Fall 2016 Newsletter

Quiz: Test Your Interest Rate Knowledge

In December 2015, the Federal Reserve raised the federal funds target rate to a range of 0.25% to 0.50%, the first rate increase from the near-zero range where it had lingered for seven years. Many economists viewed this action as a positive sign that the Fed had finally deemed the U.S. economy healthy enough to withstand slightly higher interest rates. It remains to be seen how rate increases will play out for the remainder of 2016. In the meantime, try taking this short quiz to test your interest rate knowledge.
1. Bond prices tend to rise when interest rates rise.
a. True
b. False
2. Which of the following interest rates is directly controlled by the Federal Reserve Open Market Committee?
a. Prime rate
b. Mortgage rates
c. Federal funds rate
d. All of the above
e. None of the above
3. The Federal Reserve typically raises interest rates to control inflation and lowers rates to help accelerate economic growth.
a. True
b. False
4. Rising interest rates could result in lower yields for investors who have money in cash  alternatives.
a. True
b. False
5. Stock market investors tend to look unfavorably on increases in interest rates.
a. True
b. False
1. b. False. Bond prices tend to fall when interest rates rise. However, longer-term bonds may feel a greater impact than those with shorter maturities. That’s because when interest rates are rising, bond investors may be reluctant to tie up their money for longer periods if they anticipate higher yields in the future; and the longer a bond’s term, the greater the risk that its yield may eventually be superceded by that of newer bonds. (The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost.)
2. c. Federal funds rate. This is the interest rate at which banks lend funds to each other (typically overnight) within the Federal Reserve System. Though the federal funds rate affects other interest rates, the Fed does not have direct control of consumer interest rates such as mortgage rates.
3. a. True. Raising rates theoretically slows economic activity. As a result, the Federal Reserve has historically raised interest rates to help dampen inflation. Conversely, the Federal Reserve has lowered interest rates to help stimulate a sluggish economy.
4. b. False. Rising interest rates could actually benefit investors who have money in cash alternatives. Savings accounts, CDs, and money market vehicles are all likely to provide somewhat higher income when interest rates increase. The downside, though, is that if higher interest rates are accompanied by inflation, cash alternatives may not be able to keep pace with rising prices.
5. a. True. Higher borrowing costs can reduce corporate profits and reduce the amount of income that consumers have available for spending. However, even with higher rates, an improving economy can be good for investors over the long term.

Top Financial Concerns of Baby Boomers, Generation Xers, and Millennials

Many differences exist among baby boomers, Generation Xers, and millennials. But one thing that brings all three generations together is a concern about their financial situations.
According to an April 2016 employee financial wellness survey, 38% of boomers, 46% of Gen Xers, and 51% of millennials said that financial matters are the top cause of stress in their lives. In fact, baby boomers (50%), Gen Xers (56%), and millennials (60%) share the same top financial concern about not having enough emergency savings for unexpected expenses. Following are additional financial concerns for each group and some tips on how to address them.
Baby boomers
Baby boomers cite retirement as a top concern, with 45% of the group saying they worry about not being able to retire when they want to. Although 79% of the baby boomers said they are currently saving for retirement, 52% of the same group believe they will have to delay retirement. Health issues (30%) and health-care costs (38%) are some of the biggest retirement concerns cited by baby boomers. As a result, many baby boomers (23%) are delaying retirement in order to retain their current health-care benefits.
Other reasons reported by baby boomers for delaying retirement include not having enough money saved to retire (48%), not wanting to retire (27%), and having too much debt (23%).
Generation X
While baby boomers are concerned about retiring when they want to, Gen Xers are more specifically worried about running out of money in retirement, with 50% of the surveyed group citing this as a top concern. More Gen Xers (26%) than baby boomers (25%) or millennials (21%) have already withdrawn money held in their retirement plans to pay for expenses other than retirement.
Besides worrying about retirement, 25% of Gen Xers are concerned about meeting monthly expenses. Forty-four percent find it difficult to meet household expenses on time each month, and 53% consistently carry balances on their credit cards.  Being laid off from work is another financial worry among Gen Xers, cited by 22% of those surveyed–more than cited by baby boomers or millennials.
Gen Xers (26%) report that better job security would help them achieve future financial goals, which may help explain their worry about both future (retirement) and current (living) expenses.
Unlike baby boomers and Gen Xers who worry about future financial needs, millennials seem to be more concerned about meeting current expenses. This concern has grown substantially for millennials, from 23% in the same survey conducted in 2015 to 35% in 2016. Millennials are also finding it increasingly difficult to pay their household expenses on time each month, with the number jumping from 35% in 2015 to 46% in 2016.
Considering the amount of debt that millennials owe, it’s probably not surprising that they worry about making ends meet. Specifically, 42% of the millennials surveyed have a student loan(s), with 79% saying their student loans have a moderate or significant impact on their ability to meet other financial goals. In an attempt to make ends meet, 30% of millennials say they use credit cards to pay for monthly necessities because they can’t afford them otherwise. But 40% of those who consistently carry balances find it difficult to
make their minimum credit-card payments on time each month.
How each generation can address their concerns Focusing on some basics may help baby boomers, Gen Xers, and millennials address their financial concerns. Creating and sticking to a budget can make it easier to understand exactly how much money is needed for fixed/discretionary expenses as well as help keep track of debt. A budget may also be a useful tool for learning how to prioritize and save for financial goals, including adding to an emergency savings account and retirement. At any age, trying to meet the competing demands of both short- and long-term financial goals can be frustrating. Fortunately, there is still time for all three generations to develop healthy money management habits and improve their finances.


The Importance of Saving for Retirement at a Young Age

If you’re an adult in your 20s, you are entering an exciting stage of life. Whether you’ve just graduated from college or are starting a new career, you will encounter many opportunities and challenges as you create a life of your own.
As busy as you are, it’s no surprise that retirement may seem a long way off, especially if you’re just entering the workforce. What you may not realize, however, is that there are four very important advantages to begin planning and saving for retirement now.
1. Money management skills
Now that you’re out on your own, it’s important to start taking responsibility for your finances little by little. Part of developing financial responsibility is learning to balance future monetary needs with present expenses. Sometimes that means saving for a short-term goal (for example, buying a new car) and a long-term goal (for example, retirement) at the same time. Once you become used to balancing your priorities, it becomes easier to build a budget that takes into account both fixed and discretionary expenses. A budget can help you pursue your financial goals and develop strong money management skills. If you establish healthy money habits in your 20s and stick with these practices as you grow older, you’ll have a major advantage as you edge closer to retirement.
2. Time on your side
When you’re young, you have the benefit of time on your side when saving for long-term goals (like retirement). You likely have 40-plus years ahead of you in the workforce. With that much time, why not put your money to work using the power of compounding? Here’s a hypothetical example of how compounding works. Let’s say that at age 25, you start putting $300 each month into your employer’s retirement savings plan, and your account earns an average of 8% annually. If you continued this practice for the next 40 years, you would have contributed $144,000 to your account, accumulating just over $1 million by the time you reached age 65. But if you waited 10 years until age 35 to start making contributions to your plan, you would have accumulated only $440,000 by age 65.
Note: This hypothetical example of mathematical compounding is used for illustrative purposes only and does not represent any specific investment. Taxes and investment fees are not considered. Rates of return will vary over time, especially for long-term investments. Investments offering the potential for higher rates of return also involve a higher degree of risk. Actual results will vary.
3. Workplace retirement benefits
If your employer offers a workplace retirement plan such as a 401(k) or 403(b), you may find that contributing a percentage of your salary (up to annual contribution limits) will make saving for retirement easier on your budget. Contributions are typically made on a pre-tax basis, which means you can lower your taxable income while building retirement funds for the future. You aren’t required to pay any taxes on the growth of your funds until you take withdrawals. Keep in mind that distributions from tax-deferred retirement plans are taxed as ordinary income and may be subject to a 10% federal income tax penalty if withdrawn before age 59½. Depending on the type of plan, your employer may offer to match a percentage of your retirement plan contributions, up to specific limits, which can potentially result in greater compounded growth and a larger sum available to you in retirement. If you don’t have access to a workplace retirement savings plan, consider opening an IRA and contribute as much as allowable each year. An IRA may offer more investment options and certain tax advantages to you. If you have both a workplace plan and an IRA,
one strategy is to contribute sufficient funds to your workplace plan to take advantage of the full company match, and then invest additional funds in an IRA (up to annual contribution limits). Explore the options available to find out what works best for your financial situation.
4. Flexibility of youth Although there’s a good chance you have student loans, you probably have fewer
financial responsibilities than someone who is older and/or married with children. This means you may have an easier time freeing up extra dollars to dedicate toward retirement. Get into the retirement saving habit now, so that when future financial obligations arise, you won’t have to fit in saving for retirement too–you’ll already be doing it.


Should I pay off my student loans early or contribute to my workplace 401(k)?

For young adults with college debt, deciding whether to pay off student loans early or contribute to a 401(k) can be tough. It’s a financial tug-of-war between digging out from debt today and saving for the future, both of which are very important goals. Unfortunately, this dilemma affects many people in the workplace today. According to a student debt report by The Institute for College Access and Success, nearly 70% of college
grads in the class of 2014 had student debt, and their average debt was nearly $29,000. This equates to a monthly payment of $294, assuming a 4% interest rate and a standard 10-year repayment term.
Let’s assume you have a $300 monthly student loan payment. You have to pay it each month–that’s non-negotiable. But should you pay more toward your loans each month to pay them off faster? Or should you contribute any extra funds to your 401(k)? The answer boils down to how your money can best be put to
work for you. The first question you should ask is whether your employer offers a 401(k) match. If yes, you
shouldn’t leave this free money on the table. For example, let’s assume your employer matches $1 for every dollar you save in your 401(k), up to 6% of your pay. If you make $50,000 a year, 6% of your pay is $3,000. So at a minimum, you should consider contributing $3,000 per year to your 401(k)–or $250 per month–to get the full $3,000 match. That’s potentially a 100% return on your investment.
Even if your employer doesn’t offer a 401(k) match, it can still be a good idea to contribute to your 401(k). When you make extra payments on a specific debt, you are essentially earning a return equal to the interest rate on that debt. If the interest rate on your student loans is relatively low, the potential long-term returns
earned on your 401(k) may outweigh the benefits of shaving a year or two off your student loans. In addition, young adults have time on their side when saving for retirement, so the long-term growth potential of even small investment amounts can make contributing to your 401(k) a smart financial move. All investing involves risk, including the possible loss of principal, and there can be no guarantee that any investing strategy will be successful.


Should I accept my employer’s early-retirement offer?

The right answer for you will depend on your situation. First of all, don’t underestimate the psychological impact of early retirement. The adjustment from full-time work to a more leisurely pace may be difficult. So consider whether you’re ready to retire yet. Next, look at what you’re being offered. Most early-retirement offers share certain basic features that need to be evaluated. To determine whether your employer’s offer is worth taking, you’ll want to break it down.
Does the offer include a severance package? If so, how does the package compare with your projected job earnings (including future salary increases and bonuses) if you remain employed? Can you live on that amount (and for how long) without tapping into your retirement savings? If not, is your retirement fund large enough that you can start drawing it down early? Will you be penalized for withdrawing from your retirement savings?
Does the offer include post-retirement medical insurance? If so, make sure it’s affordable and provides adequate coverage. Also, since Medicare doesn’t start until you’re 65, make sure your employer’s coverage lasts until you reach that age. If your employer’s offer doesn’t include medical insurance , you may have to
look into COBRA or a private individual policy.
How will accepting the offer affect your retirement plan benefits? If your employer has a traditional pension plan, leaving the company before normal retirement age (usually 65) may greatly reduce the final payout you receive from the plan. If you participate in a 401(k) plan, what price will you pay for retiring early? You could end up forfeiting employer contributions if you’re not fully vested. You’ll also be missing out on the opportunity to make additional contributions to the plan.
Finally, will you need to start Social Security benefits early if you accept the offer? For example, at age 62  each monthly benefit check will be 25% to 30% less than it would be at full retirement age (66 to 67 , depending on your year of birth). Conversely, you receive a higher payout by delaying the start of benefits past your full retirement age–your benefit would increase by about 8% for each year you delay benefits, up to age 70.
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