Financial Literacy

8
Oct

Upside Down: What Does the Yield Curve Suggest About Growth?

YieldsOn August 14, 2019, the Dow Jones Industrial Average plunged 800 points, losing 3% of its value in its biggest drop of the year. The Nasdaq Composite also lost 3%, while the S&P 500 lost 2.9%.1

The slide started with bad economic news from Germany and China, which triggered a flight to the relative safety of U.S. Treasury securities. High demand briefly pushed the yield on the benchmark 10-year Treasury note below the two-year note for the first time since 2007.2 This is referred to as a yield curve inversion, which has been a reliable predictor of past recessions. The short-lived inversion spooked the stock market, which recovered only to see the curve begin a series of inversions a week later.3

From short to long

Yield relates to the return on capital invested in a bond. When prices rise due to increased demand, yields fall and vice versa. The yield curve is a graph with the daily yields of U.S. Treasury securities plotted by maturity. The slope of the curve represents the difference between yields on short-dated bonds and long-dated bonds. Normally, it curves upward as investors demand higher yields to compensate for the risk of lending money over a longer period. This suggests that investors expect stronger growth in the future, with the prospect of rising inflation and higher interest rates.

The curve flattens when the rates converge because investors are willing to accept lower rates to keep their money invested in Treasuries for longer terms. A flat yield curve suggests that inflation and interest rates are expected to stay low for an extended period of time, signaling economic weakness.

Parts of the curve started inverting in late 2018, so the recent inversions were not completely unexpected. However, investors tend to focus on the spread between the broadly traded two-year and 10-year notes.4

Inversion as an indicator

An inversion of the two-year and 10-year notes has occurred before each recession over the past 50 years, with only one “false positive” in that time. It does not indicate timing or severity but has reliably predicted a recession within the next one to two years. A recent Federal Reserve study suggested that an inversion of the three-month and 10-year Treasuries — which occurred in March and May 2019 — is an even more reliable indicator, predicting a recession in about 12 months.5

Is it different this time?

Some analysts believe that the yield curve may no longer be a reliable indicator due to the Federal Reserve’s unprecedented balance sheet of Treasury securities — originally built to increase the money supply as an antidote to the Great Recession. Although the Fed has trimmed the balance sheet, it continues to buy bonds in large quantities to replace maturing securities. This reduces the supply of Treasuries and increases pressure on yields when demand rises, as it has in recent months.6

At the same time, the Fed has consistently raised its benchmark federal funds rate over the last three years in response to a stronger U.S. economy, while other central banks have kept their policy rates near or below zero in an effort to stimulate their sluggish economies. This has raised yields on short-term Treasuries, which are more directly affected by the funds rate, while increasing global demand for longer-term Treasuries. Even at lower rates, U.S. Treasuries offer relatively safe yields that cannot be obtained elsewhere.7

The Fed lowered the federal funds rate by 0.25% in late July, the first drop in more than a decade. While this slightly reduced short-term Treasury yields, it contributed to the demand for long-term bonds as investors anticipated declining interest rates. When interest rates fall, prices on existing bonds rise and yields decline. So the potential for further action by the Fed led investors to lock in long-term yields at current prices.8

Economic headwinds

Even if these technical factors are distorting the yield curve, the high demand for longer-term Treasuries represents a flight to safety — a shift of investment dollars into low-risk government securities — and a pessimistic economic outlook. One day after the initial two-year/10-year inversion, the yield on the 30-year Treasury bond fell below 2% for the first time. This suggests that investors see decades of low inflation and tepid growth.9

The flight to safety is being driven by many factors, including the U.S.-China trade war and a global economic slowdown. Five of the world’s largest economies — Germany, Britain, Italy, Brazil, and Mexico — are at risk of a recession and others are struggling.10

Although the United States remains strong by comparison, there are concerns about weak business investment and a manufacturing slowdown, both weighed down by the uncertainty of the trade war and costs of the tariffs.11 Inflation has been persistently low since the last recession, generally staying below the 2% rate that the Fed considers optimal for economic growth. On the positive side, unemployment remains low and consumer spending continues to drive the economy, but it remains to be seen how long consumers can carry the economic weight.12

Market bounceback

Regardless of further movement of the yield curve, there are likely to be market ups and downs for many other reasons in the coming months. Historically, the stock market has rallied in the period between an inversion and the beginning of a recession, so investors who overreacted lost out on potential gains.13 Of course, past performance does not guarantee future results. While economic indicators can be helpful, it’s important to make investment decisions based on your own risk tolerance, financial goals, and time horizon.

U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid. The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. The performance of an unmanaged index is not indicative of the performance of any specific security. Individuals cannot invest directly in any index.

1-2, 13) The Wall Street Journal, August 14, 2019
3) CNBC.com, August 23, 2019
4-5) Reuters, August 13, 2019
6) Forbes.com, August 16, 2019
7-9) The Wall Street Journal, August 16, 2019
10, 12) CNN, August 14 and 18, 2019
11) Reuters, July 1, 2019
13
Aug

Back To School Financial Guide For 2019

Back To School Financial Guide For 2019

In a recent study conducted by the ‘National Retail Federation and Prosper Insights and Analytics’, it was found that the average American family will spend just south of $700 for back-to-school costs in 2019. Is your child soon to be a college student? The same survey reported you should be ready to spend a little less than $1,000 alone for start-up school supplies. While this cost seems large, it’s just a part of your financial portfolio. Back-to-school time is not only a great time to plan a scholastic budget, but also reviewing and reassessing your financial plan. Below is your Official 2019 Back-To-School Financial Guide to make sure your student, and your financial goals, stay on track:

Create a Baseline Report

How has your year progressed in terms of finances? Have you met or succeeded in your goals? Developing a spreadsheet and comparing where you were at the beginning of the year to where you are now can help you asses how aligned you are with your financial goals. Building this report toward the latter of the year will also give you time to adjust your plan (if needed), throughout the remainder of 2019.

Rethink Insurance Needs

Life happens, which is why insurance was invented. Whether you want to provide for your family in case of an emergency or someone forgets to turn off the stove…again; insurance of all sorts can help cushion the blows to your wallet and financial well-being. However, just as life is always changing, so too are your insurance needs and costs. Once a year, you should reevaluate your insurance needs and coverage for any change. While you may not be able to change health insurance in the middle of the year, items like car and home can be changed with a little research and not much effort.

Develop or Update Your Budget

Regardless if you are married, single, with or without dependents, it is crucial to create and maintain a workable budget. Life changes on a regular basis and your budget must coincide with your current income, needs wants, and goals. Back-to-school time is an ideal time to revisit your budget. It’s a relatively slow time on the tail end of summer travels and on the steps leading up to the holiday season. Budgets should be regularly checked throughout the year and especially after any life changes like marriage, death, education, etc. 

Plan Out Taxes for 2019

Now is the best time to make sure you are receiving the most tax breaks you can on income for 2019. Items like 401(k), charitable contributions, and retirement contributions are all fantastic ways to reduce your tax liability. Consider boosting certain contributions to reduce what you’ll pay in taxes. While ‘tax season’ is still months away, it’s important to start looking at your 2019 year from a financial perspective and start looking out other ways to save on taxes before years end. 

Back-to-school season signifies the approach of cooler weather, the quick onset of school costs, and the ultimate approach of years end. Make sure you have a great start to 2020 and finish off 2019 by utilizing this guide when looking at the remainder of your financial year. Although these are good recommendations to start with, you should connect with a financial professional to see where you are on your financial journey and how these tips could benefit you.

For those who are looking for financial advice, we realize the available options are many and deciding who to work with is a challenging problem. At SeaCure Advisors, we know that it is your retirement, and you should have control over it. We offer our experience and knowledge to help you design a custom strategy for financial independence. Contact us today to schedule an introductory meeting!

Content derived from www.money.usnews.com and www.usatoday.com

Disclosure: This information is provided as general information and is not intended to be specific financial guidance. Before you make any decisions regarding your personal financial situation, you should consult a financial or tax professional to discuss your individual circumstances and objectives.

The post Back To School Financial Guide For 2019 appeared first on Adult Financial Education Services.

Provided by: Adult Financial Education

21
May

Six Potential 401(k) Rollover Pitfalls

You’re about to receive a distribution from your 401(k) plan, and you’re considering a rollover to a traditional IRA. While these transactions are normally straightforward and trouble-free, there are some pitfalls you’ll want to avoid.

1. Consider the pros and cons of a rollover

The first mistake some people make is failing to consider the pros and cons of a rollover to an IRA in the first place. You can usually leave your money in the 401(k) plan if your balance is over $5,000 (at least until the plan’s normal retirement age, typically 65). And if you’re changing jobs, you may also be able to roll your distribution over to your new employer’s 401(k) plan.

  • Though IRAs typically offer significantly more investment opportunities and withdrawal flexibility, your 401(k) plan may offer investments that can’t be replicated in an IRA (or can’t be replicated at an equivalent cost).
  • An IRA may give you more flexibility with distributions. Your distribution options in a 401(k) plan depend on the terms of that particular plan, and your options may be limited. However, with an IRA, the timing and amount of distributions are generally at your discretion (until you reach age 70½ and must start taking required minimum distributions in the case of a traditional IRA).
  • 401(k) plans offer virtually unlimited protection from your creditors under federal law (assuming the plan is covered by ERISA; solo 401(k)s are not), whereas federal law protects your IRAs from creditors only if you declare bankruptcy. Any IRA creditor protection outside of bankruptcy depends on your particular state’s law.
  • Required minimum distributions from traditional IRAs must begin by April 1 following the year you reach age 70½. However, if you work past that age and are still participating in your employer’s 401(k) plan, you can delay your first distribution from that plan until April 1 following the year of your retirement (if you own no more than 5% of the company).
  • 401(k) plans may allow employee loans (IRAs can not allow loans).
  • Most 401(k) plans don’t provide an annuity payout option, while some IRAs do.

2. Not every distribution can be rolled over to an IRA

For example, required minimum distributions can’t be rolled over. Neither can hardship withdrawals or certain periodic payments. Do so and you may have an excess contribution to deal with.

3. Use direct rollovers and avoid 60-day rollovers

While it may be tempting to give yourself a free 60-day loan, it’s generally a mistake to use 60-day rollovers rather than direct (trustee to trustee) rollovers. If the plan sends the money to you, it’s required to withhold 20% of the taxable amount. If you later want to roll the entire amount of the original distribution over to an IRA, you’ll need to use other sources to make up the 20% the plan withheld. In addition, there’s no need to taunt the rollover gods by risking inadvertent violation of the 60-day limit.

4. Remember the 10% penalty tax

Taxable distributions you receive from a 401(k) plan before age 59½ are normally subject to a 10% early distribution penalty, but a special rule lets you avoid the tax if you receive your distribution as a result of leaving your job during or after the year you turn age 55. But this special rule doesn’t carry over to IRAs. If you roll your distribution over to an IRA, you’ll need to wait until age 59½ before you can withdraw those dollars from the IRA without the 10% penalty (unless another exception applies). So if you think you may need to use the funds before age 59½, a rollover to an IRA could be a costly mistake.

5. Learn about net unrealized appreciation (NUA)

If your 401(k) plan distribution includes employer stock that’s appreciated over the years, rolling that stock over into an IRA could be a serious mistake. Normally, distributions from 401(k) plans are subject to ordinary income taxes. But a special rule applies when you receive a distribution of employer stock from your plan: You pay ordinary income tax only on the cost of the stock at the time it was purchased for you by the plan. Any appreciation in the stock generally receives more favorable long-term capital gains treatment, regardless of how long you’ve owned the stock. (Any additional appreciation after the stock is distributed to you is either long-term or short-term capital gains, depending on your holding period.) These special NUA rules don’t apply if you roll the stock over to an IRA.

6. And if you’re rolling over Roth 401(k) dollars to a Roth IRA …

If your Roth 401(k) distribution isn’t qualified (tax-free) because you haven’t yet satisfied the five-year holding period, be aware that when you roll those dollars into your Roth IRA, they’ll now be subject to the Roth IRA’s five-year holding period, no matter how long those dollars were in the 401(k) plan. So, for example, if you establish your first Roth IRA to accept your rollover, you’ll have to wait five more years until your distribution from the Roth IRA will be qualified and tax-free.

Caution: When evaluating whether to initiate a rollover from an employer plan to an IRA always be sure to (1) ask about possible surrender charges that may be imposed by your employer plan, or new surrender charges that your IRA may impose, (2) compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan.