Making Money Market Funds Work for You

Some investors turn to money market funds when they are concerned about market volatility. At the start of 2009, in the wake of the 2008 global financial crisis, the amount of cash held in money market funds exceeded the money in stock mutual funds for the first time in more than a decade.1

Money market funds may carry less risk than stocks, but investing in them as a reaction to market volatility also carries risk: You could miss out on any potential gains when the market begins to recover.

Meet the Money Market

Money market funds are mutual funds that invest in cash-alternative assets, usually short-term debt. They seek to preserve a value of $1 per share.

Investors may use money market funds on a temporary basis to hold proceeds from the sale of assets while they determine where to reinvest the funds. Because money market funds aim to maintain liquidity and may offer higher yields than bank savings accounts, they can also provide a place to hold your emergency fund. It’s always a good idea to have enough cash saved to carry you through a financial emergency.

Less Risk May Mean Low Returns

Money market funds may have a place in your portfolio, but it’s usually not a good idea to keep the bulk of your wealth in low-yielding cash instruments because you are concerned about market volatility. As you can see in the chart, trying to choose the appropriate moment to flee or reinvest in stocks can be a costly practice that may cause you to miss out on market gains.

Low rates of return may also make money market funds less ideal for long-term investing. Any time the after-tax yield is lower than the rate of inflation, your investment may be losing purchasing power.

When considering money market funds, it’s important to remember that lower risk usually translates to lower returns. Before you invest in money market funds, be sure to evaluate whether or not they may help you reach your long-term goals.

Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your inv

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estment at $1 per share, it is possible to lose money by investing in such a fund.

Mutual funds 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 investment company, can be obtained from your Naperville financial services professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) The New York Times, January 10, 2009

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 a Naperville Accounting firm. 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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Consider Your Retirement Needs, but Don’t Forget Your Retirement Wants

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You might have read or heard that you need to replace about 80% of your pre-retirement income to maintain your standard of living in retirement. Although some research validates this guideline, consider that half of today’s retirees say their spending is higher or about the same as it was when they were working.1–2

The idea that you may need less income in retirement considers that your income tax burden may be lower when you quit working and that you probably are not contributing a large chunk of your salary to retirement plans. Variables that can influence the replacement ratio — positively or negatively — include your living expenses, overall debt level, health-care costs, and whether you will receive an employer-provided pension.

Rather than focusing on how much money you’ll need to get by in retirement, take some time to envision a retirement lifestyle that you can really get excited about. Unless you plan to spend retirement being frugal, there’s a good chance that you could need more than 80% of your pre-retirement income to fund the lifestyle you seek.

More Time, More Money?

Retirement may be the first time in your life when you are free to travel, play golf, go back to school, focus on hobbies, and pursue other interests that you simply didn’t have time for during your working years.

What a disappointment it would be to retire and finally have the time, but not the money, to do as you please. If you would find it difficult to afford your ideal retirement lifestyle on your current income, it could be an indication that you are underestimating how much income you’ll need in retirement.
Changing Needs

As we grow older, what once may have been considered a luxury can become a necessity. In their list of “basic needs,” more than half of baby boomers include an Internet connection, special occasion gifts, and pet care. Many baby boomers would add family vacations, dining out, professional haircuts/coloring, movies, and their children’s or grandchildren’s education to the list of basic needs.3 And for 98% of baby boomers, health-care coverage is not a luxury but a basic need, one that they are extremely concerned about being able to afford.4

Underestimating Costs and Spending

The danger of underestimating how much you expect to spend in retirement is that it could lead you to save too little or invest too conservatively during your working years. Among the 46% of workers who have attempted to calculate how much money they will need for retirement, 44% made changes to their retirement savings strategies as a result, with the majority of changes involving saving or investing more.5

To prepare for a retirement that you can truly look forward to, consider the luxuries that your retirement-needs calculation may not account for. It could mean the difference between living well and just getting by.

1) CNNMoney, October 8, 2009
2, 5) Employee Benefit Research Institute, 2010
3) MarketWatch, August 6, 2010
4) Society for Human Resource Management, 2010

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 Naperville Retirement Planning 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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Eye on Japan's Recovery Within a Recovery

Just days before the Great Tohoku Earthquake, Japan’s central bank was expressing optimism that the nation’s economy was returning to a moderate growth path after a bout with chronic deflation that has dragged on for two decades.1

Now the Japanese government is estimating that the damage caused by the 9.0 temblor and the resulting tsunami and nuclear accident that devastated Japan’s northeast coast on March 11, 2011, may surpass $309 billion. That price tag — more than double the damage from Hurricane Katrina, which ravaged the U.S. Gulf Coast in 2005 — would make this the costliest natural disaster on record.2

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Although Japan has been in the economic doldrums since the early 1990s, suffering from an aging population (it was the only major nation not to experience a baby boom after World War II), the country plays a critical role in global commerce. Its nearly $6 trillion economy is the third largest, behind China and the United States, and accounts for nearly 9% of global economic output.3–4

The human toll of the disaster is heartbreaking, with perhaps 10,000 confirmed dead, nearly twice that number still missing, and hundreds of thousands displaced.5 Yet this event could serve as a turning point for Japan’s economy. Rebuilding could create investment opportunities, help break the cycle of deflation, and provide a paradigm-shifting jolt that may help a new Japan emerge from the rubble.

But in the near and medium term, Japan will face many challenges that could send ripples through the global economy.

Stabilizing the Yen

In the days after the quake, the Japanese yen surged in chaotic trading, hitting an all-time high on March 16. Two days later, the G-7 nations staged an unusual intervention to help bring the yen’s value down against other currencies.6

A similar currency spike occurred after the 1995 Kobe earthquake, when insurance companies had to buy yen to pay claims, driving up the value. This recent surge may have been driven by speculators who anticipated the yen would rise in the aftermath.7

A strong yen is seen as harmful to Japan’s export-driven economy. Prices for Japanese goods are expected to rise because they have been made more scarce by the country’s lost productivity. The combination of a strong yen and higher prices could cause Japan’s exports to lose market share to lower-priced competitors.
Supply-Chain Interruptions

Japan is a key supplier of equipment, mainly related to transportation and machinery. It supplies 14% of the world’s automotive exports and is an important source of parts for U.S. car makers.8 A shortage of just a few parts can bring an assembly line to a halt. This could lead to temporary plant closings while new supply chains are established. If Japan can’t restart production on key exports, it could create openings for its competitors.

Japan is the world’s biggest steel exporter. A drop in production is anticipated but unlikely to affect the world steel market because there is still slack capacity from the Great Recession. Major mills in 64 nations are operating at 82% capacity.9 Again, this could create an opening for Japan’s steel-making competitors.

Japan is the source of 60% of the world’s silicon wafers, a building block for computer chips. Two factories wiped out in the disaster accounted for 25% of world supply.10 Japan also supplies 90% of a special resin used to make printed circuit boards.

The risks associated with investing on a worldwide basis include differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. These risks may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

High Saving Rate

Japan may be in prime shape to pay for rebuilding. It has an abundance of yen-denominated assets, as evidenced by its high personal saving rate, which has averaged almost 17% since 1980.12 The high saving rate may be due to the nation’s persistent economic woes, which have wrought low wages and deflation. (Deflation in particular creates an incentive to save because goods become cheaper over time.) This means that reconstruction may commence regardless of the near-term prospects for Japan’s economy, which is likely to slump.

Tragedies like the one unfolding in Japan may be unpredictable, but they are inevitable. It’s important not to overreact to such events, but to position your portfolio to withstand — and perhaps benefit — when they strike.

1, 4, 6–11) The Wall Street Journal, February 28, 2011; March 25, 2011; March 19, 2011
2) Associated Press, March 23, 2011
3, 12) Haver Analytics, 2011
5) NHK World, March 24, 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 a Naperville Accountant or Naperville Investment 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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Another Economic Stimulus

Temporary Incentives Could Affect Naperville Businesses of All Sizes

Although Congress was unable to tackle the controversial issue of future income tax rates before the 2010 midterms, it quietly passed a little-noticed tax package: the Small Business Jobs Act of 2010 (H.R. 5297). Here’s a roundup of some of the bill’s major provisions.

Lending support — A $30 billion lending fund was created to make inexpensive credit available to small businesses. The loans will be made available through community banks.1

Bonus depreciation — The 50% first-year bonus depreciation, which expired at the end of 2009, was extended through 2010. It allows 50% of the cost of a depreciable item to be deducted as an expense in the first year of ownership. The additional year of bonus depreciation for equipment with a recovery period of 10 years or longer, and for tangible property used to transport people or equipment, was extended through 2011.2

Maximum first-year depreciation caps for new vehicles increased to $11,060 for passenger automobiles purchased and put into service in 2010. The maximum deduction for light trucks and vans remains at $11,160.3

Section 179 expensing — The maximum deduction related to qualified Code Sec. 179 property doubled to $500,000 for tax years beginning in 2010 and 2011. The law also temporarily modified the definition of qualified Section 179 property to include up to $250,000 of qualified real property (qualified leasehold improvement property, restaurant property, and retail improvement property).4

Small-business income tax credits — The law extended the carryback period on general business tax credits to five years, and they can be applied to both regular tax liability and AMT tax liability.5

Start-up expense deduction — In 2010 only, start-up costs related to the creation of a new business can be expensed instead of having to be amortized. The maximum expense that can be claimed is $10,000.6

Self-employed tax break — In 2010 only, self-employed people are allowed to deduct their health insurance premiums before computing their payroll taxes.7

1) U.S. Small Business Administration, 2010
2–7) CCH, 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 a Naperville accountant. 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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The Tax Year Calendar

Here are some important dates for the 2011 Tax Year:

January

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    18 –     Fourth quarter 2010 estimated tax due. Use Form 1040-ES.
    31 –     Deadline for employers to provide copies of Forms W-2 and 1099 for 2010 to employees.
February
    15 –     If you claimed exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by February 15 to continue your exemption for another year.
    28 –     Deadline for farmers and fishermen who have a balance due on their taxes to file their 2010 individual income tax returns and pay the balance due without penalties.
March
    15 –     Deadline for 2010 Naperville corporate tax returns (Forms 1120, 1120-A, and 1120-S) or to request an extension using Form 7004.
April
    18 –     Deadline to file 2010 Naperville individual income tax returns (Form 1040, 1040A, or 1040EZ) and any taxes owed, or to file for an automatic 6-month extension.
    18 –     Last day to contribute to a traditional IRA, Roth IRA, or SEP-IRA for the 2010 tax year.
    18 –     First quarter 2011 estimated tax due. Use Form 1040-ES.
    18 –     Deadline to file 2010 trust tax returns (Form 1041) or to request an automatic extension.
    18 –     Deadline to file 2010 partnership tax returns (Form 1065) or to request an automatic extension.
June
    15 –     Deadline for U.S. citizens living abroad to file individual tax returns and pay any tax, interest, and penalties due, or to request a 4-month extension (Form 4868).
    15 –     Second quarter 2011 estimated tax due. Use Form 1040-ES.
September
    15 –     Third quarter 2011 estimated tax due. Use Form 1040-ES.
October
    1 –     Deadline for existing employers to establish a SIMPLE IRA plan.
    17 –     If you were given a 6-month extension to file your income tax return for 2010, file Form 1040, 1040A, or 1040EZ and pay any tax, interest, and penalties due.
    17 –     Final deadline to file 2010 partnership tax return if you were given a 6-month extension.

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