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September 2016 – Monthly Economic Update

September 19th, 2016 | No Comments | Posted in Uncategorized

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The Danger of Treating Your 401(k) As a Piggybank

July 19th, 2011 | No Comments | Posted in Uncategorized

Your 401(k) retirement account is meant to be a nest egg, but more employees than ever are treating these accounts as piggybanks these days, taking loans and withdrawals. Unfortunately, these moves could come back to haunt them.

“It’s never a mistake to put too much money into a 401(k) plan,” says Scott Tuxbury, director of retirement and investments with New Wealth Advisors in Tewksbury, Mass. “The mistake is using these balances, not as a retirement account, but as a rainy day account.”

Don’t get us wrong. Borrowing from a 401(k) isn’t always a bad move—if you’re borrowing for sound reasons and are sure you can pay it back, it can be better than running up high interest credit card debt. But borrowing can also be an indication that there are problems with the way you’re managing and protecting your retirement savings.

Consider the new client Tuxbury met with last fall—a 55-year-old woman making $110,000 a year, who was in 401(k) paralysis. Back in 2007, when her 401(k) was worth $230,000, she took out a $50,000 loan (the maximum allowed by law) to pay for a daughter’s wedding.  (We’ll leave others to comment on the wisdom of borrowing so much for a wedding.) Then, in 2008, during the stock market crash, the woman’s balance declined another $80,000. Panicked, she moved what was left all into fixed income investments (missing the stock market recovery) and stopped making new contributions altogether.

Tuxbury helped her undertake a complete family 401(k) makeover. She’s started contributing again, is paying the loan back over five years (as required by law), and has moved funds back into equities. Her husband, despite a $100,000 a year income, had only a $20,000 401(k) from a former employer and wasn’t contributing to a 401(k) at a new job. Now he is maxing out contributions. “They understand the severity of the matter,” Tuxbury says, adding that they are rethinking spending plans too–maybe they don’t really need that new Jacuzzi and deck they had planned to add to the back of their house.

Is it too easy to get money out of retirement accounts? Maybe, maybe not.  If you couldn’t borrow from a 401(k), some workers might be more reluctant to put their money into one. But just because you can borrow, doesn’t mean you should.

The percentage of 401(k) participants who had an outstanding loan in 2010 was 28%, a record high, according to a recent Aon Hewitt report, “Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cashouts Are Eroding Retirement Income.” Moreover, even before the recession, the percentage had been steadily rising; it was 21% in 2006; 22% in 2007; 23% in 2008; and 26% in 2009. Just as worrisome, a third of those with outstanding loans in 2010 had two or more loans outstanding at once.

While folks of all ages take 401(k) loans, those who are in their 40s and earning between $40,000 and $60,000 are most likely to have outstanding loans, the report found.  That’s not too surprising. After all, by their 40s, folks should have substantial balances from which they can borrow, and may be facing special costs, for kids’ college tuition and the like.

In such circumstances, a 401(k) loan isn’t necessarily bad —if you pay it back. That’s a big “if.” You have to pay back principal and interest (with after tax dollars) on a schedule, and if you default, the remaining amount of the loan counts as a taxable distribution (that means it’s added on to your income at tax time). Moreover, if you’re under 59.5, there’s also a 10% early withdrawal penalty tacked on.

The biggest risk for default is if you lose your job. Generally you have to pay back the loan in full within 60 to 90 days of termination. It’s the same deal if you quit. “You find people borrowing and six months later they give notice, and all of a sudden they have this big tax bite they weren’t planning on,” says Robert Demmett, a CPA with EisnerLubin in New York City.

When employees with loans terminate employment, nearly 70% subsequently default on the repayment (versus less than 3% of active employees), according to the AON Hewitt report.

An aerospace engineer with the Department of Air Force, Raymond Ryan, learned this the hard way. In 2003 at the recommendation of a coworker — not usually the best place to get 401(k) advice, although commonplace – he took out a $50,000 general purpose loan from his TSP account to pay off debt and buy a parcel of land. (The TSP is the equivalent of a 401(k) for federal employees.)

Less than two years later, the Air Force reassigned Ryan from Texas to Oklahoma and he failed to report to duty, citing medical reasons. The Air Force put him on AWOL status, and his plan closed his loan, despite the fact that he kept making payments and told his plan that he was appealing his removal from service. Long story short, a U.S. Tax Court judge has just ruled that Ryan, who paid the income tax due on the early distribution in 2006, now has to pay $979, the 10% early distribution penalty, too.

For general purpose loans, the total outstanding principal cannot exceed the lesser of 50% of your account balance or $50,000. So someone with a $120,000 401(k), could take $50,000 and someone with a $40,000 401(k) could take a loan of up to $20,000. The term of the loan must be five years or less.

In addition to general purpose loans, many plans allow special loans for the purchase of a home (your primary home, not a vacation home). In such cases, the length of the loan can exceed five years. Watch out: this doesn’t apply for home improvement loans or a refinancing, notes Glenn Sulzer, a senior pension law analyst at CCH, a Wolters Kluwer company. And read the fine print. Application fees and annual service charges are usually higher for residence loans.

In addition to loans, some employees have been raiding their 401(k)s by taking what’s called a “hardship” withdrawal. These are allowed for medical or educational expenses, burial or funeral expenses, and costs associated with avoiding eviction or foreclosure. But these really should be a last resort. Hardship withdrawals are always included in income (you don’t put the money back into the plan), and if you’re under 59.5, the 10% penalty applies. Another downside: for six months after making a hardship withdrawal, you’re not allowed to make new contributions to your 401(k), further eroding your retirement stash.

Once you reach 59.5, you face even more temptations. That’s because many plans let employees take in-service withdrawals, a fine move if you don’t like your plan and you’re rolling the funds over to an Individual Retirement Account, but a dangerous one if you’re taking the money out to spend. Similarly, Tuxbury say, the biggest 401(k) mistake he sees is retirees who get lump sum checks sent to them in the mail and deposit the full amount in their bank account. “You’ll see a real spike in expenditures,” he says. “They’ve always wanted that Cadillac.”

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A Few Things You Can’t Afford To Do

February 10th, 2011 | No Comments | Posted in Uncategorized

There are many reasons people make mistakes with money – a lack of knowledge or confidence, inattention, relying of the advice of friends rather than professionals. Here are some all-too-common money errors to avoid.

Putting off financial planning. Procrastination does not help you save for retirement, and it will not help you reduce your taxes or transfer money to your heirs. Delaying necessary financial planning can be perilous.

Putting all your eggs in one basket. Spread your assets across multiple investments, and you help to insulate them against the effects of economic ups and downs.

Buying more home than you can afford. Interest-only loans, option adjustable-rate mortgages (option ARMs) and lease purchases have tantalized many couples and families with small nest eggs, modest salaries and credit blemishes into taking on much more liability than they can bear. This year, foreclosures have skyrocketed nationally.

Making impulsive or emotional money decisions. A decision that feels good (or exciting) may not be appropriate for you financially. Avoid spur-of-the-moment financial choices, and the influences that may trigger them.

Living above your means. In the acclaimed book The Millionaire Next Door, authors Thomas Stanley and William Danko found that most millionaires drive used American cars and shun a champagne-and-caviar lifestyle. It is the middle class that is generally seduced by big-debt, big-ticket luxury items … sometimes all the way into bankruptcy.

Avoiding all risk. Caution is good, but being extremely risk-averse (for example, refraining from investment and just putting your money in an FDIC-insured bank account) may cost you in terms of the growth of your retirement savings and assets.

Flu Protection

February 10th, 2011 | No Comments | Posted in Uncategorized

Flu is a serious contagious disease that can lead to hospitalization and even death. In 2009–2010, a new and very different flu virus (called 2009 H1N1) spread worldwide causing the first flu pandemic in more than 40 years. Flu is unpredictable, but the Centers for Disease Control and Prevention (CDC) expects the 2009 H1N1 virus to spread this upcoming season along with other seasonal flu viruses.

CDC urges you to take the following actions to protect yourself and others from influenza (the flu):

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Take time to get a flu vaccine.

   • CDC recommends a yearly flu vaccine as the first and most important step in
     protecting against flu viruses.

   • While there are many different flu viruses, the flu vaccine protects against the
     three viruses that research suggests will be most common.

   • The 2010-2011 flu vaccine will protect against an influenza A H3N2 virus, an
     influenza B virus and the 2009 H1N1 virus that caused so much illness last
     season.

   • Everyone 6 months of age and older should get vaccinated against the flu as soon as the
     2010-2011 season vaccine is available.

   • People at high risk of serious flu complications include young children, pregnant women,
     people with chronic health conditions like asthma, diabetes or heart and lung disease and
     people 65 years and older.

   • Vaccination of high risk persons is especially important to decrease their risk of severe flu
     illness.

   • Vaccination also is important for health care workers, and other people who live with or care
     for high risk people to keep from spreading flu to high risk people.

   • Children younger than 6 months are at high risk of serious flu illness, but are too young to be
     vaccinated. People who care for them should be vaccinated instead.

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Take everyday preventive actions to stop the spread of germs.

   • Cover your nose and mouth with a tissue when you cough or sneeze. Throw
     tissue in the trash after you use it.

   • Wash your hands often with soap and water. If soap and water are not
     available, use an alcohol-based hand rub.*

   • Avoid touching your eyes, nose and mouth. Germs spread this way.

   • Try to avoid close contact with sick people.

   • If you are sick with flu–like illness, CDC recommends that you stay home for at least 24 hours
     after your fever is gone except to get medical care or for other necessities. (Your fever should
     be gone without the use of a fever-reducing medicine.)

   • While sick, limit contact with others as much as possible to keep from infecting them.

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Take flu antiviral drugs if your doctor prescribes them.

   • If you get the flu, antiviral drugs can treat your illness.

   • Antiviral drugs are different from antibiotics. They are prescription medicines
     (pills, liquid or an inhaled powder) and are not available over-the-counter.

   • Antiviral drugs can make illness milder and shorten the time you are sick.
     They may also prevent serious flu complications.

   • It’s very important that antiviral drugs be used early (within the first 2 days of
     symptoms) to treat people who are very sick (such as those who are hospitalized) or people
     who are sick with flu symptoms and who are at increased risk of severe flu illness, such as
     pregnant women, young children, people 65 and older and people with certain chronic health
     conditions.

   • Flu-like symptoms include fever, cough, sore throat, runny or stuffy nose, body aches,
     headache, chills and fatigue. Some people may also have vomiting and diarrhea. People may
     be infected with the flu, and have respiratory symptoms without a fever.

Visit CDC’s website to find out what to do if you get sick with the flu and how to care for someone at home who is sick with the flu.

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Nail Gun DaVinci

November 15th, 2010 | No Comments | Posted in Uncategorized

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