Kim 10/4/16 Kim 10/4/16

Ways to Repair Your Credit Score

Steps to get your credit rating back toward 720. We all know the value of a good credit score. We all try to maintain one. Sometimes, though, life throws us a financial curve and that score declines. What steps can we take to repair it?

Reduce your credit utilization ratio (CUR). CUR is credit industry jargon, an arcane way of referring to how much of a credit card’s debt limit a borrower has used up. Simply stated, if you have a credit card with a limit of $1,500 and you have $1,300 borrowed on it right now, the CUR for that card is 13:2, you have used up 87% of the available credit.¹

Carrying lower balances on your credit cards tilts the CUR in your favor and promotes a better credit score. If you borrow less than 30% of a card’s debt limit per month, it will help you. If you borrow less than 10% of the debt limit on a card per month, it will help you even more.

Review your credit reports for errors. You probably know that you are entitled to receive one free credit report per year from each of the three major U.S. credit reporting agencies – Equifax, Experian, and TransUnion. You might as well request a report from all three at once. About 20% of credit reports contain mistakes. Upon review, some borrowers spot credit card fraud committed against them; some notice botched account details or identity errors. Mistakes are best noted via postal mail with a request for a return receipt (send the agency the report, the evidence and a letter explaining the error).^1,2

If you have been doing the right things, tell your creditors to report them. If you fail to pay your bills, your creditors will let the major reporting firms know. What if you unfailingly pay the bills on time for a year – will they tell the major reporting firms about that?

Quite often, “good behavior” goes unrecognized by certain creditors while “bad behavior” gets a quick red flag. Urging a creditor to report the things you are doing right to the credit reporting firms can aid the comeback of your credit score.¹

Think about getting another credit card or two (but not too many). Your CUR is calculated across all your credit card accounts, in respect to your total monthly borrowing limit. So if you have a $1,200 balance on a card with a $1,500 monthly limit and you open two more credit card accounts with $1,500 monthly limits, you will markedly lower your CUR in the process. Alternately, you could lower your CUR a bit by keeping just one credit card, but asking that card issuer to raise your debt limit. Refrain from trying to open several new lines of credit at once – that could actually harm your score more than help it.¹

Think twice about closing out credit cards you rarely use. When you realize that your CUR takes all the credit cards you have into account, you see why this may end up being a bad move. If you have $5,500 in consumer debt among five credit cards and you close out three of them accounting for $1,300 of that revolving debt, you now have $4,200 among three credit cards. In terms of CUR, you are now using a third of your available credit card balance whereas you once used a fifth.¹

Beyond that, a portion of your credit score is based on account longevity. This represents another downside to closing out older, little used credit cards.¹

New FICO scoring may also help you out if you have problem credit. The FICO XD score – a rating recently launched in a Fair Isaac Co. pilot program with a dozen credit card companies – could open doors for you if you have been rejected by certain credit card issuers. On-time bill paying is a big component in the FICO XD score calculation.³

Roughly 15 million consumers now have XD scores, including 55% to 60% of recent credit card applicants. Between 35-50% of those applicants are estimated to have XD scores above 620, which can be the make-or-break point for getting a credit card.³

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

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.

Citations.

1 - gobankingrates.com/personal-finance/video5-quick-ways-raise-credit-score/ [1/27/15]

2 - money.usnews.com/money/blogs/my-money/2014/07/10/how-to-dispute-credit-report-errors [7/10/14]

3 - blogs.wsj.com/moneybeat/2015/10/08/new-fico-score-may-have-wider-impact-than-first-thought/ [10/8/15]

Kim 9/26/16 Kim 9/26/16

THINK TWICE ABOUT BORROWING FROM YOUR 401(K)

You may be tempted to do it – but do you really want to? While you might be able to borrow from a 401(k), that doesn’t mean you should. Yes, we are in a recession. Yes, times are tough. But borrowing from your 401(k) could prove highly detrimental to your financial health.

Some 401(k) plans will not even allow you to take a loan. Those that do commonly permit you to borrow up to 50% of your vested account balance or $50,000, whichever is less.1 How do you pay the money back? You pay it back (with interest) from future paychecks. How long have you got to pay it back? Usually, up to 5 years. If you use what you borrow to buy a home that will be your primary residence, you may be given longer to pay back the money.2

But again, this doesn’t mean you should. Here’s why this idea belongs in the category of “last resort”.

It could pressure you to reduce your 401(k) contributions. You’ll repay the loan out of your paychecks. Can you do that and continue to contribute to your 401(k)? If you have to lessen or cease 401(k) contributions as a consequence of this move, it could further hurt your retirement savings potential, especially if your company offers you a match on contributions.

If you can’t repay the loan, it becomes a distribution. If you can’t pay the money back within the time period allowed, it is considered a distribution, subject to federal and state income taxes. If you are younger than age 59½, you will face the usual 10% penalty for making a premature withdrawal from your retirement account on top of that.1

If you lose your job, guess what: in most cases, you have to pay the loan back within 60 days, or it becomes a taxable distribution. Ow.3

The money isn’t tax-sheltered after you borrow it. Nor is the loan tax-deductible.1

It works against the time value of money. In other words, compounding. One of the key tenets of investing is that money available to you now is worth more than money available to you in the future. Any money you put in a bank account or tax-advantaged investment account now has potential earning capacity – the capacity to grow and compound over time.

This is why we would all prefer to have, say, $20,000 to invest today rather than $20,000 to invest 30 years from now. If you wait 30 years to invest it, you will lose 30 years of time value. Additionally, that idle $20,000 will be worth less 30 years from now due to inflation.

If you borrow from your 401(k), you are working against the time value of money and the power of compounding. By removing assets from that tax-advantaged account, you are hindering its potential earning capacity.

Every 401(k) plan loan carries an opportunity cost. Years from now, you may have to reckon with some sobering questions – how much could those funds have earned if they were left inside the 401(k), and how much did they earn for you when you took them out of the 401(k)? Did the money you borrowed earn you a dime? Did you take on another debt using the money you borrowed?

Are you paying yourself interest? Think again. As you pay back a 401(k) plan loan, the 401(k) program puts the principal and interest back into your 401(k) account. So it looks like you are paying yourself interest. Technically, you are. But to pay that interest, you need to earn money (a salary) and pay income tax on what you’ve earned. You pay the interest on your loan with post-tax dollars. Guess what: when you withdraw those dollars from your 401(k) at retirement, they’re taxed again (as taxable income). So in essence, those dollars are being taxed twice. (It must be noted that specific tax rules apply to Roth 401(k) contributions.)2

Why harm your retirement fund? Borrowing from your 401(k) could amount to an injurious financial mistake, one that could haunt you for years. If the thought has crossed your mind, talk to your financial or tax professional – there may be other ways to find the money you need.

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

These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Professional for further information.

Kim 9/18/16 Kim 9/18/16

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 kbolker@sigmarep.com or 616-942-8600.

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.

Citations.

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 8/23/16 Kim 8/23/16

Money Habits That May Help You Become Wealthier

Financially speaking, what do some households do right? Why do some households tread water financially while others make progress? Does it come down to habits?

Sometimes the difference starts there. A household that prioritizes paying itself first may end up in much better financial shape in the long run than other households.

Some families see themselves as savers, others as spenders. The spenders may enjoy affluence now, but they also may be setting themselves up for financial struggles down the road. The savers better position themselves for financial emergencies and the creation of wealth.

How does a family build up its savings? Well, money not spent can be money saved. That should be obvious, but some households take a long time to grasp this truth. In the psychology of spenders, money unspent is money unappreciated. Less spending means less fun.

Being a saver does not mean being a miser, however. It simply means dedicating a percentage of household income to future goals and needs rather than current wants.

You could argue that it is harder than ever for households to save consistently today; yet, it happens. As of May, U.S. households were saving 5.3% of their disposal personal income, up from 4.8% a year earlier.1

Budgeting is a great habit. What percentage of U.S. households maintain a budget? Pollsters really ought to ask that question more often. In 2013, Gallup posed that question to Americans and found that the answer was 32%. Only 39% of households earning more than $75,000 a year bothered to budget. (Another interesting factoid from that survey: just 30% of Americans had a long-run financial plan.)2

So often, budgeting begins in response to a financial crisis. Ideally, budgeting is proactive, not reactive. Instead of being about damage control, it can be about monthly progress.

Budgeting also includes planning for major purchases. A household that creates a plan to buy a big-ticket item may approach that purchase with less ambiguity – and less potential for a financial surprise.

Keeping consumer debt low is a good habit. A household that uses credit cards “like cash” may find itself living “on margin” – that is, living on the edge of financial instability. When people habitually use other people’s money to buy things, they run into three problems. One, they

start carrying a great deal of revolving consumer debt, which may take years to eliminate. Two, they set themselves up to live paycheck to paycheck. Three, they hurt their potential to build equity. No one chooses to be poor, but living this way is as close to a “choice” as a household can make.

Investing for retirement is a good habit. Speaking of equity, automatically contributing to employer-sponsored retirement accounts, IRAs, and other options that allow you a chance to grow your savings through equity investing are great habits to develop.

Smart households invest with diversification. They recognize that directing most of their invested assets into one or two investment classes heightens their exposure to risk. They invest in such a way that their portfolio includes both conservative and opportunistic investment vehicles.

Taxes and fees can eat into investment returns over time, so watchful families study what they can do to reduce those negatives and effectively improve portfolio yields.

Long-term planning is a good habit. Many people invest with the goal of making money, but they never define what the money they make will be used to accomplish. Wise households consult with financial professionals to set long-range objectives – they want to accumulate X amount of dollars for retirement, for eldercare, for college educations. The very presence of such long-term goals reinforces their long-term commitment to saving and investing.

Every household would do well to adopt these money habits. They are vital for families that want more control over their money. When money issues threaten to control a family, a change in financial behavior is due.

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

Kim 8/14/16 Kim 8/14/16

The New Gradual Retirement

Working a little (or a lot) after 60 may become the norm. Do we really want to retire at 65? Not according to the latest annual retirement survey from the Transamerica Center for Retirement Studies which gauges the outlook of American workers. It found that 51% of us plan to work part-time once retired. Moreover, 64% of workers 60 and older wanted to work at least a little after 65 and 18% had no intention of retiring.1

Are financial needs shaping these responses? Not entirely. While 61% of all those polled in the Transamerica survey cited income and employer-sponsored health benefits as major reasons to stay employed in the “third act” of life, 34% of respondents said they wanted to keep working because they enjoy their occupation or like the social and mental engagement of the workplace.1

It seems “retirement” and “work” are no longer mutually exclusive. Not all of us have sufficiently large retirement nest eggs, so we strive to stay employed – to let our savings compound a little more, and to leave us with fewer years of retirement to fund.

We want to keep working into our mid-sixties because of two other realities as well. If you are a baby boomer and you retire before age 66 (or 67, in the case of those born 1960 and later), your monthly Social Security benefits will be smaller than if you had worked until full retirement age. Additionally, we can qualify for Medicare at age 65.2,3

We are sometimes cautioned that working too much in retirement may result in our Social Security benefits being taxed – but is there really such a thing as “too much” retirement income?

Income aside, there is another question we all face as retirement approaches.

How much control will we have over our retirement transition? In the Transamerica survey, 41% of respondents saw themselves making a gradual entry into retirement, shifting from full-time employment to part-time employment or another kind of work in their sixties.1

Is that thinking realistic? It may or may not be. A recent Gallup survey of retirees found that 67% had left the workforce before age 65; just 18% had managed to work longer. Recent research from the Employee Benefit Retirement Institute fielded roughly the same results: 14% of retirees kept working after 65 and about half had been forced to stop working earlier than they planned due to layoffs, health issues or eldercare responsibilities.3

If you do want to make a gradual retirement transition, what might help you do it? First of all, work on maintaining your health. The second priority: maintain and enhance your skill set, so

that your prospects for employment in your sixties are not reduced by separation from the latest technologies. Keep networking. Think about Plan B: if you are unable to continue working in your chosen career even part-time, what prospects might you have for creating income through financial decisions, self-employment or in other lines of work? How can you reduce your monthly expenses?

Easing out of work & into retirement may be the new normal. Pessimistic analysts contend that many baby boomers will not be able to keep working past 65, no matter their aspirations. They may be wrong – just as this active, ambitious generation has changed America, it may also change the definition of retirement.

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

Citations.

1 - forbes.com/sites/laurashin/2015/05/05/why-the-new-retirement-involves-working-past-65/ [5/5/15]

2 - ssa.gov/retire2/agereduction.htm [6/11/15]

3 - money.usnews.com/money/blogs/planning-to-retire/2015/05/22/how-to-pick-the-optimal-retirement-age [5/22/15]

Kim 8/3/16 Kim 8/3/16

INHERITING AN IRA

Make sure you pay attention to the rules. What do you do when you inherit an IRA? Good question. Most people don’t know the rules and regulations pertaining to inherited IRA assets. You should. You, not the IRS, should benefit the most in this circumstance.

Will my income taxes soar this year as a result? Not necessarily. If you roll the assets into an inherited IRA, you have up to five years to either a) withdraw the money entirely or b) withdraw the money over your lifetime according to an IRS life expectancy formula.¹ Many heirs would prefer b) because the tax scenario is better – but some IRA custodians require you to go by the five-year rule.²

What if you don’t roll the money into an inherited IRA? What if you just take the balance as a lump sum and spend it? Look out. All that money will be taxed at your regular income tax rate.³ After income and estate taxes eat away at the IRA balance, you may be left with a fraction of the original assets.

Let’s look at some options for those who inherit IRA assets. Keep in mind: this brief article discusses only some basic, common scenarios. Tax laws pertaining to inherited IRA assets are complex, with constant “new wrinkles” – so be sure to talk to a financial advisor or tax advisor who is up to speed on IRS rule changes.

What if you inherit your spouse’s IRA? The IRS says a surviving spouse can elect to be treated as the owner of such IRA assets rather than the beneficiary.¹ A surviving spouse can therefore roll this money into his or her own IRA. That makes a lot of sense, especially for younger spouses: distributions can be extended over your lifetime and the lifetime of your beneficiaries.

If you roll over your late spouse’s IRA assets into your IRA, they may be able to compound for a long time, as you don’t have to take a Required Minimum Distribution from your IRA until you reach age 70½. (If you have a Roth IRA, you don’t have to take them at all.) On the other hand, you must take a distribution from an inherited IRA a year after your spouse’s death.⁴

You also have other options. If you are younger than 59½ and need the IRA assets for living expenses, you could keep all or part of the money in your late spouse’s IRA, whereby you could take penalty-free distributions. Or you could disclaim some or all of the IRA assets if you don’t need them (this has to happen within nine months of the original IRA owner’s death). Disclaiming them will allow the IRA assets to go to the contingent beneficiaries named by the original IRA owner. This might result in a better estate tax picture for your kids.⁴

You inherit an IRA from someone other than a spouse. Okay, this is complicated. Was the original IRA owner younger than age 70½ at death? Did he or she turn 70½ last year and die before April 1 this year? If the answer is yes to either question, you have two choices. 1) You can liquidate the inherited IRA by no later than December 31 of the fifth year after the year the original IRA owner dies. This is mandatory for some IRAs. 2) You can take minimum withdrawals over your life expectancy, calculated per IRS tables.²

Did the original IRA owner pass away on or after April 1 of the year after he or she turned 70½? Then forget the five-year rule. You must start taking minimum withdrawals over your life expectancy. Your first such withdrawal has to happen by Dec. 31 of the year after the year the original IRA owner dies.²

The no-RMDs-in-2009 wrinkle. No one has to take a Required Minimum Distribution from an IRA in 2009. What does that mean for inherited IRAs? If the IRA owner died in 2008, you don't have to take a distribution in 2009 and you get six years rather than five to withdraw inherited IRA assets if you would ordinarily go by the five-year rule.

But watch out: if you inherited an IRA from a non-spouse and the original IRA owner named multiple beneficiaries, you still have to split up the IRA into separate inherited IRAs by the end of 2009 to permit minimum withdrawals over heirs’ life expectancies. If you don’t, each beneficiary will have to take withdrawals based on the age of the oldest beneficiary, which could be a tremendous blow to tax deferral.⁵

You can’t contribute to inherited IRAs. This applies to traditional and Roth IRAs.^6,7 However, as mentioned above, surviving spouses can elect to treat an inherited IRA as their own – in IRS eyes, they do so by making any contribution to it.¹

A Roth IRA wrinkle. It is possible to pay taxes on an inherited Roth IRA. Roth IRA earnings can be withdrawn tax-free starting on the first day of the fifth taxable year after the year the Roth IRA was established. So if an inherited Roth IRA was established less than five years ago, an heir may have to pay tax on earnings withdrawals if the original owner's death and the withdrawal both occur within five years of the creation of the account. However, a beneficiary can circumvent this penalty by leaving the earnings in the Roth IRA for the required time period, even if he or she withdraws everything besides the earnings.⁷

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

Citations.

¹irs.gov/publications/p590/ch01.html#en_US_publink10006321 [2009]

²smartmoney.com/personal-finance/taxes/Inheriting-Uncle-Henrys-IRA-11874/ [1/21/09]

³investorsinsight.com/blogs/retirement_watch/archive/2008/09/19/avoiding-ira-inheritance-disasters.aspx/ [9/19/08]

⁴kiplinger.com/features/archives/2009/02/krr_leave_an_ira_that_is_heir_tight2.html?kipad_id=42 [3/3/09]

⁵forbes.com/forbes/2009/0302/045_heir_alert.html [3/2/09]

⁶schwab.com/public/schwab/investment_products/retirement/inherited_iras/faq?cmsid=P-2008538&lvl1=investment_products&lvl2=retirement [5/22/09]

⁷fairmark.com/rothira/inherit.htm [1/24/08]

Kim 7/21/16 Kim 7/21/16

The Rise of the Fee-Based Financial Professional

A huge shift is underway, with the client in mind. A wave of change is transforming the financial services profession. The shift has been gradual, but noticeable. Increasingly, financial professionals are choosing to be compensated, partly or wholly, through fees rather than through commissions.

This is a real change from the old status quo. In the days before the Internet and gourmet coffee on every corner, compensation usually resulted from product sales. A client opened up an investment, and the broker who “sold” that investment received a commission as an outcome.

The more informed an investor was, the more he or she tended to be cynical about this arrangement. It was all too easy for a client to regard the registered representative on the other side of the table as a salesperson, rather than a consultant or an advisor.

The presence of commissions also raised the potential for conflicts of interest. While ethical standards demanded that the representative suggest or present investments suitable for the client, certain suitable investments could mean a larger commission for the representative than others.

Before going further, it must be noted that this is not as simple as “fees good, commissions bad.” In some cases, an investor may be better served when a financial professional is compensated largely through commissions, or a mix of fees and commissions. In terms of services rendered, that kind of arrangement may be more cost-effective for the client.

On the whole, though, the profession is moving toward a fee-based business model. In this compensation structure, a representative is paid mostly in fees that equal a small percentage of client assets under management. In addition, he or she may charge hourly or per-project fees.

A new retirement account rule is encouraging the shift. The Department of Labor is implementing a fiduciary standard for financial professionals who consult IRA owners or participants in workplace retirement plans. Beginning in 2017 (2018, for IRAs), financial professionals and their firms will be asked to commit to that standard (with certain exceptions).¹

Many fee-only and fee-based financial practitioners already abide by a fiduciary standard. Registered Investment Advisors (RIAs) and others who work under this standard have an ethical and legal obligation to put the client’s interests ahead of their own.²

For decades, many registered representatives have made thoughtful and conscientious investment recommendations under the suitability standard, by which any suggested investment must be suitable for a client’s needs and objectives. It is no longer an argument of which standard is better, however; the Department of Labor will soon require fiduciary care for all retirement accounts.

Many more financial professionals could soon be fee-based. A small percentage are actually fee-only now, meaning that they earn 100% of their income in fees. The DoL rule change is helping to push the industry in this direction, as well as a priority on client relationships.

Decades ago, an inherent problem plagued the traditional, commission-driven brokerage compensation model: the broker did not profit unless the client bought something. That reality affected the client relationship. Even now, traces of this longstanding structural problem linger.

In a fee-based or fee-only relationship, the emphasis is on financial guidance and investment management rather than product sales. Investment management fees are typically based on account values, and both the client and the financial practitioner want the account to grow. Their interests are closely aligned; they can see each other as partners in the effort to build and sustain the client’s invested assets under management.

This business is relationship-oriented; it must be for mutual success. Increasingly, financial services industry professionals are operating fee-based or fee-only practices with the goal of enhancing existing client relationships and forging new ones.

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

Citations.

1 - money.usnews.com/money/blogs/planning-to-retire/articles/2016-04-08/the-new-retirement-account-fiduciary-standard [4/8/16]

2 - forbes.com/sites/peterlazaroff/2016/04/06/the-difference-between-fiduciary-and-suitability-standards/print/ [4/6/16]

Kim 7/13/16 Kim 7/13/16

Why the Brexit Should Not Rattle Investors

Wall Street has rebounded so many times, so quickly. Uncertainty is the hobgoblin of financial markets. Right now, investors are contending with it daily as the European Union contends with the United Kingdom’s apparent exit.

Globally, many institutional investors have responded to this uncertainty by selling. Should American retirement savers follow their lead?

They may just want to wait out the turbulence.

The Brexit vote was a disruption for Wall Street, not a new normal. Yes, it could mean a “new normal” for the European Union – but the European Union is not Wall Street. Stateside, investors respond to domestic economic and geopolitical indicators as much as foreign ones, perhaps more.

As Wells Fargo (WFC) Investment Institute head global market strategist Paul Christopher remarked to FOX Business on June 24, “We’re getting used to the shock of the vote and [the] surprise. But does it change anything fundamentally about the market? No.”1

Central banks may respond to make the Brexit more bearable. They are certainly interested in restoring confidence and equilibrium in financial markets.

Post-Brexit, there is no compelling reason for the Federal Reserve to raise interest rates this summer, or during the rest of 2017. You may see the European Central Bank take rates further into negative territory and further expand its asset-purchase program. The Bank of England could respond to the Brexit challenge with quantitative easing of its own, and interest rate cuts.

“There is no sense of a financial crisis developing,” U.S. Treasury Secretary Jack Lew told CNBC on June 27. Lew called the global market reaction “orderly,” albeit pronounced.2

The market may rebound more quickly than many investors assume. Ben Carlson, director of Institutional Asset Management at Ritholtz Wealth Management, reminded market participants of that fact on June 24. He put up a chart on Twitter from S&P Capital IQ showing the time it took the S&P 500 to recover from a few key market shocks. (Sam Stovall, U.S. equity strategist at S&P Global Market Intelligence, shared the same chart with MarketWatch three days later.)3,4

The statistics are encouraging. After 9/11, the market took just 19 days to recover from its correction (an 11.6% loss). The comeback from the “flash crash” of 2010 took only four days.

Even the four prolonged market recoveries noted on the chart all took less than ten months: the S&P gained back all of its losses within 257 days of the attack on Pearl Harbor, within 143 days of Richard Nixon’s resignation, within 223 days of the 1987 Black Monday crash, and within 285 days after Lehman Brothers announced its bankruptcy. The median recovery time for the 14 market shocks shown on the chart? Fourteen days.3,5

The S&P sank 3.5% on June 24 following the news of the Brexit vote – but that still left it 11% higher than it had been in February.5

The Brexit is a political event first, a financial event second. Political issues, not economic ones, largely drove the Leave campaign to its triumph. As Credit Suisse analysts Ric Deverell and Neville Hill wrote in a note to clients this week, “This is not a shock on the scale of Lehman Brothers’ bankruptcy in 2008 or, if it had happened, a disruptive Greek exit from the euro, in our view. Those types of events deliver an immediate devastating shock to the global financial architecture that, in turn, have a powerfully negative impact on economic activity.” Aside from the political drama of the U.K. exiting the E.U., in their opinion “nothing else has changed.”4

The Brexit certainly came as a shock, but equilibrium should return. Back in 1963, the admired financial analyst Benjamin Graham made a statement that still applies in 2016: “In my nearly fifty years of experience in Wall Street, I’ve found that I know less and less about what the stock market is going to do, but I know more and more about what investors ought to do.”6

Graham was making the point that investors ought to stick to their plans through periods of volatility, even episodes of extreme market turbulence. These disruptions do become history, and buying opportunities do emerge. Wall Street has seen so few corrections of late that we have almost forgotten how eventful a place it can be. The Brexit is an event, one of many such news items that may unnerve Wall Street during your lifetime. Eventually, equilibrium will be restored, and, as the historical examples above illustrate, that can often happen quickly.

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

Citations.

1 - foxbusiness.com/markets/2016/06/24/after-brexit-carnage-should-rejigger-your-investment-portfolio.html [6/24/16]

2 - time.com/4383915/brexit-treasury-secretary-jack-lew-financial-crisis/ [6/26/16]

3 - tinyurl.com/jx2brl3 [6/24/16]

4 - marketwatch.com/story/brexit-vote-more-a-political-than-a-financial-one-and-thats-important-2016-06-27 [6/27/16]

5 - equities.com/news/what-does-brexit-mean-for-individual-investors [6/27/16]

6 - blogs.wsj.com/moneybeat/2016/06/24/the-more-it-hurts-the-more-you-make-investing-after-brexit/ [6/24/16]

Kim 6/29/16 Kim 6/29/16

The Brexit Shakes Global Markets

A worldwide selloff occurs after the United Kingdom votes to leave the European Union. A wave of anxiety hit Wall Street Friday morning. Thursday night, the United Kingdom elected to become the first nation state to leave the European Union. The “Brexit” can potentially be finalized as soon as the summer of 2018.¹

Voters in England, Scotland, Wales, and Northern Ireland were posed a simple question: “Should the United Kingdom remain a member of the European Union or leave the European Union?” Seventy-two percent of the U.K. electorate went to the polls to answer the question, and in the final tally, Leave beat Remain 51.9% to 48.1%.^2,3

The vote shocked investors worldwide. The threat of a Brexit was supposed to have decreased. As late as Thursday, key opinion surveys showed the Remain camp ahead of the Leave camp – but at 10:40pm EST Thursday, the BBC called the outcome and projected Leave would win.⁴

Why did Leave triumph? The leaders of the Leave campaign hammered home that E.U. membership was a drag on the U.K. economy. They criticized E.U. regulations that impeded business growth. They felt that the U.K. should no longer contribute billions of pounds per year to the E.U. budget. They had concerns over E.U. immigration laws, which permit free movement of people among E.U. nations without visas.¹

Financial markets were immediately impacted. The pound fell almost 11% Thursday night to a 31-year low, and the benchmark U.K. equities exchange, the FTSE 100, slipped 5% after initially diving about 8%. Germany’s DAX exchange and France’s CAC-40 exchange respectively incurred losses of 7% and 9%. In Tokyo, the Nikkei 225 closed nearly 8% lower, taking its largest one-day slide since 2008.⁵

Stateside, S&P 500 and Nasdaq Composite futures declined more than 5% overnight; that triggered the Chicago Mercantile Exchange’s circuit breaker, briefly interrupting trading. The Chicago Board Options Exchange Volatility Index, or CBOE VIX, approached 24 after midnight. The price of WTI crude fell more than $2 in the pre-dawn hours.^5,6

At the opening bell Friday, the Dow Jones Industrial Average was down 408 points. The Nasdaq shed 186 points at the open; the S&P, 37 points.⁷

Fortunately, the first trading day after the Brexit referendum was a Friday, giving Wall Street a pause to absorb the news further over the weekend.

How could the Brexit impact investors & markets going forward? Consider its near-term ripple effect, which could be substantial.

The Brexit could deal a devastating blow to both the United Kingdom and the European Union. Depending on which measurements you use, the E.U. collectively represents either the first or third largest economy in the world. In terms of international trade, its import and export activity surpasses that of China (and that of the United States).²

An analysis by the U.K.'s Treasury argued that the country would be left “permanently poorer” by the Brexit, with less tax revenue and lower per-capita GDP and productivity. The Brexit certainly hurt the U.K.’s major trading partners, which include China, India, Japan, and the United States. Some Chinese and American companies have established operations in the U.K. specifically to take advantage of its E.U. membership and the free trade corridors it opens. With the U.K. exiting the E.U., the profits of those firms may be reduced – and the U.K. will have to quickly negotiate new trade deals with other nations. The most recently available European Commission data shows that in 2014, U.S. direct investment in the E.U. topped €1.8 trillion (roughly $2 trillion), with a slightly greater amount flowing back to the U.S.²

You could also see a sustained flight to the franc, the yen, and the dollar in the coming weeks. The stronger the dollar becomes, the weaker the demand for American exports.

Investors should hang on through the turbulence. The Brexit is a historic and unsettling moment, but losses on Wall Street should be less severe than those happening overseas. Retirement savers should not mistake this disruption of market equilibrium for the state of the market going forward. A year, a month, or even a week from now, Wall Street may gain back all that was lost in the Brexit vote’s aftermath. It has recovered from many events more dramatic than this.

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

Citations.

1 - bbc.com/news/uk-politics-32810887 [6/23/16]

2 - cnbc.com/2016/06/21/uk-brexit-what-you-need-to-need-to-know.html [6/24/16]

3 - bbc.com/news/politics/E.U._referendum/results [6/23/16]

4 - bbc.com/news/live/uk-politics-36570120 [6/23/16]

5 - nytimes.com/aponline/2016/06/24/world/asia/ap-financial-markets.html [6/24/16]

6 - rE.U.ters.com/article/us-usa-stocks-idUSKCN0Z918E [6/24/16]

7 - marketwatch.com/story/us-stocks-open-sharply-lower-joining-global-post-brexit-selloff-2016-06-24 [6/24/16]

Kim 6/22/16 Kim 6/22/16

Do Women Face Greater Retirement Challenges Than Men?

If so, how can they plan to meet those challenges? A new study has raised eyebrows about the retirement prospects of women. It comes from the National Institute on Retirement Security, a non-profit, non-partisan research organization based in Washington, D.C. Studying 2012 U.S. Census data, NRIS found that women aged 65 and older had 26% less income than their male peers. Looking at Vanguard’s 2014 fact set on its retirement plans, NRIS learned that the median retirement account balance for women was 34% less than that of men.1

Alarming numbers? Certainly. Two other statistics in the NRIS report are even more troubling. One, a woman 65 or older is 80% more likely to be impoverished than a man of that age. Two, the incidence of poverty is three times as great for a woman as it is for a man by age 75.1,2

Why are women so challenged to retire comfortably? You can cite a number of factors that can potentially impact a woman’s retirement prospects and retirement experience. A woman may spend less time in the workforce during her life than a man due to childrearing and caregiving needs, with a corresponding interruption in both wages and workplace retirement plan participation. A divorce can hugely alter a woman’s finances and financial outlook. As women live longer on average than men, they face slightly greater longevity risk – the risk of eventually outliving retirement savings.

There is also the gender wage gap, narrowing, but still evident. As American Association of University Women research notes, the average female worker earned 79 cents for every dollar a male worker did in 2014 (in 1974, the ratio was 59 cents to every dollar).3

What can women do to respond to these financial challenges? Several steps are worth taking.

Invest early & consistently. Women should realize that, on average, they may need more years of retirement income than men. Social Security will not provide all the money they need, and, in the future, it may not even pay out as much as it does today. Accumulated retirement savings will need to be tapped as an income stream. So saving and investing regularly through IRAs and workplace retirement accounts is vital, the earlier the better. So is getting the employer match, if one is offered. Catch-up contributions after 50 should also be a goal.

Consider Roth IRAs & HSAs. Imagine having a source of tax-free retirement income. Imagine having a healthcare fund that allows tax-free withdrawals. A Roth IRA can potentially provide the former; a Health Savings Account, the latter. An HSA is even funded with pre-tax dollars, as opposed to a Roth IRA, which is funded with after-tax dollars – so an HSA owner can potentially get tax-deductible contributions as well as tax-free growth and tax-free withdrawals.4

IRS rules must be followed to get these tax perks, but they are not hard to abide by. A Roth IRA need be owned for only five tax years before tax-free withdrawals may be taken (the owner does need to be older than age 59½ at that time). Those who make too much money to contribute to a Roth IRA can still convert a traditional IRA to a Roth. HSAs have to be used in conjunction with high-deductible health plans, and HSA savings must be withdrawn to pay for qualified health expenses in order to be tax-exempt. One intriguing HSA detail worth remembering: after attaining age 65 or Medicare eligibility, an HSA owner can withdraw HSA funds for non-medical expenses (these types of withdrawals are characterized as taxable income). That fact has prompted some journalists to label HSAs “backdoor IRAs.”4,5

Work longer in pursuit of greater monthly Social Security benefits. Staying in the workforce even one or two years longer means one or two years less of retirement to fund, and for each year a woman refrains from filing for Social Security after age 62, her monthly Social Security benefit rises by about 8%.6

Social Security also pays the same monthly benefit to men and women at the same age – unlike the typical privately funded income contract, which may pay a woman of a certain age less than her male counterpart as the payments are calculated using gender-based actuarial tables.7

Find a method to fund eldercare. Many women are going to outlive their spouses, perhaps by a decade or longer. Their deaths (and the deaths of their spouses) may not be sudden. While many women may not eventually need months of rehabilitation, in-home care, or hospice care, many other women will.

Today, financially aware women are planning to meet retirement challenges. They are conferring with financial advisors in recognition of those tests – and they are strategizing to take greater control over their financial futures.

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

Citations.

1 - bankrate.com/financing/retirement/retirement-women-should-worry/ [3/1/16]

2 - blackenterprise.com/small-business/women-age-65-are-becoming-poorest-americans/ [3/18/16]

3 - tinyurl.com/jq5mqhg [6/8/16]

4 - bankrate.com/finance/insurance/health-savings-account-rules-and-regulations.aspx [1/1/16]

5 - nerdwallet.com/blog/investing/know-rules-before-you-dip-into-roth-ira/ [1/29/16]

6 - fool.com/retirement/general/2016/05/29/when-do-most-americans-claim-social-security.aspx [5/29/16]

7 - investopedia.com/articles/retirement/05/071105.asp [6/16/16]

Kim 6/13/16 Kim 6/13/16

Sometimes the Pundits Get It Wrong

In fact, many predictions about Wall Street have misread the market’s direction. Trying to determine how Wall Street will behave next week, next month, or next year is difficult. Some feel it is impossible. To predict the near-term direction of the market, you may also need to predict upcoming earnings seasons, central bank policy moves, and the direction of both the domestic and global economy. You might as well forecast the future of the world.

That is not to say forecasting is useless. You could even argue that it is a necessity. Every month, economists are polled by various news outlets that publish their median forecasts for hiring, inflation, personal spending, and other economic indicators. Those median forecasts are often close to the mark, and sometimes exactly right.

Figuring out what lies ahead for equities, however, is often a guessing game. Looking back, some very bold predictions have been made for the market – some way off the mark.

Dow 30,000! More than a decade ago, a few analysts boldly forecast that the Dow Jones Industrial Average would climb to astonishing heights – heights the index has yet to reach today.

The first was investment manager Harry Dent, who, to his credit, had written a book called Great Boom Ahead predicting an amazing run for both the economy and the market starting in the mid-1990s. (Indeed, the S&P 500 averaged a yearly gain of almost 29% during 1995-99.) Dent’s 1999 bestseller, The Roaring 2000s, posited that the Dow would top 30,000, perhaps 35,000 in the near future as maturing baby boomers poured money into equities. He was wrong. What happened instead was the so-called “lost decade,” in which the broad market basically did not advance. As for the Dow 30, it ended the 2000s at 11,497.12.^1,2

As a money manager, Robert Zuccaro had been part of a team that had realized triple-digit annual returns in the late 1990s. He put out a book soon afterward called Dow 30,000 by 2008: Why It’s Different This Time. (As the market cratered in 2008, you might say his timing was bad.) Analysts James K. Glassman and Kevin A. Hassett authored a volume called Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market. It came out in 2000, and also proved overly optimistic.^2,3

Dow 3,300! Harry Dent changed his outlook over time. In 2011, he told the Tampa Bay Times that the blue chips would plunge to that dismal level by 2014 or earlier. The Dow finished 2014 at 17,823.07. For the record, Dent now sees a “bubble collapse” starting in 2016 or 2017, soon breeding “widespread civil unrest” in America.^2,4

Sell your shares now! In “Bearish on America,” a 1993 Forbes cover story, Morgan Stanley analyst Barton Biggs urged investors to dump their domestic shares en masse in light of the economic policies favored by a new presidential administration. The compound return of the S&P 500 over the next seven years: 18.5%.⁵

The market is done, no one believes in it! Perhaps the most famous doomsday call of all time occurred in 1979 when Business Week published a cover story entitled “The Death of Equities.” Wall Street was emerging from its second awful bear market in less than seven years. The article cited a widespread loss of faith among investors, asserting that “the death of equities is a near permanent condition.” Equities, so to speak, soon proved very much alive: the S&P 500 returned 21.55% in 1982, 22.56% in 1983, 6.27% in 1984, 31.73% in 1985, and 18.67% in 1986.^5,6

Recession ahead, the market points the way! Can the behavior of the market foretell a recession? Is there a causal relationship between a down or sideways market and an oncoming economic slump? Some analysts see little or no link. Fifty years ago in Newsweek, the noted economist Paul Samuelson wrote that the equity markets had “forecast nine of the past five recessions.” He was being sardonic, but he had a point. Looking back from 2016 to 1945, Wall Street has seen 13 bear markets, only seven of which (53%) have seen a recession begin within about a year of their onset.^7,8

Take the words of the pundits with a grain of salt. Some have been right, but many have been wrong. While the most radical market predictions may make good copy, they may also lead investors to take bad advice.⁵

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

Citations.

1 - cbsnews.com/news/harry-dent-and-the-chamber-of-poor-returns/ [8/19/13]

2 - finance.yahoo.com/q/hp?s=^DJI&a=11&b=29&c=1999&d=11&e=31&f=2014&g=d [6/2/16]

3 - dividend.com/how-to-invest/10-hilariously-wrong-bullbear-calls/ [1/19/15]

4 - tampabay.com/news/business/markets/economic-naysayers-including-tampas-harry-dent-are-back-with-fresh-reports/2270981 [3/28/16]

5 - forbes.com/sites/katestalter/2015/09/14/6-doomsday-predictions-that-were-dead-wrong-about-the-market/ [9/14/15]

6 - forbes.com/sites/oppenheimerfunds/2014/01/23/clues-from-the-80s-bull-run/ [1/23/14]

7 - cnbc.com/2016/02/04/can-the-markets-predict-recessions-what-we-found-out.html [2/4/16]

8 - blogs.wsj.com/economics/2013/10/03/plunging-stock-prices-are-good-recession-predictor/ [10/3/13]

Kim 6/13/16 Kim 6/13/16

The Things Most Likely to Kill Us

What are the biggest risks to our lives? Some are overblown. What are the major risks to our lives? If we look at the statistics of what claims lives, some of our collective fears look unfounded.

According to the Centers for Disease Control’s most recent tally, 614,438 Americans died of heart disease in 2014, and another 591,699 from cancer. Chronic lower respiratory diseases (not including the flu and pneumonia) took 147,101 lives in that year, while 136,053 people died accidental deaths. Strokes claimed 133,103 lives, Alzheimer’s disease 93,541 more and diabetes another 76,488. Those were America’s leading causes of death.¹

Notice what that list did not include. It did not include war, terrorism, murder, plane crashes, natural disasters, or the Zika or Ebola viruses. Many of us fear these things, but they are hardly prominent causes of American mortality. Our perception of risk may be skewed. You may know someone who is afraid to fly, but who consistently smokes. You may know someone who fears dying in a terrorist attack, yet drives aggressively and recklessly on the freeway.

Note also that many of the mortality causes on the CDC list may be preventable. Lifestyle choices may help us avoid certain forms of cancer, diabetes, stroke, or lung and heart disease.

Depression is a comparatively underpublicized risk to our lives. In 2014, CDC statistics show that 42,773 Americans died from suicide or forms of “intentional self-harm.” Suicide was the tenth biggest killer in America that year.¹

Medical errors may pose a major risk. The medical professionals who treat us are only human, and they can make mistakes. How often do serious mistakes occur? Far too often, according to a team of researchers at Johns Hopkins University’s School of Medicine. This year, that research team published a study in The BMJ (formerly, The British Medical Journal) critiquing the CDC’s figures, asserting that medical mistakes actually represent America’s third-leading cause of death. The CDC’s National Center for Health Statistics does not list doctor and hospital errors as a cause of death, but the researchers estimate that these lapses result in more than 250,000 deaths a year.²

We don’t know exactly when or how we will die, so we can only strive to live well. Avoiding addiction, eating enough fruits and vegetables, controlling our sugar and fat intake; these are all things we are capable of doing. Rather than worry about what might take our lives, we can take better care of ourselves to sustain our health and quality of life.

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

Citations.

1 - cdc.gov/nchs/fastats/leading-causes-of-death.htm [4/27/16]

2 - newsok.com/article/5496838 [5/7/16]

Kim 5/8/16 Kim 5/8/16

Tell Your Beneficiaries About Your Accounts and Policies

Let them know how they will receive retirement assets and insurance benefits.

Will your heirs receive a fair share of your wealth? Will your invested assets go where you want them to when you die?

If you have a proper will or estate plan in place, you will likely answer “yes” to both of those questions. The beneficiary forms you filled out years ago for your IRA, your workplace retirement plan, and your life insurance policy may give you even more confidence about the eventual transfer of your wealth.

One concern still remains, though. You have to tell your heirs that these documents exist.

That does not mean sharing all the details. If you have decided that some of your heirs will one day get more of your wealth than others, you can keep quiet about that decision as long as you live. You do want to tell your heirs the essential details; they should know that you have a will and/or an estate plan, and they should understand that you have named beneficiaries for your retirement accounts, your investment accounts, and your insurance policies.

Over time, you must review your beneficiary decisions. In fact, you may want to revisit them. As an example, say you opened an IRA in 1997. Your life has probably changed quite a bit since 1997. Were you single then, and are you married now? Were you married then, and are you single now? Have you become a parent since then? If you can answer “yes” to any of those three questions, then you need to look at that IRA beneficiary form now. Your choices may need to change.

Here is a quick look at how beneficiary decisions play out for a few of the most popular retirement accounts.

Employer-sponsored retirement plans. These are governed by the Employee Retirement Income Security Act (ERISA), which rules that if the late accountholder was married, the surviving spouse is entitled to at least 50% of the account assets. That applies even if another person has been designated as the primary beneficiary. In such a case, the spouse and the primary beneficiary may split the assets 50/50. (The spouse can actually waive his or her right to that 50% of the invested assets through a Spousal Waiver form. A spouse usually has to be older than 35 for this to be allowed.) These rules also apply for other types of ERISA-governed retirement assets, such as pension plan accounts and corporate-owned life insurance.^1,2

The Supreme Court has decided that these rules take priority over state laws (Egelhoff v. Egelhoff, 2001; Hillman v. Maretta, 2013) and divorce agreements (Kennedy Estate v. Plan Administrator for the DuPont Saving and Investment Plan, 2008).^3,4

If a participant in one of these retirement accounts remarries, the new husband or wife is entitled to 50% of those assets at death. While a plan participant may name a child as the beneficiary of a retirement account after a divorce, remarriage will leave only 50% of those assets with that child when the accountholder dies, rather than 100%, unless the new spouse waives his or her right to receiving 50% of the assets. The new spouse will be in line to receive that 50% of the account even if unnamed on the beneficiary form.¹

IRAs. Unlike an employer-sponsored retirement plan, a spouse does not have automatic beneficiary rights with an IRA. That is because IRAs are governed under state laws rather than ERISA. One interesting estate planning aspect of an IRA rollover is that the owner of the new IRA has the freedom to name anyone as the primary beneficiary.¹

Life insurance policies. The death proceeds go to the named beneficiary; occasionally, a beneficiary may not know a policy exists.

Recently, 60 Minutes did an expose on the insurance industry. Major insurers had withheld more than $7.5 billion in life insurance death proceeds from beneficiaries. They had a contractual reason for doing so: the beneficiaries had never stepped forward to file claims.⁵

While many of the policies involved were valued at $10,000 or less, others were worth over $1 million. The deceased policyholders had either failed to tell their heirs about the policies or misplaced the copies and the paperwork. Their heirs did not know (or know how) to claim the money. As a result, the insurance proceeds lay unclaimed for years, and the insurers only now feel pressure to pay out the benefits.⁵

Update your beneficiaries; let your heirs know how vital these forms are. Make sure that your beneficiary decisions on retirement, brokerage and bank accounts, college savings plans, and life insurance policies suit your wealth transfer objectives.

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

Disclosure

Citations.

1 - 401khelpcenter.com/401k_education/connor_beneficiary_designations.html [4/21/16]

2 - nolo.com/legal-encyclopedia/claim-payable-on-death-assets-32436.html [4/21/16]

3 - marketwatch.com/story/check-your-beneficiary-designations-now-2013-09-17/ [9/17/13]

4 - forbes.com/sites/deborahljacobs/2013/06/03/supreme-court-favors-ex-wife-over-widow-in-battle-for-life-insurance-proceeds/ [6/3/13]

5 - cbsnews.com/news/60-minutes-life-insurance-investigation-lesley-stahl/ [4/17/16]

Kim 4/5/16 Kim 4/5/16

Money Concerns for Those Remarrying

What financial factors deserve attention?

Some of us will marry again in retirement. How many of us will thoroughly understand the financial implications that may come with tying the knot later in life?

Many baby boomers and seniors will consider financial factors as they enter into marriage, but that consideration may be all too brief. There are significant money issues to keep in mind when marrying after 50, and they may be important enough to warrant a chat with a financial professional.

You might consider a prenuptial agreement. A prenup may not be the most romantic gesture, but it could be a very wise move from both a financial and estate planning standpoint. The greater your net worth is, the more financial sense it may make.

If you remarry in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin), all the money that you and your spouse will earn during your marriage will be considered community property. The same goes for any real property that you happen to purchase with those earnings. Additionally, these states often regard extensively comingled separate property as community property, unless property documentation or evidence exists to clarify separate origin or status.¹

A prenuptial agreement makes part or all of this community property the separate property of one spouse or the other. In case of a divorce, a prenup could help you protect your income, your IRA or workplace retirement plan savings, even the appreciation of your business during the length of your marriage (provided you started your business before the marriage began).^1,2

A prenup and its attached documents lay everything bare. Besides a core financial statement, the support documentation includes bank statements, deeds, tax returns, and (optionally) much more. The goal is to make financial matters transparent and easy to handle should the marriage sour.^1,2

If one spouse discovers that the other failed to provide full financial disclosure when a prenup was signed, it can be found invalid. (A prenup signed under duress can also be ruled invalid.) If a divorce occurs and the prenup is judged worthless, then the divorce will proceed as if the prenup never existed.²

You should know about each other’s debts. How much debt does your future spouse carry? How much do you owe? Learning about this may seem like prying, but in some states, married couples may be held jointly liable for debts. If you have a poor credit history (or have overcome one), your future spouse should know. Better to speak up now than to find out when you apply for a home loan or business loan later. In most instances, laws in the nine community property states define debts incurred during a marriage as debts shared by the married couple.¹

You should review your estate planning. Affluent individuals who remarry have often done some degree of estate planning, or at least have made some beneficiary decisions. Remarriage is as much of a life event as a first marriage, and it calls for a review of those decisions and choices.

In 2009, the Supreme Court ruled that the beneficiary designation on an employer-sponsored retirement plan account overrides any wishes stated in a will. Many people do not know this. Think about what this might mean for an individual remarrying. A woman might want to leave her workplace retirement plan assets to her daughter, her will even states her wish, but the beneficiary form she signed 25 years ago names her ex-husband as the primary beneficiary. At her death, those assets will be inherited by the man she divorced. (That will hold true even if her ex-husband waived his rights to those assets in the divorce settlement.)³

In the event of one spouse’s passing, what assets should the other spouse receive? What assets should be left to children from a previous marriage? Grandchildren? Siblings? Former spouses? Charities and causes? Some or all of these questions may need new answers. Also, your adult children may assume that your new marriage will hurt their inheritance.

Are you a homeowner planning to remarry? Your home is probably titled in the name of your family. If you add your new spouse to the title, you may be opening the door to a major estate planning issue. Joint ownership could mean that the surviving spouse will inherit the property, with the ability to pass it on to his or her children, not yours.⁴

One legal option is to keep the title to your home in your name while giving your new spouse occupancy rights that terminate if he or she dies, moves into an eldercare facility or divorces you. Should any of those three circumstances occur, your children remain in line to inherit the property at your death.⁴

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

Citations.

1 - nolo.com/legal-encyclopedia/marriage-property-ownership-who-owns-what-29841.html [3/17/16]

2 - blog.credit.com/2015/06/prenup-vs-postnup-which-is-better-117548/ [6/1/15]

3 - tinyurl.com/j8ncltt [9/7/11]

4 - usatoday.com/story/money/columnist/brooks/2014/05/20/retire-baby-boomer-divorce-remarry-pension/9171469/ [5/20/14]

Kim 2/11/16 Kim 2/11/16

White House Proposes Changes to Retirement Plans

A look at some of the ideas contained in the 2017 federal budget.

Will workplace retirement plans be altered in the near future? The White House will propose some changes to these plans in the 2017 federal budget, with the goal of making such programs more accessible. Here are some of the envisioned changes.

Pooled employer-sponsored retirement programs. This concept could save small businesses money. Current laws permit multi-employer retirement plans, but the companies involved must be similar in nature. The White House wants to lift that restriction.^1,2

In theory, allowing businesses across disparate industries to join pooled retirement plans could result in significant savings. Administrative expenses could be reduced, as well as the costs of compliance.

Would governmental and non-profit workplaces also be allowed to pool their retirement plans under the proposal? There is no word about that at this point.

This pooled retirement plan concept would offer employees new degrees of portability for their savings. A worker leaving a job at a participating firm in the pool would be able to retain his or her retirement account after taking a job with another of the participating firms. Along these lines, the White House will also propose new ways to make it easier for workers to monitor and reconcile multiple workplace retirement accounts.^2,3

Scant details have emerged about how these pooled plans would be created or governed, or how much implementing them would cost taxpayers. Congress will be asked for $100 million in the new budget draft to test new and more portable forms of retirement savings accounts. Presumably, many more details will surface when the proposed federal budget becomes public in February.^2,3

Automatic enrollment in IRAs. In the new federal budget draft, the Obama administration will require businesses with more than 10 employees and no retirement savings program to enroll their workers in IRAs. This idea has been included in past federal budget drafts, but it has yet to survive bipartisan negotiations – and it may not this time. Recently, the myRA retirement account was created through executive action to try and promote this objective.^1,3

A lower bar to retirement plan participation for part-time employees. Another proposal within the new budget would allow anyone who has worked for an employer for more than 500 hours a year for the past three years to participate in an employer-sponsored retirement plan.²

A bigger tax break for businesses starting retirement plans. Eligible employers can receive a federal tax credit for inaugurating a retirement plan – a credit for 50% of what the IRS deems the employer’s “ordinary and necessary eligible startup costs,” up to a maximum of $500. That credit (which is part of the general business credit) may be claimed for each of the first three years that the plan is in place, and a business may even elect to begin claiming it in the tax year preceding the tax year that the plan goes into effect. The White House wants the IRS to boost this annual credit from $500 to $1,500.^2,4

Also, businesses could receive an annual federal tax credit of up to $500 merely for automatically enrolling workers in their retirement plans. As per the above credit, they could claim this for three straight years.²

What are the odds of these proposals making it into the final 2017 federal budget? The odds may be long. Through the decades, federal budget drafts have often contained “blue sky” visions characteristic of this or that presidency, ideas that are eventually compromised or jettisoned. That may be the case here. If the above concepts do become law, they may change the face of retirement plan participation and administration.

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

Citations.

1 - nytimes.com/2016/01/26/us/obama-to-urge-easing-401-k-rules-for-small-businesses.html [1/26/16]

2 - tinyurl.com/je5uj3r [1/26/16]

3 - bloomberg.com/politics/articles/2016-01-26/obama-seeks-to-expand-401-k-use-by-letting-employers-pool-plans [1/26/16]

4 - irs.gov/Retirement-Plans/Retirement-Plans-Startup-Costs-Tax-Credit [8/18/15]

Kim 1/25/16 Kim 1/25/16

When Will Stocks Stabilize?

How deep will this correction ultimately be?

January may prove to be the worst month for stocks in eight years. The S&P 500 just corrected for the second time in five months, and some investors think the bull market may be ending.^1,2

Bull markets do end, and the current one is nearly seven years old, the third longest in history. If a bear market is truly on the horizon, it may not last very long – the 12 bear markets recorded since the end of World War II have averaged 367 days in duration.²

How far would stocks have to fall for a bear market to begin? Should the S&P close at 1,708 or below, you would have an “official” bear market on Wall Street – a 20% fall of that index from its most recent peak. Right now, the S&P is above 1,800.^2,3

While the S&P, Dow Jones Industrial Average, and Nasdaq Composite have all corrected this month, the damage to the small caps has been worse. The Russell 2000 is now in a bear market, off more than 20% from its June 2015 high. On January 20, the MSCI All-Country World index went bear, joining the Nikkei 225, TSX Composite, Hang Seng, and Shanghai Composite.^2,4

Where is the bottom? We may not be there just yet. For the market to stabilize or rebound, institutional investors must accept (or at least distract themselves from) three realities that have been hard for them to stomach...

Oil prices may remain under $50 all year. Earlier this month, the Wall Street Journal asked 12 investment banks to project the average crude oil price across 2016. Their consensus? West Texas Intermediate crude will average $48 in 2016; Brent crude will average $50. Oil price forecasts are frequently off the mark, however – and if the oil glut persists, prices may take months to regain those levels. Saudi Arabia and Russia are not cutting back output, as they want to retain market share. With embargoes being lifted, Iran is set to export more oil. U.S. daily oil output has fallen by only 500,000 barrels since April.⁵

China’s manufacturing sector may never again grow as it once did. Its leaders are overseeing a gradual shift from a robust, manufacturing-centered economy to a still-booming economy built on services and personal consumption expenditures. The nation’s growth rate has vacillated between 4%-15% since 1980, but for most of that time it has topped 8%. In 2015, the Chinese economy grew only 6.9% by official estimates (which some observers question). The International Monetary Fund forecasts growth of just 6.3% for China in 2016 and 6.0% in 2017. Stock and commodity markets react quickly to any sputtering of China’s economic engine.⁶

The Q4 earnings season looks to be soft. A strong dollar, the slumping commodities sector, and the pullback in U.S. stocks have all hurt expectations. A note from Morgan Stanley struck a reasonably positive chord at mid-month, however, stating that “a lowered bar for earnings should be cleared” and that decent Q4 results could act as “a catalyst to calm fears.”⁷

What developments could help turn things around this quarter? OPEC could cut oil output, Chinese indicators could beat forecasts, and corporate earnings could surprise to the upside. If these seem like longshots to you, they also do to economists. Still, other factors could emerge.

Central banks could take further action. Since China’s 6.9% 2015 GDP came in below projections, its leaders could authorize a stimulus. The European Central Bank could increase the scope of its bond buying, and the Federal Reserve could hold off on tightening further in the first half of the year. If this month’s Fed policy statement notes that Fed officials are taking extra scrutiny in light of recent events, it could be reassuring. Any statement that could be taken as “second thoughts” about raising interest rates would not be reassuring.⁶

U.S. GDP could prove better than expected. The Atlanta Fed thinks the economy grew 0.6% in Q4 and Barclays believes Q4 GDP will come in at 0.3%; if the number approaches 1%, it could mean something for investors. Moving forward, if the economy expands at least 2.5% in Q1 and Q2 (which it very well might), it would say something about our resilience and markets could take the cue. Other domestic indicators could also affirm our comparative economic health.⁸

While the drama on Wall Street is high right now, investors would do well not to fall prey to emotion. As Jack Bogle told CNBC on January 20, “In the short run, listen to the economy; don’t listen to the stock market. These moves in the market are like a tale told by an idiot: full of sound and fury, signaling nothing.”⁹

Kim Bolker may be reached at kbolker@sigmarep.com or 61-942-8600. 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.

Citations.

1 - bostonherald.com/business/business_markets/2016/01/market_analyst_believes_stocks_will_rebound_after_correction [1/14/16]

2 - jillonmoney.com/will-stock-correction-lead-to-bear-market/ [1/16/16]

3 - foxbusiness.com/markets.html [1/20/16]

4 - cnbc.com/2016/01/20/msci-global-stock-market-index-hits-bear-market.html [1/20/16]

5 - tinyurl.com/h6ry47n [1/12/16]

6 - bbc.com/news/business-35349576 [1/19/16]

7 - usnews.com/news/articles/2016-01-14/will-corporate-earnings-be-the-stock-markets-savior [1/14/16]

8 - money.cnn.com/2016/01/19/news/economy/global-fears-federal-reserve-rate-hike/ [1/19/16]

9 - cnbc.com/2016/01/20/investing-legend-jack-bogle-stay-the-course.html [1/20/16]

Kim 10/21/15 Kim 10/21/15

National Save for Retirement Week

Are you on target to reach your retirement goals?

October 18-24 is National Save for Retirement Week – a reminder of the importance of saving and investing with the goal of a comfortable future.

Are Americans saving enough for tomorrow? All kinds of articles will tell you that Americans are not. Those articles may not be telling the entire story, however.

Undeniably, the average IRA balance in this country is smaller than it should be. According to the most recent quarterly survey data from Fidelity Investments, it was $96,300 at the end of June. The average balance in the common employer-sponsored retirement plan was about the same at that time, Fidelity found – $91,100.¹

The picture looks better when viewed by age group. After studying 25.8 million IRAs, the Employee Benefit Research Institute recently announced an average IRA balance of $122,957 among IRA owners aged 55-59. It was $165,139 for IRA owners aged 60-64. In its last yearly study (end of 2014), Vanguard determined that the typical employer-sponsored retirement plan account held by an employee aged 55-64 had a balance of $180,771.^2,3

Consider the above statistics. Can you retire on $181,000? That would be a challenge. How about $181,000 plus another $165,000? Not exactly an ideal retirement savings amount, but more than many others have. Now factor in business wealth. Add housing wealth. Add inheritances. Things start to look brighter – but not for everyone. The sad fact is that many Americans lack access to retirement savings accounts and/or the ability to contribute to them.

The good news? Retirees may have more money than some analysts think. As a July Forbes article noted, the Social Security Administration reports total U.S. retiree income in its Income of the Aged publication, based on data from the Census Bureau’s Current Population Survey. Economists and journalists cite this publication as proof that retirees rely too much on Social Security, and that IRAs and workplace retirement plans are poor retirement saving vehicles.⁴

Few of these economists and journalists seem to realize that the CPS has been underreporting retiree income for decades. It does not count annual distributions from IRAs and workplace retirement plans as retiree income, only pension-style payments from Social Security and other sources. For example, the CPS calculated $5.6 billion in individual IRA income during 2008, while retirees reported $111 billion in IRA income that year to the IRS. Just recently, the CPS altered its questions to try and improve its retirement income reporting.⁴

Saving for retirement early cannot be emphasized enough. In fact, when you start saving may have more of an impact than how you save and invest. This has to do with compounding.

Thanks to compounding, a young adult who regularly invests $500 a month starting at age 25 would become a millionaire at age 65 if his or her investments yielded but 6% annually. Impressive? Yes, but here is an even more eye-opening statistic (from J.P. Morgan Asset Management research). A young adult who defers $5,000 a year into a retirement account annually from age 25-35 ends up with $602,070 at age 65 (assuming a 7% sustained annual return) even if he or she contributes nothing to the account after age 35. Moreover, even though that investor quits saving at 35, the $602,070 he or she accumulates by age 65 exceeds the $540,741 in savings that would be amassed by someone investing from age 35-65 under the same set of conditions.⁵

If you are behind, you must strive to catch up. Some people start saving for retirement after 40, or after 50. Others have to resume or rethink their effort at midlife due to divorce, business failures or other predicaments. If this applies to you, what positive steps can you take?

First of all, see if you can max out the retirement accounts you have (or those you will start). Remember that larger “catch-up” contributions are often allowed after age 50. (Can you take advantage of employer matches?) With new money regularly flowing into your account, decent yields and a little compounding, your current, minor savings may become much greater by the time you retire. Along the way, see if you can reduce or eliminate debt – home loans, car loans, credit card balances – and resolve to let your kids pay their way through college. After all, there is no retiree financial aid.

Now is a good time to review your retirement savings effort. Turn to a financial professional for insight. Talk about your vision of retirement. What does it look like? What would you like to do? What would you like to accomplish financially before you retire, so you no longer have this or that money concern when you start your “next act”?

That kind of conversation can help you gauge the “distance” remaining toward your retirement money goals. You may need to save more. You may be in better shape than you think. You should definitely find out where you stand now, rather than later.

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

Citations.

1 - tinyurl.com/olyhdch [7/31/15]

2 - money.usnews.com/money/retirement/articles/2015/07/06/how-your-retirement-account-balance-compares-to-your-peers [7/6/15]

3 - fool.com/investing/general/2015/01/05/the-average-american-has-this-much-saved-in-a-401k.aspx [1/5/15]

4 - forbes.com/sites/andrewbiggs/2015/07/09/good-news-retirement-income-still-being-undercounted/ [7/9/15]

5 - businessinsider.com/amazing-power-of-compound-interest-2014-7 [7/8/14]

Citations.

1 - tinyurl.com/olyhdch [7/31/15]

2 - money.usnews.com/money/retirement/articles/2015/07/06/how-your-retirement-account-balance-compares-to-your-peers [7/6/15]

3 - fool.com/investing/general/2015/01/05/the-average-american-has-this-much-saved-in-a-401k.aspx [1/5/15]

4 - forbes.com/sites/andrewbiggs/2015/07/09/good-news-retirement-income-still-being-undercounted/ [7/9/15]

5 - businessinsider.com/amazing-power-of-compound-interest-2014-7 [7/8/14]

Kim 10/15/15 Kim 10/15/15

Do Our Biases Affect Our Financial Choices?

Even the most seasoned investors are prone to their influence.

Investors are routinely warned about allowing their emotions to influence their decisions. They are less routinely cautioned about letting their preconceptions and biases color their financial choices.

In a battle between the facts & our preconceptions, our preconceptions may win. If we acknowledge this tendency, we may be able to avoid some unexamined choices when it comes to personal finance. So it may actually “pay” us to recognize our biases as we invest. Here are some common examples of bias creeping into our financial lives.

Valuing outcomes of investment decisions more than the quality of those decisions. An investor thinks, “I got a great return off of that decision” instead of thinking, “that was a good decision because ______.”

How many investment decisions do we make that have a predictable outcome? Hardly any. In retrospect, it is all too easy to prize the gain from a decision over the wisdom of the decision, and to therefore believe that the decisions with the best outcomes were in fact the best decisions (not necessarily true).

Valuing facts we “know” & “see” more than “abstract” facts. Information that seems abstract may seem less valid or valuable than information that relates to personal experience. This is true when we consider different types of investments, the state of the markets, and the health of the economy.

On Main Street, we find a classic example in Gallup’s U.S. Economic Confidence Index. In the August edition of this monthly poll of more than 3,500 U.S. adults, 55% of respondents said the American economy is “getting worse” instead of better. In fact, more Americans have told Gallup that the economy is getting worse rather than better since March.¹

This flies in the face of the declining jobless rate, the strong hiring of 2015, the comeback of the housing market, and key surveys showing years of consistent monthly growth in the manufacturing and service sectors – but in all probability, these poll respondents are not looking at economic indicators when they make such a judgment. Their neighbor was laid off, or there was a story on the nightly news about a new homeless camp growing in size. These are facts they can “see” – and therefore, in their minds the economy is getting worse.¹

Valuing the latest information most. In the investment world, the latest news is almost always more valuable than old news... but when the latest news is consistently good (or consistently bad), memories of previous market climate(s) may become too distant. If we are not careful, our minds may subconsciously dismiss the eventual emergence of the next bear (or bull) market.

Being overconfident. The more experienced we are at investing, the more confidence we have about our investment choices. When the market is going up and a clear majority of our investment choices work out well, this reinforces our confidence, sometimes to a point where we may start to feel we can do little wrong thanks to the state of the market, our investing acumen or both. This can be dangerous.

The herd mentality. You know how this goes: if everyone is doing something, they must be doing it for sound and logical reasons. If most investors are getting out of equities, or getting back into equities, it follows that you should follow them. The herd mentality is what leads many investors to buy high (and sell low). It can also promote panic selling. Above all, it encourages market timing – and when investors try to time the market, they frequently realize subpar returns.

Did you know that American retail investors held equity shares for an average of 6.3 years during the 1950s? That duration kept shortening until the 2000s, when it was reduced to roughly six months – which is still the average today. We have exponentially greater media coverage of Wall Street today than we had in the 1950s, and that may be the big factor in that difference – but still, you have to wonder how much better the typical investor’s return would be if he or she had the patience of the investors of the past.²

Extreme aversion to risk. Some investors want zero risk, or close. What price do they pay in pursuit of that goal? The opportunity cost may be sizable. In building an extremely risk-averse portfolio, they thwart their potential for significant gains when the equity markets advance.

Everyone loves to be certain about things. Sometimes, however, we need to ask ourselves what that certainty is based on, and what it reflects about ourselves. Examining our preconceptions may help us as we invest.

Citations.

1 - gallup.com/poll/184640/economic-confidence-index-stable.aspx [8/18/15]

2 - nytimes.com/2014/01/13/your-money/stocks-and-bonds/why-we-buy-in-a-marked-up-market.html [1/13/14]

Kim 9/20/15 Kim 9/20/15

The Fed Decides to Wait

In a tough time for equities, it elects not to roil the markets. On Thursday, the Federal Reserve postponed raising short-term interest rates. Citing “global economic and financial developments” that could “somewhat” impair economic progress and lessen inflation pressure, the Federal Open Market Committee voted 9-1 against a rate hike, with Richmond Fed President Jeffrey Lacker being the lone dissenter.¹

This spring, a September rate hike seemed probable – but during this past week, assumptions grew that the central bank would put off tightening. On Wednesday, the futures market put the likelihood of a rate hike at less than 30%.²

The latest economic indicators did not suggest the time was right. The August Consumer Price Index retreated 0.1%, and the core CPI ticked up only 0.1%. In annualized terms, core CPI was up 1.8% through August while the Federal Reserve’s own core Personal Consumption Expenditures (PCE) price index was only up 1.2%. Retail sales advanced a mere 0.2% in August, 0.1% minus auto sales. Industrial production slipped 0.4% last month. The healthy labor market aside, none of this data was particularly compelling.^3,4

Additionally, central banks have eased across the board the last few years. The Bank of Japan, the Reserve Bank of India, the People’s Bank of China, the Bank of Canada, the European Central Bank – none of them have begun tightening. Fed officials may have worried about the global impact had the FOMC elected to start a rate hike cycle.⁴

Some institutional investors hoped the Fed would tighten. Royal Bank of Scotland researcher Alberto Gallo recently surveyed 135 influential market participants and found that a majority wanted a September rate hike; 80% called for the Fed to make an upward move by the end of 2015. (Just 42% thought a September rate hike would occur, however.)²

That may seem like an odd viewpoint, but another response to the RBS survey helps to explain it: 63% of these institutional investors felt central banks had been too accommodative to equities markets, to the point where their credibility was slipping and exits from easy money policies appeared difficult.²

We may be witnessing a hawkish pause. The Fed uses a dot-plot chart to publish its forecast for the key interest rate, and the latest dot-plot projects the federal funds rate at 0.40% by the end of 2015. In other words, the Fed more or less told investors to get ready for a rate hike on either October 28 or December 16, the dates of its next two policy meetings.^1,5

At the press conference following Thursday’s FOMC policy statement, Fed chair Janet Yellen acknowledged that a rate hike could happen in October. (She noted that if it did, the Fed would arrange a press conference following that FOMC meeting.) Yellen said that the central bank wanted “a little more confidence” that annualized core inflation would approach its 2% target before adjusting rates. She also commented that the recent global equities selloff and the strengthening dollar do “represent some tightening of financial conditions.”⁶

On the whole, investors reacted positively to the news. In the wake of the announcement, the Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 were all up more than 1%, with the S&P cresting the 2,000 mark and the Nasdaq approaching the 5,000 level. The CBOE VIX quickly dipped under 20.⁶

In one respect, it was a day of reassurance for investors – but it was also a day that brought signals that the Fed would soon start the process of normalizing monetary policy.

Citations.

1 - marketwatch.com/story/federal-reserve-keeps-interest-rates-unchanged-but-forecasts-hike-this-year-2015-09-17 [9/17/15]

2 - msn.com/en-us/money/markets/stocks-rise-as-fed-hike-odds-fade/ar-AAenA97?li=AA9ZWtY [9/16/15]

3 - briefing.com/investor/calendars/economic/2015/09/14-18 [9/17/15]

4 - forbes.com/sites/greatspeculations/2015/09/16/why-the-fed-will-not-hike-rates-this-year/ [9/16/15]

5 - dailyfx.com/calendar/bank-calendar.html [9/17/15]

6 - blogs.marketwatch.com/capitolreport/2015/09/17/live-blog-and-video-of-fed-decision-and-janet-yellen-press-conference-2/ [9/17/15]

Kim 9/1/15 Kim 9/1/15

The Long Ascent of the S&P 500

The index has overcome obstacle after obstacle through the years.

No one knows what will happen tomorrow on Wall Street. Even the most esteemed analysts can only make educated guesses. As the old saying goes: past performance is not indicative of future results.

All that said, the market has had many more positive years than negative years. The history of the S&P 500 is worth considering in light of recent market volatility. The S&P is the broad benchmark that economists, journalists, and investors regard as shorthand for the “market.” As the S&P 500 includes about 500 companies, it represents overall market performance better than the 30-component Dow Jones Industrial Average.

If you look at the annual returns of the S&P since 1928, you will see a long ascent with periodic interruptions, and a historical affirmation of equity investment. Looking at the total returns of the S&P (with dividends reinvested), the numbers are even more impressive.

The S&P advanced in 63 of the 87 years from 1928-2014. The average total return during those 63 profitable years was 21.5%. The average total return during the 24 down years was not as bad: -13.6%.¹

The index has endured only four multi-year slumps in this 87-year period: 1930-31, 1940-41, 1973-74 and 2000-02. As for extremes, the total return for 1954 was 52.56%; the total return for 1931 was -43.84%.²

Narrowing the time frame a bit to reflect the investing experience of baby boomers, the S&P advanced in 31 of the 40 years from 1975-2014.³

Have market gains typically outpaced inflation? Looking at data since 1950, the answer is yes. Only in the 1970s and 2000s did U.S. equities climb less than consumer prices. The nadir came in the 1970s, when yearly inflation averaged 7.4% while the S&P’s average price return was 1.6% and its average total return was 5.8%. Contrast that with the 1990s. In that decade, the annual price return for the index averaged 15.3%, the average total return 18.1%; mean yearly inflation was just 2.9%.⁴

When it seemed like the market was coming apart, the S&P recovered. As the oil crisis and inflation threatened to unglue venerable economies in the 1970s, the S&P posted total returns of -14.31% in 1973 and -25.90% in 1974. Then it roared back, gaining 37.00% in 1975 and 23.83% in 1976. When the dot-com bubble burst, the total return was -11.85% in 2001, -21.97% in 2002; after that, the S&P’s next two annual total returns were +28.36% and +10.74%. When the credit crunch and the Great Recession occurred, the index delivered an abysmal -36.55% total return in 2008; the next year, the total return improved to +25.94% and stayed positive through 2014.²

The S&P’s compound returns are especially encouraging. In studying the index’s compound annual returns, we get a solid understanding of how staying in the market has benefited the U.S. equity investor. Average returns are interesting, yet they do not factor in cumulative gains or losses over a given period.

Examining 40-year performance periods for the S&P from 1928-2014, the poorest such period had a compound return of 8.9%. The best 40-year “window” had a 12.5% compound return. Using an even narrower “window,” we find that the best 15-year stretch was from 1985-99, producing a compound return of 18.3%. The poorest 15-year stretch occurred before many of today’s investors were born: the interval from 1929-43 had a compound annual growth rate of just 0.6%.¹

The compound return across 1928-2014 is 9.8%, in simplest terms meaning that a $100 investment in shares of S&P 500 firms in that year would have grown to $346,261 in 2014.¹

The correction we have just witnessed looks momentary indeed in the light cast by these “windows” of time.

The lesson? Stay patient & keep the big picture in mind. Before this latest correction, the market had been comparatively calm for so long (the previous 10% drop happened nearly four years ago), investors had almost forgotten what a correction felt like. Moreover, that 2011 correction was the culmination of a three-month market descent; it was not so abrupt.⁵

We cannot predict tomorrow, but we can take comfort (and encouragement) from the history of the market and how well the S&P 500 has performed over time.

Citations.

1 - marketwatch.com/story/understanding-performance-the-sp-500-in-2015-02-18 [2/18/15]

2 - pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html [1/5/15]

3 - 1stock1.com/1stock1_141.htm [8/27/15]

4 - simplestockinvesting.com/SP500-historical-real-total-returns.htm [8/27/15]

5 - cnbc.com/2015/08/21/the-associated-press-qa-what-a-stock-market-correction-means-to-you.html [8/21/15]

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Sometimes the Pundits Get It Wrong

The Things Most Likely to Kill Us

Tell Your Beneficiaries About Your Accounts and Policies

Money Concerns for Those Remarrying

White House Proposes Changes to Retirement Plans

When Will Stocks Stabilize?

National Save for Retirement Week

Do Our Biases Affect Our Financial Choices?

The Fed Decides to Wait

The Long Ascent of the S&P 500

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