After the Military: Tips for Your Financial Transition to Civilian Life

Published on November 10, 2014 by dredheadz

A drawdown is looming. You’re separating at the end of active service. You’ve decided to retire after a long career. No matter why you’re leaving the military, a big part of preparing for your civilian life is taking steps to proactively address the financial issues you might face. Here are some tips to help ease the transition.

Get your road map ready

An impending separation from service may be both exciting and anxiety-provoking for you and your family. Your lifestyle, income sources, and benefits will be changing. Major decisions that may affect your finances include:

Where you decide to live
Whether you’ll be selling or purchasing a home
Whether you and/or your spouse will need to find new employment
Your plans to return to school
Your eligibility for benefits (e.g., from the military or a future employer)

To help you prepare for your transition to civilian life, the Department of Defense, along with other agencies, has developed a program called Transition GPS. All servicemembers who are retiring, separating, or being released from a period of at least 180 days of active duty must participate in this program. Transition GPS includes preseparation counseling, briefings, and workshops that cover topics such as education and training, employment and career goals, financial management, and VA benefits. You’ll also prepare an Individual Transition Plan. For more information, visit the DoD Transition Assistance Program (TAP) website at www.dodtap.mil.

Prepare a realistic budget

Having a realistic budget is important. Once you leave the military, it’s likely that your living expenses will increase because you won’t be receiving tax-free allowances, and costs for insurance, housing, groceries, and other day-to-day expenses may be higher. Preparing a budget that reflects your new sources of income and expenses, and adjusting it when necessary, can help you stay on track as you adapt to your new financial circumstances.

Here are some questions to consider as you prepare your working budget:

Income

Will you be eligible for separation pay or cashing in unused leave? These can be sources of short-term income if necessary.
What about retirement pay? Make sure you understand how much you’ll receive, if applicable, and what other sources of retirement income you’ll be eligible for.
What salary can you expect from your new career?
Will your spouse be working?
Will you be eligible for any veterans benefits that will provide ongoing income?

Here’s a tip: If you’re unable to find a job right away, you may qualify for unemployment compensation, but your eligibility may be affected by any retirement or separation pay you receive. Unemployment benefits vary from state to state, so for more information you’ll need to contact your local unemployment office.

Expenses

Will the general cost of living (for example, gas, food, and utilities) be higher in your new location?
How will your health expenses change? Will you have access to employer-sponsored health insurance?
What will your housing costs include (e.g., rent or mortgage payment, property taxes, and insurance)?
Will you need to purchase and insure a vehicle?
What about other expenses, such as commuting costs, clothing, and child care?

Here’s a tip: Have a plan in place to reduce your expenses if necessary. Identify items in your budget that you consider discretionary and would be willing to cut at least temporarily. It will likely be much easier to pay off debt now while you have a steady paycheck from the military rather than later when your job situation might be uncertain.

Save for transition expenses

Some of your costs will be covered through transition assistance (for example, storage and shipment of household goods), but it’s likely that you’ll have expenses for which you won’t be reimbursed, such as housing deposits. Having some savings set aside in a transition fund that you can easily access may help you avoid having to dip into your long-term savings and investments to cover unexpected expenses. It will also decrease the odds that you’ll rack up credit-card debt that you’ll have to pay off down the road.

Before leaving the military…

Housing	Determine how much you can afford to pay for housing, and contact a local real estate agent who can show you properties available to rent or buy. Visit and evaluate the area where you’d like to move.
Health care	Schedule medical and dental appointments, and review and copy your records. Learn about your postseparation or retirement health insurance options and determine whether you’ll need transitional insurance.
Life insurance	Review your life insurance needs. Decide whether it’s cost-effective to convert your SGLI policy to VGLI, or whether you should purchase an individual policy. If you have FSGLI coverage for your spouse, remember that it’s not convertible to VGLI, so look at options for replacing your spouse’s coverage.
Estate planning	Update your estate plan, including your will, powers of attorney, and other documents to reflect your new situation.
Retirement planning	Decide what to do with your Thrift Savings Plan (TSP) account, if you’ve contributed. If you’re seeking employment in the civilian sector, learn about any new options for retirement savings, such as contributing to a tax-deferred employer sponsored retirement plan. If you’re retiring, consider how your military retirement pay fits into your overall retirement income plan.
Education planning	Make sure you understand your education benefits that can help you pay for college or vocational training. Consider transferring Post-9/11 GI Bill benefits to dependents. While you’re still on active duty, take tests that can help you earn college credit or a license or certification, and find out whether any of your military training may be substituted for college credit.
Career planning	Attend relevant employment workshops and counseling. Attend job fairs and network with potential employers and recruiters. Military spouses can connect with the Spouse Education and Career Opportunities (SECO) program for career planning help atwww.militaryonesource.mil/seco.

Here’s a tip: Don’t wait until the last minute. Make saving for your transition a priority, and start as far ahead of time as possible to ensure that you have several months of savings set aside to cover transition expenses.

Review and revisit

After your transition is complete and your income and expenses have stabilized, update your budget to reflect your new circumstances. It’s also a good time to review your financial goals. Now that your focus has shifted from your short-term priorities, you can refocus on pursuing your long-term goals to prepare for your next stage in life.

What I’m Watching This Week – 10 November 2014

Published on November 10, 2014 by dredheadz

The Markets

In the wake of the midterm election results that gave Republicans control of both houses of Congress, domestic equities took a break from their recent volatility. Though the S&P 500’s increase was relatively modest, it still managed to regain the 2,000 level and go on to set three fresh record highs in the process. The Dow industrials not only set their own new record but also had the week’s biggest gain, while the Nasdaq and Russell 2000 ended the week basically flat. Declines in oil prices continued to make headlines as the price of West Texas Intermediate crude fell below $80 a barrel.

Market/Index	2013 Close	Prior Week	As of 11/7	Weekly Change	YTD Change
DJIA	16576.66	17390.52	17573.93	1.05%	6.02%
Nasdaq	4176.59	4630.74	4632.53	.04%	10.92%
S&P 500	1848.36	2018.05	2031.89	.69%	9.93%
Russell 2000	1163.64	1173.51	1173.32	-.02%	.83%
Global Dow	2484.10	2527.85	2516.73	-.44%	1.31%
Fed. Funds	.25%	.25%	.25%	0%	0%
10-year Treasuries	3.04%	2.35%	2.32%	-3 bps	-72 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

The U.S. unemployment rate edged down 0.1% to 5.8% in October, according to the Bureau of Labor Statistics. The economy added 214,000 jobs, most of them in restaurants, retail, and health care. The new jobs figure was slightly lower than the 222,000 monthly average so far this year. Meanwhile, October’s 3-cent increase brought the average hourly wage to $24.57; that average is up just under 2% over the last 12 months.
Saudi Arabia announced it would cut its price for oil sold to U.S. customers and raise prices for Asian customers. On top of increased Alaskan oil production during October, that caused the price of crude oil to drop to its lowest level in more than two years. The Organization of the Petroleum Exporting Countries said it expects demand for OPEC crude oil to fall nearly 2 million barrels a day to 28.2 million barrels a day by the end of 2017.
Lower than expected growth in Germany, France, and Italy led the European Commission to cut its growth forecast for next year. The commission said it now sees the eurozone’s 2014 GDP increasing by 0.8% rather than the 1.2% forecast last spring, while the 28-member EU as a whole is now expected to grow 1.3%. The forecast for 2015 is 1.1% growth for the eurozone and 1.5% for the EU. Eurozone inflation is seen stalling at 0.5% this year and 0.8% next year–far below the European Central Bank’s target 2%. Nevertheless, the European Central Bank left its key interest rate unchanged, though ECB President Mario Draghi once again said fresh stimulus measures will be adopted if necessary.
A sluggish global economy also affected the U.S. trade deficit, according to the Bureau of Economic Analysis. A 1.5% decline in exports to the rest of the world was a major reason for September’s nearly 7% increase in the trade gap.
S. manufacturing activity declined 0.6% in September, according to the Commerce Department. However, the Institute for Supply Management’s manufacturing index suggested a course reversal in October; the index rose 2.4%, and the 59% reading represented the 65th straight month of expansion.
S. construction spending was down 0.4% in September as private and public construction fell 0.1% and 1.3% respectively. The Commerce Department said it was the fourth straight monthly decline in private construction spending.

Eye on the Week Ahead

Data from the retail sector will dominate what little economic information is on tap next week. The Job Openings and Labor Turnover Survey report also may get extra attention for its implications for the employment picture.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Social Security Claiming Strategies for Married Couples

Published on November 4, 2014 by dredheadz

Deciding when to begin receiving Social Security benefits is a major financial issue for anyone approaching retirement because the age at which you apply for benefits will affect the amount you’ll receive. If you’re married, this decision can be especially complicated because you and your spouse will need to plan together, taking into account the Social Security benefits you may each be entitled to. For example, married couples may qualify for retirement benefits based on their own earnings records, and/or for spousal benefits based on their spouse’s earnings record. In addition, a surviving spouse may qualify for widow or widower’s benefits based on what his or her spouse was receiving.

Fortunately, there are a couple of planning opportunities available that you may be able to use to boost both your Social Security retirement income and income for your surviving spouse. Both can be used in a variety of scenarios, but here’s how they generally work.

File and suspend

Generally, a husband or wife is entitled to receive the higher of his or her own Social Security retirement benefit (a worker’s benefit) or as much as 50% of what his or her spouse is entitled to receive at full retirement age (a spousal benefit). But here’s the catch: under Social Security rules, a husband or wife who is eligible to file for spousal benefits based on his or her spouse’s record cannot do so until his or her spouse begins collecting retirement benefits. However, there is an exception–someone who has reached full retirement age but who doesn’t want to begin collecting retirement benefits right away may choose to file an application for retirement benefits, then immediately request to have those benefits suspended, so that his or her eligible spouse can file for spousal benefits.

The file-and-suspend strategy is most commonly used when one spouse has much lower lifetime earnings, and thus will receive a higher retirement benefit based on his or her spouse’s earnings record than on his or her own earnings record. Using this strategy can potentially boost retirement income in three ways.

The spouse with higher earnings who has suspended benefits can accrue delayed retirement credits at a rate of 8% per year (the rate for anyone born in 1943 or later) up until age 70, thereby increasing his or her retirement benefit by as much as 32%.
The spouse with lower earnings can immediately claim a higher (spousal) benefit.
Any survivor’s benefit available to the lower-earning spouse will also increase because a surviving spouse generally receives a benefit equal to 100% of the monthly retirement benefit the other spouse was receiving (or was entitled to receive) at the time of his or her death.

Here’s a hypothetical example. Leslie is about to reach her full retirement age of 66, but she wants to postpone filing for Social Security benefits so that she can increase her monthly retirement benefit from $2,000 at full retirement age to $2,640 at age 70 (32% more). However, her husband Lou (who has had substantially lower lifetime earnings) wants to retire in a few months at his full retirement age (also 66). He will be eligible for a higher monthly spousal benefit based on Leslie’s work record than on his own–$1,000 vs. $700. So that Lou can receive the higher spousal benefit as soon as he retires, Leslie files an application for benefits, but then immediately suspends it. Leslie can then earn delayed retirement credits, resulting in a higher retirement benefit for her at age 70 and a higher widower’s benefit for Lou in the event of her death.

File for one benefit, then the other

Another strategy that can be used to increase household income for retirees is to have one spouse file for spousal benefits first, then switch to his or her own higher retirement benefit later.

Once a spouse reaches full retirement age and is eligible for a spousal benefit based on his or her spouse’s earnings record and a retirement benefit based on his or her own earnings record, he or she can choose to file a restricted application for spousal benefits, then delay applying for retirement benefits on his or her own earnings record (up until age 70) in order to earn delayed retirement credits. This may help to maximize survivor’s income as well as retirement income, because the surviving spouse will be eligible for the greater of his or her own benefit or 100% of the spouse’s benefit.

This strategy can be used in a variety of scenarios, but here’s one hypothetical example that illustrates how it might be used when both spouses have substantial earnings but don’t want to postpone applying for benefits altogether. Liz files for her Social Security retirement benefit of $2,400 per month at age 66 (based on her own earnings record), but her husband Tim wants to wait until age 70 to file. At age 66 (his full retirement age) Tim applies for spousal benefits based on Liz’s earnings record (Liz has already filed for benefits) and receives 50% of Liz’s benefit amount ($1,200 per month). He then delays applying for benefits based on his own earnings record ($2,100 per month at full retirement age) so that he can earn delayed retirement credits. At age 70, Tim switches from collecting a spousal benefit to his own larger worker’s retirement benefit of $2,772 per month (32% higher than at age 66). This not only increases Liz and Tim’s household income but also enables Liz to receive a larger survivor’s benefit in the event of Tim’s death.

Things to keep in mind

Deciding when to begin receiving Social Security benefits is a complicated decision. You’ll need to consider a number of scenarios, and take into account factors such as both spouses’ ages, estimated benefit entitlements, and life expectancies. A Social Security representative can’t give you advice, but can help explain your options.
Using the file-and-suspend strategy may not be advantageous when one spouse is in poor health or when Social Security income is needed as soon as possible.
Delaying Social Security income may have tax consequences–consult a tax professional.
Spousal or survivor’s benefits are generally reduced by a certain percentage if received before full retirement age.

Handling Market Volatility

Published on November 4, 2014 by dredheadz

Conventional wisdom says that what goes up, must come down. But even if you view market volatility as a normal occurrence, it can be tough to handle when it’s your money at stake. Though there’s no foolproof way to handle the ups and downs of the stock market, the following common sense tips can help.

Don’t put your eggs all in one basket

Diversifying your investment portfolio is one of the key tools for trying to manage market volatility. Because asset classes often perform differently under different market conditions, spreading your assets across a variety of investments such as stocks, bonds, and cash alternatives has the potential to help reduce your overall risk. Ideally, a decline in one type of asset will be balanced out by a gain in another, though diversification can’t eliminate the possibility of market loss.

One way to diversify your portfolio is through asset allocation. Asset allocation involves identifying the asset classes that are appropriate for you and allocating a certain percentage of your investment dollars to each class (e.g., 70 percent to stocks, 20 percent to bonds, 10 percent to cash alternatives). A worksheet or an interactive tool may suggest a model or sample allocation based on your investment objectives, risk tolerance level, and investment time horizon, but that shouldn’t be a substitute for expert advice.

Focus on the forest, not on the trees

As the market goes up and down, it’s easy to become too focused on day-to-day returns. Instead, keep your eyes on your long-term investing goals and your overall portfolio. Although only you can decide how much investment risk you can handle, if you still have years to invest, don’t overestimate the effect of short-term price fluctuations on your portfolio.

Look before you leap

When the market goes down and investment losses pile up, you may be tempted to pull out of the stock market altogether and look for less volatile investments. The small returns that typically accompany low-risk investments may seem attractive when more risky investments are posting negative returns.

But before you leap into a different investment strategy, make sure you’re doing it for the right reasons. How you choose to invest your money should be consistent with your goals and time horizon.

For instance, putting a larger percentage of your investment dollars into vehicles that offer safety of principal and liquidity (the opportunity to easily access your funds) may be the right strategy for you if your investment goals are short-term and you’ll need the money soon, or if you’re growing close to reaching a long-term goal such as retirement. But if you still have years to invest, keep in mind that stocks have historically outperformed stable value investments over time, although past performance is no guarantee of future results. If you move most or all of your investment dollars into conservative investments, you’ve not only locked in any losses you might have, but you’ve also sacrificed the potential for higher returns.

Look for the silver lining

A down market, like every cloud, has a silver lining. The silver lining of a down market is the opportunity you have to buy shares of stock at lower prices.

One of the ways you can do this is by using dollar cost averaging. With dollar cost averaging, you don’t try to “time the market” by buying shares at the moment when the price is lowest. In fact, you don’t worry about price at all. Instead, you invest a specific amount of money at regular intervals over time. When the price is higher, your investment dollars buy fewer shares of an investment, but when the price is lower, the same dollar amount will buy you more shares. A workplace savings plan, such as a 401(k) plan in which the same amount is deducted from each paycheck and invested through the plan, is one of the most well-known examples of dollar cost averaging in action.

For example, let’s say that you decided to invest $300 each month. As the illustration shows, your regular monthly investment of $300 bought more shares when the price was low and fewer shares when the price was high:

Although dollar cost averaging can’t guarantee you a profit or avoid a loss, a regular fixed dollar investment may result in a lower average price per share over time, assuming you continue to invest through all types of markets.

(This hypothetical example is for illustrative purposes only and does not represent the performance of any particular investment. Actual results will vary.)

Making dollar cost averaging work for you

Get started as soon as possible. The longer you have to ride out the ups and downs of the market, the more opportunity you have to build a sizeable investment account over time.
Stick with it. Dollar cost averaging is a long-term investment strategy. Make sure that you have the financial resources and the discipline to invest continuously through all types of markets, regardless of price fluctuations.
Take advantage of automatic deductions. Having your investment contributions deducted and invested automatically makes the process easy and convenient.

Don’t stick your head in the sand

While focusing too much on short-term gains or losses is unwise, so is ignoring your investments. You should check up on your portfolio at least once a year, more frequently if the market is particularly volatile or when there have been significant changes in your life. You may need to rebalance your portfolio to bring it back in line with your investment goals and risk tolerance. Don’t hesitate to get expert help if you need it to decide which investment options are right for you.

Don’t count your chickens before they hatch

As the market recovers from a down cycle, elation quickly sets in. If the upswing lasts long enough, it’s easy to believe that investing in the stock market is a sure thing. But, of course, it never is. As many investors have learned the hard way, becoming overly optimistic about investing during the good times can be as detrimental as worrying too much during the bad times. The right approach during all kinds of markets is to be realistic. Have a plan, stick with it, and strike a comfortable balance between risk and return.

What I’m Watching This Week – 3 November 2014

Published on November 3, 2014 by dredheadz

The Markets

A robust U.S. GDP reading coupled with the prospect of greater economic stimulus in Japan and additional positive corporate earnings reports helped drive both the Dow industrials and the S&P 500 to new record highs. The small caps of the Russell 2000 saw their third straight week of solid gains, which gave the index a positive year-to-date return once again.

Gold tumbled nearly $60 an ounce, hurt in part by the promise of additional monetary stimulus by the Bank of Japan. And the benchmark 10-year Treasury retreated as investors regained an appetite for equities risk.

Market/Index	2013 Close	Prior Week	As of 10/31	Weekly Change	YTD Change
DJIA	16576.66	16805.41	17390.52	3.48%	4.91%
Nasdaq	4176.59	4483.72	4630.74	3.28%	10.87%
S&P 500	1848.36	1964.58	2018.05	2.72%	9.18%
Russell 2000	1163.64	1118.82	1173.51	4.89%	.85%
Global Dow	2484.10	2470.50	2527.85	2.32%	1.76%
Fed. Funds	.25%	.25%	.25%	0%	0%
10-year Treasuries	3.04%	2.29%	2.35%	6 bps	-69 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

The U.S. economy grew at an annualized rate of 3.5% during the third quarter, according to the initial estimate by the Bureau of Economic Analysis. That was slightly less than Q2’s 4.6%, but still much stronger than during 2014’s first quarter.
As expected, the Federal Reserve’s monetary policy committee finally called a halt to new bond purchases, which have helped support the economy for the last six years by making credit easier to get. The statement said that despite improvements in the labor market and general economy, the committee sees inflation being held in check by lower energy prices. Therefore, it still anticipates the Fed funds interest rate will remain at its current level for “a considerable time.” However, that timetable could be accelerated by unanticipated upticks in inflation and/or employment (or pushed back if either declines).
As Fed bond purchases came to an end, the Bank of Japan went in the opposite direction, unexpectedly announcing it will expand its securities purchases. The move is designed to try to reduce the potential for deflation (Japan’s 1% annual inflation rate is far below the central bank’s 2% target). The added buying could make Japanese exports cheaper and help the country’s economy recover from the effects of a sales tax increase in the spring.
Durable goods orders fell 1.3% in September, according to the Commerce Department. However, much of that was due to a 3.7% decline in the typically volatile transportation sector; excluding transportation, new orders were down 0.2%.
Home prices rose in August, but the annual growth rate was the slowest in almost two years. The 0.2% increase in the S&P/Case-Shiller 20-City Composite Index represented a 5.6% annual increase from the previous August, down from July’s 6.7%.
Despite a 0.2% increase in personal income in the United States during September, personal consumption fell by an equal amount, according to the Bureau of Economic Analysis. The drop in personal consumption was the first monthly decline since January.

Eye on the Week Ahead

With quantitative easing officially at an end, what’s left of the Q3 corporate earnings season could receive more attention. And as the Fed watches the labor market closely to determine the timing of rate increases, investors will do the same with Friday’s jobs report. The results of Tuesday’s midterm elections also could influence the mood of the markets.

Monthly Market Review – October 2014

Published on November 3, 2014 by dredheadz

The Markets

October lived up to its reputation for volatility as triple-digit intraday swings in the Dow became almost commonplace. Despite being spooked for much of the month–at one point the S&P 500 was down almost 8% from its most recent high–both the S&P and the Dow industrials rallied strongly to end the month at fresh all-time records. Generally encouraging corporate earnings from U.S. companies, a strong Q3 GDP, and increased central bank support overseas helped equities markets overcome fears about the end of the Federal Reserve’s quantitative easing and global concerns about slowing growth and the threat of Ebola.

Increased U.S. energy resources and reduced global demand meant that oil prices continued to drop, ending the month at roughly $80 a barrel. The dollar maintained its September gains against a basket of six foreign currencies; since oil is traded in dollars, a stronger dollar also helped keep oil prices in check. Meanwhile, after a bounce at mid-month, the price of gold plummeted to roughly $1,170 an ounce. Not surprisingly, the volatility in equities caused the yield on the benchmark 10-year Treasury to fall briefly to its lowest level since June 2013 as investors sought the relative safety of Treasury securities.

Market/Index	2013 Close	Prior Month	As of 10/31	Month Change	YTD Change
DJIA	16576.66	17042.90	17390.52	2.04%	4.91%
Nasdaq	4176.59	4493.39	4630.74	3.06%	10.87%
S&P 500	1848.36	1972.29	2018.05	2.32%	9.18%
Russell 2000	1163.64	1101.68	1173.51	6.52%	.85%
Global Dow	2484.10	2534.47	2527.85	-.26%	1.76%
Fed. Funds	.25%	.25%	.25%	0 bps	0 bps
10-year Treasuries	3.04%	2.52%	2.35%	-17 bps	-69 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

The Month in Review

The U.S. economy grew at an annualized rate of 3.5% during the third quarter, according to the initial estimate by the Bureau of Economic Analysis. That was slightly less than Q2’s 4.6%, but still much stronger than during 2014’s first quarter.
The 248,000 new jobs created in September helped cut the U.S. unemployment rate from 6.1% to 5.9%; it’s the first time since July 2008 that joblessness has been below 6%. Also, the Bureau of Labor Statistics said hiring during the prior two months was stronger than previously thought. However, at least some of the decline in the unemployment rate resulted from 97,000 people, such as retiring baby boomers, dropping out of the labor force. That brought the percentage of people in the workforce to 62.7%–the lowest participation rate since 1978.
As expected, the Federal Reserve’s monetary policy committee halted new bond purchases, which have helped support the economy for the last six years by making credit easier to get. The statement said that despite improvements in the labor market and the overall economy, the committee sees inflation being held in check by lower energy prices. Therefore, it still anticipates the Fed funds interest rate will remain at its current level for “a considerable time.” However, that timetable could be accelerated by unanticipated upticks in inflation and/or employment (or pushed back if either declines).
As Fed bond purchases came to an end, the Bank of Japan went in the opposite direction, announcing it will expand its securities purchases. The move is designed to prevent potential deflation (Japan’s 1% annual inflation rate is far below the central bank’s 2% target). The added buying could help make Japanese exports cheaper.
Eurozone manufacturing output saw its largest monthly decline since late 2008 in August, according to the European Union’s statistical agency. The 4.3% decline in German industrial production was especially unsettling, and September’s 0.3% annual inflation rate in the eurozone–the lowest level in five years–raised concerns about the possibility of deflation. To help combat that weakness, the European Central Bank will expand its bond purchases to include asset-backed securities and certain bank bonds, but declined to lower its key interest rate, at least for the time being.
China’s growth rate, while still robust compared to the rest of the world, slowed to 7.3% during the third quarter, according to the National Bureau of Statistics–below the 7.5% official target for annual growth. Real estate prices and sales continued to be a soft spot. To try to jump-start lending, China’s central bank plans to inject roughly $33 billion into its banking system.
Data on the U.S. housing market was generally encouraging. September’s 2.4% increase in existing-home sales represented the fastest growth of 2014, according to the National Association of Realtors®. New home sales also were up 0.2%, which put them 17% higher than in September 2013, and the Commerce Department said both housing starts and building permits were up for the month. However, home prices were a different story. The 0.2% increase in the S&P/Case-Shiller 20-City Composite Index in August represented the slowest annual growth rate in almost two years.
U.S. inflation continued to be well-contained. Consumer prices rose 0.1% in September, which left the Consumer Price Index up 1.7% for the last 12 months. The Bureau of Labor Statistics said increases in food and housing outweighed a 0.7% drop in energy costs. Meanwhile, wholesale prices fell 0.1% in September, largely because of declines in both food and energy costs, though wholesale prices overall are 1.6% higher than in September 2013.
Retail sales in the United States slipped 0.3% in September, though the Commerce Department said they were 4.3% ahead of a year earlier. The biggest declines were seen in building and garden supplies, clothing, and nonstore retailers, all of which were down more than 1% during the month.
U.S. durable goods orders fell 1.3% in September, according to the Commerce Department. However, much of that was due to a 3.7% decline in the typically volatile transportation sector; excluding transportation, new orders were down 0.2%.

Eye on the Month Ahead

With the Fed’s quantitative easing officially at an end and monetary policy meetings on hold until December, equities markets may begin to focus on what’s left of earnings season as well as the jobs and inflation data that will affect future Fed actions. The results of Tuesday’s midterm elections also could influence the mood of the markets.

IRA and Retirement Plan Limits for 2015

Published on October 31, 2014 by dredheadz

IRA and Retirement Plan Limits for 2015

IRA contribution limits

The maximum amount you can contribute to a traditional IRA or Roth IRA in 2015 is $5,500 (or 100% of your earned income, if less), unchanged from 2014. The maximum catch-up contribution for those age 50 or older remains at $1,000. (You can contribute to both a traditional and Roth IRA in 2015, but your total contributions can’t exceed these annual limits.)

Traditional IRA deduction limits for 2015

The income limits for determining the deductibility of traditional IRA contributions have increased for 2015 (for those covered by employer retirement plans). For example, you can fully deduct your IRA contribution if your filing status is single/head of household and your income (“modified adjusted gross income,” or MAGI) is $61,000 or less (up from $60,000 in 2014). If you’re married and filing a joint return, you can fully deduct your IRA contribution if your MAGI is $98,000 or less (up from $96,000 in 2014). If you’re not covered by an employer plan but your spouse is, and you file a joint return, you can fully deduct your IRA contribution if your MAGI is $183,000 or less (up from $181,000 in 2014).

If your 2015 federal income tax filing status is:	Your IRA deduction is reduced if your MAGI is between:	Your deduction is eliminated if your MAGI is:
Single or head of household	$61,000 and $71,000	$71,000 or more
Married filing jointly or qualifying widow(er)*	$98,000 and $118,000 (combined)	$118,000 or more (combined)
Married filing separately	$0 and $10,000	$10,000 or more

*If you’re not covered by an employer plan but your spouse is, your deduction is limited if your MAGI is $183,000 to $193,000, and eliminated if your MAGI exceeds $193,000.

Roth IRA contribution limits for 2015

The income limits for determining how much you can contribute to a Roth IRA have also increased. If your filing status is single/head of household, you can contribute the full $5,500 to a Roth IRA in 2015 if your MAGI is $116,000 or less (up from $114,000 in 2014). And if you’re married and filing a joint return, you can make a full contribution if your MAGI is $183,000 or less (up from $181,000 in 2014). (Again, contributions can’t exceed 100% of your earned income.)

If your 2015 federal income tax filing status is:	Your Roth IRA contribution is reduced if your MAGI is:	You cannot contribute to a Roth IRA if your MAGI is:
Single or head of household	More than $116,000 but less than $131,000	$131,000 or more
Married filing jointly or qualifying widow(er)	More than $183,000 but less than $193,000 (combined)	$193,000 or more (combined)
Married filing separately	More than $0 but less than $10,000	$10,000 or more

Employer retirement plans

The maximum amount you can contribute (your “elective deferrals”) to a 401(k) plan has increased for 2015. The limit (which also applies to 403(b), 457(b), and SAR-SEP plans, as well as the Federal Thrift Plan) is $18,000 in 2015 (up from $17,500 in 2014). If you’re age 50 or older, you can also make catch-up contributions of up to $6,000 to these plans in 2015 (up from $5,500 in 2014). (Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.)

If you participate in more than one retirement plan, your total elective deferrals can’t exceed the annual limit ($18,000 in 2015 plus any applicable catch-up contribution). Deferrals to 401(k) plans, 403(b) plans, SIMPLE plans, and SAR-SEPs are included in this limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan–a total of $36,000 in 2015 (plus any catch-up contributions).

The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) plan has increased to $12,500 for 2015, up from $12,000 in 2014. The catch-up limit for those age 50 or older has also increased, to $3,000 (up from $2,500 in 2014).

Plan type:	Annual dollar limit:	Catch-up limit:
401(k), 403(b), governmental 457(b), SAR-SEP, Federal Thrift Plan	$18,000	$6,000
SIMPLE plans	$12,500	$3,000

Note: Contributions can’t exceed 100% of your income.

The maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2015 is $53,000 (up from $52,000 in 2014), plus age-50 catch-up contributions. (This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement plan.)

Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans in 2015 has increased to $265,000, up from $260,000 in 2014; the dollar threshold for determining highly compensated employees (when 2015 is the look-back year) is $120,000, up from $115,000 in 2014.

What I’m Watching This Week – 27 October 2014

Published on October 27, 2014 by dredheadz

The Markets

Relief at last: Investors finally regained some appetite for risk as equities got a break from the recent wave of selling. After four straight weeks of losses, the S&P 500 saw a strong bounce. However, the Nasdaq’s rebound was even bigger and the small caps of the Russell 2000 saw their second consecutive week of robust gains. Though the Dow industrials lagged the other three domestic indices, the rally brought the Dow back into positive territory for the year. The Global Dow also recovered from its slump, nearly managing to break even for the year.

The strong showing in equities helped send the benchmark 10-year Treasury yield up as prices fell. Meanwhile, the price of oil stabilized in the low $80s

Market/Index	2013 Close	Prior Week	As of 10/24	Weekly Change	YTD Change
DJIA	16576.66	16380.41	16805.41	2.59%	1.38%
Nasdaq	4176.59	4258.44	4483.72	5.29%	7.35%
S&P 500	1848.36	1886.76	1964.58	4.12%	6.29%
Russell 2000	1163.64	1082.33	1118.82	3.37%	-3.85%
Global Dow	2484.10	2409.20	2470.50	2.54%	-.55%
Fed. Funds	.25%	.25%	.25%	0%	0%
10-year Treasuries	3.04%	2.22%	2.29%	7 bps	-75 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

Sales of existing homes jumped 2.4% during September, according to the National Association of Realtors®. That’s the highest pace of 2014, though the number of sales was 1.7% lower than in the previous September. The $209,700 median sale price was 5.6% higher than a year earlier.
Meanwhile, new home sales were up 0.2% in September; the Commerce Department said that put them 17% higher than in September 2013.
Consumer prices rose 0.1% in September. The Bureau of Labor Statistics said that left the Consumer Price Index up 1.7% for the last 12 months–a level that might give the Federal Reserve some leeway to keep interest rates low. Increases in food and housing outweighed a 0.7% drop in energy costs.
China’s growth rate, while still robust compared to the rest of the world, slowed during the third quarter, according to the National Bureau of Statistics. The 7.3% increase in the country’s gross domestic product was slightly lower than Q2’s 7.5% and below the official target for annual growth (also 7.5%). Real estate prices and sales continued to be a soft spot in the Chinese economy.
After subjecting 150 European banks to annual stress tests, the European Central Bank and the European Banking Authority said only 12 of them needed to raise additional capital as protection against a worst-case scenario. Italy had the most problem banks, with Greece and Cyprus tied for second.
Similar stress tests for U.S. banks to be conducted by the Federal Reserve next year will measure how well they would withstand a sharp deterioration in the corporate bond market, especially high-yield bonds issued by highly indebted companies. As in previous years, the tests also will gauge exposure to threats from a variety of factors that include sharp declines in the job market and economic growth, a jump in oil prices to $110 a barrel, and a 60% drop in the stock market. Banks that fail the test could be restricted in their ability to pay dividends or buy back stocks until they address the deficiencies.

Eye on the Week Ahead

Once again, all eyes will be on the Fed as quantitative easing is expected to come to an end. And with recent volatility in the equities markets suggesting investor uncertainty, the first estimate of Q3 gross domestic product is likely to be significant. Also, the release of stress tests conducted on European banks could affect investor perception of the financial system there.

Investor, Know Thyself: How Your Biases Can Affect Investment Decisions

Published on October 16, 2014 by dredheadz

Traditional economic models are based on a simple premise: people make rational financial decisions that are designed to maximize their economic benefits. In reality, however, most humans don’t make decisions based on a sterile analysis of the pros and cons. While most of us do think carefully about financial decisions, it is nearly impossible to completely disconnect from our “gut feelings,” that nagging intuition that seems to have been deeply implanted in the recesses of our brain.

Over the past few decades, another school of thought has emerged that examines how human psychological factors influence economic and financial decisions. This field–known as behavioral economics, or in the investing arena, behavioral finance–has identified several biases that can unnerve even the most stoic investor. Understanding these biases may help you avoid questionable calls in the heat of the financial moment.

Sound familiar?

Following is a brief summary of some common biases influencing even the most experienced investors. Can you relate to any of these?

Anchoring refers to the tendency to become attached to something, even when it may not make sense. Examples include a piece of furniture that has outlived its usefulness, a home or car that one can no longer afford, or a piece of information that is believed to be true, but is in fact, false. In investing, it can refer to the tendency to either hold an investment too long or place too much reliance on a certain piece of data or information.
Loss-aversion bias is the term used to describe the tendency to fear losses more than celebrate equivalent gains. For example, you may experience joy at the thought of finding yourself $5,000 richer, but the thought of losing $5,000 might provoke a far greater fear. Similar to anchoring, loss aversion could cause you to hold onto a losing investment too long, with the fear of turning a paper loss into a real loss.
Endowment bias is also similar to loss-aversion bias and anchoring in that it encourages investors to “endow” a greater value in what they currently own over other possibilities. You may presume the investments in your portfolio are of higher quality than other available alternatives, simply because you own them.
Overconfidence is simply having so much confidence in your own ability to select investments for your portfolio that you might ignore warning signals.
Confirmation bias is the tendency to latch onto, and assign more authority to, opinions that agree with your own. For example, you might give more credence to an analyst report that favors a stock you recently purchased, in spite of several other reports indicating a neutral or negative outlook.
The bandwagon effect, also known as herd behavior, happens when decisions are made simply because “everyone else is doing it.” For an example of this, one might look no further than a fairly recent and much-hyped social media company’s initial public offering (IPO). Many a discouraged investor jumped at that IPO only to sell at a significant loss a few months later. (Some of these investors may have also suffered from overconfidence bias.)
Recency bias refers to the fact that recent events can have a stronger influence on your decisions than other, more distant events. For example, if you were severely burned by the market downturn in 2008, you may have been hesitant about continuing or increasing your investments once the markets settled down. Conversely, if you were encouraged by the stock market’s subsequent bull run, you may have increased the money you put into equities, hoping to take advantage of any further gains. Consider that neither of these perspectives may be entirely rational given that investment decisions should be based on your individual goals, time horizon, and risk tolerance.
A negativity bias indicates the tendency to give more importance to negative news than positive news, which can cause you to be more risk-averse than appropriate for your situation.

An objective view can help

The human brain has evolved over millennia into a complex decision-making tool, allowing us to retrieve past experiences and process information so quickly that we can respond almost instantaneously to perceived threats and opportunities. However, when it comes to your finances, these gut feelings may not be your strongest ally, and in fact may work against you. Before jumping to any conclusions about your finances, consider what biases may be at work beneath your conscious radar. It might also help to consider the opinions of an objective third party, such as a qualified financial professional, who could help identify any biases that may be clouding your judgment.

The New Estate Tax Rules and Your Estate Plan

Published on October 15, 2014 by dredheadz

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act) included new gift, estate, and generation-skipping transfer (GST) tax provisions. The 2010 Tax Act provided that in 2011 and 2012, the gift and estate tax exemption was $5 million (indexed for inflation in 2012), the GST tax exemption was also $5 million (indexed for inflation in 2012), and the maximum rate for both taxes was 35%. New to estate tax law was gift and estate tax exemption portability: generally, any gift and estate tax exemption left unused by a deceased spouse could be transferred to the surviving spouse in 2011 and 2012. The GST tax exemption, however, is not portable. Starting in 2013, the American Taxpayer Relief Act of 2012 (the 2012 Tax Act) permanently extended the $5 million (as indexed for inflation, and thus $5,340,000 in 2014, $5,250,000 in 2013) exemptions and portability of the gift and estate tax exemption, but also increased the top gift, estate, and GST tax rate to 40%. You should understand how these new rules may affect your estate plan.

Exemption portability

Under prior law, the gift and estate tax exemption was effectively “use it or lose it.” In order to fully utilize their respective exemptions, married couples often implemented a bypass plan: they divided assets between a marital trust and a credit shelter, or bypass, trust (this is often referred to as an A/B trust plan). Under the 2010 and 2012 Tax Acts, the estate of a deceased spouse can transfer to the surviving spouse any portion of the exemption it does not use (this portion is referred to as the deceased spousal unused exclusion amount, or DSUEA). The surviving spouse’s exemption, then, is increased by the DSUEA, which the surviving spouse can use for lifetime gifts or transfers at death.

Example: At the time of Henry’s death in 2011, he had made $1 million in taxable gifts and had an estate of $2 million. The DSUEA available to his surviving spouse, Linda, is $2 million ($5 million – ($1 million + $2 million)). This $2 million can be added to Linda’s own exemption for a total of $7,340,000 ($5,340,000 + $2 million), assuming Linda dies in 2014.

The portability of the exemption coupled with an increase in the exemption amount to $5,340,000 per taxpayer allows a married couple to pass on up to $10,680,000 gift and estate tax free in 2014. Though this seems to negate the usefulness of A/B trust planning, there are still many reasons to consider using A/B trusts.

The assets of the surviving spouse, including those inherited from the deceased spouse, may appreciate in value at a rate greater than the rate at which the exemption amount increases. This may cause assets in the surviving spouse’s estate to exceed that spouse’s available exemption. On the other hand, appreciation of assets placed in a credit shelter trust will avoid estate tax at the death of the surviving spouse.
The distribution of assets placed in the credit shelter trust can be controlled. Since the trust is irrevocable, your plan of distribution to particular beneficiaries cannot be altered by your surviving spouse. Leaving your entire estate directly to your surviving spouse would leave the ultimate distribution of those assets to his or her discretion.
A credit shelter trust may also protect trust assets from the claims of any creditors of your surviving spouse and the trust beneficiaries. You can also include a spendthrift provision to limit your surviving spouse’s access to trust assets, thus preserving their value for the trust beneficiaries.

A/B trust plans with formula clauses

If you currently have an A/B trust plan, it may no longer carry out your intended wishes because of the increased exemption amount. Many of these plans use a formula clause that transfers to the credit shelter trust an amount equal to the most that can pass free from estate tax, with the remainder passing to the marital trust for the benefit of the spouse. For example, say a spouse died in 2003 with an estate worth $5,340,000 and an estate tax exemption of $1 million. The full exemption amount, or $1 million, would have been transferred to the credit shelter trust and $4,340,000 would have passed to the marital trust. Under the same facts in 2014, since the exemption has increased, the entire $5,340,000 estate will transfer to the credit shelter trust, to which the surviving spouse may have little or no access. Review your estate plan carefully with an estate planning professional to be sure your intentions will be carried out under the new laws.

Wealth transfer strategies through gifting

Because of the larger exemptions and lower tax rates, there may be unprecedented opportunities for gifting.

By making gifts up to the exemption amount, you can significantly reduce the value of your estate without incurring gift tax. In addition, any future appreciation on the gifted assets will escape taxation. Assets with the most potential to increase in value, such as real estate (e.g., a vacation home), expensive art, furniture, jewelry, and closely held business interests, offer the best tax savings opportunity.

Gifting may be done in several different forms. These include direct gifts to individuals, gifts made in trust (e.g., grantor retained annuity trusts and qualified personal residence trusts), and intra-family loans. Currently, you can also employ techniques that leverage the high exemptions to potentially provide an even greater tax benefit (for example, creating a family limited partnership may also provide valuation discounts for tax purposes).

For high-net-worth married couples, gifting to an irrevocable life insurance trust (ILIT) designed as a dynasty trust can reduce estate size while providing a substantial gift for multiple generations (depending on how long a trust can last under the laws of your particular state). The value of the gift may be increased (leveraged) by the purchase of second-to-die life insurance within the trust. Further, the larger exemptions enable you to increase, gift tax free, the premiums paid for life insurance policies that are owned by the ILIT or other family members. Premium payments on such policies are taxable gifts, so these premium payments are often limited to avoid incurring gift tax. This in turn restricts the amount of life insurance that can be purchased. But the increased exemptions provide the opportunity to make significantly greater gifts of premium payments, which can be used to buy a larger life insurance policy.

Before implementing a gifting plan, however, there are a few issues you should consider.

Can you afford to make the gift in the first place (you may need those assets and the related cash flow in the future)?
Do you anticipate that your estate will be subject to estate taxes at your death?
Is minimizing estate taxes more important to you than retaining control over the asset?
Do you have concerns about gifting large amounts to your heirs (i.e., is the recipient competent to manage the asset)?
Does the transfer tax savings outweigh the potential capital gains tax the recipient may incur if the asset is later sold? The recipient of the gift gets a carryover basis (i.e., your tax basis) for income tax purposes. On the other hand, property left to an individual as a result of death will generally receive a step-up in cost basis to fair market value at date of death, resulting in potentially less income tax to pay when such an asset is ultimately sold.

Caution: The amount of gift tax exemption you used in the past will reduce the $5,340,000 available to you in 2014. For example, a person who used $1 million of his or her exemption in 2012, will be able to make additional gifts totaling $4,340,000 during 2014 free from gift tax.

Tip: In addition to this opportunity to transfer a significant amount of wealth tax free, it’s important to remember that you can still take advantage of the $14,000 per person per year annual gift tax exclusion for 2013 and 2014. Also, gifts of tuition payments and payment of medical expenses (if paid directly to the institutions) are still tax free and can be made at any time.