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Are you ready for a long retirement?

Following is a great article on funding a long retirement:

http://www.marketwatch.com/story/how-to-fund-a-long-retirement-2017-01-10

We typically plan for our clients to live until age 100.   An interesting fact from the article, the average life expectancy for a 65-year-old male rose from 84.7 in 1950 to 87.8 in 2010 and average life expectancy for 65-year-old woman rose from 86.6 in 1950 to 89.7 in 2010.

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Rising Rates: The Fed Takes Next Step Toward Normal

On December 14, the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds rate by 0.25% — to a range of 0.50% to 0.75%. This was the second increase since December 2008, when the benchmark rate was lowered to a near-zero level (0% to 0.25%) during the Great Recession.1

The rate hike was widely anticipated by investors, and the only element of surprise was a change in the forecast for the federal funds rate. The median projection for the end of 2017 is 1.4%, up from 1.1% in September, which suggests that Fed officials now expect three additional rate increases in 2017 instead of two.2

As the financial markets priced in the prospect of an extra rate hike, the yield on two-year Treasuries surged to its highest level since August 2009. The 10-year Treasury yield climbed to 2.523%, the highest level in more than two years and a full percentage point higher than the record low in early July 2016.3(Bond yields typically rise as prices fall.) The S&P 500 index declined 0.8% on the day of the Fed’s decision, but recovered quickly and rose 0.4% the following day.4-5

The December rate hike reflects the committee’s growing confidence in the health of the U.S. economy, but it’s also likely to push up borrowing costs for households and businesses.

Central Bank Influence

The Federal Reserve and the FOMC operate under a dual mandate to conduct monetary policies that foster maximum employment and price stability. The federal funds rate is the interest rate at which banks lend funds to each other overnight within the Federal Reserve system. It serves as a benchmark for many short-term rates set by banks.

Adjusting the federal funds rate is one way the central bank can influence short-term interest rates, economic growth, and inflation. The Fed has been tasked with loosening monetary policy early enough to keep inflation from flaring up, but not so quickly as to reverse economic progress or upset financial markets.

Second Time Around

A lot has happened since December 2015, when the stock market cheered the Fed’s first rate increase since the financial crisis. At the time, the Fed projected four rate hikes by the end of 2016, but tightening was put on hold when GDP growth and inflation were slow to materialize. A number of outside risks, including a weak global economy and uncertainty surrounding the June Brexit vote, threatened to dampen U.S. GDP growth in the first half of 2016.6

The Fed’s most recent statement acknowledged that “the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since midyear.”7 Unemployment fell to 4.6% in November, a nine-year low, and GDP growth improved to 3.2% in the third quarter.8-9

Inflation is still below the Fed’s 2% target but has started to firm in recent months. According to the Fed’s preferred measure, personal consumption expenditures (PCE), prices rose at a 1.4% annual rate through October, and core PCE (which excludes volatile food and energy prices) rose at a 1.7% rate.10

What About Investments?

When interest rates rise, the value of outstanding bonds typically falls. Longer-term bonds tend to fluctuate more than those with shorter maturities, because investors may be reluctant to tie up their money if they anticipate higher yields in the future. Bonds redeemed prior to maturity may be worth more or less than their original value, but if a bond is held to maturity, the owner suffers no loss of principal unless the issuer defaults.

Equities may also be affected by rising rates, though not as directly as bonds. Stock prices are closely tied to earnings growth, so many corporations stand to benefit from a more robust economy. On the other hand, companies that rely heavily on borrowing will likely face higher costs, which could affect their profits.

Considerations for Consumers

The prime rate, which commercial banks charge their best customers, is typically tied to the federal funds rate. Though actual rates can vary widely, small-business loans, adjustable rate mortgages, home equity lines of credit, auto loans, credit cards, and other forms of consumer credit are often linked to the prime rate, so the rates on these types of loans may increase with the federal funds rate. Fed rate hikes may also put some upward pressure on interest rates for new fixed rate home mortgages.

Although rising interest rates make it more expensive for consumers and businesses to borrow, retirees and others who seek income could eventually benefit from higher yields.

The FOMC expects economic conditions to “warrant only gradual increases,” but future Fed policies will depend on global financial developments, economic data, and growth projections. If inflation rises more or less than expected, rate adjustments will likely follow suit.

The financial markets could continue to react to Fed policies, but that doesn’t mean you should do the same. As always, it’s important to maintain a long-term perspective and make sound investment decisions based on your own financial goals, time horizon, and risk tolerance.

The return and principal value of stocks fluctuate with market conditions. Shares, when sold, may be worth more or less than their original cost.

1-2, 7) Federal Reserve, 2016
3-6) The Wall Street Journal, December 14-15, 2016
8) U.S. Bureau of Labor Statistics, 2016
9-10) U.S. Bureau of Economic Analysis, 2016

 

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Year End Tax Tips

It is time to make some year end tax planning moves.    Following is an article with some tips that I think will help most people.

https://www.yahoo.com/finance/news/5-things-to-do-by-new-years-eve-to-get-a-bigger-tax-return-185655740.html

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Retirement Crisis

Most people find investing “complex and confusing.”   They also “don’t know what to do to prepare for retirement.”   This is what we help our clients figure out.

When planning for retirement, it is important to try to find your target.

  1. When do you want to retire?
  2. What do you want to do for retirement?
  3. How much do you need for retirement?

Following is a great article about the retirement crisis.

http://www.businessinsider.com/reasons-for-americas-retirement-crisis-2016-11

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Early Returns: How U.S. Markets Reacted to the Presidential Election

On November 8, 2016, Republican candidate Donald J. Trump won a closely contested election for president of the United States.

Late on election night, when it became evident that Trump was likely to win despite consistently trailing in the polls, foreign markets went into a deep dive.1 Many observers expected a similar reaction when the U.S. stock market opened on November 9, but after an initial drop, the S&P 500, Dow Jones Industrial Average, and NASDAQ rose throughout the day, and all three indexes closed up more than 1%.2 Although this was unexpected after the late-night surprise, it actually continued a two-day upsurge that began when Democratic candidate Hillary Clinton was expected to win the election.3

The market was mixed but steady the following day, November 10, with the Dow again up more than 1%, a small increase in the broader S&P 500, and a moderate decline in the NASDAQ, which tends to be more volatile due to its inclusion of smaller, technology-driven companies. On November 11, the NASDAQ recovered its loss, the Dow was slightly higher, and the S&P 500 was slightly lower — not unusual after a week of rising stock prices.4

On the other hand, bond prices fell steeply the day after the election, and the yield on the benchmark 10-year Treasury note, which rises as prices fall, jumped more than 2% for the day. This, too, was a surprise because Treasuries are generally seen as a safe haven in times of uncertainty. But on the day after the election, investors were more interested in selling Treasuries than buying them.5 The Treasury sell-off continued on November 10.6 (Bond markets were closed on November 11 in honor of Veterans Day.)

The conciliatory tone of Trump’s acceptance speech, Clinton’s concession speech, and remarks by President Obama all indicate there will be an orderly transfer of power, which may have helped calm the markets. Here are some additional implications that might be drawn from the initial market reaction.

First, although the Trump presidency was unexpected and his economic policies are untested, rising stock prices suggest that investors may be optimistic that his promised pro-business agenda could help continue the upward market trend of the last few years. Investors like clarity and consistency, and the fact that the same party will control the White House and Congress might create a more productive and predictable working relationship.7 At the same time, fundamental differences between the president-elect and the Republican Congress suggest that any changes may be more measured than originally anticipated.8

Second, in this initial transition stage, money flowing out of Treasuries suggests that bond investors may see a Trump presidency as leading to higher inflation and higher interest rates due to a combination of more protective trade policies and heavier government borrowing in order to fund infrastructure spending and reduce taxes for individuals and corporations. Declining bond prices might also reflect a belief that the Federal Reserve may raise rates at its December meeting despite the political surprise.9

Of course, these are just first impressions, and there could be many market ups and downs as investors try to understand what the new president’s policies might be, how much support they may have from Congress, and how they might affect the broader economy. Moreover, government policy and political debate are only two of many factors that can create market volatility.

Is the U.S. economy strong enough to withstand any headwinds that arise from a changing administration? That remains to be seen, but fundamental economic indicators have been solid, and overreacting to political events is unwise. The most stable approach in changing times is generally to maintain a well-diversified portfolio using a strategy appropriate for your time frame, personal goals, and risk tolerance.

Diversification does not guarantee a profit or protect against investment loss. The principal value of stocks and bonds may fluctuate with market conditions. Stocks, when sold, and bonds redeemed prior to maturity may be worth more or less than their original cost. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest.

The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results; actual results will vary.

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.

1) CNNMoney, November 9, 2016

2, 5, 7) MarketWatch, November 9, 2016

3-4) Yahoo! Finance, November 11, 2016

6) MarketWatch, November 10, 2016

8) The New York Times, November 9, 2016

9) CNBC.com, November 9, 2016

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Facebook and Your Retirement

I don’t use facebook very much, but I can understand seeing your friends on vacation would make you want to go as well.  This article looks at this situation in depth.    I really like the do’s and don’ts listed at the end of the article.    Be happy with what you have and be happy for your friends.

http://www.usatoday.com/story/money/columnist/powell/2016/11/16/retiree-facebook-travel-jealous-retirement-risk/90740868/

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Retirement Planning Tips

There are a lot of great tips in this article.    The ability to donate money using your RMD is an opportunity a lot of retirees miss.

http://money.usnews.com/money/retirement/401ks/articles/2016-11-14/6-end-of-year-retirement-planning-tips-that-will-save-you-money

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Fear of Spending

I frequently meet with clients that do not believe they can afford to retire.   Even after working when their financial goals show that they have more than they need.    Once they retire, they are reluctant to spend their money and it takes some time to feel comfortable spending.   Following is a great article on the subject.

http://time.com/money/4560067/retirement-fear-of-spending-budgeting-income/

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IRA and Retirement Plan Limits for 2017

IRA contribution limits

The maximum amount you can contribute to a traditional IRA     or Roth IRA in 2017 is $5,500 (or 100% of your earned income, if     less), unchanged from 2016. The maximum catch-up contribution for those age     50 or older remains at $1,000. (You can contribute to both a traditional and     Roth IRA in 2017, but your total contributions can’t exceed these annual limits.)

Traditional IRA deduction limits for 2017

The income limits for determining the deductibility of     traditional IRA contributions in 2017 have increased. If your filing status is     single or head of household, you can fully deduct your IRA contribution up to $5,500 in     2017 if your MAGI is $62,000 or less (up from $61,000 in 2016). If you’re     married and filing a joint return, you can fully deduct up to $5,500 in 2017 if your     MAGI is $99,000 or less (up from $98,000 in 2016). And if you’re not covered by an employer plan but your spouse is, and you     file a joint return, you can fully deduct up to $5,500 in 2017 if your MAGI is     $186,000 or less (up from $184,000 in 2016).

If your 2017 federal income tax      filing status is: Your  IRA deduction is limited if your MAGI is      between: Your deduction is eliminated if your MAGI is:
Single or head of household $62,000 and $72,000 $72,000 or more
Married filing jointly or qualifying      widow(er)* $99,000 and $119,000 (combined) $119,000 or more      (combined)
Married filing separately $0      and $10,000 $10,000 or more

 

*If you’re not covered by an employer plan but your spouse     is, your deduction is limited if your MAGI is $186,000 to $196,000, and     eliminated if your MAGI exceeds $196,000.

Roth IRA contribution limits for 2017

The income limits for determining how much you can     contribute to a Roth IRA have also increased for 2017. If your filing status is     single or head of household, you can contribute the full $5,500 to a Roth IRA in     2017 if your MAGI is $118,000 or less (up from $117,000 in 2016). And if you’re     married and filing a joint return, you can make a full contribution in 2017 if your     MAGI is $186,000 or less (up from $184,000 in 2016). (Again, contributions     can’t exceed 100% of your earned income.)

If your 2017 federal income tax      filing status is: Your Roth IRA contribution is limited if your MAGI      is: You cannot contribute to a Roth IRA if your MAGI is:
Single or head of household More than $118,000 but less than $133,000 $133,000 or more
Married filing jointly or qualifying      widow(er) More than $186,000 but less than $196,000      (combined) $196,000 or more (combined)
Married filing separately More      than $0 but less than $10,000 $10,000 or more

 

Employer retirement plans

Most of the significant employer retirement plan limits for 2017 remain unchanged from 2016. The maximum amount you can contribute (your “elective     deferrals”) to a 401(k) plan in 2017 is $18,000. This limit also     applies to 403(b), 457(b), and SAR-SEP plans, as well as the Federal Thrift     Plan. If you’re age 50 or older,     you can also make catch-up contributions of up to $6,000 to these plans in 2017. [Special catch-up limits apply to certain participants     in 403(b) and 457(b) plans.]

If you participate in more than one retirement plan, your     total elective deferrals can’t exceed the annual limit ($18,000 in 2017 plus     any applicable catch-up contribution). Deferrals to 401(k) plans, 403(b) plans,     SIMPLE plans, and SAR-SEPs are included in this aggregate limit, but deferrals to Section     457(b) plans are not. For example, if you participate in both a 403(b) plan and     a 457(b) plan, you can defer the full dollar limit to each plan—a total of     $36,000 in 2017 (plus any catch-up contributions).

The amount you can contribute to a SIMPLE IRA or SIMPLE     401(k) plan in 2017 is $12,500, and the     catch-up limit for those age 50 or older remains at $3,000.

Plan type: Annual dollar      limit: Catch-up limit:
401(k), 403(b), governmental 457(b),      SAR-SEP, Federal Thrift Plan $18,000 $6,000
SIMPLE      plans $12,500 $3,000

 

Note: Contributions can’t exceed 100% of your     income.

The maximum amount that can be allocated to your account in     a defined contribution plan [for example, a 401(k) plan or profit-sharing plan]     in 2017 is $54,000, up from $53,000 in 2016, plus age 50 catch-up     contributions. (This includes both your contributions and your employer’s     contributions. Special rules apply if your employer sponsors more than one     retirement plan.)

Finally, the maximum amount of compensation that can be     taken into account in determining benefits for most plans in 2017 is     $270,000 (up from $265,000 in 2016), and the dollar threshold for determining     highly compensated employees (when 2017 is the look-back year) is $120,000, unchanged from 2016.

Is 70 the New 65? Why Americans Are Working Longer

Roshan Loungani is sharing a great video on retirement.   Please click on the link below:

Is 70 the New 65? Why Americans Are Working Longer