What's the Government Buying with your Money?

Tax time is over for another year for millions of Americans (who didn't ask for an extension), and as you look over your tax payments for calendar 2016, you’re undoubtedly wondering where those dollars are being spent by Uncle Sam.

The Wall Street Journal recently published a chart which breaks down spending for every $100 of tax receipts—and concludes that the U.S. government is actually a very large insurance company, that also happens to have an army. Chances are, the check or checks that you wrote for the year barely keep the government running for a fraction of a second.

For every $100 you pay in taxes, $23.61 goes to Social Security payments and administration—basically old age insurance for retirees.  Another $15.26 goes to Medicare, the government health insurance program.  Medicaid, the health insurance program for the poor, accounts for another $9.55 of that $100 tax bill—bringing the total costs for various civilian insurance programs to 48% of the total budget.  And that army?  It costs $15.24 of every $100 the government collects in taxes, not counting veterans benefits.

In all, the 2016 federal budget fell $15.24 out of every $100 short of revenues equaling expenses.  Where would you cut?

Things like federal expenditures and grants for education ($2.08), food stamps ($1.89), affordable housing ($1.27) and foreign aid ($1.14) actually make up a very small part of the budget, smaller than interest payments on the national debt ($6.25).

There has been talk about helping reduce the budget by lowering expenditures on the National Endowments for the Arts and Humanities, which together represent eight tenths of one cent of that $100 tax bill.  This would be comparable to someone trying to pay off his mortgage by looking for coins under the sofa cushions.

As for us, we're just glad that we survived another very busy tax season, with more compliance requirements imposed on preparers and taxpayers than ever before. Tax simplification? Doesn't seem to ever be in the cards.

If you would like to review your current investment portfolio or discuss any other tax or 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:

https://www.wsj.com/articles/how-100-of-your-taxes-are-spent-8-cents-on-national-parks-and-15-on-medicare-1492175921

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

First Quarter 2017 YDFS Market Review

Are we in the early stages of a bear market given that we've had over eight years of an up-trending market that may be growing tired? Or are we in the late stages of a bull market—that time when the market suddenly takes off like a rocket for no apparent reason?

Over the last eight years, the S&P 500 stock market index has returned more than 300%.  But the tail end of this run (if indeed it's the tail end) seems to have accelerated the trend.  The first quarter of 2017 provided the highest returns for U.S. large-cap stocks since the last three months of 2013.  The NASDAQ index has booked its 21st record close of the year so far, and the indices have recorded a 30% rise over the past six quarters, marking the fastest advance since 2006.

The first quarter of 2017 has seen the Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—rise 5.72%, while the comparable Russell 3000 index gained 5.91% in the first quarter.

Looking at large cap stocks, the Wilshire U.S. Large Cap index gained 6.01% in the first quarter.  The Russell 1000 large-cap index finished the first quarter with a 6.23% performance, while the widely-quoted S&P 500 index of large company stocks was up 5.53% in the first three months of 2017.

Meanwhile, the Russell Midcap Index gained 5.15% in the first quarter.

As measured by the Wilshire U.S. Small-Cap index, investors in smaller companies posted a relatively modest 2.26% gain over the first three months of the year.  The comparable Russell 2000 Small-Cap Index finished the quarter up 2.20%, while the technology-heavy NASDAQ Composite Index rose 9.83% in the first quarter, continuing its record-breaking climb.

Even the international investments were finally soaring through the start of the year.  The broad-based EAFE index of companies in developed foreign economies gained 6.47% in the first three months of calendar 2017.  In aggregate, European stocks gained 6.74% for the quarter, while EAFE’s Far East Index gained 5.13%.  Emerging market stocks of less developed countries, as represented by the EAFE EM index, rose 11.14%.

Looking over the other investment categories, real estate investments, as measured by the Wilshire U.S. REIT index, eked out a 0.03% gain during the year’s first quarter.  The S&P GSCI index, which measures commodities returns, lost 2.51%, in part due to a 5.81% drop in the S&P crude oil index.  Gold prices shot up 8.64% for the quarter and silver gained 14.18%.

In the bond markets, rates are incrementally rising from practically zero to not much more than zero. Coupon rates on 10-year Treasury bonds now stand at 2.39% a year (otherwise known as the risk-free rate), while 30-year government bond yields have risen to 3.01%.

The pundits on Wall Street have been telling us that the market’s sudden meteoric rise—which really accelerated starting in December of last year—is the result of the so-called “Trump Trade,” shorthand for an expectation that companies and individuals will soon be paying fewer taxes and be burdened by fewer regulations, leading to higher profits and greater overall prosperity.  Add in a trillion dollars of promised infrastructure spending, and the expectation was an economic boom across virtually all sectors.

However, there is, as yet, no sign of that boom; just a continuation of the slow, steady recovery that the U.S. has experienced since 2009.  The latest reports show that the U.S. gross domestic product—a broad measure of economic activity—grew just 1.6% last year, the most sluggish performance since 2011.  The U.S. trade deficit widened in January, and both consumer spending and construction activities are weakening from slower-than-average growth rates.

The good news is that corporate profits increased at an annual rate of 2.3% in the fourth quarter, which shows at least incremental improvement.  However, the previous three months saw a 6.7% rise in profits, suggesting that the trend may be downward going forward. Expectations for the first quarter of 2017 earnings are even higher, which would help stretched valuations in many stocks and in the overall market.

It’s possible to read too much into the recent failure of health care legislation, and imagine that we’re in for four years of ineffective leadership.  There will almost certainly be a tax reform debate in Congress in the coming months, but the surprising aspect—as with the healthcare legislation—is that there seems to have been no prepared plan for Congress to vote on.  We know that the Republican President and Congress want to lower corporate tax rates and simplify the tax code—which, in the past, has meant adding thousands of new pages to it.  We know that there is general opposition to any form of estate taxes, but nobody is proposing which deductions would be eliminated in order to make this package revenue-neutral. I have no illusions that tax reform will ultimately amount to any measure of tax simplification (cue the collective sigh from overworked tax preparers).

Similarly, there have been no details about the infrastructure package, which means we don’t know yet whether it would be a budget-busting package of pork barrel projects or a real contribution to America’s global competitiveness.

We can, however, be certain of one thing: as the bull market ages, we are moving ever closer to a period when stock prices will go down, perhaps as dramatically as 20%, which would qualify as a bear market, perhaps more or less.  While bull markets don't die of old age alone, this is still a good time to ask yourself: how much of a downturn would I be able to stomach either before panic sets in or my lifestyle is endangered?  If your answer is less than 20%, or close to that figure, this might be a good time to revisit your stock and bond allocations. It's never too soon to trim profits on some positions to lighten exposure and take advantage of any coming sell-off.

On the other hand, if you’re not fearful of a downturn, then you should look at the next bear market the way the most successful investors do, and envision a terrific buying opportunity, a time when stocks go on sale for the first time in the better part of a decade.  For some reason, people go to the shopping mall to buy when items go on sale, and do the opposite when the investment markets go down.  Knowing this can be an unfair advantage to your future wealth, and even make you look forward to the end of this long, unusually steady, increasingly frantic bull run in stocks.  After all, if history is any indication, the next downturn will be followed by another bull run.

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:

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/

Bond rates:

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

General:

http://www.marketwatch.com/story/debate-about-path-for-stock-market-rages-as-dow-rallies-4440-points-in-year-and-a-half-2017-03-31?siteid=yhoof2&yptr=yahoo

http://www.marketwatch.com/story/how-investors-can-learn-to-stop-worrying-and-love-a-stock-market-correction-2017-03-30

http://www.reuters.com/article/us-usa-economy-gdp-idUSKBN1711MX?feedType=RSS&feedName=domesticNews

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

Higher short-term rates: What to Do

The U.S. Federal Reserve Board’s Open Market Committee just raised the short term Federal Funds rate from 0.75% to 1.00%—the second rate hike in three months.  The short term federal funds rate is what banks are charged for overnight borrowing and affects all manner of loans and credit cards. So what should you do with your investment portfolio in light of this change?

Nothing.

Why?  First of all, the rate change was laughably minor, considering all the press coverage it received.  In the mid-2000s, Fed Chairman Alan Greenspan raised interest rates 17 times in quarter-point jumps, finally taking Fed Funds to a 5% rate.  This time around, the economists at America’s central bank are behaving extremely cautiously.

Second, you may read that any raise in interest rates is depressing for stocks.  It’s true that borrowing will be incrementally more expensive for American corporations than they were last week.  But bigger picture, this move was actually a validation of the country’s economic progress in our long slow climb out of The Great Recession.

By raising rates, the Fed was indicating that it believes the companies that make up our economy are healthy enough to survive and prosper under slightly higher interest rates.  The markets apparently felt like this was a positive sign, that the economy no longer needs to be nursed back to health.  The widely-followed S&P 500 stock index rose a full percentage point on the news the day of announcement.

Third, and more good news, the Fed has now moved into a mode where it is fighting inflation, rather than trying desperately to stimulate it.  The worst thing that could happen to the economy is a bout of deflation, where prices fall and there are no policy remedies to fix the problem.  In the discussion accompanying the rate rise (the infamous Fed “minutes”) the Board of Governors expressed concern that inflation might rise above their “target” of 2%, hence the tightening.  If you read the message between the lines, they seem to feel that the threat of deflation is over.

Finally, the rate hike was expected, and already built into the price of stocks.  And more still are expected: at least two and possibly three 0.25% rises before the end of the year.  But the Fed also signaled that if there is any sign of economic backtracking, those plans will be scrapped.  The rate rises are anything but reckless. But given the strength in the unemployment rate, the jobs numbers and wage increases, I believe that at least two more rate increases are in store before the end of the year.

So what WILL be the effect of the rate hike?  Borrowing to buy a car or a house will be slightly more expensive going forward than it was last week.  The average thirty year fixed mortgage rate this time last year was 3.68%; it’s now up to 4.21%.

Most credit cards charge variable rates of interest, which likely means a 0.25 percent rise in the rates you pay on any balances you carry from month to month.

And private student loans with variable interest rates will likely increase each time the Fed raises rates.  Balances on Stafford, Graduate Plus or Parent Plus loans will remain at their current interest rates, but the rates on new loans will probably rise.

If your portfolio is well-diversified, there’s not much more you can do to ride out a (slowly) rising-rate environment.  Ignore the headlines and celebrate the fact that even the most cautious economists in Washington are finally admitting that the economy is on solid ground.

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:  

https://www.theguardian.com/business/2017/mar/15/us-federal-reserve-raises-interest-rates-to-1

http://www.chicagotribune.com/business/ct-fed-interest-rate-impact-0316-biz-20170315-story.html

https://www.ft.com/content/9ea0e1bd-8c45-31ff-9d7c-241023fd5e12

https://www.nerdwallet.com/blog/investing/fed-rate-hike-4-ways-to-ride-rising-interest-rate-wave/#.WMmTRplBq6o.twitter

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

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