Jeffrey Lacker Presentation

Jeffrey Lacker, President of the Richmond Federal Reserve, made a presentation at the Sarasota Yacht Club on Friday, April 10.

It contained a number of interesting insights, summarized below for those who could not attend, regarding what is driving the economy and how it influences the Fed's thinking.

The event was sponsored by the Financial Planning Association of the Suncoast and the Global Interdependence Center, and you can see the video of the same by clicking here.

Mr. Lacker has been a proponent of tighter monetary policy for some time and his comments are his own thoughts, not those of the Federal Reserve committee. Here are some of my takeaways from the presentation:

•    In the next year, Mr. Lacker expects US growth similar to the last 12 months and expects inflation to move close to 2%. He cited personal income increasing at 2.2% and consumer spending increasing at 3.1% over the last year. It seems that most indicators show similar rates of growth and inflation as we have seen over the last year continuing for the next year. He noted that it is important to look at the outlook not just the most recent numbers when trying to decipher what is going on. I agree that it is important to look at the trends, not just the headline announcements.

•    Core inflation, as the government measures it, has been 1.4% over the last year. This does not include food and energy. My opinion is that this measure is not reality for most people. Medical costs are still increasing at a rate three times faster than core inflation. Rents are rising due to lower vacancy. Food costs are rising and costs for other services such as restaurants are increasing. Although energy costs dropped drastically in the last year, and this is a significant part of most family's budgets, I don't believe they will stay down forever.

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The Calm Before the Storm?

The stock market (S&P 500) has been steadily increasing since the latter part of 2011. Is it time for a correction?

Can we predict a drop in market prices (before they actually drop)?

There are a number of valuation factors, trends, and indicators you can track in order to make your own judgment. Let's take a look at one such measure, the VIX or, as it's commonly referred to, the "Fear Index".

The VIX consists of futures prices (prices that are agreed upon today for assets that will be delivered on a future date), so it illustrates the traders' expectations of future market prices or the volatility of the S&P 500.

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Keep Roth IRA Withdrawals Tax-Free

Roth IRAs are used because their growth is tax-deferred and withdrawals are not taxed, but make sure to avoid these situations where your withdrawals could be taxed or penalized...

Watch out for the 5-year rule! If you have a Roth IRA that does not contain any conversions from a Traditional IRA or 401k, the rule is simple – after age 59 ½, you can withdraw your contributions both tax and penalty-free. In order to withdraw the money that comes from investment gains, rather than your contributions, without paying tax or a penalty, the account must be open for at least five tax years. The good news here is that the 5-year clock doesn't restart every time you make a contribution. This is another good reason why you should open a Roth IRA now, before you need it.

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Audit Your Beneficiaries

When you buy insurance or open a bank or investment account, you have to designate one or more beneficiaries.

For many people, that initial moment is the last time they ever look at their beneficiary designations. Has anything changed in your life since you opened that account or bought a policy? If it has been more than a year, the answer for many of us is YES!

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Before You Put Away Your 1040

The April 15th deadline has come and gone so, hopefully, you've either filed your taxes or requested an extension, but don't put away that 1040 just yet...

Your 1040 is full of valuable information that can help you move closer to your financial goals. Your 1040 can tell you how much you earned, how much you spent, how much you paid in taxes, and how much you saved for the future.

Let's start by making 3 columns, "Income", "Savings", and "Taxes".

The first column is easy; just take a look at line 22, your Total Income. Line 22 will tell you how much money you had to work with in 2013. Put that number in the "Income" column.

Then let's see how much you saved. If any of the income from line 22, wages, interest, dividends, rents, IRAs, pensions, Social Security, or any other income, was reinvested – put that amount in the "Savings" column. Take any Capital Gains from investment sales on Schedule D, and any money that was deducted from your paycheck for retirement accounts such as a 401k or a 403b and put that on the "Savings" column too.

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The U.S. Budget in Perspective

When we hear talk of trillions, it’s easy for our eyes to glaze over but, if we simply remove a few zeroes (8 to be exact), the U.S. Budget and the current debt situation become a lot more relatable.

The following numbers are based on the estimated figures from the Summer/Fall 2013...

Federal Budget: 
U.S. Tax Revenue: 
New Debt: 
National Debt: 
Recent Budget Cuts: 
$ 3,820,000,000,000.00
$ 2,170,000,000,000.00
$ 1,650,000,000,000.00 
$ 16,271,000,000,000.00
$ 38,500,000,000.00

 

Subtract the Revenue from the Budget.

 

Now, remove 8 zeroes and pretend it's a typical household budget…

Family Expenses: 
Family Income: 
New Credit Card Debt: 
Credit Cards Balance: 
Total Budget Cuts: 
$ 38,200.00
$ 21,700.00
$ 16,500.00
$ 162,710.00
$ 38.50

 

Subtract the Income from the Expenses.

 

For more information about meeting your personal financial goals, call Tom Roberts, CFP at A New Approach Financial Planning at (941) 927-9590.

Another Way to Save for Retirement

Current estimates show that retirees can expect to spend an average of $250,000 on health care costs throughout their retirement – not including the cost of long-term care should that become necessary! Health care cost can quickly deplete any portfolio, but there's another way to save for a healthy retirement...

The Affordable Care Act opens another avenue for accumulating tax deferred savings. High deductible plans, like some Bronze or Silver plans, allow individuals and families to contribute pre-tax dollars to a Health Savings Account (HSA).

HSAs were created 10 years ago and they share some of the characteristics of Traditional and Roth IRAs. Your tax deductible contributions will continue to grow tax free and, if you ever need to withdraw an amount to pay for medical expenses, you do not pay taxes on that amount.

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Know Your Investment Terms - What are all these different types of yield?

Yield is generally defined as the income returned from an investment. This income is usually in the form of interest, dividends or distributions. Most of the time you see it listed as a percentage, the income divided by the value of the investment. The different yields are due to how the value of the investment is defined and the time period. Using the proper measure is important when evaluating an investment.

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How Health Care Reform Affects You

The health care reform act has been phasing in since 2010. Although some provisions have already occurred, 2013 and 2014 are bringing a number of major changes. It is almost certain that at least some of these reforms will have an effect on you and your family.

How will health coverage change?

*Plans must fully cover certain wellness and preventive care benefits (e.g., immunizations, cancer, diabetes, and heart disease screenings, smoking cessation programs)

*Plans can no longer charge more for out-of-network emergency care

*Plan can't impose lifetime limits on health coverage (annual limits will be gradually phased out, and will be fully phased out by 2014)

*Children can remain on a parent's health plan up to age 26

*Health coverage can't be rescinded due to illness (only for fraud or intentional misrepresentation)

*State run markets will be created to offer health care plans in 2014.

Check out this video.

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Myth of the Month - "US Treasury Bonds are Risk Free"

All investments have risks, although the risks may not be the same for every investment. Investing in US Treasury bonds expose you to market, inflation, interest rate, credit and sovereign risks. The value of your bonds will rise and fall with the overall bond market, and you have no control over market moves. If the return, interest payments and bond price increases, do not keep up with inflation, the real value of your investment is dropping. Currently these bonds are barely keeping up with the current rate of inflation. If inflation picks up in the future, these losses may be significant.

Interest rate risk is important when considering how bonds will perform. Bond value moves opposite the change in market interest rates. That is, if the prevailing interest rate goes up .5% the value of the bonds you hold will go down. The bond's interest rate and the time left to it matures, affects how much it reacts to market interest rate changes. The lower the bond's interest rate and the longer it is until it matures, the greater the impact. A 30 year Treasury bond with a 4% rate will have a significant loss of value if the market interest rates increase .5%. Shorter term bonds have less interest rate risk, although their overall return is also less.

Of lesser concern are the concerns of repayment due to poor financial condition or the US deciding to default on its obligations. Other bond classes have a greater chance of default than US Treasury issues.

US Treasury bonds are not risk free. For more detail on investment risks and how to match risk to your portfolio, check out this article.

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