How Much Market Risk Can You Take?

Many market shocks are short-lived. However, major market downturns such as the 2000 dot-com bust and the 2008-09 credit crisis are powerful reminders that we cannot control or predict how, where, or when precarious situations will arise.

What is market risk?
Market risk refers to the possibility that an investment will lose value because of a broad decline in the financial markets, as a result of economic or sociopolitical factors. Investors who are willing to accept more investment risk may benefit from higher returns in good times, but get hit harder during bad times. A more conservative portfolio generally means there are fewer highs, and fewer lows.

Your portfolio’s risk profile should reflect your ability to endure periods of market volatility, both financially and emotionally. Below are some points to help you evaluate your personal relationship with risk.

How much risk can you afford?
Your capacity for risk generally depends on your current financial position (income, assets, and expenses) as well as your age, health, future earning potential, and time horizon. Your time horizon is the length of time before you expect to tap your investment assets for specific financial goals. The more time you have to keep the money invested, the more likely it is that you can ride out the volatility associated with riskier investments. An aggressive risk profile may be appropriate if you’re investing for a retirement that is many years away. However, investing for a teenager’s upcoming college education may call for a conservative approach.

Consider your goals
lf you know how much money you have to invest and can estimate how much you will need in the future, then it’s possible to calculate a “required return” (and a corresponding level of risk) for your investments. Older retirees who have sufficient income and assets to cover expenses for the rest of their lives may not need to expose their savings to risk. On the other hand, some risk-averse individuals may need to invest more aggressively to accumulate enough money for retirement and offset another risk: that inflation could erode the purchasing power of their assets over the long term.

Consider your comfort level
Some people seem to be born risk-takers, whereas others are cautious by nature, but an investor’s true psychological risk tolerance can be difficult to assess. Some people who describe their personality a certain way on a questionnaire may act differently when they are tested by real events. Additionally, an investor’s attitude toward risk can change over time, with experience and age.

Brace yourself
Market declines are an inevitable part of investing, but abandoning a sound investment strategy in the heat of the moment could be detrimental to your portfolio’s long-term performance. Having a plan in place could help you manage your emotions when turbulent times arrive.

All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.

 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

What’s Your Money Script?

Money is power. A fool and his money are soon parted. A penny saved is a penny earned.

Do any of these expressions ring true for you?

As it turns out, the money beliefs our families espoused while we were growing up may have a profound effect on how we behave financially today — and may even influence our financial success.

Beliefs drive behaviors
In 2011, The Journal of Financial Therapypublished a study by financial psychologist Brad Klontz, that gauged the reactions of 422 individuals to 72 money-related statements. 

Examples of such statements include1:

  • There is virtue in living with less money
  • Things will get better if I have more money
  • Poor people are lazy
  • It is not polite to talk about money

Based on the findings, Klontz was able to identify 4 “money belief patterns,” also known as “money scripts,” that influence how people view money. Klontz has described these scripts as “typically unconscious, trans-generational beliefs about money” that are “developed in childhood and drive adult financial behaviors.“2

4 Money Scripts:

  1. Money avoidance — People who fall into this category believe money is bad and is often a source of anxiety or disgust. This may result in a hostile attitude toward the wealthy. Paradoxically, these people might also feel all their problems would be solved if they only had more money. For this reason, they may unconsciously sabotage their own financial efforts while working extra hours just to make ends meet.
  2. Money worship— Money worshippers believe money is the route to true happiness, and one can never have enough. They feel they will never be able to afford everything they want. These people may shop compulsively, hoard their belongings, and put work ahead of relationships in the ongoing quest for wealth.
  3. Money status— Similar to money worshippers, these people equate net worth with self-worth, believing money is the key to both happiness and power. They may live lavishly in an attempt to keep up with or even beat the Joneses, incurring heavy debt in the process. They are also more likely than those in other categories to be compulsive gamblers or to lie to their spouses about money.
  4. Money vigilance— Money vigilants are cautious and sometimes overly anxious about money, but they also live within their means, pay off their credit cards every month, and save for the future. However, they risk carrying a level of anxiety so high they cannot enjoy the fruits of their labor or ever feel a sense of financial security.

Awareness is the first step
According to Klontz’s research, the first three money scripts typically lead to destructive financial behaviors, while the fourth is the one to which most people would want to aspire.

If you believe you may fit in one of the self-limiting money script categories, consider how experiences in your childhood or the beliefs of your parents or grandparents may have influenced this thinking. Then do some reality-checking about the positive ways to build and manage wealth. As in other areas of behavioral finance and psychology in general, awareness is often the first step toward addressing the problem.

1 “Money Beliefs and Financial Behaviors,” The Journal of Financial Therapy, Volume 2, Issue 1

2 Financial Planning Association, accessed October 24, 2017 

 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

How can I protect myself from digital deception?

Imagine that you receive an email with an urgent message asking you to verify your banking information by clicking on a link. Or maybe you get an enticing text message claiming you’ve won a free vacation to the destination of your choice — all you have to do is click on the link you were sent. In both scenarios, clicking on the link causes you to play right into the hands of a cybercriminal seeking your sensitive information. Just like that, you’re at risk for identity theft because you were tricked by a social engineering scam.

What is social engineering?
Social engineering attacks are a form of digital deception in which cybercriminals psychologically manipulate victims into divulging sensitive information. Cybercriminals “engineer” believable scenarios designed to evoke an emotional response (curiosity, fear, empathy, or excitement) from their targets. As a result, people often react without thinking first due to curiosity or concern over the message that was sent. Since social engineering attacks appear in many forms and appeal to a variety of emotions, they can be especially difficult to identify.

How to protect yourself
The good news is, you can take steps to protect yourself from a social engineering scam:

  • If you receive a message conveying a sense of urgency, slow down and read it carefully before reacting.
  • Don’t click on suspicious or unfamiliar links in emails, text messages, and instant messaging services.
  • Hover your cursor over a link before clicking on it to see if it will bring you to a real URL.
  • Always check the spelling of URLs — any mistakes indicate a scam website.
  • Look for the secure lock symbol and the letters https: in the address bar of your Internet browser.
  • Never download email attachments unless you can verify the sender is legitimate.
  • Don’t send money to charities or organizations that request help unless you can follow up directly with the charitable group.
  • Be wary of unsolicited messages. If you get an email or a text that asks you for financial information or passwords, do not reply — delete it.

Remember that social engineering scams can also be carried out over the phone. Use healthy skepticism when you receive calls that demand money or request sensitive information. Always be vigilant and think before acting.

 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

 

How Much Money Should A Family Borrow For College?

There is no magic formula to determine how much you or your child should borrow to pay for college. But there is such a thing as borrowing too much. How much is too much? Well, one guideline for students is to borrow no more than their expected first-year starting salary after college, which, in turn, depends on a student’s particular major and job prospects.

But this guideline is simply that — a guideline. Just as many homeowners get burned by taking out larger mortgages than they can afford (even though lenders may have told them they were qualified for that amount), students can get burned by borrowing amounts that may have seemed reasonable at first glance but now, in reality, are not.

Keep in mind that student loans will need to be paid back over a term of 10 years or longer. A lot can happen during that time. What if a student’s assumptions about future earnings don’t pan out? Will student loans still be manageable when other expenses like rent, utilities, and/or car payments come into play? What if a borrower steps out of the workforce for an extended period to care for children and isn’t earning an income? There are many variables, and every student’s situation is different. Of course, a loan deferment is available in certain situations, but postponing payments only kicks the can down the road.

To build in room for the unexpected, a smarter strategy may be for undergraduate students to borrow no more than the federal student loan limit, which is currently $27,000 for four years of college. Over a 10-year term with a 4.45% interest rate (the current 2017/2018 rate on federal student loans), this equals a $279 monthly payment. Borrow more by adding in co-signed private loans, and the monthly payment will jump: $40,000 in loans (at the same interest rate) equals a monthly payment of $414, while $60,000 in loans will result in a $620 monthly payment. Before borrowing, students should know exactly what their monthly payment will be.

As for families, there is no one-size-fits-all rule on how much to borrow. Many factors come into play including, but not limited to, the number of children in the family, total household income and assets, and current and projected retirement savings.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

Key Retirement & Tax Numbers for 2018

Every year, the Internal Revenue Service announces cost-of-living adjustments that affect contribution limits for retirement plans, thresholds for deductions and credits, and standard deduction and personal exemption amounts.

Here are a few of the key adjustments for 2018.

Employer retirement plans

  • Employees who participate in 401(k), 403(b), and most 457 plans can defer up to $18,500 in compensation in 2018 (up from $18,000 in 2017); employees age 50 and older can defer up to an additional $6,000 in 2018 (the same as in 2017)
  • Employees participating in a SIMPLE retirement plan can defer up to $12,500 in 2018 (the same as in 2017), and employees age 50 and older can defer up to an additional $3,000 in 2018 (the same as in 2017).

IRAs

The limit on annual contributions to an IRA remains unchanged at $5,500 in 2018, with individuals age 50 and older able to contribute an additional $1,000. For individuals who are covered by a workplace retirement plan, the deduction for contributions to a traditional IRA is phased out for the following modified adjusted gross income (AGI) ranges:

2017 2018
Single/head of household (HOH) $62,000 – $72,000 $63,000 – $73,000
Married filing jointly (MFJ) $99,000 – $119,000 $101,000 – $121,000
Married filing separately (MFS) $0 – $10,000 $0 – $10,000

The 2018 phaseout range is $189,000 – $199,000 (up from $186,000 – $196,000 in 2017) when the individual making the IRA contribution is not covered by a workplace retirement plan but is filing jointly with a spouse who is covered. 

The modified AGI phaseout ranges for individuals to make contributions to a Roth IRA are:

2017 2018
Single/HOH $118,000 – $133,000 $120,000 – $135,000
MFJ $186,000 – $196,000 $189,000 – $199,000
MFS $0 – $10,000 $0 – $10,000

Estate and gift tax

  • The annual gift tax exclusion for 2018 is $15,000, up from $14,000 in 2017.
  • The gift and estate tax basic exclusion amount for 2018 is $11,200,000, up from $5,490,000 in 2017. 

Personal exemption

There is no personal exemption amount for 2018; it was $4,050 in 2017. For 2018, there is no phaseout of personal exemptions or overall limit on itemized deductions once AGI exceeds certain thresholds.

For 2017, personal exemptions were phased out and itemized deductions were limited once AGI exceeded $261,500 (single), $287,650 (HOH), $313,800 (MFJ), or $156,900 (MFS).

Standard deduction

2017 2018
Single $6,350 $12,000
HOH $9,350 $18,000
MFJ $12,700 $24,000
MFS $6,350 $12,000

The additional standard deduction amount for the blind or aged (age 65 or older) in 2018 is $1,600 (up from $1,550 in 2017) for single/HOH or $1,300 (up from $1,250 in 2017) for all other filing statuses. Special rules apply if you can be claimed as a dependent by another taxpayer.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

Always Factor Inflation into Retirement Planning

Inflation is one of the key factors you will need to consider when planning for retirement. Not only will the cost of living rise while you’re accumulating assets for retirement, but it will continue to rise during your retirement, which could last 25 years or longer. This, combined with the fact that you will not likely earn a paycheck during retirement, is the main reason your portfolio needs to maintain at least some growth potential for the duration of your retirement.

Consider this: If inflation runs at 3% (which is approximately its long-term average, as measured by the Consumer Price Index), the purchasing power of a given sum of money would be cut in half in 23 years. If it averages 4%, your purchasing power would be cut in half in 18 years.

A simple example illustrates the impact of inflation on retirement income. Assuming a consistent annual inflation rate of 3%, if $50,000 satisfies your retirement income needs this year, you’ll need $51,500 of income next year to meet the same income needs. In 10 years, you’ll need about $67,195 to equal the purchasing power of $50,000 this year. And in 25 years, you’d need nearly $105,000 just to maintain that purchasing power!1 Keep in mind that even a 3% long-term average inflation rate conceals periods of skyrocketing prices, such as in the late 1970s and early 80s, when inflation reached double digits. Although consumer prices have been relatively stable in more recent decades, there’s always the chance that unexpected shocks could cause prices to spike again.

So how do you strive for the returns you’ll need to outpace inflation by a wide enough margin both before and during retirement? The key is to consider investing at least some of your portfolio in growth-oriented investments, such as stocks.2

1 This hypothetical example of mathematical principles is used for illustrative purposes only and does not represent the performance of any specific investment. Note that these figures exclude the effects of taxes, fees, expenses, and investment returns in general.

2 All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

Spring Cleaning Your Finances

While most spring cleaning projects are likely focused on your home, spring is also a good time to evaluate and clean up your personal finances.

Examine your budget…and stick with it
A budget is the centerpiece of any good personal financial plan. Start by identifying your income and expenses. Next, add them up and compare the two totals to make sure you are spending less than you earn. If you find your expenses outweigh your income, you’ll need to make some adjustments to your budget.

Keep in mind that in order for your budget to work, you’ll need to stick with it. While straying from your budget from time to time is to be expected, there are some ways to help make working within your budget a bit easier:

  • Make budgeting a part of your daily routine
  • Build occasional rewards into your budget
  • Evaluate your budget regularly and make changes if necessary
  • Use budgeting software/smartphone applications

Evaluate your financial goals
Spring is also a good time to evaluate your financial goals. Take a look at the financial goals you’ve previously set for yourself — both short and long term. Perhaps you wanted to increase your cash reserve or invest more money toward your retirement.

Review your investments
To determine whether your investments are still on target, ask yourself the following questions:

  • Has my investment time horizon recently changed?
  • Has my tolerance for risk changed?
  • Do I have an increased need for liquidity in my investments?
  • Does any investment now represent too large (or too small) a part of my portfolio?

Pay off debt
When it comes to personal finances, reducing debt should always be a priority. Whether you have debt from student loans, a mortgage, or credit cards, have a plan in place to pay down your debt load as quickly as possible. The following tips could help you manage your debt:

  • Keep track of credit card balances and be aware of interest rates and hidden fees
  • Manage your payments to avoid late fees
  • Optimize your repayments by paying off high-interest debt first
  • Avoid charging more than you can pay off at the end of each billing cycle

Take a look at your credit history
Having good credit is an important part of any sound financial plan, and now is a good time to check your credit history. Review your credit report and dispute any inaccuracies.

Assess tax planning opportunities
The return of the spring season also means we are approaching the end of tax season, Now is also a good time to assess any tax planning opportunities for the coming year. You can use last year’s tax return as a basis, then make any anticipated adjustments to your income and deductions for the coming year.

Be sure to check your withholding. If necessary, adjust the amount of federal or state income tax withheld from your paycheck by filing a new Form W-4 with your employer.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

4 Ways to Double the Power of Your Tax Refund

What you do with a tax refund is up to you, but below are some ideas that may make your refund twice as valuable.

Double your savings
Perhaps you’d like to use your tax refund to start an education fund for your children or grandchildren, contribute to a retirement savings account for yourself, or save for a rainy day. A financial concept known as the Rule of 72 can give you a rough estimate of how long it might take to double what you initially save. Simply divide 72 by the annual rate you hope your money will earn.

Split your refund in two
If stashing your refund away in a savings account or using it to pay bills sounds appealing, go ahead and splurge on something for yourself. But remember, you don’t necessarily have to spend it all. Instead, you could put half of it toward something practical and spend the other half on something fun.

The IRS makes splitting your refund easy. When you file your income taxes and choose direct deposit for your refund, you can decide to have it deposited among two or even three accounts, in any proportion you want. Qualified accounts include savings and checking accounts, IRAs, Coverdell Education Savings Accounts, health savings accounts, Archer MSAs and TreasuryDirect online accounts.

Double down on your debt
Using your refund to pay down credit card debt or a loan with a high interest rate could enable you to pay it off early and save on interest charges. The time and money you’ll save depend on your balance, the interest rate, and other factors such as your monthly payment.

Be twice as nice to others
Giving to charity has its own rewards, but Uncle Sam may also reward you for gifts you make now; when you file your taxes next year. If you itemize, you may be able to deduct contributions made to a qualified charity. You can also help your favorite charity or nonprofit reap double rewards by finding out whether your gift qualifies for a match. With a matching gift program, individuals, corporations, foundations and employers offer to match gifts the charitable organization receives, usually on a dollar-for-dollar basis. Terms and conditions apply, so contact the charitable organization or your employer’s human resources department to find out more about available matching gift programs. 

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

Is the Social Security Administration Still Mailing Social Security Statements?

Your Social Security Statement provides important information about your Social Security record and future benefits. For several years, the Social Security Administration (SSA) mailed these statements every five years to people starting at age 25, but due to budgetary concerns, the SSA has stopped mailing Social Security Statements to individuals under age 60.

Workers age 60 and over who aren’t receiving Social Security benefits will still receive paper statements in the mail, unless they opt to sign up for online statements instead. If you’re age 60 or older, you should receive your statement every year, about three months before your birthday. The SSA will mail statements upon request to individuals under age 60.

However, the quickest way to get a copy of your Social Security Statement is to sign up for any Social Security account at the SSA website, ssa.gov. Once you’ve signed up, you’ll have immediate access to your statement, which you can view, download, or print. Statement information generally includes a projection of your retirement benefits at age 62, at full retirement age (66 to 67), and at age 70; projections of disability and survivor benefits; a detailed record of your earnings; and other information about the Social Security program.

The SSA has recently begun using a two-step identification method to help protect Social Security accounts from unauthorized use and potential identity fraud. If you’ve never registered for an online account or haven’t attempted to log in to yours since this change, you will be prompted to add either your cell phone or email address as a second identification method. Every time you enter your account username and password, you will then be prompted to request a unique security code via the identification method you’ve chosen, and you need to enter that code to complete the login process.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

 

Paying Off Holiday Credit Card Debt

It’s a common occurrence once the holiday season winds down — you reluctantly look at your credit card statement and wince at all the purchases you made over the holidays. Fortunately, there’s no need to panic. Consider using one of the following strategies to help pay it off.

Make a lump-sum payment
The best way to pay off credit card debt is with a single lump-sum payment, which would allow you to pay off your balance without owing additional interest. Look for sources of funds you can use for a lump-sum payoff, such as an employment bonus or other windfall. However, most individuals find themselves getting into credit card debt due to a lack of cash on hand in the first place, so this may not be an option for everyone.

Pay more than the minimum due
If it’s not possible for you to pay off your balance entirely, always be sure to pay more than the required minimum payment due. Otherwise, you’ll continue to carry the bulk of your balance forward without actually reducing your overall balance. You can refer to your monthly statement for more information on the impact minimum payments will have on your credit card balance.

Prioritize your payments
If you have multiple credit cards that carry outstanding balances, another payoff strategy is to prioritize your payments and systematically pay off your credit card debt. Start by making a list of your credit cards and prioritizing them according to their interest rates. Send the largest payment to the card with the highest interest rate. Continue making payments on your other cards until the card with the highest interest rate is paid off. You can then focus your repayment efforts on the card with the highest interest rate, and so on, until they’re paid off.

Transfer your balances
Another option is to transfer your balances to a card that carries a lower interest rate. Many credit card companies offer highly competitive balance transfer offers (e.g., 0% interest for 12 to 24 months). Balance transfers may enable you to reduce interest fees and pay more against your existing balance. Keep in mind credit cards often charge a fee for balance transfers (usually a percentage of the balance transferred).

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.