Tag: economy

Retirement Myths and Realities

Published on by dredheadz

We all have some preconceived notions about what retirement will be like. But how do those notions compare with the reality of retirement? Here are four common retirement myths to consider.

1. My retirement won’t last that long

The good news is that we’re living longer lives. The bad news is that this generally translates into a longer period of time that you’ll need your retirement income to last. Life expectancy for individuals who reach age 65 has been steadily increasing. According to the National Center for Health Statistics, life expectancy for older individuals improved mainly in the latter half of the 20th century, due largely to advances in medicine, better access to health care, and healthier lifestyles. Someone reaching age 65 in 1950 could expect to live approximately 14 years longer (until about age 79), while the average 65-year-old American today can expect to live about another 19 years (to age 84) (Source: National Vital Statistics Report, Volume 61, Number 4, May 2013). So when considering how much retirement income you’ll need, it’s not unreasonable to plan for a retirement that will last for 25 years or more.

2. I’ll spend less money after I retire

Consider this–Do you spend more money on days you’re working or on days you’re not working? One of the biggest retirement planning mistakes you can make is to underestimate the amount you’ll spend in retirement. One often hears that you’ll need 70% to 80% of your preretirement income after you retire. However, depending on your lifestyle and individual circumstances, it’s not inconceivable that you may need to replace 100% or more of your preretirement income.

In order to estimate how much you’ll need to accumulate, you need to estimate the expenses you’re likely to incur in retirement. Do you intend to travel? Will your mortgage be paid off? Might you have significant health-care expenses not covered by insurance or Medicare? Try thinking about your current expenses and how they might change between now and the time you retire.

3. Medicare will pay all my medical bills

You may presume that when you reach age 65, Medicare will cover most health-care costs. But Medicare doesn’t cover everything. Examples of services generally not covered by traditional Medicare include most chiropractic, dental, and vision care. And don’t forget the cost of long-term care–Medicare doesn’t pay for custodial (nonskilled) long-term care services, and Medicaid pays only if you and your spouse meet certain income and asset criteria. Without proper planning, health-care costs can sap retirement income in a hurry, leaving you financially strapped.

Plus there’s the cost of the Medicare coverage itself. While Medicare Part A (hospital insurance) is free for most Americans, you’ll pay at least $104.90 each month in 2014 if you choose Medicare Part B (medical insurance), plus an average of $31 per month if you also want Medicare Part D (prescription coverage). In addition, there are co-pays and deductibles to consider–unless you pay an additional premium for a Medigap policy that covers all or some of those out-of-pocket expenses. (As an alternative to traditional Medicare, you can enroll in a Medicare Advantage (Part C) managed care plan; costs and coverages vary.)

4. I’ll use my newfound leisure hours to ______ (fill in the blank)

According to the Bureau of Labor Statistics 2012 American Time Use Survey, retirees age 65 and older spent an average of 8 hours per day in leisure activities. (Leisure activities include sports, reading, watching television, socializing, relaxing and thinking, playing cards, using the computer, and attending arts, entertainment, and cultural events.) This compares to an average of 5.4 hours per day for those age 65 and older who were still working.

So how did retirees use their additional 2.6 hours of leisure time? Well, they spent most of it (1.6 hours) watching television. In fact, according to the survey, retirees actually spent 4.5 of their total 8 leisure hours per day watching TV.

And despite the fact that many workers cite a desire to travel when they retire, retirees actually spent only 18 more minutes, on average, per day than their working counterparts engaged in “other leisure activities,” which includes travel.

401(k) Frequently Asked Questions

Published on by dredheadz

How much money can I put into my 401(k) account?

The maximum pre-tax contribution dollar amount is set by law and adjusted for inflation annually. The 2008 pre-tax contribution limit is $17,500. If you are age 50 or older you may also make an additional catch-up contribution of $6,500 per year. Some plans may offer you the option to contribute on an after-tax basis which is not included in the $17,500 limit. Note that plans may restrict employee contributions to an amount less than $17,500, and may also choose not to permit catch-up contributions.

What is the difference between investing pre-tax and after-tax contributions?

The difference between the two types of contributions is when you are taxed. Pre-tax contributions and earnings are taxed only when you withdraw it. Since the money that would normally be paid in taxes goes directly into the plan, pre-tax contributions can accumulate quickly. However, if you need to withdraw money prior to age 59½ you may incur a 10% withdrawal penalty, in addition to owing current income taxes. After-tax contributions are taxed before they are put into the plan. Although you won’t owe taxes on your contributions when you take a withdrawal, you will be taxed on the earnings and may be subject to an early withdrawal penalty on the interest earned if you do so before age 59½.

What pre-tax percentage should I invest when I am starting out?

Any savings is better than nothing and the sooner you get started, the better!! You should maximize your company’s match. For example, if your company matches 50 cents on the dollar up to 6%, you should contribute at least 6%. Simply defer as much as you can afford to budget and take full advantage of the tax deferral.

Is it legal for my employer to move my 401(k) account balances to similar investment funds and change investment fund managers?

It is legal. It is your company’s responsibility to provide competitively performing funds.

What can I do if I do not like the investment funds that my company offers.

Talk to your human resources representative. Your employer has implemented a retirement savings plan for the employees to utilize and appreciate. It is your employer’s fiduciary responsibility to provide competitively performing funds.

Can I withdraw money from my account while I am still working?

Some plans offer loans allowing you to borrow money from your 401(k) account, but you have to pay yourself back with interest. If you fail to pay back the loan it is treated as a withdrawal and the outstanding loan balance will be subject to current income taxes as well as a 10% early withdraw penalty. If your plan doesn’t offer loans, you may be able to qualify for a severe financial hardship withdrawal if no other resources are available to you. According to the IRS a hardship withdrawal includes the following:

  • down payment of primary residence
  • college tuition for you or your dependents
  • unreimbursed medical expenses
  • prevent eviction or foreclosure from your home

Some companies are more lenient than others. Because of the complexity surrounding this issue and varying plan designs, you need to reference your plan document or ask your Human Resources representative for further information regarding plan withdrawals.

How is my company match determined?

There are several different methods used to determine the amount your company may contribute to the plan. Some of the more common employee matches include:

  • fixed percentage – company contribution 25% up to 6% participant deferral.
  • guaranteed percentage – company contributes a pre-determined percentage of participants’ pay.
  • discretionary percentage – company contributes a percentage of participants’ pay generally based on company profits and subject to change year to year.

Can I stop contributing if I feel I cannot afford to?

Most plans allow you to stop contributing at any time though employers are not required by law to do so. Some plans may require specific percentage contribution for a full plan year so be sure to check your plan rules.

What happens to my 401(k) account balance if I choose to leave or am fired from the company?

Your distribution options are the same whether you voluntarily leave or are terminated. If your account balance is more than $5,000, you can leave your money in the plan. If you want to take your money with you, your vested account balance can be rolled into another 401(k) plan with your employer or put into an IRA to avoid early withdrawal penalties.

How long can my former company hold my account balance from my date of termination?

There is no quick, general answer. There are four factors that affect the timing of your distribution:

  • The plan itself may provide a time frame which should be documented in your plan documentation or summary plan description. In some rare cases, distributions are not made until the participant has reached retirement age, usually defined as age 65, even if the participant terminated employment much earlier.
  • Your distribution cannot be processed until after the next valuation date when the plan determines the account balances of participants. Companies can determine account balances daily, monthly, quarterly, semiannually or even annually.
  • How your money is invested can affect how long it will take for you to get your distribution. While most investments can be liquidated quickly, a few, such as some real estate investments, may take longer.
  • Processing your paperwork after the valuation date can take a few days or a few weeks depending on how your plan is managed.

It is important for you to know that your company wants you to have your money just as soon as you do. The company is responsible for and must pay fees on your account balance for as long as your money remains in the plan.

What information and reports is my employer required to provide me with on my 401(k) plan?

Your employer must provide you with a Summary Plan Description and an annual statement of your account information. You have a legal right to ask the plan administrator for a copy of the plan’s latest Form 5500 or Form 5500-C/R, the summary plan description, the plan document, the trust agreement setting up the plan, if separate from the plan, and any collective bargaining contract, if appropriate, and any other instrument under which the plan was established or is operated. In addition, you will often be provided a prospectus for every fund offered in the plan, but this is not legally required. If your company’s stock is offered in the plan you are required to receive a prospectus on the company stock fund.

How soon does my employer have to deposit my contributions deducted from my pay into my 401(k) account?

Government regulations require that participant contributions to a 401(k) be deposited to the plan on the earliest date that they can be reasonably segregated from the employer’s general assets, but in no event may they be deposited later than the 15th business day of the month following the month in which the participant contributions are deducted from their pay. Please note that your employer can not wait until the 15th business day of the month following the month in which your contribution was deducted just for the convenience of doing so. If they can deposit the funds sooner, they must do so.

I still have a 401(k) account with my former employer. I would like to transfer this account into my IRA. Can this be done? If so, are there any penalties?

Yes, this can be done and is referred to as a trustee to trustee transfer. You need to request the distribution forms from your former employer. Make sure you open your new IRA before the transfer so that you can provide the account information on the required forms. There are no penalties with a trustee to trustee transfer, but if you allow your former employer to send the funds directly to you and not to your new IRA, they will be required to deduct and remit 20% of the total to the IRS.

What are the rules regarding hardship withdrawals from my 401(k)?

Hardship withdrawals are allowed by law but your employer is not required to provide this option in your plan. The cost of administering such a program can be prohibitive for many small companies. Your summary plan description (SPD) will state whether or not your employer allows withdrawals in your plan.The IRS code that governs 401(k) plans provides for hardship withdrawals only if: (1) the withdrawal is due to an immediate and heavy financial need; (2) the withdrawal must be necessary to satisfy that need (i.e. you have no other funds or way to meet the need); (3) the withdrawal must not exceed the amount needed by you; (4) you must have first obtained all distribution or nontaxable loans available under the 401k plan; and (5) you can’t contribute to the 401(k) plan for 6 months following the withdrawal.The following four items are considered by the IRS as acceptable reasons for a hardship withdrawal:

  • Un-reimbrused medical expenses for you, your spouse, or dependents.
  • Purchase of an employee’s principal residence.
  • Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
  • Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.

Hardship withdrawals are subject to income tax, and if you are not at least 59½ years of age, the 10% withdrawal penalty. You do not have to pay the withdrawal amount back.

What are the general rules regarding loans from a 401(k)?

The rules governing 401(k) plans allow plans to provide loans, but do not mandate that an employer make it a plan feature. Your summary plan description (SPD) will state whether or not your employer allows loans in your plan.Most of the time loans are only allowed for the following reasons: (1) to pay education expenses for yourself, spouse, or child; (2) to prevent eviction from your home; (3) to pay un-reimbursed medical expenses; or (4) to buy a first-time residence. You must pay the loan back within five years, although this can be extended for the first-time home purchase.Usually you are allowed to borrow up to 50% of your vested account balance to a maximum of $50,000 (set by law). Because of the cost, many plans will also set a minimum amount and restrict the number of loans you can have outstanding at any one time. Loan payments will generally be deducted from your payroll checks and, if married, you may need your spouse to consent to the loan. Funds obtained from a loan are not subject to income tax or the 10% early withdrawal penalty. If you should terminate your employment, often any unpaid loan will be distributed to you. This distribution will be subject to income tax and, if you are not at least 59½ years of age, the 10% withdrawal penalty.

I am currently working in the U.S. on a Visa. If I choose to leave the U.S. when my Visa expires, what will happen wiht my 401(k) account?

To avoid early withdrawal penalties and payment of taxes you can do one of two things: (1) If your account balance is over $5,000, you can leave your 401(k) money in your former employer’s plan. (2) You can roll your account balance into an IRA. You can also request a distribution from the 401(k) plan and take the lump-sum payment. You will have to pay taxes and early withdrawal penalties with the lump sum payment.

Disclaimer: I am not engaged in rendering legal advice. I am providing you with general 401(k) information. For plan specific information, you need to refer to your employer’s summary plan description.

What I’m Watching This Week – 14 July 2014

Published on by dredheadz

The Markets

After Alcoa’s strong report unofficially kicked off the Q2 earnings season, domestic equities rebounded from two down days. However, investors decided to take advantage of equities’ recent record levels and take some profits after revelations about a banking problem in Portugal revived concerns about Europe’s financial sector. Meanwhile, the spot price of oil, which had spiked to $107 two weeks ago, ended the week just over $100 a barrel.

Market/Index 2013 Close Prior Week As of 7/11 Weekly Change YTD Change
DJIA 16576.66 17068.26 16943.81 -.73% 2.21%
Nasdaq 4176.59 4485.93 4415.49 -1.57% 5.72%
S&P 500 1848.36 1985.44 1967.57 -0.90% 6.45%
Russell 2000 1163.64 1208.15 1159.93 -3.99% -.32%
Global Dow 2484.10 2638.59 2599.40 -1.49% 4.64%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.65% 2.53% -12 bps -51 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 Federal Reserve currently expects its bond purchases to end in October, according to minutes of the most recent Federal Open Market Committee meeting. However, the minutes also reiterated that the end of bond-buying won’t automatically mean higher interest rates, at least not for a “considerable time.” The Fed also will continue to reinvest the proceeds of maturing bonds it already holds until after it acts on rates.
  • Talks aimed at trying to address U.S.-China differences over Chinese currency policies began. The United States contends that those policies have kept the yuan artificially low, giving Chinese companies an unfair pricing advantage. Meanwhile, Chinese exports were up 7.2% in June from a year earlier, according to China’s General Administration of Customs.
  • A major Portuguese lender’s failure to make payments on some of its short-term debt raised concerns once again about the stability of European banks and the possibility of contagion. Banco Espirito Santo has been known to be struggling since December, but investor reaction to the disclosure caused several other European companies to postpone bond offerings.

Eye on the Week Ahead

Q2 earnings reports from some major financial and tech companies, due next week, could influence investor thinking about whether Q1’s discouraging GDP really has given way to renewed growth. Housing and inflation data also are likely to be closely watched.

What I’m Watching This Week – 7 July 2014

Published on by dredheadz

The Markets

After generally positive economic data once again suggested that the economy really did begin to rebound this spring, the Dow industrials surpassed 17,000 for the first time, while the S&P 500 hit three new all-time records during the week. And as investors embraced stocks, worries about the potential impact of a strong economy on potential Fed rate increases also sent the benchmark 10-year Treasury yield up and the price down.

Market/Index 2013 Close Prior Week As of 7/4 Weekly Change YTD Change
DJIA 16576.66 16851.84 17068.26 1.28% 2.97%
Nasdaq 4176.59 4397.93 4485.93 2.00% 7.41%
S&P 500 1848.36 1960.97 1985.44 1.25% 7.42%
Russell 2000 1163.64 1189.49 1208.15 1.57% 3.83%
Global Dow 2484.10 2603.77 2638.59 1.34% 6.22%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.54% 2.65% 11 bps -39 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 unemployment rate fell to 6.1% in June; that’s 1.4% lower than a year earlier and the lowest level in almost six years. The economy added 288,000 new jobs during the month, higher than the 272,000 monthly average since March. The data, coupled with upward revisions to payroll figures for April and May, suggested possible acceleration in job growth. The Bureau of Labor Statistics said the widespread job gains were led by professional/business services, retail, restaurants/bars, and health care.
    • A 2% increase in new orders placed with U.S. manufacturers put orders at their highest level since late 2013. Even though the Institute for Supply Management’s index showed that manufacturing growth didn’t accelerate in June, it still remained at a healthy 55.3% reading (any number above 50 represents expansion). The ISM’s measure of the services sector also showed slightly slower growth than the previous month, though the reading remained at a robust 56.3%.
    • After three straight monthly increases, new orders for U.S. manufactured goods slipped 0.5% in May, though most of the decline was in the volatile transportation sector. The Commerce Department also said inventories were at their highest level on record and have increased 18 of the last 19 months.
    • Commercial construction spending rose 1.1% in May, but the Commerce Department said that was largely offset by a 1.4% drop in the value of new home projects. The 0.1% overall increase in construction spending was weaker than April’s 0.8% gain, but the annual rate was 6.6% higher than a year ago.
    • As expected, the European Central Bank left two key interest rates unchanged, hoping that measures taken last month will be enough to help stimulate the economy.
    • Higher auto-related exports and less spending on imported oil and consumer goods helped cut the U.S. trade deficit by 5.5% in May to $44.4 billion, according to the Bureau of Economic Analysis.
    • The U.S. Supreme Court ruled that closely held, for-profit companies can choose to opt out of a provision of the Affordable Care Act that requires that employees’ insurance include coverage for birth control. The court also ruled that workers who aren’t full-fledged public employees cannot be required to pay fees to a union even if they benefit from its collective bargaining efforts.
    • Two separate assessments suggested that China’s sluggish manufacturing sector may be rebounding. The reading on the Chinese government’s purchasing managers’ index nudged up slightly to 51 in May. Meanwhile, HSBC/Markit’s Manufacturing PMI was basically flat but stayed in expansion territory, apparently responding to small steps taken by the government to stimulate economic growth.

Eye on the Week Ahead

In a week that’s light on fresh economic reports, investors may begin to focus on the Q2 earnings season, which has its unofficial start on Tuesday when Alcoa reports. Minutes of the most recent Federal Open Market Committee meeting could shed new light on the debate over whether the Fed should be concerned yet about inflation.

 

 

 

Monthly Market Review – June 2014

Published on by dredheadz

The Markets

After a rocky start, the quarter eventually made up for domestic equities’ earlier losses. As winter weather finally lost its chokehold on the U.S. economy, investors also grew increasingly comfortable with the Federal Reserve’s slow-and-steady approach to unwinding quantitative easing. As a result, they were willing to take on risk again, handing the Dow and S&P their 11th and 22nd all-time record closes of the year. As tech and biotech stocks rebounded from their early-spring slump, they helped push the Nasdaq back to a level it hadn’t seen since March 2000. By June, the small caps of the Russell 2000, which suffered the most in April, had managed to climb back into positive territory for the year, and the Global Dow’s year-to-date performance was more than triple that of its U.S. counterpart.

Bond investors continued to confound Fed-wary pundits, sending the benchmark 10-year Treasury yield down as demand pushed up prices. With Iraq joining Ukraine as a source of geopolitical anxiety, concern about oil supplies helped send the spot price above $107 a barrel. And despite some volatility that took the price of gold down to roughly $1,240 an ounce, a June rally allowed it to end the quarter at roughly $1,320.

Market/Index 2013 Close As of 6/30 Month Change Quarter Change YTD Change
DJIA 16576.66 16826.60 .65% 2.24% 1.51%
NASDAQ 4176.59 4408.18 3.90% 4.98% 5.54%
S&P 500 1848.36 1960.23 1.91% 4.69% 6.05%
Russell 2000 1163.64 1192.96 5.15% 1.70% 2.52%
Global Dow 2484.10 2605.62 1.61% 4.11% 4.89%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.53% 5 bps -20 bps -51 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.

Quarterly Economic Perspective

  • The end of winter weather brought greater relief than usual this spring, especially after gross domestic product was shown to have contracted strongly in Q1. The Bureau of Economic Analysis’s final -2.9% GDP estimate was the worst reading since early 2009 and a far cry from the 2.6% growth of the previous quarter. The BEA said most of the decline was caused by cuts in exports, business investments/inventory, and state and local government spending, while consumers spent more on higher heating costs. The slump caused the Federal Reserve to cut its economic growth forecast for all of 2014 to 2.1%-2.3%. Meanwhile, corporate profits were down 9.1% during the quarter–the largest drop since the end of 2008, according to the BEA.

  • The U.S. economy finally regained all of the jobs lost since the recession officially began in late 2007, and total employment was higher than when it previously peaked in January 2008. Also, the unemployment rate inched downward to 6.3%–its lowest level since September 2008.
  • By the end of the quarter, the housing market had begun to rebound from its winter slowdown as more homes came onto the market. According to the Commerce Department, sales of new single-family homes leaped 18.6% in May, and the National Association of Realtors® said that the 4.9% increase in home resales was the biggest monthly gain in nearly three years. Also, April was a strong month for both housing starts and building permits, though they had tapered off by the end of the quarter.
  • U.S. manufacturing also showed signs of strength. Industrial production rose for three months out of four, according to the Federal Reserve. And after three straight months of increases, durable goods orders slumped in May, but the Commerce Department said non-defense orders were up 0.1%. And once winter weather abated, retail sales also showed gains.
  • By quarter’s end, consumer inflation had risen at the fastest monthly pace (0.4%) in more than a year. The Bureau of Labor Statistics said the increases were driven by higher prices for housing, food, electricity, and gas. However, Fed Chair Janet Yellen called recent upticks “noisy” data and said the 2.1% inflation rate for the last 12 months isn’t a concern. The past year’s 2% increase in wholesale prices is substantially higher than the 1% of last May, but also within the Fed’s comfort zone. However, one of the Fed’s favorite inflation gauges–personal consumption expenditures–saw its biggest 12-month gain since October 2012, raising questions about possible future inflation.
  • The Federal Reserve’s monetary policy committee continued to unwind its economic support by cutting $10 billion worth of bond purchases each month. The committee now predicts that additional improvement in the economy and job market in coming months will allow it to increase the current near-zero target rate to 1.2% by the end of 2015 and 2.4% in 2016. Longer-term, however, it sees that rate leveling out around 3.75%.
  • To stimulate lending, the European Central Bank’s key interest rate was cut to -.01%; it’s now essentially charging banks to hold their funds rather than paying interest on deposits. The ECB also said it’s prepared to take additional steps later if necessary. The action is designed to stimulate lending, stave off the threat of deflation, and help jump-start the European economy, which grew 0.3% or less during Q1.
  • The Chinese economy showed signs of slowing. According to the country’s National Bureau of Statistics, the annual growth rate dropped below the official 7.5% target to 7.4%, the HSBC Purchasing Managers’ Index of Chinese manufacturing showed a slight contraction, and housing sales prices fell in half of 70 major cities.

Eye on the Month Ahead

The Fed will be watching the housing market this summer as it considers the timing of future interest rate increases. Also, the second week of July marks the unofficial start of the Q2 corporate earnings season. After the dismal Q1 GDP final reading, those reports may assume even greater significance than usual, as will the Bureau of Economic Analysis’s initial estimate of Q2 economic growth.

Is there a new one-rollover-per-year rule for IRAs?

Published on by dredheadz

Yes–starting in 2015.

The Internal Revenue Code says that if you receive a distribution from an IRA, you can’t make a tax-free (60-day) rollover into another IRA if you’ve already completed a tax-free rollover within the previous 12 months. The long-standing position of the IRS, reflected in Publication 590 and proposed regulations, was that this rule applied separately to each IRA you own.

Using an IRS example, assume you have two traditional IRAs, IRA-1 and IRA-2. You take a distribution from IRA-1 and within 60 days roll it over into your new traditional IRA-3. Under the old rule, you could not make another tax-free 60-day rollover from IRA-1 (or IRA-3) within one year from the date of your distribution. But you could still make a tax-free rollover from IRA-2 to any other traditional IRA.

Recently a taxpayer, Mr. Bobrow, did just what the example above seemed to allow, taking a distribution from IRA-1 and repaying it back to IRA-1 within 60 days, and then taking a distribution from IRA-2 and repaying it back to IRA-2 within 60 days. Unfortunately for the taxpayer, the IRS decided this was no longer the correct interpretation, and told Mr. Bobrow that his transactions violated the one-rollover-per-year rule. The case made its way to the Tax Court, which agreed with the IRS and held that regardless of how many IRAs he or she maintains, a taxpayer may make only one nontaxable 60-day rollover within each 12-month period.

Not surprisingly, the IRS has announced that it will follow the Bobrow case beginning in 2015 (more technically, the new rule will not apply to any rollover that involves a distribution occurring before January 1, 2015). For the rest of 2014 the “old” one-rollover-per-year rule in IRS Publication 590 (see above) will apply to any IRA distributions you receive. But keep in mind that you can make unlimited direct transfers (as opposed to 60-day rollovers) between IRAs–these aren’t subject to the one-rollover-per-year rule. So if you don’t have a need to actually use the cash for some period of time, it’s generally safer to use the direct transfer approach and avoid this potential problem altogether.

(Note: The one-rollover-per-year rule also applies–separately–to your Roth IRAs.)

What I’m Watching This Week – 30 June 2014

Published on by dredheadz

The Markets

Domestic equities seemed to shrug off a massive downward revision to first-quarter GDP and mostly ended the week flat. Though the Nasdaq’s gain was slight, it was the sixth positive week out of the last seven. Meanwhile, the benchmark 10-year Treasury yield remained low as demand from bond investors continued to support prices.

Market/Index 2013 Close Prior Week As of 6/27 Weekly Change YTD Change
DJIA 16576.66 16947.08 16851.84 -.56% 1.66%
Nasdaq 4176.59 4368.04 4397.93 .68% 5.30%
S&P 500 1848.36 1962.87 1960.97 -.10% 6.09%
Russell 2000 1163.64 1188.42 1189.49 .09% 2.22%
Global Dow 2484.10 2617.86 2603.77 -.54% 4.82%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.63% 2.54% -9 bps -50 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 contracted at a much faster pace in Q1 than anticipated, falling 2.9% (not the 1% recently estimated). The Bureau of Economic Analysis said its unusually steep downward revision of gross domestic product was caused not only by winter weather but also by exports and health-care spending that were both lower than previously thought.
  • The housing market rebounded strongly in May from its winter slump. According to the Commerce Department, sales of new single-family homes leaped 18.6% in May and were almost 17% better than a year earlier. Also, the National Association of Realtors® said the 4.9% increase in resales of existing homes was the biggest monthly gain in nearly three years. However, the NAR also said existing home sales were 5% lower and the number of unsold homes was 6% higher than in May 2013.
  • Data on April home prices also was mixed. Cities in the S&P/Case-Shiller 20-City Composite Index averaged a 1.1% gain in April, for a gain of almost 11% since last April. Boston saw its biggest monthly gain in the index’s 27-year history, and San Francisco had its sixth straight price increase. However, seven cities reported a decline since March, and S&P said year-over-year price gains had begun to slow.
  • U.S. incomes rose faster than personal consumption in May; according to the Bureau of Economic Analysis, incomes were up 0.4%, while spending rose 0.2%. Even after adjusting for inflation, incomes were up 0.2% for the second straight month. The bad news? That 0.2% increase in personal consumption expenditures–a key inflation gauge for the Fed–resulted in the biggest 12-month gain since October 2012; further increases could mean inflationary pressure that might affect interest rates.
  • The European Union formalized a trade agreement with Ukraine, Georgia, and Moldova–the agreement whose rejection by the former Ukrainian president led to subsequent protests and ultimately Russia’s annexation of Crimea. Shortly thereafter, European leaders told Russia it had until Monday evening to persuade rebels in Ukraine to respect a cease-fire or face further EU economic sanctions.
  • Durable goods orders fell 1% in May after three strong months. However, the Commerce Department said most of the decline was caused by a 31% drop in defense spending on equipment. Other than defense, new orders were up 0.6%.

Eye on the Week Ahead

In a holiday-shortened week, trading volumes are likely to continue to be light. Manufacturing data may suggest whether recent improvements can be sustained. The European Central Bank is scheduled to report on Thursday, but last month’s decision to adopt a negative interest rate likely precludes much immediate change in policy. And as always, the jobs report, issued a day early, will be watched.

Retirement Income Investing: Beyond Annuities

Published on by dredheadz

One of the challenges of investing during retirement is providing for annual income while balancing that need with other considerations, such as liquidity, how long you need your funds to last, your risk tolerance, and anticipated rates of return for various types of
investments. Annuities may be seen as a full or partial solution, since they can offer stable income or guaranteed lifetime payments (subject to the claims-paying ability of the issuer). However, they’re not right for everyone.

A well-thought-out asset allocation in retirement is essential. While income investments alone are unlikely to meet all your needs, it’s important to understand some of the most common non-annuity investments that can provide income as part of your overall investment strategy.

Bonds: retirement’s traditional backbone 

A bond portfolio can help you address investment goals in multiple ways. Buying individual bonds (which are essentially IOUs) at their face values and holding them to maturity can provide a predictable income stream and the assurance that unless a bond issuer defaults, you’ll receive the principal when the bond matures. (Bear in mind that if a bond is callable, it may be redeemed early, and you would have to replace that income.) You also can buy bonds through mutual funds or exchange-traded funds (ETFs). Depending on your circumstances, funds may provide greater diversification at a lower cost than individual bonds. However, a bond fund has no specific maturity date and therefore behaves differently from an individual bond, though like an individual bond, its price typically moves in the opposite direction from interest rates.

Consider the issuer

Bonds are available from many types of issuers, including corporations, the U.S. Treasury, local and state governments, governmental agencies, and foreign governments. Each type is taxed differently.

For example, the income from Treasury securities (unlike corporate bonds) is exempt from state and local taxes but not from federal taxes. Bonds issued by state and local governments, commonly called municipal bonds or munis, are just the opposite. Often a staple for retirees in a high tax bracket, munis generally are exempt from federal income tax (though specific issues may be taxable), but may be subject to state or local taxes. Largely because of that tax advantage, a tax-free bond typically yields less than a corporate bond with the same maturity. You’ll need to compare a muni’s tax-equivalent yield to know whether it makes sense on an after-tax basis.

Think about bond maturities

Bond prices can drop when interest rates and/or inflation rise, because their fixed income will buy less over time. Inflation affects prices of long-term bonds–those with maturities of 10 or more years–the most. One way to keep a bond portfolio flexible is to use so-called laddering: buying bonds with various maturities. As each matures, its proceeds can be reinvested. If bond yields are up, you benefit from higher rates; if yields are down, you have the option of choosing a different maturity or investment.

Certificates of deposit/savings accounts

Certificates of deposit (CDs), which offer a fixed interest rate for a specific time period, usually pay higher interest than a regular savings account, and you typically can have interest paid at regularly scheduled intervals. A CD can be rolled over to a new CD or another investment when it matures, though you may not get the same interest rate, and you’ll pay a penalty if you cash it in early. A high-yield savings account also pays interest, and, like a CD, is FDIC-insured up to $250,000.

Stocks offering dividends

Dividend-paying stocks, as well as mutual funds and ETFs that invest in them, also can provide income. Because dividends on common stock are subject to the company’s performance and a decision by its board of directors each quarter, they may not be as
predictable as income from a bond. However, dividends on preferred stock are different;
the rate is fixed and they’re paid before any dividend is available for common stockholders. That fixed payment means that prices of preferred stocks tend to behave somewhat like bonds. Preferred shares usually pay a higher dividend rate than common shares, and though most preferred stockholders do not have voting rights, their claims on the company’s assets will be satisfied before those of common stockholders if the company has financial difficulties. However, a company is often permitted to call in preferred shares at a predetermined future date, and preferred stockholders do not participate in a company’s growth as fully as common shareholders would.

Pass-through securities/REITs
Some investments are designed to act as a conduit for income from underlying assets. For example, mortgage-related securities represent an ownership interest in mortgage loans made by financial institutions. The most basic of these, known as pass-throughs, represent a direct ownership interest in a trust that consists of a pool of mortgages. Examples of pass-throughs include securities issued by the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal National Mortgage Association. Certain types of investment trusts–for example, REITs that buy, develop, manage, or sell real estate–don’t owe taxes as long as they pay out at least 90% of their net income to investors. That payout has traditionally made them popular as an
income vehicle and portfolio diversifier (though diversification alone does not guarantee a profit or ensure against a loss). There are many types of REITs, so be sure you understand how the one you choose functions before investing.

Automated inflation fighting

Some investments are designed to fight inflation for you. Treasury Inflation-Protected Securities (TIPS) pay a slightly lower fixed interest rate than regular Treasuries. However, your principal is automatically adjusted twice a year to match changes in the Consumer Price Index (CPI). Those adjusted amounts are used to calculate your interest payments.
That inflation adjustment means that if you hold a TIPS until it matures, your repaid principal will likely be higher than when you bought it (the government guarantees it will not be less). However, you can still lose money if you sell a TIPS before maturity. Inflation
rates change, and other interest rates can affect the value of a TIPS. If inflation is lower than expected, the total return on a TIPS could actually be less than that of a comparable non-indexed Treasury. Also, federal taxes on the interest and increases in your principal
are owed yearly even though additions to principal aren’t paid until a TIPS matures. Inflation-linked CDs function much like TIPS, but you’ll generally owe federal, state, and local taxes each year. Some mutual funds are managed with an eye toward inflation. A mutual fund that invests in inflation-protected securities pays out not only the interest but also any annual inflation adjustments, which are taxable each year as short-term capital gains. Some funds target inflation by mixing TIPS with floating rate loans, commodity-linked notes, real estate-related investments, stocks, and bonds.

Distribution funds

Some mutual funds are designed to provide an income stream from year to year. Available as part of a series, each fund designates a percentage of your assets to be distributed each year as scheduled payments, usually monthly or quarterly. Some funds are designed to last over a specific time period and plan to distribute all your assets by the end of that time; others focus on capital preservation, make payments only from earnings, and have no end date. You may withdraw money at any time from a distribution fund; however, that may reduce future returns. Also, payments may vary, and there is no guarantee a fund will achieve the desired return.

Many choices

New ways to help you translate savings into income are constantly being created. These are only a few of the many possibilities, and there’s more to understand about each.

IRS Guidance Limits Employer Pre-Tax Subsidies

Published on by dredheadz

The IRS has put the kibosh on any potential attempts by large employers to skirt the requirements of the Affordable Care Act (ACA) by paying employees before-tax subsidies to buy individual health insurance through private (commercial) carriers or through a Health insurance Exchange Marketplace. According to a recently published IRS Q&A, such employer payment plans are considered group health plans, and do not conform to the ACA, potentially subjecting the employer to an excise tax of $100 per employee, per day ($36,500 per employee, per year). Essentially, the IRS says employers can’t offer tax-free money to employees for the purpose of buying individual health insurance coverage.

Shared responsibility

Effective 2015, the ACA imposes a shared responsibility mandate on large employers with 100 or more full-time equivalent employees (2016 for employers with 50 or more full-time equivalent employees) to provide qualifying and affordable health insurance to employees or face a penalty. For information on the shared responsibility mandate, see IRS Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act.

However, some employers might attempt to comply with the ACA mandate by paying employees a before-tax subsidy that they can use to buy their own health insurance from a private insurer or through a Health Insurance Exchange Marketplace. The IRS has determined that these employer payment plans are akin to group health plans. Among other things, the ACA requires that group health plans must provide certain benefits such as preventive screenings without co-pays or other charges. In addition, group health plans cannot impose annual limits on the dollar amount of benefits for any individual. The IRS says these employer pre-tax payment arrangements do not meet the requirements of group health plans under the ACA.

Some ACA provisions unaffected

The IRS essentially prohibits employers from paying tax-free funds to employees to buy individual policies of health insurance. It does not appear to affect other provisions of the ACA, however. For instance, employers can pay taxable funds to workers that they can use to buy their own health insurance. Large employers can elect not to offer any group coverage to employees and pay a penalty of either $2,000 or $3,000 per employee, depending on the circumstances. Or, employers can contract with a private exchange; employers can provide tax-free money to employees, which they can use to shop for coverage on the private exchange, which may provide several health-care plan alternatives. Also, it’s important to note that the employer shared responsibility mandate applies only to large employers; employers with fewer than 50 full-time equivalent workers are not required to offer health insurance coverage to employees. In any case, it’s a good idea for employers to consult with a health care benefits professional to discuss options available under the ACA.

What I’m Watching This Week – 23 June 2014

Published on by dredheadz

The Markets

Reassurance from the Fed seemed to outweigh the situation in Iraq last week as investors showed greater comfort with taking on more risk. The week’s biggest gains were in the small caps of the Russell 2000, which once again returned to positive territory for the year, while the Nasdaq closed the week at a level it hasn’t seen since April 2000. Meanwhile, the Dow and S&P 500 set new record highs yet again–the 11th so far this year for the Dow, the 22nd for the S&P 500.

 

Market/Index 2013 Close Prior Week As of 6/20 Weekly Change YTD Change
DJIA 16576.66 16775.68 16947.08 1.02% 2.23%
Nasdaq 4176.59 4310.65 4368.04 1.33% 4.58%
S&P 500 1848.36 1936.15 1962.87 1.38% 6.20%
Russell 2000 1163.64 1162.68 1188.42 2.21% 2.13%
Global Dow 2484.10 2587.94 2617.86 1.16% 5.38%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.60% 2.63% 3 bps -41 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 Fed’s long/short strategy: The Federal Reserve’s monetary policy committee predicted that further improvement in the economy and the job market would allow it to raise interest rates slightly faster than previously anticipated. It now sees its current near-zero target rate hitting 1.2% by the end of 2015 and 2.4% in 2016. That’s slightly higher than previous forecasts. However, it also suggested subsequent increases might take rates to only 3.75%–slightly lower than its earlier long-term forecast of 4%. And as expected, Fed bond purchases were once again cut by $10 billion, leaving the monthly total at $35 billion.
  • Despite the projected economic rebound, 2014’s winter-weakened first quarter led the Fed to cut its U.S. growth forecast for the year from the nearly 3% predicted in March to 2.1%-2.3%. The Fed also said the growth rate could bump up above 3% in 2015 but would settle back to a little over 2% in the longer term. Both forecasts are roughly in line with figures from the International Monetary Fund.
  • U.S. manufacturing showed strength in May. Industrial production increased for the third month out of the last four and was up 4.3% from a year ago. The Federal Reserve said May’s 0.6% gain was led by a 1.5% increase in automotive output, and that 79.1% of the nation’s manufacturing capacity was being used. Also, the Fed’s Empire State manufacturing index remained at a multiyear high for the second consecutive month, and the Philly Fed index rose from 15.4 to 17.8–its highest reading since September and the fourth straight positive month.
  • Consumer prices rose in May at the fastest pace in more than a year. The Bureau of Labor Statistics said the 0.4% increase was broad-based, but was driven largely by higher prices for housing, food, electricity, airfares, and gas (food prices jumped more than in any month in almost three years, and groceries were up 0.7% for the month). The increases put the overall consumer inflation rate for the last year at 2.1%. Fed Chair Janet Yellen said that though recent upticks have left inflation a bit on the high side, it’s basically in line with the Fed’s 2% target.
  • Housing starts slumped 6.5% in May, according to the Commerce Department, but were still 9.4% higher than in May 2013. Building permits–an indicator of future activity–also fell, and the 6.4% decline left them nearly 2% lower than a year ago.

 Eye on the Week Ahead

New and existing home sales will suggest whether the summer housing market is picking up, while consumer spending also will be of interest. Depending on the situation in Iraq, oil prices could start to become a bigger factor in investor thinking.