It’s important to understand how inflation is reported and how it can effect investments. “If the current annual inflation rate is only 0.7%, why do my bills seem like they’re 10% higher than last year?” Many of us ask ourselves that question, and it illustrates the importance of understanding how inflation is reported and how it can affect investments. ¹ Inflation is defined as an upward movement in the average level of prices. Each month, the Bureau of Labor Statistics reports on the average level of prices when it releases the Consumer Price Index (CPI). The CPI is a measure of the change in the prices for a “market basket” of consumer goods and services over a period of time. The CPI is developed from detailed expenditure information provided by families and individuals on what they actually bought in eight major categories: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other groups and services. Whose Basket of Goods? Many find that the government’s “basket” doesn’t reflect their experience, so the CPI, while an indicator of the rate of inflation, can come under scrutiny. For example, the CPI rose 0.7% for the 12-months ended December 2015 — a modest increase. However, a closer look at the report shows movement in prices on a more detailed level. Not counting food and energy, prices rose 2.1% for the 12 months.² As inflation rises and falls, it can have three effects on investment. Real Rate of Return First, inflation reduces the real rate of return on investments. If an investment earned 6% for a 12-month period, and inflation averaged 1.5% over that time, the investment’s real rate of return would have been 4.5%. If taxes are considered, the real rate of return may be reduced further.² Second, inflation puts purchasing power
Although working with a financial advisor who invests in mutual funds may seem like a great way to “set it and forget it”, most investors fail to realize the truth about what these investments are costing them in fees that typically fly below the radar screen. The reality is that holders of mutual funds are experiencing costs amounting tomultiples of what is apparent to them. If these invisible costs were taken into account, many would see mutual funds in a different light. The Expense Ratio Leaves Much to be Desired The advantages of investing in a mutual fund are many. Mutual funds are offered by SEC registered investment companies that are heavily regulated. The manager’s track record is clearly disclosed, and many funds offer track records of ten years of more. The performance is audited and subject to high regulatory scrutiny. By pooling assets together with the other investors in the fund, the owner of a smaller account gets access to higher quality, institutional caliber money management than he or she would be able to gain investing directly. With hundreds of mutual funds out there, how does an investor pick the right one? Evaluating a mutual fund on management fee alone can leave some pretty hefty costs out of the equation. The expense ratio compares the management fee (what the portfolio management company gets paid for operating the fund on behalf of the shareholders) versus the assets in the fund. Expense ratios are disclosed, by SEC law, in the fund’s prospectus. Trading and Management Fees As they are deducted from the fund’s net asset value, trading and management fees have the potential to have a significant impact on a mutual fund’s performance and reduce returns to the shareholders. Mutual fundsare actively managed. Mutual funds have management fees, which are disclosed,
Merriam Webster defines the word “verify” to mean “to establish the truth, accuracy, and reality of” a claim or situation. When it comes to choosing someone to make decisions with your money, nothing serves as better verification of ability than the truth about a financial advisor’s past performance. Then why don’t more investors ask to see a track record? If you’re in the market for a financial advisor, ask these 3 questions to make sure that he or she truly does possess the level of skill needed to manage your portfolio successfully. 1. Can you provide me with your 10 year track record in writing? Many advisors will say they’ve created good results, but when it comes to the “show me the numbers” moment, they can’t produce any concrete evidence in writing. How long does the track record need to be? Because of the cyclical nature of the economy and the market, you should only consider advisors with track records of 10 years or longer. Usually over the span of a decade there is a downturn of some sort which can show how the manager performs in such an environment. A track record shorter than 10 years is just not revealing enough – luck may have been the driving factor rather than skill. Advisors build financial plans and invest your portfolio accordingly. In cases where portfolios are customized for each client, advisors will say that there is no track record because each portfolio is different. For example, the investments for a 35 year old are likely to be more aggressive than those for an 80 year-old couple. The portfolios are going to be invested differently — but nonetheless, there should be a track record for each type. The bottom line is that any time an advisor claims to be making
Just as you would do before hiring a heart surgeon or anyone who provides a critical service, conducting proper due diligence is a must before enlisting the help of a financial advisor. In this article, we’ll cover which documents that you should ask for, how to navigate through all the clutter, and how to get the skeletons out of the closet regarding disciplinary history. The Essential Documents Registered Investment Advisor (RIA) firms must file a Form ADV with either the state(s) in which they do business or the SEC. There are two sections to Form ADV: Part I and Part II. Form ADV Part I will tell you the basic information about the firm such as: Location, hours, telephone number, name of the Chief Compliance Officer, number of employees, etc. Number of clients and assets under management (Items 5C and 5D). You’d want to make sure this jives with what the advisor is saying about the size of their practice to make sure they are not exaggerating their success. Be sure to note the difference between the advisor’s personal book of business and the assets that the firm manages. Especially in the case of large investment companies like Merrill Lynch, UBS, Ameriprise, Edward Jones or Wells Fargo, the advisor may only have direct responsibility for a very small portion of the firm’s overall portfolio assets. Compensation methods (Item 5E and Item 8). Here you’ll learn all the ways an advisor can get paid, whether hourly fees, flat fees, commissions, or a percentage of assets under management. If you want truly conflict-free advice, it’s best to avoid advisors who get paid commissions for placing money into products. The type of business that they are in (Item 6). Some RIA firms, for example, operate as “hybrid” advisors where they also are paid
Changing jobs can be a tumultuous experience. Even under the best of circumstances, making a career move requires a series of tough decisions, not the least of which is what to do with the funds in your old employer-sponsored retirement plan. Some people choose to roll over these funds into an Individual Retirement Account, and for good reason. More than 25% of all retirement assets in the U.S. are held in IRAs, and more than 50% of traditional IRA owners funded all or part of their IRAs with a rollover. Generally, you have three choices when it comes to handling the money in a former employer’s retirement account. First, you can cash out of the account. However, if you choose to cash out, you will be required to pay ordinary income tax on the balance plus a 10% early withdrawal penalty if you are under age 59½. Second, you may be able to leave the funds in your old plan. But some plans have rules and restrictions regarding the money in the account. Or third, you can roll the money into an IRA. Why do so many people choose an IRA rollover? Here are a few of the major benefits: Rollovers may preserve the tax-favored status of your retirement money. As long as your money is moved through a direct “trustee-to trustee” transfer, you can avoid a taxable event. In a traditional IRA, your retirement savings will have the opportunity to grow tax-deferred until you begin taking distributions in retirement. An IRA rollover may open up your investment choices. When you stick with your former employer’s retirement plan, you are typically limited to the investments offered by the plan. With an IRA, you may have a much broader range of choices, giving you greater control over how your assets are allocated.
What effect does inflation have on your investment portfolio? Have you factored inflation into your long-term financial plan? Featured Video
Annuities can be complicated This article in Forbes magazine will help you get the information you need to know about the pros and cons of annuities. The Facts You Need to Know About Annuities
Have you ever had one of those months? The water heater stops heating, the dishwasher stops washing and your family ends up on a first-name basis with the nurse at urgent care. Then, as you’re driving to work, giving yourself your best, “You can make it!” pep talk, you see smoke seeping out from under your hood. Bad things happen to the best of us, and instead of conveniently spacing themselves out, they almost always come in waves. The important thing is to have a financial life preserver, in the form of an emergency cash fund, at the ready. Although many people agree that an emergency fund is an important resource, they’re not sure how much to save or where to keep the money. Others wonder how they can find any extra cash to sock away. One survey found that 28% of Americans don’t have any emergency savings at all.¹ How Much Money? When starting an emergency fund, you’ll want to set a target amount. But how much is enough? Unfortunately, there is no “one-size-fits-all” answer. The ideal amount for your emergency fund may depend on your financial situation and lifestyle. For example, if you own your home or provide for a number of dependents, you may be more likely to face financial emergencies. And if the crisis you face is a job loss or injury that affects your income, you may need to depend on your emergency fund for an extended period of time. Coming Up With Cash If saving several months of income seems an unreasonable goal, don’t despair. Start with a more modest target, such as saving $1,000. Build your savings at regular intervals, a bit at a time. It may help to treat the transaction like a bill you pay each month. Consider setting up an
The Social Security program allows you to start receiving benefits as soon as you reach age 62. The question is, “should you?” Monthly payments differ substantially depending on when you start receiving benefits. The longer you wait (up to age 70), the larger each monthly check will be. The sooner you start receiving benefits, the smaller the check. From the Social Security Administration’s point of view, it’s simple: If a person lives to the average life expectancy, the person will eventually receive roughly the same amount in lifetime benefits no matter when he or she chooses to start receiving them. In actual practice, it’s not quite that straightforward, but the principle holds. Assumes the maximum retirement benefit of $2,533 at age 67. Does not assume COLA.Source: Social Security Administration, 2014. The chart shows how Social Security benefits accumulate for individuals who started to receive at ages 64, 67, and 70. The person who started to receive benefits at age 64 would accumulate $536,996 by the age 85. Conversely, the person who started to receive benefits at age 70 would accumulate $646,550 by the age of 85. There is no single “right” answer to the question of when to start benefits. Many base their decision on family considerations, economic circumstances, and personal preferences. If you have a spouse, the decision about when to start benefits gets more complicated—particularly if one person’s earnings were considerably higher than the other’s. The timing of spousal benefits should be factored into a decision.When considering at what age to start Social Security benefits, it may be a good idea to review all the assets you have gathered for retirement. Some may want the money sooner based on how assets are positioned, while others may benefit by waiting. So as you near a decision point, it may
Does your investment portfolio resemble a junk drawer — a little of this and a little of that, with no real rhyme or reason? Time to take a look at the big picture.
Take a closer look at the divide between what some pre-retirees expect and what today’s retirees actually experience.
Here’s a look at several birthdays and “half-birthdays” that have implications regarding your retirement income.
Most children stop being “and-a-half” somewhere around age 12. Kids add “and-a-half“ to make sure everyone knows they’re closer to the next age than the last. When you are older, “and-a-half” birthdays start making a comeback. In fact, starting at age 50, several birthdays and “half-birthdays” are critical to understand because they have implications regarding your retirement income. Age 50 At age 50, workers in certain qualified retirement plans are able to begin making annual catch-up contributions in addition to their normal contributions. Those who participate in 401(k), 403(b), and 457 plans can contribute an additional $6,000 per year in 2017.¹ Those who participate in Simple IRA or Simple 401(k) plans can make a catch-up contribution of up to $3,000 in 2017. And those who participate in traditional IRAs can set aside an additional $1,000 a year.² Age 59½ At age 59½, workers are able to start making withdrawals from qualified retirement plans without incurring a 10% federal income-tax penalty. This applies to workers who have contributed to IRAs and employer-sponsored plans, such as 401(k) and 403(b) plans (457 plans are never subject to the 10% penalty). Keep in mind that distributions from traditional IRAs, 401(k) plans, and other employer-sponsored retirement plans are taxed as ordinary income. Age 62 At age 62 workers are first able to draw Social Security retirement benefits. However, if a person continues to work, those benefits will be reduced. The Social Security Administration will deduct $1 in benefits for each $2 an individual earns above an annual limit. In 2017, the income limit is $15,720. Age 65 At age 65, individuals can qualify for Medicare. The Social Security Administration recommends applying three months before reaching age 65. It’s important to note that if you are already receiving Social Security benefits, you will automatically be enrolled
Social Security is a critical component of the retirement financial strategy for many Americans, so before you begin taking it, you should consider three important questions. The answers may affect whether you make the most of this retirement income source. 1. When to Start? You have the choice of: 1) starting benefits at age 62 2) claiming them at your full retirement age 3) delaying payments until age 70. If you claim early, you can expect to receive an amount lower than what you would have earned at full retirement. If you wait until age 70, you can expect to receive an even higher benefit than if you had begun receiving payments at your full retirement age. The decision of when to begin taking benefits may hinge on whether you need the income now or can wait, and whether you think your lifespan will be shorter or longer than the average American. 2. Should I Continue to Work? Work provides income, personal satisfaction, and may increase your Social Security benefits. However, if you begin taking benefits prior to your full retirement age and continue to work, your benefits will be reduced by $1 for every $2 in earnings above the prevailing annual limit ($15,720 in 2016).¹ If you work during the year in which you attain full retirement age, your benefits will be reduced by $1 for every $3 in earnings over a different annual limit ($41,880 in 2016) until the month you reach full retirement age. After you attain your full retirement age, earned income no longer reduces benefit payments.² 3. How Can I Maximize My Benefit? The easiest way to maximize your monthly Social Security benefit is to simply wait until you turn age 70 before receiving payments.
If you live in or have visited a big city, you’ve probably run into street vendors–people who sell everything from hot dogs to umbrellas in carts on the streets and sidewalks. Many of these entrepreneurs sell completely unrelated products, such as coffee and ice cream. At first glance, this approach seems a bit odd, but it turns out to be quite clever. When the weather is cold, it’s easier to sell hot cups of coffee. When the weather is hot, it’s easier to sell ice cream. By selling both, vendors reduce the risk of losing money on any given day. Asset Allocation Asset allocation applies this same concept to managing investment risk. Under this approach, investors divide their money among different asset classes, such as stocks, bonds, and cash alternatives, like money market accounts. These asset classes have different risk profiles and potential returns.1 The idea behind asset allocation is to offset any losses in one class with gains in another, and thus reduce the overall risk of the portfolio. It’s important to remember that asset allocation is an approach to help manage investment risk. It does not guarantee against investment loss.2 Determining the Most Appropriate Mix The most appropriate asset allocation will depend on an individual’s situation. Among other considerations, it may be determined by two broad factors. Time. Investors with longer time frames may be comfortable with investments that offer higher potential returns but also carry higher risk. A longer time frame may allow individuals to ride out the market’s ups and downs. An investor with a shorter time frame may need to consider market volatility when evaluating various investment choices. Risk tolerance. An investor with high risk tolerance may be more willing to accept greater market volatility in the pursuit of potential returns. An investor with a