Financial World Relies on Key Groups to Track the Economy

Over the years, the closely watched “yield curve” has been fairly adept at signaling the onset of U.S. economic recessions. When short-term Treasury yields exceed long-term yields, an economic slowdown often results. When such a yield “inversion” occurred in late 2005, some economists pointed to it as an indication that a recession was approaching. Some two years later, the economy indeed fell into recession.

A yield curve inversion would seem to be a fairly straightforward method for ascertaining the direction of the economy, but more often than not, matters are not so simple. This is evidenced by the committees and teams who join forces to study the economy and weigh in with predictions and forecasts. Here’s a look at some of the key organizations that bring together the world’s most powerful and influential economists.

Beyond the Curve

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The Federal Reserve’s Federal Open Market Committee is ground zero for information about the possible future of interest rates. The committee is composed of the seven members of the Federal Reserve Board and five of the 12 Federal Reserve Bank presidents. They meet nine times a year to set monetary policy. Even though the FOMC announces its decisions immediately after each meeting, the announcements are couched in sterile language that does little to indicate what really happens during the meetings. It’s a bit like hearing the score of a football game without seeing any of the action — the score reveals the outcome but not the drama. The real action can be seen in the meeting minutes, which are usually released a few weeks later. Analysts and journalists pore over the minutes for clues about whether the committee was divided, what specific concerns were discussed, and what data motivated the committee’s decision.

The Wall Street Journal’s Economic Forecasting Survey also showcases competing views. This monthly poll of more than 50 economists reveals predictions of major economic indicators, such as inflation, interest rates, taxes, and employment. Their consensus forecasts are published in the newspaper each month, but their individual views are sometimes more interesting. To adapt an old saying, 50 heads are better than one, and considering the differences among the surveyed economists can sometimes provide clues about how they reached their consensus views.

The National Bureau of Economic Research’s Business Cycle Dating Committee has the last word on when recessions start and end, even though their judgments sometimes come years after the fact. This cautious group of academics uses a broad measure to define a recession: not simply two quarters of declining gross domestic product but also weakness in income, employment, production, and sales. Although the business cycle committee gets most of the headlines, the NBER itself might be the most prestigious collection of economists in the world or in history. Many of its members are Nobel Prize winners; several have served as economic advisers to the president of the United States or as governors and chairmen of the Federal Reserve.

Everyone has an opinion, but clearly not all opinions are equal. Considering the views offered by the best of the best may help with decisions about your Naperville Investments portfolio.

1) The Wall Street Journal, August 16, 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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Why Realistic Expectations May Be Great Expectations

A survey of investors found that many have reduced their expectations for the stock market. A large majority expect annual stock market returns over the next one to five years to be no higher than 8%.1 This is down from the 12% return investors expected from stocks in 2010 and the 20% return they expected in 2009.2

Despite scaling back their investment expectations, 87% of investors still expect to reach their long-term financial goals, even though four in 10 made no adjustments to their investment strategies during the previous two years.3

Positive thinking can be a powerful force, but there’s a fine line between optimism and unrealistic expectations.

Possible Pitfalls

The most obvious risk of overestimating how your portfolio will perform is that you may not reach your goal on time. Major financial goals such as retirement and saving for college can take years to achieve. If you arrive at the expected date of your goal but haven’t accumulated the expected funds, there’s no starting over. You may be forced to postpone your goal or make do with less money.

A less obvious risk is that, as you get closer to your target date and it appears as though you may not achieve your goal, you may be tempted to take on more risk than would be suitable for your situation in order to help close the shortfall.

Unrealistic expectations can also create a false sense of retirement security by leading you either to contribute too little of your income during your working years or to withdraw too much during retirement.

A small difference in investment performance can have a tremendous effect over a long period. If you were expecting a 5% average annual return but actually earned 8%, you’d probably be pleasantly surprised. Imagine your disappointment if you were expecting the higher return but actually earned less. Investments seeking to achieve higher rates of return also involve a higher degree of risk.

It’s natural to hope for the best. But being realistic — and not overly optimistic — may put you in a better posi

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tion to pursue your financial goals.

1, 3) Investment Advisor, July 15, 2010
2) CNBC.com, December 21, 2009; December 31, 2008

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 Investment Services 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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New Rules Are in the Cards

In 2010, the federal government issued a dizzying array of rules and reforms affecting the plastic you carry in your wallet. In case you had trouble keeping track, here are some of the important developments.

Credit cards: Under the Credit Card Accountability, Responsibility and Disclosure Act of 2009, consumers must be given a 45-day notice before any significant changes affecting their account terms can take effect. Such changes include higher interest rates, fees, and finance charges. Consumers who exceed their credit limits cannot be charged an overlimit fee without their consent. Card issuers must send statements a minimum of 21 days before the due date, which must be the same date every month.1

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Debit cards: Banks are required to have a debit-card user’s permission before they can charge overdraft fees on
point-of-sale purchases and ATM withdrawals (overdrafts via paper checks and automatic payments are exempt; banks can continue to cover them for a fee without the account holder’s permission). Card holders who agree to the fees will have their purchases authorized when their accounts don’t have sufficient funds. Card holders who don’t accept the fees will likely see their over-limit purchases declined.2

Gift cards (and certificates): Issuers cannot charge inactivity fees on cards sold on or after August 22, 2010, unless the card or certificate has been inactive for at least one year. After one year, the issuer may levy inactivity fees, but no more than once per month. The money stored in a gift card must be usable for at least five years from the date the card was issued. If a consumer adds money to the card, the amount added must also retain its value for at least five years.3

1) Bankrate.com, 2010
2) National Foundation for Credit Counseling, 2010
3) Federal Reserve, 2010

The information in this article is not intended 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 Naperville Accounting 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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Getting to Know Your Beneficiaries

Thanks to a popular 2007 motion picture, many Americans now have a “bucket list” — an inventory of accomplishments they hope to achieve in their lifetimes.

Although many bucket list endeavors require courage or tenacity, such as traveling to faraway places or writing a book, there’s at least one task you can resolve to accomplish that is fairly simple but could have lasting benefits for your family, friends, and possibly a favorite charity.

Designate Your Beneficiaries

When you set up an IRA or participate in an employer-sponsored retirement plan, you are typically asked to fill out a beneficiary designation form. Although many people postpone the naming of a beneficiary, this can be a big mistake. IRAs and most retirement accounts are not subject to probate, and the assets will convey directly to your designated beneficiaries, regardless of different instructions in your will. Whoever is designated as your account beneficiary will inherit the proceeds directly, and it would be unlikely for a probate court to order a different result.

Failing to designate a beneficiary means your estate could inherit the money. Because your estate is not eligible for the same tax benefits that individual investors enjoy, your estate would be required to withdraw the assets over a shorter time period. By contrast, a correctly named beneficiary can preserve the tax-deferred status of the inherited funds and spread the tax liability over several years or even over his or her lifetime.

Life Insurance Policies, Too

Life insurance benefits also convey directly to beneficiaries, independent of the probate process. Although it would be unusual to purchase life insurance without designating a beneficiary, it’s not unusual for policy owners to fail to review their beneficiary designations on a regular basis.

The reasons you bought your life insurance policy and the people you want it to protect may change over time. But only you can change the designated beneficiaries on your life insurance policy. Major life events such as marriage, birth, divorce, or death may affect your choice of beneficiaries, and it’s important to update your designations to keep pace with any changes in your life.

Estate conservation issues may be uncomfortable to face, but there’s probably no other aspect that is as simple or inexpensive as designating beneficiaries. Keeping your beneficiary designations up to date can help ensure that your valuable assets go to the people you want to inherit them.

For more information on how we can assist you with your Naperville Estate Planning, please call us today!

The information in this article is not intended as Naperville 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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How to Make the Most of the Payroll Tax Cut

Have you considered what you will do with the extra 2% in take-home pay that you will receive in 2011? The 2010 Tax Relief Act (H.R. 4853) not only extended the expiration dates of many current tax rates but also reduced the Social Security payroll tax by two percentage points for the 2011 tax year.

An extra 2% might not seem like much, but it could be an opportunity to make a difference in your financial future.

Eliminate Credit-Card Debt

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Two-thirds of Americans who file for bankruptcy attribute the main cause of their financial problems to credit cards.1 If you have credit-card debt, consider how it might be interfering with progress toward your long-term goals.


The average variable interest rate on credit cards is more than 14%.2 Thus, a borrower with a $5,000 credit-card balance and a 14.5% interest rate would pay $1,872 in interest to retire the debt, assuming $125-per-month payments for 55 months — that’s about four and a half years!

If you have racked up some bills on your credit cards, consider using the extra 2% in take-home pay to help reduce or eliminate the debt, which could free up more of your future income to save and invest.
Increase Retirement Plan Contributions

Experts often recommend that you try to give your retirement plan a raise every year by increasing your contribution by an extra 1% or 2%. Putting the extra 2% you will get this year toward your workplace retirement plan is a relatively painless way to accomplish this objective.

For a worker earning $75,000 a year, the 2% payroll tax cut would be worth an extra $125 per month in take-home pay. By contributing $125 more each month for 25 years to an account earning a hypothetical 5% average annual return, a worker could accumulate an extra $74,440 toward retirement. Of course, this assumes the extra 2% contributions continue to be made even after the payroll tax cut expires after 2011. However, if the worker receives annual pay increases, he may be able to use them to maintain the higher contributions in future years without experiencing a reduction in take-home pay. This hypothetical example is used for illustrative purposes only and does not represent the performance of any specific investment. Fees and expenses are not considered and would reduce the performance described if included. Actual results will vary.

In 2011, the contribution limit for 401(k), 403(b), and 457 plans is $16,500 (or $22,000 for workers age 50 and older). If you aren’t making the maximum annual contribution to an employer-sponsored retirement plan, consider using the additional income to increase your monthly contributions. It could help you accumulate more for retirement.

Open an IRA

If you are already making the maximum annual contribution to a workplace retirement plan or don’t have access to such a plan, it might be time to open a Roth IRA or a traditional IRA. In 2011, you can contribute up to $5,000 ($6,000 for those age 50 and older) to all IRAs combined, as long as you have earned income. Contributions to a traditional IRA are generally tax deductible (subject to income limits if you are an active participant in an employer-sponsored retirement plan), whereas contributions to a Roth IRA are after-tax (income eligibility limits apply). Distributions from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income. Qualified distributions from a Roth IRA (those made after the account has been in place for at least five years and after the original owner reaches age 59½) are free of federal income tax. Early IRA and employer-plan distributions (prior to age 59½) may be subject to a 10% federal income tax penalty.

Take Your Portfolio in a New Direction

If you are already doing everything you can to pursue your retirement objectives, you might consider investing in something that previously has been out of reach. Perhaps you are interested in an investment opportunity that is not available in your workplace retirement plan. Maybe you have always wanted to broaden your investment experience but never had the money. Remember that investments seeking to achieve higher rates of return also involve a higher degree of risk, so it’s a good idea to make sure you are using money that you won’t need in the near term.

Save for a Specific Financial Goal

The extra take-home income could be an incentive to open an investment account to pursue other important goals, such as saving for a child’s college education, a down payment on a home, a wedding, or a vacation. Because getting started is often the most difficult aspect of pursuing a new goal, using the payroll tax cut to open a new account may help you build momentum so that you will find other ways to keep the account growing.

If you simply plan to spend the extra income from the 2011 payroll tax cut, you could be passing up on an opportunity to adopt some new habits and put yourself in a better position to pursue your financial goals. Although the tax cut is temporary, it may be just the impetus to make a meaningful difference in your long-term financial situation.

1) Reuters, October 25, 2010
2) Bankrate.com, January 18, 2011 (average interest rate as of January 12, 2011)

Phone us today so we can discuss Naperville Investment Services.

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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