Category Archives: January

Mistakes People Make at Different Ages People tend to face certain financial challenges during different periods in their lives. Here are some pitfalls to guard against.

Financial challenges are not limited to a specific age, but people tend to face certain challenges during particular stages of their lives. Regardless of your age, you might recognize some of these financial issues

In Your 20s

Living beyond your means. When you have your first good job, it’s tempting to spend money on the latest and greatest gadgets, entertainment and eating out, and travel. But if you can’t pay for your wants up-front, you need to rein in your lifestyle. Too much debt can hold you back financially for a long time.

Not saving for retirement. You’ve got plenty of time, so harness that time to work for you. Start saving at least 3% of your annual salary now (more would be better), and your 67-year-old self will thank you.

Not being financially literate. Learn as much as you can about saving, budgeting, and investing now so you can benefit from it for the rest of your life.

In Your 30s

Being house poor. Whether buying your first home or trading up, don’t buy a house you can’t afford. Build in some wiggle room for a possible dip in household income.

Not protecting yourself financially. Life is unpredictable. What would happen if you were unable to work and earn a paycheck? Let go of the “it won’t happen to me” attitude and protect yourself with life and disability insurance. The younger you are when you purchase coverage, the lower your premiums will be.

Still not saving for retirement. Maybe your 20s passed you by and retirement wasn’t on your radar screen. Now that you’re in your 30s, it’s critical to start saving. Wait longer, and it will be hard to catch up. Start now, and you have 30 years or more to save.

In Your 40s

Trying to keep up with the Joneses. The nice homes, cars, vacations, and “stuff” that others have might look appealing, but appearances can be deceiving. Your neighbors could be taking on lots of debt.

Funding college over retirement. If you have limited funds, set aside a portion for college, but earmark the majority for retirement. Then sit down with your teenager and discuss academic options that your family can afford.

Not having a will or an advance medical directive. No one likes to think about death or catastrophic injury, but these documents can help your loved ones immensely if something should happen to you.

In Your 50s & 60s

Co-signing loans for adult children. Co-signing puts you on the hook if your child can’t pay, a situation you don’t want to face as you’re approaching retirement.

Raiding your home equity or retirement funds. Obviously, doing so will prolong your debt and/or reduce your nest egg.

Not calculating your retirement income. As you approach retirement, you should know how much you can expect from Social Security, pension income, and your personal retirement savings.

These are just a few of the financial challenges you might face throughout your lifetime. There’s a saying that wisdom comes with age, but it pays to be financially savvy at any age.

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. Copyright 2016 Emerald Connect, LLC.

Stability and Liquidity: Money Market Mutual Funds The appeal of money market mutual funds despite yields near zero since the recession.

During the late 1990s, money market mutual funds offered an annual return of around 5% (see graph). This made them attractive to investors, including retirees and pre-retirees who wanted to preserve principal while earning a modest return.

After an uptick just before the recession, yields on these funds have been near zero. Even so, at the end of July 2015, investors held more than $2.6 trillion in money market funds — about one-third held by individual investors and the rest by institutional investors.1 What’s the appeal, considering such a low return? In two words: stability and liquidity.

Cash Alternative

Money market funds are mutual funds that invest in cash-alternative assets, usually short-term debt. They seek to preserve a stable value of $1 per share and can generally be liquidated fairly easily. Money market funds are typically used as the “sweep account” for clearing brokerage transactions, and investors often keep cash proceeds in money market funds on a temporary basis while looking for another investment. The funds can also be useful to hold emergency funds.

However, for long-term investing, money market funds are a questionable choice. You might keep some assets in these funds to balance riskier investments. But in the current low-interest-rate environment, the value of money market funds may be eroded by inflation, so you might lose purchasing power along with the opportunity to pursue growth through other investments. Of course, this could change if interest rates rise.

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 investment at $1.00 per share, it is possible to lose money by investing in such a fund.

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

1) Investment Company Institute, 2015

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. Copyright 2016 Emerald Connect, LLC.

Fed Delivers Vote of Confidence in the U.S. Economy A look at the policy tools the Fed can use to influence short-term interest rates, economic growth, and inflation.

On December 16, the Federal Open Market Committee (FOMC) raised the benchmark federal funds rate to a range of 0.25% to 0.50%, the first increase from the near-zero range (0% to 0.25%) where it had lingered since December 2008.1

In response to the widely expected decision, the stock market rallied, reflecting a collective sigh of relief that the U.S. economy is finally deemed healthy enough to withstand slightly higher interest rates. The Dow Jones Industrial Average rose 224 points or about 1.3%. The yield on two-year U.S. Treasury notes settled above 1% for the first time in more than five years, while 10-year Treasury yields were little changed.2

The Federal Reserve and the FOMC operate under a dual mandate to conduct monetary policies that foster maximum employment and price stability. Adjusting the federal funds rate up or down is one of the ways the central bank can influence short-term interest rates, economic growth, and inflation. The Fed faces the tricky task of removing unprecedented levels of support early enough to keep inflation from flaring up, but not so quickly as to reverse economic progress or upset financial markets.

Policy Tools Tested

The federal funds rate is the interest rate at which banks lend funds to each other overnight to maintain reserve requirements at the Fed. It serves as a benchmark for many short-term rates set by banks. Lower­ing interest rates fuels demand for credit and encourages consumers and businesses to spend and invest. Raising interest rates helps to slow ­economic activity when inflation is seen as the larger threat.

The FOMC expects economic conditions to “warrant only gradual increases,” and the median projection by 17 Fed officials was for the federal funds rate to reach 1.375% by the end of 2016.3 This means investors should expect to see additional small rate hikes this year.

In the wake of the 2008 financial crisis, Fed officials conducted three rounds of quantitative easing to help push down longer-term yields — essentially creating money to buy up bonds. This bond-buying program ended in 2014 but left the Federal Reserve with a much larger balance sheet. Reducing the Fed’s $4.5 trillion bond portfolio could disrupt the markets, so officials will keep holdings at the same level until rate increases are “well under way.”4

Anticipating Inflation

In 2012, the FOMC set a goal of 2% for inflation, but consumer prices have remained stubbornly low. According to the Fed’s preferred measure of inflation (core PCE), prices increased at an annual rate of only 1.3% in October 2015.5

Why was the federal funds rate lifted when inflation is still well below the stated target? The Committee expects that labor market conditions will continue to strengthen and is “reasonably confident” that inflation will rise to 2% over the medium term. It takes time for monetary policies to work, and the Committee wants to avoid a situation in which rates might need to be increased “abruptly” if inflation suddenly heats up.6

Investor Concerns

When interest rates rise, the value of existing 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 when a bond is held to maturity, the bond owner would suffer 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 on heavy borrowing will likely face higher costs going forward, which could affect their bottom lines.

Consumer Credit and Savings

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 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 from bank accounts, CDs, bonds, and other fixed-interest investments could eventually benefit from higher yields.

Keep in mind that future Fed policies will depend on ongoing assessments of economic data and growth projections. If inflation rises more or less than expected, rate adjustments will likely follow suit, despite any previous forecasts.

The financial markets could continue to react — and occasionally overreact — to policies announced by the Federal Reserve. 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 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. The FDIC insures CDs and bank savings accounts (up to $250,000 per depositor, per insured institution), which generally provide a fixed rate of return.

1, 3, 5–6) Federal Reserve, 2015
2, 4) The Wall Street Journal, December 16, 2015

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. Copyright 2016 Emerald Connect, LLC.

Donor-Advised Funds Individuals who want to maximize the positive impact of their donations might consider using donor-advised funds.

The holiday season is full of emotional appeals for charitable donations. Thus, some people may find themselves rushing to write checks by the end of the year, just in time to qualify for a tax deduction. But there may be a more effective way to give throughout the year.

A donor-advised fund (DAF) is a charitable account offered by sponsors such as financial institutions, community foundations, universities, and fraternal or religious organizations. Philanthropists who itemize deductions on their federal income tax returns can write off DAF contributions in the year they are made and receive an immediate tax deduction for the full market value of most assets. Any amount that can’t be deducted in the current year can be deducted for up to five succeeding years.

DAFs have been around since the 1990s, but their popularity has been surging. The value of contributions to DAFs tripled in just five years, reaching $7.4 billion in fiscal year 2014. Still, grants from donor-advised funds account for only about 5% of total charitable giving in the United States.1

If you want to maximize the positive impact of your donations — either for your favorite charitable causes or for your own tax situation — you might consider executing a more strategic charitable giving program.

Highly Appreciated Benefits

DAF contributions can be made with cash, publicly traded securities, and more complicated assets such as real estate, valuable art and collectibles, or a stake in a privately held business. A DAF contribution is irrevocable, which means the donor is giving the sponsor legal control of it, while retaining advisory privileges with respect to the distribution of funds and the investment of assets.

Giving appreciated assets to charity often provides extra tax benefits. A donor may qualify for a tax deduction based on the current fair market value of the contribution, while avoiding capital gain taxes on the profits from the sale of those assets. This strategy may be helpful when family businesses or shares of privately held companies are sold, or any time a larger tax deduction is needed during a particular year.

DAFs make it easier to give away appreciated assets, because donors can make a single contribution that eventually benefits multiple charities. Fund sponsors typically have experience in evaluating prospective donations and liquidating assets after they are transferred (a qualified appraisal may be needed). Thus, DAFs make it possible to help charities that might not be able to accept direct donations of appreciated assets.

Buying Time

Because there are no rules about how quickly money in DAFs should be distributed, donors have the flexibility to time gifts as they please, allowing them to vet unfamiliar charities and explore philanthropic opportunities more carefully. Donors can take advantage of matching fund campaigns when they are offered, for example, or have money ready to aid disaster victims. Some families prefer to build up funds over a number of years in order to make a substantial grant for a special purpose.

Grants can generally be made to any qualified tax-exempt charitable organization in good standing. It may also be possible to set up recurring gifts or make anonymous donations, if so desired.

A donor-advised fund should be fairly easy to establish, but there is typically a $5,000 minimum initial contribution. DAFs have fees and expenses that donors giving directly to a charity would not face, but donors are spared from paperwork hassles they would otherwise encounter when making
contributions directly.

1) The Wall Street Journal, August 22, 2014

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. Copyright 2016 Emerald Connect, LLC.

Family Limited Partnerships for the Next Generation A family limited partnership could help business owners and their heirs address business succession and other issues.

About 75% of family businesses in the United States have been family-run for two or more generations.1 One challenge faced by family-run businesses involves business continuation.

When business owners fail to consider that federal and state estate taxes could be due upon their passing, the money needed to cover the bill may not be available, and their heirs may have no choice but to liquidate the family’s business. On the other hand, starting the succession planning process sooner rather than later could help reduce the estate tax burden and alleviate family strife.

A family limited partnership (FLP) is a legal agreement that enables business owners and their heirs to address tax issues, business succession, and estate planning needs all at once. Specifically, business owners who want family members to inherit their businesses in the future could use FLPs to transfer assets out of their estates during their lifetimes. Moreover, they might begin this process many years before they intend to give up operational control.

Estate Tax Threat

The IRS calculates the estate tax due on an individual’s gross taxable estate by adding the value of all owned assets, including a home and/or a business, and subtracting any applicable exemptions. Even if a business valuation falls well below the federal estate tax exemption level ($5.45 million in 2016), the family might not be entirely out of the woods, especially if they live in a state that has an estate tax or an inheritance tax with a lower exemption amount.

Family Discount

If an FLP is set up for the benefit of limited partners such as a spouse and children, a general partner (or a corporation or limited liability company controlled by the general partner) may gift ownership shares in installments that conform to the $14,000 annual gift tax exclusion (in 2016).

Gifts of limited partnership interests can also be discounted up to 30% or more from fair market value, which may provide an opportunity to take even greater advantage of tax-free gifts. For example, a limited partner may be able to gift approximately $20,000 worth of property or business shares that are currently valued at $14,000 for gift tax purposes.2 Of course, each situation is different, and actual results will vary.

Setting up a family limited partnership can involve complex tax rules and regulations, as well as up-front costs and ongoing expenses. Be sure to consult with your tax and estate planning professionals.

1) US Family Business Survey, PricewaterhouseCoopers, 2015
2) 2015 Field Guide, National Underwriter

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. Copyright 2016 Emerald Connect, LLC.

Student Debt? These Programs Could Spell Relief More student loan borrowers are expected to gain access to new federal programs designed to reduce monthly payments.

More student loan borrowers are expected to gain access to new federal programs designed to reduce monthly payments and lessen the wider economic toll of student debt.

The Revised Pay as You Earn (REPAYE) program will expand an existing income-based repayment program. It may be available to as many as 5 million Direct Loan borrowers (not Parent Direct PLUS Loan borrowers), without their having to demonstrate “financial hardship” and regardless of when they took out their Direct Loans.

With this repayment plan, your monthly student loan payment would be 10% of your annual discretionary income. Discretionary income refers to what you earn above 150% of the federal poverty line ($17,655 in 2015). A borrower earning $40,000, for example, would make payments based on discretionary income of $22,345.

After 20 years of on-time payments, the remaining balance would be forgiven. If you borrowed money for graduate school, you must wait 25 years for forgiveness. Debt may be forgiven after 10 years for those in certain public-service jobs.

To qualify for loan forgiveness under the Public Service Loan Forgiveness (PSLF) program, you must make 120 on-time payments on your Direct Loans (Direct Subsidized and Unsubsidized Loans, Stafford Loans, Direct PLUS Loans, and Direct Consolidation Loans). Only payments made after October 1, 2007, will qualify.

While making the 120 payments, you must be working full-time at a qualifying public-service organization, which may include federal, state, and local government entities such as the military, public safety and law enforcement, public education and libraries, public health and legal services, as well as tax-exempt, not-for-profit groups.

Source: The New York Times, August 14, 2015

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. Copyright 2016 Emerald Connect, LLC.