Your Money Questions Answered

Commonsense solutions to your financial concerns
By Lea Ann Knight, CFP

Few Americans are without money woes—whether it’s planning for retirement, deciding what to do with a windfall or debating a switch to an online bank. Here, certified financial planner Lea Ann Knight, author of the weekly blog Financially Fit After 40 and owner of Garrison/Knight Financial Planning in Bedford, Mass., takes a stab at some frequently asked financial questions. 

Make the Most of Extra Cash

Q. I received a raise a few months ago and have been using the extra cash to pay down my new mortgage. Should I be doing something else with the money instead? 

A. Because mortgage rates have been at historic lows recently, consider putting those extra dollars to work somewhere else. The average return in the stock market has been around 8%, so one good alternative is to invest what’s left over from your paycheck each month in a basic stock-index mutual fund at a low-cost brokerage house. Or you could add the money to your retirement savings. But if you feel like you’re on track financially and you have surplus cash, then paying down debt with a low interest rate can be a smart move.

Maximize Your Retirement Savings

Q. My company is now offering a Roth 401(k) in addition to the traditional 401(k) plan. What would be the financial benefits of switching my 401(k) contributions to the Roth version?

A. The advantage of contributing to a Roth 401(k) is that, although you can’t take an annual tax deduction now, you will be able to withdraw your money tax-free in retirement. If you think you might be in a higher tax bracket when you’re older, a Roth 401(k) is a good idea. But if you like having that pretax deduction each year, you might prefer to keep your money where it is. Alternatively, as long as you are single and earn less than $110,000 yearly (or your combined annual income if married is less than $173,000), you may continue your traditional 401(k) plan at work and contribute up to $5,000 per year to a Roth IRA as well. Having both types of accounts in retirement will give you more flexibility with withdrawals and help you minimize taxes in your golden years.

Decide if an Elderly Parent Still Needs Life Insurance

Q. My dad has retired but is still paying premiums for a large life insurance policy. His house is paid for, and all his children are independent. Does he still need this insurance?

Insurance (Photo credit: Christopher S. Penn)

A. Assuming there will be no financial obligations for his estate to meet in the event of his death, your father might no longer need to keep paying for the insurance policy. If that’s the case and his is a term life insurance policy—which provides coverage for a set amount of time—with no cash value, he can simply stop paying the premiums to end his coverage. If, on the other hand, it is permanent life insurance, the policy might have a cash surrender value, meaning he could cash it in (and pay income tax on the proceeds) or use the cash value to start paying for his premiums. The latter option is appealing if he wants to keep enough value in the policy to help pay for his burial expenses or wishes to leave the death benefit to his heirs. Before he acts, however, he should review his choices with a financial planner to determine which option makes the most sense for him.

Consider Additional Disability Coverage

Q. My company benefits plan includes some disability coverage, but not at my full salary. Should I supplement with private disability insurance?

A. Many employers offer long-term disability plans that cover 60% to 70% of your salary if you become unable to work. Private policies can be pricey, so decide how much of your paycheck you need to meet your monthly expenses in such an event. If it’s within the employer-covered amount, you likely don’t need a private disability plan, but if you’re the sole breadwinner with young kids and a big mortgage, it might be a good bet. Also consider how close you are to age 65, when many such policies terminate anyway.

Weigh the Pros and Cons of Online Banking

Q. I’ve heard that online banks offer great interest rates, but I’m not sure if they’re safe. Are there any other drawbacks?

A. Before you switch, confirm that your account will be FDIC-insured, meaning your money will have the same protection as it would at a brick-and-mortar institution should the bank fail. And recognize that although many online banks can offer a higher interest rate because they don’t have the same overhead as traditional banks, it will take longer to get your hands on your money in an emergency and—if you must make deposits by mail—for checks to post to your account. Also think about how often you need services such as certified checks—which might not be as easy to obtain online. Consider two accounts: your local bank for day-to-day needs and an online one for savings. That way you’ll still have easy access to some of your money but will earn higher interest on what you don’t need today.

Adapted from the Aug. 24, 2012 issue of All You. © 2012 Time Inc. All rights reserved.

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With Stocks, It's Not the Economy

Companies are no longer tied to their home GDPs. Yet we still invest that way. By Zachary Karabell 

From the beginning of May until late June, stock markets worldwide declined sharply, with losses surpassing 10%. The first weeks of July brought only marginal relief. Ominous voices began to warn that the weakness of stocks was a direct response to the stalling of an economic recovery that had lasted barely a year. Anxiety over debt-laden European countries—most notably Greece—combined with stubbornly high unemployment in the U.S. to create a toxic but fertile mix that allowed concern to blossom into full-bloom fear. 

The most common refrain was that stocks were weak because global economic activity was sagging. A July 12 report by investment bank Credit Suisse was titled “Are the Markets Forecasting Recession?” With no more stimulus spending on the horizon in the U.S., Europeans on austerity budgets and consumer sentiment best characterized as surly, the sell-off in stocks was explained as a simple response to an economy on the ropes. 

It’s a good story and a logical one. But it distorts reality. Stocks are no longer mirrors of national economies; they are not—as is so commonly said—magical forecasting mechanisms. They are small slices of ownership in specific companies, and today, those companies have less connection to any one national economy than ever before. 

As a result, stocks are not proxies for the U.S. economy, or that of the European Union or China, and markets are deeply unreliable gauges of anything but the underlying strength of the companies they represent and the unpredictable mind-set of the traders who buy and sell the shares. There has always been a question about just how much of a forecasting mechanism markets are. Hence the saying that stocks have correctly predicted 15 of the past nine recessions. 

At times, stocks soar as the economy sours (in 1975, for instance) or sour when the economy soars (as with China’s stock market, the Shanghai stock exchange, in the past year). At other times, stocks have tracked or even anticipated a nation’s economic strength—but that happened in an era when a strong relationship existed between the companies that traded on a particular exchange (American companies on the New York Stock Exchange, British companies in London) and the country in which they traded. For many years, American companies did most of their business in the U.S., so their results could be expected to parallel the larger economy. 

But since the turn of the millennium, business and capital have gone truly global. The companies of the S&P 500 now make about half of their sales outside the U.S., and if you remove geography-bound utilities and railroads, regional banks and a fair number of retailers, the percentage is higher. That means that even if the U.S. economy is a total wash, they can access other markets to maintain their growth. The same might be said of a international conglomerate as well. 

This is known within companies, though CEOs are often susceptible to the false story—which makes some sense, given that most CEOs are older than 50 and once operated in a world where what was good for GM was indeed good for America. But look at the actual balance sheets of thousands of global companies, large and small, and you’ll find that their fortunes have diverged from those of their national economies. 

Over the past two years, as unemployment in the U.S. has soared and GDP has stumbled, companies have been minting money. Tons of it. The Shaw Group, an engineering firm that makes things like nuclear power plants in Saudi Arabia, trades at about $32 a share and has $19 per share in cash. It would be as if you owned outright a $500,000 home and had $300,000 in the bank. That is the case for most companies. Their position is almost the opposite of that of governments and consumers: lots of growth, little debt and mounds of money. 

They have amassed that hoard of cash and are now growing 20% a year, on average, at a time when the economies of Europe, the U.S. and Japan are flat. But you’d never know that from the continued drumbeat about how markets reflect economies. Every time Apple unveils a new product and millions rush to buy it, we should pause for a moment and wonder which jobs report—the one released by the U.S. government every month or the Steve Jobs report on Apple’s health—tells us more about the world. 

As companies report their earnings for the third quarter of 2010, it will be harder than ever to escape the fact that corporations now inhabit their own thriving economy, unencumbered by many of the ills of nation-states. That may be exhilarating (if you’re an investor) or troubling (if you’re a citizen), but either way, it’s time to let go of the false belief that as goes the economy, so go companies and their stocks. 

From the Aug. 2, 2010 issue of Time. © 2010 Time Inc. All rights reserved. 

Please contact us at Platinum Financial for all your Naperville Brokerage Services needs. We can assist you to better understand the world of stocks and investing.

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Rebalancing World Trade

Despite the European debt crisis and the related market turmoil, total U.S. exports demonstrated six months of record-breaking increases last year and reached an all-time high of nearly $180 billion in September 2011.^1–2

Rising exports have generated nearly half of U.S. gross domestic product (GDP) growth since the recession ended in June 2009.³ Sales of U.S. goods and services abroad surged 29% in the first nine quarters of the recovery, as manufacturers took advantage of stable demand from developing nations in Asia and Latin America. In fact, emerging markets now receive 55% of U.S. goods shipments (up from 40% in 2000).⁴

Investors who follow the balance of trade may also be interested in some other recent shifts in the exports sector, including the federal government’s efforts to stimulate the domestic economy by removing barriers to trade and expanding global trading opportunities.

Balancing Act

When the economy imports more goods and services than it exports, it creates a trade deficit. The United States has run prolonged trade deficits since the 1970s, when the price of imported oil began to surge along with U.S. demand for oil and other foreign-made goods such as cars and electronics.

U.S. imports tend to grow when the economy grows, because consumers may have more money to spend on goods and there is often more demand for foreign oil. But this pattern did not reappear in 2011; the economy grew slowly (at an annual rate of 1.8%) in the third quarter, even as the trade deficit narrowed.^5–6

Changing Landscape

U.S. exports to China and Chinese imports both rose to record high levels near the end of 2011, but the imbalance continued to grow in China’s favor. Despite the shrinking national trade gap, the trade deficit with China was forecasted to end the year as the highest ever with a single nation.⁷

There was another interesting development in 2011 regarding international trade. By processing crude oil for growing nations such as Mexico and Brazil, the United States became a net exporter of petroleum products for the first time since 1949.⁸Meanwhile, the United States is still the world’s largest importer of crude oil.⁹

Focus on Free Trade

In March 2010, President Obama signed the National Export Initiative, an executive order intended to promote international trade and provide assistance and financing for small businesses that want to enter foreign markets. In pursuit of the president’s stated goal to double exports by 2015 (from 2009 levels), U.S. trade officials have recently forged some of the most significant trade agreements in years.¹⁰

In October 2011, Congress passed new trade pacts with South Korea, Colombia, and Panama. Upon their implementation, the United States will have trade agreements with 20 countries. The United States is also participating in negotiations for a Trans-Pacific Partnership with nine nations (including Australia, Chile, Peru, and Singapore) — a robust region that represents more than 40% of global trade.¹¹

A recession in Europe or high oil prices could affect the balance of trade, because U.S. export growth typically depends on the health of our trading partners and the strength of the dollar. Consequently, fast-growing emerging markets and a relatively weak dollar help explain why healthy U.S. exports have been a more important contributor to economic growth than they were in the wake of any other recession since World War II.

Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

1, 6) U.S. Department of Commerce, 2011
2–4, 8) Bloomberg.com, December 5, 2011
5) U.S. Bureau of Economic Analysis, 2011
7) thehill.com, December 9, 2011
9) The Wall Street Journal, November 30, 2011
10) Whitehouse.gov, 2010
11) Office of the U.S. Trade Representative, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Brokerage Services advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

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Variable Annuities and Your Retirement Strategy

Retirement savers are generally wise to take full advantage of the tax benefits that apply to employer-sponsored retirement plans and IRAs. However, because these tax-deferred plans are subject to strict annual contribution limits, many higher-income individuals may not be able to set aside enough money in them to pursue a comfortable retirement lifestyle.

Because a variable annuity is not subject to federal contribution limits, it enables investors to invest more after-tax dollars to supplement the income they could receive from other plans. Taxes on earnings are deferred until withdrawn.

Not only does a variable annuity offer a way to pursue investment gains, but it may offer an opportunity for the contract holder to purchase guarantees (for an additional cost) to help protect against the downside risks of investing in the markets. Examples may include the guarantee of minimum fixed income payments or a guarantee to withdraw a specific amount over a lifetime, regardless of account value. Of course, any guarantees are contingent on the claims-paying ability of the issuing insurance company.

If you are looking for a way to supplement your retirement income and defer taxes on investment gains, a variable annuity could play a key role in your retirement portfolio.

Market Exposure with Potential Gains
A variable annuity is a long-term investment vehicle designed for retirement purposes. The contract holder agrees to make a single payment or a series of payments to an insurance company in exchange for a future income (typically in retirement). These payouts can be structured to last for the rest of the contract holder’s lifetime.

During the accumulation period, the contract holder invests in a variety of investment subaccounts according to his or her risk tolerance, long-term goals, and time horizon. In this way, the investor can participate in the growth potential of the stock market. Of course, the future value of the annuity and the amount of income available in retirement depend on the performance of the subaccounts selected.

Because variable annuity subaccounts fluctuate with changes in market conditions, the principal may be worth more or less than the original amount invested when the annuity is surrendered. The investment return and principal value of an investment option are not guaranteed.

There are contract limitations, fees, and charges associated with variable annuities, which can include mortality and expense risk charges, sales and surrender charges, investment management fees, administrative fees, and charges for optional benefits. Withdrawals reduce an annuity’s death benefit and values. Only the earnings portion of variable annuity withdrawals is taxed as ordinary income; withdrawals made prior to age 59½ may be subject to a 10% federal income tax penalty. Variable annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association.

Variable annuities are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Brokerage Services advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Finding a Good Time to Invest

When the Dow Jones Industrial Average closed above 12,000 in February 2011 — the first time since June 2008 — it broke an important psychological barrier. It seemed to confirm to many that the stock market could be recovering from the global financial crisis.1When a major index such as the Dow crosses a significant threshold, it can stir optimism among investors and those who have been sitting on the sidelines waiting for the markets to rally. Although there may indeed be good and bad times to invest, the problem is that such periods usually become apparent only in hindsight. Most investors have important financial goals and only a limited time to reach them. Waiting for the “right” moment to invest could prove to be a costly and ineffective strategy.

A Lesson Not Yet Learned
As a result of the 2008 financial crisis and turbulence of the past two years, a growing number of young investors have shunned the stock market. According to the Investment Company Institute, only 34% of people under age 35 say they’re willing to take substantial or above-average risks with their portfolios, down from 48% in 2005.2

The early market experiences of young investors were disappointing, and they learned a hard lesson in market risk — that their portfolios can take a big hit in an economic downturn. But they may not have the perspective of “time in the market” and staying power over the long term.

In fact, a bigger danger for young stock-shy investors could be missing out on potential long-term opportunities. For example, over the 41 10-year holding periods since 1960, stocks lost money in only two periods (see chart). Of course, past performance does not guarantee future results.

Post-2008 Bull Market
From the start of a bull market on March 9, 2009, to February 1, 2011, the Dow’s total return (assuming reinvestment of dividends) was 92%. Investors who purchased stocks mirroring the S&P 500, a broader measure of the stock market, would have nearly doubled their returns (assuming reinvestment of dividends).3
The rise in stocks did not erase all the damage caused by the Great Recession, but it helped many investors recoup a chunk of their losses. Investors who pulled money out of stocks and missed this upswing also missed out on potential gains.

It’s natural to be tempted to make investment decisions based on good news or bad news about the financial markets. But by sticking to a sound investing approach that considers your risk tolerance, time horizon, and long-term goals, you may be able to prevent emotions from taking your portfolio on a rollercoaster ride.
1) Yahoo! Finance, 2011, Dow Jones Industrial Average for the period 1/1/2008 to 2/1/2011. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Rates of return will vary over time, particularly for long-term investments. Actual results will vary.
2) CNNMoney, January 6, 2011
3) CNSNews.com, February 1, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from a Naperville Brokerage Services advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Using a Variable Annuity for Guaranteed Income

One of the recommendations from the White House Task Force on Middle Class Working Families was for retirees to purchase annuities to help reduce the risks of outliving their savings or experiencing lower living standards because of inflation and investment losses.1

The White House is not a common source of retirement information, but its recommendation addressed a common concern: running out of money in retirement. Although the task force wasn’t talking about variable annuities in particular, one of the benefits offered by variable annuities is the potential for a guaranteed lifetime income.

If you have wondered whether your retirement portfolio will be able to go the distance, you might want to learn more about variable annuities.

An Investment in Insurance

A variable annuity is an insurance contract that is typically funded with either a lump sum or a series of premium payments. The term variable derives from the variable return potential. During the accumulation period, the contract holder can direct his or her premiums to be invested among a variety of subaccounts, which pursue returns in the financial markets. The subaccounts offer varying degrees of risk, allowing contract holders to pursue investment returns according to their risk tolerance, long-term goals, and time horizon.

When the contract holder is ready to begin receiving a retirement income, the amount of income available depends on the contract value, which is determined in part by how the investment subaccounts performed during the accumulation period.

A lifetime income is one of several payout options. Contract holders may also select an income that lasts for a specific number of years or for the lifetimes of two people. For an additional cost, contract holders may be able to purchase guarantees, such as a guarantee of minimum fixed income payments or a guarantee to withdraw a specific amount over a lifetime, regardless of the account value.

There are contract limitations, fees, and charges associated with variable annuities, which can include mortality and expense risk charges, sales and surrender charges, investment management fees, administrative fees, and charges for optional benefits. Withdrawals reduce annuity contract benefits and values. Variable annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association. Withdrawals of annuity earnings are taxed as ordinary income and may be subject to a 10% federal income tax penalty if made prior to age 59½. Surrender charges may also apply if the annuity is surrendered in the early years of the contract. Any guarantees are contingent on the claims-paying ability of the issuing company. The investment return and principal value of an investment option are not guaranteed. Because variable annuity subaccounts fluctuate with changes in market conditions, the principal may be worth more or less than the original amount invested when the annuity is surrendered.

Variable annuities are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) Kiplinger’s Personal Finance, May 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Tips For Fighting Inflation

Federal Reserve Chairman Ben Bernanke told Congress earlier this year that he does not see inflation becoming a major threat to the U.S. economy anytime soon.1 But as more than one pundit has pointed out, the Fed doesn’t exactly have a stellar record of anticipating crises. Some critics believe that the central bank was caught unaware by the financial crisis that began in 2008.
Although inflation has been fairly quiet over the past few years, it remains a perennial concern for investors because it reduces the value of money over time. When inflation is low, it just means the purchasing power of a dollar is eroding at a rate that is slow enough not to cause widespread concern.

Fortunately, the U.S. Treasury issues a form of debt that could help protect investors from the effects of inflation. If you are concerned about how inflation is affecting your portfolio, you may want to consider Treasury Inflation-Protected Securities (TIPS).

Inflating Principal
The principal value of TIPS increases as the Consumer Price Index (a popular measure of inflation) rises, and the value decreases when the CPI falls. This, in turn, can increase or decrease your yield. TIPS make interest payments twice a year and return the greater of either the original or the inflation-adjusted principal at maturity.


One advantage is that as the principal amount grows, so do the interest payments, meaning that the income generated by TIPS has the potential to rise over time. One disadvantage is that unless you own TIPS in a tax-deferred account, you must pay federal income tax on the income plus any increase in principal, even though you won’t receive any accrued principal until the bond matures.

U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of TIPS fluctuates with changes in market conditions. If not held to maturity, TIPS may be worth more or less than their original value.

Inflation appears to be under control at the moment, but over long periods even a modest inflation rate can significantly reduce purchasing power. We can help you decide whether inflation-fighting TIPS may be a valuable addition to your portfolio.

1) The Wall Street Journal, April 15, 2010

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The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.

For more information regarding inflation-fighting TIPS, contact your Naperville Brokerage Services team at Platinum Financial.

Naperville Financial Planning- Managing Your Finances for Sustainability

A lot of people don’t know anything at all about managing their finances. While it is true that managing your own finances is never easy, it is still essential to keep track of you cash flow, your monthly spending and your savings if you want to have anything left in the future for your children and for retiring. If you find it difficult to manage your personal finances, you can always opt to employ the aid of Naperville financial planning service provider. If you do so, you can get a financial planner to help you accomplish you financial goals and help you properly manage your personal finances to make it sustainable.

Through Naperville financial planning services, you can learn proper planning in the areas of cash flow management, retirement planning, investment planning, education planning, risk management, estate pla

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nning and tax planning. With the help of a financial planner, you will be carefully guided in the financial planning process to enable you to create a viable and sustainable financial plan that is tailor made to suit your current financial situation and as well as your financial goals.  You can even employ the aid of Naperville Brokerage services if you need the help of a stock broker to help manage your current investments and plan out your future investments for you.

The aim of every financial planner is to help you find meaning and direction to each financial decision you make and to allow you to understand the implications of each decision to other financial areas. If you want to keep all your investments secure, you can work with your financial planner to ensure with the highest probability that all your financial goals are achieved at the target date and make sure that all your plans are open to the possibilities of both positive and negative changes that may affect your finances in the future.

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Are Brokerage Services Just for Real Estate Transactions?

       Contacting a professional for Naperville brokerage services is the first place to start in assessing your future.  Naturally, you require the best as you will be investing your hard earned money with them and want to see it flourish.

A couple of different types of brokers for you to choose from.  One type offers full service, while the other offers limited assistance.  The descriptions are common sense and you need to determine what type of direction you require.  The newbie’s out there that have never dealt with the stock market and need full assistance with their investments.  It gives a sense that their money is cradled and well cared for.
 
A full service broker has advantages for most clients.  Many of us are skilled at our trade and do not have time nor the desire to learn about stocks.  Our full service broker can take care of this.  Of course, they will consult you before trading, but they know the market very well and can place intelligent trades on your behalf.  The average commissions are 1-2% and there are more affordable services for other clients.

Websites exist out there that allow for you to make trades on your own at a fee per trade.  This seems easy and quick to do.  No phone calls, just click away on your computer.  Seems like a great idea?  No way... in this instance, you take out the human factor.  Understand that most of us do not have an education in brokerage and yet, we are willing to risk our savings to think so?  Don’t make that mistake.  Contact a professional for your Naperville brokerage services.