Permanent Value

Week in Review – 01/16/2017

Bruce Doole
January 16th, 2017
Do We Ever Really Know What to Expect From Rising Interest Rates?

In December, the Federal Reserve raised the federal-funds lending rate by .25%, only the second increase in the past decade.

Let’s consider what rising interest rates might bring to the various markets.

The first asset class we usually become concerned with is the bond market. This is where people and organizations lend money to corporations and governments, in turn receiving a fixed interest rate over a period of time that is typically 3, 5, 10 or even 30 years.

Suppose you bought a bond in which you loaned money to the US government for 30 years at 2.5%. If the going rate increased to 4.5%, you would not be very happy. You would be losing 2% a year in potential income you might earn if your money wasn’t tied up in the 30-year bond. Since the bond isn’t due to be repaid for 30 years, the only way you can get out of it is to sell it. No one is going to want a bond paying 2.5% when they can get 4.5%, so you are going to have to take a loss and sell the bond at a discount. So clearly, when interest rates rise the holders of long-term bonds get clobbered compared to shorter-term bonds.

The reverse is also true. If interest rates go down, the longer-term the bond the more valuable it becomes, as investors become willing pay a premium for bonds with a higher interest rate than the current market rate.

It’s hardly surprising, then, that when interest rates are rising many advisors recommend holding short-term or intermediate-term bonds that mature or pay off in 1 to 5 years. The idea is that when interest rates rise, the price decrease of shorter-term bonds is less because of the shorter time to maturity when you get your money back and can reinvest at the higher rates.

From this you might logically conclude that, when interest rates rise, long-term bond prices always fall. Not necessarily.

The bottom line is that we can’t depend on any markets to be logical. The bond market, like the stock market, is a free market driven by emotions. This human factor is a good reason not to take bets with your long-term investments on what the market response will be to anything.

Source: Rick Kahler

THIS WEEK’S ECONOMIC DATA:

  • China Consumer Price Index rose 2.1% in December, down from the seven-month high of 2.3% recorded in November.
  • U.S. EIA Petroleum Status Report Crude oil inventories rose 4.1 million barrels in the January 6 week to 483.1 million, up 7.1% from last year at this time.
  • U.S. Jobless Claims remain very low, at 247,000 for initial claims in the January 7 week.
  • China Merchandise Trade Balance fell to $40.82 billion in December from $44.61 billion in November, somewhat below the consensus forecast.
  • U.S. Producer Price Index rose 0.3% in December.
  • U.S. Retail Sales posted a very solid gain in December, up 0.6%, but without autos the gain falls to only 0.2%

Source: Ivy Weekly

 

Week in Review 01/09/2016

Bruce Doole
January 9th, 2017

Rising Student Debt Among Seniors Threatens to Wreck Their Retirement (part 1)

The CFPB reports that 60 and older is the fastest growing age segment with student debt, and nearly 40% of borrowers 65 and older are in default

Financial advisors may be surprised to learn that the fastest growing age segment of student loan borrowers are those 60 and older, and nearly 40% of student loan borrowers 65 and older were in default on student debt in 2015.

These are just two of the startling statistics disclosed in a new report from the Consumer Financial Protection Bureau.

The loans are both public and private, and about three-quarters were taken to finance a child’s or grandchild’s college education as a borrower or co-signer. The remaining portion were used for the education of the borrower or his or her spouse.

No matter who the beneficiary is, these loans are a burden for seniors in or near retirement, many of whom also hold other debt, such as a mortgage, auto loan or credit card debt.

For example, heads of households aged 50 to 59 who had outstanding student loan debt saved less for retirement that their counterparts who didn’t have such debt, according to Federal Reserve stats quoted in the report.

In 2013, the median 401(k) savings balance was $65,000 for those consumers without student loans but $55,000 for those with such loans. The gap was even greater for IRAs: a median $56,000 balance for those without student loans versus just $31,000 for those with student loans.

Advisors usually counsel clients to make saving for retirement a priority over saving for college, but having outstanding student debt apparently can also impact retirement saving.

Co-signing a student loan is also a risk for parents and grandparents, says Sommer. He suggests others ways to finance a child’s college education including choosing a community college for at least for the first two years of a college education as well as work study and student loans owed by only the student with no co-signer.

The latter are usually more available with government, rather than private, loans but there are limits to what can be borrowed.

Source: Bernice Napach

THIS WEEK’S ECONOMIC DATA:

  • FOMC Minutes revealed a wait-and-see theme as members expressed caution in evaluating the economic outlook given uncertainty on how federal spending, tax and regulatory policies would unfold under the incoming Trump administration.
  • U.S. jobless claims fell by 28,000 to 235,000 for the week ended Dec. 31, continuing a trend that suggests a solid job market.
  • EIA Petroleum Status Report showed crude oil inventories down 7.1 million barrels in the Dec. 31 week to 479 million, which is 6.2% above the level in the same period of the prior year.
  • Eurozone/European Union economic sentiment saw its fourth successive monthly rise in December, up 1.2 points to 107.8.
  • U.S. employment rose a lower-than-expected 156,000 (nonfarm payrolls) in December.
  • U.S. international trade deficit widened sharply in November to a higher-than-expected $45.2 billion. Exports fell 0.2%, while imports rose 1.1%.
  • U.S. factory orders fell 2.4% in November but were actually up 0.1% when excluding transportation equipment and a 94% monthly downswing in commercial aircraft orders.

Source: Ivy Weekly

Week in Review 01/03/2017

Bruce Doole
January 3rd, 2017

9 Ways to Save on Taxes in Retirement (6/9)

4. USING THE RMD TO TIME TAXES.

If you’re taking required minimum distributions from one or more traditional IRAs, and if you don’t need that money to live on during the year, you can wait until December to take it – and at the same time ask the IRA sponsor to hold back enough to pay the IRS not just for the estimated tax on the RMD, but also to cover the taxes on your other taxable income.

Estimates tax payments are considered to be made when you send the IRS a check, but amounts withheld from IRA distributions are considered paid throughout the year, even if you make them in a lump sum at the end of the year.

So if your RMD is well-enough funded to pay your whole tax bill, the money can stay sheltered for most of the year and still not expose you to the underpayment penalty.

5. TIME TAX BENEFITS.

You may not realize, after years of an employer automatically deducting your taxes, that you have a choice about when to fork over the money.

But, of course, that comes with pitfalls.

Since taxes are due when income is earned, if you stall on sending tax payments till the April 15 after you receive income, you’re going to find an astonishing array of penalties and interest await you.

But you can control, to an extent, tax payments- through withholding from regular payments from a company pension or annuity, or from an IRA. In fact, you’d have to file a Form W-4P to stop it.

And you should bear in mind that IRA withholding is at a flat rate of 10%, unless you either block it or request a different rate. If you have to pay taxes on Social Security benefits, you’ll need to file a Form W-4V, since Social Security doesn’t withhold taxes by default.

6. SPOUSAL IRA CONTRIBUTION.

Just because one of you is retired doesn’t mean the other has to stop saving for retirement.

If you’re half of a couple and one of you is still working and at least 50 years old, he or she can contribute up to $6,500 a year to an IRA that you own. Traditional IRAs allow spousal contributions up to the year you hit age 70½, while there are no age limits on a Roth.

As long as your spouse has enough earned income to fund the contribution to your account (and any deposits to his or her own), you can continue to save to boost your retirement funding levels. For both 2016 and 2017, that $6,500 cap applies.
Source: Marlene Y. Satter

THIS WEEK’S ECONOMIC DATA:

  • U.S. consumer confidence in December reached its highest level since August 2001, the Conference Board said.
  • Japan’s industrial output rose 1.5% in November, boosted by growth in electronics and automotive parts.
  • U.S. pending home sales fell 2.5% in November, after rising slightly in October, on a sudden increase in mortgage rates and limited inventory.

Source: Ivy Weekly