Author: production

Recently, the Federal Reserve raised interest rates for the third time since the financial crisis, and many Fed watchers agree that additional hikes are on the horizon.

This represents a change. The Fed lowered its key federal funds rate to zero in December 2008 to help revive the collapsing housing market. Since then, however, consumers have become accustomed to lower interest rates: those who bought homes and cars paid less in interest, as did those who carried credit card balances. But our cash investments didn’t generate much in the way of income.

So, how might increased rates affect you?

Cash equivalents may pay more interest. American savers struggled for years, earning little interest in their savings account and certificates of deposit (CDs). When the Fed raises interest rates, banks generally pay customers more interest on deposits.

Mortgage rates are now rising, but remain low. In fact, a Fed rate hike does not automatically mean mortgage rates will rise. At times, the Fed has raised rates and mortgage rates have fallen, although this is unusual. You can expect higher (but not yet game-changing) interest rates on mortgages and other big-ticket items in the future.

The stock market could tremble. Stock markets used to swoon at the mere hint of a Fed rate hike, as rate hikes increase the cost of borrowing for companies and strengthen the U.S. dollar (which in turn makes U.S. products more expensive and thus less attractive to foreign buyers). The March 2017 increase was widely expected and didn’t impact the markets significantly. However, future increases may.

It’s a long-standing issue and the subject of much debate: If you have extra money, which should you do first – pay off debt or invest?

In fact, you have three options. For example:

You can use extra money to pay off debt. Whether you should pay off a mortgage, a car loan, credit card balances or a family member’s student loan before investing depends on the interest rate of the debt. The “magic number” will vary by individual, but broadly speaking, if the interest rate is higher than 10% you should pay off the debt. Why? Because you are unlikely to get that high a return on a stock market investment over the long term.

Use any extra money to invest. If, however, the interest rate on your debt is low, you may want to consider investing before you pay off your debt.

Generally speaking, if the interest rate is lower than 5% (as it could be on your mortgage, for example) you may be better served by investing your extra money in stocks or stock mutual funds.

What about bonds? In fact, bonds may not be the ideal investment, as their yield is now low.

So with an interest rate on your mortgage of, say, 4%, purchasing a bond or bond fund that yields approximately 2% wouldn’t make sense.

Use some of the extra money to pay off debt, and some to invest. You could also use a portion of your extra money to pay down your debt, and invest the remainder in stocks. Perhaps start at 50/50, then adjust based on stock-market performance. For example, in a rising market, you might put 75% of your extra money toward stocks and use 25% to pay off debt.

For many, this option’s a win-win. But just to be sure, ask your advisor.

Note: This material has been prepared for informational purposes only, and is not intended to provide financial advice.

Although interest rates fell precipitously in the early 1980s, they are now on the rise through the Federal Reserve System. Higher rates will resonate through virtually every sector of the economy, including investments; more specifically, the increasing interest rates can be bad for bonds. And many fixed-income investors are asking where they should turn.

When interest rates rise, new bonds pay a higher yield, which is good for new bond buyers. But it’s bad for existing bondholders, because their bonds, which pay less interest, are less attractive and therefore decline in price.

Variable rate instruments

Investors who are concerned about the potential impact of higher interest rates on their existing portfolios have options in variable rate instruments, which are securities that do not offer a fixed rate of interest. The rate of interest they pay varies over time.

Floating-rate securities

One such instrument is the floating-rate security. Floating-rate securities are typically issued by investment-grade companies with solid credit ratings. They have interest rates that are tied to an index and reset periodically. So if interest rates rise, floating-rate securities tend to pay a higher interest rate starting with the next reset date. The downside: floating-rate securities may offer yields lower than fixed-rate bonds of the same maturity offered by the same issuer.

Bank loans

Bank loans are also variable rate investment vehicles, with rates that usually reset every 30, 60, or 90 days. These tend to offer a higher interest rate, but also may carry a greater credit risk than investment-grade floating-rate securities.

In a declining interest-rate environment, variable-rate instruments such as floating-rate securities and bank loans can be poor investment choices. But in stable and rising-rate environments, they may offer a measure of protection against increasing interest rates. Discuss with your advisor whether variable-rate instruments are right for you, given your financial situation and investment goals.

Developing countries, also known as emerging markets, may be an appealing investment option to certain investors.

The four largest emerging markets by gross domestic product are the so-called BRIC countries: Brazil, Russia, India, and China. However, there are other large emerging markets, including Mexico, Indonesia, Turkey, and Saudi Arabia.

In the past few years, emerging markets have disappointed investors; stocks have been restrained by a number of factors, including weak commodity prices and political disruptions. However, in 2016, this trend reversed. Now investors seeking international diversification in their portfolios are wondering if they should look again at emerging markets. There may be solid reasons why they should.

A number of factors support positive emerging-market performance. The Chinese economy has stabilized as a result of early 2016 stimulus. Commodity prices are more supportive than they have been in the past. And in many emerging markets, developing middle classes are driving growth.

On the other hand, the potential impact of rising interest rates and a stronger U.S. dollar is a big concern for those considering investments in emerging markets, although in many previous rate-hike cycles, the U.S. dollar has rallied through first interest-rate hikes, then sold off. Certainly, risks must be monitored. For any lasting recovery to occur, there will need to be a stabilization of corporate earnings in emerging market countries.

On balance, however, emerging markets may be back as an interesting investment option for suitable investors.

Americans hear a lot these days about the importance of saving for retirement, and individual retirement accounts (IRAs) are one way to build a nest egg.

But the variety of these investments can be confusing, and you may need your advisor’s help to select the one that’s right for you. For example:

With a traditional IRA, you contribute pretax money, and it grows tax-deferred; you do not pay taxes on it until you withdraw it, at which time it is taxed as ordinary income.

On the other hand, with a Roth IRA, you contribute after-tax money. It still grows tax-deferred, and withdrawals are tax-free in retirement.

With both traditional and Roth IRAs, you can contribute $5,500 if you are under age 50, and $6,500 if you are older than age 50. Generally, you would choose a traditional IRA if you think you will be in a lower tax bracket in retirement and a Roth IRA if you think you will be in a higher tax bracket.

The SEP IRA is available to individuals who are self-employed or operate a small business. As with the traditional IRA, you contribute pretax funds, and withdrawals are taxed as ordinary income. The difference: the annual contribution limit is much higher. In 2017, you can contribute up to 25% of your income, to a $54,000 ceiling.

Also geared toward the self-employed and small-business owner is the SIMPLE IRA. You contribute pretax funds, and withdrawals are taxed as ordinary income, but the contribution limits are lower. They are $12,500 if you are under age 50, and $15,500 if you are 50 or older.

As a small-business owner, you can set up a SIMPLE IRA for your employees, who can elect to contribute. You’ll match their contributions according to one of two formulas. And if you’re self-employed with staff, you can contribute as both employer and employee.

We have seen volatility in the financial markets over the past year, and many investors believed they could take advantage of upswings or avoid downturns by timing the market. But does market-timing work?

Numerous forces drive the markets: economic measures, central-bank policy, and geopolitical events, to name just a few. The CBOE Volatility Index (VIX), which shows the degree of volatility the market may expect in a 30-day period, identifies events affecting the market and acts as a measure of risk.

For example, last year’s VIX spiked and dropped as it reflected events such as the drop in crude oil prices and Brexit. But despite some record spikes, most were short-lived, and 2016’s index closed quietly. Last year, most investors trying to time the market by buying and selling at “the right time” would have had difficulty predicting, and likely made more than a few mistakes.

Market-timing mistakes can be expensive. So instead of trying to time the market, most savvy investors plan well and stay the course. Diversification – the practice of spreading your investments among different asset classes and assets so your exposure to any one type is limited – can help reduce the volatility of your portfolio over time and provide you with an overall return that meets your comfort level.

It’s important to work with your advisor to develop an asset allocation that works for you over time. He or she is familiar with your individual circumstances, and can help you design a portfolio that stands the test of time.

Our tax situation changes as our life stages change, and losing a spouse is no exception. You may not want to consider taxes at such a difficult time, but when you’re ready, here are some tips that will help keep your tax bill to the legal minimum:

Joint returns: First, if your spouse passed away in the current year, you can still file a joint return for the year. This may provide you with the best tax rates and the largest standard deductions, assuming you do not itemize. Regardless of when during the year your spouse died, you may also claim a full exemption for him or her.

Dependent children: In addition, if you have a child living with you and that child qualifies as your dependent, for the first two years after your spouse’s death you may file as a so-called qualifying widow or widower – a filing status that provides you with the benefit of joint – return tax rates.

However, you will not receive an exemption for your late spouse. In the third year after your spouse’s death, if you have a child living with you and that child qualifies as your dependent, you can claim head-of-household status on your tax return. The advantage of doing so is that tax rates are better than they are for single taxpayers (although they are less favorable than they are for joint returns and qualifying widow and widower returns.)

Life insurance: Finally, remember that any proceeds you receive from a life insurance policy are tax-free (regardless of who paid the premiums); you should not report those proceeds as income.

You also may get breaks in other areas, such as individual retirement accounts and rental property inherited from a spouse. Your financial advisor can clarify.

Of course, these suggestions won’t compensate for the loss of your spouse, but they may make your life easier during this time.

Note: This material has been prepared for informational purposes only and is not intended to provide tax advice.

As spring arrives, many of us look forward to spring cleaning our homes – dusting the corners, organizing cabinets, and airing it out in preparation for a new season. But spring is also a good time to get your financial house in order.

That means you may want to meet your advisor for an annual financial review. Here are some areas to examine during your meeting:

Your accounts: Look at your bank and retirement accounts, credit card balances, and investments. Do they still meet your needs? Discuss your finances with your advisor to decide whether you should consolidate, close, or open.

Updated account information: Ensure that all your financial accounts are up to date. Is the contact information still accurate and is the status of your beneficiaries current? If you haven’t checked your beneficiaries’ information in some time, you may want to review it. Some distant relations may have moved or changed their names.

Your budget and debts: Is your spending on budget? If not, determine why. Are you spending too much money on luxury items? Are you overwhelmed with debt? Work with your advisor on a strategy to keep spending on track and eliminate debt.

Estate planning: Estate planning isn’t just for the wealthy; everyone should have a will. If you don’t, get one. If you have one, ensure it still protects your family as you intended. For example, did you know that by making as many of your financial accounts as possible “transfer on death” you can help your beneficiaries avoid probate? Your lawyer can provide details.

Rising interest rates are generally bad for bond funds. This is very important for bond investors today to understand.

Let’s use an example to explain why.

Let’s say you purchased a bond with a coupon of 6 percent at par, for $1,000. You will receive annual interest of $60 ($1,000 x 6%). You will also receive your $1,000 principal back when the bond matures. Until then, however, the value of your bond will fluctuate as interest rates move.

Assume, for example, that interest rates rise to 8 percent. That means newly issued bonds have coupons of 8 percent, and your bond, with a paltry 6 percent coupon, is less valuable. Its price declines.

On the other hand, assume that interest rates fall to 3 percent. That means newly issued bonds have coupons of 3 percent, and your bond, with a 6 percent coupon, is more valuable. Its price rises.

So the market value of a bond moves inversely to market interest rates. This doesn’t matter if you plan to hold the bond to maturity, in which case you’ll receive its face value. However, if you plan to sell it sooner, interest rates matter.

The situation is further complicated if you hold shares of a bond fund. A fund holds many individual bonds instead of a single individual bond.

When interest rates rise, shareholders get scared and tend to sell their shares. In order to pay those shareholders, the fund manager may have to sell some of the portfolio of bonds. This can hurt the value of the bond fund.

Today, interest rates are historically low in the United States, and the U.S. Federal Reserve has suggested that it will increase rates.

If you’re a bond investor, be sure you understand the risks. Bonds can play an important role in a diverse portfolio, but no investment is without risk.

It’s one of the most-asked questions of financial professionals: “If I want my nest egg to support me for the rest of my life, how much of it can I safely withdraw each year?” It’s not an easy question to answer, as it depends on so many factors. However, here are some things you can consider.

Figure out how long you might live in retirement

You can’t know for certain, of course, but you can get an idea. Consider your health and look at some online calculators. If these tools illustrate anything, it’s that you probably need your savings to support you into your early 90s, just to be on the safe side.

Come up with an anticipated withdrawal rate

Once you have an idea how many years you may be relying on your nest egg, you should think about how much money you will be spending in retirement. This is your withdrawal rate. Financial advisors have sophisticated tools to do this, but you can get an idea by looking at your expenses. Don’t forget to factor in inflation.

Allow for adjustments

Finally, understand that you will likely have to make adjustments to both your life expectancy and withdrawal rate over time. The former will change based on your health, and the latter will change based on your spending and the performance of your nest egg. A market crash, for example, can derail the best of plans.

Together, these steps will help you develop a strategy to generate the income you need for a successful retirement.