Economic Updates & Financial Articles
- Weekly Economic Update - 10/16/2017
- Monthly Economic Update - October 2017
- Quarterly Economic Update - 3Q 2017
Retirement in Sight Newsletter:
- Retirement In Sight - October 2017
- Understanding Inherited IRAs - 10/16/2017
- Retirement Plan Trusts - 10/16/2017
- Are There Blind Spots in Your Insurance Plan? - 10/9/2017
- Will Debt Spoil Too Many Retirements? - 10/2/2017
- Questions After the Equifax Data Breach - 10/2/2017
- Millennials, Do Not Imitate Your Parents - 10/2/2017
- Is Your Company's Retirement Plan as Good as It Could Be? - 10/2/2017
- Health Care Costs Are Cutting Into Retirement Preparations - 10/2/2017
- How Much Should You Save By Age 30, 40, 50, or 60? - 9/25/2017
- Retiring Before 60 - 9/18/2017
- Is a Home an Investment? - 9/18/2017
- The Financial Toll of Addiction - 9/18/2017
- Avoiding the Cybercrooks - 9/11/2017
- The Equifax Data Breach - 9/11/2017
- An Estate Plan or a Wealth Transfer Strategy? - 9/4/2017
- Why You Should Stay Invested Through Tense Times - 8/28/2017
- Are You Really Saving Enough for Retirement? - 8/21/2017
- Getting Kids Excited and Ready for the School Year - 8/21/2017
- Financial Priorities Young Families Should Address - 8/14/2017
- Translating Stock Market Jargon - 8/14/2017
- Preventing a Debit Card Hack - 8/7/2017
- Bitcoin Splits in Two - 8/7/2017
- Before You Claim Social Security - 7/31/2017
- Cybercurrencies, A Risky Choice - 7/31/2017
- Medicare Enrollment Options for 2017-18 - 7/31/2017
- Getting (Mentally) Ready to Retire - 7/24/2017
- Saving More Money, Now and Later - 7/17/2017
- Life Insurance Products with Long-Term Care Riders - 7/17/2017
- A Look at Self-Directed Brokerage Accounts - 7/17/2017
- Talking to Your Kids About Your Wealth - 7/10/2017
- Japan and the European Union Forge a Major Trade Deal - 7/10/2017
- Will You Really Be Able to Work Longer? - 7/3/2017
- Should Millennials Be Your Money Models? - 6/26/2017
- Will You Be Prepared When the Market Cools Off? - 6/19/2017
- The June Rate Hike - 6/19/2017
- Having the Money Talk With Your Children - 6/12/2017
- One Couple, Two Different Retirements - 6/5/2017
- The Real Cost of College - 5/29/2017
- Beware of Emotions Affecting Your Money Decisions - 5/22/2017
- Keep Calm, Stay Invested - 5/22/2017
- Why Retirees Need Good Credit Scores - 5/15/2017
- What Are Your Odds of Being Audited? - 5/15/2017
- The Rough Consequences of Not Saving for Retirement - 5/8/2017
- The Importance of Financial Literacy - 5/1/2017
- Insurance and Investments - 4/24/2017
- Have a Plan, Not Just a Stock Portfolio - 4/17/2017
- How Will You Spend Your Retirement Savings? - 4/17/2017
- Combining Your Finances When You Marry - 4/10/2017
- Tax Rules on Rental Property - 4/10/2017
- When Someone Dies Without a Will - 4/3/2017
- Could Insurance Rescue You in Retirement? - 4/3/2017
- 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
RETAIL SALES, SENTIMENT NUMBERS IMPRESS
Two economic indicators stood out last week. Retail purchases rose 1.6% during September as households and businesses replaced cars and trucks damaged in hurricanes. This was the best monthly advance recorded by the Department of Commerce since March 2015, and the gain was 1.0% even with auto buying removed. The University of Michigan’s initial October consumer sentiment index displayed a reading of 101.1, which was nearly a 14-year high. Economists polled by Briefing.com had forecast just a half-point improvement to 95.6.1,2
GAS PRICES DRIVE UP INFLATION
A 13.1% spike in retail gasoline costs accounted for 75% of the 0.5% September increase in the Consumer Price Index. Not since January has the CPI risen so much in a month. Still, the core CPI was up just 0.2%. In yearly terms, headline inflation now stands at 2.2%; core inflation, at 1.7%.3
SOCIAL SECURITY BENEFITS TO INCREASE 2% IN 2018
Friday, the Social Security Administration announced the largest cost-of-living adjustment to retirement benefits since 2012. Next year, Social Security payments will get a 2.0% boost, meaning the average retired Social Security recipient will receive $27.40 more per month.4
At first glance, the rules surrounding inherited IRAs are complex. Here are some questions (and potential answers) to consider if you have inherited one or may in the future.
Who was the original IRA owner? If the original owner was your spouse, you have a fundamental choice to make. You can roll over your late spouse’s IRA into an IRA you own, or you can treat it as an inherited IRA. If the original owner was not your spouse, you must treat the IRA for which you are named beneficiary as an inherited IRA.1,2
What kind of IRA is it? It will either be a traditional IRA funded with pre-tax contributions or a Roth IRA funded with post-tax contributions.
Inherited IRA assets are vulnerable in bankruptcy proceedings. Many older IRA owners and their beneficiaries do not realize this, but it is true.
In Clark, et ux v. Rameker (2014), the Supreme Court ruled 9-0 that inherited IRAs cannot be defined as “retirement funds” under federal bankruptcy law. They now lack the protection that retirement savings accounts commonly get in bankruptcy courts.1
So today, a longstanding estate planning dictum is being reevaluated. If you have non-spousal heirs who seem at risk for bankruptcy, you might want to leave your IRA to a trust.
When IRA owners make this move, it is usually because they want a legal and financial firewall in place, i.e., the potential heir to the IRA is a minor or someone who is bad with money. Add protecting inherited IRA assets against creditors and lawyers to the list of objectives. Spouses can inherit IRA assets and receive creditor protection for those assets when they roll them into IRAs of their own, but federal tax law does not yet give other heirs that perk.2
A Retirement Plan… or a College Plan?
Some parents feel they should pay for all or part of their children’s college education. They make it a financial priority and put saving for retirement further down on their to-do list. If their kids can graduate without any student loan debt, the thinking goes, they will be better positioned to provide financial support to mom and dad one day.
This assumption may be hazardous to retiree financial health. One, the kids may not be inclined to provide such support in the future. Cultural or familial expectations may not be realized. Two, students can receive financial aid; retirees cannot. Three, consider these numbers: a couple retiring today may have to pay $275,000 or more in future medical costs, the current average annual Social Security benefit is less than $16,000, and according to a recent PWC survey, half of baby boomers have less than $100,000 saved for retirement. The takeaway here? Unless you are impressively wealthy, you should be regularly funding retirement accounts first, without interruptions, reductions to contributions, or drawdowns to pay for college. Your young adult children should recognize that their college years mark the start of their financial lives, with attendant financial responsibilities.1,2
HURRICANES HURT SEPTEMBER JOB NUMBERS
For the first time in seven years, the economy went a month without payroll growth. The Department of Labor’s September employment report revealed the impact of Hurricanes Harvey and Irma: it showed 33,000 fewer people working. Average hourly wages rose 0.5% to take the annualized gain to 2.9%, but this may have been an effect of the net loss of 105,000 lower-paying bar and restaurant jobs. In a statistical fluke, the headline jobless rate fell to 4.2%, and the U-6 rate, counting the underemployed, declined to 8.3%, even as slightly more Americans looked for work.1
ISM FACTORY PMI TOPS 60
Rising 2.0 points for September, the Institute for Supply Management’s factory purchasing manager index hit 60.8, its best mark since May 2004. ISM’s service sector PMI also made a nice leap in September, ascending 4.5 points to 59.8, its highest result since August 2005. Analysts polled by the Wall Street Journal expected the services PMI to tick down to 55.2 last month.2
OIL HAS FIRST DOWN WEEK IN MORE THAN A MONTH
WTI crude settled at $49.29 on the NYMEX Friday, slipping 4.6% lower for the week. While Tropical Storm Nate put a drag on Gulf Coast oil production, traders also sensed OPEC members may retain caps on crude output through 2018.3
Many households and businesses are insufficiently insured. The problem is not necessarily the quality of coverage, but the breadth and depth of it. Your own business or household may be more vulnerable than you realize.
Too many people go without disability insurance. If you work in a physically demanding field, your employer may provide short-term disability coverage – but many companies do not. According to the Bureau of Labor Statistics, just 39% of workplaces offer employees short-term coverage, and only 33% offer long-term coverage.1
If you are disabled and cannot work, your income soon disappears. Short-term disability insurance, which may last anywhere from 10-26 weeks, commonly replaces around 60% of it. Not ideal, but better than 0%. About 8% of the time, however, a short-term disability lasts more than six months and extends into a long-term disability. Long-term disability coverage can replace 50-70% of your salary for a period of 2-10 years, perhaps even until you turn 65.1,2
THE MONTH IN BRIEF
In August, investors witnessed a terrible natural disaster and heard threats of war on America, and the S&P 500 still managed to gain 0.05%. September brought two terrible natural disasters and more threats of war on America, and the broad benchmark rose 1.93% and topped 2,500 for the first time. In other words, the bulls remained firmly in charge. European stocks rallied impressively last month, and oil went back above $50. U.S. economic indicators were a mixed bag, and home sales seemed to be cooling off. In what may be the month’s most important development for investors, the Federal Reserve detailed its plan for reducing its vast securities portfolio.1
DOMESTIC ECONOMIC HEALTH
On September 20, the Federal Reserve announced a strategy to trim its $4.2 trillion balance sheet. The quantitative tightening will be gradual. Starting this quarter, the Fed will let $10 billion of bonds mature each month; in Q1 2018, that will increase to $20 billion a month. The monthly runoff rate will keep climbing by $10 billion each quarter until hitting a ceiling of $50 billion. According to Fed Chair Janet Yellen, this strategy is fixed, barring a “sufficiently great” threat to U.S. economic stability. At last month’s Fed meeting, three-quarters of the central bank’s policymakers forecast another rate hike before the end of the year.2
Three of the latest economic indicators to appear were underwhelming. Consumer spending only rose 0.1% in August, the Department of Commerce noted, with wages up 0.2%. July had seen a 0.3% increase in both categories. Retail sales slipped 0.2% in August, with core sales registering the same monthly decline.3,4
THE QUARTER IN BRIEF
Encouraging economic data and a series of unsettling news headlines vied for Wall Street’s attention in the third quarter, and ultimately, investors were not shaken. The S&P 500 rose 3.96% over three months, getting a lift from upbeat manufacturing and consumer confidence readings as well as earnings news. Away from our shores, the economies of China and the euro area showed improvement, and foreign stock benchmarks rallied along with ours. A slumping dollar offered no big spark for the commodities markets. The residential real estate market looked to be cooling off. The quarter was filled with major news stories, yet the bulls sauntered through the disruptions.1
DOMESTIC ECONOMIC HEALTH
Consumer confidence barometers were among the most impressive economic indicators last quarter. By August, the Conference Board’s index topped 120, far above its origin score of 100; it was at 119.8 in September. The University of Michigan’s consumer sentiment gauge ended Q3 exactly where it ended Q2 – at a solid mark of 95.1, rebounding from a July dip to 93.4.2,3
The economy’s two key purchasing manager indices were also elevated well above the 50 level, which also cheered Wall Street. In September, the Institute for Supply Management’s factory PMI jumped to 60.8 – rising above 60 for the first time in 13 years, after readings of 58.8 in August and 56.3 for July. ISM’s service sector PMI came in at 53.9 for July and 55.3 for August (at this writing, the September reading was pending).4,5
PERSONAL SPENDING BARELY IMPROVES
Consumer spending increased by only a seasonally adjusted 0.1% in August, while consumer incomes rose 0.2%. Those gains precisely matched the projections of economists surveyed by the Wall Street Journal. Factoring in inflation, household spending actually retreated 0.1% during August. Hurricane Harvey may be partly to blame for these numbers.1
ROUNDING UP REAL ESTATE INDICATORS
Census Bureau data shows new home buying down 3.4% in August; this dip comes on the heels of a (revised) 5.5% fall in July. Pending home sales, as measured by a National Association of Realtors index, slipped 2.6% in August after retreating 0.8% a month earlier. The 12-month gain for the S&P/Case-Shiller home price index improved 0.2% to 5.8% in the July edition (released last week).2
CONSUMER OUTLOOK WEATHERS STORMS
The University of Michigan’s consumer sentiment index and the Conference Board’s consumer confidence index both declined for September, but not drastically. The university’s gauge fell 1.7 points to a reading of 95.1, right where analysts polled by MarketWatch thought it would land; that left it 4.3 points above where it was in September 2016. At a mark of 119.8, the CB index was just 0.6 points lower than its August reading.2,3
The key points of retirement planning are easily stated. Start saving and investing early in life. Save and invest consistently. Avoid drawing down your savings along the way. Another possible point for that list: pay off as much debt as you can before your “second act” begins.
Some baby boomers risk paying themselves last. Thanks to lingering mortgage, credit card, and student loan debt, they are challenged to make financial progress in the years before and after retiring.
More than 40% of households headed by people 65-74 shoulder home loan debt. That figure comes from the Federal Reserve’s Survey of Consumer Finances; the 2013 edition is the latest available. In 1992, less than 20% of Americans in this age group owed money on a mortgage. Some seniors see no real disadvantage in assuming and retiring with a mortgage; tax breaks are available, interest rates are low, and rather than pay cash for a home, they can arrange a loan and use their savings on other things. Money owed is still money owed, though, and owning a home free and clear in retirement is a great feeling.1
How long should you worry about identity theft in the wake of the Equifax hack? The correct answer might turn out to be “as long as you live.” If your personal data was copied in this cybercrime, you should at least scrutinize your credit, bank, and investment account statements in the near term. You may have to keep up that vigilance for years to come.
Cybercrooks are sophisticated in their assessment of consumer habits and consumer memories. They know that eventually, many Americans will forget about the severity and depth of this crime – and that could be the right time to strike. All those stolen Social Security and credit card numbers may be exploited in the 2020s rather than today. Or, perhaps these criminals will just wait until Equifax’s offer of free credit monitoring for consumers expires.
Equifax actually had its data breached twice this year. On September 18, Equifax said that their databases had been entered in March, nearly five months before the well-publicized, late-July violation. Its spring security effort to prevent another hack failed. Bloomberg has reported that the same hackers may be responsible for both invasions.2
A new generation of investors is coming to the forefront: your generation. Millennials have witnessed a fantastic bull market, one of the longest on record. Any given week, scary headlines may generate some volatility, but the bulls just keep on running.
It is easy to be lulled into a false sense of security in this market climate. Bearish arguments can be effortlessly dismissed. Innovation, consumer-friendly technologies, and new social media platforms are turning heads and sending share prices higher. TD Ameritrade says that the five most-owned stocks among its millennial accountholders are Apple, Netflix, Amazon, Tesla, and Facebook. Snap and Twitter are also on the radar. Trading shares via phone is routine. So what if these stocks pay no dividends? (Currently, only Apple does.) These companies seem invincible.1
Twenty years ago, another generation of investors worshipped tech stocks. In the Web 1.0 era, baby boomers and Gen Xers salivated over the potential of Yahoo, Cisco, Lycos, Broadcast.com, E*TRADE, GeoCities, and other emerging tech firms. They were all so hot. Then came the dot-com crash of 2000.
At times, running your business takes every ounce of energy you have. Whether you have a human resources officer at your company or not, creating and overseeing a workplace retirement plan takes significant effort. These plans demand periodic attention.
As a plan sponsor, you assume a fiduciary role. You accept a legal responsibility to act with the best financial interests of others in mind – your retirement plan participants and their beneficiaries. You are obligated to create an investment policy statement (IPS) for the plan, educate your employees about how the plan works, and choose the investments involved. That is just the beginning.1
You must demonstrate the value of the plan. Your employees should not merely shrug at what you are offering – a great opportunity to save, invest, and build wealth for the future. Financial professionals know how to communicate the importance of the plan in a user-friendly way, and they can provide the education that “flips the switch” and encourages worker participation. If this does not happen, your employees may view the plan as just an option instead of a necessity as they save for retirement.
You may have seen this statistic before or one resembling it: the average 65-year-old retiring couple can now expect to pay more than $250,000 in health care expenses during the rest of their lives.
In fact, Fidelity Investments now projects this cost at $275,000, up 70% from its initial estimate in 2002. The effort to prepare for these potential expenses is changing the big picture of retirement planning.1
Individual retirement savings strategies have been altered. How many people retire with a dedicated account or lump sum meant to address future health costs? Very few. Most retirees end up winging it, paying their out-of-pocket costs out of income, Social Security benefits, and savings.
The older retirees are, the heavier this financial burden seems to be. According to a study from the Employee Benefit Research Institute, people aged 85 and older devote an average of 19% of their household expenses to health care, compared to 11% of household costs for those 65-74.1
FEDERAL RESERVE: UNWINDING WILL BE GRADUAL
Last Wednesday, the country’s central bank detailed how it would shrink its mammoth balance sheet. During the fourth quarter, the Fed will unload $10 billion of maturing bonds per month; in each subsequent quarter, the monthly runoff will increase by $10 billion until reaching a limit of $50 billion. Fed chair Janet Yellen said that this schedule is set in stone, barring a “sufficiently great” economic threat. The Fed made no interest rate move last week, but 12 of 16 Fed officials do project a hike before 2017 ends.1
HOME SALES RETREAT AGAIN
In August, existing home sales fell for the fourth time in five months. Resales decreased 1.7% to a seasonally adjusted annual pace of 5.35 million, a 12-month low, according to the National Association of Realtors. Two factors hindered would-be buyers: a median house price of $253,500 and a 2.1% monthly reduction in inventory (the supply of homes for sale was 6.5% greater in August 2016).2
BUILDING PERMITS UP 5.7% IN AUGUST
This good news was countered by last month’s 0.8% reduction in groundbreaking. The Census Bureau’s report on August construction activity showed the rate of issuance for permits 8.3% above where it was a year earlier; the pace of starts was 1.4% improved. Starts for single-family homes were up 17.1% in 12 months.3
It is agreed that the earlier you start saving for retirement, the better. The big question on the minds of many savers, however, is: “How am I doing?” This article will show you some rough milestones to try and reach. (Keep in mind that you may need to save more or less than these amounts based on your objectives and lifestyle and income needs.)
At age 30, can you have the equivalent of a year’s salary saved? Some 30-year-olds have the equivalent of a year’s salary in debt, it is true; the thing is, you can probably manage debt and save and invest to build wealth simultaneously. One way to plan to reach this goal is to save (and invest) about a fifth of your after-tax income beginning at age 25. That assumes you start at 25 with no savings; if you start saving and investing earlier, the goal may be easier to attain.1
At age 40, will your savings be triple that of your yearly earnings? The average American currently saves about 3.5% of his or her income. Can you save 3.5% of what you earn at 25 or 30 and build a six-figure retirement fund by your 40th birthday? Perhaps, if you are an absolute investing wizard or start your career with a salary north of $100,000. Otherwise, saving and investing 10-15% of what you earn annually will be crucial in planning to reach this goal.1,2
INFLATION SPIKED IN AUGUST
Economists had long assumed consumer prices would rise abruptly at some point, and they certainly did last month. The Consumer Price Index increased 0.4% in August, its biggest one-month advance since its 0.6% gain in January. Higher gas prices were a major influence: they rose 6.3% for August. Core inflation was up 0.2% after four straight 0.1% monthly gains. Yearly consumer inflation is now at 1.9%. Wholesale inflation, as measured by the Producer Price Index, rose 0.2% in August to an annualized pace of 2.4%.1,2
RETAIL SALES STAGE A LATE-SUMMER RETREAT
Americans cut back on retail purchases during August. Retail sales declined 0.2%, a disappointment after the 0.3% July gain. The silver lining: the core number, minus gasoline and auto buying, rose 0.2%.2
CONSUMER SENTIMENT INDEX DIPS SLIGHTLY
The University of Michigan’s twice-monthly barometer of the American consumer’s mood fell 1.5 points in its initial September edition. At a mark of 95.3, the index was still 4.5% above where it was a year earlier. While the index’s current conditions component hit its highest level in nearly 17 years, 9% of survey respondents believed that Hurricanes Irma and Harvey had hurt the overall economy.3
How could you retire in your fifties by choice? You will need abundant retirement savings and ways to access your retirement assets that lessen or avoid early withdrawal penalties. You may also need to have other, sometimes overlooked, components of retirement planning in place.
There are ways to tap retirement savings accounts before 60. True, the I.R.S. discourages this with 10% penalties on traditional IRA withdrawals prior to age 59½ and withdrawals from many employee retirement plans before age 55½ – but those penalties may be skirted.1
An IRA or workplace retirement account funded with pre-tax dollars can be converted to a Roth IRA funded with post-tax dollars. While the conversion is a taxable event, it allows a pre-retiree more potential to retrieve retirement savings early. Before age 59½, you are permitted to make tax-free, penalty-free withdrawals of the amount you have contributed to a Roth IRA (as opposed to the Roth IRA’s earnings). After age 59½, you can withdraw contributions and earnings tax free provided you have owned the Roth IRA for five years. For Roth IRA conversions, the 5-year period begins on January 1 of the year in which the conversion happens. Roth conversions may be a good move for some, but a bad move for those who live in high-tax states with plans to retire to a state with lower income taxes.1,2
When you buy a home, are you investing? If you buy it to flip it or buy it as a rental property, the answer is yes. If you buy a home simply to live in it, the answer may be no.
Your home is an expression of your lifestyle, a wonderful setting for your life, and a place you can enjoy in privacy and comfort. As an investment, though, it is essentially illiquid, and its rate of return is no sure thing.
Home values do not automatically increase with time. Buyers learned that lesson in the Great Recession. Simply using the S&P/Case-Shiller home price index as a barometer, house prices today are roughly where they were in 2007 – it has taken the residential real estate market that long to recover from the mortgage meltdown.1
Imagine your retirement dreams put on hold or compromised, your savings and investment accounts reduced, and your loved ones incommunicative or at odds with each other. This terrible state is reality for families ravaged by addiction.
OxyContin, heroin, and other opioids can cost an addict hundreds of dollars per day. Where will an addict find the thousands of dollars needed, over time, to pay for their habit? No family wants to consider the possibilities.1
Treating opioid addictions can take money equivalent to a year’s salary. A stay at a first-class treatment center can cost $30,000-$65,000 a month. Even outpatient counseling can cost $5,000-$10,000. The drugs may still exert their grip on the addict afterwards.2,3
Retirement Calculators May Not Add in Everything
You may turn to an online retirement calculator for a simple snapshot of your retirement income needs and your retirement savings progress. These calculators are everywhere and so easy to use – but just how realistic are their projections?
In truth, not very. They fail to consider many variables. While they may have you enter your present salary, the percentage of income you want to replace in retirement, your estimated retirement date, and the rate of return for your investments, they ignore things like taxes (especially with regard to retirement account withdrawals), relocation expenses, health care costs, inflation, and your Social Security claiming strategy. Even their basic calculations can vary: input the same data into three different calculators, and the amount that you are supposed to save for retirement can vary by as much as $300,000-$400,000. So, use one or more retirement calculators to run some numbers, but confer with a financial professional you trust to tackle planning for the factors these basic tools cannot address.1
EQUIFAX BREACH MAY IMPACT 44% OF AMERICANS
Thursday evening, credit reporting agency Equifax disclosed that hackers had raided its databases this spring, accessing the personal information of up to 143 million people. Equifax believes that about 209,000 credit card numbers may have been collected in the process, plus numerous Social Security and driver’s license numbers. Consumers can visit equifaxsecurity2017.com to see if they may have been affected by the breach. Equifax is offering a free year of identity theft insurance and credit monitoring for those at risk.1
SERVICE SECTOR EXPANDS FASTER
At an August reading of 55.3, the Institute for Supply Management’s service sector purchasing manager index was 1.4 points improved from its July mark, indicating a quicker pace of expansion for non-manufacturing firms in the eighth month of the year. Readings above 50 indicate sector growth.2
DEBT CEILING RAISED, WITH DECEMBER 15 DEADLINE
Congress passed a bill to lift the federal borrowing limit Friday, after the White House and congressional leaders agreed to extend the prior, late-September deadline. This measure approves two-and-a-half more months of funding for the federal government. A $15 billion aid package for hurricane victims was also included in the legislation.3
Imagine finding out that your computer has been hacked. The hackers leave you a message: if you want your data back, you must pay them $300 in bitcoin. This was what happened to hundreds of thousands of PC users in May 2017 when they were attacked by the WannaCry malware, which exploited security flaws in Windows.
How can you plan to avoid cyberattacks and other attempts to take your money over the Internet? Be wary, and if attacked, respond quickly.
Phishing. This is when a cybercriminal throws you a hook, line, and sinker in the form of a fake, but convincing, email from a bank, law enforcement agency, or corporation, complete with accurate logos and graphics. The goal is to get you to disclose your personal information – the crooks will either use it or sell it. The best way to avoid phishing emails: stick to a virtual private network (VPN) or extremely reliable Wi-Fi networks when you are online.1
On September 7, credit reporting agency Equifax dropped a consumer bombshell. It revealed that cybercriminals had gained access to the personal information of as many as 143 million Americans between May and July – about 44% of the U.S. population. The culprits were able to retrieve roughly 209,000 credit card numbers, in addition to many Social Security and driver’s license numbers.1
How can you find out if you were affected? Visit equifaxsecurity2017.com, the website Equifax just created for consumers. There, you can enter your last name and the last six digits of your Social Security number to find out. (Having to enter the last six digits of your SSN hints at how significant this breach is.)2
If you are among the consumers whose data was hacked, Equifax will ask you to return to equifaxsecurity2017.com to enroll in an identity theft protection product, TrustedID Premier. This program will provide you with free credit monitoring for a year. (The lingering question is whether your data could be used easily by criminals afterward.)1,2
THE MONTH IN BRIEF
August brought an overwhelming natural disaster, a threat of war from a foreign dictator, and violence in the streets – so it is little wonder stocks went sideways. The S&P 500 eked out an advance of 0.05% for the month. Economically speaking, there were some positives: improvements in consumer confidence and consumer spending, continued strength in manufacturing, and a comeback for retail sales. The economies of the eurozone and the Asia-Pacific region showed more upside. In the commodities market, gold and gasoline grew more valuable, while the price of oil fell. A seller’s market seemed firmly in place in residential real estate. Investors hung on through the turbulence.1
DOMESTIC ECONOMIC HEALTH
Americans spent more this summer and felt optimistic about the state of economy. The evidence? The July gain in personal spending and the lofty reading on the Conference Board’s August consumer confidence index. Consumer spending improved 0.3% in July as consumer incomes rose 0.4%. That seemingly had an effect on retail sales, which, in July, had their best month in some time: they advanced 0.6%. The CB index went north to a mark of 122.9, up 2.9 points from its notably high July reading. (The University of Michigan’s consumer sentiment index finished August at 96.8, above its final July reading of 93.4, but slightly lower than its preliminary August mark of 97.6.)2,3
Another important index registered an impressive reading in August: the Institute for Supply Management’s purchasing manager index for U.S. manufacturing. Already at 56.3 in July, it improved to 58.8 last month, indicating strong expansion for the factory sector. At the start of August, ISM’s non-manufacturing sector PMI bore a July reading of 53.9, 3.5 points lower than its June mark; that was still well over the 50-level, delineating growth from contraction.2,4
SEPTEMBER BRINGS A MEDIOCRE JOBS REPORT
The Department of Labor’s latest employment snapshot shows payrolls expanding by 156,000 net new jobs in August. This was a retreat from the job gains of 200,000+ reported in both June and July. The headline jobless rate ticked up to 4.4%; the U-6 rate, which factors in the underemployed, held steady at 8.6%. Annualized wage growth remained stuck at 2.5%.1
POSITIVE NEWS FROM MAIN STREET
Climbing once again, the Conference Board’s consumer confidence index ascended 2.9 points to 122.9 in August. That topped the forecast of economists surveyed by MarketWatch, who anticipated a 122.5 reading. Additionally, the Department of Commerce said that consumer spending advanced 0.3% in July, up from 0.2% in June. Household incomes rose 0.4% in July; they were unchanged in June.2
ISM: FACTORY SECTOR IN FINE SHAPE
Can the Institute for Supply Management’s manufacturing purchasing manager index top 60 soon? It rose 2.5 points to 58.8 in August, indicating a high degree of expansion. This was the best reading on the index since April 2011. So far in 2017, the factory PMI has averaged a reading of 56.7.3
There are three degrees of estate planning: advanced, basic, and none at all. Basic is better than none, but elementary estate planning can still leave something to be desired. While appropriate documents may be in place, they may not be able to fully convey what you really want to do with your estate.
Have you communicated your wishes to your heirs, in writing? Cut-and-dried, boilerplate legal forms will hardly do this for you.
In a wealth transfer strategy (as opposed to a basic, generic estate plan), you share your values and goals in addition to your assets. You hand down your wealth with purpose, noting to your beneficiaries and heirs what should be done with it. You also let them know how long the transfer of assets may take. This way, expectations are set, and you reduce the risk of your beneficiaries and heirs being unpleasantly surprised.
SUMMER SLOWDOWN HITS HOUSING MARKET
Low inventory and high prices are taking a toll on existing home sales. They declined 1.3% in July, according to the National Association of Realtors, making a second straight monthly retreat. In the past 12 months, the number of existing homes on the market has shrunk 9.0%, while the median sale price has risen 6.2% to $258,300. While resales were up 2.1% year-over-year, the seasonally adjusted annual sales rate reached a 2017 low in July. Census Bureau data showed new home sales falling 9.4% last month.1,2
GASOLINE FUTURES RISE, BUT OIL FUTURES FALL
On the NYMEX, unleaded gasoline gained 2.6% last week, with prices briefly reaching a 5-month peak. Even as oncoming Hurricane Harvey posed a threat to Gulf Coast oil output, crude lost 1.6% last week to settle at $47.87 Friday.3
ORDERS FOR DURABLES DECLINE
Hard goods orders retreated 6.8% for July; the decrease was 7.8% with defense orders factored out. However, core orders (which do not include transportation equipment purchases) were up 0.5% last month.1
We have seen some uneasy times lately. Uneasiness impacts the financial markets. When it does, we all need to keep some long-term perspective in mind. Those who race to the sidelines and exit equities may regret the choice when crises pass.
Wall Street loves calm. Traders literally want “business as usual,” every day. If breaking news disrupts that calm, it can rattle the market – but every investor must realize that these disruptive events are exceptions to the norm. (If the major Wall Street indices rollercoastered dramatically every day, who would invest in stocks to begin with?)
History shows how the market has bounced back in the past. You probably know the old financial industry saying: past performance is no guarantee of future results. That is certainly true, but it is also true that the major indices have staged some impressive recoveries when confronted with turbulence.
RETAIL SALES RISE IMPRESSIVELY
In July, they were up 0.6% – the largest monthly increase seen so far in 2017. This gain suggests the economy has gathered momentum in the third quarter. Core retail sales (which do not include food, construction, gas, and auto buying) advanced 0.6% for July as well. The Department of Commerce also revised some spring numbers: retail purchases improved 0.3% in June and were flat a month earlier.1
AN UPTURN FOR CONSUMER SENTIMENT
The University of Michigan’s monthly gauge of how U.S. households view current and future economic conditions rose 4.5 points in its preliminary August edition to 97.6. Not since January has the index been so high. In the past 12 months, it has gained 8.7 points.2
HOUSING STARTS RETREAT
Groundbreaking decreased 4.8% in July, according to the latest monthly Census Bureau snapshot of American construction activity. Building permits were also down for the month, with the pace of permits issued declining by 4.1%.3
Are you on track to save $1 million or more for retirement? If you are 50 or younger, you may need that much in savings to generate the kind of retirement income you prefer.
Personal finance website NerdWallet recently did some math concerning this very objective. What kind of sustained savings effort would a 30-year-old with nothing invested need to make to amass $1 million in retirement savings by age 67, assuming a consistent 6% annual return? (Keep in mind, a tax-advantaged retirement account is not the only potential source of retirement savings.)1
According to NerdWallet’s projection, a 30-year-old earning $40,000 a year would have to set aside 18.3% of each paycheck toward that goal. The percentage drops to 12.2% for a 30-year-old earning $60,000 annually, and 9.2% a year for a 30-year-old with an $80,000 salary.1
How can you get your kids back in school mode? Unscheduled summer days can lead to unstructured mornings and frustration for families when school days roll around. You may be wondering what you can do to bring back some organization in the mornings.
Regular sleep can really help. If your kids can go to bed at a consistent time starting 10-14 days before the first day of school, that may help them to get up regularly (and early) again, so you can avoid a frenzied morning, and consequently, they can avoid a hurried bike ride or a race to the school bus.
Taking a bath or a shower at the same time every day should be another goal. If that habit has been lost, reintroduce it as school nears. Have your kids take a bath at the same time each night or a shower at the same time each night or morning.
Address These Retirement Planning Priorities After 50
When you turn 50, you start to think practically about the steps of your retirement transition. A to-do list emerges of tasks to try and accomplish, as well as things to consider.
Now is the time to pour all you can into your retirement savings. As an example, say you direct $15,000 annually into your workplace retirement account from age 55 to 65. If it returns 6%, you’ll see $48,000 growth off those $150,000 in salary deferrals. An additional $198,000 sounds nice, but keep in mind that your annual contribution ceiling rises to $24,000 starting at age 50. Contribute $24,000 annually to that retirement account returning 6% across those ten years, and you will have an added $316,000 for your “second act” including $76,000 in growth. Whittling down your debt should also be a goal. About 30% of seniors have outstanding home loans, and the average household headed up by seniors age 65-69 carries nearly $7,000 in monthly credit card charges. Are your investments too bullish? It may be time to reduce the amount of equities in your portfolio. Thanks to the recent rally on Wall Street, there may be a higher percentage of your invested assets in stocks than you assume, and that could expose you to more risk than you prefer.1
TAME INFLATION PERSISTS
Can the Federal Reserve justify another interest rate hike in the second half of 2017? Given weak inflation pressure, maybe not. The central bank has set a 2% yearly inflation target, but the Consumer Price Index rose only 0.1% in July, resulting in a 1.7% year-over-year gain. Core consumer prices rose 0.1% for a fourth consecutive month in July, so annualized core inflation was also at 1.7%. The Producer Price Index fell 0.1% last month; analysts polled by Briefing.com expected a 0.2% rise.1,2
ANALYSIS: EARNINGS GROW AT A 10% PACE
More than 90% of companies in the S&P 500 have now reported second-quarter results. FactSet, the respected financial analytics firm, now projects a blended earnings growth rate of 10.2% for the S&P 500 for the second quarter, along a with 5.1% blended sales growth rate. S&P component firms generating less than 50% of their sales outside the U.S., however, are set to record 14.0% blended earnings growth and 6.0% blended revenue growth.3
THE PRICE OF GOLD RISES
At Friday’s close, the yellow metal hit a 2-month high of $1,294.00 on the COMEX as investors looked away from equities. Gold gained 2.3% on the week.4
As you start a family, you start to think about certain financial matters. Before you became a mom or dad, you may not have thought about them much, but so much changes when you have kids.
Parenting presents you with definite, sudden, financial needs to address. By focusing on those needs today, you may give yourself a head start on meeting some crucial family financial objectives tomorrow. The to-do list should include:
Life & disability insurance coverage. If one or both of you cannot work and earn income, your household could struggle to meet education expenses, medical expenses, or even paying the bills. Disability insurance payments could provide some financial support in such an instance. Some employers provide it, but that coverage often proves insufficient. Every fifth American has a disability, and more than 25% of 20-year-old Americans will become disabled before reaching retirement age. One in eight working people will be disabled for five years or longer during their pre-retirement years. Could you imagine your household going that long on only a fraction of its current income?1,2
Have you ever been confused by the jargon used on Wall Street? Perhaps it is time to translate some of those esoteric stock market terms into plain English.
Blue chips: This term refers to stocks that have a history of consistently strong dividend payments, issued by large corporations with solid management. In addition, this is also a nickname for the Dow Jones Industrial Average, which includes 30 companies that usually deserve such a label.
Hedge: A position you take with your money or investments to try and counteract or control potential losses. An investor who owns a lot of bank stocks, for example, might hedge by also investing significantly in utilities shares. The two industries have little, if any, relationship, so if stocks suffer in one industry due to a trend or breaking news, the other may not be hurt.
Moving average: This is simply the average, per-share price of a stock within a set period – it could be 50 days, 100 days, or 200 days. Stock market indices like the Dow and Nasdaq have moving averages, too, which are measured in the same way.
LATEST JOBS REPORT BRINGS GOOD NEWS
U.S. payrolls swelled with 209,000 net new workers in July, according to the Department of Labor. That beat the 183,000 estimate by analysts surveyed by Reuters. About 53,000 of the hires were at restaurants and bars, with another 49,000 in the professional and business services category. While yearly wage growth remained at 2.5%, the headline jobless rate ticked back down to 4.3%. The U-6 rate (which includes the underemployed) stayed at 8.6%.1
A MEAGER GAIN IN CONSUMER SPENDING
The 0.1% June advance reported by the Department of Commerce matched the (low) expectations of economists surveyed by MarketWatch. Consumer incomes were flat in June; the same group of forecasters thought they would improve 0.3%. Personal spending had increased 0.2% in May, with income up 0.3%.2
ISM PMIS SHOW CONTINUED BUSINESS GROWTH
In June, both purchasing manager indices at the Institute for Supply Management were above 57. Their July readings were lower, but still indicated significant sector expansion as both numbers were well above 50. The manufacturing PMI fell 1.5 points to 56.3, and the service sector PMI dropped 3.5 points to a mark of 53.9.3
Debit card data theft has surged lately. According to FICO’s Card Alert Service, the number of businesses or ATM locations where debit cards were hacked rose 26% from 2015 to 2016. Additionally, the number of compromised cards has steadily risen during this decade.1
Crooks can attach skimmers to ATMs or point-of-purchase devices in seconds. These counterfeit card readers instantly record banking data ingrained on a debit card’s magnetic stripe. You probably have one of the new EVM chip cards, but if you happen to insert or slide your card through an older ATM that cannot accept the newer cards, your data could still be at risk.2
Bankrate reports that chip skimmers are now surfacing, capable of hacking first-generation EVM chip cards relying on static data authentication. Second-generation EVM chip cards use dynamic data authentication, which makes data theft more difficult – but not impossible.2
There are now two kinds of bitcoin. A governance dispute over how to manage bitcoin transactions has prompted a spinoff of the cybercurrency: bitcoin cash. It went live on August 1, the byproduct of a bitcoin civil war.1
Bitcoin’s underlying technology begged for an upgrade this year. All bitcoin transactions have been conducted on its peer-to-peer blockchain network, which verifies and approves bitcoin payments without the need of any bank or government authority. Lately, that network has had issues, proving too slow for some bitcoin “miners” (users).2
Prior to August 1, each block on the blockchain could hold 1MB of data. That was fine, years ago, but this year, the speed of bitcoin transactions had declined to as slow as three per second, with occasional delays as transactions waited for space on an open block.3
THE MONTH IN BRIEF
The Dow Jones Industrial Average gained 2.54% in July as earnings announcements and fundamental indicators provided a lift for the blue chips and other stock market indices. Hiring and manufacturing data was particularly reassuring. Annualized inflation declined once more. Oil, gold, and other marquee commodities advanced and so did many Asia-Pacific stock benchmarks. In the real estate market, home buyers coped with slim supply and high median prices as mortgage rates crept up. Wall Street had another calm month and that suited the bulls.1
DOMESTIC ECONOMIC HEALTH
Monthly job growth again topped the 200,000 mark. The Department of Labor’s June employment report showed a gain of 222,000 hires (the most in any month since February) with wages up 0.2%, which took the year-over-year increase to 2.5%. Almost 5 million more people sought work in June than in May, so that resulted in the headline unemployment rate ticking up to 4.4%; the U-6 rate, which includes discouraged job seekers and part-time workers, increased 0.2% to 8.6%.2
More good news came from the factory sector. At a June mark of 57.8, the Institute for Supply Management’s manufacturing purchasing manager jumped an impressive 3.9 points off its May level. ISM’s service sector PMI nearly matched it, rising half a point in June to 57.4. Elsewhere in manufacturing news, federal government data showed overall durable goods orders growing by an astonishing 6.5% in June (but just 0.2% minus transportation orders). Industrial production was up 0.4% in June; manufacturing production, up 0.2%.3,4
HOUSEHOLDS ARE FEELING OPTIMISTIC
Unemployment is at a 16-year low, and the Conference Board’s consumer confidence index is near a 16-year high. It reached 121.1 in July, rising 3.8 points; analysts polled by MarketWatch expected a reading of 116.9. The University of Michigan’s consumer sentiment index rose to 93.4.1,2
HAVE HOME SALES REACHED A PLATEAU?
Last week, the National Association of Realtors announced a 1.8% June retreat for existing home sales. New home buying only advanced 0.8% for June by Census Bureau calculations. Analysts point to tight supply limiting resales and a scarcity of affordably priced new developments discouraging new home shoppers.3
GROWTH PICKED UP IN THE SECOND QUARTER
According to the Bureau of Economic Analysis, the economy expanded at an annual rate of 2.6% in Q2, with the yearly personal spending rate at 2.8%. As it presented its Q2 estimate, the BEA also revised Q1 consumer spending up from 1.1% to 1.9%.2
Whether you want to leave work at 62, 67, or 70, claiming the retirement benefits you are entitled to by federal law is no casual decision. You will want to consider a few key factors first.
How long do you think you will live? If you have a feeling you will live into your nineties, for example, it may be better to claim later. If you start receiving Social Security benefits at or after age 67 (Full Retirement Age), your monthly benefit will be larger than if you had claimed at 62. If you file for benefits at 67 or later, chances are you probably a) worked into your mid-sixties, b) are in fairly good health, c) have sizable retirement savings.
If you sense you might not live into your eighties or you really, really need retirement income, then claiming at or close to 62 might make more sense. If you have an average lifespan, you will, theoretically, receive the average amount of lifetime benefits regardless of when you claim them; the choice comes down to more lifetime payments that are smaller or fewer lifetime payments that are larger. For the record, Social Security’s actuaries project the average 65-year-old man living 84.3 years and the average 65-year-old woman living 86.6 years.1
Bitcoin. Ethereum. Litecoin. Ripple. These are just four of the cybercurrencies attracting opportunistic investors today. Are they the next big thing? Or the next big bust?
The answer to that question may vary per day, week, month, or year. These altcoins are classified as commodities, not currencies, by the Commodity Futures Trading Commission. Like all commodities, their value can quickly change.1
This spring, a bitcoin bubble popped. As 2017 unfolded, the value of a single bitcoin tripled, reaching more than $3,000 in May. Just weeks later, it was down to around $2,245, sliding roughly 25%. That tumble paled in comparison to the dive it took starting in late 2013, when its price sank from above $1,000 to about $200. After losing 80% of its value, the price then stayed around $200 for nearly three years.1
Key Medicare enrollment periods are approaching. This fall and winter, there are three periods in which Medicare beneficiaries can either enroll or disenroll in forms of coverage.
>> Oct. 15-Dec. 7, 2017: Open enrollment period. This is when you can exit Original Medicare (Part A & B) for a Medicare Advantage Plan (Part C) and change your prescription drug coverage (Part D). You can also get out of a Part C plan and go back to Part A & B during this period; although, you will certainly want a Medicare Supplement (Medigap policy) in place before you make such a move. (In most cases, that means having to pass underwriting.)1
>> Dec. 8, 2017: Annual enrollment period begins for 5-star plans. All Part C and Part D plans are assigned ratings. Beginning December 8, 2017 and ending November 30, 2018, a window opens for you to enroll in a 5-star Part C or Part D plan. You can do this once per 365 days. How do you find the 5-star plans? Visit the Medicare Plan Finder: medicare.gov/find-a-plan.2
WILL STOCKS GET AN EARNINGS BOOST?
While the first full week of the Q2 earnings season saw no pronounced rallies, there were also no shocks. By Friday’s closing bell, 20% of S&P 500 member firms had reported calendar Q2 results, and a FactSet analysis showed 77% had topped sales projections and 73% had beaten earnings-per-share forecasts – a good sign in an earnings-driven market climate. The Nasdaq Composite gained 1.19% last week and settled at 6,387.75 Friday; the S&P 500 rose to 2,472.54 after a 5-day gain of 0.54%. As blue chips fell 0.27% across five trading days, the Dow Jones Industrial Average closed at 21,580.07 Friday. All three indices hit record highs during the week.1,2
CONSTRUCTION ACTIVITY SURGED IN JUNE
According to a new Census Bureau report, housing starts rose 8.3% last month, while building permits were up 7.4%. That counteracts the 2.8% fall for starts and the 4.9% drop for permits in May.3
GOLD TOPS $1,250
Settling at $1,254.90 Friday, the yellow metal hit its highest COMEX close since June 23, up 2.2% in five days. Silver rose 3.3% last week to a Friday close of $16.46.4
A successful retirement is not merely measured in financial terms. Even those who retire with small fortunes can face boredom or depression and the fear of drawing down their savings too fast. How can new retirees try to calm these worries?
Two factors may help: a gradual retirement transition and some guidance from a financial professional.
An abrupt break from the workplace may be unsettling. As a hypothetical example, imagine a well-paid finance manager at an auto dealership whose personal identity is closely tied to his job. His best friends are all at the dealership. He retires, and suddenly his friends and sense of purpose are absent. He finds that he has no compelling reason to leave the house, nothing to look forward to when he gets up in the morning. Guess what? He hates being retired.
On the other hand, if he prepares for retirement years in advance of his farewell party by exploring an encore career, engaging in varieties of self-employment, or volunteering, he can retire with something promising ahead of him. If he broadens the scope of his social life, so that he can see friends and family regularly and interact with both older and younger people in different settings, his retirement may also become more enjoyable.
INFLATION PRESSURE WEAKENS
The Consumer Price Index was unchanged in June, according to the Bureau of Labor Statistics. That left its yearly advance at only 1.6%, nearly half a point below the Federal Reserve’s target (the core CPI was up 1.7%). After the announcement, some economists and market strategists wondered whether the Fed would rethink its plans for a third interest rate hike in 2017. The Producer Price Index rose 0.1% in June, leaving its yearly increase at 2.0%.1,2
RETAIL SALES, CONSUMER SENTIMENT INDEX DECLINE
For the second month in a row, households scaled back their retail purchases – retail sales were down 0.2% in June following a 0.1% May decline. Core sales fell 0.2% after a May retreat of 0.3%. The University of Michigan’s preliminary July consumer sentiment index lost 2.0 points off its final June mark to a reading of 93.1.1,2
A projection of rising demand and news of a pipeline shutdown in Nigeria sent the price of light sweet crude 5.2% higher in a week. WTI crude settled at $46.54 on the NYMEX Friday, its best close since July 3.3
Directly & indirectly, you might be able to save more per month than you think. Hidden paths to greater savings can be found at home and at work, and their potential might surprise you.
Little everyday things may be costing you dollars you could keep. Simply paying cash instead of using a credit card could save you four figures annually. An average U.S. household carries $9,000 in revolving debt; as credit cards currently have a 13% average annual interest rate, that average household pays more than $1,000 in finance charges a year.1
The typical bank customer makes four $60 withdrawals from ATMs a month – given that two or three are probably away from the host bank, that means $5-12 a month lost to ATM fees, or about $60-100 a year. A common household gets about 15 hard-copy bills a month and spends roughly $80 a year on stamps to mail them – why not pay bills online? Automating payments also rescues you from late fees.1
The price of long-term care insurance has really gone up. If you are a baby boomer and you have kept your eye on it for a few years, chances are you have noticed this. Last year, the American Association for Long-Term Care Insurance (AALTCI) noted that married 60-year-olds would pay between $2,000-3,500 annually in premiums for a standalone LTC policy.1
Changing demographics and low interest rates have prompted major insurers to stop offering LTC coverage. As the AALTCI notes, the number of LTC policies sold in this country fell from 750,000 in 2000 to 105,000 in 2015. Today, only about 15 insurers offer these policies at all. The demand for the coverage remains, however – and in response, insurance providers have introduced new options.1,2
Hybrid LTC products have emerged. Some insurers offer “cash rich” permanent life insurance policies that let you tap part of the death benefit to pay for long-term care. Other insurance products feature similar potential benefits.1,2
Ever hear of an SDBA? That acronym stands for self-directed brokerage account. If you are enrolled in a 401(k), 403(b), or 457 plan, you might want to see if your plan gives you this option, which is often unnoticed.
About 40% of workplace retirement plans now have SDBAs. These accounts can connect you to a wider variety of investment choices than the default ones presented in your plan, meaning potentially greater flexibility for your portfolio.1
Why are SDBAs underutilized? Simply put, they are not for every retirement saver. They are geared toward the pre-retiree who works with an investment professional and/or the investor comfortable with managing his or her level of risk. According to Aon Hewitt research, only about 3% of retirement plan participants use SDBAs – and the average account balance of those who do is around $250,000.1
When Baby Boomers Become Elders, Will Their Kids Provide Care?
Right now, millions of baby boomers provide informal, unpaid eldercare to parents in their eighties and nineties. This obligation has led some boomers to retire earlier. The Center for Retirement Research at Boston College says that men who play these caregiving roles are 2.4% less likely to stay in the workforce than their peers. Women are more likely to leave the office under such stress, and the CRR estimates that those who do balance a career and eldercare work 3-10 hours less a week and earn an average of 3% less than other working women.
Fewer middle-aged adults may be available to care for baby boomers who become elders. Divorce and geographic separation of families may worsen this dilemma. Additionally, nearly all baby boomers will be age 70 or older by 2033 – the date when the Social Security Trust Fund is projected to run dry, and a 20% reduction in Social Security benefits has been mentioned as a possible consequence. Rising nursing home costs and the financial strain of caregiving may eventually lead federal agencies and the private sector to a collaborative response to meet a pressing need for economical eldercare.1
Consider All That Traveling Could Do for You
Some domestic and foreign trips may provide an education, a chance to make a difference, even opportunities to save money. For that matter, living abroad for months or years may allow you to retire on less, and renting out (or selling) a home stateside could pad your retirement savings.
THE QUARTER IN BRIEF
After a remarkable first quarter, the stock market cooled off slightly in Q2 – but investors still saw substantial gains. Strong earnings helped take Wall Street’s collective mind off a decidedly mixed bag of economic signals. Consumers remained confident as the quarter unfolded; although hiring, inflation, and consumer spending weakened. Home sales declined, then rebounded. Overseas, factory activity in China and the eurozone showed improvement, and foreign equity benchmarks continued climbing. Many commodities took sizable Q2 losses. When the quarter ended, the bulls were still firmly in charge.1
DOMESTIC ECONOMIC HEALTH
As one quarter ends, the Bureau of Economic Analysis commonly makes its third and last assessment of the prior quarter’s economic growth (though, even this “final” estimate may be adjusted in later years). In the last week of June, the BEA announced a “final” Q1 growth number of 1.4%, which was nothing to celebrate. Would Q2 growth come in above 2%?2
Second-quarter consumer spending data from the Department of Commerce raised some concerns about reaching that percentage of growth. While April and May brought solid growth for personal incomes (0.3% in the former month and 0.4% in the latter), the gain in personal spending fell from 0.4%, in the fourth month of the year, to 0.1%, in the fifth. Retail sales, too, tailed off: after rising a robust 0.4% in April, they fell 0.3% for May.2
HIRING PICKS UP AGAIN
The Department of Labor announced some good news Friday: the creation of 222,000 net new jobs in June, the largest hiring gain in four months. Approximately 4.7 million people reentered the labor force and found work in June, a peak unmatched in 27 years of monthly data. Wages rose 0.2% for an annualized gain of 2.5%. The main unemployment rate ticked north to 4.4% as more Americans joined the job hunt; the U-6 rate, including the underemployed, increased 0.2% to 8.6%, its first rise since January.1
ISM FACTORY PMI HITS 3-YEAR PEAK
In June, the Institute for Supply Management’s globally watched manufacturing purchasing manager index improved 2.9 points to 57.8, its highest reading since August 2014. ISM’s non-manufacturing PMI rose to 57.4 after a half-point gain; its June reading signaled the 90th straight month of expansion for the country’s service sector.2,3
GOLD SETTLES AT ITS LOWEST PRICE SINCE MARCH
The yellow metal fell to a COMEX close of $1,209.70 Friday. It is now on a 5-week losing streak. The price of gold sank 2.6% last week, while the price of silver dropped 6.9%; silver ended the week down at $15.43.4
THE MONTH IN BRIEF
June brought some definite headwinds to Wall Street, but the broad stock market still advanced. The S&P 500 added 0.48% across the month, even with tech shares selling off. As anticipated, the Federal Reserve raised the federal funds rate by another quarter point. Last month was a trying one for European stocks as well as oil and many other commodities. The latest round of U.S. economic indicators contained some disappointments; though, manufacturing and home sales surprised to the upside. All in all, increased volatility, terrorist incidents, and political happenings did not have much of an effect on investor confidence.1
DOMESTIC ECONOMIC HEALTH
Hours before the June Federal Reserve policy meeting, traders put the odds of a rate hike at 99%. The central bank did not challenge that expectation. On June 14, it took the benchmark interest rate north to a range of 1.00-1.25%. As it did so, it made one unexpected move: it set a rough start date for unwinding its balance sheet. The Federal Open Market Committee’s latest policy statement said that process would begin “this year.” Initially, the Fed plans to let $6 billion in Treasury notes and $4 billion in mortgage bonds mature each month, with the amounts gradually rising to $30 billion per month in Treasuries and $20 billion per month in mortgage-backed securities.2
Judging by the latest reading on the Consumer Price Index, the Fed might have to address low inflation again. The annualized inflation rate fell 0.3% in May to 1.9%, beneath the Fed’s long-established 2% target. Through May, core consumer prices had only advanced 1.7% in a year. In contrast, producer prices were up 2.4% in 12 months, even with the headline Producer Price Index flat in May.3
Are you an owner of a thriving business or a medical or legal practice? Are you a highly paid executive? If you have children, at some point they may discern how wealthy you are – and in turn, learn how “rich” they are. How will you handle that moment? How will they handle that knowledge?
Some kids end up valuing family wealth more than others. We all know (or have heard) about children from wealthy families who grew up to become opportunistic, materialistic, and unmotivated young adults living off their parents’ largess. Other children learn to treat family money with respect and admiration, recognizing the role it plays for the family, while glimpsing its potential to help charities and the community.
What accounts for the difference? It may boil down to values. When the right values are handed down, a young adult is poised to hold wealth in high regard and receive it with maturity.
On July 6, the eve of a G-20 summit, a global trade pact planned for four years took a major step toward reality. In Brussels, Japanese Prime Minister Shinzo Abe, European Commission President Jean-Claude Juncker, and European Council President Donald Tusk unveiled a sweeping free trade treaty strengthening economic ties between east and west.1
The yet-unnamed pact is slated to take effect in early 2019, after details are finalized. It will create the globe’s largest economic area: a market of roughly 640 million people, accounting for about a third of the world economy.1,2
What is this trade accord designed to accomplish? Besides sending out what Prime Minister Abe terms “a strong message to the world,” the agreement will phase out E.U. import taxes of up to 10% on Japanese cars and trucks and Japanese tariffs of up to 30% on food exports coming from E.U. nations. European taxes on most Japanese electronics products will also be dropped as soon as the accord is in effect.1,2
HOUSEHOLD EARNINGS OUTPACE SPENDING
According to newly released Department of Commerce data, personal incomes improved 0.4% in May, but personal spending advanced just 0.1% after a 0.4% gain in April. Core consumer prices (minus food and energy costs) rose only 1.4% during the 12 months ending in May.1,2,3
WERE CONSUMERS MORE CONFIDENT IN JUNE?
By the looks of the University of Michigan’s monthly household sentiment index, no – that gauge fell 2.0 points to a mark of 95.1. On the other hand, the Conference Board’s consumer confidence index rose 1.3 points to a reading of 118.9.2,3
PENDING HOME SALES WEAKEN
A National Association of Realtors report showed housing contract activity declining by 0.8% in May. This follows a 1.7% dip for pending home sales in April.3
How long do you think you will work? Are you one of those baby boomers (or Gen Xers) who believes he or she can work past 65?
Some pre-retirees are basing their entire retirement transition on that belief, and that could be financially perilous.
In a new survey on retirement age, the gap between perception and reality stands out. The Employee Benefit Research Institute (EBRI) recently published its 2017 Retirement Confidence Survey, and the big takeaway from all the data is that most American workers (75%) believe they will be on the job at or after age 65. That belief conflicts with fact, for only 23% of retired workers EBRI polled this year said that they had stayed on the job until they were 65 or older.1
MORE HOMES MOVED IN MAY
In a pleasant surprise for economists, both new and existing home sales picked up last month. The National Association of Realtors announced a 1.1% gain for resales, with the average house for sale spending only 27 days on the market. New home buying increased 2.9% in May, resulting in an annualized gain of 8.9%. The average sale price for a new home was $406,400, a record.1
LEADING INDICATORS IMPROVE
The Conference Board’s Leading Economic Index rose 0.3% for May, following gains of 0.2% for April and 0.4% for March. Most of the index’s components were positive for May and a steepening interest rate spread, a climb for the Institute for Supply Management’s new orders index, and greater consumer optimism about business and economic conditions were major factors. The LEI was up 3.5% year-over-year through May.2
CRUDE IS ON ITS LONGEST LOSING STREAK IN 2 YEARS
WTI crude settled at $43.01 at Friday’s closing bell, down 4.4% from the end of last week. This decline marked the fifth straight weekly retreat for oil; an 8-week losing streak ended in August 2015. Oil is now in a bear market.3
Financially, Generation Y is often criticized for being risk averse & unaware. Is this truth, or is it fiction? In some instances, pure fiction. Here are some good financial habits common to millennials – habits their parents and grandparents might do well to emulate.
Millennials are good savers. Last year, Bankrate found that about 60% of American adults younger than 30 were saving 5% or more of their paychecks. Only around half of the adults older than 30 were doing so. This difference is even more interesting when you think about the overhanging college debt faced by many millennials and the comparatively greater incomes of older workers. Twenty-nine percent of millennials were saving 10% of their incomes last year, right in line with the average for other generations (28%).1
Millennials value experiences more than possessions. Data affirms this view – in a Harris Poll of millennials, 78% of those surveyed said that they would rather spend their money on an experience or an event rather than some pricy material item. In contrast, some members of Gen X and the baby boom generation have spent too much money on depreciating consumer goods, with too little to show for it.2
FED DELIVERS EXPECTED & UNEXPECTED NEWS
As Wall Street anticipated, the Federal Reserve raised interest rates on June 14. The Federal Open Market Committee voted 8-1 to take the benchmark interest rate north by a quarter-point to the 1.00-1.25% range. The Fed also said it would begin to reduce its $4.5 trillion balance sheet at some point “this year” by slowing reinvestments. As a start, it will let $6 billion per month in Treasury holdings run off, along with $4 billion per month in agency debt and mortgage-linked securities. This implies upward pressure on long-term interest rates.1,2
RETAIL SALES, HEADLINE INFLATION BOTH RETREAT
The Consumer Price Index declined 0.1% in May, noted the Bureau of Labor Statistics; core consumer inflation rose 0.1%. A bigger May decline came for retail purchases – the Census Bureau said that they fell 0.3% even with car sales factored out.3
HOUSING STARTS SLIP
The Census Bureau’s new residential construction snapshot showed groundbreaking at an 8-month low, with total housing starts down 5.5% in May. Total building permits decelerated 4.9% last month to their slowest pace since April 2016.4
We have seen a tremendous rally on Wall Street, nearly nine months long, with the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average repeatedly settling at all-time peaks. Investors are delighted by what they have witnessed. Have they become irrationally exuberant?
The major indices do not always rise. That obvious fact risks becoming “back of mind” these days. On June 15, the Nasdaq Composite was up 27.16% year-over-year and 12.67% in the past six months. The S&P 500 was up 17.23% in a year and 7.31% in six months. Performance like that can breed overconfidence in equities.1,2
The S&P last corrected at the beginning of 2016, and a market drop may seem like a remote possibility now. Then again, corrections usually arrive without much warning. You may want to ask yourself: “Am I prepared for one?”3
On Wednesday morning, futures markets put the odds at 99.6% of a June interest rate increase by the Federal Reserve. Sure enough, the central bank made a move. It raised the key interest rate by 0.25%, taking the target range for the federal funds rate to the 1.00-1.25% range. The Federal Open Market Committee voted 8-1 to hike the rate, with Minneapolis Fed President Neel Kashkari being the lone dissenter.1,2
What were the key takeaways from the latest Fed policy statement? A few are worth noting. First of all, the central bank did not change its dot-plot forecast for the rest of 2017. It still projects just one more interest rate hike before 2018 arrives. (After the rate move Wednesday, the CME Group’s FedWatch Tool put the odds of a September rate increase at 19% and the odds of a December rate increase at 45%.)2,3
Second, the Fed announced it would begin to slowly reduce its $4.5 billion holdings of Treasuries and mortgage-linked securities “this year.” Third, it lowered its inflation projection for the balance of 2017 to 1.6% from the prior 1.9%. Fourth, it projected the unemployment rate to decline to 4.3% by December.2
Can Your Life Insurance Policy Help You Out in Retirement?
Under certain circumstances, it can play a crucial financial role. Besides a death benefit, a permanent life insurance policy can accrue cash value over time (provided the premiums are paid). That cash value could prove useful in or near retirement. If you need to, you could withdraw some of it to pay for medical procedures, home improvements, long-term care, or a child’s college education. It could even provide you with additional retirement income. Moreover, distributions from a permanent life insurance policy are tax free as opposed to distributions from traditional IRAs (and some other retirement plans), which are taxed at regular rates.
There is one notable negative to all this. When you take cash value from a life insurance policy, it is not a withdrawal – it is a loan. You are borrowing against the value of your policy, and in doing so, you reduce its death benefit. You can restore the full value of the death benefit by paying back the loan in full – but that loan may carry 7-8% interest. Also, life insurance premiums and fees can be costly when weighed against other retirement savings vehicles. Dollars that fund a permanent life insurance policy are also dollars that could alternately go into your other retirement accounts, which you do not pay premiums to keep up.1
AN UPBEAT REPORT ON THE SERVICE SECTOR
The Institute for Supply Management’s May non-manufacturing purchasing manager index displayed a reading of 56.9 last week, showing expansion in U.S. service industries for an eighty-ninth straight month. Although the gauge declined 0.6 points from its April mark, it signaled a solid pace of growth. The index’s employment component rose 6.4 points to a mark of 57.8, as 15 industries added workers in May. The PMI has averaged a reading of 55.9 over the past 12 months.1
FACTORY ORDERS DECLINED IN APRIL
According to a new Census Bureau report, they decreased 0.2%. That marked their first month-over-month retreat of 2017. The 0.2% gain for March factory orders, however, was revised up to 1.0%. Orders increased by an average of 0.7% per month in the first quarter.2
ABUNDANT SUPPLY HURTS OIL
WTI crude lost 3.8% during June 5-9, tumbling to a $45.83 settlement on the NYMEX Friday. The U.S. rig count rose again last week, as it has every week for the past five months. While OPEC has vowed to reduce production by 1.2 million barrels per day, daily American oil output has increased by almost 600,000 barrels, so far, this year.3
Some young adults manage to acquire a fair amount of financial literacy. In the classroom or the workplace, they learn a great deal about financial principles. Others lack such knowledge and learn money lessons by paying, to reference William Blake, “the price of experience.”
Broadly speaking, how much financial literacy do young people have today? At this writing, some of the most recent data appears in U.S. Bank’s 2016 Student and Personal Finance Study. After surveying more than 1,600 American high school and undergraduate students, the bank found that just 15% of students felt knowledgeable about investing. For that matter, just 42% felt knowledgeable about deposit and checking accounts.1
Relatively few students understood the principles of credit. Fifty-four percent thought that having “too many” credit cards would negatively impact their credit score. Forty-four percent believed that they could build or improve their credit rating by using credit or debit cards. Neither perception is accurate.1
THE MONTH IN BRIEF
May was another good month for stocks. The S&P 500 gained more than 1%, putting its YTD advance above 7.7%. While the housing market showed some spring weakness, hiring bounced back and most other important economic indicators did not falter. Wall Street seemed little troubled by politics, terrorist incidents, data disappointments, or earnings misses. Overseas, stock benchmarks largely advanced, some impressively. Gasoline futures ascended; mortgage rates descended. Both investors and consumers seemed firmly confident.1
DOMESTIC ECONOMIC HEALTH
The Department of Labor’s latest employment report showed a rebound in job creation. While March saw just 79,000 net new jobs, that number increased to 211,000 in April. These additions left the main (U-3) jobless rate at 4.4%, a 10-year low. The U-6 rate, including the underemployed, fell 0.3% to 8.6%, another low unseen for nearly a decade. Numbers like these seemed to amount to a green light for a June interest rate hike at the Federal Reserve.2
Later in the month, however, word arrived that the Fed was more cautious about a June hike than some investors assumed. May ended with the Bureau of Economic Analysis revising the Q1 GDP number north by half a percent to 1.2%, but that was still far from impressive. Minutes from the May 2-3 Federal Open Market Committee meeting noted that FOMC members “generally judged that it would be prudent to await additional evidence” of the economy picking up before making another policy move. Still, the Fed futures market had the chance of a June rate increase at 83% in late May.3,4
JOB CREATION, JOBLESS RATE DOWN IN MAY
A day after ADP’s employment change report estimated a hiring gain of 253,000 in May, the Department of Labor’s latest jobs report told a far different story. It said employers added just 138,000 workers last month. The U-3 jobless rate fell to a 16-year low of 4.3% in May, partly because of people dropping out of the labor force. The U-6 rate, counting the underemployed, decreased to a 10-year low of 8.4%. Annualized wage growth improved 0.2% to 2.5%.1,2
CONSUMER CONFIDENCE INDEX DECLINES
The Conference Board’s monthly consumer confidence gauge remained well north of 100 in May. It came in at 117.9. The index actually descended 1.5 points from its (downwardly revised) April reading of 119.4.1
FACTORY GROWTH MAINTAINS ITS PACE
Rising a tenth of a percentage point to 54.9, the Institute for Supply Management’s manufacturing purchasing manager index showed healthy sector expansion in May. ISM last measured a sector contraction (a reading below 50) in August.3
When you see online ads or TV commercials about retirement planning, do they ever show baby boomer couples arguing? No. After all, retirement planning is about the pursuit of a happy outcome – a fun and emotionally rewarding “second act” that spouses and partners can share.
Realizing that goal takes communication. As you approach retirement, you may not be who you were at 30 or 50. You and your significant other may want different daily lives once you retire. This is a frequently ignored reality in retirement planning. In preparing to retire, you might want to consider your individual preferences and differences when it comes to these factors:
How you spend your days. What does a good day in retirement look like to you? What does it look like for your spouse or partner?
CONSUMER SENTIMENT DECLINES JUST A BIT
Ending May at a mark of 97.1, the University of Michigan’s consumer sentiment index fell 0.6 points from its preliminary reading for the month. Economists polled by MarketWatch had forecast the gauge to remain at 97.7.1
FEWER HOMES WERE BOUGHT IN APRIL
Both new and existing home sales tapered off last month. The National Association of Realtors said that resales fell 2.3% for April, while the Census Bureau announced an 11.4% retreat for new home purchases. While demand was high, tight supply reduced the number of buyers.2
FED MINUTES: Q1 SLUMP “LIKELY TO BE TRANSITORY”
With the Federal Open Market Committee expressing that exact opinion in the record of its May 2-3 meeting, investors saw little that would delay the central bank from raising interest rates in June. Still, the minutes sounded a cautious note. Fed policymakers “generally judged that it would be prudent to await additional evidence,” confirming that the winter economic slowdown was short lived prior to tightening further. The Bureau of Economic Analysis did revise its Q1 GDP estimate up to 1.2% last week, compared with an initial evaluation of 0.7%.1,3
How much will your family end up paying for college? Your household’s income may have less influence than you think – and some private colleges may be cheaper than you assume.
Private schools sometimes extend the best aid offers. Yes – it is true that the more money you earn and the more assets you have in a tax-advantaged college savings plan, the harder it becomes to qualify for financial aid. Merit aid is another matter, however; most private colleges and universities that boast major endowment funds that support healthy merit-based aid packages.
These scholarships and institutional grants – awarded irrespective of a family’s financial need – can reduce the “sticker shock” of a college education. A study from the National Association of College and University Business Officers found that grant-based aid effectively cut tuition and fees by an average of 48.6% in the 2015-16 academic year. If your child can fit into the top quarter of a college’s student population in terms of grades or achievement, merit aid may be a possibility. A college that might be your student’s second or third choice might offer him or her more merit aid than the first choice.1
CONSTRUCTION ACTIVITY SLOWED IN APRIL
Against expectations, both housing starts and building permits declined in the fourth month of the year. Newly released Census Bureau data shows a 2.5% retreat for permits and a 2.6% pullback for starts last month. The key factors: a 9.2% drop in starts for multi-family projects (which have declined for four straight months) and a 4.5% fall for single-family permits.1
INDUSTRIAL OUTPUT SURGES
Economists polled by Briefing.com expected industrial production to rise 0.3% in April, following a 0.4% advance in March. The number surprised to the upside – the Federal Reserve reported a 1.0% improvement.2
GOLD & WTI CRUDE STAGE MAJOR RALLIES
As both stocks and the dollar hit a rough patch last week, investors turned to commodities. Gold advanced 2.1% on the COMEX in five trading days, settling at $1,253.60 Friday. Oil gained a little more than 5% for the week to a Friday close of $50.33 on the belief that OPEC would extend its current production cut.3,4
When emotions and money intersect, the effects can be financially injurious. Emotions can cause us to overreact – or not act at all when we should.
Think of the investors who always respond to sudden Wall Street volatility. That emotional response may not be warranted, and they may come to regret it.
In a typical market year, Wall Street can see big waves of volatility. This year, it has been easy to forget that truth. During the first third of 2017, the S&P 500 saw only 3 trading days with a 1% or greater swing – or to put it another way, 1% swings occurred just 3.5% of the time. Compare that to 2015, when the S&P moved 1% or more in 29% of its trading sessions.1
The 1.80% May 17 drop of the S&P stirred up fear in some investors. The plunge felt earthshaking to some, given the placid climate on the Street this year. Daily retreats of this magnitude have been seen before, will be seen again, and should be taken in stride.2
Recent headlines have disturbed what was an unusually calm stock market. The political uproar in Washington may continue for weeks or months, and it could mean significant, ongoing turbulence for Wall Street.
As an investor, a retirement saver, how much will this turmoil matter to you in the long run? Perhaps, very little. There are many good reasons to remain in the market.
The earnings recession has ended, and the economy has strengthened. This past earnings season was a superb one. The first quarter of 2017 saw the biggest annualized leap in corporate profits in five years – nearly 15%, according to S&P Capital IQ. The good news hardly ends there. We may be at or near full employment – both the headline jobless rate and the U-6 rate measuring underemployment are back to where they were before the Great Recession began. Inflation has, at last, picked up, and the manufacturing and service sectors have been growing.1,2
A SOLID RETAIL SALES READING
Americans bought more in April. The pace of retail purchases hastened by 0.4% last month, and the Bureau of Economic Analysis revised the 0.2% March retreat into a 0.1% gain. Headline retail sales were up 4.5% across the 12 months ending in April. Core retail sales rose 0.3% in the fourth month of the year.1,2
INFLATION PICKS UP AS SPRING ARRIVES
After falling 0.3% for March, the Consumer Price Index rose 0.2% last month. (The major factor: a 1.1% leap for energy costs.) This increase left annualized inflation at 2.2%. The core CPI (minus food and energy prices) advanced 0.1% in April. On the wholesale front, the Producer Price Index jumped up 0.5% in April, taking its year-over-year advance to 2.5%.1,2
A GAIN FOR A CONSUMER SENTIMENT INDEX
The University of Michigan’s monthly barometer of household sentiment rose 0.7 points in its preliminary May reading to a mark of 97.7. Its consumer expectations component advanced 1.1 points to a reading of 88.1.2
Is Social Security Coming Up Short for Retirees?
The non-partisan Senior Citizens League says yes, charging that the wrong metric is being used to determine cost of living adjustments (COLAs) to retiree benefits. The federal government uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to figure various COLAs. Younger, employed people usually have lower medical expenses than older people; they also spend more money on gasoline and transportation than retirees do. Senior advocates argue that the Consumer Price Index for the Elderly (CPI-E) should be used instead of the CPI-W, especially since medical costs have risen quickly in recent years, while gasoline prices and transportation costs have fallen.
An SCL analysis estimates that if the CPI-E was the COLA yardstick, Social Security recipients would have had COLAs of 0.6% and 1.5% in 2016 and 2017 rather than 0% and 0.3%. Since 2014, the SCL has surveyed retirees annually; in each survey, about 90% of respondents said that their monthly household budgets grew by at least $39 year-over-year. In SCL’s 2017 survey, 37% of those polled said that their monthly expenses were more than $119 above where they had been a year ago. What expenses had jumped the most from last year? Medical costs and food.1
We spend much of our adult lives working, borrowing, and buying. A good credit score is our ally along the way. It retains its importance when we retire.
Retirees should do everything they can to maintain their credit rating. A FICO score of 700 or higher is useful whether an individual works or not.
For example, some retirees will decide to refinance their home loans. A recently published study from the Center for Retirement Research at Boston College noted that in 2013, 50% of homeowners older than 55 carried some form of housing debt. In 2017, it is probable that picture is unchanged. Arranging a lower interest rate on any remaining mortgage payments could bring income-challenged retirees more money each month. A strong FICO score will help them do that; a substandard one will not.1
Most retirees will want to buy a car at some point. Perhaps buying a recreational vehicle is on their to-do list. Very few car, truck, or RV purchases are all cash. A good credit score can help a retiree line up an auto loan with lower interest payments.
Fewer than 1% of Americans have their federal taxes audited. The percentage has declined recently due to Internal Revenue Service budget cuts. In 2016, just 0.7% of individual returns were audited (1 of every 143). That compares to 1.1% of individual returns in 2010.1,2
The rich are more likely to be audited – and so are the poor. After all, an audit of a wealthy taxpayer could result in a “big score” for the I.R.S., and the agency simply cannot dismiss returns from low-income taxpayers that claim implausibly large credits and deductions.
Data compiled by the non-profit Tax Foundation shows that in 2015, just 0.47% of Americans with income of $50,000-75,000 were audited. Only 0.49% of taxpayers who made between $75,000-100,000 faced I.R.S. reviews. The percentage rose to 8.42% for taxpayers who earned $1-5 million. People with incomes of $1-25,000 faced a 1.01% chance of an audit; for those who declared no income at all, the chance was 3.78%.2
NEW DATA SHOWS MORE HIRING, LESS SPENDING
Unemployment hit a 10-year low in April as payrolls swelled with 211,000 net new jobs, a rebound from the meager gains of March. The Department of Labor’s monthly report showed the headline jobless rate declining 0.1% to 4.4%; the U-6 rate measuring underemployment was at 8.6%, falling 0.3%. The latest consumer spending report from the Department of Commerce was less impressive. Personal spending was flat in March, with personal incomes up 0.2%.1,2
ISM PMIS WENT OPPOSITE WAYS IN APRIL
America’s factory sector grew at a slower rate last month than it did during March, while the country’s service sector picked up its pace of expansion. The Institute for Supply Management’s April purchasing manager index dipped to 54.8 from its previous 57.2 mark; ISM’s non-manufacturing PMI rose 2.3 points in April to 57.5.2
FEDERAL RESERVE LEAVES RATES ALONE
As expected, the central bank left the benchmark interest rate in the 0.75-1.00% target range last week. The Federal Open Market Committee felt that the poor economic growth of the first quarter was likely “transitory,” and in its view, economic activity should “expand at a moderate pace” with “gradual” monetary policy adjustments. On May 5, Fed futures traders put the odds of a June rate hike at 79%.3,4
Saving for retirement may seem a thankless task. But you may be thanking yourself later. Putting away a percentage of one’s income, money that could be used for any number of bills or luxuries, is a sacrifice made in the present in order to avoid a larger trouble down the road.
More than a quarter of seniors have no retirement savings. To be more specific, the Government Accountability Office says 29% of households headed by people 55 or older have no savings in a retirement account and no possibility of receiving an employer pension.1
Late last year, a PWC survey revealed that 37% of baby boomers had less than $50,000 in retirement assets. Just 24% of baby boomer households PWC polled had saved more than $300,000 for their “second acts.”2
What kind of future awaits boomers who have saved less than $50,000 for retirement? It is hard to say exactly what may happen to them financially, but it is possible to make some educated guesses.
THE MONTH IN BRIEF
In April, investors kept one eye on impressive corporate earnings and another on geopolitical developments in Asia and Europe. Earnings ultimately drew the most attention – the Dow Jones Industrial Average rose more than 1% for the month, while the Nasdaq Composite added more than 2%. The latest readings on some key economic indicators were disappointing, but consumer confidence and purchasing manager indices looked good. Positive economic news filtered in from both China and the eurozone. Home sales were up; mortgage rates down. Commodity futures largely struggled. All in all, the month featured more economic positives than negatives.1
DOMESTIC ECONOMIC HEALTH
An extremely bullish stock market climate and abundant consumer confidence often coincide. In April, the nation’s most-watched consumer confidence indices remained high; albeit, not as high as they were in March. The Conference Board’s index declined to 120.6, 4.3 points lower than the previous month; the University of Michigan’s household sentiment index ended the month at 97.0, one point lower than its preliminary April mark.2
CONSUMER CONFIDENCE DIPS SLIGHTLY
The University of Michigan and Conference Board consumer confidence indices descended a little last month, but remained in great shape. The CB index displayed an April reading of 120.6, down from 124.9 in March. Slipping a point from its initial April mark, the Michigan barometer fell to 97.0.1
LATEST HOUSING DATA IS MOSTLY POSITIVE
New home sales rose 5.8% in March, the Census Bureau noted last week; headline sales were 15.6% improved from a year earlier. The latest 20-city S&P/Case-Shiller home price index (January) showed 5.8% average yearly house price appreciation, up from 5.6% in December. Pending home sales retreated 0.8% in March, the National Association of Realtors reported.1,2
FIRST QUARTER SAW LITTLE ECONOMIC GROWTH
According to the Bureau of Economic Analysis, America’s economy expanded at a pace of 0.7% in Q1, well below the 2.1% growth seen in Q4. Economists polled by MarketWatch had projected a 0.8% Q1 GDP reading.1
If only money came with instructions. If it did, the route toward wealth would be clear and direct. Unfortunately, many people have inadequate financial knowledge, and for them, the path is more obscure.
Are most people clueless about financial matters? That depends on what gauge you want to use to measure financial knowledge. The U.S. ranked fourteenth in Standard & Poor’s 2015 Global Financial Literacy Study, with just 57% of the country’s population estimated as financially literate.1
Obviously, the other 43% of Americans have some degree of financial understanding – but it is mixed with a degree of incomprehension. Witness some examples:
EXISTING HOME SALES HIT A 10-YEAR PEAK
Rising 4.4% for March, resales surpassed expectations – analysts polled by Reuters projected a gain of 2.5%. The National Association of Realtors said that sales were 5.9% improved from a year before, and that put them at their best level since February 2007, even with existing home inventory 6.6% slimmer than in March 2016.1
CONSTRUCTION ACTIVITY WANES
Department of Commerce data showed a 6.8% reduction in housing starts in March. Even with that fall, starts were up 9.2% in 12 months. Building permits rose 3.6% last month, resulting in a 17.0% annualized increase.2
LIGHT SWEET CRUDE SLIDES 7% IN 5 TRADING DAYS
WTI crude settled at $49.62 Friday, 7.4% below where it had closed a week earlier. One influence was a Baker Hughes report showing that the number of active rigs had increased for a fourteenth consecutive week.3
Some people mistake investing for financial planning. Their “financial strategy” is an investing strategy, in which they chase the return and focus on the yield of their portfolio. As they do so, they miss the big picture.
Investing represents but one facet of long-term financial planning. Trying to build wealth is one thing; trying to protect it is another. An effort must be made to manage risk.
Insurance can play a central role in wealth protection. That role is underappreciated – partly because some of the greatest risks to wealth go unnoticed in daily life. Five days a week, investors notice what happens on Wall Street; the market is constantly “top of mind.” What about those “back of mind” things investors may not readily acknowledge?
PRICES DECLINE IN MARCH
In March, the Consumer Price Index retreated for the first time in 13 months. Its 0.3% dip left annualized consumer inflation at a moderate 2.4%. Fuels, autos, and groceries have all become less expensive recently, according to Bureau of Labor Statistics data. Core consumer prices were up 2.0% in the year ending in March. The Producer Price Index fell just 0.1% in March, with the yearly PPI gain left at 2.3%.1,2
RETAIL SALES FALL
March’s 0.2% decrease followed a 0.3% pullback in February. The silver lining? Minus gas and vehicle sales, retail sales were up 0.1% last month. Core retail sales were flat for March.2
AN IMPROVEMENT FOR CONSUMER SENTIMENT
Rising to an initial April reading of 98.0, the University of Michigan’s consumer sentiment index improved 2.1 points from its final March level. The index’s current conditions component increased 2.0 points to an outstandingly high 115.2.2
Why You Might Not Want a Lump-Sum Retirement Payout
Do you have the option of receiving your retirement money as a lump sum? You may want to turn that choice down. A new MetLife study, Paycheck or Pot of Gold, warns of the “lottery effect” that can occur when all that money makes its way into a household at once. Surveying more than 1,050 retirement plan participants who had taken lump-sum payouts, MetLife found that 21% had already used up 100% of that money; on average, it had disappeared in less than six years.
Like a lottery winner bereft of financial counseling, a recipient of a lump-sum retirement payout can too easily find ways to part with those dollars. What did the respondents to the MetLife survey do within a year of taking their lump sums? In some cases, the money was practically spent: 27% used the funds to attack debt, and 20% said that they made home improvements. On the other hand, 22% gave some of the money away (sometimes to family members and friends), and 12% bought a new car or took a major vacation. Looking back, 31% lamented some of their buying and spending decisions in the first year after taking the lump sum, and 23% regretted financial gifts they had made. Education about the merits and demerits of lump-sum payouts may be insufficient – in the survey, only 45% of pension plan participants offered the choice between a lump sum or a lifelong income stream remembered being given a comparison of the two options.1
In the first quarter of 2017, the bull market seemed unstoppable. The Dow Jones Industrial Average soared past 20,000 and closed at all-time highs on 12 consecutive trading days. The Nasdaq Composite gained almost 10% in three months.1
An eight-year-old bull market is rare. This current bull is the second longest since the end of World War II; only the 1990-2000 bull run surpasses it. Since 1945, the average bull market has lasted 57 months.2
Everyone knows this bull market will someday end – but who wants to acknowledge that fact when equities have performed so well?
You can probably envision how most of your retirement money will be spent. Much of it will be used on living expenses, health care expenses, and, perhaps, debt reduction. Beyond the basics, you will unquestionably reserve some of those dollars for grand adventures and great experiences. If your financial situation permits, you may also contribute to charity.
You just have to remember that your retirement fund is not a bottomless well. If outflows begin to exceed inflows (that is, you repeatedly withdraw more than you make back), you will face a serious financial problem.
With that hazard in mind, be wary of these four spending sieves. Some retirees fall prey to them, and all four can potentially reduce a retirement fund at an alarming rate.
COMPANIES ADDED FEWER WORKERS IN MARCH
Just 98,000 net new jobs were created last month, and some analysts think Winter Storm Stella may have held hiring back. Even so, the Department of Labor’s latest employment report showed the U-3 jobless rate decreasing 0.2% to 4.5%; the broader U-6 rate fell 0.3% to 8.9%. The big factor in both declines: 326,000 people leaving the ranks of the unemployed. If all this seems incongruous, consider that the Bureau of Labor Statistics compiles data from two separate surveys: one focusing on payroll growth; the other, on the employment status of individuals.1
STRONG EXPANSION FOR SERVICE, FACTORY SECTORS
Another month, another wave of growth for industry and retail businesses – this was the tale told by the two purchasing manager indices at the Institute for Supply Management. For March, ISM’s service sector PMI came in at 55.2; its factory PMI, at 57.2. The services PMI lost 2.4 points from its February mark; the factory PMI, 0.5 points. Still, these readings were well above the crucial 50 level.2
FED MAY START TO REDUCE ITS BALANCE SHEET
According to the minutes of the March Federal Reserve policy meeting, most Federal Open Market Committee members believe that the central bank should begin shrinking its vast portfolio of mortgage-backed securities and Treasuries later in 2017. The minutes noted that whether the FOMC decides to phase out or halt reinvestments, the shift in balance sheet policy “should be communicated…well in advance of an actual change.”3
Some spouses share everything with each other – including the smallest details of their personal finances. Other spouses decide to keep some individual financial decisions and details to themselves, and their relationship is just fine.
Just as a marriage requires understanding, respect, and compromise, so does the financial life of a married couple. If you are marrying soon or have just married, you may be surprised (and encouraged) by the way your individual finances may and may not need to change.
If you are like most single people, you have two or three bank accounts. Besides your savings account and your checking account, you may also have a “dream account” where you park your travel money or your future down payment on a home. You can retain all three after you marry, of course – but when it comes to your expenses, you have a fundamental decision to make.
Buying or selling income property has definite tax consequences. A taxpayer should clearly understand them, whether he or she intends to acquire a property or put one on the market.
A sale of income property incurs either a capital gain or loss. If you profit from the sale of income property, that profit is considered fully taxable by the Internal Revenue Service. Fortunately, if you have owned that property for at least a year, you will pay only capital gains tax on those profits rather than income tax.1
Your capital gain is determined by subtracting the adjusted basis of the property (i.e., the price you paid for it, plus the total of any renovations, closing costs, and eligible legal fees) from the sale price. For most taxpayers, the capital gains rate is but 15%. If you sell an investment property for a capital gain of $30,000 and your capital gains rate is 15%, you will pay $4,500 of capital gains tax from the sale.1
THE MONTH IN BRIEF
Stocks went sideways rather than north in March, with the S&P 500 losing just 0.04%. The Federal Reserve made another quarter-point interest rate move, and overseas, the United Kingdom initiated Brexit proceedings. While new data showed weak consumer spending, consumer optimism remained high and hiring was once again strong. A subpar month for commodities did bring major gains for two energy futures. In the housing market, existing home sales decelerated, while new home sales picked up. A little volatility did not upset the primarily bullish outlook on Wall Street.1
DOMESTIC ECONOMIC HEALTH
On March 15, the Federal Reserve felt confident enough in the economy to raise the benchmark interest rate to the 0.75%-1.00% range. The central bank left its 2017 dot-plot unchanged – its forecast still calls for a total of three rate hikes this year.2
Last month, most of the major indicators affirmed the health of the economy. The only question mark concerned household spending, and the 0.1% February gain may have just been an aberration. Consumer incomes did increase 0.4% in February, so it appeared households were pocketing more of what they had made; in fact, there was only a 0.1% February rise in retail sales. Speaking of consumer spending, the Bureau of Economic Analysis revised fourth-quarter growth up to 2.1% as the month ended; even with that upgrade to the Q4 GDP number, the economy grew just 1.6% last year, a full percentage point less than in 2015.3,4
THE QUARTER IN BRIEF
The opening quarter of 2017 was a historic one for Wall Street as the Dow Jones Industrial Average topped 20,000 for the first time. Equities rallied through January and February, then lost momentum in March; even so, the S&P 500 had gained 5.53% YTD when the quarter ended. The Federal Reserve raised the federal funds rate for only the third time in a decade, in response to strengthening inflation pressure and other signals of economic acceleration. Consumer confidence remained high. Commodities had a decidedly mixed quarter. New home sales improved, while existing home sales tapered off. The U.K. took another step toward its Brexit; the U.S. left the Trans-Pacific Partnership. Wall Street kept its hopes up for tax reform and lighter business and banking industry regulation.1,2
DOMESTIC ECONOMIC HEALTH
As the stock market climbed, so did the Conference Board’s consumer confidence index. By March, it had reached an astonishingly high mark of 125.6. The University of Michigan’s household sentiment index declined from 98.5 to 96.9 across the quarter, but it remained well above its historical average of 86.0.3,4
Factory and service sectors expanded nicely during Q1, according to the Institute for Supply Management. The Arizona-based organization’s manufacturing purchasing manager index was at 56.0 in January, 57.7 in February, and 57.2 in March. Its service sector PMI (the March number was not available at this writing) came in at 56.5 in January and 57.6 in February. All these numbers indicate solid growth.5,6
PERSONAL SPENDING SLOWS
Consumers apparently chose saving over spending in the second month of the year. Last week, a Department of Commerce report noted only a 0.1% gain for personal spending in February. That happened even with personal incomes rising 0.4%, nearly matching the 0.5% January advance. In other news concerning personal spending, the Bureau of Economic Analysis raised its estimate of fourth-quarter GDP to a final reading of 2.1% from the previous 1.9%.1
HOUSEHOLDS MAINTAIN THEIR OPTIMISM
The Conference Board’s much-watched consumer confidence index came in at 125.6 for March, soaring 9.5 points to a level unseen since December 2000. Economists polled by Reuters expected the index to descend slightly to 114.0. Losing 0.7 points from its preliminary March result, the University of Michigan’s household sentiment index remained high at 96.9.1,2
A BOOST FOR PENDING HOME SALES
Housing contract activity increased 5.5% in February by the estimate of the National Association of Realtors, more than reversing January’s 2.8% decline. The latest S&P/Case-Shiller 20-city home price index (January) showed a 0.2% seasonally adjusted monthly gain and a 5.7% year-over-year improvement.1
Every day, people die intestate. In legalese, that means without a will. This opens the door for the courts to decide what happens with their estates.
When no valid will exists, state intestacy laws dictate how assets are distributed. These laws divide an estate evenly (or equitably) among heirs. Any assets held in joint tenancy go to the joint owner. Assets held in a trust transfer to the trust beneficiaries (with spouses getting a share of those assets in some states). Community property goes to a spouse or partner in community property states.1
Simple, right? Unfortunately, the way assets transfer under these laws may not correspond to the wishes of the deceased person. Did the decedent want some of his or her estate to go to a charity or a person close to them? These laws will not allow that. State law will also decide who the executor of the estate is, since the decedent never named one.2
You plan for retirement with expectations in mind. You hope to enjoy a certain quality of life, with sufficient income resulting from smart financial choices. Ideally, your future unfolds as planned.
But what if the unexpected happens? Will you have the right insurance in place to deal with it?
Insurance matters more in retirement planning than you may think. It is seldom “top of mind” in retirement planning conversations, but the right coverage could help you maintain some financial equilibrium in the face of sudden money pressures.
A life insurance payout could provide income for a surviving spouse. Thanks to late-night TV commercials marketing small funeral insurance policies, many retirees associate life insurance benefits with paying off burial costs. Benefits from larger policies can potentially accomplish much more.
Suppose a 75-year-old widow receives a $500,000 death benefit from a policy purchased by her late spouse. An income stream could be arranged from that death benefit, with the widow receiving $20,000 annually from that lump sum (or more) into her nineties. The payout could also be invested.
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.