Economic Updates & Financial Articles
- Weekly Economic Update - 6/26/2017
- Monthly Economic Update - June 2017
- Quarterly Economic Update - 1Q 2017
Retirement in Sight Newsletter:
- Retirement In Sight - June 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
- Are Millennial Women Saving Enough for Retirement? - 3/27/2017
- The Federal Reserve Raises Benchmark Interest Rate - 3/20/2017
- Key Estate Planning Mistakes to Avoid - 3/20/2017
- Should the Self-Employed Plan to Work Past Age 65? - 3/13/2017
- The 60-Day IRA Rollover Rule - 3/13/2017
- Building an Emergency Fund - 3/6/2017
- Should Women Strive to Work Past 62? - 2/27/2017
- Using an IRA Trust - 2/27/2017
- Little Things That May Help Your Retirement Saving - 2/20/2017
- What Could You Do With Your Tax Refund? - 2/13/2017
- Worried About What Might Happen to Bonds? - 2/13/2017
- Annual Tax Guide - A Guide to 2017 Tax Law Changes (and More) - 2/13/2017
- Managing Money Well as a Couple - 2/6/2017
- Could Dodd-Frank Soon Disappear? - 2/6/2017
- Life Insurance Before Age 40 - 1/30/2017
- What Does Your Home Insurance Policy Cover? - 1/23/2017
- Retirement Account Limits for 2017 - 1/23/2017
- How Much Will You Spend When You Retire? - 1/16/2017
- Saving $1 Million for Retirement - 1/9/2017
- Could Education Debt Shrink Your Social Security Income? - 1/2/2017
- Could You Create Your Own Pension Plan? - 1/2/2017
- Golden Handcuffs for Key Employees - 1/2/2017
- The Cross-Purchase Buy-Sell Agreement - 1/2/2017
- A Portrait of Gen X Retirement Saving - 12/26/2016
- As Anticipated, Interest Rates Rise - 12/19/2016
- Do Our Attitudes About Money Help or Hurt Us? - 12/19/2016
- Retirement Planning for Single Parents - 12/12/2016
- Could You Improve Your Personal Finances Today? - 12/5/2016
- Holiday Wrap-Up - 2016 - 11/28/2016
- Is Women's Wealth Growing Faster Than Men's Wealth? - 11/28/2016
- Your Annual Financial To-Do List - 2017 - 11/21/2016
- The Intriguing Post-Election Rally - 11/21/2016
- End-Of-The-Year Money Moves - 2016 - 11/21/2016
- 2017 Retirement Plan Contribution Limits - 11/14/2016
- Should You Care What the Market Does Each Day? - 11/14/2016
- Global Markets React to the Trump Win - 11/9/2016
- What You Can and Cannot Control as You Plan for Retirement - 11/7/2016
- How Will the Market Respond to the Election? - 10/31/2016
- Retirees Should Have Spending Plans - 10/31/2016
- The Difference Between JTWROS and JT TEN - 10/31/2016
- What to Do Financially When a Spouse Dies - 10/31/2016
- Tiny Social Security COLA, Possible Medicare Premium Hike - 10/24/2016
- Mind Over Money - 10/24/2016
- Helicopter Money - 10/24/2016
- Funding 35-40 Years of Retirement - 10/24/2016
- Could Unclaimed Money Be Yours? - 10/24/2016
- Mortgage Rates May Stay Low for a Long Time - 10/17/2016
- Could Insurance Save Your Retirement? - 10/17/2016
- Social Security - Myths vs. Facts - 10/10/2016
- How Much Home Can You Afford? - 10/10/2016
- Financial Steps to Take Before a Divorce - 10/10/2016
- Is This the Season to Change Jobs? - 10/3/2016
- The Wells Fargo Scandal - 10/3/2016
- What Expenses Could Change When You Retire? - 9/26/2016
- Could a Self-Directed IRA Help You Solve a Real Estate Issue? - 9/26/2016
- Retirees Are Racking Up Credit Card Debt - 9/19/2016
- Characteristics of the Millionaires Next Door - 9/12/2016
- The Trump and Clinton Budget Proposals - 9/12/2016
- Are You Insured? - 9/6/2016
- What Will the Election Do to the Market? - 8/29/2016
- The Trump and Clinton Tax Plans - 8/22/2016
- Are There Really Tax-Free Retirement Plan Distributions? - 8/22/2016
- When Is Social Security Income Taxable? - 8/15/2016
- Updating Your Estate Plan - 8/8/2016
- Filial Responsibility Laws - 8/8/2016
- The TPP Controversy - 8/8/2016
- Do Our Biases Inhibit Our Retirement Savings Efforts? - 8/1/2016
- Think About Your Lifestyle Before You Retire - 7/25/2016
- Stocks and Presidential Elections - 7/18/2016
- Protecting Your Parents From Elder Financial Abuse - 7/18/2016
- Good Retirement Savings Habits Before Age 40 - 7/11/2016
- Money Habits That May Help You Become Wealthier - 7/4/2016
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.
NEW HOME SALES GO ONE WAY, RESALES ANOTHER
Rising 6.1% in February, new home sales reached a 7-month peak. The Census Bureau said that this gain occurred with just 5.4 months of inventory on the market, less than half that available in 2006 during the height of the last residential real estate boom. In contrast, the National Association of Realtors reported a 3.7% retreat for existing home sales last month, with increasing mortgage rates, high prices, and limited supply as major factors.1
A GAIN FOR DURABLE GOODS ORDERS
A Census Bureau report noted a 1.7% improvement in February, following January’s 2.3% advance. Core hard goods orders did retreat 0.1% last month.2
LIGHT SWEET CRUDE BREAKS 4-DAY LOSING STREAK
Friday’s small gain in the price of oil marked the first daily advance for the commodity since March 17. Across March 20-24, crude prices declined 1.7% as news broke of record stockpiles; it was the third losing week for oil in the past month. WTI crude settled at a NYMEX price of $47.97 Friday.3
Women 35 and younger are often hard-pressed to save money. Student loans may be outstanding; young children may need to be clothed, fed, and cared for; and rent or home loan payments may need to be made. With all of these very real concerns, are they saving for retirement?
The bad news: 44% of millennial women are not saving for retirement at all. This discovery comes from a recent Wells Fargo survey of more than 1,000 men and women aged 22-35. As 54% of the millennial women surveyed were living paycheck to paycheck, this lack of saving is hardly surprising.1
The good news: 56% of millennial women are saving for retirement. Again, this is according to the Wells Fargo survey. (A 2016 Harris Poll determined roughly the same thing – it found that 54% of millennial women were contributing to a retirement savings account.)1,2
FED HIKES, LEAVES 2017 FORECAST UNCHANGED
As expected, the Federal Reserve raised the target range for the federal funds rate by a quarter-point last week to 0.75-1.00%. “The simple message is, the economy is doing well,” Fed chair Janet Yellen explained to the media following the move. The central bank’s dot-plot table still projects two more rate increases during the balance of 2017, with three rate hikes envisioned for both 2018 and 2019.1
INFLATION PRESSURE EASES
February’s Consumer Price Index displayed only a 0.1% gain, compared to 0.6% in January. Core consumer prices moved 0.2% higher. The small February increase still left the headline CPI up 2.7% in the past 12 months. The Producer Price Index rose 0.3% for February, putting its yearly advance at 2.2%.2
SMALL GAINS IN SENTIMENT, RETAIL SALES
The initial March University of Michigan consumer sentiment index came in at 97.6 Friday, 1.3 points above its final February mark. Thanks mainly to “improved personal finances” among households, the index’s current economic conditions component hit a 17-year high. A Census Bureau report showed retail purchases up 0.1% in February, 0.2% with car and gasoline buying factored out.2,3
How Much of Your Retirement Savings Should You Withdraw Each Year?
When Fidelity Investments asked more than 1,000 pre-retirees to guess the percentage that retirement planners would recommend, 19% said 7-9% a year. (A typical recommendation might be 4%.) Additionally, another 19% of pre-retirees responding to the investment company’s Retirement IQ survey thought they could safely draw down their retirement funds at a rate of 10-15% a year. At that pace, they could risk outliving their money by their mid-seventies.
If interest rates were a few percentage points higher in this bull market, such large annual withdrawals might be bearable. As interest rates are still low, many debt securities currently offer small yields. That forces today’s retirees to rely on equities to a degree their parents did not. Wall Street remains volatile, and some analysts see the major equity indices making only minor annual advances in the near term. Whether their predictions prove true or false, a yearly withdrawal rate of 3-5% may help a retirement fund last much longer than one subjected to annual 7-9% distributions.1
Are Golf Carts a Safety Risk?
In some Sun Belt communities, retirees drive them off the links to run errands or eat out. While these electric vehicles are easy to operate and better for the environment than a gas guzzler, their open architecture can make them extremely dangerous in collisions with cars, bicycles, and obstacles. Just how dangerous? By the estimate of the Consumer Product Safety Commission, there were nearly 18,000 emergency room visits stemming from golf cart-related injuries in the U.S. during 2015.
On March 15, the Federal Reserve raised the benchmark interest rate by a quarter-point to a range of 0.75-1.00%. The increase was widely expected, and it represented a vote of confidence in the economy.1
This was the central bank’s second rate hike in three months, and Wall Street took it in stride, with the S&P 500 rising nearly 15 points on the day. One reason for that may have been the Fed’s latest dot-plot forecast, which remained as it was when the last interest rate adjustment was made in December. The Fed still projects a total of three hikes for 2017.1,2
When the economy picks up its pace, the Fed responds. In the past several months, job growth and economic output have been steady, and inflation pressure has built to where consumer prices are rising close to 2% a year. The central bank thinks economic growth is now significant enough to warrant a series of small rate hikes.3
Many affluent professionals and business owners put estate planning on hold. Only the courts and lawyers stand to benefit from their procrastination. While inaction is the biggest estate planning error, several other major mistakes can occur. The following blunders can lead to major problems.
Failing to revise an estate plan after a spouse or child dies. This is truly a devastating event, and the grief that follows may be so deep and prolonged that attention may not be paid to this. A death in the family commonly requires a change in the terms of how family assets will be distributed. Without an update, questions (and squabbles) may emerge later.
Going years without updating beneficiaries. Beneficiary designations on qualified retirement plans and life insurance policies usually override bequests made in wills or trusts. Many people never review beneficiary designations over time, and the estate planning consequences of this inattention can be serious. For example, a woman can leave an IRA to her granddaughter in a will, but if her ex-husband is listed as the primary beneficiary of that IRA, those IRA assets will go to him per the beneficiary form. Beneficiary designations have an advantage – they allow assets to transfer to heirs without going through probate. If beneficiary designations are outdated, that advantage matters little.1,2
COMPANIES HIRED READILY IN FEBRUARY
U.S. firms added 235,000 net new jobs last month, and the latest Department of Labor employment report showed the largest growth occurring in the construction and education/health care sectors. The DoL also revised January’s job gains upward by 11,000 to 238,000. Payroll expansion has averaged 209,000 per month since December. The headline (U-3) jobless rate ticked down 0.1% to 4.7%, and the total (U-6) jobless rate, counting the underemployed, fell 0.2% to 9.2%.1
FED FUTURES MARKET: MARCH RATE HIKE A GIVEN
The CME Group’s FedWatch Tool, which tracks the prices of 30-day Fed Fund futures to get a bead on traders’ reactions to potential monetary policy moves, put the chance of a March 15 quarter-point interest rate hike at 93% Friday. The odds of another quarter-point move in June were put at 51%.2
OIL SLUMPS 9.1% IN A WEEK
During March 6-10, WTI crude had its worst week since November, retreating to a Friday close of $48.49 on the NYMEX. News of rising output and plentiful stateside inventory hurt prices. In other oil news, a billion-barrel crude reserve was just found in the Alaskan interior – the largest such discovery since the 1980s.3,4
About 20% of Americans aged 65-74 are still working. A 2016 Pew Research Center study put the precise figure at 18.8%, and Pew estimates that it will reach 31.9% in 2022. That estimate seems reasonable: people are living longer, and the labor force participation rate for Americans aged 65-74 has been rising since the early 1990s.1,2
It may be unreasonable, though, for a pre-retiree to blindly assume he or she will be working at that age. Census Bureau data indicates that the average retirement age in this country is 63.3
When do the self-employed anticipate retiring? A 2017 Transamerica Center for Retirement Studies survey finds that 56% of U.S. solopreneurs think they will retire after 65 or not at all.4
Are financial uncertainties promoting this view? Not necessarily. Yes, the survey respondents had definite money concerns – 28% felt Social Security benefits might be reduced in the future; 22% were unsure that their retirement income and accumulated savings would prove sufficient; and 26% suspected they were not saving enough for their tomorrows. On the other hand, 54% of these self-employed people said that they wanted to work in retirement because they enjoyed their job or profession, and 67% felt working would help them remain active.4
If you receive a distribution from your IRA or workplace retirement plan, what will you do with it? You will probably want to arrange an IRA rollover – a common and useful financial move designed to take these invested assets from one retirement account to another, without tax consequences. The I.R.S. may give you just 60 days to do it, however.
The clock starts ticking on the day you receive the distribution. If assets from your employee retirement plan account or your IRA are paid directly to you, you have 60 calendar days to transfer those funds into an IRA or workplace retirement plan. If you fail to do that, the I.R.S. will characterize the entire distribution as taxable income. (It may also tack on a 10% early withdrawal penalty if you take possession of such funds before age 59½.)1
Your goal is to make this indirect rollover by the deadline. It is called an indirect rollover because its mechanics can be a bit involved. If the assets are coming out of an employee retirement plan, your employer may withhold 20% of them in accordance with tax laws. Unfortunately, you do not have the option of depositing only 80% of the distribution into an IRA or another employee retirement plan – you must deposit 100% of it by the deadline. You have to come up with the remaining 20%, yourself, from your own savings. The withheld 20% should be returned to you at tax time if the rollover completes smoothly.2
YELLEN: RATE MOVE MAY HAPPEN THIS MONTH
In Chicago Friday, Federal Reserve chair Janet Yellen said that if hiring and inflation indicators continue to meet the central bank’s expectations, an interest rate hike “would likely be appropriate” at its March policy meeting. She also noted that, barring unforeseen events, the pace of tightening in the near term “likely will not be as slow as it was during the past couple of years.” After these statements, the Fed futures market put the chance of a March rate increase at 82%.1
RISING CONFIDENCE, TEMPERED SPENDING
At a mark of 114.8, the Conference Board consumer confidence index reached its highest point in 14½ years in February. Just 20.3% of Americans found jobs “hard to get,” the smallest percentage in eight years. A Department of Commerce report, however, showed only average consumer spending in January: personal spending rose just 0.2% in that month, and it actually slipped 0.3% when adjusted for inflation. Personal incomes grew by 0.4% in the first month of the year.2,3
FACTORIES HUM IN FEBRUARY
The Institute for Supply Management’s manufacturing purchasing manager index rose 1.7 points to 57.7 last month. That was its best reading since August 2014. ISM’s services gauge also improved; it moved north 1.1 points in February to 57.6.3,4
We all would love to have a little extra cash on hand for emergencies. Saving up that cash can be a challenge – but with a little effort, that challenge can be met.
Imagine a 30-year-old couple with no real savings. Let’s call them Kurt and Diana. Together, they earn about $8,000 a month, but their household finances are being squeezed by education debt, rent, and the high cost of living in an affluent metro area. They have about $300 in the bank between them, and they just learned they have a baby on the way. Their need to save has never been greater. How can they do it?
They have many options for building their fund, more than they first assume. Kurt has an old dirt bike gathering dust in his dad’s garage, and he is no longer into off-road motorcycling. Even in its dusty condition, it could easily be sold for more than $1,500. They each have gym memberships; Kurt drops his and Diana switches to a cheaper gym, leading to a 12-month savings of $500.
THE MONTH IN BRIEF
February was a great month for stocks and a historic month for the Dow Jones Industrial Average. The blue chips closed at record highs for 12 straight trading sessions, a feat unmatched for 30 years. The S&P 500 gained 3.72% for the month. Readings on consumer confidence and purchasing manager indices remained impressive, and a key home price index hit a 30-month high. The latest Consumer Price Index showed mounting inflation pressure, and the Federal Reserve hinted at an oncoming rate move.1,2
DOMESTIC ECONOMIC HEALTH
In January, inflation spiked to a degree unseen in nearly five years as the Consumer and Producer Price Indexes both rose 0.6%. The CPI’s monthly gain was its largest since March 2012, and the PPI’s advance was its greatest since September 2012. Yearly consumer inflation reached 2.5%, a 4-year peak; annualized wholesale inflation rose to 1.6%.3,4
It was little wonder, then, that the Federal Reserve considered the possibility of another rate hike. Minutes from its January 31-February 1 meeting revealed that “many participants” in the Federal Open Market Committee felt a quarter-point move might be warranted “fairly soon” if the labor market showed further strength and inflation pressure held. Would March be too early for an interest rate adjustment? After the minutes were released, market expectations put the chance of a March move at less than 25%, but that jumped to 50% by the end of the month.1,5
A LITTLE LESS OPTIMISM AMONG CONSUMERS
February’s final University of Michigan consumer sentiment index came in at 96.3, down from its January mark of 98.5, but well above the 91.7 reading of a year earlier. Despite the descent, the index just had its best three months since early 2004.1
FED MINUTES SUGGEST RATE MOVE MAY BE NEAR
At the last Federal Reserve policy meeting, “many participants” in the Federal Open Market Committee felt it “might be appropriate to raise the federal funds rate again fairly soon” if inflation and hiring data are strong enough. Even with that language appearing in the latest FOMC minutes, the CME Group’s FedWatch Tool forecasts just a 22% chance of a quarter-point hike when the FOMC convenes in March.2,3
HOME SALES IMPROVED AT START OF 2017
According to reports from the Census Bureau and National Association of Realtors, new home sales advanced 3.7% in January, while existing home sales rose 3.3%. Tight inventory notwithstanding, new home purchases were up 5.5% from January 2016; resales were up 3.8% year-over-year.4
Every now and then, you read an article about a woman past the age of 65 who says she loves her job and will “never retire.” In addition to keeping herself engaged and active, she may be doing herself a great financial favor as well. More women are working after 65, and some are even in the office full time.
How long should a woman plan to work? Should she prepare for a 40-hour workweek until age 65 or age 70? Should she try to work part time after that?
If a woman invests and plans sufficiently for retirement, that may not be necessary – but there are some strong reasons why a woman might want to retire later than age 62.
Ideally, Social Security would count years spent raising children and caring for elderly relatives as working years. The world is not ideal, however, and Social Security does not. It bases your Social Security income on three key factors; the age at which you claim your benefits is only one of them.
Seemingly everyone has heard of an IRA, but few people know about IRA trusts. Perhaps more people should, for an IRA trust may provide a way to “stretch” IRA assets for decades to benefit multiple generations.
An IRA trust is simply a revocable living trust designed to hold IRA assets. It will continue to house them after your death, but that will not prevent you from distributing those assets to your heirs. This is because an IRA trust also contains one or more sub-trusts, which can be designated and customized for your beneficiaries.1
At your option, these sub-trusts can be made lifetime dynasty trusts (sometimes called generation-skipping trusts). Dynasty trusts are complex, but they can potentially allow your grandchildren and great-grandchildren to receive distributions of IRA assets. The distributions may occur decades from now. That may be exactly what you prefer; you may want to give your IRA assets to your grandkids when they are in their forties instead of their twenties.1,2
RETAIL SALES ROSE 0.4% IN JANUARY
Consumer spending on household electronics and appliances powered this gain. Analysts polled by Reuters had expected a 0.1% advance. Core retail purchases also rose 0.4% last month. The Department of Commerce revised the December increase for retail sales upward to 1.0%. Across the 12 months ending in January, retail sales advanced 5.6%.1
INFLATION PRESSURE MOUNTS
In January, the headline Consumer Price Index climbed 0.6%. That was its greatest monthly gain in four years, and it took annualized inflation to a 4-year high of 2.5%. Producer prices also jumped 0.6% in January, in the largest monthly increase seen since September 2012; that development left them up 1.6% year-over-year.1,2
BUILDING PERMITS UP, HOUSING STARTS DOWN
Unsurprisingly, groundbreaking declined in January. The Census Bureau recorded a 2.6% fall for housing starts in the winter weather. The rate of permits issued for future projects, however, increased by 4.6%.3
Saving for retirement takes decades and demands the investment of significant amounts of your income. As this major effort unfolds, you should recognize that some subtle factors and seemingly minor decisions could end up making a sizable and positive impact on your financial future.
Your investment yield may be less important than the amount you save. Beating the S&P 500 feels great, but outperforming the market is not your foremost goal. Your real retirement saving objective is to accumulate sufficient assets – enough to provide adequate income in the “second act” of your life.
How much control do you have over your investment returns? The short answer is very little; market cycles, macroeconomic factors, and the behavior of institutional investors influence them profoundly. On the other hand, you have direct control over your savings rate. The more you pour into your retirement accounts, the more dollars you are giving a chance to compound.
Retiring with an Age Difference
If you are 10 or 15 years older than your spouse or partner, to what degree should that age gap influence your retirement planning? You will want to consider this question, for it may affect many aspects of your financial future – such as your planned retirement dates, how you decide to claim Social Security, and how you choose to invest.
Your age difference will lengthen your total retirement experience as a couple. For example, Social Security projects that the average man turning 62 this month will live 84.6 years and die in 2039. The average woman turning 45 this month is forecast to live 85.5 years and die in 2057. So a hypothetical couple with a 17-year age gap would need to keep a 40-year retirement time horizon in mind if the older spouse or partner retired today, potentially including 17 years alone for the younger spouse or partner.
If you and your partner have an age gap, the two of you might need to work longer and ramp up your retirement saving. A more aggressive approach to investing may be wise. If you are the older spouse, you may want to claim Social Security as late as possible and opt for joint-and-survivor pension benefits. If you are more than 10 years older than your spouse, the calculated Required Minimum Distributions from your 401(k)s and IRAs will end up being slightly smaller than standard.1,2
CONSUMER SENTIMENT SLIPS A BIT
The University of Michigan’s preliminary February index of consumer sentiment came in at a reading of 95.7 Friday, compared with a final January mark of 98.5 (which was a 13-year peak). Economists polled by Bloomberg had expected a slight decline to 98.0. While this was the index’s lowest level in three months, it still topped many of the monthly readings from 2016.1
HOW IS EARNINGS SEASON GOING?
Nearly two-thirds of S&P 500 members have issued Q4 results so far. As Zacks Investment Research noted Wednesday, more than 69% of these S&P components have beaten earnings-per-share estimates; more than 54% have surpassed revenue forecasts. Total Q4 earnings for S&P firms are projected to rise 7.3% over Q4 2015, the strongest annual earnings growth since Q4 2014.2
GOLD GAINS AS OIL WAVERS
Gold futures advanced 1.12% on the COMEX during a choppy week to a Friday settlement of $1,233.30. Light sweet crude for March delivery dipped at midweek, but then rebounded, settling at $53.81 Friday for a 5-day retreat of just 0.09%.3
About 70% of taxpayers receive sizable refunds from the Internal Revenue Service. Just how sizable? The average refund totals about $2,800.1
What do households do with that money? It varies. Last year, consumer financial services company Bankrate asked Americans about their plans for their federal tax refunds. Thirty-one percent of the respondents to Bankrate’s survey said that they would save or invest those dollars, and 28% indicated they would attack their debts with the money. Another 27% said they would buy food with that cash or use it to pay utility bills. Just 6% said they would earmark their refunds for shopping sprees or vacations.2
So, according to those survey results, about six in ten people who get a refund will use it to try and improve their personal finances. You could follow their example.
Are tough times ahead for the bond market? Some investors think so. U.S. monetary policy is tightening, with the Federal Reserve planning gradual increases for the key interest rate.
A rising interest rate environment presents a challenge to the bond market, but it does not necessarily imply some kind of doomsday for bondholders. Blanket advice to “get out of bonds” is imprudent, because it really all depends on what you intend to do with the debt investments you hold and how long you intend to hold them.
Rising interest rates affect the market values of bonds. Repeat: the market values. Market values should not be confused with face values.
To illustrate, say you invest $5,000 in a 30-year Treasury with a 1% yield. That means that every year for the next 30 years, that Treasury note will pay out $50 to you.
As taxpayers and tax preparers send in 1040 forms for 2016, they are also wondering about the changes to federal tax law that may occur in 2017 and 2018. Will President Trump’s administration be able to follow through on his campaign pledge to cut corporate and estate taxes and revise individual income tax brackets? If the Affordable Care Act is repealed and replaced, how significant will the tax impact be for businesses, families, and individuals?
As it stands now, federal tax laws are changing little in 2017. The 2015 Protecting Americans from Tax Hikes (PATH) Act extended many tax breaks, which were set to expire in 2015, through at least 2018 and made others permanent (the $500,000 Section 179 deduction, charitable IRA gifts, the R&D tax credit, and more).
POSITIVES & NEGATIVES IN JANUARY’S JOB DATA
The Department of Labor’s latest jobs report showed 227,000 net new hires last month. Unfortunately, wages grew just 0.1% in January as the headline jobless rate rose slightly to 4.8%. The U-6 rate, counting the underemployed, rose 0.2% to 9.4%.1
STRONG CONSUMER CONFIDENCE & SPENDING
While the Conference Board’s monthly consumer confidence index declined 1.5 points in January, it remained at a high level with a 111.8 reading. Personal spending improved 0.5% in December, with personal incomes up 0.3%.2
ISM INDICES SHOW FURTHER SECTOR EXPANSION
The Institute for Supply Management’s purchasing manager indices were at high levels in January. ISM’s factory index gained 1.5 points to 56.0. Its service sector gauge ticked down 0.1 points to 56.5, but that still signaled solid growth.3
THE MONTH IN BRIEF
Stocks advanced again in January. The Dow Jones Industrial Average closed above 20,000 for the first time, and the S&P 500 gained 1.79% on the month. As January ended, politics took center stage: investors focused first on the controversy surrounding President Donald Trump’s executive orders, then on earnings and economic indicators. As the forex market sensed that the new administration might prefer a weaker currency, the dollar stumbled. Growing haven demand sent prices of metals higher, while prices of energy futures fell. Consumer confidence plateaued at a high level, while home sales declined. While the latest consumer spending report was solid, the first estimate of fourth-quarter growth was unimpressive.1
DOMESTIC ECONOMIC HEALTH
Was 2016 really the poorest year for U.S. economic growth since 2011? Yes, according to the Bureau of Economic Analysis. It said that the economy expanded 1.9% in Q4, which means our GDP was only 1.9% for the whole year. It appears 2016 will be recorded as the eleventh straight year in which our economy grew less than 3%.2
The manufacturing and service sectors kept growing in December. Data from the Institute for Supply Management’s purchasing manager indices showed the pace of expansion picking up for the factory sector – that PMI improved 1.5 points to 54.7. The service sector PMI remained in good shape at a mark of 57.2. Industrial output rose 0.8% for December; hard goods orders fell 0.4% in that month, but actually rose 1.7% minus defense orders.3,4
When you marry or simply share a household with someone, your financial life changes – and your approach to managing your money may change as well. To succeed as a couple, you may also have to succeed financially. The good news is that is usually not so difficult.
At some point, you will have to ask yourselves some money questions – questions that pertain not only to your shared finances, but also to your individual finances. Waiting too long to ask (or answer) those questions might carry an emotional price. In the 2016 TD Bank Love & Money survey of 1,902 consumers who said they were in relationships, 42% of the respondents who described themselves as “unhappy” cited their number one financial error as “waiting too long” to discuss money matters with their significant other.1
First off, how will you make your money grow? Investing is essential. Simply saving money will help you build an emergency fund, but unless you save an extraordinary amount of cash, your uninvested savings will not fund your retirement.
Major legislative changes may soon impact the financial industry. On February 3, President Donald Trump signed two executive orders authorizing reviews of some key industry regulations – the Dodd-Frank Act, and an upcoming Department of Labor rule requiring financial professionals offering retirement planning advice to serve as fiduciaries.1
Passed in 2010, the Dodd-Frank Act was a response to the 2008 financial crisis. To this day, parts of the law have never been carried out. Its goal was to put safety measures in place to prevent further bank bailouts. Dodd-Frank sought to limit risk exposure for big banks by limiting certain speculative forms of investment, setting tighter mortgage lending standards, and establishing greater transparency.2
The critics of Dodd-Frank have contended that its hundreds of regulations hamper banks and investment firms. Some feel that Dodd-Frank makes it harder for small and mid-sized businesses to obtain loans, hindering the nation’s economic growth. According to the New York Times, House Republicans are advancing legislation to “repeal and replace” Dodd-Frank as a complement to the executive order.1
HOUSEHOLD SENTIMENT GAUGE RISES AGAIN
The University of Michigan’s Index of Consumer Sentiment gained 0.4 points from its preliminary reading this month to reach a final January mark of 98.5. That represents a 12-year peak for the index, which stood at 92.0 in January 2016.1,2
HOME SALES FELL IN DECEMBER
Given costlier mortgages, rising prices, and tight inventory, the December retreat for resales was not surprising. The National Association of Realtors said that existing home sales slipped by 2.8% last month. New home sales dropped 10.4%, but the Census Bureau stated that they increased 12.2% for 2016, marking the best year for new home buying since 2007.3
FIRST ESTIMATE OF Q4 GDP: 1.9%
If that Department of Commerce appraisal holds, it will mean that the economy grew just 1.9% for all of 2016, contrasting with 2.6% expansion in 2015. Hard goods orders fell 0.4% in December, but rose 1.7% minus defense orders.2
Do you plan to buy life insurance before you turn 40? Maybe you should. You may save money in the long run by doing so.
At first thought, the idea of purchasing a life insurance policy in your thirties may seem silly. After all, young adults are now marrying and starting families later in life than past generations did, and you and your peers are likely in excellent health with a good chance of living past 80.
In fact, LIMRA – a life insurance research and advocacy group – recently surveyed millennials and found that 30% thought saving for a vacation mattered more than buying life insurance coverage. The perception seems to be that insurance is something to purchase when you start a family or when you hit your forties or fifties.1
LARGEST INFLATION ADVANCE IN 5 YEARS
The Consumer Price Index rose 2.1% in 2016, marking its greatest annual gain since 2011. During 2015, consumer prices only increased by 0.7%. December saw a 0.3% rise for the headline CPI and a 0.2% gain for the core CPI (which excludes food and energy costs). The core CPI gained 2.2% last year.1
MUCH MORE GROUNDBREAKING IN DECEMBER
Cold had little impact on residential construction as 2016 ended. Housing starts advanced 11.3% last month and rose 5.7% for the year. Single-family starts declined 4.0% in December, but they still improved 3.9% in 2016. Building permits were down 0.2% last month and posted a yearly gain of 0.7%.2
GOLD GOES BACK ABOVE $1,200
The yellow metal rose 1.84% week-over-week to settle Friday at $1,210.00 on the COMEX. (Silver ended the week at $17.12.) On the NYMEX, oil ended up at $52.33 as Wall Street rang its closing bell Friday, retreating 0.19% week-over-week.3
Not all home insurance policies are alike. Coverage amounts obviously vary, and so do coverage areas. Taking ten minutes to scrutinize what your policy does (and does not) cover is a wise idea.
Homeowner policies routinely provide tornado, windstorm, & hailstorm coverage. If a tornado, windstorm, or hailstorm damages your home or yard, the insurer will commonly pay out in response to your claim, unless your residence has somehow failed to qualify for such coverage.1,2
How about hurricanes & floods? Here, basic coverage may not be enough. Most homeowner policies cover hurricane damage, but a hurricane frequently results in flooding. A flood is not usually a covered peril in a standard home insurance policy.2
In 2017, 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 2017 limits are the same as in 2016: $5,500 for IRA owners who will be 49 and younger this year, $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.1
RETAIL SALES RISE 0.6%
All of this December gain can be attributed to increased car buying and gasoline purchases; in fact, retail sales were flat with those two categories removed. Analysts surveyed by MarketWatch had projected a 0.8% December advance. Census Bureau data shows that online sales rose 13.2% in 2016, while department store sales fell 8.4%.1,2
CONSUMERS MAINTAIN OPTIMISM AS 2017 BEGINS
The University of Michigan’s preliminary January consumer sentiment index was little changed from the final December edition – just a tenth of a point lower at 98.1. In January 2016, the index was at 92.0. The current conditions component of the index reached 112.5, its highest mark since 2004.3
PRODUCER PRICES CLIMB AGAIN
After heading north 0.4% in November, the Producer Price Index advanced another 0.3% in December, perhaps hinting that an extended period of minimal wholesale inflation is now history. The December increase left both the headline and core PPI up 1.6% year-over-year.1
You may have heard that people spend less once they are retired. Statistically, that is true. The question is whether a retiree has enough income to meet his or her expenses.
Ideally, retirees should be able to live comfortably on 70-85% of their end salaries and draw their retirement fund down no more than 4-5% per year during a 30-year retirement. Are these two objectives realistic for the average retiree household?1,2
According to the most recently published Bureau of Labor Statistics data, a household maintained by someone 65 or older had a mean income of $46,627 in 2015 and a disposable income of $42,959 after taxes. That average retiree household spent an average of $44,664 in 2015. So, on average, seniors spent more than they had on hand.2,3
Can You Work Your Way into Retirement?
As 2016 ended, the 17th Annual Transamerica Retirement Survey appeared and noted a preference for a phased retirement among a majority (53%) of workers polled by the insurance and investment company’s Center for Retirement Studies. In fact, 48% of the pre-retirees surveyed felt that their current employer would allow them to continue working in some capacity after age 65.
How many employers are okay with workers staying on the job past 65? Perhaps more than many of us may assume: 72% of the workers Transamerica talked with said that their employer supported the idea, and 48% felt the company culture where they worked was “aging friendly.”
On the downside, just 20% of employees surveyed said that their employers would let them ease into retirement through shorter workweeks or flextime, and 26% said that the company where they worked was doing “nothing” to help its employees make retirement transitions. Regarding aging in the workplace, one other statistic from the survey stands out: only 42% of respondents said that they were keeping their job skills up to date, which might be a necessity if they want to stay in the workforce into their sixties.1
RISING WAGES, MODERATE HIRING IN DECEMBER
The Department of Labor’s latest employment report shows the average hourly wage at $26.00 last month, up 2.9% in a year. That is the largest annualized wage increase seen since June 2009. Payrolls expanded by 156,000 additional hires in December, leaving total 2016 job growth at a 5-year low of 2.2 million. (This could be a sign of the labor market reaching full employment.) The headline jobless rate ticked up to 4.7%, while the U-6 rate encompassing the underemployed was at 9.2%.1
MANUFACTURING ACTIVITY PICKED UP AS 2016 ENDED
Investors liked what they saw in the Institute for Supply Management’s December purchasing manager indices. ISM’s manufacturing PMI rose 1.5 points to 54.7, its best reading in two years. The Institute’s service sector PMI held steady at an impressive 57.2 last month.2,3
FED OUTLOOK: CAUTIOUSLY OPTIMISTIC
Minutes from the December Federal Reserve policy meeting noted that Federal Open Market Committee members were reasonably confident about the economy for 2017, while citing some “uncertainty about the timing, size and composition” of future policy moves. In other words, the Fed may or may not ultimately follow through on its 2017 forecast of three interest rate hikes. FOMC members saw “only a modest risk” of a “sharp acceleration in prices” this year.4
THE MONTH IN BRIEF
While the Dow Jones Industrial Average did not top 20,000 in December, it did advance nicely, gaining 3.34%. The Federal Reserve took its interest rate target to 0.50-0.75%, adjusting the federal funds rate for just the second time in two years; around the world, other central banks held rates steady, and one even pledged additional easing. Oil prices jumped. Closely watched consumer confidence and purchasing manager indices rose, and unemployment declined. Home sales improved even as mortgage rates neared highs unseen since 2011. Wall Street and Main Street seemed optimistic about the economy’s future.1,2
DOMESTIC ECONOMIC HEALTH
The Fed adjusted its dot-plot for the next three years as it raised the benchmark interest rate by a quarter-point in December. Its latest forecast projects two to three rate hikes per year through 2019, with three occurring this year. Fed policymakers see the economy expanding 2.1% in 2017.2
Employers grew their payrolls by 178,000 net new hires in November, noted the Department of Labor’s latest jobs report. Unemployment dropped 0.3% to 4.6%; the jobless rate was last that low in August 2007. (The broader U-6 rate, which also counts the underemployed, declined 0.2% to 9.3%, the lowest figure since April 2008.) The average hourly wage was $25.89, up 2.5% in the past year.3
How many of us will retire with $1 million or more in savings? More of us ought to – in fact, more of us may need to, given inflation and the rising cost of health care.
Sadly, few pre-retirees have accumulated that much. A 2015 Government Accountability Office analysis found that the average American aged 55-64 had just $104,000 in retirement money. A 2016 GoBankingRates survey determined that only 13% of Americans had retirement savings of $300,000 or more.1,2
A $100,000 or $300,000 retirement fund might be acceptable if our retirements lasted less than a decade, as was the case for some of our parents. As many of us may live into our eighties and nineties, we may need $1 million or more in savings to avoid financial despair in our old age.
THE QUARTER IN BRIEF
Two events strongly influenced U.S. and foreign financial markets in the fourth quarter – one unexpected by many, the other widely anticipated. Neither of them particularly upset investors. Donald Trump’s win in the presidential election led to a rally on Wall Street, and the Federal Reserve’s December interest rate hike was taken in stride, even as our central bank’s monetary policy stood out globally for its hawkishness. The S&P 500 ended up gaining 3.25% in three months. The United Kingdom scheduled its Brexit, and OPEC elected to trim oil output for the first time in eight years. Oil rallied, and so did the dollar; precious metals retreated. The housing sector showed strength even as mortgage rates ascended. On the whole, the most-watched U.S. economic indicators were encouraging.1
DOMESTIC ECONOMIC HEALTH
On December 14, the Federal Reserve announced its second quarter-point rate hike in two years. The federal funds rate was reset at the 0.50-0.75% range, and the central bank’s latest dot-plot forecast showed three planned rate moves in 2017 instead of the previously projected two. Fed officials emphasized that oncoming tightening will be “gradual.”2
By November, monthly payroll gains were averaging 180,000 for the year. The main U-3 jobless rate was at 4.9% in October and at 4.6% in November. The U-6 rate that included the underemployed fell from 9.5% in October to 9.3% a month later. In November, the U-3 rate was at its lowest level since August 2007, and the U-6 rate had not been so low since April 2008.3
A SURGE IN CONSUMER OPTIMISM
The Conference Board’s consumer confidence index continued to climb in December. Analysts polled by MarketWatch projected a reading of 110.0 for the gauge, but it beat that forecast, rising 4.3 points to a 15-year peak of 113.7. The major factor in the gain? Growing expectations of a better economy, particularly among older Americans. The CB’s monthly expectations index reached a high unseen since December 2003.1,2
PENDING HOME SALES SLIP
Housing contract activity declined 2.5% in November, according to the latest research from the National Association of Realtors. In October, pending sales were up by just 0.1%.1
YEARLY HOME PRICE GAINS INCREASE
October’s S&P/Case-Shiller national home price index came out last week, showing a 5.6% annualized improvement. In its September edition, the 12-month advance was 5.4%. The 20-city composite version of the index rose 5.1% in the year ending in October.1,2
Do you have a federal student loan that needs to be repaid? You may be surprised at what the government might do to collect that money someday, if it is not paid back soon enough.
If that debt lingers too long, you may find your Social Security income reduced. So far, the Department of the Treasury has carved $1.1 billion out of Social Security benefits to try and reduce outstanding student loan debt. It has a long way to go: of that $1.1 billion collected, more than 70% has simply been applied to fees and interest rather than principal.1,2
How many baby boomers & elders are being affected by these garnishments? Roughly 114,000 Social Security recipients older than 50. In the big picture, that number may seem insignificant. After all, 22 million Americans have outstanding federal student loans.1,2,3
What is not insignificant is how quickly the ranks of these seniors have increased. According to the Government Accountability Office, the number of Americans older than 65 who have been hit with these income cuts has risen 540% since 2006.2
Contrary to popular belief, classic pension plans have not disappeared. Corporations have mostly jettisoned them, but highly profitable small businesses are giving them a second look. Why are small business owners deciding to adopt old-school, employer-funded retirement plans?
The tax breaks attached to a defined benefit plan may be substantial. In fact, if these plans are funded with insurance contracts or guaranteed insurance products, plan contributions made by the owner become tax-deductible for the business.1
There is no cap on how much you can save. IRAs, 401(k)s, and SEPs all have annual contribution limits. Traditional employer-funded pension plans do not. Business owners have the potential to accumulate millions for the future through such a vehicle.
To retain key employees, make their jobs too good to leave. Arrange “golden handcuffs” agreements with key managers to reward loyalty and promote retention. A golden handcuffs strategy can make a management position so attractive that it would be financially irresponsible to walk away.
The classic golden handcuffs arrangement is a “top hat” program – a non-qualified deferred compensation plan (NQDC) designed solely for management employees. As a non-qualified plan, it does not have to comply with the bulk of ERISA regulations – and there are no Internal Revenue Service reporting requirements. The business must still file a simple statement with (and provide plan documents to) the Department of Labor within 120 days of setting up the plan. Doing this relieves the firm of having to file Form 5500s with the IRS. It also frees the top hat plan from having to produce a summary plan description.1,2
Business owners are builders. They spend their lives building firms to provide goods and services to their clients, and those firms provide them with a living. But nothing can tear down that lifetime of work faster than the death of a business owner, or the death of a business partner. Often, much of the value of a business dies with the owner.
Small business owners face two major succession questions. First, can the business heirs keep the company afloat when the owner dies, or at least avoid surrendering it at a “fire sale” price?
The executor of a deceased business owner’s estate can elect to continue the company, but must find someone willing to run it. That may not be easy. Some heirs or business partners may want to keep things going; others may want to cash out. This discord can potentially sink a firm, because if the business continues, any partners wanting out will want to be fairly compensated. If sufficient cash isn’t on hand to do that, liquidation may be the only option.
HOUSEHOLD SPENDING SLOWS IN NOVEMBER
Last month, consumer spending increased 0.2%, while consumer incomes were flat. November was the first month in nine in which household incomes failed to rise, and the consumer spending advance was half that of October. Even so, with consumer confidence indices and other economic indicators becoming stronger, the November figures may represent an anomaly. Another Department of Commerce report revised third-quarter growth up to 3.5%.1
CONSUMER OPTIMISM AT A 13-YEAR PEAK
The University of Michigan’s last consumer sentiment index of 2016 came in at 98.2, 4.4 points above its final November mark. It has not been that high since January 2004. Economists polled by Thomson Reuters expected an advance to 98.0.2
HOME SALES RISE AS TEMPERATURES DROP
Resales were up 0.7% last month, according to the National Association of Realtors. The Census Bureau recorded a 5.2% November gain in new home buying. In October, new home sales fell 1.4%, while existing home sales improved 1.5%.3
How would you guess Gen X is faring when it comes to retirement saving? Americans born between 1965 and 1980 are approaching what should be their peak income years, and many of them have actively contributed to workplace retirement plans, IRAs, and investment accounts. At the same time, Gen X is becoming the new “sandwich generation” – spending time and money to care for kids and aging parents at once.
Here is what we know about Gen X’s degree and pattern of retirement saving, and its progress toward its goals.
Gen Xers began investing for retirement earlier than baby boomers did. According to research from Natixis Global Asset Management, the average Gen Xer started participating in a workplace retirement plan at age 27. That compares with age 31 for baby boomers (and age 23 for millennials).1
Still, this generation has some catching up to do. Would you like to guess the median amount of retirement savings for a Gen Xer? The answer is $69,000. That finding comes from a Transamerica Center for Retirement Studies survey of more than 4,000 workers, taken last summer. To put that in perspective, a 40-year-old who has $69,000 in retirement savings and defers $250 a month into a retirement account returning 6% annually will have $331,649 at age 60, and $481,331 at age 65.2,3
FED RAISES RATES, PLOTS THREE 2017 HIKES
Federal Reserve policymakers unanimously chose to raise the benchmark interest rate by a quarter point last week. That was expected; less expected was the central bank’s adjustment to its 2017 dot-plot. Fed officials now see three rate hikes next year instead of two. The move to the new target range of 0.50-0.75% sent the dollar and bond yields higher Wednesday – the yield on the 2-year note quickly touched a peak unseen since August 2009. Stocks suffered only moderate losses after the announcement. Federal Open Market Committee members now forecast economic growth of 2.1% in 2017 and 2.0% in 2018.1
RETAIL SALES TICK UP, PRODUCER PRICES RISE
Economists, polled by Briefing.com, had expected a 0.4% October advance for retail purchases; the gain was only 0.1% instead, and 0.2% minus car and truck sales. The Producer Price Index rose 0.4% last month after a flat October; the core PPI also posted a 0.4% increase. Inflation pressure remained steady for the consumer: both the headline and core Consumer Price Index advanced 0.2% in November.2
HOUSING STARTS FALL FROM 9-YEAR PEAK
Groundbreaking declined 18.7% last month as winter arrived, with single-family starts down 4.1%. The Census Bureau also reported a 4.7% November decline in building permits.3
Teamwork Counts for Couples Close to Retirement.
Talking about a few lifestyle and financial matters in the years immediately before your retirement transition may help you and your spouse find more happiness in your “second act.”
How close are you to receiving Medicare? Should one or both of you strive to work until age 65? HealthPocket (a tech firm that evaluates health plans) estimates that the average non-smoking, 60-year-old couple would pay nearly $18,000 for a silver plan at one of the health care exchanges (assuming no subsidies). Can you delay filing for Social Security, and time your claims to position yourselves for greater lifetime benefits? If either of you are in line for a pension from your employer, this is the time to weigh the merits of a lump-sum payout that could be invested versus a lifelong income stream.
Are you both going to retire at roughly the same time, or years apart? Have someone run the numbers to show you how those different scenarios might unfold for you in terms of retirement income and retirement spending. Finally, talk to each other about your typical day in retirement – how you want to spend your time, and what you want to spend the most time doing.1
Wednesday, the Federal Reserve raised its key interest rate by 0.25%. That decision surprised no one – at least no one in the financial markets. Hours before the announcement, the CME Group’s FedWatch Tool, which calculates the chance of interest rate moves based on Fed futures contracts, showed a 97.1% probability of a quarter-point hike.1,2
The central bank made its decision “in view of realized and expected labor market conditions and inflation.” Equity investors reacted with some degree of calm: thirty minutes after the news broke, the S&P 500 was down less than 15 points. As for Treasuries, the yield on the 2-year note spiked and hit a peak unseen since 2009 within a half-hour of the release of the Federal Open Market Committee’s statement.2,3
Any other decision could have thrown market participants for a loop. There is no such thing as a “sure thing” on Wall Street, but a December interest rate hike looked like a lock to many analysts. Fed officials had hinted that a move was near, and with economic indicators broadly improving, the Federal Open Market Committee had little choice but to follow through.
Our relationship with money is complex & emotional. When we pay a bill, go to the mall, trade in a car for a new one, hunt for a home or apartment, or pass someone seemingly poor or rich on the street, we feel things and harbor certain perceptions.
Are our attitudes about money inherited? They may have been formed when we were kids. We watched what our parents did with their money, and how they managed it. We were told how important it was – or, perhaps, how little it really mattered. Parental arguments over money may be ingrained in our memory.
This history has an effect. Some of us think of money, finance, investing, and saving in terms of getting ahead, in terms of opportunity. Others associate money and financial matters with family struggles or conflicts. Our family history is not responsible for our entire attitude about money – but it is, undoubtedly, an influence.
SERVICE SECTOR LOOKS VERY HEALTHY
The Institute for Supply Management’s monthly services index improved 2.4 points in November to a 57.2 reading. Analysts polled by Briefing.com had expected a small gain to 55.6. It was the PMI’s best reading since October 2015, and it marked the 82nd consecutive month of expansion for the non-manufacturing segment of the economy.1
HOUSEHOLD SENTIMENT SOARS
Rising 4.2 points to a mark of 98.0, December’s initial University of Michigan consumer sentiment index came in just a tenth of a point below its most recent (2015) peak. This was one of the index’s three highest readings in the last 12 years. The main reason, in the words of University of Michigan economist Richard Curtin: “More consumers spontaneously mentioned the expected positive impact of new economic policies than ever before recorded in the long history of the surveys.”2
OIL FINISHES THE WEEK WITH A FLOURISH
WTI crude advanced 1.22% Friday, reaching $51.46 a barrel as Wall Street ended its trading day. Gold and silver respectively slipped 1.11% and 1.03% on the same day; gold ending the week at $1,159.40 an ounce, and silver, at $16.92 an ounce.3
How does a single parent plan for retirement? Diligently. Regularly. Rigorously. Here are some steps that may help, whether you are just beginning to do this or well on your way.
Setting a household budget can be a wise first step. Most households live without budgets – and because of that financial inattention, some of the money they could save and invest routinely disappears. When you set and live by a budget, you discipline yourself to spend only so much and save (or invest) some of the rest. You need not track every single expense, but try and track your expenses by category. You may find money to save as a result.
Save first, invest next. If you are starting from scratch, creating an emergency fund should be the first priority. It should grow large enough to meet 6-9 months of living expenses. If no financial emergency transpires, then you will end up with a cash reserve for retirement as well as investments.
JOBS REPORT SHOWS UNEMPLOYMENT AT 4.6%
America’s jobless rate fell to a nine-year low in November as companies added 178,000 net new jobs. The U-6 rate (including the underemployed decreased) 0.2% to 9.3%. There were some negatives: yearly wage growth moderated to 2.5%, and the labor force participation rate ticked down to 62.7%, in part because of baby boomer retirements.1
STRONG CONSUMER CONFIDENCE, SPENDING, GDP
As November ended, the Conference Board’s monthly consumer confidence index rose 6.3 points to a mark of 107.1. In October, personal spending increased 0.3%, according to the Census Bureau, with personal incomes up 0.6%. The Bureau of Economic Analysis revised third quarter growth upward by 0.3% to 3.2% last week.2
PENDING HOME SALES, HOME PRICES SEE GAINS
The S&P/Case-Shiller 20-city home price index showed a 5.5% annualized gain in its September edition, improved from 5.2% in August. Housing contract activity rose another 0.1% in October, according to the National Association of Realtors.2
THE MONTH IN BRIEF
November was certainly newsworthy, presenting investors with three historic moments. First, Donald Trump won the presidency in a stunning upset that confounded political analysts. Next, the stock market rallied spectacularly after receiving that unanticipated news – the Dow Jones Industrial Average repeatedly closed at all-time peaks, advancing 5.41% on the month. Finally, OPEC nations agreed to reduce oil output for the first time since 2008, a development that sent crude prices soaring. On the whole, the latest U.S. economic indicators looked good. Existing home sales maintained their pace, even as mortgage rates climbed. A December interest rate hike by the Federal Reserve looked more and more likely.1,2
DOMESTIC ECONOMIC HEALTH
Consumers spent significantly in October. The latest reports from the Department of Commerce showed personal spending up 0.3% in the tenth month of the year, and both headline and core retail sales advancing 0.8%. Personal incomes increased by an impressive 0.6% in October.3,4
Consumer confidence surged in November. The Conference Board’s monthly index hit 107.1, jumping 6.3 points from its October reading; analysts polled by MarketWatch felt it would rise to 102.5. The University of Michigan’s November consumer sentiment gauge rose to 93.8.3
In life, there are times when simple decisions can have a profound impact. The same holds true when it comes to personal finance. Here are some simple choices you could make that may leave you better off financially – in the near term, the long term, or both.
Use less credit. Every time you pay with cash instead of credit, you are saving pennies on the dollar – actually, dimes on the dollar. At the start of December, the average “low interest” credit card in America charged users 12.45%, the average cash back card 17.15%. If you want to see your bank balance grow, try consistently paying in cash. There is no need to pay extra money when you pay for something.1
Set up automated contributions to retirement plans & investment accounts. By automating your per-paycheck salary deferrals to your workplace retirement plan or your IRA, you remove the chore (and the psychological hurdle) of having to make lump-sum contributions. You can bolster invested assets with regular inflows of new money, without even thinking about it. Often, arranging these recurring account contributions takes 20 minutes or less of your time.2
STOCKS SETTLE AT ALL-TIME HIGHS
An abbreviated trading week was also a historic week on Wall Street, as the four key U.S. equity indices all reached new peaks. At Friday’s closing bell, the Russell 2000 settled at a record 1,347.20 after its fifteenth straight day of gains; it was up 2.37% for the week. The Dow advanced 1.47% on the week to a Friday close of 19,152.14. Adding 1.42% in three-and-a-half days, the Nasdaq ended the week at 5,398.92. The S&P 500, which finished Friday up more than 3% since the election, rose 1.40% on the week to 2,213.35.1,2,5
EXISTING HOME SALES RISE, NEW HOME SALES FALL
The National Association of Realtors announced a 2.0% gain for resales in October. Existing home sales have kept their momentum, even with inventory down 4.3% and the median sale price up 6.0% in the past year. According to the Census Bureau, new home sales declined 1.9% in October, but were still up 12.7% year-over-year.3
CONSUMER SENTIMENT IMPROVES
At a final November mark of 93.8, the University of Michigan’s household sentiment index surpassed the consensus forecast of economists polled by MarketWatch, who expected a 92.0 reading. The index’s initial November edition had a reading of 91.6.4
The year in brief. Investors will likely remember 2016 as a year of two momentous votes and one monetary policy decision. This year brought the Brexit referendum in the United Kingdom and a surprise presidential election victory for Donald Trump, and it now appears probable that the Federal Reserve will raise interest rates in December. As Thanksgiving week began, the S&P 500 sat comfortably near 2,200, while the Dow Jones Industrial Average pushed toward breaking 19,000. Some analysts felt both indices would post single-digit advances in 2016, but they may yet surpass those expectations – the S&P was up 7.3% YTD when Thanksgiving week started, and the Dow had advanced 8.6% YTD. Some major overseas indices were also in line for nice 2016 gains. Away from the equity markets, 2016 has been a fine year for commodities, with oil prices rebounding, and a great year for home sales. Investors approached the holidays in a bullish mood.1
Domestic economic health. Economically speaking, 2016 resembles 2015: a poor first quarter, then improved GDP in succeeding quarters. An anemic 0.8% GDP reading for Q1 preceded 1.4% growth in Q2 and a 2.9% rate of expansion in Q3 (a two-year high).2
The headline jobless rate had been at 5.0% in December 2015; by May 2016, it had descended to 4.7%. Then it rose and fell again to end up at 4.9% in October. The U-6 rate, measuring underemployment as well as unemployment, jumped 0.7% to 10.5% in January, but fell to 9.2% by October.3,4
Picture the women of the world growing wealthier. It’s happening right now. Research from the Boston Consulting Group affirms this development. BCG, a leading business strategy advisor, says that as the world grew 5.2% wealthier between 2015 and 2016, women’s wealth grew 6.6%. In total, women own about $39.6 trillion in assets worldwide, and possess a 5% greater share of global wealth in 2016 than they did in 2011.1
What are some of the reasons behind this shift? One reason is that more women are becoming successful business owners. Census Bureau data from 2012 (the most recently available year, at this writing) shows women owning 36% of U.S. businesses, a 30% leap from the levels of 2007. As the ranks of middle market companies rose 4% from 2008-2014, the number of women-owned or women-led middle market firms soared by 32%.2
This has all taken place even though female entrepreneurs typically start a business with 50% less money than their male peers, according to research from the National Women’s Business Council. Perhaps most impressive has been the growth of businesses owned by Latina and African-American women. American Express OPEN found that from 1997-2015, the number of U.S. firms owned by Latinas increased by 224%. Simultaneously, the number of businesses owned by black women rose by 322%. African-American women started up companies at six times the national average during those 18 years.2,3
YELLEN HINTS STRONGLY AT A RATE HIKE
Thursday, Federal Reserve chair Janet Yellen told Congress that the central bank could raise the benchmark interest rate “relatively soon,” calling current monetary policy merely “moderately accommodative.” She added that Fed officials envision “only gradual increases in the federal funds rate over time to achieve and maintain maximum employment and price stability.” Friday, the Fed Rate Monitor Tool at Investing.com put the possibility of a December rate hike at 91%.1,2
FRESH SIGNS OF A HEALTHY ECONOMY
Two economic indicators really stood out last week. Headline and core retail sales increased 0.8% in October, according to the Census Bureau (which also revised the September retail sales gain north to 1.0%). Housing starts advanced 25.5% last month, the Bureau also noted; this more than offset a 9.5% September dip.3
CONSUMER PRICES ROSE 0.4% IN OCTOBER
This change in the Consumer Price Index took its year-over-year increase to 1.6%. A mere 0.1% monthly gain in the core CPI left its 12-month advance at 2.1%. Producer prices were flat last month, with core prices retreating 0.2%; in the year ending in October, the headline Producer Price Index rose only 0.8% with the core PPI advancing 1.2%.3
What financial, business, or life priorities do you need to address for 2017? Now is a good time to think about the investing, saving, or budgeting methods you could employ toward specific objectives. Some year-end financial moves may help you pursue those goals as well.
What can you do to lower your 2017 taxes? Before the year fades away, you have plenty of options. Here are a few that may prove convenient:
*Make a charitable gift before New Year’s Day. You can claim the deduction on your 2016 return, provided you itemize your 2016 deductions with Schedule A. The paper trail is important here.1
If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the IRS does not equate a pledge with a donation. If you pledge $2,000 to a charity in December, but only end up gifting $500 before 2016 ends, you can only deduct $500.1
Wall Street likes certainty. When startling financial, political, or societal events occur, volatility usually follows, and the major indices may fall.
In late October, the Dow Jones Industrial Average went on a multi-day losing streak as Donald Trump caught up to Hillary Clinton in the polls tracking the presidential race. Wall Street had been anticipating a Clinton victory; suddenly, that looked less certain. The Dow gradually sank below 18,000. When Trump won, however, the Dow did not drop further. It rallied for seven days and notched four record closes.1,2
What sparked the Dow’s rally? One, a new presumption of massive federal spending on infrastructure and defense. In August, Trump pledged he would “at least double” Clinton’s proposed federal stimulus if elected, which would mean committing more than $500 billion to repair the nation’s highways, bridges, and ports. He has also talked of greater military spending. Many, if not all, of the 30 companies making up the Dow could play significant roles in such efforts. Two, a Trump presidency is perceived as pro-business, with the potential for decreased regulation, renegotiated trade agreements, and tax cuts.2,3
What has changed for you in 2016? 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 2017 begins.
Even if your 2016 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
In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years.1
BLUE CHIPS HIT ALL-TIME HIGHS
Donald Trump’s unexpected presidential election win did not rattle Wall Street. Instead, bulls saw the prospect of greater federal outlays and less business regulation in the near future. The Dow Jones Industrial Average closed at a new record Friday: 18,847.66. The Dow 30 had its finest week since 2011, gaining 5.36%. As for the S&P 500, it advanced 3.80% in five days to 2,164.45. Settling at 5,237.11 Friday, the Nasdaq Composite rose 3.78% on the week.1,2
FED’S FISCHER: TIME FOR GRADUAL TIGHTENING
Stating that the central bank “appears reasonably close to achieving both inflation and employment components of its mandate,” Federal Reserve vice chairman Stanley Fischer noted Friday that “the case for (raising interest rates) gradually is quite strong, keeping in mind that the future is uncertain and that monetary policy is not a preset course.” Some analysts believe sizable infrastructure spending under a Trump administration could spur inflation. On Friday, Fed fund futures contracts implied an 81% chance of a hike at the central bank’s December meeting.3
CONSUMER SENTIMENT ROSE BEFORE ELECTION
Displaying a reading of 91.6, the University of Michigan’s preliminary November household sentiment index climbed 4.4 points off its final October mark. Analysts polled by Bloomberg forecast an initial November reading of 87.9 for the gauge.4
Could Some Simple Moves Help You Reduce Your Taxes?
Quite possibly. Elaborate tax management strategies aside, you might find ways to cut your tax bill for 2016 and beyond through a few, straightforward steps.
One step is to direct more of your retirement assets into tax-free investment vehicles or investments. Think Roth IRAs. Think fixed-income securities issued by federal, state, or municipal governments. Another step is to save money as you downsize – perhaps the stuff you give away can take the form of a charitable contribution, which you can itemize and deduct. You could also donate appreciated securities to a charity or make a charitable IRA gift. Do you have a home loan? Deduct what mortgage interest you can. Exploit the medical expense deduction
As you try to minimize taxes, you should also acknowledge their impact. Are you in the 15% tax bracket? If so, a $30,000 withdrawal from a traditional IRA will result in around $4,500 of income tax. Pension plan withdrawals are taxable. Even a portion of the payments you receive from a privately arranged, long-term income contract may be taxed. Learning to live with taxes while you live without a salary can be frustrating, but you have no choice.1,2
Each October, the Internal Revenue Service announces changes to annual contribution limits for IRAs and workplace retirement plans. Are any of these limits rising for 2017?
Will IRA contribution limits go up? Unfortunately, no. Annual contributions for Roth and traditional IRAs remain capped at $5,500 for 2017, with an additional $1,000 catch-up contribution permitted for those 50 and older. This is the fifth consecutive year those limits have gone unchanged. The SIMPLE IRA contribution limit is the same in 2017 as well: $12,500 with a $3,000 catch-up permitted.1,2
There are some changes pertaining to IRAs. The limit on the employer contribution to a SEP-IRA rises $1,000 in 2017 to $54,000; this adjustment also applies for solo 401(k)s. The compensation limit applied to the savings calculation for SEP-IRAs and solo 401(k)s gets a $5,000 boost to $270,000 for 2017.1
Investors are people, and people are often impatient. No one likes to wait in line or wait longer than they have to for something, especially today when so much is just a click or two away.
This impatience also manifests itself in the equities markets. When the S&P 500, Dow, or Nasdaq take a tumble, some investors grow uneasy. Their impulse is to sell, get out, and get back in later. If they give into that impulse, they may effectively pay a price.1
Across the twenty years ending in 2015, the annual return of the S&P 500 averaged 9.85%. During this same period, the average retail investor realized a yearly return of just 5.19%. (These numbers come from Dalbar, a respected investment analytics firm.) Why the difference? It could partly stem from impatience.1
Some investors may be worrying too much – and acting on those worries to their detriment. An investor who glances at a portfolio once per quarter may end up making more progress toward his or her goals than one who anxiously pores over financial websites every day.1
News of Donald Trump’s upset election victory did not upend the equities markets. As word of his unexpected Electoral College win traveled around the world, most major indices did not suffer alarming losses. While the Nikkei 225 sank 5.36% overnight, the Shanghai Composite slipped 0.62%, the Sensex 1.23%, and the Hang Seng 2.16%. In Europe, there were notable gains: the FTSE 100 rose 1.00%, the Stoxx Europe 600 1.46%, the CAC-40 1.49%, and the DAX 1.56%.1
Wall Street quickly rallied. Some analysts feared the worst Wednesday morning, but a half-hour after the opening bell, the Dow Jones Industrial Average was up 28 points while the S&P 500 and Nasdaq Composite were barely in the red. Three hours into the trading session, the Dow had gained 179 points, the S&P 16, and the Nasdaq 27. Trump’s post-midnight victory speech, in which he commented that it was “time for America to bind the wounds of division” and to “come together as one united people,” may have had a steadying influence.1,2
How will the key U.S. indices behave going forward? That is the big question. Compared to the Brexit vote, the Trump upset was not a major market disruptor. The S&P, Dow, and Nasdaq did not crater on November 9 and erase their year-to-date gains; will they maintain their equilibrium or even rally between now and 2017? Some of the early viewpoints are reassuring.
NEW DATA SHOWS BRIGHTER JOBS PICTURE
Unemployment fell to 4.9% in October as firms added 161,000 net new workers, but that was just one positive from the Department of Labor’s latest summary of the U.S. employment situation. Year-over-year wage growth reached 2.8%, the best number seen since June 2009, as average hourly pay rose ten cents last month. The U-6 rate (underemployment + unemployment) fell 0.2% to 9.5%. In addition, hiring totals across August and September were revised higher by 44,000.1
CONSUMER SPENDING ROSE IN SEPTEMBER
The ninth month of 2016 saw gains of 0.5% in personal spending and 0.3% in personal incomes, the Commerce Department reported last week. Adjusted for inflation, consumer spending advanced 0.3% for September, as opposed to retreating 0.2% in August.2
MORE EXPANSION AMONG SERVICE & FACTORY FIRMS
The Institute for Supply Management’s twin barometers of the U.S. manufacturing and non-manufacturing sectors were both comfortably above the 50-mark showing growth in October. ISM’s factory purchasing managers index came in at 51.9, up 0.4 points; its service sector PMI declined 2.3 points to 54.8.3
THE MONTH IN BRIEF
Bulls were reined in during October. The S&P 500 lost 1.94% as Wall Street responded unenthusiastically to the fall earnings season. Even though much of the economic news that emerged in October was good, investors saw an interest rate hike on the horizon and remained concerned about an increasingly controversial presidential race. Consumer confidence waned, but improved manufacturing, consumer spending, and retail sales numbers all factored into stronger growth. New and existing home sales accelerated. The price of oil rose, then quickly fell; the price of gold slipped, then recovered just a bit. Overseas, a timeline was set for the Brexit. In the big picture, appetite for risk waned as investors remained cautious.1
DOMESTIC ECONOMIC HEALTH
Economic indicators flashed clear signals that the economy was picking up. Household spending rose a healthy 0.5% during September, the most since June. Household incomes rose 0.3% in the ninth month of the year. Retail sales were up 0.6% for September, with core retail purchases rising 0.5%.2,3
Are you worried about retiring? Many baby boomers are, and they have reason to be, given low interest rates, subpar returns on equities, increasing health care costs, and the issues facing Social Security.
Now, do yourself a favor. Read that last sentence again, and ask yourself, “which of those four things can I control?”
The correct answer: none of them. That may be frightening, but it is also truthful. As you plan for retirement, you must acknowledge that certain factors are beyond your control. As much as you would like to influence or change them, you have no say over them.
So, what can you control? Primarily, three things: the way you save; the way you manage risk; and the way you will spend your savings.
ECONOMY EXPANDS 2.9% IN THIRD QUARTER
After just 1.4% growth in Q2, this was welcome news. Surging exports and greater inventory investment and federal spending made Q3 the best quarter for the economy in two years, according to the Department of Commerce. The federal government’s core PCE price index was up 1.7% for the quarter versus 1.8% in Q2.1
CONSUMER CONFIDENCE INDICES DESCEND
Last week, the Conference Board’s gauge of household confidence came in at 98.6 for October, down from 103.5 in September. The University of Michigan’s final October consumer sentiment index slipped to 87.2 from its prior mark of 87.9.2
PENDING HOME SALES REBOUND
The National Association of Realtors noted a 1.5% gain in housing contract activity in September, following a 2.5% downturn in August. The August S&P/Case-Shiller home price index revealed a 5.3% annual rise in U.S. home values.2
What will happen on Wall Street after November 8? We can shrug and say, “who knows,” and that simple answer may be as good as any other. Trying to predict which way the market will go is difficult, even when it comes to a single trading session. All that said, investors may take some cues from the result of the presidential election and push stocks in one direction or another.
Could there be a market shock? The biggest stock market disruptor so far in 2016 has been the Brexit vote in the United Kingdom. That late June development erased the entire year-to-date advance of the S&P 500 – but the S&P recovered quickly, gaining back its losses by the start of July in a textbook example of stock market resilience. The index rallied for several weeks thereafter.1
The market appears to be pricing in a Clinton win. A Trump win would defy quite a few political forecasts – and perhaps affect Wall Street in a way similar to the Brexit vote.
Every day, articles appear urging people to save for retirement. These articles are so prevalent that it may seem like retirement planning is entirely about getting people to save.
Actually, retirement planning concerns much more than that. It has another aspect well worth discussing: the eventual spending of all of that money that has been accumulated.
Too few Americans coordinate their retirement spending. Earlier this year, Ameriprise asked more than 1,300 savers aged 55-75 if they had a drawdown strategy in mind for the future. Nearly two-thirds of the pre-retirees surveyed did not. A third of the retired respondents to the survey also lacked spending plans.1
In retirement, inattention to household spending can have serious consequences. A newly retired couple can travel too much, eat out too frequently, and live it up to such a degree that its savings can be drawn down abruptly. That danger is heightened if a couple’s investments start to perform poorly. A spending plan may help retirees guard against this kind of crisis.
JTWROS. JT TEN. What do these acronyms stand for? To what degree do their meanings differ? If you own or co-own assets, you should know the subtle distinction that some states make between them.
JTWROS stands for Joint Tenancy with Right of Survivorship. JT TEN stands for Joint Tenants with Right of Survivorship. No difference, right? Well, in some states, courts may see one. Here is a discussion of the meaning of each ownership option, and some fine print worth knowing about.
A JTWROS ownership option gives each co-owner equal rights to an asset or account. When a co-owner dies, the asset/account then passes to the surviving owner(s) without going through probate. The surviving owner(s) then own(s) 100% of the asset/account.1
Is JT TEN just another way to spell JTWROS? In many states, yes – but not all. Most states regard JT TEN as the equivalent of JTWROS, and do not interpret the “TEN” in JT TEN to mean “tenants in common,” which is also called “tenancy by the entirety.” Some states, however, do interpret it to mean “tenants in common.” That interpretation may lead to an asset being probated.
When a spouse passes away, the emotion and magnitude of the loss can send our lives reeling. This profound change can also affect our finances. All at once, we have a to-do list before us, and the responsibility of it can make us feel pressured. With that in mind, this article is intended as a kind of checklist – a list of some of the key financial matters to address following the death of a spouse.
The first steps. These actions should come first. Some of these steps do require locating some documentation. Hopefully, your spouse kept these documents where you can easily find them – either at home, in a safe deposit box, or in an online vault.
*Contact family members, friends, and your spouse’s employer to tell them of your spouse’s passing. (As a courtesy, your spouse’s employer should put you in touch with the person overseeing its employee benefits plan or human resources department.)
*If your spouse owned a business, check to see what plans are in place for its short-term continuation. Will a partner or key employee take the reins for the time being (or for the long term) as a result of a defined succession plan?
YEARLY INFLATION INCREASES
Consumer prices rose 1.5% in the 12 months ending in September, the Bureau of Labor Statistics announced last week. That is the highest annualized inflation rate seen since October 2014, up from 1.1% in the year ending in August. The headline Consumer Price Index advanced 0.3% last month; the core CPI 0.1%.1
EXISTING HOME SALES REBOUND
September saw a 3.2% gain in resales – the first improvement since June, according to the National Association of Realtors. First-time buyers made up 34% of home purchasers, a 4-year peak. Separately, the Census Bureau reported a 9.0% plunge for groundbreaking in September, but building permits increased by 6.3%.2,3
OIL PRICES KEEP RISING; STOCKS MAKE MINOR GAINS
Settling Friday at $50.85, light sweet crude added 1.0% for the week. Crude now has a 5-week winning streak going on the NYMEX. All three major indices advanced during the past five trading days. The S&P 500 rose 0.38% to 2,141.16; the Nasdaq Composite, 0.83% to 5,257.40; and the Dow Jones Industrial Average, 0.04% to 18,145.71.4,5
The average Social Security recipient will get a $5 raise next year. Yes, a whopping $5 per month. In 2017, Social Security’s mean monthly benefit is projected to rise – from the current $1,355 – by this scant amount, all because of low yearly inflation measured by the federal government.1,3,4
Social Security cost-of-living adjustments are tied to changes in the CPI-W. This is a version of the Consumer Price Index that measures inflation for urban wage earners and clerical workers. If that seems a bit incongruous to you, it also does to many senior advocacy groups. They would prefer that these cost-of-living adjustments be based on the CPI-E, a version of the CPI that tracks consumer costs for the elderly.1,2,3
The CPI-E gives more weight to increases in medical and housing costs than the CPI-W. If Social Security COLAs were linked to the CPI-E, the thinking goes, they might be greater. Data from the Bureau of Labor Statistics backs up this assertion, as healthcare costs alone advanced 5.1% in the 12 months ending in August.1,3
When we go to the grocery store, we seldom shop on logic alone. We may not even buy on price. We buy one type of yogurt over another because of brand loyalty, or because one brand has more appealing packaging than another. We buy five bananas because they are on sale for 29 cents this week – the bargain is right there; why not seize the opportunity? We pick up that gourmet ice cream that everyone gets – if everyone buys it, it must be a winner.
As casual and arbitrary as these decisions may be, they are remarkably like the decisions many investors make in the financial markets.
A degree of emotion also factors into many of our financial choices. There is even a discipline devoted to how our emotions affect our financial decisions: behavioral finance. Examples of emotionally driven financial behaviors are all around us, especially in the investment markets.
Behavior #1: Believing future performance relates to past performance. In truth, there is no relation. If an investment yields 8-10% for six consecutive years, that does not mean it will yield 8-10% next year. Still, we may be lulled into expecting such performance – how can you go wrong with such a “rock solid” investment? In behavioral finance, this is called recency bias. Bullish investors tend to harbor it, and it may lead to irrational exuberance.1
Imagine cash falling from the sky into the hands of grateful consumers. Fleets of helicopters hover over cities, dispensing massive flurries of $100 bills. Everyone gets their fair share of the money. Presto, economic stimulus.
This is pure fantasy, of course, but some economists think that the Federal Reserve should consider its figurative equivalent. Picture the Fed and other components of the federal government agreeing to boost the money supply in a radical, spectacular way – either by cutting taxes across the board or handing out cash to all Americans with no strings attached.1
This idea has been around for years. Noted economist Milton Friedman introduced it in an essay in 1969, coining the phrase “helicopter money.” Former Fed chair Ben Bernanke is a fan of the concept, and even legendary bond fund manager Bill Gross has called for it. “It is something that one might legitimately consider,” current Fed chair Janet Yellen noted earlier this year.1,2
Will you live to 100? Your odds of becoming a centenarian may be improving. Earlier this year, the Centers for Disease Control reported that the population of Americans aged 100 or older rose 44% between 2000-2014. The Pew Research Center says that the world had more than four times as many centenarians in 2015 as it did in 1990.1,2
If you do live to 100, will your money last as long as you do? What financial steps may help you maintain your retirement savings and income? Consider these ideas.
Keep investing in equities. The S&P 500 does not automatically gain 10% or more each year, but it certainly has the potential to do so in any year. As the benchmark interest rate is still well below 1%, fixed-rate investments are not producing anything close to double-digit returns. Some fixed-rate vehicles are even failing to keep up with the current inflation rate (1.5%). Turning away from equity investments in retirement may seriously hinder the growth of your savings and your level of income.3
More than $40 billion in unclaimed cash & property waits to be returned. At first glance, that figure seems staggering, unbelievable – and, yet, it is true. To be more exact, the National Association of Unclaimed Property Administration (NAUPA), a coalition of state unclaimed property programs, puts the total at $41.7 billion.1
How do you find out if some of this money is rightfully yours? As a first step, you can either go to missingmoney.com (a NAUPA website), or the website of your state’s unclaimed property program. A search should let you know the answer. Aside from searching in the state where you currently reside, you can also search for unclaimed assets in states where you previously worked or lived.1
In all 50 states, financial institutions and insurers must escheat (i.e., hand over) account assets to the state if the owner has failed to contact the institution or insurer for a year or longer. The onus is then on the state’s unclaimed property department to find the owner, or at least make public that such assets are waiting to be claimed. How long does an original owner or an heir have to claim the forgotten assets? Usually, there is no statute of limitations.1
RETAIL SALES JUMP 0.6%
This September gain was impressive – minus auto sales, the advance was still 0.5%. In August, both headline and core retail sales fell 0.2%. While consumers bought more last month, they were less confident earlier this month – the University of Michigan’s initial October consumer sentiment index fell 3.3 points to 87.9.1
INTEREST RATES MAY SOON RISE
The minutes from September’s Federal Reserve policy meeting affirmed what some investors suspected. One, last month’s decision not to raise the federal funds rate was a “close call.” Two, the Federal Open Market Committee expects to make a move “relatively soon.” Last month, 74% of economists responding to a Wall Street Journal survey thought the central bank would raise rates in December.2
PRODUCER PRICE INDEX UP 0.3%
A 2.5% advance in energy prices became the biggest factor in September’s PPI gain. The headline PPI rose 0.7% in the 12 months ending in September.3
Do You Understand the Social Security “Earnings Penalty”?
Most baby boomers know that their Social Security benefits can be reduced if they earn too much in retirement. While 76% of baby boomer respondents to a 2015 AARP survey understood this fact, 57% also thought they would never recoup those surrendered benefits. That is incorrect.
Social Security’s “earnings test” only applies before you reach Full Retirement Age (66-67 years old, depending on your birthdate). If you receive Social Security benefits before your FRA, your benefits will be reduced by $1 for every $2 in wage income or self-employment income you earn above a $15,720 yearly threshold. During the 12 months prior to your FRA, you can earn up to $41,880 without any of your benefits being withheld; $1 of your benefits will be held back for every $3 you earn above that amount.
If some of your benefits are withheld as a consequence of all this, Social Security will try and make it up to you. After your FRA, your monthly Social Security payment will grow slightly larger; any benefits withheld will gradually be paid out to you, and you will no longer face the “earnings test.”1
In November 2012, the interest rate on a 30-year home loan averaged just 3.31%. That was an all-time low. Simultaneously, the 15-year fixed-rate mortgage averaged just 2.63% interest and the rate on the adjustable 5/1-year loan fell to 2.74%.1,2
Nearly four years after Freddie Mac reported those numbers, mortgage rates are back near those levels. The 30-year FRM has averaged less than 4% interest all year, declining from a high of 3.97% in Freddie’s January 7 Primary Mortgage Market Survey down to the vicinity of 3.5%, in its September 15 PMMS findings.3
Are ultra-low mortgage rates here to stay? They could be. When the Federal Reserve raised the benchmark interest rate in December 2015, analysts thought mortgages would gradually become more expensive. That hasn’t happened. An overseas economic development helped to keep them in check. After voters in the United Kingdom approved the Brexit in June, U.S. investors raced to buy Treasuries. Their yields hit record lows as prices jumped, thanks to demand.4
Most people begin insuring themselves when they marry or start a family. They buy coverage in response to two potential calamities – disability during their working years, and death.
Somewhere between youth and death comes retirement, and in retirement, the role of insurance is often downplayed. Does a retired multimillionaire really need a life insurance policy? Now that he or she is not working, what is the point of having disability coverage?
Make no mistake, insurance can play a vital role in retirement planning. It may help to keep a retiree household financially afloat in a money crisis. It can also be used creatively to address other financial concerns.
What can life insurance do for a retiree before he or she dies? Many permanent life insurance policies accumulate cash value over time. Potentially, that cash value could be tapped to pay off medical expenses, education debt, mortgage debt, or debts owed by a business. It could fund a buy-sell agreement. It could go into an investment vehicle that could later pay out income. While the death benefit of a policy may be reduced as a consequence, the trade-off may be worth it for the policyholder.1
HIRING PICKED UP IN THE THIRD QUARTER
Employers added 156,000 net new jobs to their payrolls in September, the Department of Labor stated Friday. The August gain was revised up to 167,000, so monthly job growth averaged 192,000 in Q3, improved from 146,000 in Q2. The unemployment rate ticked up to 5.0% in September; the U-6 underemployment rate remained at 9.7%. Yearly wage growth reached 2.6%, with the average hourly wage rising six cents to $25.79.1,2
ISM INDICES SHOW A SEPTEMBER REBOUND
America’s manufacturing sector grew again last month; the Institute for Supply Management’s factory PMI improved to 51.5 in September, recovering from its recessionary August mark of 49.4. The Institute’s non-manufacturing PMI surged north 5.7 points last month, rising to 57.1.2
OIL & GOLD PRICES HEAD IN OPPOSITE DIRECTIONS
On Friday, gold closed down at $1,251.90 on the COMEX, falling about 5% for the week. Light sweet crude advanced just over 3% last week, closing at $49.81 on the NYMEX Friday, even after a 1.3% loss during the trading week’s last session.3
THE MONTH IN BRIEF
Investors had plenty of news to absorb in September: the latest monetary policy statement from the Federal Reserve, the Wells Fargo fiasco and the crisis involving Deutsche Bank, and a major deal forged between OPEC member nations. Add in the presidential race and a raft of economic data, and you had all the ingredients for market turbulence. Wall Street saw much of that last month. Yet, at the close on September 30, the S&P 500 was little changed from the end of August – the index was just 0.12% lower. The latest housing indicators showed fewer home sales and less groundbreaking; hiring tapered off, and news came that the manufacturing sector had abruptly contracted. Even so, consumer confidence strengthened.1
DOMESTIC ECONOMIC HEALTH
Would the Federal Reserve raise the key interest rate in September? As it turned out, no. The Fed elected to postpone a rate hike, a decision in line with market expectations. The 7-3 vote was, however, unusually close, and the latest Fed dot-plot indicated consensus for a rate increase before the end of the year. At the press conference following the release of the Federal Open Market Committee’s statement, Fed chair Janet Yellen noted that the FOMC is “generally pleased with how [the] economy is doing.”2
Main Street seemed to share that feeling as well. Both of the key consumer confidence polls ended September higher. The University of Michigan index went from 89.8 at the end of August to a final September mark of 91.2, while the Conference Board’s gauge went north 3.0 points to a very strong reading of 104.1.3,4
THE QUARTER IN BRIEF
The economy seemed to hit a soft patch this summer, but stocks carried onward and upward – the S&P 500 advanced for a fourth straight quarter in Q3, rising 3.31%. Markets were notably placid for much of the quarter, even with two major banking scandals, multiple terror attacks, and the latest dispatches from an especially contentious presidential race in the headlines. As Q3 went on, the Federal Reserve all but signaled to investors to expect a rate hike before the end of the year. Home sales, residential construction, factory activity, and consumer spending seemed to wane in the quarter, but consumers grew more confident.1
DOMESTIC ECONOMIC HEALTH
As Wall Street mulled over the chances of a fall interest rate increase, some economic indicators pointed to a summer slowdown. In August, the Institute for Supply Management’s manufacturing purchasing managers index went under 50 (49.4), meaning the sector had contracted for the month. Both industrial and manufacturing production declined 0.4%. Durable goods orders, up 3.6% for July, were suddenly flat. Retail sales fell off by 0.3%, and personal spending was flat after an 0.4% gain in July (personal incomes did manage to rise another 0.2%).2,3
The pace of hiring also moderated in August, though July’s number was revised upward in September. Employers added 275,000 new jobs in July, 151,000 for August. The headline jobless rate (4.9%), the U-6 rate counting the underemployed and the unemployed (9.7%), and the labor force participation rate (62.8%) were exactly the same in both months.4
Some myths & misperceptions keep circulating about Social Security. These are worth dispelling, as more and more baby boomers are becoming eligible for their retirement benefits.
Myth #1: Social Security will go away before you do. The federal government has announced that Social Security may become insolvent between 2033 and 2037 if no action is taken – but it is practically a given that Congress will act on the program’s behalf. Social Security provides 40% of the total income of the 40 million Americans receiving retirement benefits.1
Did you know that Social Security has had a surplus each year since 1984? That situation is about to change. By about 2020, the program is projected to face a deficit, which it will tap incoming interest payments to offset. It will only be able to use that tactic until the mid-2030s. The program will not “run dry” or go bankrupt at that point, but by some estimates, its payments to retirees could become about 25% smaller.1
Does buying a home make sense for you financially? It may or may not, depending on some financial, career, and lifestyle factors. Your savings, your credit, your salary, your level of disposable income, and your housing preferences all count.
If you are serious about becoming a homeowner, you should have three priorities: keeping your credit score above 700, saving up the down payment, and getting pre-approved for a mortgage.
How can you calculate how much home you can afford? The rules of thumb are fairly simple. If you intend to assume a 30-year fixed rate mortgage, your monthly housing expenses should amount to no more than 28% of your monthly gross income. For Federal Housing Administration (FHA) loans, the general rule is that the mortgage payment should be less than 31% of the buyer’s gross monthly income. For Veterans Administration (VA) loans, the rule is that the debt-to-income ratio should not exceed 41% of gross monthly income.1,2
Before your divorce goes through, it will be wise to check up on financial matters. It will be better to assess the state of your financial life before the split rather than after.
Find out where you stand financially. Beyond your salary and your bank accounts, how much do you have in the way of retirement savings? What will your monthly income be? What investments do you hold? Will you retain ownership of any real estate, and assume the mortgage payments yourself? Will you be selling any assets or ownership interests?
You should document everything about your personal finances. Everything you can think of. Whether you scan it or copy it, you should have as complete a picture of your financial life as possible.
The picture of your financial life should also detail your credit & insurance. Do you know your credit score? Today, a good credit score is considered anything north of 690. If you have a score in the mid-600s, you have fair credit. Below 630, you have poor credit.1
NO ADVANCE IN CONSUMER SPENDING
Personal spending was flat in August even as personal incomes rose 0.2%. These numbers from the Department of Commerce fell short of expectations: economists polled by MarketWatch had forecast a 0.2% gain in both categories. In other news linked to consumer spending, the federal government revised second-quarter GDP up to 1.4% in its third estimate; it had previously put Q2 growth at 1.1%.1
HOUSEHOLD CONFIDENCE IMPROVES
September brought a big jump in the Conference Board’s closely watched consumer confidence index, which rose 3.0 points to 104.1. The University of Michigan’s consumer sentiment index ended September at 91.2, up from 89.8 at the end of August; the main factor in that gain was an improved outlook among higher-income households.1,2
NEW HOME SALES DIP 7.6%
This housing indicator tends to be very volatile, and this August retreat follows a 13.8% July advance. The median new home price was down 5.3% in August from a year earlier, the Census Bureau noted. Looking at other real estate data, the July edition of the 20-city S&P/Case-Shiller home price index showed a 5.0% annual increase in existing home values, ticking down from 5.1% in June; the National Association of Realtors said that pending home sales fell 2.4% in August.1,3
Switching from one job to another can literally pay off. Data from payroll processing giant ADP confirms that statement. In the first quarter of this year, the average job hopper realized a 6% pay boost. The salary increase averaged 11% for workers younger than 25.1
A recent LinkedIn study found that Generation Y is making job switching something of a habit: on average, millennials will change jobs four times from age 22-32. This compares to an average of two job moves in the first decade out of college for Generation X.2
As you change jobs at any age, you need to take care of a few things during the transition. On your way to (presumably) higher pay, be sure you address these matters.
Since the start of this decade, Wells Fargo employees have created millions of fake bank and credit card accounts to meet their sales goals. While those deemed at fault are being punished, the question is whether the consequences will equal the actions committed.
The details. From 2011-16, Wells Fargo collected $2.6 million in customer fees as its employees set up more than 1.5 million unsanctioned deposit accounts and more than 500,000 unapproved credit card accounts.1
Some years ago, Wells Fargo CEO Dick Kovacevich introduced the idea that “eight is great” – meaning that any household banking with Wells Fargo should eventually be sold eight of its products. This longstanding cross-selling objective seems to have fostered dishonesty at Wells Fargo, at least under the leadership of current CEO John Stumpf.1,2
FED WAITS TO RAISE INTEREST RATES
Federal Reserve officials decided against a rate hike last week, but two details in the central bank’s latest policy statement suggested an upward move was near. One, the Federal Open Market Committee voted 7-3 against raising the federal funds rate – an unusually close margin. Two, the Fed’s new dot-plot forecast showed consensus for a rate increase before the end of 2016. “Our decision [to wait] does not reflect a lack of confidence in the economy,” Fed chair Janet Yellen told the media after the announcement. “We’re generally pleased with how the U.S. economy is doing.”1
FEWER HOUSING STARTS, LESS HOMEBUYING
August saw existing home sales dip 0.9%; as the National Association of Realtors delivered that news, it also revised its July sales calculation to a decline of 3.4%. A Census Bureau report showed housing starts falling 5.8% last month, and building permits decreasing 0.4% following an 0.8% retreat in July.2
OIL GAINS FOR WEEK, EVEN WITH 4% FRIDAY FALL
WTI crude settled Friday at $44.48 on the NYMEX, even after the price slipped 4% in one trading day. The worst daily drop for the commodity since July 13 did not stop crude from posting a 2% weekly gain.3
Your retirement may seem near at hand or far away, but one thing is certain: your future will differ from your present.
Financially, that fact is worth remembering. Some of the costs you have paid regularly all these years may suddenly decrease or fade away. Others may increase.
Will your insurance costs rise with age? Maybe not. You may find that your overall insurance expenses decline. Yes, health insurance becomes more expensive the older you get – but those premiums are merely part of the bigger insurance coverage picture. If you stop working in retirement, you have no need for disability insurance. You might have little need for life insurance, for that matter. You may have paid off your home and other major debts, and rather than drawing income from work, you will be drawing it from investments and Social Security.
You can expect your medical expenses to increase. By how much, exactly? That will vary per household, but perhaps you have read some of the latest estimates. This summer, Fidelity Investments said that a 65-year-old couple retiring today will need around $260,000 to cover future health care costs. This estimate assumes they live 20-22 years after they retire. Long-term care coverage was not included in that projection; Fidelity projects that a policy providing three years of care at $8,000 a month would cost the same couple an extra $130,000.1
Did you know you can buy & sell real estate using a tax-deferred retirement account? It is completely possible to do that if you have a self-directed IRA – that is, an IRA that permits alternative investments.
Why would you involve a self-directed IRA in a real estate transaction? Two reasons come to mind. One, the IRS will let you deduct or write off any contribution you make to most IRAs. Two, if you buy real estate using a self-directed IRA, the self-directed IRA can later sell the appreciated asset without triggering capital gains tax, with the profits of sale flowing right back into the IRA. (An exception may occur if a loan has been used to buy the property.)1,2
So in terms of deferring tax, is this a better strategy than a 1031 exchange? In some instances, yes – but not always. If you need debt financing in order to acquire a replacement property, a like-kind exchange may be the better option. Some self-directed IRAs can leave you with taxable income (read: tax) if you buy a replacement property with a loan. Otherwise, the use of a self-directed IRA is worth exploring.3
RETAIL SALES DECREASE SLIGHTLY
Shoppers bought 0.3% less goods and services in August, according to the latest monthly report from the Department of Commerce – but minus auto sales, the decline was just 0.1%. Retail sales were still up 1.9% from year-ago levels, with online sales rising 10.9% in 12 months.1
CONSUMER COSTS RISE IN AUGUST
The Consumer Price Index rose 0.2% after a flat July, with the core CPI up 0.3%. Economists surveyed by MarketWatch had expected the headline and core CPI to respectively advance 0.1% and 0.2%. August brought no change whatsoever in the Producer Price Index, which had fallen 0.4% a month earlier. Speaking of production, the Federal Reserve announced a 0.4% dip in industrial output for August, a marked difference from July’s 0.6% gain.2
HOUSEHOLD SENTIMENT INDEX SHOWS NO CHANGE
Friday, the University of Michigan’s consumer sentiment index displayed an initial September reading of 89.8, duplicating its final August mark. In September 2015, the index was at 87.2.3
$6,876. That is the average amount of credit card debt owed by an American household headed up by an individual aged 65-69.1
If you are newly retired or close to retiring, that figure may alarm you. It is more than twice the amount of Social Security’s maximum monthly income payment.2
Credit card use is surging, and seniors are taking on more revolving debt as part of the trend. That $6,876 figure comes from personal finance website ValuePenguin, which just published its latest yearly study on U.S. credit card debt. As ValuePenguin found, revolving debt shrinks little with age: in households headed up by those 75 and older, the mean credit card balance was $5,638.1
In the second quarter of 2016, Americans charged $34.4 billion to their credit cards. According to research from WalletHub, that was the biggest second-quarter jump seen in 30 years. Undoubtedly, this was a byproduct of the quarter’s 4.4% boost in consumer spending. All this recently added consumer debt would seem less troubling were it not for two other statistics. One, Americans paid down just $27.5 billion in revolving debt in Q1 2016, the least in any first quarter since 2008. Two, U.S. consumers piled on $71 billion in credit card debt during 2015, representing the greatest annual increase since 2007.3,4
Can You Determine Your Ideal Retirement Income by Formula?
Retirement income formulas can serve as a starting point or simple estimation of the amount of money you may need per month or year, but other factors may influence those needs as well. Some articles state that you need to live on 70% or 80% of your end salary in retirement, but such rules of thumb may prove simplistic. Claims that you need to amass a certain amount to retire comfortably today can also gloss over some key retirement planning variables.
For example, when and where do you think you will retire? Leaving work a few years earlier (or later) will affect your income planning. So will retiring to another location. There are retirees who move to more affluent areas with higher costs of living, even as they move into smaller homes. Do you want to travel quite a bit, or pursue a particularly expensive hobby or passion? Fulfilling those dreams might require more income than you now imagine. How about inheritances, bonuses, or selling your company? These potential cash infusions can decrease income needs, just as health crises or eldercare can increase them. A good retirement planner may help you determine your needs in a way that simple math may not.1
SERVICE SECTOR SEES WEAKEST GROWTH SINCE 2010
The Institute for Supply Management’s non-manufacturing purchasing manager index came in at a disappointing 51.4 in August, 4.1 points below its July level. While American service industries expanded for a 79th consecutive month, the pace of expansion was the slowest since February 2010, and the monthly drop in the ISM index was the largest recorded since November 2008.1
BEIGE BOOK SHOWS LITTLE WAGE PRESSURE
If the economy is near full employment, it is not seeing the strong wage and inflation gains usually linked with that situation. The Federal Reserve’s latest summation of economic activity in its 12 districts stated that wage growth was “fairly modest” with little improvement expected in the near term. While wages increased in many districts for highly skilled workers, the Fed also noted that employers had been hard-pressed to fill job vacancies in the IT, engineering, and construction fields.2
OIL, GOLD PUSH HIGHER
WTI crude advanced 3.2% last week, even with a 3.7% Friday slip. Crude settled at $45.88 a barrel on the NYMEX Friday. Gold ended the week at a COMEX price of $1,334.50, up 0.6% in five days.3
THE MONTH IN BRIEF
How calm was August? Very. At the close on August 31, the S&P 500 had not moved 1% up or down in a trading session since July 8. The latest round of U.S. economic indicators showed a healthy labor market, solid consumer spending, decent consumer confidence, and bearable consumer inflation. The numbers were encouraging – so encouraging that Federal Reserve officials began to suggest the possibility of a fall interest rate move. The latest home sales figures were mixed. Oil rallied, while gold retreated. There was good news about growth in the emerging markets, and it was a good month for some of the leading foreign indices.1
DOMESTIC ECONOMIC HEALTH
For the second consecutive month, hiring totals impressed. Non-farm payrolls swelled with 255,000 additional jobs in July. June’s job gain was revised up by the Department of Labor to 292,000. As labor force participation increased a bit, the main jobless rate remained at 4.9%, while the U-6 gauge of underemployment ticked north to 9.7%. The average hourly wage for private workers increased by seven cents to $21.59.2
The Conference Board’s consumer confidence index went up in August. It rose 4.4 points to 101.1, far surpassing the 97.0 consensus from economists polled by Briefing.com. August did see a small slip in the University of Michigan index measuring household sentiment. That index ended the month at 89.8, down from the final July mark of 90.4.3,4
Just how many millionaires does America have? By the latest estimation of Spectrem Group, a research firm studying affluent and high net worth investors, it has more than ever before. In 2015, the U.S. had 10.4 million households with assets of $1 million or greater, aside from their homes. That represents a 3% increase from 2014. Impressively, 1.2 million of those households were worth between $5 million and $25 million.1
How did these people become rich? Did they come from money? In most cases, the answer is no. The 2016 edition of U.S. Trust’s Insights on Wealth and Worth survey shares characteristics of nearly 700 Americans with $3 million or more in investable assets. Seventy-seven percent of the survey respondents reported growing up in middle class or working class households. A slight majority (52%) said that the bulk of their wealth came from earned income; 32% credited investing.2
It appears most of these individuals benefited not from silver spoons in their mouths, but from taking a particular outlook on life and following sound financial principles. U.S. Trust asked these multi-millionaires to state the three values that were most emphasized to them by their parents. The top answers? Educational achievement, financial discipline, and the importance of working.2
Hillary Clinton & Donald Trump have big plans for America. How might their proposed federal budgets impact the federal deficit and the national debt?
Any discussion of this must proceed from a fundamental understanding: regardless of who wins the election, the Congressional Budget Office estimates that the deficit will near $800 billion in 2020.1
Hillary Clinton’s budget would boost health, education, & infrastructure spending. It would increase Affordable Care Act subsidies; resolve the “family glitch,” making some households ineligible for such credits; and eliminate the “Cadillac tax” on “high-cost,” employer-sponsored health plans. It would direct grants to states, so that students whose parents earn less than $85,000 a year could attend public universities in their home states for free. (That threshold would incrementally rise to $125,000 within four years of implementation.) Another $275 billion (or more) would be spent on projects to rebuild highways and bridges.1,2,3
To help cover the increased expenditures resulting from the proposals in her budget, Clinton would utilize the 3.8% investment surtax, which is currently levied on incomes greater than $200,000 or $250,000 for individuals and couples, respectively, and apply it to pass-through business income as well. Thus, this surtax would not only be implemented to eligible households, but also to limited partners, members of LLCs and owners of S-corporations. In addition, owners of CPA firms, law firms, consulting firms and other professional services businesses would face payroll taxes on their incomes.3
MODEST JOB GROWTH IN AUGUST
Payrolls expanded with 151,000 net new jobs last month, according to the Department of Labor’s latest report. The jobless rate was unchanged at 4.9%, and the U-6 rate tracking underemployment remained at 9.7%. After the release of the data, Wall Street traders saw only a 21% chance of a September interest rate hike by the Federal Reserve and a 55% chance of a rate increase by the end of 2016.1
FACTORY SECTOR CONTRACTS
Taking a surprisingly steep drop, the Institute for Supply Management’s manufacturing purchasing manager index fell down to 49.4 in August, indicating a slowdown in U.S. factory activity. In July, the PMI had a reading of 52.6.2
SOLID CONSUMER CONFIDENCE, SPENDING NUMBERS
The Bureau of Economic Analysis noted a 0.3% rise in personal spending and a 0.4% gain for personal income in July. The Conference Board’s consumer confidence index rose 4.4 points in August to an impressive 101.1 mark.2
September is National Life Insurance Awareness Month – a good time to think about the value and importance of insuring yourself.
According to a recent Bankrate survey, 42% of Americans have no life insurance at all. They may not know that life insurance coverage has become much more affordable than it once was.1
Many people ask if life insurance is really worth the cost; maybe you are among them. The simple answer to that question is yes. It can be stunningly cheap: a healthy, non-smoking man in his thirties may pay less than $45 a month for a $1 million 20-year term policy. Permanent life insurance costs more than term life insurance, but permanent life policies can build cash value over time; term policies cannot.2
Life insurance is about managing risk, and if other people rely on you financially, you need to have it in place in case your passing puts them at financial risk. When a spouse or parent dies, there are financial matters to address: a sudden lack of income for a household, bills and mortgages or rent to pay, final expenses such as funeral or cremation costs, and the cost of children’s education. Without adequate life insurance coverage, a household is hard-pressed to meet these immediate, financially draining challenges.
YELLEN HINTS AT A RATE HIKE
Speaking Friday at the Federal Reserve’s annual retreat in Jackson Hole, Wyoming, Fed chair Janet Yellen commented that “the case for an increase in the federal funds rate has strengthened in recent months.” That statement was interpreted by some economists as a sign that the central bank could adjust interest rates this fall, but perhaps only after the presidential election.1
NEW HOME SALES ACCELERATE, RESALES DECLINE
The good news, from the Census Bureau: July brought a 12.4% leap in new home buying. Sales approached a 9-year peak, even with only 4.3 months of new home inventory available. The bad news, from the National Association of Realtors: July saw existing home purchases slip 3.2%. Inventory was down 5.8% year-over-year; the median sale price was $244,100, 5.3% better than a year earlier.2
SENTIMENT GAUGE SLIPS IN AUGUST
The University of Michigan’s consumer sentiment index finished the eighth month of the year at 89.8, underneath its 90.4 preliminary reading. Consumer assessment of current economic conditions remained high at 107.0, increasing nearly a point from the initial August survey.3
Wall Street has had a rather calm summer. How about fall? Will volatility increase before and after Election Day?
So far, the market is performing roughly in line with historical patterns. In 19 of the prior 22 presidential election years, the S&P 500 advanced from June through October. The median gain for the index during that 5-month period: 4.1%.1
During those 22 election years, the S&P averaged a gain of 1.5% in June, 1.9% in July, and 3.0% in August. This year, the S&P rose 0.1% in June and rallied 3.6% in July; it is up slightly for the month as August draws to a close. An August gain would represent its sixth straight monthly advance.1,2
In past election years, July & August have been the most volatile months. The yearly standard deviation for the S&P averaged 18.6% during the past 22 election years, but volatility averaged 28.8% in July and 30.3% in August of those 22 years. (These July and August numbers, however, are a bit distorted as a result of the wild market turbulence of 1932. In that year, the S&P gained 55.7%.)1
IS A 2016 INTEREST RATE HIKE STILL POSSIBLE?
According to the minutes from the Federal Reserve’s July monetary policy meeting, some Federal Open Market Committee members felt “that economic conditions would soon warrant taking another step in removing policy accommodation.” Others favored waiting longer to adjust rates, contending that the strong hiring seen in recent months would presently moderate. Fed officials broadly agreed that more economic data would be needed before any action.1
NO CPI ADVANCE IN JULY
The federal government’s Consumer Price Index went nowhere last month, leaving yearly inflation at a mere 0.8%. The core CPI advanced another 0.1%, which put the 12-month gain in core consumer prices at 2.2%. In the year ending in June, annual headline inflation was at 1.0%; core inflation, at 2.3%.2
HOUSING STARTS RISE 2.1%
This gain comes on the heels of the 5.1% advance for June (first recorded by the Census Bureau as a 4.8% gain). July’s improvement sent the seasonally adjusted annual rate of groundbreaking to a 5-month high. The pace of building permits ticked down 0.1% last month.3
Seemingly every presidential candidate offers a plan for tax reform. You can add Donald Trump and Hillary Clinton to that long list. Here is a look at their plans, and the key reforms to federal tax law that might result if they were enacted.
Donald Trump revised his tax plan this summer. The latest plan put forth by Trump and his advisors contains the key features of the one introduced last year.
Under Trump’s plan, the standard deduction would rise. It would rise from the current level of $6,300 to $25,000 for single filers. Joint filers could claim a $50,000 standard deduction. (The GOP plan proposes respective standard deductions of $12,000 and $24,000.) Instead of seven federal income tax rates, there would just be three – 12%, 25%, and 33%. (In his original tax reform blueprint, the rates were 10%, 20%, and 25%.)1
The estate tax would vanish entirely under Trump’s plan. Taxes on capital gains and dividends would top out at 20%.2,3
Trump wants to reduce the corporate tax rate from 35% to 15%. The new lower rate would apply to partnerships, LLCs, and S corps as well as C corps. (With a proposed corporate tax ceiling of 15% and a proposed individual tax ceiling of 33%, some economists have wondered if a Trump presidency might generate a wave of individuals incorporating themselves.) Full expensing would also be allowed for business investments under Trump’s plan.1
Will you receive tax-free money in retirement? Some retirees do. You should know about some of your options for tax-free retirement distributions, some of which are less publicized than others.
Qualified distributions from Roth accounts are tax-free. If you own a Roth IRA or have a Roth retirement account at work, you can take a tax-free distribution from that IRA or workplace retirement plan once you are older than 59½ and have held the account for at least five tax years. One other nice perk: original owners of Roth IRAs never have to take Required Minimum Distributions (RMDs) during their lifetimes. (Owners of employer-sponsored Roth retirement accounts are required to take RMDs.)1,2
Trustee-to-trustee transfers of retirement plan money occur without being taxed. In a rollover of this kind, the custodian financial firm that hosts your workplace retirement plan account makes a payment directly out of the account to an IRA you have waiting, with not a penny in taxes levied or withheld. Trustee-to-trustee transfers of IRAs work the same way.3
RETAIL SALES WEAKEN
July was the first month since March without a gain in U.S. retail purchases. The Census Bureau’s latest report showed retail sales were flat last month, a disappointment in the wake of June’s 0.8% climb. Car and truck sales advanced 1.1% during July, but, minus auto buying, retail sales were actually down 0.3% for the month.1
HOUSEHOLD SENTIMENT INDEX IMPROVES
The University of Michigan’s monthly consumer sentiment index rose to 90.4 last week in its preliminary August edition. It had ended July at a mark of 90.0. A consensus forecast of economists at Briefing.com had projected a 90.2 reading.1,2
WHOLESALE INFLATION RETREATS
The federal government’s Producer Price Index moved 0.4% lower in July as declining energy costs lessened inflation pressure. The core PPI fell 0.3%. In June, the headline PPI rose 0.5%; the core PPI, 0.4%.1,2
Your Social Security income could be taxed. That may seem unfair, or unfathomable. Regardless of how you feel about it, it is a possibility.
Seniors have had to contend with this possibility since 1984. Social Security benefits became taxable above certain yearly income thresholds in that year. Frustratingly for retirees, these income thresholds have been left at the same levels for 32 years.1
Those frozen income limits have exposed many more people to the tax over time. In 1984, just 8% of Social Security recipients had total incomes high enough to trigger the tax. In contrast, the Social Security Administration estimates that 52% of households receiving benefits in 2015 had to claim some of those benefits as taxable income.1
Only part of your Social Security income may be taxable, not all of it. Two factors come into play here: your filing status and your combined income.
WHO CLAIMS SOCIAL SECURITY AT 62, AND WHY?
According to the Center for Retirement Research at Boston College, 48% of men and 42% of women take Social Security benefits as soon as they are eligible for them. A baby boomer who claims those benefits at age 62 will get 25% less monthly Social Security income than a boomer who waits to claim benefits at age 66, and 32% less than a boomer who puts off filing for benefits until age 70.
Those who claim at first opportunity may have urgent reasons to do so, however. Some seniors are in declining health, so they see no point in waiting. Others lack sufficient savings. This year, the non-profit Economic Policy Institute estimated average household retirement savings of $163,577 for Americans aged 56-61. A sum of that size might generate a sustainable yearly income stream of about $6,500 at a 4% withdrawal rate. Other seniors may claim at 62 because they want more money to pay down debt, fund a dream or live more of the good life.
Some early Social Security claims may be motivated by fear – fear that the program will soon disappear. In reality, Social Security’s trustees have forecast a surplus for the program through 2019; 2034 is now the projected date when its reserves will be exhausted, barring a fix from Congress.1,2
TWO STRAIGHT MONTHS OF IMPRESSIVE JOB GAINS
The Department of Labor provided Wall Street and Main Street with some great news Friday. Last month, the population of Americans with full-time jobs rose by 255,000. About 70,000 of the workers hired in July found employment within the professional and business services sectors. In addition, the huge June hiring gain was revised slightly upward to 292,000. As labor force participation increased to 62.8% in July, the headline jobless rate stayed at 4.9% while the broader U-6 measure of unemployment came in at 9.7%; the average wage rose 0.3%. Across the past year, the economy has added an average of 206,000 jobs a month.1
SOLID CONSUMER SPENDING IN JUNE
Households boosted their spending by 0.4% in the sixth month of 2016, according to a new report from the Bureau of Economic Analysis. The June advance matched the gain in May. Personal incomes also rose 0.2% for the second month in a row.2
GROWTH MODERATES IN FACTORY, SERVICE SECTORS
Both purchasing manager indices at the Institute for Supply Management retreated in July. ISM’s manufacturing PMI fell 0.6 points to 52.6; its non-manufacturing PMI dipped a full point to 55.5. The numbers still pointed to healthy industry expansion.3
THE MONTH IN BRIEF
The post-Brexit bounce turned into a sustained rally across July. Second-quarter earnings were not as gloomy as anticipated, and core economic indicators often matched or surpassed expectations. Housing news was generally good, and the latest jobs report showed employers hiring in spectacular fashion. Panic did not spread through European markets; in fact, July was a great month for European (and global) equities. Precious metals shone brightly, but energy futures fell hard. July did end with a troubling initial estimate of Q2 GDP that seemed to suggest the U.S. economy would stall without its current, strong level of consumer spending (and, by extension, consumer confidence).1
DOMESTIC ECONOMIC HEALTH
All in all, the major economic reports from June and July were pretty positive – none more so than the June employment report from the Department of Labor. There were 287,000 net new hires in the sixth month of 2016, the most in eight months. (Compare that to the consensus projection of 180,000 from Bloomberg.) As more people were seeking work in June, the jobless rate inched up to 4.9% (the U-6 rate, including the underemployed, inched down to 9.6%).2
Weeks after the Brexit decision in Europe, U.S. consumers seemed little rattled. The Conference Board’s July consumer confidence index barely budged from its (revised) June level – only down a tenth of a point to 97.3. At the University of Michigan, survey results took the nation’s other major consumer sentiment survey down just 3.5 points from its final June reading to 90.0.3
An estate plan has three objectives. The first goal is to preserve your accumulated wealth. The second goal is to express who will receive your assets after your death. The third goal is to state who will make medical and financial decisions on your behalf if you cannot.
Over time, your feelings about these objectives may change. You may want to name a new executor or health care agent. You may rethink how you want your wealth distributed.
This is why it is so vital to review your estate plan. Over ten or twenty years, your health, wealth, and outlook on life may change profoundly. The key is to recognize the life events that may call for an update.
Have you just married or divorced? If so, your estate plan will absolutely need revision. For that matter, some, or all, of your will may now be legally invalid. (Some state laws strike down existing wills when a person is married or divorced.) If your children or grandchildren marry or divorce, that also calls for an estate plan review.1
Imagine your parents outliving their money. A terrible thought, right? Should this occur, there will be one of two outcomes. Either your parents will move in with you (or someone else), or your parents will become indigent.
Hopefully, your parents have saved, invested, and managed their money well enough to avoid such a plight, whether they live together or separately. If either or both of your parents do end up in such dire financial straits, the burden of rescuing them could fall on your shoulders. That is because 29 states have filial responsibility laws.1,2
Imagine drawing down your retirement savings to pay for nursing home care. Thanks to these obscure, but enforceable, state laws, this scenario is not unimaginable.
Nursing homes may turn to these statutes to demand payment of eldercare bills. These laws can be challenged in court, but sons and daughters may have little recourse. In 2012, the Superior Court of Pennsylvania upheld a lower court ruling requiring a man to pay off a $93,000 long-term care bill owed by his mother to a nursing home. In August 2015, the same state court upheld a ruling that a man had to pay his mother $400 a month in filial support.1,2
The Trans-Pacific Partnership is back in the news. A new wave of controversy surrounds this huge trade deal, which has been agreed to, in principle, by 12 nations, but not yet ratified. Its adherents say that it would boost U.S. economic growth. Its detractors say that it would destroy more U.S. manufacturing jobs and doesn’t go far enough to halt environmental abuse.1
Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam have all committed to joining the TPP. These 12 countries generate about 40% of the world’s economic growth and about a third of global commerce. At least six of these nations must ratify the TPP in order for it to operate, and two of those six nations must be Japan and the United States. Therein lies the obstacle. Lawmakers in both Japan and the U.S. will certainly debate the merits of the agreement on the way to a 2017 vote, and there is a real possibility the deal could be struck down.1
What does the TPP aim to achieve? It would lower taxes on imports and exports – and get rid of them altogether in some instances. It would require other nations to adopt U.S. copyright terms on intellectual property (life of the creator + 70 years), counterattacking the flow of bootleg copies of movies, TV shows, and music plaguing entertainment firms.1
CONFIDENCE INDICES HOLD STEADY
Rising half a point from its previous reading, the University of Michigan’s consumer sentiment index finished July at 90.0. The Conference Board’s monthly household confidence gauge came in at 97.3 last week, near its (revised) June mark of 97.4.1
ROUNDING UP THE LATEST REAL ESTATE NEWS
New Census Bureau data shows new home sales up 3.5% in June after a 6.0% May setback. Pending sales of existing homes increased 0.2% in June, reported the National Association of Realtors. The S&P/Case-Shiller home price index (20-city composite) rose 0.9% in May, putting its annualized gain at 5.2%.1
ECONOMY GREW JUST 1.2% IN Q2
The Bureau of Economic Analysis disappointed Wall Street with its initial estimate of second quarter GDP. Economists polled by Bloomberg expected growth of 2.5%. While household consumption rose 4.2% in Q2, private fixed investment took its biggest quarterly fall since 2009, slipping 3.2%.2
Picture an 18-wheeler, its 4,000-cubic-foot cargo trailer filled to capacity with stacks of $100 bills. The driver shuts and locks the trailer, closing the door on roughly $10 billion.
Now imagine that truck driving off to a landfill, where that $10 billion will be dumped, shredded and buried, rendered useless.
As the day goes on, 170 more 18-wheelers start up their engines and carry the exact same payload to the same destination. When the convoy finishes its work, $1.7 trillion is gone.
Unimaginable? Metaphorically speaking, perhaps not. The National Bureau of Economic Research, a respected non-profit think tank, says we are forfeiting $1.7 trillion in potential retirement savings. Why? Simply because of our biases.1
Two major biases can impact our saving & investment decisions. NBER identified them in a study published in its Bulletin on Aging & Health in April.1
GAINS IN HOME BUYING & HOUSING STARTS
June brought a 1.1% rise in existing home sales. Analysts, polled by the Wall Street Journal, had forecast a 0.7% decline. In its new report, the National Association of Realtors said 33% of June sales involved first-time buyers, which was a 4-year peak. New Department of Commerce data showed housing starts up 4.8% last month.1
SOME EARLY EARNINGS SEASON NUMBERS
According to the latest Zacks Earnings Trend report, 68.9% of 103 S&P 500 companies reporting so far this season have beaten estimates and 56.3% have topped revenue projections. Zacks now forecasts a 3.6% year-over-year decline in earnings for S&P member firms, better than its 6.2% appraisal of two weeks ago.2
A DOWN WEEK FOR OIL & GOLD FUTURES
Wrapping up the week at a NYMEX price of $44.19, WTI crude slipped 3.8% across the five trading days ending Friday. Gold futures gave back 0.3% last week on the COMEX, settling Friday at $1,323.40.3,4
How many words have been written about retirement? It’s a preoccupation for many, and we devote so much time, thought, and energy toward saving for the last day we go to work. Saving and investing in such a way that we no longer have to work may seem ideal at first, but it raises a question: what do you have planned for all of that free time?
What do you do with your first day? Maybe you finally take that big vacation you’ve been talking about. Or, perhaps, it’s time to catch up with your kids, grandkids, and other extended family. But, eventually, you come home from a vacation or a visit.
While many of us have that first day mapped out, it’s the days that follow that we haven’t really considered. In a survey conducted by Merrill Lynch and AgeWave, people who were about to retire were asked "what they would miss the most" once they left the working world. A “reliable income” was the top answer, coming in at 38%.1
TWO SIGNS OF A STRONGER ECONOMY
Retail sales improved 0.6% in June, according to the Commerce Department, and the core gain was 0.7% with auto buying and home improvement purchases factored out. Industrial production rose 0.6% in June, making up for a 0.3% May loss. Both indicators could be taken as hints of solid second-quarter growth.1
CORE INFLATION IS OUTPACING HEADLINE INFLATION
In the year ending in June, the headline Consumer Price Index increased just 1.0%. According to the Department of Labor, the average 12-month gain in the past decade is 1.7%. The yearly gain in the core CPI, however, was 2.3% in June; it has averaged 1.9% in the past 10 years. June also saw a 0.5% gain for the Producer Price Index.1,2
SENTIMENT INDEX FALLS 4 POINTS
The drop in the University of Michigan’s monthly consumer sentiment index seemed to reflect anxiety over the Brexit vote; 24% of households with upper-tier incomes cited it in their survey responses. The preliminary July edition of the index came in at 89.5, down from the final June mark of 93.5. Economists polled by MarketWatch had anticipated a 92.5 reading.3
THE ADVANTAGES OF A HEALTH SAVINGS ACCOUNT
Why do people open up Health Savings Accounts in conjunction with high-deductible insurance plans? For one, HSAs are funded with pre-tax income, and grow untaxed. Distributions out of an HSA are tax-free as long as they are used to pay qualified health-care expenses. On the flip side, HSA funds don’t pay for all forms of health care. You also can’t use HSA funds to pay for a Medigap policy or Medicare supplemental insurance, in case you are wondering about such a move. Since contributions to the HSA are, in most states, made with your pre-tax income, however, the money grows over time.1
IS EARLY RETIRMENT FOR EVERYONE?
If you have the option to retire early, understand that there are emotional and financial aspects to the decision. The advantages are obvious - your time is suddenly your own, and you are free to pursue your favorite pastimes, hobbies, and volunteer in your community or for your favorite organizations. Family time is at a surplus, too, with more time for grandkids.
Unfortunately, not everyone knows what to do with all of that time, and it may time to find a focus for your energies. Does your employer pay for your health insurance? What will you be doing for coverage between your last day at work and when you are eligible for Medicare at 65? Meanwhile, without a regular paycheck, you may be tempted to dip into your retirement funds; doing so before age 59½ could lead to a 10% penalty for early withdrawal. If you’re relatively healthy, you could be in for a much longer retirement than your own parents; this means more years that your retirement savings must cover. You may well add to those savings by moving into a new, less demanding career, or merely cut back on the number of hours you are working. Regardless, you’ll want to consider each of these factors long before your final day at work.2
As an investor, you know that past performance is no guarantee of future success. Expanding that truth, history has no bearing on the future of Wall Street.
That said, stock market historians have repeatedly analyzed market behavior in presidential election years, and what stocks do when different parties hold the reins of power in Washington. They have noticed some interesting patterns through the years, which may or may not prove true for 2016.
Do stocks really go through an “election cycle” every four years? The numbers really don’t point to any kind of pattern. (Some analysts contend that stocks follow a common pattern during an election year; more about that in a bit.)
In price return terms, the S&P 500 has gained an average of 6.1% in election years, going back to 1948, compared to 8.8% in any given year. The index has posted a yearly gain in 76% of presidential election years starting in 1948, however, as opposed to 71% in other years. Of course, much of this performance could be chalked up to macroeconomic factors having nothing to do with a presidential race.1
We are becoming more familiar with the notion of financial abuse targeting elders – scams and other exploitation targeting the savings of people aged 60 and older – but many may think, “it won’t happen to my family” or “my relative is too smart to be taken in by this.”
These assumptions are only wishful thinking; this sort of fraud is on the rise, so it’s important to talk to your loved ones about what to look for, and how they can protect their finances.
More common than you think. The U.S. Department of Justice’s Elder Justice Initiative offers a sobering statistic: in the United States alone, multiple studies have found that, every year, 3-5% of seniors endures financial abuse by family members. This form of exploitation is, typically, one of the top two most frequently reported means of elder abuse.1
Talk about money. It can be uncomfortable to talk with family about financial issues, but this is often the best first step toward guarding against financial abuse. Find out the information you would already need to know in the event of a sudden calamity. Questions to ask include: where is the important paperwork kept - i.e. bills, deeds, and wills? Who are the professionals they work with – accountants, lawyers, and those who assist with financial matters?2
A REASSURING JOBS REPORT
June was the best month for hiring since October. Employers added 287,000 new jobs to their payrolls last month; analysts polled by Bloomberg forecast a gain of 180,000. The headline unemployment rate rose to 4.9% in the Department of Labor’s latest report, a reflection of more Americans looking for work. The broader U-6 rate, including the underemployed, fell a tenth of a point to 9.6%.1
STRONG SERVICE SECTOR GROWTH IN JUNE
Rising 3.6 points, the Institute for Supply Management’s non-manufacturing purchasing manager index came in at a June mark of 56.5. The index was last above 56 in November. Referencing the past relationship between the index and the overall health of the economy in its summary, ISM noted that a 56.5 reading for its services PMI has corresponded with annualized GDP growth of about 3.0%.2
A 6-WEEK WINNING STREAK FOR GOLD
The yellow metal rose another 1.5% last week, closing at a COMEX price of $1,358.40. Silver has also advanced for six consecutive weeks on the COMEX; it closed at $20.10 Friday, rising 2.6% in four days.3
You know you should start saving for retirement before you turn 40. What can you start doing today to make that effort more productive, to improve your chances of ending up with more retirement money, rather than less?
Structure your budget with the future in mind. Live within your means and assign a portion of what you earn to retirement savings. How much? Well, any percentage is better than nothing – but, ideally, you pour 10% or more of what you earn into your retirement fund. If that seems excessive, consider this: you are at risk of living 25-30% of your lifetime with no paycheck except for Social Security. (That is, assuming Social Security is still around when you retire.)
Saving and investing 10-15% of what you earn for retirement can really make an impact over time. For example, say you set aside $4,000 for retirement in your thirtieth year, in an investment account that earns a consistent (albeit hypothetical) 6% a year. Even if you never made a contribution to that retirement account again, that $4,000 would grow to $30,744 by age 65. If you supplant that initial $4,000 with monthly contributions of $400, that retirement fund mushrooms to $565,631 at 65.1
THE MONTH IN BRIEF
In June, an overseas referendum affected American stocks more than any domestic event. The United Kingdom unexpectedly voted to leave the European Union, and news of the Brexit rocked financial markets worldwide. Even so, the S&P 500 began to recover quickly – it actually gained 0.09% for the month. Fresh economic reports made the U.S. look like the proverbial best house in a bad neighborhood – even if the economy was underperforming compared to past decades, America was at least faring better than some other nations and regions. While the latest jobs report was mystifying, personal spending, retail sales, and consumer confidence were bright spots.1
DOMESTIC ECONOMIC HEALTH
Stateside, most of the key economic indicators pointed up rather than down. You could even say that about the most retrospective of all of them: the quarterly growth estimate from the Bureau of Economic Analysis. In June, the BEA upgraded Q1 GDP from its second estimate of 0.8% to a final mark of 1.1% (its initial appraisal was just 0.5%).2
According to the Department of Commerce, consumer spending rose another 0.4% in May, with household incomes rising 0.2%. Households were also buying plenty of goods and services in May: retail sales were up 0.5% in that month; core retail purchases, 0.4%.3,4
THE QUARTER IN BRIEF
As the first half of 2016 ended, the economy seemed to be repeating the pattern seen in 2014 and 2015 – a poor first quarter giving way to a better second quarter. Monthly indicators showed improvements in consumer spending, retail sales, and manufacturing. Consumer confidence also rose. The quarter did see a decline in the pace of hiring, and the red-hot housing sector cooled a bit. Oil prices rebounded, which really helped equities. For the first time in history, a country voted to leave the European Union. News of that vote stunned financial markets worldwide in June, to an even greater degree than the multiple terrorist attacks carried out by ISIS and its sympathizers. Bullish sentiment ultimately won out on Wall Street during a volatile quarter as the S&P 500 rose 1.90% in three months. The Federal Reserve left interest rates unchanged, which could be the case for some time.1
DOMESTIC ECONOMIC HEALTH
On May 27, Federal Reserve chair Janet Yellen reflected on the potential for an interest rate hike at Harvard University, commenting that “probably in the coming months such a move would be appropriate.” Other Fed officials were making hawkish statements of their own. At the end of the second quarter, a summer rate hike looked decidedly inappropriate – after the Brexit, traders lowered the possibility to 8% for the rest of 2016 and felt there would be a 20% chance the Fed would make a rate cut by early 2017.2,3
While Wall Street will likely not have to worry about an interest rate hike for the rest of the year, investors and economists alike may be a bit worried about the labor market. In May, the economy added just 38,000 jobs, and the government scaled down its estimate of hiring for March and April by a combined 59,000. Economists knew that monthly hiring would taper off from the 200,000 level at some point; in Q2, the labor market may have reached that point. In June, the unemployment rate was 4.7%, and the broader U-6 rate factoring in the underemployed was at 9.7%.4
SOLID GAINS IN CONSUMER SPENDING, CONFIDENCE
Personal spending rose 0.4% in May, according to the Department of Commerce, complemented by a 0.2% advance for personal incomes. April’s consumer spending increase was revised up to 1.1%. The Conference Board’s monthly consumer confidence index also improved in June, heading north 5.6 points to a reading of 98.0.1
BEST ISM MANUFACTURING PMI IN 16 MONTHS
The factory purchasing manager index, maintained by the Institute for Supply Management, reached 53.2 in June, a gain of 1.9 points to its highest reading since February 2015. As recently as February of this year, the PMI was below the 50 level, demarcating growth from contraction. In other news concerning economic output, the federal government revised Q1 GDP up 0.3% to a final estimate of 1.1% last week.1,2
HOUSING CONTRACT ACTIVITY SLOWS
The National Association of Realtors reported a dip in pending home sales: they declined 3.7% in May. Turning to other housing news, the 20-city composite Case-Shiller home price index showed a 5.4% annualized gain in its April edition, ticking down from 5.5% in March.1
Why do some households tread water financially while others make progress? Does it come down to habits?
Sometimes the difference starts there. A household that prioritizes paying itself first may end up in much better financial shape in the long run than other households.
Some families see themselves as savers, others as spenders. The spenders may enjoy affluence now, but they also may be setting themselves up for financial struggles down the road. The savers better position themselves for financial emergencies and the creation of wealth.
How does a family build up its savings? Well, money not spent can be money saved. That should be obvious, but some households take a long time to grasp this truth. In the psychology of spenders, money unspent is money unappreciated. Less spending means less fun.