What are the Required Minimum Distribution Rules for my IRA?

“Avoid This 50% Tax Penalty in 2015”

This is one penalty you’ll want to avoid.  If you (or someone you know!) are age 70½ or older this year, don’t forget that you must take a Required Minimum Distribution (RMD) from your retirement accounts before December 31st of this year.  The federal penalty for failing to do so is 50% of the amount of the distribution you should have taken.

There are a couple of exceptions to the rules:

  • If you turned 70½ this year, you can postpone your 2015 RMD until April 1, 2016. If you do wait, you’ll also need to take your RMD for 2016 by December 31st, 2016.  In other words, you’ll have to take two RMDs in 2016.
  • If you’re still working (assuming you don’t own more than 5% of the company), you can postpone RMDs on your 401k (or similar company retirement plan) until the year you actually retire. But you must still take RMDs for other retirement plans such as IRAs or prior employer 401k plans.

People often ask me, “Why does the government have a law requiring RMDs?”  The simple answer is, “Because they want their money!”  Your RMDs are taxed to you as ordinary income and Uncle Sam would rather get his tax money sooner rather than later.

I find many age seventy-plus clients do not need the money from their retirement accounts.  Here are some of the options you might consider:

  • If you are still working (and don’t own more than 5% ownership of the company), see if your company retirement plan allows you to roll-up your IRA into the company plan. By doing so, you’ll effectively postpone RMDs until the year you retire.  Many professions such as law, insurance, and accounting lend themselves to remaining ‘active’ as employees well beyond normal retirement age.
  • After setting aside funds for payment of taxes on your RMD, invest the money tax free bonds or bond funds so as to avoid (or minimize) income taxes on interest earned.
  • After setting aside funds for payment of taxes on your RMD, invest in dividend-paying stocks (or similar stock mutual funds) which typically have much lower income tax rates than investments producing ordinary income. Federal income tax rates on dividends are typically 15% but can be as high as 23.8% while the maximum rates for ordinary income are 39.6%.
  • Transfer your RMD directly to your favorite charity. In past years, Congress has extended the law allowing RMDs to be paid directly to a charity.  While they have not yet extended the law for this year, many expect them to do so.  Ask your IRA custodian to have your RMD check made payable to your favorite charity of charities.  If Congress extends the law you’ve simplified the reporting process.  If they don’t extend the law, you’ll report your RMD on your tax return and take an offsetting charitable deduction on your return as well.  Consult with your tax advisor before implementing this strategy.

Caution #1.  If you have multiple IRA accounts, you can calculate your RMD based on the total of all accounts and take your RMD from any one or combination of those accounts.  For any 401k plan (or similar type plans), your RMD must be both calculated and taken from each plan separately.

Caution #2.  I often hear people say, “I never pay any taxes until they are due!”  However, when it comes to your IRA account, we’ve found that in many cases, your smartest move is to withdraw some funds from your IRA each year before your RMD date if you can get it out in a lower tax bracket than your expect to be in once you reach age 70½.  The best way to determine this is to do a ‘trial tax return’ before the end of the year to determine your estimated effective tax rate and compare that rate to your estimated effective tax rate at 70½. Your tax advisor can easily help you with this.

Finally, even if you have not yet reached age 70½, I bet you know someone who has.  Be someone’s hero and give them a copy of this information.

DesktopSW

Earn 50% in One Month—Guaranteed, check your 401k Contributions

MONEY TUESDAY – Stewart Welch with the Welch Group joined us with a look at how to early 50-percent return in one month! Would you be wary of someone promising you a 50 percent return on a twelve-month investment? How about a one-month investment? Stewart assumes/hopes your early warning antennas are blaring in your head as well they should be. But there might be a way to actually make this happen for a number of really smart people. To determine if you are one of the lucky onesDesktopSW

Earn an immediate 50% return on your investment by investing in your 401K

Earn a 50% Return in 1 Month—Guaranteed

Earn a 50% Return in 1 Month—Guaranteed

Earn an immediate 50% return on your investment by investing in your 401K

Earn an immediate 50% return on your investment by investing in your 401K

Would you be wary of someone promising you a 50% return on a twelve month investment? How about a one month investment? I assume (hope) your early warning antennas are blaring in your head as well they should be. But there might be a way to actually make this happen for a number of really smart people. To determine if you are one of the lucky ones, take a moment to determine how much you have contributed to your company 401k plan as compared to the amount of company matching contribution. For example, let’s assume your company matches fifty cents on the dollar up to 6% of your compensation. If your salary is $100,000, your company would provide matching funds on up to $6,000 of contributions for this calendar year ($3,000 match). If you’re already having the company deduct $200 per month, you’re on schedule to invest $2,400 this year (with matching contributions of another $1,200). But you’re leaving $3,600 of potential ‘unmatched’ contributions on the table.

Are you really interested in earning a 50% return in one month? If so, have your human resources department up your 401k contribution by $3,600 from your December paycheck(s).

Your $3,600 investment will yield a 50% return based on the $1,800 employer matching contribution! In many cases, you can increase your payroll deduction directly through your company’s 401k website.

Ok, I admit that I used a little bit of trickery to get you to think about the importance of fully capturing your company’s matching contribution, but failing to do so is like turning your back on a portion of your compensation package…you’re just leaving money on the table. And, for many people, it never occurs to them that they could significantly adjust their payroll deduction  n the last month of the year.

Another barrier I often hear is, “I need all of my paycheck to pay my bills!” Look for ways you can get a bit creative:

  • Use personal Savings. Use personal savings or money from a personal investment account to help cover your December bills.
  • Use year-end bonus money. If you are expecting a year-end bonus, consider paying some of your December bills through whatever means necessary (savings, credit cards, etc.) to handle your cash flow needs until your bonus comes in.
  • Use a home equity line of credit. If you are using a HELOC or other forms of debt, be sure you have a sure source of repayment such as a bonus, significant pay raise, savings or investments.

Even if you’re already investing enough in your 401k to capture your company’s matching contribution, this is a strategy worth considering since you obviously will benefit from an income tax deduction and long-term tax-deferred growth.

For 2015, the maximum allowed contribution (your part) to a 401k is $18,000. If you are age 50 or older you’re allowed an additional ‘catch-up’ contribution of $6,000 for a total of $24,000. Remember, it’s never too late to start saving for your retirement and I hope a guaranteed 50% return in one month is just the incentive you need!

What Blue Chip Stocks Should I Invest In?

Readers Ask Abut Blue Chip Stocks &  Here’s what’s on their minds:
Question: “I am interested in investing about $100,000 in blue chip stocks. What are three stocks you’d recommend that pay good yearly dividends?” J.W.
Answer: First let me make a point that you’ll want to own a minimum of ten to twenty stocks in order to reduce what’s called ‘single-company risk’… the risk that the failure of one company that you own devastating your entire portfolio. A lot of people in Birmingham learned this lesson in 2008 when they refused to diversify a concentration in bank stock and saw their wealth and income devastated as bank stocks plummeted 70% or more and slashed dividends. Three blue chip stocks that we currently own for clients are Southern Company yielding 4.2%; ATT yielding 5.8%; and Kimberly Clark yielding 3.8%.
Another reader asked a similar question but wanted a recommendation for an Exchange Traded Fund (ETF). ETFs are baskets of stocks rolled into an investment product similar to an index mutual fund. You can buy and sell them like stocks. For example, iShares Dow Jones Select Dividend Index Fund (symbol DVY) is currently yielding about 3.5% and last year’s return was over 11%.
Question: “My husband and I are both age 71 and therefore must take Required Minimum Distributions from our IRA accounts. He chooses to continue working so between his paycheck and our Social Security we do not need two IRA distributions. What would you recommend we do with the money?”
Answer: You have a number of choices. Most people will simply open a personal investment account at a discount broker such as Charles Schwab or Vanguard and invest in no load mutual funds. Be sure you allocate a portion to bonds as well as stocks. An example of a mutual fund that does this for you is Vanguard Wellington (VWELX) which allocates about 34% to bonds and the balance to stocks and is yielding about 2.7%. An alternative would be to use your IRA distributions to pay down debt, if you have any or you could put it in CDs at your bank.
Question: “I am receiving a retirement from the Teacher’s Retirement System of Alabama. What percentage would you suggest I invest in stocks versus bonds for 2012?” M.D.
Answer: Generally, I’ll start this conversation with a 60% allocation to stocks; 40% to bonds then make adjustments based on the particular client facts. With this allocation, I feel you’ll receive 70% or more of the stock market return over a full market cycle (5-10 years) while experiencing about half the volatility. If you’re feeling more venturesome, you might increase your stock allocation to 70%. Except for the most worried and conservative investors, I’d have at least 30% in stocks.
And from the same reader, “Do you recommend a 529 college savings plan for my grandchild?
Yes! The gift of a good education is one of the greatest gifts you can give a family member. Alabama has a great plan and you can check it out at www.collegecounts529.com.  Be sure to use the Vanguard funds as your investment choice.
Question: “I am thinking of giving stocks to my grandson instead of presents for his birthday. He is going to be thirteen and rather than giving him something that is a throwaway gift, this could be a learning experience. Could you give some pointers particularly how it would relate to his parents tax situation? S.C.
Answer: It would take a pretty mature thirteen-year-old to get excited about receiving stocks instead of the latest game for his Xbox player so you might brace yourself for the lack of hugs and kisses. Consider choosing a stock of a company he can relate to such as Disney or Microsoft (the maker of Xbox) and you might want to receive the actual stock certificate and have it framed as a visual reminder that he ‘owns’ the company. Either you or his parents will need to be the ‘owner as custodian’ for your grandson since minors cannot own property. Any dividends paid will be reportable on his income tax return which may mean one will need to be filed for him for the first time. Most likely, no taxes will be due unless he has other income. Any unearned income in excess of $1,900 must be reported on the parents tax return with taxes paid at their tax bracket.

Stocks Rise For A Third Week – January 2012

Up to date in less than 2 minutes:
Last week U.S. stocks rose for a third week, the longest winning streak since October, as better-than-estimated economic data and company earnings boosted confidence in American growth. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 rose +2.4%, +2.0%, +2.8%, and +2.7%, respectively.

 

Equity Performance Table
Last Week
Year to Date
Last 52 Weeks
Dow Jones Industrial
+2.4%
+4.1%
+7.1%
S&P 500 (Large Caps)
+2.0%
+4.6%
+2.5%
NASDAQ (Technology)
+2.8%
+7.0%
+3.6%
Russell 2000 (Small Caps)
+2.7%
+5.9%
+1.5%
Dow Jones U.S. Total Stock Market Index
+2.1%
+5.0%
+1.9%
Dow Jones Global Ex-U.S. Index (International)
+4.0%
+5.4%
-12.4%

 

Interest Rates
Prime Lending Rate
3.25%
Interest Rate Bias
Short-Term = Neutral; Intermediate Term = Neutral; Long-Term = Neutral
90 T-bill Rate
0.04%
90 Day LIBOR
0.56%
TED Spread
0.52%
30-Year Mortgage Rate
3.95%
15-Year Mortgage Rate
3.27%
5-Year Adjustable Mortgage Rate
2.90%
30-Year Treasury Yield
3.10%
10-Year Treasury Yield
2.03%
5-Year Treasury Yield
0.89%
2-Year Treasury Yield
0.24%

 

Notable Recent Dividend Increases
Lockheed Martin (“LMT”)
33.3%
Home Depot (“HD”)
16.0%
Emerson Electric (“EMR”)
15.9%
Union Pacific Corp (“UNP”)
25.0%
McDonalds Corp (“MCD”)
14.8%
 
 
 
Now, all the details……………………
 
Last week, the S&P 500 advanced +2% to 1,315.38. The S&P 500 has gained +4.6% in 2012, the best start to a year since 1997.  The Dow gained 298.42 points, or +2.4%, to 12,720.48, reaching the highest level since July 21st. The S&P 500 rose all four days U.S. exchanges were open last week as data bolstered confidence in the American economy. Claims for jobless benefits dropped to the lowest level since 2008 and confidence among homebuilders topped forecasts. “The domestic economy is strong and that’s helped the stock market,” Mark Bronzo, who helps manage $23.4 billion at Security Global Investors in Irvington, New York, said in a Bloomberg telephone interview.  “The market’s done pretty well in the face of some good earnings news and it seems to be overcoming some of the fears around Europe.”
Technology and energy companies led rallies by nine out of 10 S&P 500 Index groups, climbing more than +2.7%.  Sears Holdings Corp. (“SHLD”) added +46% amid speculation it may go private. Bank of America Corp. (“BAC”) led Dow Jones Industrial Average gains after posting a profit. International Business Machines Corp. (“IBM”) increased +5.2% after forecasting earnings that beat analysts’ estimates.
Companies from Goldman Sachs Group Inc. (“GS”) to Union Pacific
Corp. (“UNP”) and EBay Inc. (“EBAY”) topped analysts’ income projections.  S&P 500 companies, which beat profit estimates in the previous 11 quarters, will report a +3.4% increase in per-share earnings during the September-December period, analysts’ forecasts compiled by Bloomberg show.  Of the 51 companies in the S&P 500 that reported results since January 9th, 65% posted per-share earnings that beat projections, Bloomberg data show.
Google Inc. (“GOOG”), owner of the most popular Internet search engine, slumped -6.2% to $585.99 as fourth-quarter revenue and profit missed estimates. Chief Executive Officer Larry Page is moving into new markets to ignite growth outside Google’s traditional search-based business.  That effort contributed to an -8% drop in the average price Google gets when users click an ad, because it charges less for ads on mobile devices and in emerging markets, said Herman Leung, an analyst at Susquehanna Financial Group.
Carnival Corp. (“CCL”) tumbled -7.9% to $31.56.  The company owns the Costa Concordia cruise ship that ran aground off the coast of Italy last week, killing at least 11 people.  Carnival halted advertising for its Carnival Cruise Lines and announced a review of safety procedures in the aftermath of the accident.
Last week, the Dow Jones Global Ex-U.S. Index (broad international index) rose +4.0%. The Americas were up +2.3% with Brazil up +5.4%, Canada up +1.4%, and Mexico up +2.3%. Europe was up +2.7% with Germany up +4.3%, France up +3.9%, and Spain up +1.3%. Asia-Pacific was up +3.1% with Australia up +1.0%, China up +3.3%, Hong Kong up +4.7%, India up +3.6%, Japan up +3.1%, and Taiwan up +0.7%.
Treasuries dropped in price with the 10 year yield rising on the week to 2.03% from 1.86% in the week earlier.
The Baltic Dry Index, which tracks transport costs on international trade routes and may be a good leading indicator of economic activity, ended the week at 862, down from the week earlier closing level of 1,053. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index last peaked at 4,661 set on November 11, 2009.
The TED spread measuring the difference between LIBOR and Treasury bill rates, which rose as high as 464 basis points during the liquidity crisis of 2008, is currently in more of a normal range of 52 basis points, but has increased as of late due to Euro bank concerns. The TED spread is a gauge of the willingness of banks to lend to one another. The lower the TED spread the more willing banks are to lend with each other. The TED spread fluctuates over time but generally has remained within the range of 10 and 50 bps (0.1% and 0.5%) except in times of financial crisis. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn.
Last week, oil dropped -0.2% and closed at $98.46 per barrel. Year to date, oil is down -0.4%. The average price of unleaded gasoline dropped -0.1% last week to end at $3.383 per gallon per January 22nd data provided by AAA. Year to date, unleaded gasoline is up +3.2%. Natural gas was down -12.3% last week and closed at $2.343/MMBtu. Year to date, natural gas is down -21.6%.
Last week, gold rose +2.0% closing at $1,663.70 per troy ounce. Year to date, gold is up +6.3%. Last week the dollar was down -1.6% as measured by the U.S. Dollar Index with that index closing at 80.223. Year to date, the U.S. Dollar is up +0.1% as measured by the Dollar Index. Last week the Euro was up +0.9% against the U.S. dollar closing at $1.2909/Euro. Year to date, the Euro is down -0.2% against the U.S. Dollar.
Look for a slew of earnings in the coming week from the likes of McDonald’s (“MCD”), Regions Financial (“RF”), Kimberly Clark (“KMB”), Apple (“AAPL”), United Technologies (“UTX”), and Lockheed Martin (“LMT”). Look for economic reports this week on 4th quarter 2011 GDP, housing prices, durable goods orders, Fed rate decision (expected no change here), new home sales, and weekly jobless claims data.
Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.

Economic Predictions for 2012

This past year included a lot of excitement but not much progress from an economic or stock market perspective. Extraordinary events included the near shut-down of our government; the downgrading of U.S. treasuries from AAA status; the near default of Greece; as well as a highly volatile stock market that could rise or fall several hundred points a day. In the end our economy showed only marginal improvement and the stock market, as measured by the S&P 500 Index, had a 0% return.

So what’s ahead for 2012 and how should you position your portfolio to produce the best results? This is the time of year when market analysts and economists make their predictions for the year ahead. A few will gain ‘fame’ for their uncanny accuracy but the truth is that no one knows or can predict the future. At best we make educated guesses. Think of it as a target being laid on the ground 200 yards away and then 10,000 arrows shot up in the air in the general direction of the target….one or two may very well hit the bulls-eye but it would be a mistake to declare the flinger of that arrow as the greatest archer of our time. Still it’s a lot of fun to make predictions if only to allow your detractors the opportunity to say, “I told you so!” Here are my predictions for 2012:
Stock & Bond Market
·        The stock market will rise by double digits. Publicly traded corporations continue to deliver strong earnings and I expect those earnings to rise 10% or more in 2012. Stock prices should follow. Stock prices did not follow earnings this past year but I believe the reason was that events in the U.S. and Europe continued to scare investors away from the stock market.
·        U.S. Blue Chip Dividend-Paying stocks will continue to be the ‘sweet spot’ of the stock market. All last year I touted these stocks citing both the quality of their yields and the Baby Boomer retirement dynamics. This turned out to be the bright spot for the stock market last year with returns of 8%-12%. I expect this trend to continue in 2012.
·        Little-to-no opportunity in bonds. Bonds have been on a decade-long bull market run. With interest rates hovering near historical lows, I believe there is little opportunity for returns in bonds, CDs or money market accounts. There is a greater risk that interest rates will begin to rise sometime this year, causing bond values to fall. Having said this, some allocation to bonds in your portfolio is a prudent strategy. If there is a big jolt in the stock market, your bonds will tend to help counteract the negative volatility.
Interest Rates
·        Interest rates on bonds, CDs and Money Market accounts will remain low. The 10-year treasury is yielding less than 2% while the 30-year treasury is yielding 3%. 5-year CDs are yielding about 2% while most money market accounts are yielding less than 1%. The low interest rate trend will continue throughout 2012, however, at some point, interest rates will begin to rise…maybe this year or next.
·        Mortgage rates will remain low. Currently mortgage rates are hovering between 3.25% and 3.75% depending on your credit score and the term of the mortgage you choose. Mortgage rates will remain low but these rates could well mark the bottom.
U.S. Economy
            Our economy will continue to improve throughout 2012 but at a very slow pace. Inflation will rise but not at an alarming rate. The housing market is in a five to ten year workout cycle but I expect we have seen the bottom of the housing market and it will continue to improve throughout 2012. Expect the government to intervene with some type of support program…perhaps a rental program for foreclosed mortgages owned by Fanny Mae and Freddie Mac. The unemployment numbers will improve but overall unemployment will remain above 8%.
What should you do to position yourself for financial success in 2012?
·        Review your current investment allocation and decide if you are willing to increase your stock allocation. If you are retired or near retirement, be sure to maintain a minimum of three to five years’ worth of living expenses in your fixed income portfolio (bonds, CDs, and money market accounts). Review your stock strategy and consider adding blue chip dividend-paying stocks. You’ll receive nice comparative yields with upside opportunity.
·        Compare your mortgage rate to current rates. Would you benefit from refinancing? It’s still a great time to buy a home. Consider whether this year would be a good time to downsize.
·        Pay down debt. If you have debts with relatively high interest rates, consider using any cash resources to pay down your most expensive debts.

Stocks Drop, Europe Continues to be Drag

Up to date in less than 2 minutes:
Last week U.S. stocks fell as European leaders struggled to solve the region’s debt crisis and the Federal Reserve refrained from additional stimulus. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 all dropped -2.6%, -2.8%, -3.5%, and -3.1%, respectively.

 

 

Equity Performance Table
Last Week
Year to Date
Last 52 Weeks
Dow Jones Industrial
-2.6%
+2.5%
+3.3%
S&P 500 (Large Caps)
-2.8%
-3.0%
-1.9%
NASDAQ (Technology)
-3.5%
-3.7%
-3.3%
Russell 2000 (Small Caps)
-3.1%
-7.9%
-7.4%
International Stocks (EAFE)
-4.0%
-17.3%
-15.5%
Dow Jones Total Stock Market (Broad Market)
-2.9%
-4.2%
-3.1%

 

 

Interest Rates
Prime Lending Rate
3.25%
Interest Rate Bias
Short-Term = Neutral; Intermediate Term = Neutral; Long-Term = Neutral
90 T-bill Rate
0.00%
90 Day LIBOR
0.57%
TED Spread
0.57%
30-Year Mortgage Rate
3.92%
15-Year Mortgage Rate
3.27%
5-Year Adjustable Mortgage Rate
2.84%
30-Year Treasury Yield
2.85%
10-Year Treasury Yield
1.85%
5-Year Treasury Yield
0.80%
2-Year Treasury Yield
0.22%

 

 

Notable Dividend Increases – 2011
Lockheed Martin (“LMT”)
33.3%
NextEra Energy (“NEE”)
10.0%
United Technologies (“UTX”)
12.9%
Proctor & Gamble (“PG”)
9.0%
Abbott Labs (“ABT”)
9.1%
Home Depot (“HD”)
16.0%
Clorox (“CLX”)
9.0%
Colgate Palmolive (“CL”)
9.4%
Chevron Corp (“CVX”)
8.3%
Emerson Electric (“EMR”)
15.9%
General Mills (“GIS”)
8.9%
International Business Machines (“IBM”)
15.4%
Union Pacific Corp (“UNP”)
25.0%
Intel Corp (“INTC”)
33.0%
McDonalds Corp (“MCD”)
14.8%
Kimberly Clark (“KMB”)
6.1%

 

 
Now, all the details……………………
Last week, the S&P 500 fell -2.8% to 1,219.66, breaking a two-week streak of gains.  The Dow Jones Industrial Average sank 317.87 points, or -2.6%, to 11,866.39. “The market continues to be driven by headline stories about Europe, although the economic news has been more positive with respect to the U.S.,” John Carey, a Boston-based money manager at Pioneer Investments, said in a Bloomberg telephone interview. The firm oversees about $220 billion.  “On alternate days, people are either paying attention to those improving fundamentals or worrying about what’s going on in Europe.”
Stocks slumped on December 12th as Moody’s Investors Service said a European Union summit failed to produce “decisive policy measures” and Fitch Ratings said a comprehensive solution has not yet been offered.  The S&P 500 rebounded from a three-day slump on December 15th after Labor Department figures showed initial jobless claims fell by 19,000 to 366,000 in the week ended December 10th, the fewest since May 2008, and two reports showed manufacturing in the New York and Philadelphia regions expanded more than forecast in December.
Energy producers posted the biggest declines last week as a group, falling -4.9% as oil posted the biggest weekly loss since September.
Intel (“INTC”) tumbled -7.1% to $23.23 last week, pacing declines with technology companies which had the second-biggest decline as a group in the S&P 500.  The world’s largest maker of semiconductors cut its forecast for fourth-quarter revenue, saying supply shortages for hard drives are prompting computer producers to cut orders for other components.
First Solar Inc. (“FSLR”), the world’s largest maker of thin-film solar panels, had the biggest decline in the S&P 500, falling -30% to $31.91.  The company reduced profit estimates for this year and next and said it will cut about 100 jobs as it closes a California research center.
The MSCI EAFE Index (broad developed international index) dropped -4.0% last week. The Americas dropped -3.2% with Brazil down -3.7%, Mexico down -3.2%, and Canada down -3.3%. Europe dropped -2.8% with Germany down -4.8%.  Asia-Pacific dropped -2.4% with Australia down -1.0%, China down -3.9%, Hong Kong down -1.6%, India down -4.5%, Taiwan down -1.6%, and Japan down -1.6%.
Treasuries rose in price with the 10 year yield dropping to 1.85% from 2.06% in the week earlier.
The Baltic Dry Index, which tracks transport costs on international trade routes and may be a good leading indicator of economic activity, ended the week at 1,888, down from the prior week’s level of 1,922. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index last peaked at 4,661 set on November 11, 2009.
The TED spread measuring the difference between LIBOR and Treasury bill rates, which rose as high as 464 basis points during the liquidity crisis of 2008, is currently in more of a normal range of 57 basis points, but has increased as of late due to Euro bank concerns. The TED spread is a gauge of the willingness of banks to lend to one another. The lower the TED spread the more willing banks are to lend with each other. The TED spread fluctuates over time but generally has remained within the range of 10 and 50 bps (0.1% and 0.5%) except in times of financial crisis. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn.
Last week, oil was down -5.9% and closed at $93.53 per barrel. Year-to-date oil is up +2.4%. The average price of unleaded gasoline dropped -1.6% last week to end at $3.221 per gallon per December 18th data provided by AAA. Year-to-date, unleaded gasoline is up +4.8%. Natural gas was down -5.7% last week and closed at $3.127/MMBtu. Year-to-date, natural gas is down -29.0%.
Last week, gold dropped -6.8% closing at $1,595.60 per troy ounce. Year-to-date, gold is up +12.3%. The dollar was up +2.1% as measured by the U.S. Dollar Index with that index closing at 80.256. Year-to-date, the U.S. Dollar is up +1.6% as measured by the Dollar Index. The Euro was down -0.6% against the U.S. dollar closing at $1.3035/Euro. Year-to-date, the Euro is down -2.5% against the U.S. Dollar.
In the coming week, look for corporate earnings from companies such as General Mills (“GIS”), Oracle Corp (“ORCL”), CarMax (“KMX”), and Bed Bath & Beyond (“BBBY”). Look for economic reports this week on housing starts, home sales, durable goods orders, 3rd Quarter GDP, personal income, personal spending, and weekly jobless claims data.
Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.

 

Stocks had their WORST Thanksgiving Week Since 1932

Up to date in less than 2 minutes:
Last week, U.S. stocks tumbled in the worst Thanksgiving-week loss for the Standard & Poor’s 500 Index since 1932 as concern grew that Europe’s debt crisis will spread and American policy makers failed to reach agreement on reducing the federal budget. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 all dropped -4.8%, -4.7%, -5.1%, and -7.4%, respectively.

 

Equity Performance Table
Last Week
Year to Date
Last 52 Weeks
Dow Jones Industrial
-4.8%
-3.0%
+1.3%
S&P 500 (Large Caps)
-4.7%
-7.9%
-2.6%
NASDAQ (Technology)
-5.1%
-8.0%
-3.7%
Russell 2000 (Small Caps)
-7.4%
-15.0%
-9.1%
International Stocks (EAFE)
-5.7%
-20.5%
-15.8%
Dow Jones Total Stock Market (Broad Market)
-4.9%
-9.0%
-3.7%

 

 

Interest Rates
Prime Lending Rate
3.25%
Interest Rate Bias
Short-Term = Neutral; Intermediate Term = Neutral; Long-Term = Neutral
90 T-bill Rate
0.02%
90 Day LIBOR
0.52%
TED Spread
0.50%
30-Year Mortgage Rate
4.02%
15-Year Mortgage Rate
3.38%
5-Year Adjustable Mortgage Rate
2.97%
30-Year Treasury Yield
2.92%
10-Year Treasury Yield
1.97%
5-Year Treasury Yield
0.93%
2-Year Treasury Yield
0.28%

 

 

Notable Dividend Increases – 2011
Lockheed Martin (“LMT”)
33.3%
NextEra Energy (“NEE”)
10.0%
United Technologies (“UTX”)
12.9%
Proctor & Gamble (“PG”)
9.0%
Abbott Labs (“ABT”)
9.1%
Clorox (“CLX”)
9.0%
Colgate Palmolive (“CL”)
9.4%
Chevron Corp (“CVX”)
8.3%
Emerson Electric (“EMR”)
15.9%
General Mills (“GIS”)
8.9%
International Business Machines (“IBM”)
15.4%
Union Pacific Corp (“UNP”)
25.0%
Intel Corp (“INTC”)
33.0%
McDonalds Corp (“MCD”)
14.8%
Kimberly Clark (“KMB”)
6.1%

 

 
Now, all the details……………………
The S&P 500 has fallen for seven days, the longest streak in four months, and has tumbled -7.6% so far in November. U.S. equities erased an early advance on the final session last week as S&P lowered Belgium’s credit rating and Reuters reported that Greece is demanding private investors accept larger losses on their debt. “We’ve resumed focus on the European debt issues,” Terry L. Morris, senior equity manager at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., said in a Bloomberg telephone interview.  His firm manages about $2.2 billion.  “The situation in Europe doesn’t seem to be improving, which makes the market defensive,” he said.  “Spending cuts kicking in the U.S. will be a negative too because it will be a drag on economic growth.”
The cost of insuring European sovereign bonds against default rose to a record last week as Germany failed to find buyers for 35% of the bonds offered at an auction.  German Finance Minister Wolfgang Schaeuble said market turbulence sparked by the euro region’s sovereign-debt crisis will last for “a few months.” U.S. Congress’s special debt-reduction committee failed to reach an agreement last week, setting the stage for $1.2 trillion in automatic spending cuts and fueling concern that economic-stimulus measures that are set to expire will not be renewed. Still, S&P reaffirmed it would keep the U.S.’s credit rating at AA+ after stripping the government of its top AAA grade on August 5th.
Stocks fell last Tuesday, November 22nd as revised Commerce Department figures showed that gross domestic product climbed at a 2% annual rate in the third quarter, less than projected and down from a 2.5% prior estimate.  U.S. stock exchanges were closed on November 24th for Thanksgiving and closed three hours early on November 25th.
All 10 groups in the S&P 500 fell last week, led by a -6.2% slump in energy producers and a -5.8% drop in financial shares.
The MSCI EAFE Index (broad developed international index) fell -5.7% last week. The Americas dropped -5.1% with Brazil down -3.2%, Mexico down -4.7%, and Canada down -3.6%. Europe dropped -4.6% with Germany down -5.3%. Asia-Pacific fell -4.5% with Australia down -4.6%, China down -1.5%, Hong Kong down -4.3%, India down -4.1%, Taiwan down -6.2%, and Japan down -2.6%.
Treasuries rose in price with the 10 year yield dropping to 1.97% from 2.01% in the week earlier.
The Baltic Dry Index, which tracks transport costs on international trade routes and may be a good leading indicator of economic activity, ended the week at 1,807, down from the prior week’s level of 1,895. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index last peaked at 4,661 set on November 11, 2009.
The TED spread measuring the difference between LIBOR and Treasury bill rates, which rose as high as 464 basis points during the liquidity crisis of 2008, is currently in more of a normal range of 50 basis points, but has increased as of late due to Euro bank concerns. The TED spread is a gauge of the willingness of banks to lend to one another. The lower the TED spread the more willing banks are to lend with each other. The TED spread fluctuates over time but generally has remained within the range of 10 and 50 bps (0.1% and 0.5%) except in times of financial crisis. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn.
Last week, oil was down -0.9% and closed at $96.77 per barrel. Year-to-date oil is up +5.9%. The average price of unleaded gasoline dropped -1.7% last week to end at $3.295 per gallon per November 27th data provided by AAA. Year-to-date, unleaded gasoline is up +7.2%. Natural gas was up +6.8% last week and closed at $3.542/MMBtu. Year-to-date, natural gas is down -19.6%.
Last week, gold dropped -2.3% closing at $1,685.50 per troy ounce. Year-to-date, gold is up +18.6%. The dollar was up +2.1% last week as measured by the U.S. Dollar Index with that index closing at 79.686. Year-to-date, the U.S. Dollar is up +0.8% as measured by the Dollar Index. The Euro was down -2.1% against the U.S. dollar closing at $1.3238/Euro. Year-to-date, the Euro is down -1.0% against the U.S. Dollar.
In the coming week, look for corporate earnings from companies such as Tiffany (“TIF”), Big Lots (“BIG”), Guess? Inc. (“GES”), and Barnes & Noble (“BKS”). Look for economic reports this week on new home sales, consumer confidence, manufacturing, unemployment rate, and weekly jobless claims data.
Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.

Is Your Retirement Money Safe?

This week, readers continue to search for answers to their most pressing financial questions. Here are the ones that I felt could benefit a cross-section of our readers:

Question #1
My wife and I are both retired and have our retirement savings in the Alabama RSA1 and federal TSP programs, both of which claim to have low expense ratios. Is it safe to have our retirement tied up in government sponsored programs? J.L.
J.L. is referring to Retirement System of Alabama’s deferred compensation plan which is available to state employees and the federal thrift savings plan which is similar to a 401k plan but for federal employees. Thousands of Alabamian’s are participating in these plans and I suspect many folks have heightened concern about how safe their money is in the aftermath of Jefferson County’s $3 billion default on their sewer bonds. Both programs do a great job of keeping expenses low and both plans are a ‘safe’ place for your money if you are concerned about a default or bankruptcy of some sort. What you should be concerned about under either plan is the type of investments you have chosen. Both programs offer a range of investment options including stock, bond and fixed rate-oriented securities. Both bond and stock-oriented investments can fluctuate significantly so J.L. should review his allocation and make certain it’s appropriate under his and his wife’s retirement status.
Question #2
A few weeks ago I answered a reader’s question about whether, since he is retired, should he keep his 401k with his former employer or roll it over to an IRA? I suggested he could possibly cut expenses and certainly increase his investment options by doing the rollover. Another reader asked this follow up question:
“Are they equally protected legally?  I believe a 401-k is classified as a pension and hence not subject to legal suits.  Is an IRA? I am retired, and understand that only an active employee can get a loan from a 401-K, so that means no advantage over an IRA as to taking a loan out.” M.G.

M.G. does bring up a good point. Defined contribution plans such as 401k’s and 403b’s; Simplified Employee Pension Plans (SEP) and SIMPLE IRAs; defined benefit pensions and profit sharing plans all fall under the Employee Retirement Income Security Act (ERISA) of 1974 and are fully protected against legal judgments except the Internal Revenue Service or a judgment in a divorce (called a qualified domestic relations order or QDRO). Historically, traditional IRAs have fallen under state law for purposes of legal protection. In 2005, congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act which provides that up to $1 million of traditional IRA (or Roth IRA) funds are protected under federal law if you file bankruptcy and 100% of funds rolled over from an ERISA plan are protected as well. However, if you don’t file for bankruptcy, it appears that state law will determine the level of protection for your IRA. State laws can vary widely. For example, according to a bankruptcy attorney I spoke with, Alabama provides for protection for a traditional IRA but not for a Roth IRA (legislation is pending for Roth IRA protection). So, depending on your state laws, leaving your money in your 401k may offer better asset protection. One suggestion is to review your umbrella liability policy and consider increasing the amount of coverage.

If you’d like to have your financial question answered, email me at stewart@getrichonpurpose.com and place Bhm News in the subject line.

Best Social Security Strategies

Eighty million Baby Boomers are headed for retirement and for many, Social Security will be the centerpiece of their retirement income plan. Today, I’ll reveal three little-known strategies that just might put thousands of dollars in your pocket.

First, let’s begin with a few basics. If you were born between 1943 and 1954 you can claim a full Social Security benefit at age 66. Beginning at age 62, you can take a reduced benefit equal to 75% of your full benefit. If you choose to wait beyond your full benefit age, your benefit increases 8% per year until age 70 (called Delayed Retirement Credits). A spouse can choose to receive his or her own benefit based on his or her own work record or he or she can choose to receive a spousal benefit equal to one-half of his or her spouse’s benefit. It’s worth noting that a divorced spouse, who was married at least ten years, also retains both of these options. Finally, a widow or widower may receive his or her deceased spouses’ benefit or he or she may elect to receive his or her own benefit based on his or her own work record. This widow/widower benefit can be taken as early as age 60. It’s within these multiple choices that lay the secret strategies.
Strategy #1: The Widow/Widower Strategy. By way of an example, let’s assume we have a couple where the husband is age 62 and the wife is age 60 and both have worked and therefore each has Social Security benefits. Assume the husband dies at age 62. Should the wife claim a widow benefit or wait and claim benefits based on her own earnings? As a widow she is eligible for 100% of her husband’s benefit if she waits until his full retirement age (age 66). She could begin her widow benefit as early as age 60 but the benefits will be reduced.
She should consider taking her widow benefit, perhaps as early as age 60 and then switch to her own benefits once she turns age 70. This strategy allows her to begin receiving income early while delaying her own benefits thus allowing her own benefit to increase to the maximum amount. It also allows her to make use of both her husband’s benefit and her benefit verses just her benefit.
Strategy #2: The 62/70 Strategy. In this example, let’s assume that our couple is both age 62 and we anticipate that both will live until or beyond their normal life expectancy. Instead of each taking their own benefit early at age 62 or waiting until their age 66 full benefit, the wife takes her early benefit at age 62 and the husband takes a spousal benefit at age 66. Once he turns age 70, he switches to his full benefit and she switches to a spousal benefit equal to one-half of his age 66 full retirement benefit or she continues her benefit, whichever is higher. Remember that if the husband were to die first, the wife would then step-up to 100% of the husbands age 70 benefit! Under these case facts, the earliest the husband can take a spousal benefit is age 66.
Strategy #3: The File and Suspend Strategy. In this example, let’s assume only the husband worked while the wife stayed home to raise the children. Here, the husband could begin his full benefit at age 66 then immediately ‘suspend’ his benefit. The wife then begins a spousal benefit equal to one-half of his full (but suspended) benefit. At age 70, he ‘un-suspends’ his benefit which has now grown to the maximum benefit amount including the 8% per year ‘Delayed Retirement Credits’ from age 66 to age 70.
It’s important to note that in each case example, the individual facts are vital to choosing the best strategy. Particularly in strategies one and two, case facts might drive you to reverse the order of which spouse’s benefit you choose to begin first. You need to ‘run the numbers’ under various options or have your financial advisor assist you in making this decision. Making the right choice could mean tens of thousands of dollars of additional Social Security benefits.
If you’d like to have your financial question answered, email me at stewart@getrichonpurpose.com and place Bhm News in the subject line.