerdWallet recently did some math concerning this very objective. What kind of sustained savings effort would a 30-year-old with nothing invested need to make to amass $1 million in retirement savings by age 67, assuming a consistent 6% annual return? (Keep in mind, a tax-advantaged retirement account is not the only potential source of retirement savings.)1
According to NerdWallet’s projection, a 30-year-old earning $40,000 a year would have to set aside 18.3% of each paycheck toward that goal. The percentage drops to 12.2% for a 30-year-old earning $60,000 annually, and 9.2% a year for a 30-year-old with an $80,000 salary.1
How can you get your kids back in school mode? Unscheduled summer days can lead to unstructured mornings and frustration for families when school days roll around. You may be wondering what you can do to bring back some organization in the mornings.
Regular sleep can really help. If your kids can go to bed at a consistent time starting 10-14 days before the first day of school, that may help them to get up regularly (and early) again, so you can avoid a frenzied morning, and consequently, they can avoid a hurried bike ride or a race to the school bus.
Taking a bath or a shower at the same time every day should be another goal. If that habit has been lost, reintroduce it as school nears. Have your kids take a bath at the same time each night or a shower at the same time each night or morning.
Address These Retirement Planning Priorities After 50
When you turn 50, you start to think practically about the steps of your retirement transition. A to-do list emerges of tasks to try and accomplish, as well as things to consider.
Now is the time to pour all you can into your retirement savings. As an example, say you direct $15,000 annually into your workplace retirement account from age 55 to 65. If it returns 6%, you’ll see $48,000 growth off those $150,000 in salary deferrals. An additional $198,000 sounds nice, but keep in mind that your annual contribution ceiling rises to $24,000 starting at age 50. Contribute $24,000 annually to that retirement account returning 6% across those ten years, and you will have an added $316,000 for your “second act” including $76,000 in growth. Whittling down your debt should also be a goal. About 30% of seniors have outstanding home loans, and the average household headed up by seniors age 65-69 carries nearly $7,000 in monthly credit card charges. Are your investments too bullish? It may be time to reduce the amount of equities in your portfolio. Thanks to the recent rally on Wall Street, there may be a higher percentage of your invested assets in stocks than you assume, and that could expose you to more risk than you prefer.1
TAME INFLATION PERSISTS
Can the Federal Reserve justify another interest rate hike in the second half of 2017? Given weak inflation pressure, maybe not. The central bank has set a 2% yearly inflation target, but the Consumer Price Index rose only 0.1% in July, resulting in a 1.7% year-over-year gain. Core consumer prices rose 0.1% for a fourth consecutive month in July, so annualized core inflation was also at 1.7%. The Producer Price Index fell 0.1% last month; analysts polled by Briefing.com expected a 0.2% rise.1,2
ANALYSIS: EARNINGS GROW AT A 10% PACE
More than 90% of companies in the S&P 500 have now reported second-quarter results. FactSet, the respected financial analytics firm, now projects a blended earnings growth rate of 10.2% for the S&P 500 for the second quarter, along a with 5.1% blended sales growth rate. S&P component firms generating less than 50% of their sales outside the U.S., however, are set to record 14.0% blended earnings growth and 6.0% blended revenue growth.3
THE PRICE OF GOLD RISES
At Friday’s close, the yellow metal hit a 2-month high of $1,294.00 on the COMEX as investors looked away from equities. Gold gained 2.3% on the week.4
As you start a family, you start to think about certain financial matters. Before you became a mom or dad, you may not have thought about them much, but so much changes when you have kids.
Parenting presents you with definite, sudden, financial needs to address. By focusing on those needs today, you may give yourself a head start on meeting some crucial family financial objectives tomorrow. The to-do list should include:
Life & disability insurance coverage. If one or both of you cannot work and earn income, your household could struggle to meet education expenses, medical expenses, or even paying the bills. Disability insurance payments could provide some financial support in such an instance. Some employers provide it, but that coverage often proves insufficient. Every fifth American has a disability, and more than 25% of 20-year-old Americans will become disabled before reaching retirement age. One in eight working people will be disabled for five years or longer during their pre-retirement years. Could you imagine your household going that long on only a fraction of its current income?1,2
Have you ever been confused by the jargon used on Wall Street? Perhaps it is time to translate some of those esoteric stock market terms into plain English.
Blue chips: This term refers to stocks that have a history of consistently strong dividend payments, issued by large corporations with solid management. In addition, this is also a nickname for the Dow Jones Industrial Average, which includes 30 companies that usually deserve such a label.
Hedge: A position you take with your money or investments to try and counteract or control potential losses. An investor who owns a lot of bank stocks, for example, might hedge by also investing significantly in utilities shares. The two industries have little, if any, relationship, so if stocks suffer in one industry due to a trend or breaking news, the other may not be hurt.
Moving average: This is simply the average, per-share price of a stock within a set period – it could be 50 days, 100 days, or 200 days. Stock market indices like the Dow and Nasdaq have moving averages, too, which are measured in the same way.
LATEST JOBS REPORT BRINGS GOOD NEWS
U.S. payrolls swelled with 209,000 net new workers in July, according to the Department of Labor. That beat the 183,000 estimate by analysts surveyed by Reuters. About 53,000 of the hires were at restaurants and bars, with another 49,000 in the professional and business services category. While yearly wage growth remained at 2.5%, the headline jobless rate ticked back down to 4.3%. The U-6 rate (which includes the underemployed) stayed at 8.6%.1
A MEAGER GAIN IN CONSUMER SPENDING
The 0.1% June advance reported by the Department of Commerce matched the (low) expectations of economists surveyed by MarketWatch. Consumer incomes were flat in June; the same group of forecasters thought they would improve 0.3%. Personal spending had increased 0.2% in May, with income up 0.3%.2
ISM PMIS SHOW CONTINUED BUSINESS GROWTH
In June, both purchasing manager indices at the Institute for Supply Management were above 57. Their July readings were lower, but still indicated significant sector expansion as both numbers were well above 50. The manufacturing PMI fell 1.5 points to 56.3, and the service sector PMI dropped 3.5 points to a mark of 53.9.3
Debit card data theft has surged lately. According to FICO’s Card Alert Service, the number of businesses or ATM locations where debit cards were hacked rose 26% from 2015 to 2016. Additionally, the number of compromised cards has steadily risen during this decade.1
Crooks can attach skimmers to ATMs or point-of-purchase devices in seconds. These counterfeit card readers instantly record banking data ingrained on a debit card’s magnetic stripe. You probably have one of the new EVM chip cards, but if you happen to insert or slide your card through an older ATM that cannot accept the newer cards, your data could still be at risk.2
Bankrate reports that chip skimmers are now surfacing, capable of hacking first-generation EVM chip cards relying on static data authentication. Second-generation EVM chip cards use dynamic data authentication, which makes data theft more difficult – but not impossible.2
There are now two kinds of bitcoin. A governance dispute over how to manage bitcoin transactions has prompted a spinoff of the cybercurrency: bitcoin cash. It went live on August 1, the byproduct of a bitcoin civil war.1
Bitcoin’s underlying technology begged for an upgrade this year. All bitcoin transactions have been conducted on its peer-to-peer blockchain network, which verifies and approves bitcoin payments without the need of any bank or government authority. Lately, that network has had issues, proving too slow for some bitcoin “miners” (users).2
Prior to August 1, each block on the blockchain could hold 1MB of data. That was fine, years ago, but this year, the speed of bitcoin transactions had declined to as slow as three per second, with occasional delays as transactions waited for space on an open block.3
THE MONTH IN BRIEF
The Dow Jones Industrial Average gained 2.54% in July as earnings announcements and fundamental indicators provided a lift for the blue chips and other stock market indices. Hiring and manufacturing data was particularly reassuring. Annualized inflation declined once more. Oil, gold, and other marquee commodities advanced and so did many Asia-Pacific stock benchmarks. In the real estate market, home buyers coped with slim supply and high median prices as mortgage rates crept up. Wall Street had another calm month and that suited the bulls.1
DOMESTIC ECONOMIC HEALTH
Monthly job growth again topped the 200,000 mark. The Department of Labor’s June employment report showed a gain of 222,000 hires (the most in any month since February) with wages up 0.2%, which took the year-over-year increase to 2.5%. Almost 5 million more people sought work in June than in May, so that resulted in the headline unemployment rate ticking up to 4.4%; the U-6 rate, which includes discouraged job seekers and part-time workers, increased 0.2% to 8.6%.2
More good news came from the factory sector. At a June mark of 57.8, the Institute for Supply Management’s manufacturing purchasing manager jumped an impressive 3.9 points off its May level. ISM’s service sector PMI nearly matched it, rising half a point in June to 57.4. Elsewhere in manufacturing news, federal government data showed overall durable goods orders growing by an astonishing 6.5% in June (but just 0.2% minus transportation orders). Industrial production was up 0.4% in June; manufacturing production, up 0.2%.3,4
HOUSEHOLDS ARE FEELING OPTIMISTIC
Unemployment is at a 16-year low, and the Conference Board’s consumer confidence index is near a 16-year high. It reached 121.1 in July, rising 3.8 points; analysts polled by MarketWatch expected a reading of 116.9. The University of Michigan’s consumer sentiment index rose to 93.4.1,2
HAVE HOME SALES REACHED A PLATEAU?
Last week, the National Association of Realtors announced a 1.8% June retreat for existing home sales. New home buying only advanced 0.8% for June by Census Bureau calculations. Analysts point to tight supply limiting resales and a scarcity of affordably priced new developments discouraging new home shoppers.3
GROWTH PICKED UP IN THE SECOND QUARTER
According to the Bureau of Economic Analysis, the economy expanded at an annual rate of 2.6% in Q2, with the yearly personal spending rate at 2.8%. As it presented its Q2 estimate, the BEA also revised Q1 consumer spending up from 1.1% to 1.9%.2
Whether you want to leave work at 62, 67, or 70, claiming the retirement benefits you are entitled to by federal law is no casual decision. You will want to consider a few key factors first.
How long do you think you will live? If you have a feeling you will live into your nineties, for example, it may be better to claim later. If you start receiving Social Security benefits at or after age 67 (Full Retirement Age), your monthly benefit will be larger than if you had claimed at 62. If you file for benefits at 67 or later, chances are you probably a) worked into your mid-sixties, b) are in fairly good health, c) have sizable retirement savings.
If you sense you might not live into your eighties or you really, really need retirement income, then claiming at or close to 62 might make more sense. If you have an average lifespan, you will, theoretically, receive the average amount of lifetime benefits regardless of when you claim them; the choice comes down to more lifetime payments that are smaller or fewer lifetime payments that are larger. For the record, Social Security’s actuaries project the average 65-year-old man living 84.3 years and the average 65-year-old woman living 86.6 years.1
Bitcoin. Ethereum. Litecoin. Ripple. These are just four of the cybercurrencies attracting opportunistic investors today. Are they the next big thing? Or the next big bust?
The answer to that question may vary per day, week, month, or year. These altcoins are classified as commodities, not currencies, by the Commodity Futures Trading Commission. Like all commodities, their value can quickly change.1
This spring, a bitcoin bubble popped. As 2017 unfolded, the value of a single bitcoin tripled, reaching more than $3,000 in May. Just weeks later, it was down to around $2,245, sliding roughly 25%. That tumble paled in comparison to the dive it took starting in late 2013, when its price sank from above $1,000 to about $200. After losing 80% of its value, the price then stayed around $200 for nearly three years.1
Key Medicare enrollment periods are approaching. This fall and winter, there are three periods in which Medicare beneficiaries can either enroll or disenroll in forms of coverage.
>> Oct. 15-Dec. 7, 2017: Open enrollment period. This is when you can exit Original Medicare (Part A & B) for a Medicare Advantage Plan (Part C) and change your prescription drug coverage (Part D). You can also get out of a Part C plan and go back to Part A & B during this period; although, you will certainly want a Medicare Supplement (Medigap policy) in place before you make such a move. (In most cases, that means having to pass underwriting.)1
>> Dec. 8, 2017: Annual enrollment period begins for 5-star plans. All Part C and Part D plans are assigned ratings. Beginning December 8, 2017 and ending November 30, 2018, a window opens for you to enroll in a 5-star Part C or Part D plan. You can do this once per 365 days. How do you find the 5-star plans? Visit the Medicare Plan Finder: medicare.gov/find-a-plan.2
WILL STOCKS GET AN EARNINGS BOOST?
While the first full week of the Q2 earnings season saw no pronounced rallies, there were also no shocks. By Friday’s closing bell, 20% of S&P 500 member firms had reported calendar Q2 results, and a FactSet analysis showed 77% had topped sales projections and 73% had beaten earnings-per-share forecasts – a good sign in an earnings-driven market climate. The Nasdaq Composite gained 1.19% last week and settled at 6,387.75 Friday; the S&P 500 rose to 2,472.54 after a 5-day gain of 0.54%. As blue chips fell 0.27% across five trading days, the Dow Jones Industrial Average closed at 21,580.07 Friday. All three indices hit record highs during the week.1,2
CONSTRUCTION ACTIVITY SURGED IN JUNE
According to a new Census Bureau report, housing starts rose 8.3% last month, while building permits were up 7.4%. That counteracts the 2.8% fall for starts and the 4.9% drop for permits in May.3
GOLD TOPS $1,250
Settling at $1,254.90 Friday, the yellow metal hit its highest COMEX close since June 23, up 2.2% in five days. Silver rose 3.3% last week to a Friday close of $16.46.4
A successful retirement is not merely measured in financial terms. Even those who retire with small fortunes can face boredom or depression and the fear of drawing down their savings too fast. How can new retirees try to calm these worries?
Two factors may help: a gradual retirement transition and some guidance from a financial professional.
An abrupt break from the workplace may be unsettling. As a hypothetical example, imagine a well-paid finance manager at an auto dealership whose personal identity is closely tied to his job. His best friends are all at the dealership. He retires, and suddenly his friends and sense of purpose are absent. He finds that he has no compelling reason to leave the house, nothing to look forward to when he gets up in the morning. Guess what? He hates being retired.
On the other hand, if he prepares for retirement years in advance of his farewell party by exploring an encore career, engaging in varieties of self-employment, or volunteering, he can retire with something promising ahead of him. If he broadens the scope of his social life, so that he can see friends and family regularly and interact with both older and younger people in different settings, his retirement may also become more enjoyable.
INFLATION PRESSURE WEAKENS
The Consumer Price Index was unchanged in June, according to the Bureau of Labor Statistics. That left its yearly advance at only 1.6%, nearly half a point below the Federal Reserve’s target (the core CPI was up 1.7%). After the announcement, some economists and market strategists wondered whether the Fed would rethink its plans for a third interest rate hike in 2017. The Producer Price Index rose 0.1% in June, leaving its yearly increase at 2.0%.1,2
RETAIL SALES, CONSUMER SENTIMENT INDEX DECLINE
For the second month in a row, households scaled back their retail purchases – retail sales were down 0.2% in June following a 0.1% May decline. Core sales fell 0.2% after a May retreat of 0.3%. The University of Michigan’s preliminary July consumer sentiment index lost 2.0 points off its final June mark to a reading of 93.1.1,2
A projection of rising demand and news of a pipeline shutdown in Nigeria sent the price of light sweet crude 5.2% higher in a week. WTI crude settled at $46.54 on the NYMEX Friday, its best close since July 3.3
Directly & indirectly, you might be able to save more per month than you think. Hidden paths to greater savings can be found at home and at work, and their potential might surprise you.
Little everyday things may be costing you dollars you could keep. Simply paying cash instead of using a credit card could save you four figures annually. An average U.S. household carries $9,000 in revolving debt; as credit cards currently have a 13% average annual interest rate, that average household pays more than $1,000 in finance charges a year.1
The typical bank customer makes four $60 withdrawals from ATMs a month – given that two or three are probably away from the host bank, that means $5-12 a month lost to ATM fees, or about $60-100 a year. A common household gets about 15 hard-copy bills a month and spends roughly $80 a year on stamps to mail them – why not pay bills online? Automating payments also rescues you from late fees.1
The price of long-term care insurance has really gone up. If you are a baby boomer and you have kept your eye on it for a few years, chances are you have noticed this. Last year, the American Association for Long-Term Care Insurance (AALTCI) noted that married 60-year-olds would pay between $2,000-3,500 annually in premiums for a standalone LTC policy.1
Changing demographics and low interest rates have prompted major insurers to stop offering LTC coverage. As the AALTCI notes, the number of LTC policies sold in this country fell from 750,000 in 2000 to 105,000 in 2015. Today, only about 15 insurers offer these policies at all. The demand for the coverage remains, however – and in response, insurance providers have introduced new options.1,2
Hybrid LTC products have emerged. Some insurers offer “cash rich” permanent life insurance policies that let you tap part of the death benefit to pay for long-term care. Other insurance products feature similar potential benefits.1,2
Ever hear of an SDBA? That acronym stands for self-directed brokerage account. If you are enrolled in a 401(k), 403(b), or 457 plan, you might want to see if your plan gives you this option, which is often unnoticed.
About 40% of workplace retirement plans now have SDBAs. These accounts can connect you to a wider variety of investment choices than the default ones presented in your plan, meaning potentially greater flexibility for your portfolio.1
Why are SDBAs underutilized? Simply put, they are not for every retirement saver. They are geared toward the pre-retiree who works with an investment professional and/or the investor comfortable with managing his or her level of risk. According to Aon Hewitt research, only about 3% of retirement plan participants use SDBAs – and the average account balance of those who do is around $250,000.1
When Baby Boomers Become Elders, Will Their Kids Provide Care?
Right now, millions of baby boomers provide informal, unpaid eldercare to parents in their eighties and nineties. This obligation has led some boomers to retire earlier. The Center for Retirement Research at Boston College says that men who play these caregiving roles are 2.4% less likely to stay in the workforce than their peers. Women are more likely to leave the office under such stress, and the CRR estimates that those who do balance a career and eldercare work 3-10 hours less a week and earn an average of 3% less than other working women.
Fewer middle-aged adults may be available to care for baby boomers who become elders. Divorce and geographic separation of families may worsen this dilemma. Additionally, nearly all baby boomers will be age 70 or older by 2033 – the date when the Social Security Trust Fund is projected to run dry, and a 20% reduction in Social Security benefits has been mentioned as a possible consequence. Rising nursing home costs and the financial strain of caregiving may eventually lead federal agencies and the private sector to a collaborative response to meet a pressing need for economical eldercare.1
Consider All That Traveling Could Do for You
Some domestic and foreign trips may provide an education, a chance to make a difference, even opportunities to save money. For that matter, living abroad for months or years may allow you to retire on less, and renting out (or selling) a home stateside could pad your retirement savings.
THE QUARTER IN BRIEF
After a remarkable first quarter, the stock market cooled off slightly in Q2 – but investors still saw substantial gains. Strong earnings helped take Wall Street’s collective mind off a decidedly mixed bag of economic signals. Consumers remained confident as the quarter unfolded; although hiring, inflation, and consumer spending weakened. Home sales declined, then rebounded. Overseas, factory activity in China and the eurozone showed improvement, and foreign equity benchmarks continued climbing. Many commodities took sizable Q2 losses. When the quarter ended, the bulls were still firmly in charge.1
DOMESTIC ECONOMIC HEALTH
As one quarter ends, the Bureau of Economic Analysis commonly makes its third and last assessment of the prior quarter’s economic growth (though, even this “final” estimate may be adjusted in later years). In the last week of June, the BEA announced a “final” Q1 growth number of 1.4%, which was nothing to celebrate. Would Q2 growth come in above 2%?2
Second-quarter consumer spending data from the Department of Commerce raised some concerns about reaching that percentage of growth. While April and May brought solid growth for personal incomes (0.3% in the former month and 0.4% in the latter), the gain in personal spending fell from 0.4%, in the fourth month of the year, to 0.1%, in the fifth. Retail sales, too, tailed off: after rising a robust 0.4% in April, they fell 0.3% for May.2
HIRING PICKS UP AGAIN
The Department of Labor announced some good news Friday: the creation of 222,000 net new jobs in June, the largest hiring gain in four months. Approximately 4.7 million people reentered the labor force and found work in June, a peak unmatched in 27 years of monthly data. Wages rose 0.2% for an annualized gain of 2.5%. The main unemployment rate ticked north to 4.4% as more Americans joined the job hunt; the U-6 rate, including the underemployed, increased 0.2% to 8.6%, its first rise since January.1
ISM FACTORY PMI HITS 3-YEAR PEAK
In June, the Institute for Supply Management’s globally watched manufacturing purchasing manager index improved 2.9 points to 57.8, its highest reading since August 2014. ISM’s non-manufacturing PMI rose to 57.4 after a half-point gain; its June reading signaled the 90th straight month of expansion for the country’s service sector.2,3
GOLD SETTLES AT ITS LOWEST PRICE SINCE MARCH
The yellow metal fell to a COMEX close of $1,209.70 Friday. It is now on a 5-week losing streak. The price of gold sank 2.6% last week, while the price of silver dropped 6.9%; silver ended the week down at $15.43.4
THE MONTH IN BRIEF
June brought some definite headwinds to Wall Street, but the broad stock market still advanced. The S&P 500 added 0.48% across the month, even with tech shares selling off. As anticipated, the Federal Reserve raised the federal funds rate by another quarter point. Last month was a trying one for European stocks as well as oil and many other commodities. The latest round of U.S. economic indicators contained some disappointments; though, manufacturing and home sales surprised to the upside. All in all, increased volatility, terrorist incidents, and political happenings did not have much of an effect on investor confidence.1
DOMESTIC ECONOMIC HEALTH
Hours before the June Federal Reserve policy meeting, traders put the odds of a rate hike at 99%. The central bank did not challenge that expectation. On June 14, it took the benchmark interest rate north to a range of 1.00-1.25%. As it did so, it made one unexpected move: it set a rough start date for unwinding its balance sheet. The Federal Open Market Committee’s latest policy statement said that process would begin “this year.” Initially, the Fed plans to let $6 billion in Treasury notes and $4 billion in mortgage bonds mature each month, with the amounts gradually rising to $30 billion per month in Treasuries and $20 billion per month in mortgage-backed securities.2
Judging by the latest reading on the Consumer Price Index, the Fed might have to address low inflation again. The annualized inflation rate fell 0.3% in May to 1.9%, beneath the Fed’s long-established 2% target. Through May, core consumer prices had only advanced 1.7% in a year. In contrast, producer prices were up 2.4% in 12 months, even with the headline Producer Price Index flat in May.3
Are you an owner of a thriving business or a medical or legal practice? Are you a highly paid executive? If you have children, at some point they may discern how wealthy you are – and in turn, learn how “rich” they are. How will you handle that moment? How will they handle that knowledge?
Some kids end up valuing family wealth more than others. We all know (or have heard) about children from wealthy families who grew up to become opportunistic, materialistic, and unmotivated young adults living off their parents’ largess. Other children learn to treat family money with respect and admiration, recognizing the role it plays for the family, while glimpsing its potential to help charities and the community.
What accounts for the difference? It may boil down to values. When the right values are handed down, a young adult is poised to hold wealth in high regard and receive it with maturity.
On July 6, the eve of a G-20 summit, a global trade pact planned for four years took a major step toward reality. In Brussels, Japanese Prime Minister Shinzo Abe, European Commission President Jean-Claude Juncker, and European Council President Donald Tusk unveiled a sweeping free trade treaty strengthening economic ties between east and west.1
The yet-unnamed pact is slated to take effect in early 2019, after details are finalized. It will create the globe’s largest economic area: a market of roughly 640 million people, accounting for about a third of the world economy.1,2
What is this trade accord designed to accomplish? Besides sending out what Prime Minister Abe terms “a strong message to the world,” the agreement will phase out E.U. import taxes of up to 10% on Japanese cars and trucks and Japanese tariffs of up to 30% on food exports coming from E.U. nations. European taxes on most Japanese electronics products will also be dropped as soon as the accord is in effect.1,2
HOUSEHOLD EARNINGS OUTPACE SPENDING
According to newly released Department of Commerce data, personal incomes improved 0.4% in May, but personal spending advanced just 0.1% after a 0.4% gain in April. Core consumer prices (minus food and energy costs) rose only 1.4% during the 12 months ending in May.1,2,3
WERE CONSUMERS MORE CONFIDENT IN JUNE?
By the looks of the University of Michigan’s monthly household sentiment index, no – that gauge fell 2.0 points to a mark of 95.1. On the other hand, the Conference Board’s consumer confidence index rose 1.3 points to a reading of 118.9.2,3
PENDING HOME SALES WEAKEN
A National Association of Realtors report showed housing contract activity declining by 0.8% in May. This follows a 1.7% dip for pending home sales in April.3
How long do you think you will work? Are you one of those baby boomers (or Gen Xers) who believes he or she can work past 65?
Some pre-retirees are basing their entire retirement transition on that belief, and that could be financially perilous.
In a new survey on retirement age, the gap between perception and reality stands out. The Employee Benefit Research Institute (EBRI) recently published its 2017 Retirement Confidence Survey, and the big takeaway from all the data is that most American workers (75%) believe they will be on the job at or after age 65. That belief conflicts with fact, for only 23% of retired workers EBRI polled this year said that they had stayed on the job until they were 65 or older.1
MORE HOMES MOVED IN MAY
In a pleasant surprise for economists, both new and existing home sales picked up last month. The National Association of Realtors announced a 1.1% gain for resales, with the average house for sale spending only 27 days on the market. New home buying increased 2.9% in May, resulting in an annualized gain of 8.9%. The average sale price for a new home was $406,400, a record.1
LEADING INDICATORS IMPROVE
The Conference Board’s Leading Economic Index rose 0.3% for May, following gains of 0.2% for April and 0.4% for March. Most of the index’s components were positive for May and a steepening interest rate spread, a climb for the Institute for Supply Management’s new orders index, and greater consumer optimism about business and economic conditions were major factors. The LEI was up 3.5% year-over-year through May.2
CRUDE IS ON ITS LONGEST LOSING STREAK IN 2 YEARS
WTI crude settled at $43.01 at Friday’s closing bell, down 4.4% from the end of last week. This decline marked the fifth straight weekly retreat for oil; an 8-week losing streak ended in August 2015. Oil is now in a bear market.3
Financially, Generation Y is often criticized for being risk averse & unaware. Is this truth, or is it fiction? In some instances, pure fiction. Here are some good financial habits common to millennials – habits their parents and grandparents might do well to emulate.
Millennials are good savers. Last year, Bankrate found that about 60% of American adults younger than 30 were saving 5% or more of their paychecks. Only around half of the adults older than 30 were doing so. This difference is even more interesting when you think about the overhanging college debt faced by many millennials and the comparatively greater incomes of older workers. Twenty-nine percent of millennials were saving 10% of their incomes last year, right in line with the average for other generations (28%).1
Millennials value experiences more than possessions. Data affirms this view – in a Harris Poll of millennials, 78% of those surveyed said that they would rather spend their money on an experience or an event rather than some pricy material item. In contrast, some members of Gen X and the baby boom generation have spent too much money on depreciating consumer goods, with too little to show for it.2
FED DELIVERS EXPECTED & UNEXPECTED NEWS
As Wall Street anticipated, the Federal Reserve raised interest rates on June 14. The Federal Open Market Committee voted 8-1 to take the benchmark interest rate north by a quarter-point to the 1.00-1.25% range. The Fed also said it would begin to reduce its $4.5 trillion balance sheet at some point “this year” by slowing reinvestments. As a start, it will let $6 billion per month in Treasury holdings run off, along with $4 billion per month in agency debt and mortgage-linked securities. This implies upward pressure on long-term interest rates.1,2
RETAIL SALES, HEADLINE INFLATION BOTH RETREAT
The Consumer Price Index declined 0.1% in May, noted the Bureau of Labor Statistics; core consumer inflation rose 0.1%. A bigger May decline came for retail purchases – the Census Bureau said that they fell 0.3% even with car sales factored out.3
HOUSING STARTS SLIP
The Census Bureau’s new residential construction snapshot showed groundbreaking at an 8-month low, with total housing starts down 5.5% in May. Total building permits decelerated 4.9% last month to their slowest pace since April 2016.4
We have seen a tremendous rally on Wall Street, nearly nine months long, with the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average repeatedly settling at all-time peaks. Investors are delighted by what they have witnessed. Have they become irrationally exuberant?
The major indices do not always rise. That obvious fact risks becoming “back of mind” these days. On June 15, the Nasdaq Composite was up 27.16% year-over-year and 12.67% in the past six months. The S&P 500 was up 17.23% in a year and 7.31% in six months. Performance like that can breed overconfidence in equities.1,2
The S&P last corrected at the beginning of 2016, and a market drop may seem like a remote possibility now. Then again, corrections usually arrive without much warning. You may want to ask yourself: “Am I prepared for one?”3
On Wednesday morning, futures markets put the odds at 99.6% of a June interest rate increase by the Federal Reserve. Sure enough, the central bank made a move. It raised the key interest rate by 0.25%, taking the target range for the federal funds rate to the 1.00-1.25% range. The Federal Open Market Committee voted 8-1 to hike the rate, with Minneapolis Fed President Neel Kashkari being the lone dissenter.1,2
What were the key takeaways from the latest Fed policy statement? A few are worth noting. First of all, the central bank did not change its dot-plot forecast for the rest of 2017. It still projects just one more interest rate hike before 2018 arrives. (After the rate move Wednesday, the CME Group’s FedWatch Tool put the odds of a September rate increase at 19% and the odds of a December rate increase at 45%.)2,3
Second, the Fed announced it would begin to slowly reduce its $4.5 billion holdings of Treasuries and mortgage-linked securities “this year.” Third, it lowered its inflation projection for the balance of 2017 to 1.6% from the prior 1.9%. Fourth, it projected the unemployment rate to decline to 4.3% by December.2
Can Your Life Insurance Policy Help You Out in Retirement?
Under certain circumstances, it can play a crucial financial role. Besides a death benefit, a permanent life insurance policy can accrue cash value over time (provided the premiums are paid). That cash value could prove useful in or near retirement. If you need to, you could withdraw some of it to pay for medical procedures, home improvements, long-term care, or a child’s college education. It could even provide you with additional retirement income. Moreover, distributions from a permanent life insurance policy are tax free as opposed to distributions from traditional IRAs (and some other retirement plans), which are taxed at regular rates.
There is one notable negative to all this. When you take cash value from a life insurance policy, it is not a withdrawal – it is a loan. You are borrowing against the value of your policy, and in doing so, you reduce its death benefit. You can restore the full value of the death benefit by paying back the loan in full – but that loan may carry 7-8% interest. Also, life insurance premiums and fees can be costly when weighed against other retirement savings vehicles. Dollars that fund a permanent life insurance policy are also dollars that could alternately go into your other retirement accounts, which you do not pay premiums to keep up.1
AN UPBEAT REPORT ON THE SERVICE SECTOR
The Institute for Supply Management’s May non-manufacturing purchasing manager index displayed a reading of 56.9 last week, showing expansion in U.S. service industries for an eighty-ninth straight month. Although the gauge declined 0.6 points from its April mark, it signaled a solid pace of growth. The index’s employment component rose 6.4 points to a mark of 57.8, as 15 industries added workers in May. The PMI has averaged a reading of 55.9 over the past 12 months.1
FACTORY ORDERS DECLINED IN APRIL
According to a new Census Bureau report, they decreased 0.2%. That marked their first month-over-month retreat of 2017. The 0.2% gain for March factory orders, however, was revised up to 1.0%. Orders increased by an average of 0.7% per month in the first quarter.2
ABUNDANT SUPPLY HURTS OIL
WTI crude lost 3.8% during June 5-9, tumbling to a $45.83 settlement on the NYMEX Friday. The U.S. rig count rose again last week, as it has every week for the past five months. While OPEC has vowed to reduce production by 1.2 million barrels per day, daily American oil output has increased by almost 600,000 barrels, so far, this year.3
Some young adults manage to acquire a fair amount of financial literacy. In the classroom or the workplace, they learn a great deal about financial principles. Others lack such knowledge and learn money lessons by paying, to reference William Blake, “the price of experience.”
Broadly speaking, how much financial literacy do young people have today? At this writing, some of the most recent data appears in U.S. Bank’s 2016 Student and Personal Finance Study. After surveying more than 1,600 American high school and undergraduate students, the bank found that just 15% of students felt knowledgeable about investing. For that matter, just 42% felt knowledgeable about deposit and checking accounts.1
Relatively few students understood the principles of credit. Fifty-four percent thought that having “too many” credit cards would negatively impact their credit score. Forty-four percent believed that they could build or improve their credit rating by using credit or debit cards. Neither perception is accurate.1
THE MONTH IN BRIEF
May was another good month for stocks. The S&P 500 gained more than 1%, putting its YTD advance above 7.7%. While the housing market showed some spring weakness, hiring bounced back and most other important economic indicators did not falter. Wall Street seemed little troubled by politics, terrorist incidents, data disappointments, or earnings misses. Overseas, stock benchmarks largely advanced, some impressively. Gasoline futures ascended; mortgage rates descended. Both investors and consumers seemed firmly confident.1
DOMESTIC ECONOMIC HEALTH
The Department of Labor’s latest employment report showed a rebound in job creation. While March saw just 79,000 net new jobs, that number increased to 211,000 in April. These additions left the main (U-3) jobless rate at 4.4%, a 10-year low. The U-6 rate, including the underemployed, fell 0.3% to 8.6%, another low unseen for nearly a decade. Numbers like these seemed to amount to a green light for a June interest rate hike at the Federal Reserve.2
Later in the month, however, word arrived that the Fed was more cautious about a June hike than some investors assumed. May ended with the Bureau of Economic Analysis revising the Q1 GDP number north by half a percent to 1.2%, but that was still far from impressive. Minutes from the May 2-3 Federal Open Market Committee meeting noted that FOMC members “generally judged that it would be prudent to await additional evidence” of the economy picking up before making another policy move. Still, the Fed futures market had the chance of a June rate increase at 83% in late May.3,4
JOB CREATION, JOBLESS RATE DOWN IN MAY
A day after ADP’s employment change report estimated a hiring gain of 253,000 in May, the Department of Labor’s latest jobs report told a far different story. It said employers added just 138,000 workers last month. The U-3 jobless rate fell to a 16-year low of 4.3% in May, partly because of people dropping out of the labor force. The U-6 rate, counting the underemployed, decreased to a 10-year low of 8.4%. Annualized wage growth improved 0.2% to 2.5%.1,2
CONSUMER CONFIDENCE INDEX DECLINES
The Conference Board’s monthly consumer confidence gauge remained well north of 100 in May. It came in at 117.9. The index actually descended 1.5 points from its (downwardly revised) April reading of 119.4.1
FACTORY GROWTH MAINTAINS ITS PACE
Rising a tenth of a percentage point to 54.9, the Institute for Supply Management’s manufacturing purchasing manager index showed healthy sector expansion in May. ISM last measured a sector contraction (a reading below 50) in August.3
When you see online ads or TV commercials about retirement planning, do they ever show baby boomer couples arguing? No. After all, retirement planning is about the pursuit of a happy outcome – a fun and emotionally rewarding “second act” that spouses and partners can share.
Realizing that goal takes communication. As you approach retirement, you may not be who you were at 30 or 50. You and your significant other may want different daily lives once you retire. This is a frequently ignored reality in retirement planning. In preparing to retire, you might want to consider your individual preferences and differences when it comes to these factors:
How you spend your days. What does a good day in retirement look like to you? What does it look like for your spouse or partner?
CONSUMER SENTIMENT DECLINES JUST A BIT
Ending May at a mark of 97.1, the University of Michigan’s consumer sentiment index fell 0.6 points from its preliminary reading for the month. Economists polled by MarketWatch had forecast the gauge to remain at 97.7.1
FEWER HOMES WERE BOUGHT IN APRIL
Both new and existing home sales tapered off last month. The National Association of Realtors said that resales fell 2.3% for April, while the Census Bureau announced an 11.4% retreat for new home purchases. While demand was high, tight supply reduced the number of buyers.2
FED MINUTES: Q1 SLUMP “LIKELY TO BE TRANSITORY”
With the Federal Open Market Committee expressing that exact opinion in the record of its May 2-3 meeting, investors saw little that would delay the central bank from raising interest rates in June. Still, the minutes sounded a cautious note. Fed policymakers “generally judged that it would be prudent to await additional evidence,” confirming that the winter economic slowdown was short lived prior to tightening further. The Bureau of Economic Analysis did revise its Q1 GDP estimate up to 1.2% last week, compared with an initial evaluation of 0.7%.1,3
How much will your family end up paying for college? Your household’s income may have less influence than you think – and some private colleges may be cheaper than you assume.
Private schools sometimes extend the best aid offers. Yes – it is true that the more money you earn and the more assets you have in a tax-advantaged college savings plan, the harder it becomes to qualify for financial aid. Merit aid is another matter, however; most private colleges and universities that boast major endowment funds that support healthy merit-based aid packages.
These scholarships and institutional grants – awarded irrespective of a family’s financial need – can reduce the “sticker shock” of a college education. A study from the National Association of College and University Business Officers found that grant-based aid effectively cut tuition and fees by an average of 48.6% in the 2015-16 academic year. If your child can fit into the top quarter of a college’s student population in terms of grades or achievement, merit aid may be a possibility. A college that might be your student’s second or third choice might offer him or her more merit aid than the first choice.1
CONSTRUCTION ACTIVITY SLOWED IN APRIL
Against expectations, both housing starts and building permits declined in the fourth month of the year. Newly released Census Bureau data shows a 2.5% retreat for permits and a 2.6% pullback for starts last month. The key factors: a 9.2% drop in starts for multi-family projects (which have declined for four straight months) and a 4.5% fall for single-family permits.1
INDUSTRIAL OUTPUT SURGES
Economists polled by Briefing.com expected industrial production to rise 0.3% in April, following a 0.4% advance in March. The number surprised to the upside – the Federal Reserve reported a 1.0% improvement.2
GOLD & WTI CRUDE STAGE MAJOR RALLIES
As both stocks and the dollar hit a rough patch last week, investors turned to commodities. Gold advanced 2.1% on the COMEX in five trading days, settling at $1,253.60 Friday. Oil gained a little more than 5% for the week to a Friday close of $50.33 on the belief that OPEC would extend its current production cut.3,4
When emotions and money intersect, the effects can be financially injurious. Emotions can cause us to overreact – or not act at all when we should.
Think of the investors who always respond to sudden Wall Street volatility. That emotional response may not be warranted, and they may come to regret it.
In a typical market year, Wall Street can see big waves of volatility. This year, it has been easy to forget that truth. During the first third of 2017, the S&P 500 saw only 3 trading days with a 1% or greater swing – or to put it another way, 1% swings occurred just 3.5% of the time. Compare that to 2015, when the S&P moved 1% or more in 29% of its trading sessions.1
The 1.80% May 17 drop of the S&P stirred up fear in some investors. The plunge felt earthshaking to some, given the placid climate on the Street this year. Daily retreats of this magnitude have been seen before, will be seen again, and should be taken in stride.2
Recent headlines have disturbed what was an unusually calm stock market. The political uproar in Washington may continue for weeks or months, and it could mean significant, ongoing turbulence for Wall Street.
As an investor, a retirement saver, how much will this turmoil matter to you in the long run? Perhaps, very little. There are many good reasons to remain in the market.
The earnings recession has ended, and the economy has strengthened. This past earnings season was a superb one. The first quarter of 2017 saw the biggest annualized leap in corporate profits in five years – nearly 15%, according to S&P Capital IQ. The good news hardly ends there. We may be at or near full employment – both the headline jobless rate and the U-6 rate measuring underemployment are back to where they were before the Great Recession began. Inflation has, at last, picked up, and the manufacturing and service sectors have been growing.1,2
A SOLID RETAIL SALES READING
Americans bought more in April. The pace of retail purchases hastened by 0.4% last month, and the Bureau of Economic Analysis revised the 0.2% March retreat into a 0.1% gain. Headline retail sales were up 4.5% across the 12 months ending in April. Core retail sales rose 0.3% in the fourth month of the year.1,2
INFLATION PICKS UP AS SPRING ARRIVES
After falling 0.3% for March, the Consumer Price Index rose 0.2% last month. (The major factor: a 1.1% leap for energy costs.) This increase left annualized inflation at 2.2%. The core CPI (minus food and energy prices) advanced 0.1% in April. On the wholesale front, the Producer Price Index jumped up 0.5% in April, taking its year-over-year advance to 2.5%.1,2
A GAIN FOR A CONSUMER SENTIMENT INDEX
The University of Michigan’s monthly barometer of household sentiment rose 0.7 points in its preliminary May reading to a mark of 97.7. Its consumer expectations component advanced 1.1 points to a reading of 88.1.2
Is Social Security Coming Up Short for Retirees?
The non-partisan Senior Citizens League says yes, charging that the wrong metric is being used to determine cost of living adjustments (COLAs) to retiree benefits. The federal government uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to figure various COLAs. Younger, employed people usually have lower medical expenses than older people; they also spend more money on gasoline and transportation than retirees do. Senior advocates argue that the Consumer Price Index for the Elderly (CPI-E) should be used instead of the CPI-W, especially since medical costs have risen quickly in recent years, while gasoline prices and transportation costs have fallen.
An SCL analysis estimates that if the CPI-E was the COLA yardstick, Social Security recipients would have had COLAs of 0.6% and 1.5% in 2016 and 2017 rather than 0% and 0.3%. Since 2014, the SCL has surveyed retirees annually; in each survey, about 90% of respondents said that their monthly household budgets grew by at least $39 year-over-year. In SCL’s 2017 survey, 37% of those polled said that their monthly expenses were more than $119 above where they had been a year ago. What expenses had jumped the most from last year? Medical costs and food.1
We spend much of our adult lives working, borrowing, and buying. A good credit score is our ally along the way. It retains its importance when we retire.
Retirees should do everything they can to maintain their credit rating. A FICO score of 700 or higher is useful whether an individual works or not.
For example, some retirees will decide to refinance their home loans. A recently published study from the Center for Retirement Research at Boston College noted that in 2013, 50% of homeowners older than 55 carried some form of housing debt. In 2017, it is probable that picture is unchanged. Arranging a lower interest rate on any remaining mortgage payments could bring income-challenged retirees more money each month. A strong FICO score will help them do that; a substandard one will not.1
Most retirees will want to buy a car at some point. Perhaps buying a recreational vehicle is on their to-do list. Very few car, truck, or RV purchases are all cash. A good credit score can help a retiree line up an auto loan with lower interest payments.
Fewer than 1% of Americans have their federal taxes audited. The percentage has declined recently due to Internal Revenue Service budget cuts. In 2016, just 0.7% of individual returns were audited (1 of every 143). That compares to 1.1% of individual returns in 2010.1,2
The rich are more likely to be audited – and so are the poor. After all, an audit of a wealthy taxpayer could result in a “big score” for the I.R.S., and the agency simply cannot dismiss returns from low-income taxpayers that claim implausibly large credits and deductions.
Data compiled by the non-profit Tax Foundation shows that in 2015, just 0.47% of Americans with income of $50,000-75,000 were audited. Only 0.49% of taxpayers who made between $75,000-100,000 faced I.R.S. reviews. The percentage rose to 8.42% for taxpayers who earned $1-5 million. People with incomes of $1-25,000 faced a 1.01% chance of an audit; for those who declared no income at all, the chance was 3.78%.2
NEW DATA SHOWS MORE HIRING, LESS SPENDING
Unemployment hit a 10-year low in April as payrolls swelled with 211,000 net new jobs, a rebound from the meager gains of March. The Department of Labor’s monthly report showed the headline jobless rate declining 0.1% to 4.4%; the U-6 rate measuring underemployment was at 8.6%, falling 0.3%. The latest consumer spending report from the Department of Commerce was less impressive. Personal spending was flat in March, with personal incomes up 0.2%.1,2
ISM PMIS WENT OPPOSITE WAYS IN APRIL
America’s factory sector grew at a slower rate last month than it did during March, while the country’s service sector picked up its pace of expansion. The Institute for Supply Management’s April purchasing manager index dipped to 54.8 from its previous 57.2 mark; ISM’s non-manufacturing PMI rose 2.3 points in April to 57.5.2
FEDERAL RESERVE LEAVES RATES ALONE
As expected, the central bank left the benchmark interest rate in the 0.75-1.00% target range last week. The Federal Open Market Committee felt that the poor economic growth of the first quarter was likely “transitory,” and in its view, economic activity should “expand at a moderate pace” with “gradual” monetary policy adjustments. On May 5, Fed futures traders put the odds of a June rate hike at 79%.3,4
Saving for retirement may seem a thankless task. But you may be thanking yourself later. Putting away a percentage of one’s income, money that could be used for any number of bills or luxuries, is a sacrifice made in the present in order to avoid a larger trouble down the road.
More than a quarter of seniors have no retirement savings. To be more specific, the Government Accountability Office says 29% of households headed by people 55 or older have no savings in a retirement account and no possibility of receiving an employer pension.1
Late last year, a PWC survey revealed that 37% of baby boomers had less than $50,000 in retirement assets. Just 24% of baby boomer households PWC polled had saved more than $300,000 for their “second acts.”2
What kind of future awaits boomers who have saved less than $50,000 for retirement? It is hard to say exactly what may happen to them financially, but it is possible to make some educated guesses.
THE MONTH IN BRIEF
In April, investors kept one eye on impressive corporate earnings and another on geopolitical developments in Asia and Europe. Earnings ultimately drew the most attention – the Dow Jones Industrial Average rose more than 1% for the month, while the Nasdaq Composite added more than 2%. The latest readings on some key economic indicators were disappointing, but consumer confidence and purchasing manager indices looked good. Positive economic news filtered in from both China and the eurozone. Home sales were up; mortgage rates down. Commodity futures largely struggled. All in all, the month featured more economic positives than negatives.1
DOMESTIC ECONOMIC HEALTH
An extremely bullish stock market climate and abundant consumer confidence often coincide. In April, the nation’s most-watched consumer confidence indices remained high; albeit, not as high as they were in March. The Conference Board’s index declined to 120.6, 4.3 points lower than the previous month; the University of Michigan’s household sentiment index ended the month at 97.0, one point lower than its preliminary April mark.2
CONSUMER CONFIDENCE DIPS SLIGHTLY
The University of Michigan and Conference Board consumer confidence indices descended a little last month, but remained in great shape. The CB index displayed an April reading of 120.6, down from 124.9 in March. Slipping a point from its initial April mark, the Michigan barometer fell to 97.0.1
LATEST HOUSING DATA IS MOSTLY POSITIVE
New home sales rose 5.8% in March, the Census Bureau noted last week; headline sales were 15.6% improved from a year earlier. The latest 20-city S&P/Case-Shiller home price index (January) showed 5.8% average yearly house price appreciation, up from 5.6% in December. Pending home sales retreated 0.8% in March, the National Association of Realtors reported.1,2
FIRST QUARTER SAW LITTLE ECONOMIC GROWTH
According to the Bureau of Economic Analysis, America’s economy expanded at a pace of 0.7% in Q1, well below the 2.1% growth seen in Q4. Economists polled by MarketWatch had projected a 0.8% Q1 GDP reading.1
If only money came with instructions. If it did, the route toward wealth would be clear and direct. Unfortunately, many people have inadequate financial knowledge, and for them, the path is more obscure.
Are most people clueless about financial matters? That depends on what gauge you want to use to measure financial knowledge. The U.S. ranked fourteenth in Standard & Poor’s 2015 Global Financial Literacy Study, with just 57% of the country’s population estimated as financially literate.1
Obviously, the other 43% of Americans have some degree of financial understanding – but it is mixed with a degree of incomprehension. Witness some examples:
EXISTING HOME SALES HIT A 10-YEAR PEAK
Rising 4.4% for March, resales surpassed expectations – analysts polled by Reuters projected a gain of 2.5%. The National Association of Realtors said that sales were 5.9% improved from a year before, and that put them at their best level since February 2007, even with existing home inventory 6.6% slimmer than in March 2016.1
CONSTRUCTION ACTIVITY WANES
Department of Commerce data showed a 6.8% reduction in housing starts in March. Even with that fall, starts were up 9.2% in 12 months. Building permits rose 3.6% last month, resulting in a 17.0% annualized increase.2
LIGHT SWEET CRUDE SLIDES 7% IN 5 TRADING DAYS
WTI crude settled at $49.62 Friday, 7.4% below where it had closed a week earlier. One influence was a Baker Hughes report showing that the number of active rigs had increased for a fourteenth consecutive week.3
Some people mistake investing for financial planning. Their “financial strategy” is an investing strategy, in which they chase the return and focus on the yield of their portfolio. As they do so, they miss the big picture.
Investing represents but one facet of long-term financial planning. Trying to build wealth is one thing; trying to protect it is another. An effort must be made to manage risk.
Insurance can play a central role in wealth protection. That role is underappreciated – partly because some of the greatest risks to wealth go unnoticed in daily life. Five days a week, investors notice what happens on Wall Street; the market is constantly “top of mind.” What about those “back of mind” things investors may not readily acknowledge?
PRICES DECLINE IN MARCH
In March, the Consumer Price Index retreated for the first time in 13 months. Its 0.3% dip left annualized consumer inflation at a moderate 2.4%. Fuels, autos, and groceries have all become less expensive recently, according to Bureau of Labor Statistics data. Core consumer prices were up 2.0% in the year ending in March. The Producer Price Index fell just 0.1% in March, with the yearly PPI gain left at 2.3%.1,2
RETAIL SALES FALL
March’s 0.2% decrease followed a 0.3% pullback in February. The silver lining? Minus gas and vehicle sales, retail sales were up 0.1% last month. Core retail sales were flat for March.2
AN IMPROVEMENT FOR CONSUMER SENTIMENT
Rising to an initial April reading of 98.0, the University of Michigan’s consumer sentiment index improved 2.1 points from its final March level. The index’s current conditions component increased 2.0 points to an outstandingly high 115.2.2
Why You Might Not Want a Lump-Sum Retirement Payout
Do you have the option of receiving your retirement money as a lump sum? You may want to turn that choice down. A new MetLife study, Paycheck or Pot of Gold, warns of the “lottery effect” that can occur when all that money makes its way into a household at once. Surveying more than 1,050 retirement plan participants who had taken lump-sum payouts, MetLife found that 21% had already used up 100% of that money; on average, it had disappeared in less than six years.
Like a lottery winner bereft of financial counseling, a recipient of a lump-sum retirement payout can too easily find ways to part with those dollars. What did the respondents to the MetLife survey do within a year of taking their lump sums? In some cases, the money was practically spent: 27% used the funds to attack debt, and 20% said that they made home improvements. On the other hand, 22% gave some of the money away (sometimes to family members and friends), and 12% bought a new car or took a major vacation. Looking back, 31% lamented some of their buying and spending decisions in the first year after taking the lump sum, and 23% regretted financial gifts they had made. Education about the merits and demerits of lump-sum payouts may be insufficient – in the survey, only 45% of pension plan participants offered the choice between a lump sum or a lifelong income stream remembered being given a comparison of the two options.1
In the first quarter of 2017, the bull market seemed unstoppable. The Dow Jones Industrial Average soared past 20,000 and closed at all-time highs on 12 consecutive trading days. The Nasdaq Composite gained almost 10% in three months.1
An eight-year-old bull market is rare. This current bull is the second longest since the end of World War II; only the 1990-2000 bull run surpasses it. Since 1945, the average bull market has lasted 57 months.2
Everyone knows this bull market will someday end – but who wants to acknowledge that fact when equities have performed so well?
You can probably envision how most of your retirement money will be spent. Much of it will be used on living expenses, health care expenses, and, perhaps, debt reduction. Beyond the basics, you will unquestionably reserve some of those dollars for grand adventures and great experiences. If your financial situation permits, you may also contribute to charity.
You just have to remember that your retirement fund is not a bottomless well. If outflows begin to exceed inflows (that is, you repeatedly withdraw more than you make back), you will face a serious financial problem.
With that hazard in mind, be wary of these four spending sieves. Some retirees fall prey to them, and all four can potentially reduce a retirement fund at an alarming rate.
COMPANIES ADDED FEWER WORKERS IN MARCH
Just 98,000 net new jobs were created last month, and some analysts think Winter Storm Stella may have held hiring back. Even so, the Department of Labor’s latest employment report showed the U-3 jobless rate decreasing 0.2% to 4.5%; the broader U-6 rate fell 0.3% to 8.9%. The big factor in both declines: 326,000 people leaving the ranks of the unemployed. If all this seems incongruous, consider that the Bureau of Labor Statistics compiles data from two separate surveys: one focusing on payroll growth; the other, on the employment status of individuals.1
STRONG EXPANSION FOR SERVICE, FACTORY SECTORS
Another month, another wave of growth for industry and retail businesses – this was the tale told by the two purchasing manager indices at the Institute for Supply Management. For March, ISM’s service sector PMI came in at 55.2; its factory PMI, at 57.2. The services PMI lost 2.4 points from its February mark; the factory PMI, 0.5 points. Still, these readings were well above the crucial 50 level.2
FED MAY START TO REDUCE ITS BALANCE SHEET
According to the minutes of the March Federal Reserve policy meeting, most Federal Open Market Committee members believe that the central bank should begin shrinking its vast portfolio of mortgage-backed securities and Treasuries later in 2017. The minutes noted that whether the FOMC decides to phase out or halt reinvestments, the shift in balance sheet policy “should be communicated…well in advance of an actual change.”3
Some spouses share everything with each other – including the smallest details of their personal finances. Other spouses decide to keep some individual financial decisions and details to themselves, and their relationship is just fine.
Just as a marriage requires understanding, respect, and compromise, so does the financial life of a married couple. If you are marrying soon or have just married, you may be surprised (and encouraged) by the way your individual finances may and may not need to change.
If you are like most single people, you have two or three bank accounts. Besides your savings account and your checking account, you may also have a “dream account” where you park your travel money or your future down payment on a home. You can retain all three after you marry, of course – but when it comes to your expenses, you have a fundamental decision to make.
Buying or selling income property has definite tax consequences. A taxpayer should clearly understand them, whether he or she intends to acquire a property or put one on the market.
A sale of income property incurs either a capital gain or loss. If you profit from the sale of income property, that profit is considered fully taxable by the Internal Revenue Service. Fortunately, if you have owned that property for at least a year, you will pay only capital gains tax on those profits rather than income tax.1
Your capital gain is determined by subtracting the adjusted basis of the property (i.e., the price you paid for it, plus the total of any renovations, closing costs, and eligible legal fees) from the sale price. For most taxpayers, the capital gains rate is but 15%. If you sell an investment property for a capital gain of $30,000 and your capital gains rate is 15%, you will pay $4,500 of capital gains tax from the sale.1
THE MONTH IN BRIEF
Stocks went sideways rather than north in March, with the S&P 500 losing just 0.04%. The Federal Reserve made another quarter-point interest rate move, and overseas, the United Kingdom initiated Brexit proceedings. While new data showed weak consumer spending, consumer optimism remained high and hiring was once again strong. A subpar month for commodities did bring major gains for two energy futures. In the housing market, existing home sales decelerated, while new home sales picked up. A little volatility did not upset the primarily bullish outlook on Wall Street.1
DOMESTIC ECONOMIC HEALTH
On March 15, the Federal Reserve felt confident enough in the economy to raise the benchmark interest rate to the 0.75%-1.00% range. The central bank left its 2017 dot-plot unchanged – its forecast still calls for a total of three rate hikes this year.2
Last month, most of the major indicators affirmed the health of the economy. The only question mark concerned household spending, and the 0.1% February gain may have just been an aberration. Consumer incomes did increase 0.4% in February, so it appeared households were pocketing more of what they had made; in fact, there was only a 0.1% February rise in retail sales. Speaking of consumer spending, the Bureau of Economic Analysis revised fourth-quarter growth up to 2.1% as the month ended; even with that upgrade to the Q4 GDP number, the economy grew just 1.6% last year, a full percentage point less than in 2015.3,4
THE QUARTER IN BRIEF
The opening quarter of 2017 was a historic one for Wall Street as the Dow Jones Industrial Average topped 20,000 for the first time. Equities rallied through January and February, then lost momentum in March; even so, the S&P 500 had gained 5.53% YTD when the quarter ended. The Federal Reserve raised the federal funds rate for only the third time in a decade, in response to strengthening inflation pressure and other signals of economic acceleration. Consumer confidence remained high. Commodities had a decidedly mixed quarter. New home sales improved, while existing home sales tapered off. The U.K. took another step toward its Brexit; the U.S. left the Trans-Pacific Partnership. Wall Street kept its hopes up for tax reform and lighter business and banking industry regulation.1,2
DOMESTIC ECONOMIC HEALTH
As the stock market climbed, so did the Conference Board’s consumer confidence index. By March, it had reached an astonishingly high mark of 125.6. The University of Michigan’s household sentiment index declined from 98.5 to 96.9 across the quarter, but it remained well above its historical average of 86.0.3,4
Factory and service sectors expanded nicely during Q1, according to the Institute for Supply Management. The Arizona-based organization’s manufacturing purchasing manager index was at 56.0 in January, 57.7 in February, and 57.2 in March. Its service sector PMI (the March number was not available at this writing) came in at 56.5 in January and 57.6 in February. All these numbers indicate solid growth.5,6
PERSONAL SPENDING SLOWS
Consumers apparently chose saving over spending in the second month of the year. Last week, a Department of Commerce report noted only a 0.1% gain for personal spending in February. That happened even with personal incomes rising 0.4%, nearly matching the 0.5% January advance. In other news concerning personal spending, the Bureau of Economic Analysis raised its estimate of fourth-quarter GDP to a final reading of 2.1% from the previous 1.9%.1
HOUSEHOLDS MAINTAIN THEIR OPTIMISM
The Conference Board’s much-watched consumer confidence index came in at 125.6 for March, soaring 9.5 points to a level unseen since December 2000. Economists polled by Reuters expected the index to descend slightly to 114.0. Losing 0.7 points from its preliminary March result, the University of Michigan’s household sentiment index remained high at 96.9.1,2
A BOOST FOR PENDING HOME SALES
Housing contract activity increased 5.5% in February by the estimate of the National Association of Realtors, more than reversing January’s 2.8% decline. The latest S&P/Case-Shiller 20-city home price index (January) showed a 0.2% seasonally adjusted monthly gain and a 5.7% year-over-year improvement.1
Every day, people die intestate. In legalese, that means without a will. This opens the door for the courts to decide what happens with their estates.
When no valid will exists, state intestacy laws dictate how assets are distributed. These laws divide an estate evenly (or equitably) among heirs. Any assets held in joint tenancy go to the joint owner. Assets held in a trust transfer to the trust beneficiaries (with spouses getting a share of those assets in some states). Community property goes to a spouse or partner in community property states.1
Simple, right? Unfortunately, the way assets transfer under these laws may not correspond to the wishes of the deceased person. Did the decedent want some of his or her estate to go to a charity or a person close to them? These laws will not allow that. State law will also decide who the executor of the estate is, since the decedent never named one.2
You plan for retirement with expectations in mind. You hope to enjoy a certain quality of life, with sufficient income resulting from smart financial choices. Ideally, your future unfolds as planned.
But what if the unexpected happens? Will you have the right insurance in place to deal with it?
Insurance matters more in retirement planning than you may think. It is seldom “top of mind” in retirement planning conversations, but the right coverage could help you maintain some financial equilibrium in the face of sudden money pressures.
A life insurance payout could provide income for a surviving spouse. Thanks to late-night TV commercials marketing small funeral insurance policies, many retirees associate life insurance benefits with paying off burial costs. Benefits from larger policies can potentially accomplish much more.
Suppose a 75-year-old widow receives a $500,000 death benefit from a policy purchased by her late spouse. An income stream could be arranged from that death benefit, with the widow receiving $20,000 annually from that lump sum (or more) into her nineties. The payout could also be invested.