6 Tips for Getting Your Personal Finances in Shape for 2019

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Fall is a good time to assess where you stand and where you could be.

You need not wait for 2019 to plan improvements to your finances.

You can begin now. The last few months of 2018 give you a prime time to examine critical areas of your budget, your credit, and your investments.

You could work on your emergency fund (or your rainy day fund).

To clarify, an emergency fund is the money you store in reserve for unforeseen financial disruptions; a rainy day fund is money saved for costs you anticipate will occur. A strong emergency fund contains the equivalent of a few months of salary, maybe even more; a rainy day fund could contain as little as a few hundred dollars.

Optionally, you could hold this money in a high-yield savings account. A little searching may lead to a variety of choices; here in September, it is not hard to find accounts offering 1.5% or more annual interest, as opposed to the common 0.1% or less. Remember that a high-yield savings account is intended as a place to park money; if you make regular deposits and withdrawals to and from it and treat it like a checking account, you may incur fees that diminish the savings progress you make. (1)

Review your credit score.

Federal law entitles you to a free copy of your credit report at each of the three nationwide credit reporting firms (Equifax, TransUnion, and Experian) every 12 months. Now is as good a time as any to request these reports; visit annualcreditreport.com or call 1-877-322-8228 to order them. At the very least, you will learn your credit score. You may also detect errors and mistakes that might be harming your credit rating. (2)

Think about the way you are saving for major financial goals.

Has your financial situation improved in 2018, to the extent that you could contribute a little more money to an IRA or a workplace retirement plan now or next year? If you are not contributing enough at work to receive a matching contribution from your employer, maybe now you can.

Also, consider the way your invested assets are held.

What are your current and future allocations? Some people have heavy concentrations of equities in their workplace retirement plan, IRA, or brokerage account due to Wall Street’s long bull market. If this is true for you, there may be some pain when the next bear market begins. Check in on your portfolio while things are still bullish.

Can you spend less in 2019?

That might be a key to saving more and putting more money into your rainy day or emergency funds. If your pay has increased, your discretionary spending does not necessarily have to increase with it. See if you can find room in your budget to possibly cut an expense and redirect the money into savings or investments.

You may also want to set some near-term financial goals for yourself.

Whether you want to accomplish in 2019 what you did not quite do in 2018, or further the positive financial trends underway in your life, now is the time to look forward and plan.

The Financial Planning Pyramid (3)

PlanningPyramid

Sources

  1. thesimpledollar.com/best-high-interest-savings-accounts/
  2. ftc.gov/faq/consumer-protection/get-my-free-credit-report
  3. The American College of Financial Services

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

If You’re at Or Near 50 here’s how to Catch Up on Retirement Saving

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If you are starting at or near 50, consider these ideas

Do you fear you are saving for retirement too late?

Plan to address that anxiety with some positive financial moves. If you have little saved for retirement at age 50 (or thereabouts), there is still much you can do to generate a fund for your future and to sustain your retirement prospects.

Contribute and play catch-up.

This year’s standard contribution limit for an IRA (Roth or traditional) is $5,500; common employer-sponsored retirement plans have a 2018 contribution limit of $18,500. You should try, if at all possible, to meet those limits. In fact, starting in the year you turn 50, you have a chance to contribute even more: for you, the ceiling for annual IRA contributions is $6,500; the limit on yearly contributions to workplace retirement plans, $24,500.(1)

Look for low-fee options.

Lower fees on your retirement savings accounts mean less of your invested assets going to management expenses. An account returning 6% per year over 25 years with an annual expense ratio of 0.5% could leave you with $30,000 more in savings than an account under similar conditions and time frame charging a 2.0% annual fee.2

Focus on determining the retirement income you will need.

If you are behind on saving, you may be tempted to place your money into extremely risky and speculative investments – anything to make up for lost time. That may not work out well. Rather than risk big losses you have little time to recover from, save reasonably and talk to a financial professional about income investing. What investments could potentially produce recurring income to supplement your Social Security payments?

Consider where you could retire cheaply.

When your retirement savings are less than you would prefer, this implies a compromise. Not necessarily a compromise of your dreams, but of your lifestyle. There are many areas of the country and the world that may allow you to retire with less financial pressure.

Think about retiring later.

Every additional year you work is one less year of retirement to fund. Each year you refrain from drawing down your retirement accounts, you give them another year of potential growth and compounding – and compounding becomes more significant as those accounts grow larger. Working longer also lets you claim Social Security later, and that means bigger monthly retirement benefits for you.

Most members of Generation X need to save more for their futures.

The median retirement savings balance for a Gen Xer, according to research from Allianz, is about $35,000. A recent survey from Comet Financial Intelligence found that 41% of Gen Xers had not yet begun to build their retirement funds. So, if you have not started or progressed much, you have company. Now is the time to plan your progress and follow through. (3,4)

Sources

  1. irs.gov/newsroom/irs-announces-2018-pension-plan-limitations-401k-contribution-limit-increases-to-18500-for-2018
  2. businessinsider.com/401k-fees-devastate-retirement-2017-5
  3. fool.com/retirement/2018/02/07/heres-what-gen-xers-have-saved-for-retirement.aspx
  4. entrepreneur.com/article/309746

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

 

How the Sequence of Investment Returns Can Negatively Impact Retirees

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A look at how variable rates of return do (and do not) impact investors over time.

What exactly is the “sequence of returns”?

The phrase simply describes the yearly variation in an investment portfolio’s rate of return. Across 20 or 30 years of saving and investing for the future, what kind of impact do these deviations from the average return have on a portfolio’s final value?

The answer: no impact at all.

Once an investor retires, however, these ups and downs can have a major effect on portfolio value – and retirement income.

During the accumulation phase, the sequence of returns is ultimately inconsequential.

Yearly returns may vary greatly or minimally; in the end, the variance from the mean hardly matters. (Think of “the end” as the moment the investor retires: the time when the emphasis on accumulating assets gives way to the need to withdraw assets.)

An analysis from BlackRock bears this out.

The asset manager compares three model investing scenarios: three investors start portfolios with lump sums of $1 million, and each of the three portfolios averages a 7% annual return across 25 years. In two of these scenarios, annual returns vary from -7% to +22%. In the third scenario, the return is simply 7% every year. In all three scenarios, each investor accumulates $5,434,372 after 25 years – because the average annual return is 7% in each case. (1)

Here is another way to look at it.

The average annual return of your portfolio is dynamic; it changes, year-to-year. You have no idea what the average annual return of your portfolio will be when “it is all said and done,” just like a baseball player has no idea what his lifetime batting average will be four seasons into a 13-year playing career. As you save and invest, the sequence of annual portfolio returns influences your average yearly return, but the deviations from the mean will not impact the portfolio’s final value. It will be what it will be. (1)

When you shift from asset accumulation to asset distribution, the story changes.

You must try to protect your invested assets against sequence of returns risk.

This is the risk of your retirement coinciding with a bear market (or something close). Even if your portfolio performs well across the duration of your retirement, a bad year or two at the beginning could heighten concerns about outliving your money.

For a classic illustration of the damage done by sequence of returns risk, consider the awful 2007-2009 bear market. Picture a couple at the start of 2008 with a $1 million portfolio, held 60% in equities and 40% in fixed-income investments. They arrange to retire at the end of the year. This will prove a costly decision. The bond market (in shorthand, the S&P U.S. Aggregate Bond Index) gains 5.7% in 2008, but the stock market (in shorthand, the S&P 500) dives -37.0%. As a result, their $1 million portfolio declines to $800,800 in just one year. (2)

Here is a good chart from investmentmoats.com which helps visually explain what how early negative returns in retirement could potentially impact final portfolio value:

jlFIqYt

If you are about to retire, do not dismiss this risk.

If you are far from retirement, keep saving and investing knowing that the sequence of returns will have its greatest implications as you make your retirement transition.

Sources

  1. blackrock.com/pt/literature/investor-education/sequence-of-returns-one-pager-va-us.pdf
  2. kiplinger.com/article/retirement/T047-C032-S014-is-your-retirement-income-in-peril-of-this-risk.html
  3. http://investmentmoats.com/budgeting/retirement-planning/explaining-sequence-of-return-risk-and-possible-solutions/
  4. https://retireone.com/sequence-of-returns/

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

How to Balance Portfolio Risk and Reward as You Get Closer to Retirement

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As you approach retirement, it may be time to pay more attention to investment risk.

If you are an experienced investor, you have probably fine-tuned your portfolio through the years in response to market cycles or in pursuit of a better return. As you approach or enter retirement, is another adjustment necessary?

Some investors may think they can approach retirement without looking at their portfolios. Their investment allocations may be little changed from what they were 10 or 15 years ago. Because of that inattention (and this long bull market), their invested assets may be exposed to more risk than they would like.

Rebalancing your portfolio with your time horizon in mind is only practical.

Consider the nature of equity investments: they lose or gain value according to the market climate, which at times may be fear driven. The larger your equities position, the larger your losses could be in a bear market or market disruption. If this kind of calamity happens when you are newly retired or two or three years away from retiring, your portfolio could be hit hard if you are holding too much stock. What if it takes you several years to recoup your losses? Would those losses force you to compromise your retirement dreams?

As certain asset classes outperform others over time, a portfolio can veer off course.

The asset classes achieving the better returns come to represent a greater percentage of the portfolio assets. The intended asset allocations are thrown out of alignment.1

Just how much of your portfolio is held in equities today? Could the amount be 70%, 75%, 80%? It might be, given the way stocks have performed in this decade. As a StreetAuthority comparison notes, a hypothetical portfolio weighted 50/50 in equities and fixed-income investments at the end of February 2009 would have been weighted 74/26 in favor of stocks by the end of February 2018. (1)

Ideally, you reduce your risk exposure with time.

With that objective in mind, you regularly rebalance your portfolio to maintain or revise its allocations. You also may want to apportion your portfolio, so that you have some cash for distributions once you are retired.

Rebalancing could be a good idea for other reasons.

Perhaps you want to try and stay away from market sectors that seem overvalued. Or, perhaps you want to find opportunities. Maybe an asset class or sector is doing well and is underrepresented in your investment mix. Alternately, you may want to revise your portfolio in view of income or capital gains taxes.

Rebalancing is not about chasing the return, but reducing volatility.

The goal is to manage risk exposure, and with less risk, there may be less potential for a great return. When you reach a certain age, though, “playing defense” with your invested assets becomes a priority.

Sources

  1. nasdaq.com/article/how-to-prepare-your-income-portfolio-for-volatility-cm939499

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

 

Why Medicare Should Be Part of Your Retirement Planning

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The premiums and coverages vary, and you must realize the differences.

Medicare takes a little time to understand.

As you approach age 65, familiarize yourself with its coverage options and their costs and limitations.

Certain features of Medicare can affect health care costs and coverage.

Some retirees may do okay with original Medicare (Parts A and B), others might find it lacking and decide to supplement original Medicare with Part C, Part D, or Medigap coverage. In some cases, that may mean paying more for senior health care per month than you initially figured.

How much do Medicare Part A and Part B cost, and what do they cover?

Part A is usually free; Part B is not. Part A is hospital insurance and covers up to 100 days of hospital care, home health care, nursing home care, and hospice care. Part B covers doctor visits, outpatient procedures, and lab work. You pay for Part B with monthly premiums, and your Part B premium is based on your income. In 2018, the basic monthly Part B premium is $134; higher-earning Medicare recipients pay more per month. You also typically shoulder 20% of Part B costs after paying the yearly deductible, which is $183 in 2018.(1)

The copays and deductibles linked to original Medicare can take a bite out of retirement income.

In addition, original Medicare does not cover dental, vision, or hearing care, or prescription medicines, or health care services outside the U.S. It pays for no more than 100 consecutive days of skilled nursing home care. These out-of-pocket costs may lead you to look for supplemental Medicare coverage and to plan other ways of paying for long-term care.(1,2)

Medigap policies help Medicare recipients with some of these copays and deductibles.

Sold by private companies, these health care policies will pay a share of certain out-of-pocket medical costs (i.e., costs greater than what original Medicare covers for you). You must have original Medicare coverage in place to purchase one. The Medigap policies being sold today do not offer prescription drug coverage. A monthly premium on a Medigap policy for a 65-year-old man may run from $150-250, so keep that cost range in mind if you are considering Medigap coverage.(2,3)

In 2020, the two most popular kinds of Medigap plans – Medigap C and Medigap F – will vanish.

These plans pay the Medicare Part B deductible, and Medigap policies of that type are being phased out due to the Medicare Access and CHIP Reauthorization Act. Come 2019, you will no longer be able to enroll in them.(4)

Part D plans cover some (certainly not all) prescription drug expenses.

Monthly premiums are averaging $33.50 this year for these standalone plans, which are offered by private insurers. Part D plans currently have yearly deductibles of less than $500.(2,5)

Some people choose a Part C (Medicare Advantage) plan over original Medicare.

These plans, offered by private insurers and approved by Medicare, combine Part A, Part B, and usually Part D coverage and often some vision, dental, and hearing benefits. You pay an additional, minor monthly premium besides your standard Medicare premium for Part C coverage. Some Medicare Advantage plans are health maintenance organizations (HMOs); others, preferred provider organizations (PPOs). (6)

If you want a Part C plan, should you select an HMO or PPO?

About two-thirds of Part C plan enrollees choose HMOs. There is a cost difference. In 2017, the average HMO monthly premium was $29. The average regional PPO monthly premium was $35, while the mean premium for a local PPO was $62.(6)

HMO plans usually restrict you to doctors within the plan network.

If you are a snowbird who travels frequently, you may be out of the Part C plan’s network area for weeks or months and risk paying out-of-network medical expenses from your savings. With PPO plans, you can see out-of-network providers and see specialists without referrals from primary care physicians.(6)

Now, what if you retire before age 65?

COBRA aside, you are looking at either arranging private health insurance coverage or going uninsured until you become eligible for Medicare. You must also factor this possible cost into your retirement planning. The earliest possible date you can arrange Medicare coverage is the first day of the month in which your birthday occurs.(5)

Medicare planning is integral to your retirement planning.

Should you try original Medicare for a while? Should you enroll in a Part C HMO with the goal of keeping your overall out-of-pocket health care expenses lower? There is also the matter of eldercare and the potential need for interim coverage (which will not be cheap) if you retire prior to 65. Discuss these matters with the financial professional you know and trust in your next conversation.

Sources

  1. medicare.gov/your-medicare-costs/costs-at-a-glance/costs-at-glance.html
  2. cnbc.com/2018/05/03/medicare-doesnt-cover-everything-heres-how-to-avoid-surprises.html
  3. medicare.gov/supplement-other-insurance/medigap/whats-medigap.html
  4. fool.com/retirement/2018/02/05/heads-up-the-most-popular-medigap-plans-are-disapp.aspx
  5. money.usnews.com/money/retirement/medicare/articles/your-guide-to-medicare-coverage
  6. cnbc.com/2017/10/18/heres-how-to-snag-the-best-medicare-advantage-plan.html 

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

Smart Strategies for Coping With Student Loan Debt

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Paying them down and managing their financial impact.

Is student loan debt weighing on the economy?

Probably. Total student loan debt in America is now around $1.5 trillion, having tripled since 2008. The average indebted college graduate leaves campus owing nearly $40,000, and the mean monthly student loan payment for borrowers aged 30 and younger is about $350. (1,2)

The latest Federal Reserve snapshot shows 44.2 million Americans dealing with lingering education loans. The housing sector feels the strain: in a recent National Association of Realtors survey, 85% of non-homeowners aged 22-35 cited education loans as their main obstacle to buying a house. Eight percent of student loan holders fail to get home loans because of their credit scores, the NAR notes; that percentage could rise because the Brookings Institution forecasts that 40% of student loan borrowers will default on their education debts by 2023. (1,3)

If you carry sizable education debt, how can you plan to pay it off?

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

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

  1. The local economy permitting, a couple can live on one salary and use the wages of the other earner to pay off the loan balance(s).
  2. You could use your tax refund to attack the debt.
  3. You can hold off on a major purchase or two. (Yes, this is a sad effect of college debt, but it could also help you reduce it by freeing up more cash to apply to the loan.)
  4. You can sell something of significant value – a car or truck, a motorbike, jewelry, collectibles – and turn the cash on the debt.

Now in the big picture of your budget.

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

Even just paying more than the minimum each month on your loan will help.

Making payments every two weeks rather than every month can also have a big impact.

If a lender presents you with a choice of repayment plans, weigh the one you currently use against the others; the others might be better. Signing up for automatic payments can help, too. You avoid the risk of penalty for late payment, and student loan issuers commonly reward the move by lowering the interest rate on a loan by a quarter-point. (4)

What if you have multiple outstanding college loans?

If one of them has a variable interest rate, try addressing that one first. Why? The interest rate on it may rise with time.

Also, how about combining multiple federal student loan balances into one? That is another option. While this requires a consolidation fee, it also leaves you with one payment, perhaps at a lower interest rate than some of the old loans had. If you have multiple private-sector loans, refinancing is an option. Refinancing could lower the interest rate and trim the monthly payment. The downside is that you may end up with variable interest rates. (5)

Maybe your boss could help you pay down the loan.

Some companies are doing just that for their workers, simply to be competitive today. According to the Society for Human Resource Management, 4% of employers offer this perk. Six percent of firms with 500-10,000 workers now provide some form of student loan repayment assistance. (6)

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

Need Additional Help?

Visit the Student Loan Borrowers Assistance website. The National Consumer Law Center’s Student Loan Borrower Assistance Project is a resource for borrowers, their families, and advocates representing student loan borrowers.

Sources

  1. studentloanhero.com/student-loan-debt-statistics/
  2. cnbc.com/2018/05/24/students-would-drop-out-of-college-to-avoid-more-debt.html
  3. cnbc.com/2018/04/19/student-loan-debt-can-make-buying-a-home-almost-impossible.html
  4. nerdwallet.com/blog/loans/student-loans/auto-pay-student-loans/
  5. investorplace.com/2017/06/how-to-navigate-your-student-loan-debt/
  6. shrm.org/resourcesandtools/hr-topics/benefits/pages/student-loan-assistance-benefit.aspx

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

What Do Rising Interest Rates Mean for You? (The Upside and The Downside)

dollar-currency-money-us-dollar-47344.jpeg

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Interest rates are rising.

The Federal Reserve has hiked the benchmark interest rate twice this year, and it expects to make two more hikes before 2019 arrives. It projects the federal funds rate will approach 3.5% by 2020. (1)

Are you retired, or about to retire?

You will be happy to know rates of return are improving on fixed-income investments. Take 1-year certificates of deposit, for example. Back in 2015, most of them were yielding 0.25%. Now their return is around 2.3%. Money market funds and even deposit accounts should soon feature slightly higher interest rates. The downside of this? If fixed-income investments grow increasingly attractive, investors may pull money out of equities. (4)

Do you have a lot of credit card debt?

The APR on your credit cards should continue to rise in response to the Fed’s moves. (2)

Do you have a fixed-rate mortgage?

You are unaffected. If you have an adjustable-rate mortgage, your payments may reset higher at the start of the next adjustment period. (3)

Are you a business owner seeking a short-term loan?

Try to arrange financing now. The cost of short-term borrowing increases when the Fed hikes. (2)

Do you own a business that sells high-end merchandise?

Your sales may be impacted. Higher interest rates force consumers to put more money toward debt. That means less disposable income to spend on the good life.

Sources

  1. bondbuyer.com/articles/fed-raises-rates-officials-boost-outlook-to-four-hikes-in-2018
  2. smallbusiness.chron.com/interest-rates-affect-businesses-67152.html
  3. tinyurl.com/y74tqh6q
  4. marketwatch.com/story/rising-interest-rates-give-retirees-good-news-and-bad-news-2018-06-20

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

What is the Yield Curve, and Why is the Financial Media Concerned About it?

Wall Street sign in New York City

Why are investors and economists getting nervous about Treasury yields? Here is a brief explanation, starting with a clarification.

A yield curve is really an X-Y graph projecting expected rates of return for equivalent-quality bonds with different maturity dates.

But it is not just any yield curve that matters. When investors, commentators, and economists talk about “the yield curve,” they are talking about the graph plotting the interest rates of Treasuries: 3-month, 2-year, 5-year, 10-year, and 30-year notes. The “curve” is the line connecting their projected future yields. This Treasury yields snapshot is authoritatively referred to as: “the yield curve.” (1,2)

The yield curve normally slopes upward.

(Think “rise over run.”) In other words, the projected yields on the short-term Treasuries (at the left of the X-Y graph) are small compared to the projected returns on the 10-year and 30-year Treasuries. (2)

NORMAL YIELD CURVE

normalyieldcurve_r

When the economy is booming, the slope of the yield curve is often steep.

A thriving economy typically has significant inflation, and when investors see rising inflation, they assume the Federal Reserve will start raising interest rates. That belief leaves them cold on longer-term bonds, so the prices of those bonds begin to fall, and their yields correspondingly rise. (2)

The yield curve usually flattens when the Fed tightens.

It has been flattening lately, and some economists wonder if it will invert. When the yield curve inverts, interest rates on short-term Treasuries exceed interest rates on longer-term Treasuries. (2,3)

Inverted yield curves are strongly correlated with recessions.

In fact, every recession America has experienced in the last 50 years has been preceded by an inverted yield curve. Three times in the 1950s, however, an inverted yield curve failed to presage a downturn. (2,3)

INVERTED YIELD CURVE

Invertedyieldcurve_r-1

Right now, the 10s-2s gap is being closely watched.

This is the difference between 10-year and 2-year Treasury yields. It has been steadily declining since December 2015 (when the Fed began tightening), and it narrowed to less than 0.5% this spring. (2)

Looking back over the last half-century, the 10s-2s gap has slimmed to less than 0.5% five other times, with an inversion of the yield curve – and a recession – following each time.

Those recessions took time to arrive, though. On average, they began nearly two years after the yield curve inverted. (2)

Wall Street analysts have noticed a relationship between bear markets and recessions – the former tends to herald the latter.

As some study the flattening yield curve, they not only see a recession risk, but an accompanying risk of a stock market downturn, as well. (2)

Could their fears be overblown?

As MarketWatch noted, the flattening yield curve has been promoted by pension funds buying up greater quantities of zero-coupon Treasuries. The Fed, too, may have affected things due to its quantitative easing and ongoing forward guidance. (4)

Is a flatter yield curve a new normal, as former Fed chair Janet Yellen argued in 2017?

She felt the latest gradual flattening was actually a product of a changing relationship between the yield curve and the business cycle. If that is correct, investors could worry a little less about the Fed’s determination to maintain its pace of rate hikes. (Its latest dot-plot projects four interest rate increases in 2018.) The New York Fed recently put the chance of a 2019 recession based on the slope of the yield curve at 11%; in comparison, the chance was 40% on the eve of the Great Recession. (3,5)

Sources

  1. investopedia.com/terms/y/yieldcurve.asp
  2. schwab.com/resource-center/insights/content/eye-on-indicators-what-does-yield-curve-tell-us
  3. brookings.edu/blog/up-front/2018/04/16/the-hutchins-center-explains-the-yield-curve-what-it-is-and-why-it-matters/
  4. marketwatch.com/story/how-pension-funds-could-be-muddying-the-predictive-power-of-this-recession-indicator-2018-06-13
  5. bloomberg.com/news/articles/2018-06-13/fed-raises-rates-officials-boost-outlook-to-four-hikes-in-2018

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

Life Insurance 101: The Different Types of Life Insurance Policies Explained

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Photo by Adrianna Calvo on Pexels.com

Whole life. Variable universal life. Term. What do these descriptions really mean?

All life insurance policies have two things in common.

They guarantee to pay a death benefit to a designated beneficiary after a policyholder dies (although, the guarantee may be waived if the death is a suicide occurring within two years of the policy purchase). All require recurring payments (premiums) to keep the policy in force. Beyond those basics, the differences begin. (1)

Some life insurance coverage is permanent, some not.

Permanent life insurance is designed to cover you for your entire life (not just a portion or “term” of it), and it can become an important element in your retirement planning. Whole life insurance is its most common form. (2)

Whole life policies accumulate cash value.

How does that happen? An insurer directs some of your premium payments into a reserve account and puts those dollars into investments (typically conservative ones). The return on the investments influences the growth of the cash value, which builds up according to a formula the insurer sets. (3)

A whole life policy’s cash value grows with taxes deferred.

After a while, you gain the ability to borrow against that cash value. You can even cancel the policy and receive a surrender value. Premiums on whole life policies, though, are usually higher than premiums on term life policies, and they may rise with time. Also, beneficiaries only receive a death benefit (not the policy’s cash value) when a whole life policyholder dies. (2,4)

Universal life insurance is whole life insurance with a key difference.

Universal life policies also build cash value with taxes deferred, but there is the chance to eventually pay the monthly premiums out of the policy’s investment portion. (5)

Month by month, some of your premium on a universal life policy gets credited to the cash reserve of the policy. Sooner or later, you may elect to pay premiums out of the cash reserve – so, the policy essentially begins to “pay for itself.” If all goes well, a universal life policy may have a lower net cost than a whole life policy. If the investments chosen by the insurer severely underperform, that can mean a dilemma: the cash reserve of your policy may dwindle and be insufficient to keep paying the premiums. That could mean cancellation of the policy. (5)

What about variable life (and variable universal life) policies?

Variable life policies are basically whole life or universal life policies with a riskier investment component. In VL and VUL policies, you may direct percentages of the cash reserve into investment sub-accounts managed by the insurer. Assets allocated to the sub-accounts may be put into equity investments of your choice as well as fixed-income investments. If you choose equity investments, you (and the insurer) assume greater risk in exchange for the possibility of greater reward. The performance of the subaccounts cannot be guaranteed. As an effect of this risk exposure, a VUL policy usually has a higher annual cost than a comparable UL policy. (6)

The performance of the stock market may heavily affect the performance of the subaccounts and the policy premiums.

A bull market may mean better growth for the policy’s cash value and lower premiums. A bear market may mean reduced cash value and higher monthly payments to keep the policy going. In the worst-case scenario, the cash value plummets, the insurer hikes the premiums in order to provide the guaranteed death benefit, the premiums become too expensive to pay, and the policy lapses. (6)

Term life insurance is life insurance that you provides coverage for a set period.

Term life provides coverage for usually 10-30 years. Should you die within that period, your beneficiary will get a death benefit. Typically, the premium payments and death benefit on a term policy are fixed from the start, and the premiums are much lower than those of permanent life policies. When the term of coverage ends, you may be offered the option to renew the coverage for another term or to convert the policy to a form of permanent life insurance. (2,7)

Which coverage is right for you?

Many factors may come into play when deciding which type of life insurance will suit your needs. The best thing to do is to speak with a qualified financial advisor who can help you examine these factors, so you can determine which type of coverage may be appropriate.

Sources

  1. thebalance.com/does-a-life-insurance-policy-cover-suicide-2645609
  2. fool.com/retirement/2017/07/20/term-vs-whole-life-insurance-which-is-best-for-y-2.aspx
  3. investopedia.com/articles/personal-finance/082114/how-cash-value-builds-life-insurance-policy.asp
  4. insure.com/life-insurance/cash-value.html
  5. thebalance.com/what-you-need-to-know-about-universal-life-insurance-2645831
  6. insuranceandestates.com/top-10-pros-cons-variable-universal-life-insurance/
  7. consumerreports.org/life-insurance/how-to-choose-the-right-amount-of-life-insurance/

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

 

What an Investment Policy Statement is and Why You Should Have One

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An “Investment Policy Statement” is a document that forms the foundation for an investor’s portfolio.

A good IPS outlines your entire investment plan

An IPS includes the asset allocation, the asset management approach, and your objectives, time horizon, risk tolerance, expected return, liquidity requirements, income needs, and tax concerns.

If you are a value investor, a growth investor, or a conservative investor, your IPS defines a strategy to invest your assets among diverse asset classes in a way that suits your preferred investment style.

Think of your IPS as long-term GPS for your portfolio.

The goal is to set the asset allocation in a way that can potentially give you the highest possible rate of return corresponding to an acceptable level of risk.

Your IPS keeps you from getting “off track” when it comes to investing.

You and your advisor should keep an eye on your portfolio to see that your invested assets stay within the allocation boundaries set by your IPS. This is why regular reviews are so essential.

Periodically, your portfolio may need to be rebalanced.

Here’s why. As months go by, the ups and downs of the investment markets will throw your asset allocation slightly or dramatically out of whack. As an extremely simple example, let’s say you start out with 25% of your assets in U.S. large caps, 15% in U.S. mid caps, 15% in U.S. small caps, 20% in foreign shares and 25% in bonds. Suddenly, small cap stocks have a great quarter, and thanks to the great returns, you wind up with 21% of your assets invested in small caps and only 19% in bonds. Great, right?

No. What’s actually happened is that your risk has increased along with your return. A greater percentage of your assets are now held in the comparatively risky stock market, removed from the bond market. So while the short-term gains have been great, it’s time to rebalance according to the parameters set by your IPS so that you can help reduce your risk exposure.

Rebalancing in Tax-Deferred Accounts

For tax-deferred investment accounts, this is easily done: you simply transfer assets among accounts to restore the target allocations. Future contributions occur according the IPS parameters.

Rebalancing in Taxable Accounts

When it comes to taxable investment accounts, it is usually best to ramp up future contributions to the underweighted funds rather than sell portions of a fund and trigger taxes.

Maintaining Balance

As a balanced investor your IPS should be designed to help you invest in a consistent, appropriate way, a way that matches your preferred investment style. Without an IPS, you invite impulse, emotion and a short-term focus into the picture.

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