Tag: economy

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

Published on 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 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.

Handling Market Volatility

Published on 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 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.

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.

Monthly Market Review – October 2014

Published on 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.

What I’m Watching This Week – 27 October 2014

Published on 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.

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.

What I’m Watching This Week – 13 October 2014

Published on by dredheadz

The Markets

Concerns about signs of weaker growth abroad seemed to outweigh domestic corporate earnings reports last week as volatility went extreme. The Dow industrials saw triple-digit swings four days in a row that wiped out all of the index’s year-to-date gains, and both the Dow and the S&P 500 had their worst weeks since May 2012. By the end of the week, the S&P was down 5% from its most recent high (a 10% drop is considered a correction). Meanwhile, the Russell 2000 fell solidly into correction territory, ending the week down almost 13% from its most recent high in March. The Global Dow also turned negative year-to-date.

The volatility sent investors once again seeking the relative security of U.S. Treasuries. As the price of the benchmark 10-year note has risen, the decline in its yield has accelerated in each of the last four weeks; the 10-year yield ended last week at its lowest level since June 2013.

Market/Index 2013 Close Prior Week As of 10/10 Weekly Change YTD Change
DJIA 16576.66 17009.69 16544.10 -2.74% -.20%
Nasdaq 4176.59 4475.62 4276.24 -4.45% 2.39%
S&P 500 1848.36 1967.90 1906.13 -3.14% 3.13%
Russell 2000 1163.64 1104.74 1053.32 -4.65% -9.48%
Global Dow 2484.10 2493.99 2430.85 -2.53% -2.14%
Fed. Funds .25% .25% .25% 0% 0%
10-year Treasuries 3.04% 2.45% 2.31% -14 bps -73 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

  • Minutes of the most recent meeting of the Federal Reserve’s monetary policy committee showed that members are worried about slowing global growth. The potential domestic impact of dollar strength, which could become more problematic when interest rates increase, also was a concern, as a stronger dollar could make U.S. exports more expensive and weigh on the domestic economy. Members also wrestled with how to communicate any shift in the committee’s expectations about when a rate increase might occur.
  • European Central Bank President Mario Draghi said that the already sluggish European economy seems to be slowing further. Coupled with discouraging economic reports out of Germany–exports fell 5.8% in August, and manufacturing output and new orders also were down–Draghi’s statement raised concerns about the financial health of Europe as a whole. To add to the gloom, the International Monetary Fund also lowered its outlook for global growth next year, though its U.S. forecast was more optimistic.

Eye on the Week Ahead

The question of the week will be whether last week’s volatility exhausted negative sentiment or there’s more to come. If domestic Q3 earnings reports and corporate guidance are robust, they might help provide some counterbalance to global pessimism. However, many large U.S. corporations earn a large percentage of their profits overseas; if forward guidance tends to be negative, that could have the opposite effect. Options expiration at week’s end also could affect volatility.

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.

What I’m Watching This Week – 6 October 2014

Published on by dredheadz

The Markets

For the second straight week, a Friday rally after encouraging employment numbers couldn’t outweigh equities’ losses earlier in the week. However, it did manage to rescue the Russell 2000 from a brief dip into correction territory (a correction is generally considered to be 10% down from the most recent high). Once again, the Dow industrials and the S&P 500 outpaced the small caps, while equities’ recent slump translated into gains for the price of the benchmark 20-year Treasury.

Market/Index 2013 Close Prior Week As of 10/3 Weekly Change YTD Change
DJIA 16576.66 17113.15 17009.69 -.60% 2.61%
Nasdaq 4176.59 4512.19 4475.62 -.81% 7.16%
S&P 500 1848.36 1982.85 1967.90 -.75% 6.47%
Russell 2000 1163.64 1119.33 1104.74 -1.30% -5.06%
Global Dow 2484.10 2551.32 2493.99 -2.25% .40%
Fed. Funds .25% .25% .25% 0% 0%
10-year Treasuries 3.04% 2.54% 2.45% -9 bps -59 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 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 dropping out of the labor force (for example, retiring baby boomers). That brought the percentage of people in the workforce to 62.7%–the lowest participation rate since 1978.
  • Though home prices measured by the S&P/Case-Shiller 20-City Composite Index continued to rise in July, the pace slowed significantly. Year-over-year gains were down in 19 of the 20 cities, and monthly increases were smaller in 17 cities. Nevertheless, the index was 6.7% ahead of a year earlier, and prices rose 0.6% during the month.
  • The European Central Bank declined to make any further cuts to interest rates until it sees the impact of bond purchases scheduled to begin this month, including sovereign bonds from Greece and Cyprus. However, President Mario Draghi reiterated that the ECB stands ready to adopt further stimulus measures if necessary.
  • Both personal income and consumption were up in August, according to the Bureau of Economic Analysis. The increase in private wages and salaries was almost double that of July, pushing personal income up 0.3%. Personal consumption–one of the Fed’s favorite measures of inflationary pressure–rose 0.5%. That increased consumption helped cut the savings rate from 5.6% to 5.4%.
  • The failure of China’s manufacturing sector to rebound in September from the previous month’s low level fanned concerns about global growth. HSBC Corp.’s Purchasing Managers’ Index remained at 50.2–barely above the level that would represent contraction.
  • The U.S. services sector continued to grow in September, but at a slightly slower pace. The Institute for Supply Management’s non-manufacturing purchasing managers’ index nudged downward one point from August’s record level to 58.6.

Eye on the Week Ahead

The Q3 earnings season will have its unofficial kickoff when Alcoa reports its results after Wednesday’s market close. Discussions of what should happen after the anticipated end of quantitative easing will be scrutinized when minutes of the most recent Federal Open Market Committee meeting are released on Wednesday.

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.

Rollover of After-Tax Dollars from 401(k) Plans

Published on by dredheadz

Background

Here’s the dilemma. You have a traditional 401(k) that contains both after-tax and pre-tax dollars. You’d like to receive a distribution from the plan, convert only the after-tax dollars to a Roth IRA, and roll the pre-tax dollars into a traditional IRA. (By rolling over/converting only the after-tax dollars to a Roth IRA, you avoid paying any income tax on the conversion.)

For example, let’s say your 401(k) plan account balance is $10,000, consisting of $8,000 of pre-tax dollars and $2,000 of after-tax dollars. Can you simply request a total distribution of $10,000, instructing the trustee to directly roll the $8,000 of pre-tax dollars to a traditional IRA and the remaining $2,000 of after-tax dollars to a Roth IRA?

In the past, many trustees allowed you to do just that. But in recent years the IRS had suggested that this result could be achieved only with indirect (60-day) rollovers, not direct rollovers. The legal basis for this IRS position was, however, not entirely clear. (The problem with indirect rollovers is that they are subject to 20% mandatory withholding and, if not executed correctly, could be fully taxable–and distributions prior to age 59½ might also be subject to a 10% federal income tax penalty.)

IRS Notice 2014-54

On September 18, in Notice 2014-54 (and related proposed regulations), the IRS backed away from its prior position. Based on the Notice, it is finally clear that employer-plan distributions can be split into more than one retirement vehicle with, for example, pre-tax money transferred directly to a traditional IRA (with no current tax liability) and after-tax money moved directly to a Roth IRA (with no conversion tax). Even though the new rules aren’t scheduled to go into effect until January 1, 2015, taxpayers can apply this guidance to distributions made on or after September 18, 2014. (The guidance also applies to 403(b) and 457(b) plans.)

The Notice provides the following technical rules:

•When calculating the taxable portion of a distribution from a 401(k) plan, all distributions you receive at the same time are treated as a single distribution, even if the proceeds are going to multiple destinations. This is important for allocating pre-tax and after-tax contributions to a distribution. For example, assume your 401(k) account is $100,000, consisting of $60,000 (6/10s) of pre-tax dollars and $40,000 (4/10s) of after-tax dollars. You request that $20,000 be rolled directly over to an IRA and $20,000 paid to you. This is treated as a single $40,000 distribution from the 401(k) plan. Of this $40,000, $24,000 (6/10s) is pre-tax dollars, and $16,000 (4/10s) is after-tax dollars.
•If you receive a distribution (as defined above), and roll all or part of the distribution over to one or more eligible retirement plans, your pre-tax dollars will be deemed allocated first to any direct rollovers you make, and then to any 60-day (indirect) rollovers you make. After all your pre-tax dollars have been so allocated, any remaining amounts rolled over will consist of after-tax dollars.
•If you are making direct rollovers to more than one eligible retirement plan (or indirect rollovers to more than one plan), you can direct the trustee how to allocate the pre-tax dollars among those retirement plans prior to the time the direct rollovers are made.

Examples

The Notice includes the following examples:

Julie participates in a 401(k) plan. Her $250,000 account balance consists of $200,000 of pre-tax dollars and $50,000 of after-tax dollars. Julie leaves her job, and requests a distribution of $100,000. The $100,000 distribution is deemed to include $80,000 of pre-tax dollars ($100,000 x $200,000/$250,000), and $20,000 of after-tax dollars ($100,000 x $50,000/$250,000). Julie requests that $70,000 be directly rolled over to the 401(k) plan maintained by her new employer and that $30,000 be paid to her in cash. Because the pre-tax amount of the distribution ($80,000) exceeds the amount directly rolled over ($70,000), the amount directly rolled over to the new plan consists entirely of pre-tax dollars. The remaining amount paid to Julie (prior to any withholding tax) consists of $10,000 in pre-tax dollars and $20,000 in after-tax dollars. Prior to the 60th day after the distribution, Julie chooses to roll over $12,000 to an IRA. Because the amount rolled over in the 60-day rollover ($12,000) exceeds the remaining pre-tax dollars ($10,000), the amount rolled over to the IRA consists of $10,000 of pre-tax dollars and $2,000 of after-tax dollars.

The facts are the same as in Example 1, except that Julie chooses to make $82,000 of direct rollovers — $50,000 to the new 401(k) plan and $32,000 to an IRA. The remaining $18,000 is paid to Julie. Because the amount rolled over ($82,000) exceeds the pre-tax amount of the distribution ($80,000), the direct rollovers consist of $80,000 in pretax amounts and $2,000 in after-tax amounts. Julie is allowed to allocate the pre-tax dollars between the new 401(k) plan and the IRA prior to the time the direct rollovers are made.

The facts are the same as in Example 1, except that Julie chooses to make a direct rollover of $80,000 to a traditional IRA and $20,000 to a Roth IRA. Julie is permitted to allocate the $80,000 that consists entirely of pre-tax dollars to the traditional IRA so that the $20,000 rolled over to the Roth IRA consists entirely of after-tax dollars.

Conclusion

Prior to Notice 2014-54, it was possible to achieve a tax-free Roth conversion of after-tax dollars in an employer plan, but it was a fairly complicated procedure using 60 day (indirect) rollovers, not direct rollovers, which involved several steps and required taxpayers to have sufficient funds outside the plan to make up the 20% mandatory withholding that applied to the taxable portion of the distribution. The ability to accomplish the same result in a more efficient manner using direct rollovers is welcome relief.

IRS Notice 2014-54 is titled Guidance on Allocation of After-Tax Amounts to Rollovers, and can be found at www.irs.gov/pub/irs-drop/n-14-54.pdf.

Designing a Benefit Package for Your Small Business

Published on by dredheadz

If you’re a small business owner, you face many challenges in growing your company. One of them is recruiting and retaining the best talent for your needs. When your primary goals are managing costs and increasing revenue, how do you sufficiently entice new recruits and reward current staff members for continually putting their best efforts forward? One way is ensuring that you provide a competitive, cost-effective benefit package comprised of both traditional and not-so-traditional benefits.

Traditional benefits

In order to remain competitive, nearly all employers should offer some form of health insurance and retirement savings plan. Yet according to the U.S. Department of Labor, only 57% of small employers (those with fewer than 100 employees) offer health coverage and just 49% offer a retirement plan. (Source: National Compensation Survey, March 2013)

Health insurance

Small businesses can typically choose among traditional plans or managed care/health maintenance organizations (HMOs). Traditional plans are typically more expensive but tend to provide more access to providers. HMOs generally carry lower costs but have fewer options for care providers. Some small employers opt for a high-deductible health plan (HDHP) along with a health savings account (HSA). In an HDHP, employees carry a higher burden for up-front costs, but the HSA allows them to set aside money on a tax-advantaged basis to help defray these costs.

Note that a provision in 2010’s Affordable Care Act requires employers with 50 or more full-time employees (as defined by the Act) to offer adequate health insurance that’s affordable or face a possible penalty. “Adequate” means that the company’s share of total plan costs must equal at least 60%. Coverage is “affordable” if an employee’s share of the premium is less than 9.5% of his/her household income. Originally, the provision was to take effect in 2014, but the Department of Health and Human Services recently delayed implementation until 2015. In addition, employers with fewer than 25 full-time employees will be eligible for a credit to help them pay for health insurance.

Retirement plans

In today’s economic and political environment, most adults view retirement planning as a high financial priority. That’s why it’s important to include a retirement savings option in your benefit package. There are several options available to small employers, including traditional 401(k) plans, SIMPLE savings plans, and SEP-IRAs. A financial professional can help you choose the plan that’s right for your company’s needs.

Other options

Other traditional benefits include the following group insurance policies:
• Life insurance: These policies generally provide employees’ survivors a death benefit in a set amount or an amount based on salary (e.g., two times salary).
• Disability insurance: These plans provide employees with an income stream should they become disabled. Benefit amounts are typically a percentage of salary.
• Vision and dental coverage: These plans tend to be highly valued by employees, as the costs associated with dental and vision treatments, which are generally not covered by health insurance, can be quite high.

Not-so-traditional perks

In addition to traditional benefits, there are several not-so-traditional perks you can offer to help set your organization apart in the competition for talent.

Wellness programs

Some employers offer workplace-based wellness programs. According to a 2013 RAND Health study sponsored by the U.S. Departments of Labor and Health and Human Services, about half of U.S. employers offer wellness promotion initiatives. The study found that such programs can help reduce risk factors such as smoking and increase healthy behaviors like exercise. In particular, incentive-based wellness programs help improve overall employee engagement and encourage individuals to take responsibility for their own well-being. Although the study did not reveal a significant reduction in health-care costs for the period analyzed, authors did note trends that might lead to lower costs over the longer term. (Source: Workplace Wellness Programs Study, RAND Corporation, 2013)

Flexible work arrangements

In today’s hectic world, time is nearly as valuable as money. A company that values the work-life balance of its employees is nearly as highly valued as one that offers the best insurance or retirement plan. For this reason, one of the most popular and appreciated employee benefits available today is a flexible work environment. Once the hallmark of only small and “hip” technology companies, flexible work arrangements are growing in popularity. In fact, flexible scheduling is now offered by many larger, more established organizations as well.

Some examples of flexible work programs include:
• Flex schedules: work hours that are outside the norm, such as 7:00 a.m. to 4:00 p.m. instead of 8:00 a.m. to 5:00 p.m.
• Condensed work weeks: for example, working four 10-hour days instead of five 8-hour days
• Telecommuting: working from home or another remote location
• Job-sharing: allowing two or more employees to “share” the same job, essentially doing the work of one full-time employee (e.g., Jan works Monday through Wednesday noon, while Sam works Wednesday afternoon through Friday)
• Part-time or a combination: allowing employees to cut back to part-time during certain life stages, or use a combination of strategies to meet their needs

Allowing your employees to tailor their work schedules based on their individual needs demonstrates a great deal of respect and can generate an enormous amount of loyalty in return. Even if your business requires employees to be on-site during standard operating hours (such as a retail establishment), having a process in place that supports occasional paid time off to attend to outside obligations can have tremendously positive effects. These obligations might include doctors’ appointments, family commitments, and even unexpected emergencies, such as a sick relative. In some cases, these benefits have no costs associated with them, while in others, the costs may be minimal (e.g., the price of a smartphone or laptop to help employees remain productive while on the go).

Social activities

Sponsoring periodic activities can help workers relax and get to know one another. Such events don’t need to take much time out of the day, but can do wonders for building morale. Bring in lunch or schedule an office team trivia competition or group outing. If you work in a particular industry in which colleagues share a common passion, consider organizing events around that interest. For example, a sporting goods retailer could close up early on a slow-business afternoon and go for a hike or bike ride.

Concierge services, discounts

You may also be able to negotiate with other local companies for employee discounts and services. Laundry service, dry cleaning pickup/drop-off, and meal providers that can deliver hot, family-sized take-home dinners may help employees save both time and worry–and stay focused on the job.

Financial planning/education

For many people, money worries can be distracting and time consuming. Consider inviting a local financial professional into your office to provide counseling sessions for your employees. While you don’t necessarily have to pay for any services provided, simply offering the opportunity to get such help during work hours will be appreciated by your workforce.

Involve your employees

The best benefits are those that meet the needs of your employees. Before making any assumptions, solicit ideas from your employees and then conduct a survey to see what benefits they value the most. Consider putting together teams of associates to help with the idea generation and execution. By involving your employees in the decisions that matter most to them, you demonstrate that you value their time, efforts, opinions, and hard work.