Kim 8/19/14 Kim 8/19/14

After QE3 Ends

Can stocks keep their momentum once the Federal Reserve quits easing? “Easing without end” will finally end. According to its June policy meeting minutes, the Federal Reserve plans to wrap up QE3 this fall. Barring economic turbulence, the central bank’s ongoing stimulus effort will conclude on schedule, with a last $15 billion cut to zero being authorized at the October 28-29 Federal Open Market Committee meeting.^1,2

So when might the Fed start tightening? As the Fed has pledged to keep short-term interest rates near zero for a “considerable time” after QE3 ends, it might be well into 2015 before that occurs.¹

In June, 12 of 16 Federal Reserve policymakers thought the benchmark interest rate would be at 1.5% or lower by the end of 2015, and a majority of FOMC members saw it at 2.5% or less at the end of 2016.³

It may not climb that much in the near term. Reuters recently indicated that most economists felt the central bank would raise the key interest rate to 0.50% during the second half of 2015. In late June, 78% of traders surveyed by Bloomberg News saw the first rate hike in several years coming by September of next year.^4,5

Are the markets ready to stand on their own? Quantitative easing has powered this bull market, and stocks haven’t been the sole beneficiary. Today, almost all asset classes are trading at prices that are historically high relative to fundamentals.

Some research from Capital Economics is worth mentioning: since 1970, stocks have gained an average of more than 11% in 21-month windows in which the Fed greenlighted successive rate hikes. Bears could argue that “this time is different” and that stocks can’t possibly push higher in the absence of easing – but then again, this bull market has shattered many expectations.⁶

What if we get a “new neutral”? In 2009, legendary bond manager Bill Gross forecast a “new normal” for the economy: a long limp back from the Great Recession marked by years of slow growth. While Gross has been staggeringly wrong about some major market calls of late, his take on the post-recession economy wasn’t too far off. From 2010-13, annualized U.S. GDP averaged 2.3%, pretty poor versus the 3.7% it averaged from the 1950s through the 1990s.³

Gross now sees a “new neutral” coming: short-term interest rates of 2% or less through 2020. Some other prominent economists and Wall Street professionals hold roughly the same view, and are reminding the public that the current interest rate environment is closer to historical norms than many perceive. As Prudential investment strategist Robert Tipp told the Los Angeles Times recently, "People who are looking for higher inflation and higher interest rates are fighting the last war." Lawrence Summers, the former White House economic advisor, believes that the U.S. economy could even fall prey to “secular stagnation” and become a replica of Japan’s economy in the 1990s.³

If short-term rates do reach 2.5% by the end of 2016 as some Fed officials think, that would hardly approach where they were prior to the recession. In September 2007, the benchmark interest rate was at 5.25%.³

What will the Fed do with all that housing debt? The central bank now holds more than $1.6 trillion worth of mortgage-linked securities. In 2011, Ben Bernanke announced a strategy to simply let them mature so that the Fed’s bond portfolio could be slowly reduced, with some of the mortgage-linked securities also being sold. Two years later, the strategy was modified as a majority of Fed policymakers grew reluctant to sell those securities. In May, New York Fed president William Dudley called for continued reinvestment of the maturing debt even if interest rates rise.⁷

Bloomberg News recently polled more than 50 economists on this topic: 49% thought the Fed would stop reinvesting debt in 2015, 28% said 2016, and 25% saw the reinvestment going on for several years. As for the Treasuries the Fed has bought, 69% of the economists surveyed thought they would never be sold; 24% believed the Fed might start selling them in 2016.⁷

Monetary policy must normalize at some point. The jobless rate was at 6.1% in June, 0.3% away from estimates of full employment. The Consumer Price Index shows annualized inflation at 2.1% in its latest reading. These numbers are roughly in line with the Fed’s targets and signal an economy ready to stand on its own. Hopefully, the stock market will be able to continue its advance even as things tighten.⁶

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

1 - marketwatch.com/story/fed-plans-to-end-bond-purchases-in-october-2014-07-09 [7/9/14]

2 - telegraph.co.uk/finance/economics/10957878/US-Federal-Reserve-on-course-to-end-QE3-in-October.html [7/9/14]

3 - latimes.com/business/la-fi-interest-rates-20140706-story.html#page=1 [7/6/14]

4 - reuters.com/article/2014/06/17/us-economy-poll-usa-idUSKBN0ES1RD20140617 [6/17/14]

5 - bloomberg.com/news/2014-07-07/treasuries-fall-after-goldman-sachs-brings-forward-fed-forecast.html [7/7/14]

6 - cbsnews.com/news/will-the-fed-rate-hikes-rattle-the-market/ [7/10/14]

7 - bloomberg.com/news/2014-06-17/fed-will-raise-rates-faster-than-investors-expect-survey-shows.html [6/17/14]

Kim 7/29/14 Kim 7/29/14

Coping With College Loans

Paying them down, managing their financial impact.

Are student loans holding our economy back? Certainly America has recovered from the last recession, but this is an interesting question nonetheless.

In a November 2013 address before the Federal Reserve Bank of St. Louis, Consumer Financial Protection Bureau Assistant Director Rohit Chopra expressed that college loan debt “may prove to be one of the more painful aftershocks of the Great Recession.” In fact, outstanding education debt in America doubled from 2007 to 2013, topping $1 trillion.¹

More than 60% of this debt is held by people over the age of 30 and about 15% is carried by people older than 50. The housing sector feels the strain: in a November National Association of Realtors survey, 54% of the first-time homebuyers who had difficulty saving up a down payment cited their college loan expenses as the main obstacle. The ProgressNow think tank believes that education debt siphons $6 billion of new car purchasing power out of the economy per year.^2,3

As the Detroit Free Press notes, the average 2012 college graduate is burdened with $29,400 in education loans. If you carry five-figure (or greater) education debt, what do you do to pay it down faster?⁴

How can you overcome student loans to move forward financially? If you are young (or not so young), budgeting is key. Even if you get a second job, a promotion, or an inheritance, you won’t be able to erase any debt if your expenses consistently exceed your income. Smartphone apps and other online budget tools can help you live within your budget day to day, or even at the point of purchase for goods and services.

After that first step, you can use a few different strategies to whittle away at college loans.

*The local economy permitting, a couple can live on one salary and use the wages of the other earner to pay off the loan balance(s).

*You could use your tax refund to attack the debt.

*You can hold off on a major purchase or two. (Yes, this is a sad effect of college debt, but backhandedly it could also help you reduce it by freeing up more cash to apply to the loan.)

*You can sell something of significant value – a car or truck, a motorbike, jewelry, collectibles – and turn the cash on the debt.

Now in the big picture of your budget, you could try the “snowball method” where you focus on paying off your smallest debt first, then the next smallest, etc. on to the largest. Or, you could try the “debt ladder” tactic, where you attack the debt(s) with the highest interest rate(s) to start. That will permit you to gradually devote more and more money toward the goal of wiping out that existing student loan balance.

Even just paying more than the minimum each month on your loan will help. Making payments every two weeks rather than every month can also have a big impact.

If the lender presents you with a choice of repayment plans, weigh the one you currently use against the others; the others might be better. Signing up for automatic payments can help, too. You avoid the risk of penalty for late payment, and student loan issuers commonly reward the move: many will lower the interest rate on a loan by a quarter-point or so in thanks.⁵

What if you have multiple outstanding college loans? Should one of those loans have a variable interest rate (about 15% of education loans do), try addressing that debt first. Why? Think about what could happen with interest rates as this decade progresses. They are already rising.⁵

Also, how about combining multiple federal student loan balances into one? If you graduated college before July 1, 2006, the interest rate you’ll lock in on the single balance will be lower than that paid on each separate federal education loan.⁵

Maybe your boss could pay down the loan. Don’t laugh: there are college grads who manage to negotiate just such agreements. In fact, there are small and mid-sized businesses that offer them simply to be competitive today. They can’t offer a young hire what the Fortune 500 can when it comes to salary, so they pitch another perk: a lump sum that the new employee can use to reduce a college loan.⁵

To reduce your student debt, live within your means and use your financial creativity. It may disappear faster than you think.

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

1 - consumerfinance.gov/newsroom/student-loan-ombudsman-rohit-chopra-before-the-federal-reserve-bank-of-st-louis/ [11/18/13]

2 - forbes.com/sites/halahtouryalai/2013/06/26/backlash-student-loans-keep-borrowers-from-buying-homes-cars/ [6/26/13]

3 - realtor.org/news-releases/2013/11/home-buyers-and-sellers-survey-shows-lingering-impact-of-tight-credit [11/13]

4 - tinyurl.com/nouty3k [4/19/14]

5 - tinyurl.com/k29m48y [5/1/14]

Kim 6/5/14 Kim 6/5/14

Rising Interest Rates

How might they affect investments, housing & retirees? How will Wall Street fare if interest rates climb back to historic norms? Rising interest rates could certainly impact investments, the real estate market and the overall economy – but their influence might not be as negative as some perceive.

Why are rates rising? You can cite three factors. The Federal Reserve is gradually reducing its monthly asset purchases. As that has happened, inflation expectations have grown, and perception can often become reality on Main Street and Wall Street. In addition, the economy has gained momentum, and interest rates tend to rise in better times.

The federal funds rate has been in the 0.0%-0.25% range since December 2008. Historically, it has averaged about 4%. It was at 4.25% when the recession hit in late 2007. Short-term fluctuations have also been the norm for the key interest rate. It was at 1.00% in June 2003 compared to 6.5% in May 2000. In December 1991, it was at 4.00% – but just 17 months earlier, it had been at 8.00%. Rates will rise, fall and rise again; what may happen as they rise?^1,2

The effect on investments. Last September, an investment strategist named Rob Brown wrote an article for Financial Advisor Magazine noting how well stocks have performed as rates rise. Brown studied the 30 economic expansions that have occurred in the United States since 1865 (excepting our current one). He pinpointed a 10-month window within each expansion that saw the greatest gains in interest rates (referencing then-current yields on the 10-year Treasury). The median return on the S&P 500 for all of these 10-month windows was 7.93% and the index returned positive in 80% of these 10-month periods. Looking at such 10-month windows since 1919, the S&P’s median return was even better at 11.50% – and the index gained in 81% of said intervals.³

Lastly, Brown looked at the S&P 500’s return in the 12-month periods ending on October 31, 1994 and May 31, 2004. In the first 12-month stretch, the interest rate on the 10-year note rose 2.38% to 7.81% while the S&P gained only 3.87%. Across the 12 months ending on May 31, 2004, however, the index rose 18.33% even as the 10-year Treasury yield rose 1.29% to 4.66%.³

The effect on the housing market. Do costlier mortgages discourage home sales? Recent data backs up that presumption. Existing home sales were up 1.3% for April, but that was the first monthly gain recorded by the National Association of Realtors for 2014. Year-over-year, the decline was 6.8%. On the other hand, when the economy improves the labor market typically improves as well, and more hiring means less unemployment. Unemployment is an impediment to home sales; lessen it, and more homes might move even as mortgages grow more expensive.⁴

When the economy is well, home prices have every reason to appreciate even if interest rates go up. NAR says the median sale price of an existing home rose 5.2% in the past year – not the double-digit appreciation seen in 2013, but not bad. Cash buyers don’t care about interest rates, and according to RealtyTrac, 43% of buyers in Q1 bought without mortgages.^4,5

Rates might not climb as fast as some think. Federal Reserve Bank of New York President William Dudley – whose voting in Fed policy meetings tends to correspond with that of Janet Yellen – thinks that the federal funds rate will stay below its historic average for some time. Why? In a May 20 speech, he noted three reasons. One, baby boomers are retiring, which implies less potential for economic growth across the next decade. Two, banks are asked to keep higher capital ratios these days, and that implies lower bank profits and less lending as more money is being held in reserves. Three, he believes households and businesses are still traumatized by the memory of the Great Recession. Many are reluctant to invest and spend, especially with college loan debt so endemic and the housing sector possibly cooling off.⁶

Emerging markets in particular may have been soothed by recent comments from Dudley and other Fed officials. They have seen less volatility this spring than in previous months, and the MSCI Emerging Markets index has outperformed the S&P 500 so far this year.²

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

1 - newyorkfed.org/markets/statistics/dlyrates/fedrate.html [5/22/14]

2 - reuters.com/article/2014/05/21/saft-on-wealth-idUSL1N0NZ1GM20140521 [5/21/14]

3 - fa-mag.com/news/what-happens-to-stocks-when-interest-rates-rise-15468.html [9/17/13]

4 - marketwatch.com/story/existing-home-sales-fastest-in-four-months-2014-05-22 [5/22/14]

5 - marketwatch.com/story/43-of-2014-home-buyers-paid-all-cash-2014-05-08 [5/8/14]

6 - money.cnn.com/2014/05/20/investing/fed-low-interest-rates-dudley/index.html [5/20/14]

Kim 5/27/14 Kim 5/27/14

The Importance of TOD & JTWROS Designations

A convenient move that could ward off probate on your accounts. TOD, JTWROS...what do these obscure acronyms signify? They are shorthand for transfer on death and joint tenancy with right of ownership – two designations that permit automatic transfer of bank or investment accounts from a deceased spouse to a surviving spouse.

This automatic transfer of assets reflects a legal tenet called the right of survivorship –the idea that the surviving spouse should be the default beneficiary of the account. In some states, a TOD or JTWROS beneficiary designation is even allowed for real property.¹

When an account or asset has a TOD or JTWROS designation, the right of survivorship precedes any beneficiary designations made in a will or trust.^1,2

There are advantages to having TOD and JTWROS accounts ... and disadvantages as well.

TOD & JTWROS accounts can usually avoid probate. As TOD and JTWROS beneficiary designations define a direct route for account transfer, there is rarely any need for such assets to be probated. The involved financial institution has a contractual requirement (per the TOD or JTWROSdesignation) to pay the balance of the account funds to the surviving spouse.¹

In unusual instances, an exception may apply: if the deceased account owner has actually outlived the designated TOD beneficiary or beneficiaries, then the account faces probate.³

What happens if both owners of a JTWROS account pass away at the same time? In such cases, a TOD designation applies (for any named contingent beneficiary).³

To be technically clear, transfer on death signifies a route of asset transfer while joint tenancy with right of ownership signifies a form of asset ownership. In a variation on JTWROS called tenants by entirety, both spouses are legally deemed as equal owners of the asset or account while living, with the asset or account eventually transferring to the longer-living spouse.³

Does a TOD or JTWROS designation remove an account from your taxable estate? No. A TOD or JTWROS designation makes those assets non-probate assets, and that will save your executor a little money and time – but it doesn’t take them out of your gross taxable estate.

In fact, 100% of the value of an account with a TOD beneficiary designation will be included in your taxable estate. It varies for accounts titled as JTWROS. If you hold title to a JTWROS account with your spouse, 50% of its value will be included in your taxable estate. If it is titled as JTWROS with someone besides your spouse, the entire value of the account will go into your taxable estate unless the other owner has made contributions to the account.⁴

How about capital gains? JTWROS accounts in common law states typically get a 50% step-up in basis upon the death of one owner. In community property states, the step-up is 100%.⁵

Could gift tax become a concern? Yes, if the other owner of a JTWROS account is not your spouse. If you change the title on an account to permit JTWROS, you are giving away a percentage of your assets; the non-spouse receives a gift from you. If the amount of the gift exceeds the annual gift tax exclusion, you will need to file a gift tax return for that year. If you retitle the account in the future so that you are again the sole owner, that constitutes a gift to you on behalf of the former co-owner; he or she will need to file a gift tax return if the amount of the gift tops the annual exclusion.⁵

TOD & JTWROS designations do make account transfer easy. They simplify an element of estate planning. You just want to be careful not to try and make things too simple.

TOD or JTWROS accounts are not cheap substitutes for wills or trusts. If you have multiple children and name one of them as the TOD beneficiary of an account, that child will get the entire account balance and the other kids will get nothing. The TOD beneficiary can of course divvy up those assets equally among siblings, but in doing so, that TOD beneficiary may run afoul of the yearly gift tax exclusion.²

JTWROS accounts have a potential a drawback while you are alive.As they are jointly owned, you have a second party fully capable of accessing and using the whole account balance.²

As you plan your estate, respect the power of TOD & JTWROS designations. Since they override any beneficiary designations made in wills and trusts, you want to double-check any will and trust(s) you have to make sure that you aren’t sending conflicting messages to your heirs.²

That aside, TOD & JTWROS designations represent convenient ways to arrange the smooth, orderly transfer of account balances when original account owners pass away.

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

1 - dummies.com/how-to/content/bypassing-probate-with-beneficiary-designations.navId-323700.html [5/5/14]

2 - galaw.com/the-dangers-of-pod-and-tod-accounts/ [2/4/14]

3 - fidelity.com/estate-planning-inheritance/estate-planning/asset-strategies/brokerage [5/13/14]

4 - theyeshivaworld.com/news/headlines-breaking-stories/167700/what-is-probate.html [5/10/13]

5 - newsobserver.com/2013/06/08/2944839/advice-on-joint-tenancy-with-rights.html [6/8/13]

Kim 5/5/14 Kim 5/5/14

The Rise of Bitcoin

Is the virtual currency a fad, or the future? Mention “bitcoin” to assorted economists or investors, and you may trigger all kinds of associations. To some, it signifies an exciting new reality – a digital currency, with a payment system that could revolutionize finance. To others, it is a volatile commodity – propped up by hype, fraught with risk. It also refers to an open source software system, and a financially startling concept – currency production through the Internet.

You can’t talk about Bitcoin without talking about bitcoin. Bitcoin with a capital B references the Bitcoin network that creates the digital currency; bitcoin with a lower-case b refers to the currency itself.

Where is bitcoin made? Online. All bitcoin is generated in cyberspace, and the process is interesting to say the least. The first step in making bitcoin is “mining”, and mining takes math skills. A bitcoin “miner” (a computer user) tries to solve one or more math problems, with success resulting in shares of bitcoin. The more miners there are, however, the smaller fractional bitcoin shares become as no more than 21 million bitcoins will ever be created.¹

Once mined, a bitcoin can be sent to a miner’s password-protected digital wallet. (If the digital wallet is hacked, the bitcoin is irrevocably lost.) A miner can use bitcoin to pay for goods and services at a small-but-growing network of online and brick-and-mortar merchants.¹

What is a bitcoin worth? Ask the free market – specifically, the commodities market. Look at the bitcoin charts at Coinbase.com, one of a few sites tracking historical daily settlement prices for bitcoin across various bitcoin exchanges. On July 6, 2013, a single bitcoin was worth $69.31; on November 30, 2013, a bitcoin was worth $1,126.82; on April 16, 2014, a lone bitcoin was worth $516.61.²

Volatility and bitcoin go hand in hand. Since no central bank in the world issues bitcoin, it is only worth what investors are willing to pay for it. In the worst-case scenario, bitcoin plays out like the tulip bulb mania of the 1600s and investors eventually pay little or nothing for it. In the blue-sky scenario, bitcoin becomes a part of everyday life.

University of Virginia economist Peter Rodriguez neatly summed up the emergence of bitcoin in the Wall Street Journal: “It’s as if there was an effort to create gold that wasn’t gold. The longer [bitcoins] persist, the more that people will have faith in them as a legitimate store of value.”¹

Who dreamed up bitcoin? A mysterious person or entity going by the name of Satoshi Nakamoto. A white paper under that authorship floated the idea of a virtual currency and a network to create it in 2008. In 2009, “Satoshi Nakamoto” created the open source software system to generate bitcoin.³

In March, Newsweek claimed it had found Nakamoto hiding in plain sight, living quietly in a middle-class Southern California suburb – but the man they profiled, Dorian Satoshi Nakamoto, told the Associated Press that he had never heard of bitcoin until February 2014. Students and researchers at Great Britain’s Aston University claim that the author of the 2008 white paper is Nick Szabo, a respected academic theorist and George Washington University law school graduate who invented Bit Gold, a conceptual forerunner of the Bitcoin network.^4,5

For bitcoin to steal gold’s shine, it has to lose its dark side. If all of this sounds like something out of a dystopian science fiction novel, you aren’t alone in your skepticism. There is much that is exciting about bitcoin and its potential to streamline global finance, but there are also big question marks. As Entrepreneur notes, about 90% of bitcoin buyers are speculators. That is not the only detail about bitcoin that unnerves investors. The digitized anonymity of bitcoin transactions beckons to cybercriminals, who undoubtedly see bitcoin exchanges as upcoming grand prizes when it comes to hacking, phishing and malware.⁶

Where bitcoin has really taken off is China – in fact, that is where about half of daily global bitcoin trading occurred in 2013. But when the People’s Bank of China stated that bitcoin was dangerous, bitcoin values on the Mt. Gox exchange fell from $1,300 to $700 in 24 hours. (That exchange later filed for bankruptcy.) The PBOC maintains that it will not ban bitcoin.^4,6,7

Bitcoin prices skyrocketed in 2013, and they could fall just as dramatically through a variety of factors (hackers raiding exchanges, crackdowns in the PRC, imitators rising to steal its thunder). At this point, it is little wonder that many regard bitcoin as a speculative play for the long run.

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

1 - tinyurl.com/nl9n7hw [11/23/13]

2 - coinbase.com/charts [4/16/14]

3 - tinyurl.com/nvlxph7 [1/15/14]

4 - tinyurl.com/psjsfre [3/18/14]

5 - entrepreneur.com/article/233143 [4/16/14]

6 - entrepreneur.com/article/230354 [12/16/13]

7 - blogs.wsj.com/moneybeat/2014/04/11/bitbeat-bitcoin-surges-as-pboc-softens-up-its-tone/ [4/11/14]

Kim 4/14/14 Kim 4/14/14

Ways to Save for College

Comparing & contrasting the potential of some popular vehicles.

How expensive will college be tomorrow? The Department of Education projects that by 2030, the tuition cost of obtaining a four-year degree at a public university will surpass $200,000. Staggering? Indeed, but college is plenty expensive already. In 2012, tuition averaged $15,100 a year at public colleges and $32,900 a year at private colleges.¹

A Sallie Mae study finds that today’s students, on average, can only pay for 24% of their college expenses. It is little wonder that student loan debt exceeds credit card debt today.¹

How can you start saving to meet those costs today? With interest rates being what they are, don’t look to a garden-variety savings account. Even if current interest rates soon ascend to 2% or 3%, you would be at a disadvantage even if the bank account was large as tuition costs are climbing more significantly than inflation.

The message is pretty clear: to meet college costs, you need either a prepaid tuition plan or a savings vehicle that taps into the power of equity investing. Let’s look at some options.

Prepaid 529 plans. Offered by states and public colleges, these plans let you buy tomorrow’s tuition with today's dollars. You purchase X dollars of tuition today, and that is guaranteed to pay for an equivalent amount of tuition in the future.

You can do this in two different ways. Some of these prepaid plans are unit plans, in which you pay for X number of college credits or units now with a promise that the same amount of credits will be covered in the future. In other words, you’re locking in tuition at current rates.

As an example, let’s say a year of college at Hypothetical State University requires 36 units. Mom and Dad use a unit plan to pay $7,500 for those 36 units now for their 6-year-old daughter. In turn, the plan promises to pay whatever those 36 units cost when she starts her first semester at Hypothetical State 12 years from now, even though it might be much more.²

The other prepaid 529 plan variant is the contract plan, or guaranteed interest plan. In these prepaid plans, you make a lump sum contribution (or arrange recurring contributions), essentially buying X number of years of tuition. In turn, the plan guarantees to cover this predetermined amount of tuition expenses in the future.²

Usually, beneficiaries of prepaid tuition plans must be residents of the state offering the plan, or prospective students of the college offering the plan. In the wake of the recession, some of these plans are not accepting new investors as some states are worried about underfunding.^2,3

529 college savings plans. These state savings plans allow you to invest to build college savings rather than simply prepay them. Plan contributions are typically allocated among funds, and possibly other investment classes; the plan’s earnings grow without being taxed. The withdrawals aren’t taxed by the IRS either, as long they pay for qualified education expenses.²

You can contribute up to six-figure sums to these 529 plans – there’s a lifetime contribution limit that varies per state. Most of them are open to out-of-state residents. If the market does well, you can harness the power of equity investing through these plans and potentially make a big dent in college costs.²

There are two caveats about 529 plans. Should you elect to withdraw money from a 529 plan and use it for non-approved purposes, that money will be taxed by the IRS as regular income – and you will pay a penalty equal to 10% of the withdrawal amount. 529 balances can also negatively affect a student’s chances for need-based financial aid. In a given school year, that eligibility can be reduced by up 5.64% of your college savings.³

Coverdell ESAs. Originally called Education IRAs, Coverdell Education Savings Accounts offer families some added flexibility: the withdrawals may be used to pay for elementary and secondary school expenses, not just college costs. These are tax-deferred investment accounts, like 529 savings plans. Unfortunately, the current annual contribution limit for a Coverdell is $2,000. Any remaining account balance must generally be withdrawn within 30 days after the beneficiary’s 30th birthday, with the earnings portion of the balance being taxable.^3,4,5

Roth IRAs. Yes, it is possible to use a Roth IRA as a college savings vehicle. While the IRA’s earnings will be taxed, withdrawals used to pay for qualified college expenses will not be taxed and will face no IRS penalty. Additionally, if your son or daughter doesn’t go to college or comes into some kind of windfall that pays for everything, you end up with a retirement account. While Roth IRA balances don’t whittle away at a student’s chances to get need-based financial aid, the withdrawal amounts do come under the category of untaxed income on the FAFSA.³

Would a trust be worth the expense? Rarely, families set up tax-advantaged trusts for the purpose of college savings. In the classic model, the family is incredibly wealthy and the kids are “trust-fund babies” bound for elite and very expensive schools. Unless you have many children or your family is looking at potentially exorbitant college costs, a trust is probably overdoing it. The college savings vehicles mentioned above may help you save for education expenses just as effectively, all without the administrative bother associated with trusts and the costs of trust creation.

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

Kim 4/9/14 Kim 4/9/14

The Retirement We Imagine, the Retirement We Live

Examining the potential differences between assumption & reality.

Financially, how might retirement differ from your expectations? To some degree, it will. Just as few weathercasters can accurately predict a month’s worth of temperatures and storms, few retirees find their financial futures playing out as precisely as they assumed.

As you approach or enter retirement, you may find that your spending and your exit from your career don’t quite match your expectations. You may be surprised by these developments, even pleasantly surprised by some of them.

Few retirees actually outlive their money. If this was truly a crisis, we would see federal and state governments and social services agencies addressing it relentlessly. The vast majority of retirees are wise about their savings and income: they don’t spend recklessly, and if they need to live on less at a certain point, they live on less. It isn’t an ideal choice, but it is a prudent one. Health crises can and do impoverish retirees and leave them dependent on Medicaid, but that tends to occur toward the very end of retirement rather than the start.

You may not need to retire on 70-80% of your end salary. This is a common guideline for new retirees, but according to some analysts, you may not need to withdraw that much for long.

In the initial phase of retirement, you will probably want to travel, explore new pursuits and hobbies and get around to some things you may have put on the back burner. So in the first few years away from work, you might spend roughly as much as you did before you retired. After that, you could spend less.

Bureau of Labor Statistics data is very revealing about this. JP Morgan Asset Management recently studied U.S. household spending and found that it peaks at age 48. The average U.S. household headed by people aged 65-74 spends only 63% as much as a household headed by people aged 55-64. Additionally, the average household headed by people 75 and older spends only 72% as much as the average household headed by people aged 65-74.¹

In the big picture, households run by those 75 and older typically spend about half as much per year as households headed by people in their late forties.¹

Further interesting analysis of BLS statistics and retirement spending patterns comes from David Blanchett, the head of retirement research at Morningstar Investment Management. He sees a correlation between career earnings and retirement spending, one contrary to many presumptions. Comparatively speaking, he notes that higher-earning retirees commonly have to replace less of their income once their careers conclude. As he commented to Money Magazine, “the household that makes $40,000 a year might have an 85% replacement rate, and the household making $100,000 a year might need 60%.”²

Why, exactly? The upper-income household is watching its costs fall away in retirement. The home loan, the private school tuition, dining out due to convenience, the professional wardrobe, the car payment, the workplace retirement plan contribution – this is where the money goes. When these costs are reduced or absent, you spend less to live. Blanchett believes that the whole 70-80% guideline may “overestimate the true cost of retirement for many people by as much as 20%.”²

Your annual withdrawal rate could vary notably. Anything from healthcare expenses to a dream vacation to a new entrepreneurial venture could affect it. So could the performance of the stock or bond market.

You could retire before you anticipate. You may want to work well into your sixties or beyond – and the longer you wait to claim Social Security benefits after age 62, the greater your monthly payout. Reality, on the other hand, shows that most people don’t retire at age 66, 67 or 70: according to Gallup, the average retirement age in this country is 61. The aforementioned JP Morgan Asset Management study determined that less than 2% of Americans wait until age 70 to claim Social Security benefits. So if your assumption is that you will work to full retirement age (or later), you should keep in mind that you may find yourself electing to claim Social Security earlier, if only to avert drawing down your retirement savings too quickly.¹

You don’t have to be a millionaire to have a happy retirement. In a 2011 Consumer Reports poll of U.S. retirees, 68% of respondents were “highly satisfied” with their lives irrespective of their financial standing. Backing that up, JP Morgan Asset Management found that retiree satisfaction increased only incrementally the more retirement spending surpassed $40,000 a year.¹

The retirement you live may be slightly different than the retirement you have imagined. Fortunately, retirement planning and retirement income strategies may be revised in response.

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - reuters.com/article/2014/03/12/us-column-stern-advice-idUSBREA2B1R020140312 [3/12/14]

2 - money.cnn.com/2014/02/26/retirement/retirement-spending.moneymag/index.html [2/26/14]

Kim 3/25/14 Kim 3/25/14

Guarding Against Identity Theft

Take steps so criminals won’t take vital information from you.

America is enduring a data breach epidemic. As 2013 ended, the federal Bureau of Justice Statistics released its 2012 Victims of Identity Theft report. Its statistics were sobering. About one in 14 Americans aged 16 or older had been defrauded or preyed upon in the past 12 months, more than 16.6 million people.¹

Just 8% of those taken advantage of had detected identity theft through their own vigilance. More commonly, victims were notified by financial institutions (45%), alerts from non-financial companies or agencies (21%), or notices of unpaid bills (13%). While 86% of victims cleared up the resulting credit and financial problems in a day or less, 10% of victims had to struggle with them for a month or more. ¹

Consumers took significant financial hits from all this. The median direct loss from cyberthieves exploiting personal information in 2012 was $1,900, and the median direct loss from a case of credit card fraud was $200. While much of the monetary damage is wiped away for the typical victim, that isn’t always the case.¹

Tax time is prime time for identity thieves. They would love to get their hands on your return, and they would also love to claim a phony refund using your personal information. In 2013, the IRS investigated 1,492 identity theft-linked crimes – a 66% increase from 2012 and a 441% increase from 2011.²

E-filing of tax returns is becoming increasingly popular (just make sure you use a secure Internet connection). When you e-file, you aren’t putting your Social Security number, address and income information through the mail. You aren’t leaving Form 1040 on your desk at home (or work) while you get up and get some coffee or go out for a walk. If you just can’t bring yourself to e-file, then think about sending your returns via Certified Mail. Those rough drafts of your returns where you ran the numbers and checked your work? Shred them. Use a cross-cut shredder, not just a simple straight-line shredder (if you saw Argo, you know why).

The IRS doesn’t use unsolicited emails to request information from taxpayers. If you get an email claiming to be from the IRS asking for your personal or financial information, report it to your email provider as spam.²

Use secure Wi-Fi. Avoid “coffee housing” your personal information away – never risk disclosing financial information over a public Wi-Fi network. (Broadband is susceptible, too.) It takes little sophistication to do this – just a little freeware.

Sure, a public Wi-Fi network at an airport or coffee house is password-protected – but if the password is posted on a wall or readily disclosed, how protected is it? A favorite hacker trick is to sit idly at a coffee house, library or airport and set up a Wi-Fi hotspot with a name similar to the legitimate one. Inevitably, people will fall for the ruse and log on and get hacked.

Look for the “https” & the padlock icon when you visit a website. Not just http, https. When you see that added “s” at the start of the website address, you are looking at a website with active SSL encryption, and you want that. A padlock icon in the address bar confirms an active SSL connection. For really solid security when you browse, you could opt for a VPN (virtual private network) service which encrypts 100% of your browsing traffic; it may cost you $10 a month or even less.³

Make those passwords obscure. Choose passwords that are really esoteric, preferably with numbers as well as letters. Passwords that have a person, place and time (PatrickRussia1956) can be tougher to hack.⁴

Check your credit report. Remember, you are entitled to one free credit report per year from each of the big three agencies (Experian, TransUnion, Equifax). You could also monitor your credit score – Credit.com has a feature called Credit Report Card, which updates you on your credit score and the factors influencing it, such as payments and other behaviors.¹

Don’t talk to strangers. Broadly speaking, that is very good advice in this era of identity theft. If you get a call or email from someone you don’t recognize – it could tell you that you’ve won a prize, it could claim to be someone from the county clerk’s office, a pension fund or a public utility – be skeptical. Financially, you could be doing yourself a great favor.

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

Citations.

1 - dailyfinance.com/2013/12/31/scariest-identity-theft-statistics/ [12/31/13]

2 - csmonitor.com/Business/Saving-Money/2014/0317/Tax-filing-online-Seven-tips-to-avoid-identity-theft.-video [3/17/14]

3 - forbes.com/sites/amadoudiallo/2014/03/04/hackers-love-public-wi-fi-but-you-can-make-it-safe/ [3/4/14]

4 - articles.philly.com/2014-03-18/business/48301317_1_id-theft-coverage-identity-theft-adam-levin [3/18/14]

Kim 3/17/14 Kim 3/17/14

China, Ukraine & the Markets

New economic & political concerns are putting stocks to the test.

Dow drops again, analysts wonder. March 13 saw another triple-digit descent for the blue chips – the Dow Jones Industrial Average plummeted more than 230 points, the second market day in less than two weeks to witness a loss of 150 points or greater. The S&P 500’s (small) YTD gain was also wiped out by the selloff. As the bull market enters its sixth year, it faces some sudden and potentially stiff headwinds, hopefully short-term.^1,2

In Ukraine, the situation is fluid. As the trading week ended, much was unresolved about the nation’s future. The parliament of its autonomous Crimea region had announced a March 16 referendum, which gave voters two options: rejoin Russia, or break away from Ukraine and form a new nation.³

Ukraine’s government calls the referendum unconstitutional. The United States and key EU members agree and claim it violates international law. Russia welcomes the vote – 60% of the Crimean Peninsula’s population is made up of ethnic Russians, and Russian troops more or less control the region now.³

Russia wants the real estate (its Black Sea naval fleet is based on the Crimean Peninsula) and could spread its economic influence further with the annexation of that region. The cost: economic sanctions, probably harsh ones. Should diplomacy fail to stop the secession vote, then Russia can expect “a very serious series of steps Monday in Europe and [the United States],” according to Secretary of State John Kerry.³

So far, the moves have been largely symbolic: a suspension of the 2014 G8 summit and the talks on Russia’s entry into the OECD, and asset freezes for individuals and companies deemed to be hurting democracy in Ukraine. Additional “serious” steps could include financial sanctions for Russian banks, an embargo on arms exports to Russia, and the EU opting to get more of its energy supplies from other nations. Russia could respond in kind, of course, with similar asset freezes and possible pressure on eurozone companies doing business in Ukraine. The fact that Russia has already staged war games near Ukraine adds another layer of anxiety for global markets.⁴

Investors see China’s growth clearly slowing. Its exports were down 18.1% year-over-year in February. Analysts polled by Reuters projected China’s industrial output rising 9.5% across January and February, but the gain was actually just 8.6%. The Reuters consensus for a yearly retail sales gain of 13.5% for China was also way off; the advance measured in February was 11.8%. These disappointments bothered Wall Street greatly on Thursday. The news also roiled the metals market – copper fell 1.3% on March 13, its third down day on the week. Besides being the world’s top copper user, China also employs the base metal as collateral for bank loans.^1,5,6

As Chinese Premier Li Keqiang noted on March 13, the nation’s 2014 growth target is 7.5%; the respected (and very bearish) economist Marc Faber told CNBC he suspects China’s growth is more like 4%. The upside, Faber commented, is that “4 percent growth in a world that has no growth is actually very good.”⁶

Will the bull market pass the test? It has passed many so far, and it is just several days away from becoming the fifth-longest bull in history (outlasting the 1982-7 advance). Bears wonder how long it can keep going, referencing a P-E ratio of 17 for the S&P 500 right now (rivaling where it was in 2008 before the downturn), and the 1.9% consensus estimate of U.S. Q1 earnings growth in Bloomberg’s latest survey of Wall Street analysts (down from a 6.6% forecast when 2014 began).¹

Then again, the weather is getting warmer and the new data stateside is encouraging: February saw the first rise in U.S. retail sales in three months, and jobless claims touched a 4-month low last week. Maybe Wall Street (and the world) can keep these signs of the U.S. economic rebound in mind as stocks deal with momentary headwinds.¹

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - bloomberg.com/news/2014-03-12/nikkei-futures-fall-before-china-data-while-oil-rebounds.html [3/12/14]

2 - ajc.com/feed/business/stock-market-today-dow-jones-industrial-average/fYjPS/ [3/3/14]

3 - cnn.com/2014/03/13/politics/crimea-referendum-explainer/ [3/13/14]

4 - uk.reuters.com/article/2014/03/13/uk-ukraine-crisis-factbox-idUKBREA2C19L20140313 [3/13/14]

5 - cnbc.com/id/101492226 [3/13/14]

6 - cnbc.com/id/101489500 [3/13/14]

Kim 3/9/14 Kim 3/9/14

Hanging on Through the Turbulence

Patience & diversification matter in all manner of stock market climates.

Stocks rise, fall ... and rise again. Volatility certainly came back to Wall Street during the first several weeks of 2014 in the form of a 7.2% descent for the Dow Jones Industrial Average and a 5.9% retreat for the NASDAQ. The declines gave investors pause: was a correction underway? Would bulls be held back for 2014?¹

As it turned out, no. On February 27, the S&P 500 settled at a new all-time peak of 1,854.30, with dovish remarks from Federal Reserve chair Janet Yellen providing lift. On the same market day, the DJIA closed at 16,272.71 and the NASDAQ at 4,318.93.²

Ups and downs are givens when you invest in equities. Still, the skid stocks took in 2008-09 has made everyone from millennials to members of the Greatest Generation anxious about any string of down days for the big indices. If the benchmarks lose a couple of percentage points in a week, or more in a month, headlines and news alerts emerge and encourage collective fears of a stock bubble.

Be patient; be prepared. We don’t really know what will happen tomorrow, and therefore we don’t really know what will happen on Wall Street tomorrow (though we can make educated guesses in both respects). Because of that, it is wise to diversify your portfolio across different asset classes and rebalance it from time to time.

Would you rather have a portfolio that might perform at least decently in varied stock market climates, or a mix of investments that only makes sense in a bull run? We recognize that diversification is wise, especially for the long run ... and yet, when things go really well or really poorly on the Street, impatience and anxiety readily lure us away from the age-old wisdom.

The S&P 500 rose 29.6% in 2013, 31.9% with dividends included. Rationally, investors realize that such phenomenal stock gains won’t happen every year. Even so, the temptation to go full-bore into U.S. stocks and stock funds was pretty strong at the end of 2013 ... comparable to the call to invest in gold or bear-market funds back in 2008-09.⁴

If an investor relied on impulse rather than diversification across these past few years, he or she might be poorer and/or awfully frustrated today. Gold is in a bear market now, and according to Morningstar, the average bear market fund has lost 33% annually since 2008. Stocks are firmly in a bull market now, but an investor hypothetically going “all in” on domestic stocks at the end of 2013 (i.e., buying high) would have faced a market decline early in 2014 and might have impatiently sold their shares.³

Strategies like dynamic asset allocation attempt to leverage better-performing sectors of the market while shifting portfolio assets away from underperforming sectors. Such tactical moves may lead to improved portfolio performance. Of course, the strategy also seeks to foster intelligent diversification across asset classes.

Dynamic asset allocation is a strategy best left to professionals, even teams of them. Most retail investors would be hard pressed to even attempt it, even at a basic level. This is why the buy-and-hold approach (buy low, sit back, ride it out, sell high years later) is so often suggested to those saving for retirement and other long-term objectives.

Hang on when turbulence affects the markets. Staying in the market can prove the right move even when the news seems cataclysmic – look at how stocks have rebounded, and hit new highs, since the precipitous fall the S&P took in the recession. Sticking with principles of diversification can prove wise in both challenging and record-setting markets.

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

Citations.

1 - marketwatch.com/story/the-markets-in-for-a-wild-but-clearly-bullish-ride-2014-02-27 [2/27/14]

2 - thestreet.com/story/marketstory.html [2/27/14]

3 - marketwatch.com/story/dont-try-to-time-the-market-2014-02-21 [2/21/14]

4 - tinyurl.com/k9ul3af [12/31/13]

Kim 2/25/14 Kim 2/25/14

Retire at 65 ... Or Not?

Your assets matter more than your age.

Isn’t 65 the traditional retirement age? Perhaps, but baby boomers are modifying the definition of a traditional retirement (if not redefining it altogether). The Social Security Administration has subtly revised its definition of the traditional retirement age as well.

If you glance at the SSA website, the “full” retirement age for Americans born from 1943-1954 is 66, and it is 67 for those born in 1960 and later. (The “full” retirement age increases gradually from 66 to 67 for those born during the years 1955-1959.)¹

When Social Security started, the national retirement age was set at 65. In 1940, a 21-year-old American man had a 54% chance of living another 44 years (according to the federal government’s actuarial estimates). By 1990, that chance had improved to 72%. For 21-year-old women, the probability of reaching age 65 increased from 61% to 84% in that same time frame. Americans also began living longer after 65. Increased longevity led to financial dilemmas for Social Security and the necessary redefinition of “traditional” retirement age.²

What do you lose by retiring at 65? The financial opportunity cost is considerable, and maybe greater than some baby boomers realize. If your full retirement age is 67, you’ll reduce your monthly Social Security income by around 13.3% if you start taking benefits at age 65. Moreover, for every year that you refrain from claiming Social Security until age 70, your Social Security benefits will rise by 8%.^1,3

In addition to trimming your long-term retirement benefits, you may also forfeit some salary. If you are still working at age 65, you might be at or near your peak earnings level, and if that is the case, Social Security income may pale in comparison.

Think of life after 65 as your “third act” that needs funding. Do you think of 65 as late middle age? It may be. As the SSA website notes, about 25% of today’s 65-year-olds should live to age 90. About 10% of them should reach age 95. Even if that doesn’t happen for you, you should know that the average 65-year-old today can expect to live into his or her mid-eighties.⁴

Let those statistics serve as a flashing red light, illuminating two new truths of seniority. The first truth: for many Americans, “retirement” will represent 10, 20 or even 30 years of activity and opportunities. The second truth: to stay active and pursue those opportunities, retirees will need 10, 20 or 30 years of financial stability.

Most Americans haven’t amassed the equivalent 10, 20 or 30 years of retirement savings. Many want to “stay in the game” a little longer: a 2013 Gallup poll found that 37% of Americans expect to retire after age 65, compared with 14% in 1995.⁵

How many Americans can work full-time until age 65? The bad news is that according to the same Gallup poll, the average retirement age in America is 61. The good news is that it was 57 in 1991. Assuming we keep living longer and healthier, it seems plausible that the average age of retirement might hit 65 – if not for the boomers, then for Gen Xers.⁵

Regardless of when baby boomers retire, growth investing will continue to have merit. Even moderate inflation erodes purchasing power over time, and its effects can be felt in less than a decade. Who knows: the portfolios held by 65- and 70-year-olds in 2035 might look more like the ones they hold now instead of those held by their parents generations before.

When should you retire? If that question is on your mind to any degree, consider an evaluation of your retirement readiness – a review of what you have, an estimation of what you need and a clear look at the possibilities before you. It should be time well spent.

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

Citations.

1 - ssa.gov/retire2/retirechart.htm [2/20/14]

2 - ssa.gov/history/lifeexpect.html tml [2/20/14]

3 - money.usnews.com/money/blogs/on-retirement/2013/10/18/why-65-is-too-young-to-retire [10/18/13]

4 - ssa.gov/planners/lifeexpectancy.htm [2/20/14]

5 - money.usnews.com/money/retirement/articles/2013/06/10/the-ideal-retirement-age [6/10/13]

Kim 2/3/14 Kim 2/3/14

The MyRA, the USARF & Cash Balance Plans

New & old concepts to address the retirement savings gap.

How many 401(k)s have more than $100k in them? According to the Employee Benefit Research Institute (EBRI), the average 401(k) balance at the end of 2012 was $63,929. Even with stocks rising last year, the average balance likely remains underwhelming.¹

Is this enough money to retire on? No – and this is only part of America’s retirement dilemma. There is inequity in retirement savings – some households have steadily contributed to retirement accounts, others have not. Additionally, IRAs, 401(k)s and 403(b)s can suffer when stocks plunge, with the most invested potentially having the most to lose.

There is no perfect retirement savings plan, and there probably never will be – but ideas are emerging to try and address these problems.

Will MyRAs help more workers save? Over 40% of Americans don’t have a chance to participate in tax-advantaged workplace retirement plans. Last week, President Obama authorized the Treasury to create a new retirement savings account for them – the MyRA.¹

Technically speaking, the MyRA is a Roth IRA with one savings option. After-tax dollars going into the account would be invested in a new type of federal savings bond. As the White House told NPR last week, a MyRA would offer the same variable rate of return as that of the Thrift Savings Plan (TSP) Government Securities Investment Fund. From 2003-12, the TSP’s GSIF returned an average of 3.61% annually.^2,3

A Roth IRA with one savings option may not sound very exciting, but the MyRA isn’t about excitement. A MyRA would feature principal protection with tax-free growth. Employees who earn as much as $191,000 a year could invest in one, contributing as little as $5 per paycheck. The federal government would pay account fees for MyRA owners and hire an institutional investment manager to oversee the program.^1,4

A MyRA would act as a “starter” retirement account for hampered or reluctant savers: MyRA assets of $15,000 or more would be automatically rolled over into Roth IRAs.²

Analysts see three drawbacks to MyRAs. One, accountholders will apparently be able to withdraw their assets at any time. As IRA guru Ed Slott tells Reuters, workers would “have to look at it as a long-term savings account and not a slush fund” to get the most out of participating. Two, enrollment will be voluntary, and "if you don't have automatic enrollment, then not a lot of people are going to use it," cautions Alicia Munnell, director of the Center for Retirement Research at Boston College. Three, the rate of return on a MyRA would be well under historical norms for stocks.^1,4

How about the USARF? Speaking of automatic enrollment, Sen. Tom Harkin (R-IA) proposes creating the USA Retirement Funds, a new private pension program. Workers would automatically defer 6% of their paychecks into these investment funds, which would be overseen by the federal government yet managed by independent trustees. Employees would be in unless they opted out. Employers wouldn’t be required to match employee contributions, and they wouldn’t shoulder any fiduciary liability for plan assets; they would simply deal with payroll deductions. Low-income participants could qualify for a "refundable savers credit" – the USARF would match as much as $2,000 of their annual contributions via direct deposit.⁵

A worker could contribute up to $10,000 annually to the USARF, with $5,500 in yearly catch-up contributions permitted for those 50 and older. Employers could optionally make per-employee contributions of up to $5,000 per year, but contributions could not vary per employee. The funds wouldn’t offer any principal protection for plan participants, but they would get a pension-like income for life, complete with survivor benefits and spousal protections. Defined benefits would only be reduced a maximum of 5% in a downturn.⁵

And how about the cash balance plan? A cash balance plan is a pooled retirement trust with characteristics of an old-school pension plan. The employer funds the plan and plan trustees make investment decisions instead of plan participants. The employer contributes X amount of dollars into each employee’s “account.” The contribution is based on X% of employee pay plus a fixed-interest crediting rate, usually around 4-5%. Assets tend to be conservatively invested, and annual contribution limits are age-weighted for shareholders – they can be much greater than those for 401(k)s. A retiree ends up with either a lump sum or lifelong income based upon their end salary. These plans are often combined with 401(k) profit-sharing plans.⁶

During the 2000s, the number of cash balance plans grew by about 20% a year – and the trade journal Pension & Investments thinks they will be as common as 401(k)s in the coming years.⁶

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

Citations.

1 - latimes.com/business/la-fi-obama-myra-20140130,0,1409442.story#axzz2ruxl6bgF [1/29/14]

2 - consumeraffairs.com/news/obamas-no-risk-retirement-savings-plan-is-it-for-you-012914.html [1/29/14]

3 - tinyurl.com/ly7xf7p [1/29/14]

4 - tinyurl.com/n42cc2l [1/29/14]

5 - usatoday.com/story/news/politics/2014/01/30/harkin-retirement-bill/5051887/ [1/30/14]

6 - marketwatch.com/story/could-this-retirement-plan-replace-the-401k-2013-05-03 [5/3/13]

Kim 1/29/14 Kim 1/29/14

Organizing Your Paperwork for Tax Season

If you haven’t done it, now’s the time.

How prepared are you to prepare your 1040? The earlier you compile and organize the relevant paperwork, the easier things may be for you (or the tax preparer working for you) this winter. Here are some tips to help you get ready:

As a first step, look at your 2012 return. Unless your job, living situation or financial situation has changed notably since you last filed your taxes, chances are you will need the same set of forms, schedules and receipts this year as you did last year. So open that manila folder (or online vault) and make or print a list of the items that accompanied your 2012 return. You should receive the TY 2013 versions of everything you need by early February at the latest.

How much documentation is needed? If you don’t freelance or own a business, your list may be short: W-2(s), 1099-INT(s), perhaps 1099-DIVs or 1099-Bs, a Form 1098 if you pay a mortgage, and maybe not much more. Independent contractors need their 1099-MISCs, and the self-employed need to compile every bit of documentation related to business expenses they can find: store and restaurant receipts, mileage records, utility bills, and so on.¹

In totaling receipts, don’t forget charitable donations. The IRS wants all of them to be documented. A taxpayer who donates $250 or more to a qualified charity needs a written acknowledgment of such a donation. If your own documentation is sufficiently detailed, you may deduct $0.14 for each mile driven on behalf of a volunteer effort for a qualified charity.¹

Or medical expenses & out-of-pocket expenses. Collect receipts for any expense for which your employer doesn't reimburse you, and any medical bills that came your way last year.

If you’re turning to a tax preparer, stand out by being considerate. If you present clean, neat and well-organized documentation to a preparer, that diligence and orderliness will matter. You might get better and speedier service as a result: you are telegraphing that you are a step removed from the clients with missing or inadequate paperwork.

Make sure you give your preparer your federal tax I.D. number (TIN), and remember that joint filers must supply TINs for each spouse. If you claim anyone as a dependent, you will need to supply your preparer with that person’s federal tax I.D. number. Any dependent you claim has to have a TIN, and that goes for newborns, infants and children as well. So if your kids don’t have Social Security numbers yet, apply for them now using Form SS-5 (available online or at your Social Security office). If you claim the Child & Dependent Care Tax Credit, you will need to show the TIN for the person or business that takes care of your kids while you work.^1,3

While we’re on the subject of taxes, some other questions are worth examining...

How long should you keep tax returns? The IRS statute of limitations for refunds is 3 years, but if you underreport taxable income, fail to file a return or file a claim for a loss from worthless securities or bad debt deduction, it wants you to keep them longer. You may have heard that keeping your returns for 7 years is wise; some CPAs and tax advisors will tell you to keep them for life. If the tax records are linked to assets, you will want to retain them for when you figure out the depreciation, amortization, or depletion deduction and the gain or loss. Insurers and creditors may want you to keep federal tax returns indefinitely.²

Can you use electronic files as records in audits? Yes. In fact, early in the audit process, the IRS may request accounting software backup files via Form 4564 (the Information Document Request). Form 4564 asks the taxpayer/preparer to supply the file to the IRS on a flash drive, CD or DVD, plus the necessary administrator username and password. Nothing is emailed. The IRS has the ability to read most tax prep software files. For more, search online for “Electronic Accounting Software Records FAQs.” The IRS page should be the top result.⁴

How do you calculate cost basis for an investment? A whole article could be written about this, and there are many potential variables in the calculation. At the most basic level with regards to stock, the cost basis is original purchase price + any commission on the purchase.

So in simple terms, if you buy 200 shares of the Little Emerging Company @ $20 a share with a $100 commission, your cost basis = $4,100, or $20.50 per share. If you sell all 200 shares for $4,000 and incur another $100 commission linked to the sale, you lose $200 – the $3,900 you wind up with falls $200 short of your $4,100 cost basis.⁵

Numerous factors affect cost basis: stock splits, dividend reinvestment, how shares of a security are bought or gifted. Cost basis may also be “stepped up” when an asset is inherited. Since 2011, brokerages have been required to keep track of cost basis for stocks and mutual fund shares, and to report cost basis to investors (and the IRS) when such securities are sold.⁵

P.S.: this tax season is off to a late start. Business filers were able to send in federal tax returns starting January 13, but the start date for processing 1040 and 1041 forms was pushed back to January 31. Per federal law, the April 15 deadline for federal tax returns remains in place, as does the 6-month extension available for those who file IRS Form 4868.^6,7

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

Citations.

1 - bankrate.com/finance/taxes/7-ways-to-get-organized-for-the-tax-year-1.aspx [1/6/14]

2 - irs.gov/Businesses/Small-Businesses-&-Self-Employed/How-long-should-I-keep-records [8/8/13]

3 - irs.gov/Individuals/International-Taxpayers/Taxpayer-Identification-Numbers-%28TIN%29 [1/17/14]

4 - irs.gov/Businesses/Small-Businesses-&-Self-Employed/Use-of-Electronic-Accounting-Software-Records;-Frequently-Asked-Questions-and-Answers [5/22/13]

5 - turbotax.intuit.com/tax-tools/tax-tips/Rental-Property/Cost-Basis--Tracking-Your-Tax-Basis/INF12037.html [1/23/14]

6 - irs.gov/uac/Newsroom/Starting-Jan.-13-2014-Business-Tax-Filers-Can-File-2013-Returns [1/9/14]

7 - irs.gov/taxtopics/tc301.html [1/22/14]

Kim 1/6/14 Kim 1/6/14

Why 2014 May Be a Very Good Year

More improvement may be in store for the economy & the stock market.

Will the economy & the bull market make further strides? On both Wall Street and Main Street, 2013 has turned out better than many analysts expected. Will the recovery gain additional momentum in 2014, and will stocks climb even higher?

Optimism is widespread. Do you remember how gloomy things got at the end of 2012? Fears about imminent economic damage from the fiscal cliff and sequester cuts were pervasive, and bears sensed that stocks might retreat. The economy and the market withstood these anxieties and others. Look at last week for another example. Hours after the Federal Reserve announced it would scale back its asset purchases next year, the Dow closed at a fresh all-time high of 16,167.97. December 18 was the index’s best day in more than two months.¹

Weren’t investors supposed to be disappointed when the taper occurred? Let’s just say the timing was right. In August, just the hint of an oncoming taper resulted in a 5.6% dip for the Dow. Months ago, some investors were still questioning the strength of the recovery. Today, there is less to question. As Wells Capital Management chief investment strategist James Paulsen commented in USA TODAY, the Fed’s move amounted to a “vote of confidence in the future,” mirroring the confidence on Wall Street.¹

The taper to QE3 was relatively small ($10 billion) and came with a pledge to hold interest rates down “well past the time” unemployment declines to 6.5%. So the Fed likely intends to maintain its accommodative stance for some time, which is just fine by investors. (In fact, the Wall Street Journal says that only two of ten Fed officials believe the central bank will raise interest rates next year.) The Fed’s monetary policy has been instrumental to the stock market’s record-setting performance, and it isn’t going away – which is good news for 2014.^1,2

Easing isn’t the only thing powering this bull market. The unemployment rate fell to 7.0% in November, a 5-year low. It was 7.9% in January. The economy is projected to generate 2,269,500 new jobs in 2013, and assuming it does, this will be the fourth straight year with a gain in annual job creation. The Fed sees GDP improving more than half a percentage point to 2.8-3.2% in 2014 and growth of 3.0-3.4% for 2015. Housing starts have doubled in the past four years and rose 22.7% in November to a 5½-year peak. The most recently released Case-Shiller Home Price Index (September) showed a 13.3% overall annual gain in home values, and even though year-over-year existing home sales declined in November for the first time in 29 months, the National Association of Realtors said existing home prices had improved 9.4% in a year.^2,3,4,5,6,7

The global outlook may also improve. Economists at China’s National Academy of Economic Strategy feel that the PRC will maintain GDP of about 7.5% this year and see as much as 7.8% growth in 2014. Citing Eurostat and Bloomberg research, Money reports that the eurozone economy is projected to grow about 1.4% per year for the next 3-5 years, notably better than the annual 0.2% pace of expansion recorded so far in this decade.^4,8

No one is saying there won’t be challenges or surprises next year, and stock market gains in 2014 may not approach those we have seen in 2013. That said, many indicators are signaling that next year could hold considerable promise for both Wall Street and Main Street.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - usatoday.com/story/money/markets/2013/12/18/five-reasons-why-stocks-rose-despite-taper/4114075/ [12/18/13]

2 - blogs.wsj.com/economics/2013/12/18/fed-projections-see-no-rate-increase-until-2015/ [12/18/13]

3 - ncsl.org/research/labor-and-employment/national-employment-monthly-update.aspx [12/19/13]

4 - money.cnn.com/2013/12/09/news/economy/economic-outlook-2014.moneymag/index.html [12/10/13]

5 - reuters.com/article/2013/12/18/idUSLNSINE9BF20131218 [12/18/13]

6 - bostonglobe.com/business/2013/12/01/five-financial-trends-thankful-for/3FyGVa4OpIZNKlNSzHwIbO/story.html [12/1/13]

7 - mortgagenewsdaily.com/12192013_existing_home_sales.asp [12/19/13]

8 - usa.chinadaily.com.cn/business/2013-12/10/content_17162933.htm [12/10/13]

Kim 12/9/13 Kim 12/9/13

A Market to Be Thankful For

Could 2013 end up being the best year for stocks since 1995?

In financial terms, 2013 has been a very nice year – a year in which the economy, the housing and business sectors and the stock market have all improved. Looking back over the year to date, it is particularly amazing to see how stocks have soared in the face of many challenges – some of which proved tougher than others.

Wall Street is enjoying a banner year. As November wraps up, the S&P 500 is up more than 29% YTD and 32% in the past 12 months. If the S&P gains another 2% by year’s end, it will have its best year since 1995. Even if the index has a flat December, it will have its best year since 1997. In addition, it has climbed 166% from its March 2009 bear market low to the present.^1,2,3

Opening an even wider window, the total-market Wilshire 5000 index closed at 19,210.45 on November 27, 180% above its March 2009 low of 6,858.43. The optimism has truly carried worldwide: global equities have gained more than $8 trillion in value during 2013.^3,4,5

Once again, patience has been the investor’s friend. Even in a good year for stocks like this, you still have to keep from being rattled by the headlines. If you visit some of the popular financial websites with any frequency, you may have seen warnings of a new stock bubble, prognostications that 2014 will bring minimal stock gains, and so forth. This could possibly prove true; then again, those assertions may look foolish six months from now.

Dire warnings (and memories of 2008) do make people cynical about stocks. In a recent University of Chicago/Northwestern University quarterly investor survey of 1,000+ respondents, just 17% said they trusted Wall Street. In comparison, 34% said they trusted banks.⁶

In a strange way, this degree of distrust could be a good sign for the health of the bull market. Historically, individual investors are impatient – they get out of stocks too soon and get back into stocks too late. Analysts pay attention to their inefficient market timing. When even the most timid bears are putting money into equities, it may be a sign that the bulls are getting tired. It doesn’t seem that we have reached that point yet. The Investment Company Institute has recorded net inflows into mutual funds for 2013, but that follows six straight years of net outflows.⁶

For stocks, 2013 is kind of like 2012 – only better. This year, Wall Street has put up with a federal government shutdown, a crisis in Syria that threatened to require a U.S. military response, the sequestration cuts, anxiety from the Cyprus banking quagmire, and constant worries about the Federal Reserve halting its economic stimulus. Here we are, November is ending, the Dow is above 16,000 and the S&P is above 1,800. In 2012, you had the fiscal cliff looming, household income hitting a 17-year low, new recessions in Japan and Europe, slower growth in China, and bond guru Bill Gross talking about “the death of equities.” Even so, the S&P rose 13.41% on the year.^1,2,7

Be thankful. Many Americans have seen their job prospects, finances, and communities improve this year. Whether you are bullish or bearish, whether you are wealthy or building wealth, whether you are retired or saving for retirement, this is something to be thankful for.

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

Citations.

1 - bloomberg.com/quote/SPX:IND [11/27/13]

2 - 1stock1.com/1stock1_141.htm [11/27/13]

3 - bloomberg.com/news/2013-11-27/asia-stocks-fall-after-u-s-consumer-confidence-declines.html [11/27/13]

4 - investing.money.msn.com/investments/market-index/?symbol=%24US%3aW5000 [11/27/13]

5 - business.financialpost.com/2011/01/18/wilshire-5000-up-100-since-march-2009-lows/ [1/18/11]

6 - azcentral.com/business/consumer/articles/20131023signs-bubble-market-wiles.html [10/23/13]

7 - money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2013/11/26/your-biggest-enemy-may-be-financial-news [11/26/13]

image used under Creative Commons license from flickr/401(k) 2013

Kim 11/18/13 Kim 11/18/13

What’s Next in the Debt Ceiling Debate?

Implications for the short term & the long term.

In January, will the federal government be shuttered again? At first thought, it seems inconceivable that Congress would want to go through another protracted fight like the one that shut things down for 16 days in October. That could occur, however, if a new budget panel doesn’t meet its deadline.

Once more, the clock is ticking. By December 13, a group of 30 senators and representatives have to hammer out a bipartisan budget agreement. It must a) reconcile the markedly different House and Senate FY 2014 budget plans passed earlier in 2013, and b) map out a longer-term plan to shrink the federal deficit. If a) doesn’t happen, then the country will be threatened with another federal shutdown on January 15. If b) doesn’t happen, then another round of sequester cuts from the 2011 Budget Control Act will be initiated as of that same date.^1,2,3,4

Does this seem like déjà vu? It does among many political and economic analysts, who fear a repeat of the supercommittee debacle of 2011, when a bicameral, bipartisan group of 12 Capitol Hill legislators just gave up trying to find a way to shave $2 trillion from the deficits projected for the next decade.⁴

This new committee is bigger, and like the supercommittee, its leaders are far apart politically. Sen. Patty Murray (D-WA) and Rep. Paul Ryan (R-WI) are the budget chairs of their respective chambers of Congress. The key difference lies in the modesty of its ambition. On October 18, Murray told Bloomberg that the committee would aim for “a budget path for this Congress in the next year or two, or further if we can” rather than a “grand bargain” across the next 10 years.^1,3

Will they manage that? Some observers aren’t sure. Murray co-chaired the failed supercommittee of 2011, and while Ryan was quiet during the fall budget fight, he recently authored an op-ed piece for the Wall Street Journal reiterating his controversial ideas to slash the deficit by reforming entitlement programs. Still, Sen. Lindsey Graham (R-SC) told Bloomberg that “there’s a real desire to take another effort, not at a grand bargain, but at a sequestration replacement,” and Sen. Jeff Sessions (R-AL) commented that “we don’t want to raise expectations above reality, but I think there’s some things we could do.”^1,3,5

Leaders from of both parties maintain there will be no shutdown in January. Senate Minority Leader Mitch McConnell (R-KY) stated that a shutdown is “off the table” this winter. On CNN’s State of the Union, Sen. John McCain (R-AZ) warned that the public would not tolerate “another repetition of this disaster”; on ABC’s This Week, House Minority Leader Nancy Pelosi (D-CA) said she sympathized with the public’s “disgust at what happened.” These comments do not necessarily imply expedient negotiations ahead.^3,6

The short-term fix didn’t fix everything. As a FY 2014 budget hasn’t yet been agreed upon, the Treasury is still relying on stopgap funding to keep the federal government running through January 15 and “extraordinary measures” to raise the federal debt limit through February 7.²

The long-term outlook for America’s credit rating didn’t really change. Fitch put its outlook for the U.S. on “negative” and warned of a potential downgrade; Dagong, the major Chinese credit ratings agency, actually downgraded the U.S. from A to A-. Even so, S&P and Moody’s didn’t take action as a result of October’s shutdown; while S&P thinks the shutdown will cut 0.6% off of Q4 GDP, it still gives the U.S. an AA+ rating (downgraded from AAA in 2011).^7,8

America lacks top-notch credit ratings, but few nations have them. In fact, only 11 countries possess the coveted AAA rating from S&P and Fitch plus the leading Aaa rating from Moody’s. If you look at S&P’s ratings for the globe’s ten largest economies, Germany is the only one with an AAA. China gets an AA- with a “stable” outlook and Japan has an AA- with a “negative” outlook. While Russia has the world’s eighth biggest economy, Moody’s, Fitch and S&P all rate it one grade above junk bond status.⁷

Is Wall Street all that worried about another shutdown? At the moment, no – because there are several reasons why the next debt debate could be less painful. As the goal appears to be a near-term bargain instead of a grand one, it may be more easily realized. If the newly appointed budget panel fails, the economy can probably weather $20 billion of 2014 sequester cuts. Also, many mid-term elections are scheduled for 2014; do congressional incumbents really want to damage their reputations further with another shameful stalemate?⁸

While confidence on Wall Street and Main Street would erode with a repeat shutdown, the Treasury might face a slightly easier challenge in January than it did in October. Sequester cuts would trim the already-shrinking federal deficit further in early 2014, conserving some federal money. As a Goldman Sachs research note just cited, Fannie Mae and Freddie Mac could also make their dividend payments to the Treasury early in Q1, which would also help.⁸

Global investors can’t really back away from America. The dollar is still the world’s reserve currency, and China owns about $1.3 trillion of our Treasuries. Those two facts alone should compel our legislators to work things out this winter, hopefully before the last minute.⁷

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - cnn.com/2013/10/17/politics/budget-talks-whats-next [10/17/13]

2 - csmonitor.com/USA/DC-Decoder/2013/1017/A-new-shutdown-clock-is-ticking.-Can-Washington-avoid-a-rerun-video [10/17/13]

3 - bloomberg.com/news/2013-10-18/obama-s-goal-of-grand-budget-deal-elusive-as-talks-begin.html [10/18/13]

4 - tinyurl.com/lchxblz [10/18/13]

5 - cnn.com/2013/10/09/politics/shutdown-ryan/ [10/9/13]

6 - tinyurl.com/lbp8cxn [10/20/13]

7 - globalpost.com/dispatch/news/regions/americas/united-states/131018/credit-rating-debt-explained [10/20/13]

8 - cbsnews.com/8301-505123_162-57608220/5-reasons-wall-street-thinks-the-next-fiscal-feud-will-fizzle/ [10/19/13]

image used under Creative Commons license from flickr/401(k) 2013

Kim 11/5/13 Kim 11/5/13

Bearish Thoughts Persist in a Bull Market

Are memories of the downturn hurting the financial potential of boomers?

At the end of October, the S&P 500 was up 24.39% in the past 12 months. What investor wouldn’t want gains like that? As uplifting as that market advance was for many, some baby boomers missed out on it. They were simply too afraid to get back into stocks – they couldn’t dispense with their memories of 2008.¹

Would most boomers take a 4% return instead? Earlier this year, the multinational investment firm Allianz surveyed Americans with more than $200,000 in investable assets. Allianz found that for most of these people, protecting retirement savings was financial priority number one. Aversion to risk ran high: 76% of the respondents said that they would prefer an investment vehicle that offered a 4% return with no chance of loss of principal over an investment that offered an 8% return without principal protection.²

In the equity markets, risk and reward are not easily divorced. They come together in an imperfect marriage, a problematic one – but it is one you may need to put up with these days if you are seeking decent yields. With interest rates so minimal, fixed-rate, risk-averse investing can put you at a disadvantage even against mild inflation. If you turn your back on equity investing right now, you could find yourself thwarting your retirement savings potential.

Psychology froze some boomers out of the Wall Street rebound. The awful stock market slide of 2008-09 left many midlife investors skittish about stocks. As Wall Street history goes, that was an extraordinary, aberrational stretch of market behavior. These events, and the fears that followed, may have scared certain investors away from stocks for years to come.

What price risk aversion? At the end of the third quarter, more than $8 trillion was sitting in U.S. money market accounts, doing basically nothing. It wasn’t being lost, but it sure wasn’t returning much. In the Allianz survey, 80% of baby boomers polled viewed the stock market as volatile; 38% said that volatility was prompting them to keep some or all of their cash on the sidelines.^2,3

While all that money isn’t being exposed to risk, it is also bringing investors meager rewards.

Consider the psychology of our society for a moment. Generation after generation is told to save and invest for future objectives, most prominently a comfortable retirement. That need, that purpose, is not going away. As long as that societal need is in place, people are likely predisposed to believe in the potential of equity investing. So there is a collective American psychology – as yet unshaken – that the stock market is a strong option for investing, making money, and building wealth. (The same unshaken assumption remains in the housing market, even after everything homeowners have been through.)

That powerful collective psychology has contributed to the longevity of bull markets – and it isn’t going away. We had the bulk of the federal government shut down for 16 days last month, and yet the S&P 500 gained 4.46% in October. After 10 months of 2013, the index was up 23.16% YTD – and this is a year that has brought fears of a conflagration in the Middle East, the threat of a U.S. credit rating downgrade and a “fiscal cliff,” sequester cuts, a banking crisis in Cyprus that scared the international financial community, and continued high unemployment. Stocks have vaulted past all of it.¹

Consider the view from this wide historical window: in the last 10 years, the S&P 500 has averaged better than a 7% annual return, even with its appalling 47% drop from October 2007 to March 2009. Since 1926, the S&P has a) had 23 years where it returned 10% or better, b) never gone negative over a 20-year period, and c) advanced 8 to 10% a year on average.³

If you bought and held, congratulations. If you opted for tactical asset allocation during the downturn, facing that risk paid off. The point is: you stayed in the market. You didn’t cash out in late 2008 or early 2009 and decide to buy back at the top (as some bearish investors have recently done).

It isn’t time to throw caution to the wind. The Federal Reserve is not going to keep easing forever; QE3 will eventually end, perhaps early in 2014. When it does, Wall Street will react. The market may price it in, or we may see something worse happen. When you look at all the hurdles this bull market has overcome in the past few years, however, you have to think there is at least a bit more upside to come. Wall Street is optimistic and the performance of stocks certainly demonstrates that optimism, even as bearish thoughts persist.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - money.cnn.com/data/markets/sandp/ [10/31/13]

2 - foxbusiness.com/personal-finance/2013/10/24/wall-streets-rallying-so-why-are-boomers-so-scared/ [10/24/13]

3 - business.time.com/2013/09/27/seeking-shelter-from-stock-swings-savers-take-on-a-different-kind-of-risk/ [9/27/13]

Kim 10/28/13 Kim 10/28/13

SHOULD YOU PAY OFF YOUR HOME BEFORE YOU RETIRE?

Before you make any extra mortgage payments, consider some factors.

Should you own your home free and clear before you retire? At first glance, the answer would seem to be “absolutely, if at all possible.” Retiring with less debt … isn’t that a good thing? Why not make a few extra mortgage payments to get the job done?

In reality, things are not so cut and dried. There is a fundamental opportunity cost to consider. If you decide to put more money toward your mortgage, what could that money potentially do for you if you were to direct it elsewhere?

In a nutshell, the question is: should you pay down low-interest debt, or should you invest the money into a tax-advantaged account that could potentially bring you a strong return?

Relatively speaking, home loans are cheap debt. Compare the interest rate on your mortgage to the one on your credit card. Should you focus your attention on a debt with 6% interest or a debt with 15% interest?

You can usually deduct mortgage interest, so if your home loan carries a 6% interest rate, your after-tax borrowing rate could end up being 5% or lower.

If history is any barometer, your home’s value may increase over time and inflation will effectively reduce the real amount of your mortgage over time.

A Chicago Fed study called mortgage prepayments “the wrong choice”. In 2006, the Federal Reserve Bank of Chicago presented a white paper from three of its economists titled “The Tradeoff between Mortgage Prepayments and Tax-Deferred Retirement Savings”. The study observed that 16% of American households with conventional 30-year home loans were making “discretionary prepayments” on their mortgages each year – that is, payments beyond their regular mortgage obligations. The authors concluded that almost 40% of these borrowers were "making the wrong choice." The white paper argued that the same households could get a mean benefit of 11-17¢ more per dollar by reallocating the money used for those extra mortgage payments into a tax-deferred retirement account.¹

Other possibilities for the money. Let’s talk taxes. You save taxes on each dollar you direct into IRAs, 401(k)s and other tax-deferred investment vehicles. Those invested dollars have the chance for tax-deferred growth. If you are like a lot of people, you may enter a lower tax bracket in retirement, so your taxable income and federal tax rate could be lower when you withdraw the money out of that account.

Another potential benefit of directing more funds toward your 401(k): If the company you work for provides an employer match, then you may be able to collect more of what is often dubbed “free money”.

Let’s turn from tax-deferred retirement investing altogether and consider insurance and college planning. Many families are underinsured and the money for extra mortgage payments could optionally be directed toward long term care insurance or disability coverage. If you’ve only recently started to build a college fund, putting the assets into that fund may be preferable.

Let’s also remember that money you keep outside the mortgage is money that is easier to access.

What if you owe more than your house is worth? Prepaying an underwater mortgage may seem like folly to you – or maybe you really love the house and are in it for the long run. Even so, you could reallocate money that could be used for the home loan toward an emergency fund, or insurance, or some account with the potential for tax-deferred growth – when all the factors are weighed, it might look like the better move.

Think it over. It really comes down to what you believe. If you are bearish, then you may lean toward paying off your mortgage before you retire. There is no doubt about it - when you pay off debt you owe, you effectively get an instant return on your money for every dollar. If you are tantalizingly close to paying off your house, then you may just want to go ahead and do it because you love being free and clear.

On the other hand, model scenarios may tell you another story. After the numbers are run, you may want to direct the money to other financial priorities and opportunities, especially if you tend to be bullish and think the market will perform along the lines of its long-term historical averages.

No one path is right for everyone. If you’re unsure which direction may be most beneficial to you, speak with a qualified Financial Professional.

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com. This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations.

1 chicagofed.org/digital_assets/publications/working_papers/2006/wp2006_05.pdf [8/06]

2 montoyaregistry.com/Financial-Market.aspx?financial-market=will-you-have-an-adequate-retirement-cash-flow&category=3 [2/27/11]

Kim 10/14/13 Kim 10/14/13

Entering the Yellen Years

A look at the economist newly nominated to lead the Federal Reserve. Janet Yellen – currently the vice chair of the Board of Governors of the Federal Reserve – has been nominated to succeed Ben Bernanke at the helm of the world’s most important central bank. A former UC Berkeley and London School of Economics professor and San Francisco Fed president, Yellen is a globally admired economist with many fans on Wall Street. The way it looks now, in January she will become the most powerful woman in the world.^1,2,4

The average investor doesn’t know that much about Yellen and may be wondering what kind of course Fed policy may take under her watch. So here is a closer look at her.

Is Yellen just a clone of Ben Bernanke? It is true, Yellen has often voted in line with Bernanke regarding Fed policy; that was partly why Wall Street cheered her nomination. It also liked the fact that the controversial Larry Summers had withdrawn his name from consideration. Yet there are discernible differences between Yellen and Bernanke.¹

The Fed has a mandate to focus on two goals: the goal of full employment, and the goal of price stability. Some Fed chairs lean more toward the first objective, and some lean more toward the second. While Bernanke built a reputation among his fellow economists as a responsive monetarist, Yellen is known as more of a Keynesian, someone who believes in the power of a sustained government stimulus to promote employment and heal the economy. In fact, earlier this year, she commented that “it is entirely appropriate for progress in attaining maximum employment to take center stage.” ^1,2

So is Yellen an inflation dove? In the eyes of many, yes. She may end up sustaining QE3 longer than Bernanke might have, and putting off significant tapering of QE3 for longer than her predecessor. Interest rates may stay at rock-bottom levels under her tenure for longer than presumed. Since QE3 began, both Yellen and Bernanke have maintained that easing to the tune of $85 billion in bond purchases per month is needed to fight ongoing high joblessness and subpar growth, even with the threat of asset bubbles or the possibility of losses for the central bank when those bonds are sold.^1,2,3

Yellen got it right at a couple of key moments during the 2000s. In 2006, she warned of a housing bubble that could bring down the whole economy, not a particularly dovish moment for her. (Of course, Yellen and her Fed colleagues could have chosen to tighten and try to prevent one from forming 2-3 years earlier.) As the FOMC voted to cut interest rates by 25 basis points in December 2007, Yellen wanted a half-percent cut, stating that “any more bad news could put us over the edge, and the possibility of getting bad news — in particular, a significant credit crunch — seems far from remote.” The Great Recession was a fact of life within a year.^2,4

While Yellen is widely seen as extending the policies put in place during Ben Bernanke’s term with little alteration, the big question is how quickly and how ably the Fed will be able to tighten if inflation becomes hazardous after all this easing. If Bernanke’s legacy is that of a great scholar of the Great Depression who reactively managed the economy out of dire straits, Yellen’s legacy may be built on how well the Fed can control the side effects and the gradual withdrawal of its current accommodative monetary stance.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - cnn.com/2013/10/10/opinion/ghitis-janet-yellen/?hpt=hp_t4 / [10/10/13]

2 - tinyurl.com/kawhouj [3/21/12]

3 - bloomberg.com/news/2013-10-09/janet-yellen-s-to-do-list.html [10/9/13]

4 - tinyurl.com/mlqgjyf [10/13/13]

Kim 10/10/13 Kim 10/10/13

What If America Shatters Its Debt Ceiling?

The global economic consequences could be severe.

In October, America may risk running out of cash. Treasury Secretary Jacob Lew recently urged Congress to lift the federal debt limit before October 17. Secretary Lew claims that if nothing is done by that date, the Treasury will have only about $30 billion in available cash to pay down as much as $60 billion in daily net expenditures. The nonpartisan Congressional Budget Office has a slightly different opinion: it believes that the government will run out of free cash sometime between October 22 and November 1 if a stalemate persists on Capitol Hill.^1,2

Many Americans may confuse the impasse over the debt ceiling with the sparring over the federal budget, which has made headlines all September. October 1 was set as a deadline for Congress to pass a stopgap funding measure to avoid possible shutdowns of certain federal agencies. The debt ceiling could be breached in mid-October. Technically speaking, the debt limit was already hit on May 19, with the Treasury Department taking what Secretary Lew calls “extraordinary measures” to keep enough cash on hand, such as dipping into exchange-rate funds.^1,2

America has never defaulted on its debt before; what would happen if it did? No one particularly wants to find out. “Any delay in raising the debt ceiling would have dire economic consequences,” respected Moody’s Analytics economist Mark Zandi testified in front of Congress last week. “Consumer, business and investor confidence would be hit hard, putting stock, bond and other financial markets into turmoil.”¹

If the debt ceiling shatters, the Bipartisan Policy Center estimates that America would have enough cash on hand to pay 68% of its debt through the end of October. It would have to borrow to meet the $42 billion in Social Security and Medicare payments due in November.²

Global markets might get a systemic shock if America defaulted on bond payments. Investors might have one of their core assumptions upended – the assumption that Treasuries are the safest investment on earth.²

Couldn’t the government just partially pay its debts for a while? Could the Treasury pay off $30 billion in select debts each day and let other debts linger? This approach – known as prioritization – sounds reasonable, but it may not be doable.

The Washington Post reports that Treasury Department computers receive upward of 2 million invoices per day. Software confirms the math on them and greenlights the payment for each one of them, and this all happens dozens of times per second. According to the BPC, the federal government makes almost 100 million different monthly payments on its debt this way. Secretary Lew dismisses the approach; as he wrote in a letter to House Speaker John Boehner, “Any plan to prioritize some payments over others is simply default by another name.”²

Aren’t there some “end runs” the Treasury could make around the problem? In the (very) short term, the Treasury could simply let invoices pile up and delay payments for a particular day until it had enough cash to pay every debt obligation for that day. Or, the Office of Management & Budget could tell assorted federal agencies to slow down the rate of invoices headed to the Treasury, informing them that they would have to wait until later in the year to spend certain monies allocated to them (this is called “apportionment”).²

Two beyond-the-left-field-fence fixes have also been suggested: the possibility of President Obama declaring the debt ceiling unconstitutional under the 14th Amendment, and the idea to mint a $1 trillion coin.

Section 4 of the 14th Amendment says that “The validity of the public debt of the United States, authorized by law, including debts incurred for payments of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” In 2011, White House legal advisers told President Obama that this 1868 reference to the repayment of Civil War liabilities had dubious value as a tool to lift the debt limit.³

Georgia lawyer Carlos Mucha gained fame in 2012 by proposing that the Treasury authorize the U.S. Mint to make a $1 trillion platinum coin which could be deposited at the Federal Reserve. Once deposited, Mucha claimed, the Fed could credit the federal government’s account for $1 trillion and everything would be solved. An obscure passage in the 1997 Omnibus Consolidated Appropriations Act supposedly provides a rationale for this; according to its author, Rep. Mike Castle (R-DE), the passage was written to help coin collectors. In January, Treasury Department spokesperson Anthony Coley told the Washington Post that “neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit.”^4,5

The world waits & watches. As we get into October, the debt limit will become more and more of a global concern – one that will hopefully fade through negotiation and compromise.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600. This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - nytimes.com/2013/09/26/business/treasury-warns-of-potential-default-by-mid-october.html [9/26/13]

2 - washingtonpost.com/blogs/wonkblog/wp/2013/09/25/debt-ceiling-doomsday-comes-oct-17-heres-what-happens-next/ [9/25/13]

3 - nytimes.com/2011/07/25/us/politics/25legal.html [7/24/11]

4 - nytimes.com/roomfordebate/2013/01/13/proposing-the-unprecedented-to-avoid-default/platinum-coin-would-create-a-trillion-dollar-in-funds [1/13/13]

5 - washingtonpost.com/blogs/wonkblog/wp/2013/01/12/treasury-we-wont-mint-a-platinum-coin-to-sidestep-the-debt-ceiling/ [1/12/13]

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