Avoid these situations, if you can.
Pursuing your retirement dreams is challenging enough without making some common, and very avoidable, mistakes. Here are eight big mistakes to steer clear of, if possible.
No Strategy. Yes, the biggest mistake is having no strategy at all. Without a strategy, you may have no goals, leaving you no way of knowing how you’ll get there – and if you’ve even arrived. Creating a strategy may increase your potential for success, both before and after retirement.
Frequent Trading. Chasing “hot” investments often leads to despair. Create an asset allocation strategy that is properly diversified to reflect your objectives, risk tolerance, and time horizon; then, make adjustments based on changes in your personal situation, not due to market ups and downs. (The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Asset allocation and diversification are approaches to help manage investment risk. Asset allocation and diversification do not guarantee against investment loss. Past performance does not guarantee future results.)
Not Maximizing Tax-Deferred Savings. Workers have tax-advantaged ways to save for retirement. Not participating in your workplace retirement plan may be a mistake, especially when you’re passing up free money in the form of employer-matching contributions. (Distributions from most employer-sponsored retirement plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.)
Prioritizing College Funding over Retirement. Your kids’ college education is important, but you may not want to sacrifice your retirement for it. Remember, you can get loans and grants for college, but you can’t for your retirement.
Overlooking Health Care Costs. Extended care may be an expense that can undermine your financial strategy for retirement if you don’t prepare for it.
Not Adjusting Your Investment Approach Well Before Retirement. The last thing your retirement portfolio can afford is a sharp fall in stock prices and a sustained bear market at the moment you’re ready to stop working. Consider adjusting your asset allocation in advance of tapping your savings so you’re not selling stocks when prices are depressed. (The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss. Past performance does not guarantee future results.)
Retiring with Too Much Debt. If too much debt is bad when you’re making money, it can be especially harmful when you’re living in retirement. Consider managing or reducing your debt level before you retire.
It’s Not Only About Money. Above all, a rewarding retirement requires good health. So, maintain a healthy diet, exercise regularly, stay socially involved, and remain intellectually active.
Three important factors when it comes to your financial life.
Regardless of how the markets may perform, consider making the following part of your investment philosophy:
Diversification. The saying “don’t put all your eggs in one basket” has real value when it comes to investing. In a bear or bull market, certain asset classes may perform better than others. If your assets are mostly held in one kind of investment (say, mostly in mutual funds or mostly in CDs or money market accounts), you could be hit hard by stock market losses, or alternately, lose out on potential gains that other kinds of investments may be experiencing. There is an opportunity cost as well as risk.
Asset allocation strategies are used in portfolio management. A financial professional can ask you about your goals, tolerance for risk, and assign percentages of your assets to different classes of investments. This diversification is designed to suit your preferred investment style and your objectives.
Patience. Impatient investors obsess on the day-to-day doings of the stock market. Have you ever heard of “stock picking” or “market timing”? How about “day trading”? These are all attempts to exploit short-term fluctuations in value. These investing methods might seem fun and exciting if you like to micromanage, but they could add stress and anxiety to your life, and they may be a poor alternative to a long-range investment strategy built around your life goals.
Consistency. Most people invest a little at a time, within their budget, and with regularity. They invest $50 or $100 or more per month in their 401(k) and similar investments through payroll deduction or automatic withdrawal. They are investing on “autopilot” to help themselves build wealth for retirement and for long-range goals. Investing regularly (and earlier in life) helps you to take advantage of the power of compounding as well.
If you don’t have a long-range investment strategy, talk to a qualified financial professional today.
The hows and whys of charity in America.
According to Giving USA 2018, Americans gave an estimated $410.02 billion to charity in 2017. That’s the first time that the amount has totaled more that $400 billion in the history of the report.
Americans give to charity for two main reasons: to support a cause or organization they care about or to leave a legacy through their support.
When giving to charitable organizations, some people elect to support through cash donations. Others, however, understand that supporting an organization may generate tax benefits. They may opt to follow techniques that can maximize both the gift and the potential tax benefit. Here’s a quick review of a few charitable choices:
Remember, the information in this article is not a replacement for real-life advice. It may not be used for the purpose of avoiding any federal tax penalties. Make sure to consult your tax, legal, or accounting professional before modifying your charitable giving strategy.
Direct gifts are just that: contributions made directly to charitable organizations. Direct gifts may be deductible from income taxes depending on your individual situation.
Charitable gift annuities are not related to annuities offered by insurance companies. Under this arrangement, the donor gives money, securities, or real estate, and in return, the charitable organization agrees to pay the donor a fixed income. Upon the death of the donor, the assets pass to the charitable organization. Charitable gift annuities enable donors to receive consistent income and potentially manage taxes.
Pooled-income funds pool contributions from various donors into a fund, which is invested by the charitable organization. Income from the fund is distributed to the donors according to their share of the fund. Pooled-income funds enable donors to receive income, potentially manage taxes, and make a future gift to charity.
Gifts in trust enable donors to contribute to a charity and leave assets to beneficiaries. Generally, these irrevocable trusts take one of two forms. With a charitable remainder trust, the donor can receive lifetime income from the assets in the trust, which then pass to the charity when the donor dies; in the case of a charitable lead trust, the charity receives the income from the assets in the trust, which then pass to the donor’s beneficiaries when the donor dies.
Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.
Donor-advised funds are funds administered by a charity to which a donor can make irrevocable contributions. This gift may have tax considerations, which is another benefit. The donor also can recommend that the fund make distributions to qualified charitable organizations.
Some people are comfortable with their current gifting strategies. Others, however, may want a more advanced strategy that can maximize their gift and generate potential tax benefits. A financial professional can help you assess which approach may work best for you.
Not all gifts are taxable.
I’d like for you to meet my friend, Hugh. He’s a retired film stuntman who, after a long career, is enjoying his retirement. Some of what he’s enjoying about his retirement is sharing part of his accumulated wealth with his family, specifically his wife and two sons. Like many Americans, Hugh likes to make sure that, when he’s sharing that wealth, he isn’t giving the I.R.S. any overtime.
Hugh knows about the gift tax and knows how to make those gifts without running headlong into a taxable situation. This is Hugh’s responsibility because the I.R.S. puts the onus on the giver. If the gift is a taxable event and Hugh doesn’t pay up, then the responsibility falls to the beneficiaries after he passes in the form of estate taxes. These rules are in place so that Hugh can’t simply, say, give his entire fortune to his sons before he dies.
Exemptions for family and friends. It would be different for Hugh’s wife, Barbara. The unlimited marital deduction means that gifts that Hugh gives to Barbara (or vice versa) never incur the gift tax. There’s one exception, though. Maybe Barbara is a non-U.S. citizen. If so, there’s a limit to what Hugh can offer her, up to $155,000 per year. (This is the limit for 2019; it’s pegged to inflation.)
The gift limit for other people is $15,000 and it applies to both cash and noncash gifts. So, if Hugh buys his older son Tony a $15,000 motorcycle, it’s the same as writing a $15,000 check to his younger son, Jerry, or gifting $15,000 in stock. Spouses have their own separate gift limit, as well; Barbara could also write Jerry a $15,000 check from the account she shares with Hugh.
Education and healthcare. The gift tax doesn’t apply to funds for education or healthcare. So, if Tony breaks his leg riding that motorcycle, Hugh can write a check to the hospital. If Jerry goes back to college to become a chiropodist, Hugh can write a tuition check to the college. This only works if Hugh is writing the check to the institution directly; if he’s writing the check to the beneficiaries (i.e. Tony and Jerry), he might incur the gift tax.
The Lifetime Gift Tax Exemption. What if Hugh were to go over the limit? The lifetime gift tax exemption would go into effect, and the rest would be reported as part of the lifetime exemption via Form 709 come next April. Unlike the annual exemption, the lifetime exemption is cumulative for Hugh. Currently, that lifetime exemption is $11.4 million.
Being a stuntman and an active extreme sportsman, Hugh is concerned about his estate strategy. Were he to borrow Tony’s motorcycle and attempt to jump the Snake River Canyon, what would happen if he didn’t make it across? If that unfortunate event occurred in 2019, and he gave $9 million over his lifetime, and his estate and all of that giving totaled more than $2.4 million, the estate may owe a federal tax and possibly a state estate tax. Barbara would have her own $11.4 million lifetime exemption, however, and since she is the spouse, estate taxes may not apply.
Any wise stuntman will tell you, “leave this to the experts.” Talk to a trusted financial professional about your own plans for giving.
In this month’s recap: the Federal Reserve eases, stocks reach historic peaks, and face-to-face U.S.-China trade talks formally resume.
THE MONTH IN BRIEF
July was a positive month for stocks and a notable month for news impacting the financial markets. The S&P 500 topped the 3,000 level for the first time. The Federal Reserve cut the country’s benchmark interest rate. Consumer confidence remained strong. Trade representatives from China and the U.S. once again sat down at the negotiating table, as new data showed China’s economy lagging. In Europe, Brexit advocate Boris Johnson was elected as the new Prime Minister of the United Kingdom, and the European Central Bank indicated that it was open to using various options to stimulate economic activity.
DOMESTIC ECONOMIC HEALTH
On July 31, the Federal Reserve cut interest rates for the first time in more than a decade. The Federal Open Market Committee approved a quarter-point reduction to the federal funds rate by a vote of 8-2. Typically, the central bank eases borrowing costs when it senses the business cycle is slowing. As the country has gone ten years without a recession, some analysts viewed this rate cut as a preventative measure. Speaking to the media, Fed Chairman Jerome Powell characterized the cut as a “mid-cycle adjustment.”
The latest hiring and consumer spending reports from the federal government suggested an economy in good shape, and the latest data on consumer prices showed no great inflation pressure. Employers had expanded their payrolls with 224,000 net new jobs in June, a rebound from the paltry 72,000 gain in May. Both the headline jobless rate and the U-6 rate (a broader measure of joblessness that includes the unemployed and underemployed) ticked up 0.1% to a respective 3.7% and 7.2%. Personal spending was up 0.3% in July, and the pace of retail sales increased 0.4%, taking the yearly gain to 3.4%. Annualized inflation was running at just 1.6% through June, down from 1.8% in May.
The Conference Board’s monthly Consumer Confidence Index reached a year-to-date peak in July: 135.7, a gain of 11.4 points from June. (The final July University of Michigan Consumer Sentiment Index had yet to be released when the month ended.)
The pace of American manufacturing had slowed in June, according to the Institute for Supply Management’s latest monthly Purchasing Managers Index (PMI) for the sector. It declined 0.4 points to 51.7. ISM’s Non-Manufacturing PMI came in at 55.1, 1.8 points lower than it was in May. On a positive note, the federal government said that hard goods orders rose 2.0% in June, and industrial production had improved 0.9% in May.
In late July, the Bureau of Economic Analysis announced that the economy grew at a 2.1% rate in the second quarter. This was the lowest gross domestic product (GDP) number seen since Q1 2017; it was also 1.0% lower than the previous quarter. The drop was primarily attributable to reduced business spending. Consumer spending increased at a 4.3% pace in Q2.5
By the end of July, China and the U.S. had resumed face-to-face negotiations on trade matters. A new trade pact did not appear to be quickly forthcoming: Secretary of the Treasury Steven Mnuchin told the media in late July that he expected there would be “a few more meetings before we get a deal done.” On July 31, Chinese state media agency Xinhua reported that high-level discussions would resume in September.
GLOBAL ECONOMIC HEALTH
On July 25, the European Central Bank stated its expectation that borrowing costs would likely remain at current levels or “lower” through the second quarter of 2020. The ECB also stated that it would examine its “options for the size and composition of potential new net asset purchases” – in other words, it was leaving the door open to possibly restarting the monetary stimulus campaign it had ended only months before. Economists polled by Bloomberg see the ECB making a minor rate cut in September and resuming its bond-buying program in January.
One day earlier and just 99 days prior to the European Union’s Brexit deadline, Boris Johnson assumed the office of Prime Minister of the United Kingdom. When Parliament returns from its summer break in September, Johnson will be tasked with motivating lawmakers to approve a Brexit deal – which, in his words, will be “a new deal, a better deal” than those proposed by his predecessor, Teresa May. That said, he also told the media that a no-deal Brexit could occur if the E.U. leadership “refuses any further to negotiate.”
China’s gross domestic product declined to 6.2% in the second quarter. That was a 27-year low. This implies some present and near-term difficulties for other Asia-Pacific economies, as China imports large quantities of electronics, palm oil, iron, copper, and petroleum products from nations within the region, and less economic activity means less demand.
Major foreign benchmarks were mixed. Three of the biggest losses came in Asia: India’s Nifty 50 dropped 5.69%; South Korea’s Kospi, 4.98%; India’s Sensex, 4.86%. Hong Kong’s Hang Seng fell 2.68%; China’s Shanghai Composite, 1.56%. MSCI’s Emerging Markets index lost 1.69%. MSCI’s World index rose 0.42%, however. Japan’s Nikkei 225 improved 1.15%; Taiwan’s TSE 50, 1.47%; Australia’s All Ordinaries, 2.95%. In Brazil, the Bovespa rose 0.92%. In Mexico, the Bolsa slumped 5.32%.11,12
July was quite positive for the United Kingdom’s FTSE 100 index, which added 2.17%. Spain’s IBEX 35 surrendered 2.48%. In between, the FTSE Eurofirst 300 posted a 0.36% advance, while France’s CAC 40 and Germany’s DAX respectively lost 0.36% and 1.69%.
Silver made the biggest ascent of all the major commodities in July, rising 6.61% to a month-end price of $16.28 on the New York Mercantile Exchange. Meanwhile, gold added only 0.23%, settling at $1,413.30 on July 31. Platinum advanced 3.83%, but copper took a 2.07% July loss.
Outside the major metals, monthly retreats were common; although, the U.S. Dollar Index rose 2.02%, and heating oil gained 1.14%. West Texas Intermediate crude oil fell 0.53% for the month to $57.89 on the NYMEX. The list of July losses in crop and energy futures is long: sugar declined 3.03%; natural gas, 3.32%; unleaded gas, 3.98%; soybeans, 4.19%; cotton, 4.38%; cocoa, 4.61%; corn, 5.32%; wheat, 7.69%; coffee, 8.67%.13,14
Both new and existing home sales reversed direction in June. The National Association of Realtors announced a 1.7% retreat in residential resales, following a 2.9% May advance; the median sales price was $285,700. The Census Bureau said that new home sales rose 7.0% in the sixth month of 2019, after an 8.2% setback in May.
By late July, interest rates on home loans had crept up just a bit from late June. According to mortgage reseller Freddie Mac, a 30-year, fixed-rate home loan carried an average of 3.73% interest on June 27, while 15-year, fixed mortgages had an average interest rate of 3.16%. By Freddie’s July 25 Primary Mortgage Market Survey, the mean interest rate for a 30-year FRM was 0.02% higher at 3.75%; for a 15-year FRM, it was also 0.02% higher at 3.18%.16
30-year and 15-year fixed rate mortgages are conventional home loans generally featuring a limit of $484,350 ($726,525 in high-cost areas) that meet the lending requirements of Fannie Mae and Freddie Mac, but they are not mortgages guaranteed or insured by any government agency. Private mortgage insurance, or PMI, is required for any conventional loan with less than a 20% down payment.
The Census Bureau’s latest monthly recap of residential construction activity showed June declines for both housing starts (0.9%) and building permits (6.1%).
T I P O F T H E M O N T H
When a student and a parent are cosigners on a private college loan, they must recognize that they are equally liable and responsible for paying the debt back.
LOOKING BACK, LOOKING FORWARD
The S&P 500 recorded its highest-ever close during the month: 3,025.86, on July 26. It drifted downward from there. On July 31, the day of the Fed’s rate cut, it fell more than 1%.17
While the major equity indices advanced less in July than they did in June, the gains were still solid. July brought a 1.31% rise for the S&P, and respective improvements of 0.99% and 2.11% for the Dow Jones Industrial Average and Nasdaq Composite. Where did these benchmarks settle at the closing bell on July 31? S&P, 2,980.38; Nasdaq, 8,175.42; Dow, 26,864.27.14
Sources: barchart.com, wsj.com, treasury.gov - 7/31/1914,18,19
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year Treasury yield = projected return on investment, expressed as a percentage, on the U.S. government’s 10-year bond.
You may have heard the Wall Street saying, “Sell in May and go away.” That expression is based on the idea that investors would be better off out of the financial markets in the summer months. This assertion has been disproven again and again over the years, and that may end up being the case this year (witness the market’s July performance). This is a good time to remember another frequently heard assertion – time in the market often proves more important than timing the market. Any summer doldrums or losses may possibly precede fall gains.
Q U O T E O F T H E M O N T H
“No one can make you feel inferior without your consent.” ELEANOR ROOSEVELT
During the rest of August, key items in the economic news stream are scheduled as follows: the July Institute for Supply Management non-manufacturing index (8/5), the July wholesale inflation reading (8/9), July consumer inflation data (8/13), July retail sales (8/15), a new snapshot of housing starts from the Census Bureau plus the University of Michigan’s preliminary August Consumer Sentiment Index (8/16), July existing home sales (8/21), the Conference Board’s latest index of leading economic indicators (8/22), July new home sales (8/23), July durable goods orders (8/26), the Conference Board’s August Consumer Confidence Index (8/27), the second estimate of Q2 gross domestic product from the Bureau of Economic analysis (8/29), and lastly, the final August University of Michigan Consumer Sentiment Index and July consumer spending data (8/30).
T H E M O N T H L Y R I D D L E
I am very strong and tough, but never rigid. I can be broken, but only in a certain sense. What am I?
LAST MONTH’S RIDDLE: There is a five-letter word that means “nice” in English, and all of the four letters used within this word are also Roman numerals. What is this word? ANSWER: Civil.