Structured Certificates of Deposit (CDs)

As your investment advisor, we are held to a fiduciary standard.  Skipping the legalese and court cases which specifically define fiduciary, this means we act in your best interest in providing our investment advice.  This sounds obvious but many firms/brokers/insurance agents aren’t held to this tough standard.  They can, and will, sell you anything deemed suitable for you.  So, a lot of what we do with you is to get to know you, your financial situation, goals, and tolerance for risk when coming up with a financial plan and implementing that plan for you.  These are the proactive steps we take, the duty of care, in managing your investments.  And, this is an ongoing relationship as your financial situations changes throughout the years.  There is another aspect to how we manage money for you that you don’t see—and for good reason.  These are the investments you won’t see in your portfolio.  These investments might be entire asset classes, certain stocks, bonds, or funds, or insurance products.  Why? Banks, brokers, and insurance companies have invented all manner of suitable products which are either very expensive to you or seem too good to be true (e.g., upside to the stock market with no downside), or have hidden fees.  We hear these sales pitches often on your behalf.  So, we wanted to take this short blog post to highlight one of those products that was recently the subject of a page one article in the Wall Street Journal, the structured Certificate of Deposit (CD):

http://www.wsj.com/articles/wall-street-re-engineers-the-cdand-returns-suffer-1473180591

We will provide just a short summary here, but the article is worth the time to read.  With the bull market in stocks and lack of meaningful interest yields on low risk investments, Wall Street banks (i.e, Goldman, JP Morgan, Merrill Lynch, Barclays, etc.) have created structured Certificates of Deposit (CDs) to entice savers.  These are CDs linked to stocks or some other commodity, combining some limited upside and some limited downside, with guaranteed hefty fees for the salesperson and product creators. The CDs have very little liquidity if you need to sell before maturity, too.  The Journal’s analysis of 118 market-linked CDs issued at least three years ago by Barclays showed only a small number exceeding the returns an investor would have earned on a conventional FDIC-insured (risk free) CD.  If the product being sold to you has a long fancy name like “GS Momentum Builder Multi-Asset 5 ER Index-Linked Certificate of Deposit Due 2021,” a real structured CD, and disclosure documents which run hundreds of pages (most do), alarm bells should be ringing in your head.  You won’t see NWIC buying these in your portfolio.

An Important 2015 Tax TIP from Northwest

Contributions to Individual Retirement Accounts (IRAs)

When Can Contributions Be Made?

Contributions can be made to your traditional IRA for each year that you receive compensation and have not reached age 70 ½. For any year in which you do not work, contributions cannot be made to your IRA unless you receive alimony, nontaxable combat pay, military differential pay, or file a joint return with a spouse who has compensation. Even if contributions cannot be made for the current year, the amounts contributed for years in which you did qualify can remain in your IRA. Contributions can resume for any years that you qualify. Contributions must be made by the due date. Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means that contributions for 2015 must be made by April 18, 2016. [1]

The contribution limits for Traditional and Roth IRAs for 2015 is $5,500. The age 50 catch up is fixed at $1,000. Income limits do apply to Roth IRA contributions. For further information on contributions to Roth and Traditional IRA’s please visit the IRS Retirement Plan page detailing differences between traditional and Roth IRAs at https://www.irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs.

As a reminder if you would like for Northwest Investment Counselors to help you with your 2015 IRA Contribution please keep this important information and time frame in mind. If you will be using funds from existing accounts with Northwest to make your contribution, we ask that you provide us with a weeks notice prior to the deadline.

If you have any questions please contact your Wealth Manager.

[1] Department of Treasury, Internal Revenue Service Publication 590-A 2015 Returns

Major Changes to Social Security Claiming Strategies

A backroom budget negotiation at the eleventh hour in order to save the country’s borrowing authority has left a Social Security claiming strategy that was starting to gain popularity due to the potential increase in benefits on the “cutting floor”. The two strategies that potentially increased a couple’s total social security benefits, “File and Suspend” and “Restricted Spousal Benefits” now only benefit those that were born within the right time period.

• If you are already 66 or will turn 66 within six months of the new law being enacted (expected May 1, 2016) you can still File and Suspend or:
• If you turn 62 by December 31, 2015 you will still be able to claim just a spousal benefit when you turn 66 as long as your spouse is either claiming Social Security at that time or had File and Suspended by May 1, 2016 and then switch to your higher benefit when you reach 70.

For all others, you are no longer going to be able to claim only a spousal benefit while letting your own benefit accrue delayed retirement benefits. Nor will you be able to File and Suspend in order to release benefits for family members while letting yours increase.

The good news is for those who have already deployed one of these strategies those are grandfathered in as viable strategies and benefits will continue to be paid as such. It is a complicated twist to an already complicated benefit so please call or email us with your specific situation and we will be happy to offer some clarity.

Plan as if you are Single!

Plan as if you are single! While that might seem rather negative if you are married now, there is merit to planning for a time when perhaps you will not be. Ninety percent of women will be in charge of their finances at some point in their lives due to death, divorce, or inheritance. Having the means to support oneself eliminates the “Bag Lady” worry. But what is more important sometimes is how to plan for the unexpected if you are single and have the means but not the capacity to access your funds.

Recently we have had two instances of single women needing to have their children able to access their accounts. One client was preparing for the “what if’s” while the other was actually a daughter of client that was in the middle of a “what if”. Simply listing your beneficiaries on an account, or having a will, or even giving Limited Power of Attorney (LPOA) status to others on your accounts does not give enough access to the accounts at a critical time.

It is prudent to do your planning so that when you die your assets are distributed as you desire. But there is the potential for an interim time between when you are capable (mentally and physically) of accessing your funds and when they are ultimately distributed and this can be a very critical time. As fiduciaries on your accounts banks, investment firms, etc. are not allowed to move money on your behalf simply by the request of a loved one. Even if your children are listed as beneficiaries on your accounts it does not give them authority to direct the movement of money for you.

A Durable Power Attorney (DPOA) gives those you choose as trusted representatives the ability to access your accounts. For example, if you are in a car accident and end up in the hospital for a prolonged period of time, how will your bills get paid? What if you require substantial funds for your care? You may be temporarily incapacitated. No one can legally access your accounts if there is not proper documentation. A Durable Power Attorney is a notarized signed agreement that allows you to give a trusted representative access to your accounts. Of course the downside to this is that when you are healthy and able, the DPOA continues to be in effect.

It is for the “what if” moments that we cannot predict only plan for. If, at some point in your life, you find yourself single you should think about these moments before they occur. Also don’t forget to let a trusted representative know where your “important” papers are located so if there is an emergency they are readily located.

You know the saying…”Better Safe than Sorry.”

Stock Market Update

With the 24-hour news cycle, all of you are probably aware of the ongoing correction in stocks (meaning down over 10%), and increased volatility, as the summer draws to a close. What’s going on? Weakness in China has led it to decouple its currency, the Yuan, from the U.S. Dollar. It also has allowed its currency to depreciate compared to the U.S. Dollar and other currencies to help its export sectors. You can see from the first chart how strong the Chinese currency has been over the last decade. Evidently, it has become too strong and weakened its export-focused economy too much for the leaders’ likings. In all likelihood it will manage its currency even lower in the year to come. But, Chinese leaders will pull out all the stops to keep the economy growing to absorb a growing workforce. So weakness shouldn’t be extrapolated to a major economic contraction in our view. We think the Federal Reserve will also delay hiking interest rates in September and this should cheer investors in the coming days.Real-Yuan

Let’s keep things in perspective. The second chart shows how subdued volatility has been over the last couple of years. It also shows that it has been a few years, in fact four years, without a meaningful correction in stocks. We were due for a correction in stocks. Where do stocks bottom? We really don’t know and no one else does either. So far, the Dow Jones Industrials are down about 10% for the year while the S&P 500 is down about 7%, both excluding dividends. Another thing to remember, while 500 points on the Dow seems like a big number and would have been a market crash in 1987 (meaning down over 20%), today it is about 3%. Short-term results like this are well within the range of what should be expected from time to time.

What is our strategy? First, we have been at this long enough to know panicking will cost you money in the long runsp500. Second, this pullback has made some companies we have on our target list more attractive in our opinion. So, we plan to stay focused on buying high quality companies at a discount to their intrinsic value rather than trying to time the market.

We encourage you to keep in mind, as long-term investors patience is your best friend. As always, your situation is unique and you may have liquidity needs of which we are not aware. Please do not hesitate to contact us if you have any questions or would like to meet to go over your portfolio.

Are You Financially Retirement Ready?

We are frequently asked, “How much do I need to retire?” It is difficult to answer without a lot of buts and ifs and detailed spreadsheets.  So while nothing can substitute for a financial assessment by one of our Wealth Managers, you can use our Retirement Cash Flow Estimator (RCF) to help you gauge your retirement readiness (see graph).  The RCF Estimator uses the life expectancy data for females.[1]  It is an estimate of the present value of a $1 financial annuity ending at age 95 and beginning at the age you select in the graph.  We adjust the $1 annual annuity to account for inflation, mortality, and the time value of money using a recent yield curve for investment grade bonds.[2] Thus, you should think of the RCF value as what the average retiree can expect.

RCF EstimatorThere are two ways to use the RCF value.  One, divide your portfolio value (excluding your primary home equity[3]) by the RCF value nearest your age to estimate the real cash flow (it will increase by the expected inflation rate over your retirement period) the average person can expect in retirement.  For example, say you are 65 and your current portfolio value is $1,000,000.  You would divide the portfolio value by 20.01 from the graph and get $49,975.  This is an estimate of the real pre-tax cash flow a $1,000,000 portfolio would produce through age 95 for the average investor.  At age 95, the portfolio of the average retiree would be drawn down to zero.  If your retirement budget is equal to or greater than the $49,975, you probably need to save more (i.e., work longer) or find ways to cut your retirement budget.

The other way to use the RCF Estimator is to multiply the RCF value by your estimated retirement budget to determine the size of the portfolio the average retiree needs to cover retirement expenses. If your current portfolio value is well above the amount calculated above, you may be financially ready for retirement.  Now you can take the next step and meet with one of our Wealth Managers to perform a detailed financial assessment.

This should be used as a rough guide or starting point to your estimated cash flow in retirement.  It is not a guarantee of any kind nor does it reflect fees and taxes.  As it represents what the average retiree can expect, your results are likely to be different.

 

[1] U.S. Department of Health and Human Services, National Vital Statistics Reports, 2010. Using mortality data for females results in more conservative estimate of potential cash flow from your portfolio.
[2] Thank you to BlackRock, Inc. for inspiration and similar calculations.  We encourage you to also use BlackRock’s CORI™ estimator at https://www.blackrock.com/investing/insights/retirement/cori-analysis.
[3] We recommend leaving out your home equity and consider that a margin of safety in retirement.

Retire.Ready: Spotlight on the Bond Ladder

Clients near or in their retirement years consistently express three primary financial concerns:

  1. Do I have enough money?
  2. Is my cash flow predictable?
  3. What if I have an emergency?

Our Retire.Ready solution addresses these concerns. We believe those nearing retirement should transition from a pure total-return approach to a hybrid total-return and liability matching strategy to reduce risk while managing retirement cash flow. The Retire.Ready solution consists of three important components:

  1. In-depth financial assessment that creates a retirement budget
  2. Social Security optimization
  3. Portfolio divided into three financial buckets including unique 10-year bond ladder to match future cash flow needs (see diagram)

Just like our long-standing, traditionalbuckets portfolios Retire.Ready utilizes high-quality bonds. Uncovering attractive yields is always an important goal, but safety and predictability are the cornerstones of the Retire.Ready bond ladder. It takes a prudent investor to know when to pass up the siren call of even slightly more yield in favor of capital preservation. This is a tradeoff we take to the next level.

Our traditional total return portfolios that incorporate our intermediate fixed income securities are designed to be extremely safe, but also maintain a manageable amount of risk, to increase income responsibly. In our intermediate fixed income composite, we have the flexibility to target an array of credit ratings across either a range of maturities or a more consolidated timeline, as long as we feel comfortable with the overall diversification, yield, and safety. Our in-house research points us towards companies with wide economic moats and strong balance sheets, but also towards companies whose competitive advantage is based more on economies of scale in competitive, low barrier industries. We prefer companies with strong management teams and high cash flow generation, but our research allows us the flexibility to favor unusual credit metrics over others, such as a company’s ability to tap the credit markets, cut large historic dividend payments, or divest less profitable business lines. Our internal, rigorous, and evolving due diligence is our advantage in finding individual bonds that we feel confident will mature at par, all while providing higher than general market yields to maturity.

Retire.Ready takes a slightly different approach. The typical bond portfolio risks, be it interest rate risk, reinvestment risk, or headline risk have been reduced by a bond ladder designed to match our clients’ upcoming liabilities. The bonds in the ladder won’t always be the highest yielding bonds in a particular credit sector, due to our prioritizing of safety, and will in most cases be held to maturity. Though we plan to hold bonds to maturity, this is not a “set it and forget it” portfolio or high priced annuity. We continue to monitor the portfolio, be it corporate or municipal bonds, to ensure the persistent high standard of credit quality we recognized when the bonds were purchased. Retire.Ready bonds will benefit from institutional pricing and also the nimble nature of our bond desk to find mispriced “odd-lot” bonds when appropriate. The Retire.Ready portfolio will make use of corporate, agency, and municipal bonds to find the right mix of credit quality, tax-efficiency, and income. Please contact us to learn more about what goes into the Retire.Ready portfolio and how it may help you to be and feel more secure financially.

Retire.Ready

If you missed the live showing of our Private Wealth Management series on managing retirement cash flows and optimizing your Social Security strategy, here is a link to the replay on YouTube.  If you want a copy of the slides, please contact us.

The securities mentioned are not the only securities we have purchased in the last year for our clients.  If you would like a list of all securities purchased in the last year, please contact us.  Additionally, it should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities mentioned.

Retire.Ready Private Wealth Management Series

Here is a picture from our Retire.Ready presentation this morning.  We will have a video summary up soon for those who missed the presentation.  Thank you to all who attended and thank you Christel Turkiewicz, CRPC and Matt Roehr, CFA for presenting our retirement solution.20150519_162008819_iOS Please follow us at @NWInvestment or @NWRetireReady to stay informed.

Contribution Limits, Social Security, and Medicare for 2015

NWIC_logo 4As we start 2015 we wanted to make you aware of some changes in contribution limits for some retirement accounts as well as changes in Social Security and Medicare.

First of all, the contribution limit for 401(k)s will increase by $500 to $18,000. For those 50 and older the catch-up contribution also will increase by $500 to $6,000. The IRA contribution limit, however, did not change and will remain at $5,500 with those over 50 allowed to contribute an additional $1,000 for a total of $6,500. You will want to consult with your tax advisor to see whether contributions will be tax deductible if you are currently working and have access to a retirement account. Remember, you have until April 15th of 2015 to make 2014 IRA and Roth IRA contributions. If you would still like to make a 2014 contribution we encourage you to do this no later than April 1st to ensure all trades and settlements are done in a timely fashion if we need to raise some cash.

If you are currently a recipient of Social Security you will receive a 1.7% cost-of-living adjustment. Further good news is that Medicare Part B will not have an increase in premiums and will remain at $104.90 a month for 2015. However, Medicare Part A will increase from $1,216 to $1,260 in 2015 and most Medicare Part D premiums will likely increase by 4% to an average $38.83.

We hope this helps you in planning your finances for 2015 and as always please contact us if you have any questions regarding your wealth.