Are Millennials Risk Averse Savers?

The Millennials are the generation of kids born between the years 1981 and 1997. This year, Millennials will overtake the baby boomers as largest generation in United States history with 75.3 million people.

Millennial Americans are saving their money at a higher rate than their Baby Boomer counterparts at a similar age.  Research from the Transamerica Center for Retirement Studies shows that nearly three-quarters of Millennials are saving for retirement at an earlier age than past generations.  Half are putting away 6% of their income or more—a statistic that makes Millennials the best cohort of savers since the Great Depression, despite having to carry record high levels of student loan debt.  Those who participate in their workplace retirement plans are saving 7% a year, on average.

Alas, Millennials are not doing an equally good job of investing.  The research suggests that many younger Americans are frightened and confused by the topic of investing, and keep their money in their bank accounts.  That’s a problem, since low interest rates essentially drop the return on investment to 0% a year.  In the Transamerica survey, 25% of Millennial respondents said they weren’t sure how their retirement savings were invested, and, when they were promoted to check, they reported higher allocations to bonds, money market funds and other low-return investments than their Baby Boomer or Generation X counterparts.

There are a variety of prescriptions for the problem of being under-invested, which is much more easily fixed than bad savings habits.  Millennials need to be educated about investing—a subject which is not taught in high school or college.  They need to become more comfortable with risk, understanding that, although markets do go down from time to time, they have always recovered and beaten their previous highs. There is no shortage of web sites, blogs, books and podcasts available for them to take advantage of to educate themselves at little or no costs. A fee-only financial planner who is a fiduciary can be an invaluable resource to millennials who are skeptical or scared of investing.

If you are a millennial (or even if you aren't one), and would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:

http://www.forbes.com/sites/arielleoshea/2017/02/21/5-essential-investing-moves-for-millennials/?ss=personalfinance#743c36582ab5

http://www.csmonitor.com/Business/Saving-Money/2017/0221/Why-Millennials-are-better-with-their-money-than-their-parents

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post.

How to Find an Old 401(k) Account

Here's the scenario: You worked for a company sometime in the past and contributed to the 401(k) or 403(b) plan.  When you left the company, you left the funds in the plan, forgot about it, but recently came across an old statement. Excited, you call the plan administrator, assuming that you can figure out who the current administrator is. You're lucky enough to reach someone and are told that the company’s accounts had been transferred to another plan administrator years ago. You then call the new administrator and are told they also could not find your 401(k) using your social security number or other identifying information. How do you proceed?  What are your options?

A recent Q&A by personal finance columnist Liz Weston tackles this very question.

First off, prepare to make a lot more phone calls.

There’s no central repository for missing 401(k) funds — at least not yet. The Pension Benefit Guaranty Corp., which safeguards traditional pensions, has proposed rules that would allow it to hold orphaned 401(k) money from plans that have closed. However, that won't start until 2018. Another proposal, by Sen. Elizabeth Warren (D-Mass.) and Sen. Steve Daines (R-Mont.), would direct the IRS to set up an online database so workers could find pension and 401(k) benefits from open or closed plans, but Congress has yet to take action on that.

If your balance was less than $5,000 (or was more than that when you left your employer, but the funds somehow declined below that balance due to market performance or fees), your employer could have approved a forced IRA transfer, and the money could be sitting with a financial services firm that accepts small accounts. If the plan was closed and your employer couldn’t find you, the money could have been transferred to an IRA, a bank account or a state escheat office. You can check state escheat offices at Unclaimed.org, the official site of the National Assn. of Unclaimed Property Administrators (NAUPA). NAUPA also endorses the site MissingMoney.com.  Searching for an IRA or bank account may require some additional help.

If your employer still exists, call to find out if anyone knows what happened to your money. If the company is out of business, you may be able to get free help tracking down your money from the U.S. Department of Labor (at askebsa.dol.gov or (866) 444-3272) or from the Pension Rights Center, a nonprofit pension counseling center (pensionrights.org/find-help).  Another place to check is the National Registry of Unclaimed Retirement Benefits, a subsidiary of a private company, called PenChecks, that processes retirement checks, at www.unclaimedretirementbenefits.com.

Your employer or a plan administrator could insist that you cashed in your account at some point. You may be able to prove otherwise if you’ve kept old tax returns, since those typically would show any distributions. Ultimately, you may have to seek legal help if you're sure that your money is out there somewhere and you're not getting any results.

If you do find your money, understand that you may still have missed out on a lot of growth. Your investments may have been converted to cash, which has earned next to nothing over the past decade or so, particularly after inflation.

Leaving a 401(k) account in an old employer’s plan can be a convenient option, but only if you’re willing to keep track of the money — and let the administrator know each time you change your address. Your retirement success depends on it.

This shows why it’s important not to lose track of old retirement accounts. Ultimately, your current employer may allow you to transfer old accounts into its plan, or, more preferable, you can roll the money into an IRA. Either way, it’s much better to keep on top of your retirement money than to try to find it years later.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Source: How to track down an old retirement account by Liz Weston

2016 YDFS Investment Review

So President-elect Trump didn't crash the market; the world didn't fall apart after the Brexit vote; and the worst start to the year in history didn't derail what ended up being a pretty good year in the stock markets. "Who da thunk it?"

You know you’re deep into a longstanding bull market when you see things like average pedestrians keeping one eye on the market tickers outside of brokerage houses to see when the Dow Jones Industrial Average has finally breached the 20,000 mark.  Who would have imagined record market highs at this point last year, when the indices ended the year in slightly negative territory?  Or when the new year 2016 got off to such a rocky start, tumbling 10% in the first two weeks—the worst start to a year since 1930?

The markets eventually bottomed in mid-February and began a long, slow recovery, turning positive by the end of March, suffering a setback when the U.K. decided to leave the Eurozone, and endured another hard bump right after the elections.  In the end, we were disappointed; the Dow finished at 19,762.60 for the year—but the bull market has continued for another year.

This was the second year in a row that the final quarter provided investors with solid gains. The Wilshire 5000--the broadest measure of U.S. stocks—was up 4.54% in the fourth quarter of 2016, ending the year up 13.37%.  The comparable Russell 3000 index gained 4.21% in the final quarter, to finish up 12.74% for the year.

Large cap stocks were up as well.  The Wilshire U.S. Large Cap index gained 4.14% in the fourth quarter, and finished the year up 12.49%.  The Russell 1000 large-cap index closed with a 3.83% fourth quarter performance, and finished the year up 12.05%, while the widely-quoted S&P 500 index of large company stocks was up 3.25% in the fourth quarter, finishing up 9.54% for calendar 2016.

The Wilshire U.S. Mid-Cap index gained 5.31% in the final quarter, finishing the year with a gain of 17.22%.  The Russell Midcap Index gained 3.21% in the fourth quarter, and was up 13.80% in calendar 2016.

This was a year to remember for investors in small company stocks.  As measured by the Wilshire U.S. Small-Cap index, investors posted an 8.30% gain over the last three months of the year, for a total return of 22.41% over the entire 12 months.  The comparable Russell 2000 Small-Cap Index finished the year up 21.31%, while the technology-heavy Nasdaq Composite Index rose 1.34% in the fourth quarter, to finish the year up 7.50%.

International investments contributed a slight decline to overall portfolio returns.   The broad-based EAFE index of companies in developed foreign economies lost 1.04% in the fourth quarter of the year, finishing the year down 1.88% in dollar terms (I expect these stocks to carry the winning torch any day now).  In aggregate, European stocks lost 3.39% for the year, while EAFE’s Far East Index gained just 0.14%.  Emerging markets stocks of less developed countries, as represented by the EAFE EM index, gained 8.58% for the year.

Looking over the other investment categories, real estate investments, as measured by the Wilshire U.S. REIT index, lost 2.28% during the year’s final quarter, but managed to finish up 7.24% for calendar 2016.

Last year, investors were wondering why they owned commodities in their portfolios, when their statements showed that the index delivered a whopping 32.86% loss.  This year, they may be wondering why they weren’t more committed to the asset class, as the S&P GSCI index gained 27.77%, fueled in part by a 45.03% rise in the S&P crude oil index.  Gold prices shot up 8.63% for the year and silver gained 15.84%.

In the bond markets, it’s possible that the decades-long bull market—which basically means declining interest rates—has ended, and the fixed-income world is experiencing rate rises.  But despite the nudge by the Federal Reserve Board, the moves have not exactly been dramatic.  Over the past year, rates on 10-year Treasury bonds have risen from 2.25% to 2.44%, while 30-year government bond yields have risen from 3.00% to 3.07%.  According to Barclay’s Bank indices, U.S. liquid corporate bonds with a 1-5 year maturity have seen yields rise incrementally from 2.4% to 2.8% on average. Despite the many cries and declarations that the 30 year bull market in bonds is over, rest assured that bonds won't go down without a fight (winning streaks that last so long never die that quickly).

As always, there were many unpredictable anomalies in the investment world.  In the international markets, anyone lucky enough to have speculated on the Brazilian Bovespa index—comparable to the U.S. S&P 500—would have reaped a gain of 68.9% this year, despite all the headline drama around the Zika virus and political uncertainties that were reported on during the Olympic games.  Russian stocks were up 51% for the year, despite the recent sanctions from the U.S. government and the lingering international sanctions related to the invasion of the Crimean peninsula.

As is my obligation as a financial planner, I have to point out that while you may not have realized anywhere near the kinds of returns outlined above for the year, having a diversified and perhaps hedged portfolio means that you never have enough of the stuff that went up and too much of the stuff that came down or underperformed. Risk management of any kind during this bull market (read: diversification) tends to blunt returns during the good times, but is a welcome friend when the markets turn against us. Since no one knows when this is, you have to stick to your investment approach through thick and thin (you do have an investment approach, don't you? We're available to help you craft an investment approach if you need us).

What’s going to happen in 2017?  Short-term market traders seem to be expecting a robust economic stimulus combined with lower taxes and deregulatory policies that would boost the short-term profits of American corporations.  But it is helpful to remember that we are entering the ninth year of economic expansion, making this the fourth longest since 1900.  In addition, growth has not exactly been robust; the U.S. GDP has averaged just 2.1% yearly increases since the Great Recession, making this the most sluggish of all post-World War II expansions.

Slow but steady has not been a terrible formula for workers or stock investors.  The unemployment rate has slowly ticked down from a post-recession peak of 10% to less than 5% currently.  U.S. stock indices are posting record highs with double-digit gains, and that Dow 20,000 level, while essentially meaningless, is still catching a lot of attention.

It’s clear that the new President-elect wants to accelerate America’s economic growth, but the policy prescription has not always been clear.  Will we rip up longstanding trade agreements, cut back on immigration quotas and deport millions of workers who crossed the border without a visa?  Will there be a wall built between the U.S. and Mexico?  Will the government pay for huge infrastructure projects, at the same time reducing taxes and thus raising the national debt?  Will Congress raise the debt ceiling without protest if that happens?  Will the Fed raise rates more aggressively in the coming year, or cooperate with the President-elect in his efforts to drive the economy into a faster lane?

At the same time, there are many unknowns around the globe.  China’s economic growth has stalled for the second consecutive year, and you will soon be reading about a banking crisis in Italy that could force the country to leave the Eurozone—potentially a much bigger blow to European economic unity than Brexit or a still-possible Greek exit.  Russian hackers may have ushered in an era of unfettered global intrusions into our Internet infrastructure, and there will surely be a continuation of ISIS-sponsored terrorism in Europe and elsewhere.

Every year of this longstanding bull market, we have to look over our shoulders and wonder when and how it will end.  With the January downturn and so much uncertainty at this time last year, nobody could have predicted double-digit returns on U.S. stocks at year-end.  This year could bring more of the same, or it could fulfill the dire predictions many have made during the election cycle, including both Democrats and Republicans who believe the country is in worse shape than the numbers would indicate. Just remember that bull markets rarely die of old age; instead, they die from excessive enthusiasm and ebullience. This bull market is anything but ebullient.

What we have learned over the past few years is that the markets have a way of surprising us, and that trying to time the market, and get out in anticipation of a downturn, is a loser’s game.  At the county fair or amusement park, when we get on the roller coaster, we don’t bail out and jump over the side at some scary point on the track; we hang on for the remainder of the ride.  The history of the markets has been a general upward trend that benefits long-term investors, and looking out over the long-term, that—and a few hard bumps along the way--is probably the best outcome to expect. 

This is not to say that you should commit 100% of your capital to the market or stay all in at all times. It never hurts to take a few chips off the table when things are going well so that you have some dry powder to deploy when those hard bumps come along. Rebalancing into underperforming investment classes at least once or twice a year is always a good idea as well.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

You can interact with Sam TheMoneyGeek and read his latest musings on Twitter at http://twitter.com/themoneygeek

Sources:

Wilshire index data: http://www.wilshire.com/Indexes/calculator/

Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp

S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--

Nasdaq index data: http://quotes.morningstar.com/indexquote/quote.html?t=COMP

http://www.nasdaq.com/markets/indices/nasdaq-total-returns.aspx

International indices: https://www.msci.com/end-of-day-data-search

Commodities index data: http://us.spindices.com/index-family/commodities/sp-gsci

Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

Aggregate corporate bond rates: https://index.barcap.com/Benchmark_Indices/Aggregate/Bond_Indices

Aggregate corporate bond rates: http://www.bloomberg.com/markets/rates-bonds/corporate-bonds/

 Muni rates:  https://indices.barcap.com/show?url=Benchmark_Indices/Aggregate/Bond_Indices

http://www.wsj.com/articles/chinas-stock-market-still-a-draw-after-tumultuous-year-1451303164

http://www.marketwatch.com/story/these-are-the-bestand-worstperforming-assets-of-2016-2016-12-30?link=sfmw_tw

http://www.theworldin.com/article/10632/unsettling-year-markets

http://www.forbes.com/sites/maggiemcgrath/2016/12/30/markets-end-last-trading-day-of-2016-in-red-but-post-gains-for-the-year/#7db846fd7c07

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Higher Interest Rates: One and Done or More to Come?

We all know that we're paying more for almost everything these days. Everything, of course, except money. Interest rates have been at historical lows for more than eight years, even though the economy has steadily improved over this period.

So anybody who was surprised that the Federal Reserve Board (A.K.A. The Fed) decided to raise its benchmark short-term interest rate last week probably wasn’t paying attention.  The U.S. economy is humming along, the stock market is booming and the unemployment rate has fallen faster than anybody expected.  The incoming administration has promised lower taxes and a stimulative $550 billion infrastructure investment.  The question on the minds of most observers is: what were they waiting for?

The rate rise is extremely conservative: up 0.25%, to a range from 0.50% to 0.75%—which, as you can see from the accompanying chart, is just a blip compared to where the Fed had its rates ten years ago.

The bigger news is the announced intention to raise rates three times next year, and move rates to a “normal” 3% by the end of 2019—which is faster than some anticipated, although still somewhat conservative.  Whether any of that will happen is unknown; after all, in December 2015, the Fed was telegraphing four rate adjustments in 2016 , before backing off until now with just this one. Personally, I believe that three interest rate increases in 2017 will prove inadequate, especially if current signs of inflation intensify next year.

The rise in rates is good news for those who believe that the Fed has intruded on normal market forces, suppressed interest rates much longer than could be considered prudent, and even better news for people who are bullish about the U.S. economy.  The Fed may have been the last remaining skeptic that the U.S. was out of the danger zone of falling back into recession; indeed, its announcement acknowledged the sustainable growth in economic activity and low unemployment as positive signs for the future.  However, bond investors might be less pleased, as higher bond rates mean that existing bonds lose value.  The recent rise in bond rates at least hints that the long bull market in fixed-rate securities—that is, declining yields on bonds—may finally be over.

For stocks, the impact is more nuanced.  Bonds and other interest-bearing securities compete with stocks in the sense that they offer stable—if historically lower—returns on your investment.  As interest rates rise, the see-saw between whether you prefer stability or future growth tips a bit, and some stock investors move some of their investments into bonds, reducing demand for stocks and potentially lowering future returns.  None of that, alas, can be predicted in advance, and the fact that the Fed has finally admitted that the economy is capable of surviving higher rates should be good news for people who are investing in the companies that make up the economy. That's not to say that the prospect of more interest rate hikes won't cause volatility in the stock markets.

So there may be a lump of coal on the list for over-exuberant investors in the year ahead. Although the current weight of evidence points to a continuation of this economic recovery, pressures that have been synonymous with trouble in past cycles have been developing. Wage and commodity (oil, raw materials) price increases may be rising faster than anticipated, and the Fed could easily fall behind in their efforts to keep inflation in check.

The bottom line here is that, for all the headlines you might read, there is no reason to change your investment plan as a result of a 0.25% change in a rate that the Fed charges banks when they borrow funds overnight.  There is always too much uncertainty about the future to make accurate predictions, and today, with the incoming administration, the tax proposals, the fiscal stimulation, and the real and proposed shifts in interest rates, the uncertainty level may be higher than usual.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:

http://www.businessinsider.com/fed-fomc-statement-interest-rates-december-2016-2016-12

http://www.marketwatch.com/story/fed-to-hike-interest-rates-next-week-while-ignoring-the-elephant-in-the-room-2016-12-09

http://www.reuters.com/article/us-usa-fed-idUSKBN1430G4

http://www.usatoday.com/story/money/personalfinance/2016/12/15/fed-rate-hike-7-questions-and-answers/95470676/?hootPostID=32175354f7440337d62a767b3db92c68

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

2017 Retirement Contribution Limits Unchanged

Retirement plan contributions are supposed to be indexed and adjusted annually in line with the change in the rate of inflation. But only in the governmental fantasy world of non-inflation are adjustments not necessary.

That is to say, in case you missed it, the contribution limits to your 401(k) plan, IRA and Roth IRA—set by the government each year based on the inflation rate—will not go up in 2017.  Just like this year, you will be able to defer up to $18,000 of your paycheck to your 401(k), and individuals over age 50 will still be able to make a “catch-up” contribution of an additional $6,000.  (The same limits apply to 403(b) plans and the federal government’s new Thrift Savings Plan.)  Your IRA and Roth IRA contributions will continue to max out at $5,500, plus a $1,000 “catch-up” contribution for persons 50 or older.

SEP IRA and Solo 401(k) contribution limits, meanwhile, will go up from $53,000 this year to $54,000 in 2017.

The government has made small changes to the income limits on who can make deductions to a Roth IRA and who can claim a deduction for their contribution to a traditional IRA.  The phaseout schedule (income range) for single filers for 2016 starts at $117,000 and contributions are entirely phased out at $132,000; for joint filers the current range is $186,000 to $196,000.  In 2017, the single phaseout will run $1,000 higher, from $118,000 to $133,000, and the joint phaseout threshold will rise $2,000, to $188,000 up to $198,000.  Single persons who have a retirement plan at work will see the income at which they can no longer deduct their IRA contributions go up $1,000 as well, with the phaseout starting at $62,000 and ending at $72,000.  Couples will see their phaseout schedule rise to $99,000 to $119,000.

If you would like to review your retirement plan options, current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Source:

http://money.cnn.com/2016/10/27/retirement/401k-ira-contribution-2017/index.html?iid=Lead

http://www.investopedia.com/articles/retirement/111516/2017-cola-adjustments-overview.asp?partner=mediafed

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post