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April 21st, 2011 | No Comments | Posted in Prime Solutions News

Understanding Investment Risk

April 21st, 2011 | No Comments | Posted in Financial News

There are several types of investment risk, but most people are concerned with market risk, i.e., the possibility that you might not get back the amount you originally invested due to a dramatic decline in stock and bond prices.

All Investments Carry Risk

All investments involve some degree of risk and in choosing between different assets you will be trading off risk for the potential of reward. Therefore, you must know the risk associated with any investment and ensure that it fits into your goals and circumstances. As a general rule, investments that have the highest potential return also carry the greatest level of risk. Risk and reward go hand in hand. For example, concentrating on one stock or one market segment like technology is risky, but it can also be extremely rewarding. In other words, with the chance of hitting it big also comes the potential of losing it all.

There are three primary asset groups: stocks and stock mutual funds, bonds and bond mutual funds, and cash and cash-equivalents like money market mutual funds. Each carries its own level of risk.


Stocks and stock mutual funds as a rule carry the most risk. Bonds and bond funds carry a moderate amount of risk, and cash and cash-equivalents carry the least. But, be careful of this oversimplification. A stock index fund that is broadly diversified across different industries and company sizes can carry less risk than a junk bond fund.

Fear And Risk Are Not The Same

Keep in mind that when we talk about risk, we are not talking about fear. Fear is a strong emotion caused by anxious concern over a real or perceived danger. In this case, the danger that brings on the fear is that the money invested will decline in value, even temporarily. The fearful investor is the one who can’t sleep at night worrying about whether their principle is going to decline. These investors are often called “risk adverse,” but in reality they are just fearful. To overcome their fear, they have to limit investments to bank certificates of deposit, Treasury bills, and money market funds. In truth they are still putting their retirement assets at risk – inflation risk. This is the risk that your retirement funds will not earn enough to keep up with inflation and therefore have less buying power at retirement than they have today. This risk is most devastating over long periods of time.

Risk Changes With Age and Circumstances

Investing always involves making decisions that balance risk and reward. The decisions you make today may not be appropriate for you later in life. You need to factor in your age, years to retirement, and other circumstances in determining how much risk is suitable for you at any given time. When you are young and unmarried, you can take on more risk than when you are within five years of retiring and have others who are dependent on you. As a 50 year old, safety may appeal to you, but a low return on too-large a portion of your retirement account is unlikely to provide any protection against erosion in purchasing power due to inflation. And if you are within five years of retiring, you should not be taking on large amounts of risk. Instead, your concern should be with the safety of your principle.

Understanding the balance between risk and return on your investments can help you build an investment strategy for your retirement assets that you can live with and benefit from.

Should You Pay Off Your Home Before You Retire?

April 21st, 2011 | No Comments | Posted in Retirement News

Before you make any extra mortgage payments, consider some factors.

Should you own your home free and clear before you retire? At first glance, the answer would seem to be “absolutely, if at all possible.” Retiring with less debt … isn’t that a good thing? Why not make a few extra mortgage payments to get the job done?

In reality, things are not so cut and dried. There is a fundamental opportunity cost to consider. If you decide to put more money toward your mortgage, what could that money potentially do for you if you were to direct it elsewhere?

In a nutshell, the question is: should you pay down low-interest debt, or should you invest the money into a tax-advantaged account that could potentially bring you a strong return?

Relatively speaking, home loans are cheap debt. Compare the interest rate on your mortgage to the one on your credit card. Should you focus your attention on a debt with 6% interest or a debt with 15% interest?

You can usually deduct mortgage interest, so if your home loan carries a 6% interest rate, your after-tax borrowing rate could end up being 5% or lower.

If history is any barometer, your home’s value may increase over time and inflation will effectively reduce the real amount of your mortgage over time.

A Chicago Fed study called mortgage prepayments “the wrong choice”. In 2006, the Federal Reserve Bank of Chicago presented a white paper from three of its economists titled “The Tradeoff between Mortgage Prepayments and Tax-Deferred Retirement Savings”. The study observed that 16% of American households with conventional 30-year home loans were making “discretionary prepayments” on their mortgages each year – that is, payments beyond their regular mortgage obligations. The authors concluded that almost 40% of these borrowers were “making the wrong choice.” The white paper argued that the same households could get a mean benefit of 11-17¢ more per dollar by reallocating the money used for those extra mortgage payments into a tax-deferred retirement account.1

Other possibilities for the money. Let’s talk taxes. You save taxes on each dollar you direct into IRAs, 401(k)s and other tax-deferred investment vehicles. Those invested dollars have the chance for tax-free growth. If you are like a lot of people, you may enter a lower tax bracket in retirement, so your taxable income and federal tax rate could be lower when you withdraw the money out of that account.

Another potential benefit of directing more funds toward your 401(k): If the company you work for provides an employer match, then you may be able to collect more of what is often dubbed “free money”.

Let’s turn from tax-deferred retirement investing altogether and consider insurance and college planning. Many families are underinsured and the money for extra mortgage payments could optionally be directed toward long term care insurance or disability coverage. If you’ve only recently started to build a college fund, putting the assets into that fund may be preferable.

Let’s also remember that money you keep outside the mortgage is money that is easier to access.

What if you owe more than your house is worth? Prepaying an underwater mortgage may seem like folly to you – or maybe you really love the house and are in it for the long run. Even so, you could reallocate money that could be used for the home loan toward an emergency fund, or insurance, or some account with the potential for tax-deferred growth – when all the factors are weighed, it might look like the better move.

Think it over. It really comes down to what you believe. If you are bearish, then you may lean toward paying off your mortgage before you retire. There is no doubt about it – when you pay off debt you owe, you effectively get an instant return on your money for every dollar. If you are tantalizingly close to paying off your house, then you may just want to go ahead and do it because you love being free and clear.

On the other hand, model scenarios may tell you another story. After the numbers are run, you may want to direct the money to other financial priorities and opportunities, especially if you tend to be bullish and think the market will perform along the lines of its long-term historical averages.

No one path is right for everyone. If you’re unsure which direction may be most beneficial to you, speak with a PRIMESolutions advisor.

Citations.
1 chicagofed.org/digital_assets/publications/working_papers/2006/wp2006_05.pdf [8/06]
2 montoyaregistry.com/Financial-Market.aspx?financial-market=will-you-have-an-adequate-retirement-cash-flow&category=3 [2/27/11]

Asset Allocation Made Simple

April 21st, 2011 | No Comments | Posted in Retirement News

As you accumulate retirement assets, the most important decision you need to make is how the assets are going to be invested. The allotting of your retirement assets across stocks, bonds, money market, and other investments is referred to as asset allocation. Your asset allocation decision, more than any other decision, will determines how fast your retirement account will grow. Is it difficult to do? Not really, but like most investment issues you do need to know some basics.

   • Invest for the Long-term: Once you set your allocation, be patient. Discipline yourself to
     maintain your allocation through down markets as well as up markets.

   • Invest for Growth: Equity mutual funds (stocks) need to be an important part of your
     allocation, even in retirement. Don’t worry about short-term ups and downs in the stock
     market. Over time, stocks have usually outperformed all other types of investments while
     staying ahead of inflation. Make equity mutual funds the core of a long-term investing strategy.

   • Know Yourself: Understand your tolerance for risk. Ask yourself, “Can I sleep at night with my
     retirement dollars allocated this way?” If the answer is no, make a change. Don’t create undo
     emotional stress.

   • Diversified Your Portfolio: This is what good asset allocation is all about. Don’t put all your
     assets into one asset class. Spread them among different asset classes and investment
     styles. Doing so will spread your assets over an assortment of investments and should
     reduce your risk. You can learn more about asset styles by clicking here.

   • Review Annually: Take the time once a year to review your life circumstances and long-term
     goals. Based upon the results of your review, adjust your allocation. Even if nothing has
     changed, you may need to rebalance your portfolio to bring it back into line with your allocation
     objectives.

You must make your own allocation decisions based upon your individual situation, but we can give you some general “rule of thumb” asset allocations based upon age. You can use these as a starting point. We assume retirement at age 65.

   • Age: Less Than 40 — 100% in equities. Of this, 40% invested in large cap. growth funds, 25%
     small cap. growth funds, 25% in large cap. value funds, and 10% international.

   • Age: 40 to 50 – 80% in equities and 20% in fixed income. Of the equity portion, 40% invested
     in large cap. growth funds, 25% small cap. growth funds, 25% in large cap. value funds, and
     10% international.

   • Age: 51 to 55 – 70% in equities and 30% in fixed income. Of the equity portion, 40% invested
     in large cap. growth funds, 25% small cap. growth funds, 25% in large cap. value funds, and
     10% international.

   • Age: 56 to 60 – 50% in equities and 50% in fixed income. Of the equity portion, 40% invested
     in large cap. growth funds, 10% small cap. growth funds, 40% in large cap. value funds, and
     10% international.

   • Age: 61 to 65 – Reduce equities by 5% per year and increase fixed income by 5% per year so
     that at retirement you have 25% in equities and 75% in fixed income. Of the equity portion,
     40% invested in large cap. growth funds, 10% small cap. growth funds, 40% in large cap.
     value funds, and 10% international.

Remember, this information is provided as general guidance on the subject of asset allocation and is not provided as legal, tax or investment advice. Individual situations vary. Please be sure you consult with your tax, legal or financial advisor for more detailed information and advice.

Apply for Social Security Now … or Later?

April 21st, 2011 | No Comments | Posted in Retirement News

When should you apply for benefits? Consider a few factors first.

Now or later? When it comes to the question of Social Security income, the choice looms large. Should you apply now to get earlier payments? Or wait for a few years to get larger checks?

Consider what you know (and don’t know). You know how much retirement money you have; you may have a clear projection of retirement income from other potential sources. Other factors aren’t as foreseeable. You don’t know exactly how long you will live, so you can’t predict your lifetime Social Security payout. You may even end up returning to work again.

When are you eligible to receive full benefits? The answer may be found online at socialsecurity.gov/retire2/agereduction.htm.

How much smaller will your check be if you apply at 62? The answer varies. As an example, let’s take someone born in 1949. For this baby boomer, the full retirement age is 66. If that 61-year-old baby boomer decides to retire in 2011 at 62, his/her monthly Social Security benefit will be reduced 25%. That boomer’s spouse would see a 30% reduction in monthly benefits.1

Should that boomer elect to work past full retirement age, his/her benefit checks will increase by 8.0% for every additional full year spent in the workforce. (To be precise, benefits increase by .67% for every month worked past full retirement age.)2 So it really may pay to work longer.

Remember the earnings limit. Let’s put our hypothetical 61-year-old baby boomer through another example. Our boomer decides to apply for Social Security at age 62 in 2011, yet stays in the workforce. If he/she earns more than $14,160 in 2011, the Social Security Administration will withhold $1 of every $2 earned over that amount. $14,160 is the 2011 earnings limit, unchanged from 2010.3

The earnings cap disappears at full retirement age (66 in this case). If our boomer keeps working past 66, he or she may keep 100% of Social Security benefits regardless of earned income level.3

How does the SSA define “income”? If you work for yourself, the SSA considers your net earnings from self-employment to be your income. If you work for an employer, your wages equal your earned income. (Different rules apply for those who get Social Security disability benefits or Supplemental Security Income checks.)4

Please note that the SSA does not count investment earnings, interest, pensions, annuities and capital gains toward the current $14,160 earnings limit.4

Some fine print worth noticing. If you reach full retirement age in 2011, then the SSA will deduct $1 from your benefits for each $3 you earn above $37,680 in the months preceding the month you reach full retirement age.4 So if you hit full retirement age early in 2011, you are less likely to be hit with this withholding.

Did you know that the SSA may define you as retired even if you aren’t? This actually amounts to the SSA giving you a break. In 2011 – assuming you are eligible for Social Security benefits – the SSA will consider you “retired” if a) you are under full retirement age for the entire year and b) your monthly earnings are $1,180 or less. If you are self-employed, eligible to receive benefits and under full retirement age for the entire year, the SSA generally considers you “retired” if you work less than 15 hours a week at your business.2,4

Here’s the upside of all that: if you meet the tests mentioned in the preceding paragraph, you are eligible to receive a full Social Security check for any whole month of 2011 in which you are “retired” under these definitions. You can receive that check no matter what your earnings come to for all of 2011.4

Learn more at socialsecurity.gov. The SSA website is packed with information and user-friendly. One last little reminder: if you don’t sign up for Social Security at full retirement age, make sure that you at least sign up for Medicare at age 65.

Citations
1 – socialsecurity.gov/retire2/agereduction.htm [7/11/10]
2 – socialsecurity.gov/retire2/delayret.htm [8/16/10]
3 – ssa.gov/pressoffice/colafacts.htm [10/21/10]
4 – ssa.gov/pubs/10069.html [1/10]

Monthly Economic Update for April

April 21st, 2011 | No Comments | Posted in Monthly Economic Update

Understanding Fiduciary Obligation

April 21st, 2011 | No Comments | Posted in Videos

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