Author: production

Interest rates are still hovering at their lowest levels in decades, and many investors are looking for bond funds that generate a suitable level of income. If you’re one of them-and are comparing income funds-you may want to look at one or both of two commonly quoted figures: the SEC yield and the dividend rate (also referred to as distribution yield).

A dividend rate shows what a bond fund pays you in distributions. The figure is typically calculated by taking a bond fund’s income in the most recent month, multiplying by 12, and dividing by a recent fund share price.

That’s great, but the number assumes that a fund’s distributions remain constant for a year, which may not be the case. This is why investors also look at the SEC yield. This standardized yield-devised by its namesake, the Securities and Exchange Commission-seeks to more accurately reflect a bond fund’s income-producing potential over time by looking at the “yield to worst” of all the individual holdings in a mutual fund’s portfolio.

Which is better?

Both the dividend rate and the SEC yield provide useful information to investors, but which of the two is a better indicator of a fund’s actual yield is less clear. Many people prefer SEC yield because it takes into account the eventual decline of a bond now trading at higher than face value. Others prefer dividend rate because SEC yield includes some worst-case assumptions.

In general, it’s a good idea to ask your advisor. He or she can help you read the fine print in order to ensure that you understand what kind of yield you’re looking at and accurately compare and contrast it (because dividend rate is not directly comparable to SEC yield).

It’s also important to consider other factors when investing in a bond fund, and your advisor can discuss these with you in detail.

Investors who don’t recognize the big performance potential of small-cap stocks could be missing some compelling investment opportunities.

Market capitalization, a measure of a company’s size, is the total dollar value of all outstanding shares of stock. (It’s calculated by multiplying the number of shares by the current market price.) Stocks with a relatively small market capitalization are considered small capitalization (or small-cap) stocks.

Although small-cap companies are diverse-there’s no clear definition of just what range of market capitalizations a stock has to fall into to be considered small-cap-they do share some characteristics. For example, their size can allow small-cap companies to react more quickly to changes in the economy than larger companies (which explains why small-cap stocks have traditionally performed well when the economy is emerging from a downturn).

This is why some investors turn to small-cap stocks: They offer diversification potential. While diversification can’t guarantee a profit or ensure against a loss, it can help even out the ups and downs of a portfolio.

Of course, no stocks are without risks. Any stock represents ownership in its issuer, and stock prices can be hurt by poor management or shrinking product demand. However, this may be accentuated in smaller companies.

As a result, you may want to consider diversifying the small-cap component of your portfolio by investing in a variety of small-cap stocks. Purchasing shares of a mutual fund that invests specifically in small-cap stocks is one way to do this. Discuss your options with your advisor.

The last time the U.S. Federal Reserve (Fed) raised interest rates was more than 10 years ago. Now economists expect it will happen again soon. And it’s likely to affect your investments.

When the Fed raises its benchmark interest rates, other interest rates – such as those on home and auto loans, income investments, and credit cards – tend to follow. So if the Fed raises rates this year, as is widely expected by economists, higher rates will ripple through the markets. In just one example, money market fund managers will slowly replace their portfolios with higher-yielding securities – good news for fund holders, as this ultimately will benefit them.

The most significant impact will likely be on your bond investments. The interest rates on bonds with shorter maturities will likely move most; longer-dated bonds will likely be slower to react. But keep in mind the inverse relationship between interest rates and bond prices: as rates rise, bond prices fall. So your bonds could be worth less if you plan to sell them prior to maturity; if you sell at maturity, you will get face value.

That said, there’s time to prepare: For example, consider your credit card debt. Zero percent introductory rates are likely to disappear once the Fed begins raising rates, so if you’re in the market for a low-rate card, you may want to get it now. And, of course, pay it off before the 0% rate expires, as market rates on credit will rise when the Fed moves.

Similarly, it may be wise to stay away from adjustable-rate mortgages. And you may want to review your mutual fund portfolio with your financial advisor. He or she can help you develop a bond strategy, such as bond laddering, which involves purchasing bonds that mature at different times.

You can weather rate changes because – unless the bond issuer defaults – when each bond matures you’ll receive the full principal amount.

We may not realize it, but many of us are letting our emotions and values play a role when we make investment decisions. And the impact can be significant. Are you an emotional investor? And if so, what can you do about it?

Here’s an example: This investor constantly trades his portfolio. Buying and holding seems boring, so he buys and sells on a whim. It feels fun, but there’s a downside: chances are he’ll likely lose money in the process.

Of course, the opposite is also true. Consider another investor who’s afraid of ending up poor. As a result, she refuses to take even a sensible risk with her portfolio. In the end, she does end up poor, because her investments don’t keep up with inflation.

To avoid emotional investing, it’s important to know your investor persona: What do you really want from your investments? And why do you invest as you do?

For example, many investors tend to hold on too long to a loser. In this case, the underlying emotion may well be pride: Buying a security is a hopeful beginning, and few of us want to admit we’ve made a mistake. So we convince ourselves the investment will make a comeback. But it seldom does.

In the final analysis it’s likely that emotional investing will reduce your profits. Avoid this trap: have a solid financial plan and stick to it. Your advisor can work with you to develop a plan – and help you stay with it.

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Life expectancy has increased significantly in the past 100 years: The life expectancy of a person born in 1900 was age 47, compared to 79 for a person born in 2012, according to the Centers for Disease Control and Prevention. But when it comes to retirement planning, it doesn’t matter how long you’ll live; it matters how long you’ll live in retirement.

Actually, that’s increased as well. In 1980, a 65-year old man on average would live another 14.1 years; by 2010, he could expect to live to 82.7-some three additional years. Those few years can significantly affect your retirement planning, especially when the rising costs of retirement are factored in.

Say your annual expenses in retirement are $50,000. If you live to age 79, you’d have to have $700,000; but if you live to age 82, you’d need a total of $850,000. That’s an increase of $150,000, or 21%.

And that doesn’t even take inflation into account. According to the Insured Retirement Institute (IRI), if inflation averages 3%, a 65-year-old living an additional 14 years would need $854,000 to meet his or her expenses; a 65-year-old living 17 more years would need $1,088,000-27% more.

Moreover, those numbers also don’t factor in the rising costs of many goods and services needed in retirement, such as health and long-term care, which tend to outpace inflation.

For example, the Milliman Medical Index (MMI), which tracks the total annual cost of health care for a typical family of four with employer-provided PPO insurance coverage, shows that health care will cost them $24,671 in 2015-a $1,456 (6.3%) increase over last year’s MMI. And the cost of both semiprivate and private accommodations in a nursing home is rising approximately 4% per year.

Are you ready? If you’re not sure, a financial advisor can certainly help you plan.

Most adults over age 55 are way behind on retirement savings, according to a new survey. And that can be costly.

The survey of 968 respondents, conducted by Financial Engines, showed that 68% of adults age 55 and older have procrastinated when it comes to building a nest egg. Most respondents agreed that the best age to start saving is 25, but, ironically, few actually start saving until age 35.

It makes a difference. The study provides a hypothetical example in which someone who saves 6% of his or her $36,000 salary each year sees her savings increase by 1.5% a year due to raises, etc. If the saver begins at age 25, assuming a 3% employer matching contribution and a 5% annual return, by age 65, he or she will have saved roughly $500,000. To reach the same goal when starting at age 35 or 40, however, the saver would have to contribute 12% (at 35) or 16.5% (at 40) annually.

Clearly, making up for lost time when it comes to retirement saving isn’t easy, but it’s not impossible, thanks to the power of compounding. And if returns are compounded in a tax-deferred account, such as an IRA or 401(k) plan, the potential income growth is even greater.

If, like many savers, you got off to a late start, don’t panic. Simply talk to your advisor and ask for suggestions. Together, you should be able to build a solid plan that addresses your individual financial circumstances and goals.

If you’re lucky enough to inherit assets, the amount you receive may be less than expected, depending on taxes and other factors.

An estate tax may be leveled at both federal and state levels. At the federal level, the 2015 exemption is $5,430,000, so you won’t owe any federal estate taxes if the deceased’s estate is less than this.

Only a handful of states collect estate taxes (and the state that applies is the one in which the deceased lived or owned property, not your state). As with federal taxes, there’s an exemption level that varies by state.

There’s also an inheritance tax. Chances are this may not apply, because only six states collect it: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. In all of these states, property passing to a surviving spouse is exempt, and in most of them, the same is true when passing property to children and grandchildren.

In general, an inheritance is not considered income, so you won’t have to report it on your income tax return. But there are other costs to consider. For example, if someone leaves you a house, you may want to sell it, which will involve real estate agent fees. If you inherit stocks, you’ll have to pay a brokerage commission to sell them. And if you inherit an IRA, you’ll have to pay tax on the distribution just as the deceased would have.

The latter, especially, can get complex, so it’s a good idea to talk to your advisor if an inheritance is a possibility.

Many of today’s investors are uncomfortable in a declining market. But declining markets aren’t unusual: According to Ned Davis Research Inc., which analyzed years of Dow Jones Industrial Average data, dips (declines of greater than 5%) occur 127 times every 50 years; moderate corrections (greater than 10%) occur 33 times; and severe corrections (greater than 15%) occur 16 times. Bear markets (greater than 20%) occur nine times in a 50-year span.

Make it personal

Market declines are unlikely to be a problem for long-term investors, as markets typically recover after a downturn. But even if you’re a short-term investor, a market decline won’t necessarily affect you. The market may be down, but that doesn’t mean your personal holdings have dropped as well; the only share prices that should matter to you are the prices of shares you own.

So when the market declines, before you panic, look at your holdings. When did you purchase them? At what price? What is the current share price? When do you really need the money? Does the gain or loss you’ve experienced on your overall portfolio allow you to meet your goals, given your investment time horizon?

Minimize the downs

You may also want to consider some proactive steps to minimize the impact of market declines on your portfolio. You can invest in a variety of mutual funds to spread around your risk through many vehicles, including dozens or even hundreds of stocks, domestic and international funds, small-capitalization and large-capitalization investments, and more.

You also can invest in companies that pay dividends or interest, cushioning downturns with investment income. And you can dollar-cost average (make smaller investments at regular intervals over a period of time, which allows you to purchase more shares when prices are low) instead of making a single large investment.

Discuss this with your advisor; he or she may have more suggestions.

Now that tax time has passed, many Americans are looking toward the next tax year, and they have a lot of questions about individual retirement accounts (IRAs). One big question: “If I turn 70 1/2 in January 2016, can I still make deposits into my traditional IRA?” (As a reminder, a traditional IRA is a retirement savings vehicle to which you contribute pre-tax dollars. The money grows tax-deferred, and you withdraw it in retirement, paying taxes on it then.)

The answer is yes. Because you will not reach age 70 1/2 in 2015, you are eligible to make a contribution for the 2015 tax year (which is the year before the year in which you turn 70 1/2).

The maximum contribution is $5,500, with one possible addition. Because you’re older than 50, you qualify for the 2015 “catch-up” contribution of $1,000, meaning in 2015 you can contribute up to $6,500.

There are some caveats. For example, you may not contribute more than 100% of your earned income, which consists of wages or salary from work but not dividend interest from your investments. So, if your earned income for 2015 will be less than $6,500, you may not contribute the full amount.

When it comes to withdrawing from an IRA, at age 59 1/2 anyone can begin taking distributions from his or her IRA without penalty. There are no penalties if you also take distributions up to the full balance of your account.

What is regulated are required minimum distributions (RMDs), which you must begin taking by April 1 of the year following the year in which you turn 70 1/2 (in this case, April 1, 2017). As listed by IRS Publication 590, your RMDs are determined by taking the total balance of all your IRAs as of December 31 of the prior year and dividing that number by your life expectancy.

Clearly, this is complicated, which is why it’s helpful to have an advisor to guide you.

If you’re saving for retirement, it’s a good idea to understand the tax-deferred investment vehicles that are available to you. In these vehicles, the returns you make from your invested money are not reduced by income taxes annually; you only pay taxes when you withdraw the money in retirement (when you are usually in a lower tax bracket and will therefore pay less tax on the distributions.) These tax-deferred investment vehicles include:

Employer-sponsored retirement plans, such as defined benefit plans, which are usually referred to as pension plans and provide specific benefits in retirement; and defined contribution plans (such as 401(k) and 403(b) plans), which make a specific contribution to an account in your name and retirement benefits are based on the account’s investment performance.

Individual retirement accounts (IRAs) such as traditional IRAs (to which anyone can contribute) and SEP IRAs (for self-employed individuals and smaller employers). These are similar to employer-sponsored retirement plans except that you purchase them yourself. In Roth IRAs, you make after-tax contributions, and investment income accrues tax-free; under most circumstances, distributions are not taxed.

Annuities, which provide a stream of income for a certain period or for your lifetime. They are available as variable annuities, in which investment returns are based on investment experience, and fixed annuities, whereby you receive a guaranteed rate of return.

There are different eligibility rules for each investment vehicle, such as income limits, age requirements, and contribution limits.