Can the Market Ride Through the Greek Debt Crisis?

U.S. equities face their biggest test of 2015.

June definitely ended with some drama. When Greek government officials told Reuters Monday that the nation could not make its €1.5 billion loan repayment to the International Monetary Fund on June 30, the Dow plunged 350.33, the S&P 500 43.85 and the Nasdaq 122.04 while the CBOE VIX rose 36%. The Dow closed under its 200-day moving average. The big three stabilized Tuesday while investors braced for more turbulence.1,2

Greece’s last-minute requests were turned down Tuesday. Greek Prime Minister Alexis Tsipras asked eurozone finance ministers for an extension, a haircut on the nation’s debt, or a third bailout. Each request was denied, and that meant the official end of the Greek bailout coordinated by the European Financial Stability Fund. The Greek government will present a proposal for a new, third bailout to the same finance ministers (a.k.a. the Eurogroup) on Wednesday. Approval of any such bailout package will only be considered in July.3

The next hurdle is Greece’s July 5 nationwide referendum. Tsipras and his far-left Syriza party have slated a national vote for next Sunday, in which Greeks can express whether they are for or against the current IMF/EU bailout proposal. Practically speaking, Syriza is polling the Greek people to see if they want to quit the euro.4

As NPR notes, while Tsipras has argued that the austerity measures imposed on the country amount to a humiliation of Greece, most Greeks want their nation to stay in the EU. Wolfgang Schaueble, Germany’s finance minister, characterized Tsipras’s stand this way: “When you’re driving down the Autobahn and everyone else is driving the opposite direction, you may think you’re right, but you’re wrong.”4

Still, Greece could remain in the EU even if it defaults. Though Schaueble has been a severe critic of the Greek government, Bloomberg notes that he has indicated the European Central Bank will do what it must to keep Greece in the eurozone, even if its people vote to leave it. As he told ARD Television earlier this week, “Greece is on a difficult path. But we will do everything to keep Europe stable.”5

Germany is Greece’s largest creditor, and German Chancellor Angela Merkel did not soften the nation’s stance in the matter, saying bluntly on June 30: “This evening at exactly midnight Central European Time the program expires. And I am not aware of any real indications of anything else.”6

Would a “Grexit” damage the solidarity of the EU? Spanish Prime Minister Mariano Rajoy worried about that this week, expressing that if Greece leaves the eurozone, it would send “a negative message that euro membership is reversible.”6

If Greece does leave the euro and return to the drachma, it would undeniably make things worse for a nation with 26% unemployment that just experienced a run on its banks and a credit downgrade to CCC- (junk status) by Standard & Poor’s.4,7

On our shores, the Dow gained 23.16, the Nasdaq 28.40 and the S&P 500 5.48 Tuesday, offering a little hope that U.S. equity markets might possibly be able to decouple from this crisis.8

Citations.

1 – tinyurl.com/ox9yrgh [6/29/15]

2 – cbsnews.com/news/rising-grexit-risk-is-beating-down-stocks/ [6/30/15]

3 – tinyurl.com/pboqjqr [6/30/15]

4 – tinyurl.com/pjht52t [6/26/15]

5 – bloomberg.com/news/articles/2015-06-30/schaeuble-said-to-see-greece-staying-in-euro-even-if-no-vote-ibjaov8p [6/30/15]

6 – smh.com.au/world/greece-asks-for-another-bailout-but-angela-merkel-says-no-deals-before-referendum-20150630-gi1z8m.html [7/1/15]

7 –  marketwatch.com/story/sp-lowers-greeces-credit-rating-to-ccc-minus-2015-06-29 [6/29/15]

8 –  marketwatch.com/tools/marketsummary/indices/indices.asp?indexid=1&groupid=37 [6/30/15]

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Linda Bullwinkle, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, Chevron, Glaxosmithkline, AT&T, Bank of America, Qwest, Merck, Hughes, Verizon, Northrop Grumman, Raytheon, ExxonMobil, Pfizer, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Linda Bullwinkle is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

Another Glitch Hits Wall Street. The NYSE freezes floor trading for more than three hours.

Floor trading was abruptly halted at the New York Stock Exchange Wednesday. At 11:32 am EST, a sudden problem forced the NYSE to interrupt trading in all symbols and cancel all open orders in its main market. Trading continued, meanwhile, on the NYSE Arca Options and NYSE AMEX/Arca Options platforms, and the NASDAQ continued trading of NYSE-listed shares.1,2   

The stoppage continued until the final hour of the trading day: floor trading resumed shortly after 3:00pm EST with closing auctions proceeding as normal.3 

Was it a cyberattack? A U.S. government official told the Washington Post that there was “no indication” of terrorism, and the NYSE also said no, attributing the halt in trading to an “internal technical issue.”1,2

Still, Wednesday morning saw some other strange happenings – the Wall Street Journal’s website went down for a spell at approximately the same moment, and hours earlier, United Airlines had to ground all flights temporarily because of what it deemed “a network connectivity issue.”1,2

Tuesday night, the notorious hacker group Anonymous posted a tweet that read “Wonder if tomorrow is going to be bad for Wall Street…we can only hope.”2

Reuters reported that the FBI, the Treasury Department and White House were all monitoring the shutdown Wednesday, with the FBI simply stating that “no further law enforcement action is need at this time.” Securities & Exchange Commission Chair Mary Jo White told Reuters that it was “in contact” with the NYSE and keeping tabs on the problem.2,4

The trading freeze had little immediate impact on retail investors. As UBS director of floor operations Art Cashin cautioned CNBC, “This will not cause a move in any particular direction, so I would kind of wait it out and see what happens.” The day was certainly frustrating for institutional investors, triggering memories of the 2013 NASDAQ “flash freeze” and the exasperating Facebook IPO of 2012.2    

One of the leading reasons why floor trading took so long to resume might surprise you. When the NYSE froze trading Wednesday morning, all open orders had to be called off manually – an archaic repair given that NYSE floor trading amounts to about a quarter of the exchange’s composite volume.5

“Is the NYSE technologically the most (robust) exchange in the world? No,” Themis Trading principal Sal Arnuk explained to CNBC. “The fact of the matter is the different exchange operators have diverse standards, different architecture. Some of them are more legacy than others.”4

As the afternoon progressed, the NYSE tried furiously to enable floor trading before the close, as volume notably escalates at the end of a trading day. They succeeded, restoring some sense of “business as usual” while Wall Street again pondered its necessary and fragile relationship with technology. 

Citations.

1 – washingtonpost.com/business/economy/nyse-trading-has-been-halted/2015/07/08/46b51974-2588-11e5-b72c-2b7d516e1e0e_story.html [7/8/15]

2 – tinyurl.com/otqw7gr [7/8/15]

3 – bostonglobe.com/business/2015/07/08/nyse/7KVPWRUlqcIcIFJREPsgIJ/story.html [7/8/15]

4 – reuters.com/article/2015/07/08/us-markets-stocks-idUSKCN0PI19Y20150708 [7/8/15]

5 – tinyurl.com/nonlszo [7/8/15]

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Linda Bullwinkle, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, Alcatel-Lucent, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Linda Bullwinkle is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

Another Glitch Hits Wall Street

The NYSE freezes floor trading for more than three hours. 

Floor trading was abruptly halted at the New York Stock Exchange Wednesday. At 11:32 am EST, a sudden problem forced the NYSE to interrupt trading in all symbols and cancel all open orders in its main market. Trading continued, meanwhile, on the NYSE Arca Options and NYSE AMEX/Arca Options platforms, and the NASDAQ continued trading of NYSE-listed shares.1,2   

The stoppage continued until the final hour of the trading day: floor trading resumed shortly after 3:00pm EST with closing auctions proceeding as normal.3 

Was it a cyberattack? A U.S. government official told the Washington Post that there was “no indication” of terrorism, and the NYSE also said no, attributing the halt in trading to an “internal technical issue.”1,2

Still, Wednesday morning saw some other strange happenings – the Wall Street Journal’s website went down for a spell at approximately the same moment, and hours earlier, United Airlines had to ground all flights temporarily because of what it deemed “a network connectivity issue.”1,2

Tuesday night, the notorious hacker group Anonymous posted a tweet that read “Wonder if tomorrow is going to be bad for Wall Street…we can only hope.”2

Reuters reported that the FBI, the Treasury Department and White House were all monitoring the shutdown Wednesday, with the FBI simply stating that “no further law enforcement action is need at this time.” Securities & Exchange Commission Chair Mary Jo White told Reuters that it was “in contact” with the NYSE and keeping tabs on the problem.2,4

The trading freeze had little immediate impact on retail investors. As UBS director of floor operations Art Cashin cautioned CNBC, “This will not cause a move in any particular direction, so I would kind of wait it out and see what happens.” The day was certainly frustrating for institutional investors, triggering memories of the 2013 NASDAQ “flash freeze” and the exasperating Facebook IPO of 2012.2    

One of the leading reasons why floor trading took so long to resume might surprise you. When the NYSE froze trading Wednesday morning, all open orders had to be called off manually – an archaic repair given that NYSE floor trading amounts to about a quarter of the exchange’s composite volume.5

“Is the NYSE technologically the most (robust) exchange in the world? No,” Themis Trading principal Sal Arnuk explained to CNBC. “The fact of the matter is the different exchange operators have diverse standards, different architecture. Some of them are more legacy than others.”4

As the afternoon progressed, the NYSE tried furiously to enable floor trading before the close, as volume notably escalates at the end of a trading day. They succeeded, restoring some sense of “business as usual” while Wall Street again pondered its necessary and fragile relationship with technology. 

Citations.

1 – washingtonpost.com/business/economy/nyse-trading-has-been-halted/2015/07/08/46b51974-2588-11e5-b72c-2b7d516e1e0e_story.html [7/8/15]

2 – tinyurl.com/otqw7gr [7/8/15]

3 – bostonglobe.com/business/2015/07/08/nyse/7KVPWRUlqcIcIFJREPsgIJ/story.html [7/8/15]

4 – reuters.com/article/2015/07/08/us-markets-stocks-idUSKCN0PI19Y20150708 [7/8/15]

5 – tinyurl.com/nonlszo [7/8/15]

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Linda Bullwinkle, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, Pfizer, Hughes, AT&T, Qwest, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Northrop Grumman, Verizon, Bank of America, Chevron, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Linda Bullwinkle is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

Protecting Yourself Against Cyberattacks (2015)

How vulnerable is your data?

25% of Americans were cyberhacked between March 2014 and March 2015. The American Institute of CPAs announced that alarming discovery in April, publishing the results of a survey conducted by Harris Poll. Disturbing? Certainly, but the instances of pre-retirees being victimized were even greater – 34% of adults aged 55-64 reported having their data stolen or compromised within that period.1

Small businesses are also commonly victimized. While identity theft has eroded consumer and employee trust in Target, Sony, Home Depot, Anthem and Wells Fargo, they will survive; a small business with limited IT resources may not. Symantec says that 30% of all targeted cyberattacks occur against firms employing fewer than 250 workers. The National Cyber Security Alliance says that the average small business that gets hacked has a 60% chance of closing its doors within six months.2

Hackers will not put your household out of business, but they can steal the assets within your checking account or your workplace retirement plan in seconds. They can also take your Social Security number, email address, annual income data and more and sell it or retain it to hurt you in the future.

Cyberattacks within the financial world are especially frightening. Bank and brokerage accounts are respectively insured by the FDIC and SIPC, yet that insurance only protects a customer or client in cases of institutional failure. It does not cover cybertheft.3

How can you strengthen your online defenses against cyberthieves? One way to do that is through two-factor authentication, or 2FA.

Corporations are starting to realize the vulnerability of a username-password combination. Given that so many usernames are derivations of real names, and given that many passwords are still mentally convenient, a hacker can access such accounts with relative ease.

If a company installs another security factor beyond the username-password combination – such as a voiceprint audio I.D. or a one-time numeric code texted to your phone to permit account access – hacking an account becomes much harder. This two-factor authentication may become the norm in the near future.

Too many Americans use simple passwords, sometimes at multiple websites. (Did you know that “password” is one of the most commonly used passwords?) Fortunately, free software has emerged to generate random passwords for different accounts. High net worth households are discovering Norton Identity Safe, RoboForm, LastPass, Dashlane and other apps capable of creating super-strong passwords.4

Aside from using stronger passwords, avoid falling prey to the classic mistakes. When you use free Wi-Fi at a coffeeshop or airport or make a bid at an online auction site of questionable origin, you are taking your chances. The same goes for opening mystery email attachments and sharing private data on websites lacking the HTTPS protocol.

Will cybersecurity improve in the coming years? A widely adopted 2FA standard may make online theft much harder to pull off. Other defenses are being touted, some with more merit than others. Using a fingerprint as a password sounds good, but has a crippling drawback: you can change a password, but try changing your fingerprint. Some consumers are getting new EMV-equipped credit and debit cards that rely on microchips rather than magnetic strips; many of these are not the chip-and-PIN cards common to Europe, however. Instead, they are chip-and-signature cards. The second security factor is simply you signing your name. Cybersecurity analysts believe that while the chip-and-signature cards are better than the old technology, they fall short of chip-and-PIN cards.5

True cybersecurity may prove elusive, but personal vigilance and password management software are good steps toward building a better defense against cyberattacks. 

Citations.

1 – aicpa.org/Press/PressReleases/2015/Pages/AICPA-Survey-One-in-four-Americans-Victimized-by-Information-Security-Breaches.aspx [4/21/15]

2 – wscpa.org/more/news/article/wscpa-blog/2015/04/23/think-you-are-too-small-to-be-a-target-of-cyber-crime-think-again-?Site=WSCPA#.VVExkpMsDCo [4/23/13]

3 – dailyfinance.com/2015/02/12/anthem-customers-protect-your-accounts/ [2/12/15]

4 – businessinsider.com/9-things-youre-doing-that-make-you-a-perfect-target-for-hackers-2015-5?op=1 [5/6/15]

5 – washingtonpost.com/news/get-there/wp/2015/04/30/your-new-credit-card-may-not-be-as-safe-as-you-think/ [4/30/15]

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Linda Bullwinkle, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Alcatel-Lucent, Hughes, Northrop Grumman, Bank of America, Raytheon, Merck, Pfizer, ExxonMobil, Glaxosmithkline, Verizon or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Linda Bullwinkle is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

Exchange-Traded Funds: Do They Belong in Your Portfolio?

Exchange-traded funds (ETFs) have become increasingly popular since they were introduced in the United States in the mid-1990s. Their tax efficiencies and relatively low investing costs have attracted investors who like the idea of combining the diversification of mutual funds with the trading flexibility of stocks. ETFs can fill a unique role in your portfolio, but you need to understand just how they work and the differences among the dizzying variety of ETFs now available.

What is an ETF?

Like a mutual fund, an exchange-traded fund pools the money of many investors and purchases a group of securities. Like index mutual funds, most ETFs are passively managed. Instead of having a portfolio manager who uses his or her judgment to select specific stocks, bonds, or other securities to buy and sell, both index mutual funds and exchange-traded funds attempt to replicate the performance of a specific index.

However, a mutual fund is priced once a day, when the fund’s net asset value is calculated after the market closes. If you buy after that, you will receive the next day’s closing price. By contrast, an ETF is priced throughout the day and can be bought on margin or sold short–in other words, it’s traded just as a stock is.

How ETFs invest

Since their inception, most ETFs have invested in stocks or bonds, buying the shares represented in a particular index. For example, an ETF might track the Nasdaq 100, the S&P 500, or a bond index. Other ETFs invest in hard assets–for example, gold. With the rapid proliferation of ETFs in recent years, if there’s an index, there’s a good chance there’s an ETF that tracks it. More and more new indexes are being introduced, many of which cover narrow niches of the market, or use novel rules to choose securities. Many so-called rules-based ETFs are beginning to take on aspects of actively managed funds–for example, by limiting the percentage of the fund that can be devoted to a single security or industry.

Pros and Cons of Exchange-Traded Funds

Pros

  • ETFs can be traded throughout the day as price fluctuates
  • ETFs can be bought on margin, sold short, or traded using stop orders and limit orders, just as stocks can
  • ETFs do not have to hold cash or buy and sell securities to meet redemption demands by fund investors
  • Annual expenses are often lower, which can be especially important for long-term investors
  • Because ETFs typically trade securities infrequently, they have lower annual taxable distributions than a mutual fund

Cons

  • Dollar-cost averaging will require paying repeated commissions and will increase investing costs
  • If an ETF is organized as a unit investment trust, delays in reinvesting its dividends may hamper returns
  • An ETF doesn’t necessarily trade at its net asset value, and bid-ask spreads may be wide for thinly traded issues or in volatile markets

The new wave of ETFs

New and unique indexes are being developed every day. As a result, ETFs that might seem similar–for example, two funds that invest in large-cap stocks–can actually be quite different. Many indexes define which securities are included based on their market capitalization–the number of shares outstanding times the price per share. However, other indexes and the ETFs that mimic them may select or weight securities within the index based on fundamental factors, such as a stock’s dividend yield. Why is weighting important? Because it can affect the impact that individual securities have on the fund’s result. For example, an index that is weighted by market cap will be more affected by underperformance at a large-cap company than it would be by an underperforming company with a smaller market cap. That’s because the large-cap company would represent a larger share of the index. However, if the index weighted each security equally, each would have an equal impact on the index’s performance.

The cost advantages and tradeoffs of ETFs

As indicated above, one of the reasons ETFs have gained ground with investors is because of their low annual expenses. Passive index investing means an ETF doesn’t require a portfolio manager or a research staff to select securities; that reduces the fund’s overhead. Also, investing in an index means that trades are generally made only when the index itself changes. As a result, the trading costs required by frequent buying and selling of securities in the fund are minimized.

However, don’t forget that you’ll generally pay a commission with each ETF trade (depending on the type of account you have). That means a one-time lump-sum investment in an ETF will be more cost-effective than frequent, regular investments over time.

ETFs and taxes

ETFs can be relatively tax efficient. Because it trades so infrequently, an ETF typically distributes few capital gains during the year. There can be times when some investors find themselves paying taxes on capital gains generated by a mutual fund, even though the value of their fund may actually have dropped. Though it’s not impossible for an ETF to have capital gains, ETFs generally can minimize the ongoing capital gains taxes you’ll pay.

Just how much impact can reducing taxes have over the long term? More than you might think. Even a 1% difference in your return can be significant. For example, if you invest $50,000 and earn an average annual return of 5% (compounded monthly), you would have a pretax amount of $82,350 after 10 years. Even a 1% increase in that return would give you $90,970 at the end of that time. (This hypothetical example is for illustrative purposes only and does not represent the performance of any particular investment. Actual results will vary.)

Make sure you consider how an ETF’s returns will be taxed. Depending on how the fund is organized and what it invests in, returns could be taxed as short-term capital gains, ordinary income, or in the case of gold and silver ETFs, as collectibles; all are taxed at higher rates than long-term capital gains.

What are some other reasons investors use ETFs?

  • To get exposure to a particular industry or sector of the market. Because the minimum investment in an ETF is the cost of a single share, ETFs can be a low-cost way to make a diversified investment in alternative investments, a particular investing style, or geographic region.
  • To limit losses. Being able to set a stop-loss limit on your ETF shares can help you manage potential losses. A stop-loss order instructs your broker to sell your position if the shares fall to a certain price. If the ETF’s price falls, you’ve minimized your losses. If its price rises over time, you could increase the stop-loss figure accordingly. That lets you pursue potential gains while setting a limit on the amount you can lose.

How to evaluate an ETF

  1. Look at the index it tracks. Understand what the index consists of and what rules it follows in selecting and weighting the securities in it. Be aware that the performance of an unmanaged index is not indicative of the performance of any specific security. Individuals cannot invest directly in any index.
  2. Look at how long the fund and/or its underlying index have been in existence, and if possible, how both have performed in good times and bad.
  3. Look at the fund’s expense ratios. The more straightforward its investing strategy, the lower expenses are likely to be. An index using futures contracts is likely to have higher expenses than one that simply replicates the S&P 500.

Your financial professional can help you decide how ETFs might fit your investing strategy.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Bank of America, Alcatel-Lucent, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Merck, Pfizer, Glaxosmithkline, Verizon or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Linda Bullwinkle, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Linda Bullwinkle is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Pay Down Debt or Save for Retirement?

You can use a variety of strategies to pay off debt, many of which can cut not only the amount of time it will take to pay off the debt but also the total interest paid. But like many people, you may be torn between paying off debt and the need to save for retirement. Both are important; both can help give you a more secure future. If you’re not sure you can afford to tackle both at the same time, which should you choose?

There’s no one answer that’s right for everyone, but here are some of the factors you should consider when making your decision.

Rate of investment return versus interest rate on debt

Probably the most common way to decide whether to pay off debt or to make investments is to consider whether you could earn a higher after-tax rate of return by investing than the after-tax interest rate you pay on the debt. For example, say you have a credit card with a $10,000 balance on which you pay nondeductible interest of 18%. By getting rid of those interest payments, you’re effectively getting an 18% return on your money. That means your money would generally need to earn an after-tax return greater than 18% to make investing a smarter choice than paying off debt. That’s a pretty tough challenge even for professional investors.

And bear in mind that investment returns are anything but guaranteed. In general, the higher the rate of return, the greater the risk. If you make investments rather than pay off debt and your investments incur losses, you may still have debts to pay, but you won’t have had the benefit of any gains. By contrast, the return that comes from eliminating high-interest-rate debt is a sure thing.

An employer’s match may change the equation

If your employer matches a portion of your workplace retirement account contributions, that can make the debt versus savings decision more difficult. Let’s say your company matches 50% of your contributions up to 6% of your salary. That means that you’re earning a 50% return on that portion of your retirement account contributions.

If surpassing an 18% return from paying off debt is a challenge, getting a 50% return on your money simply through investing is even tougher. The old saying about a bird in the hand being worth two in the bush applies here. Assuming you conform to your plan’s requirements and your company meets its plan obligations, you know in advance what your return from the match will be; very few investments can offer the same degree of certainty. That’s why many financial experts argue that saving at least enough to get any employer match for your contributions may make more sense than focusing on debt.

And don’t forget the tax benefits of contributions to a workplace savings plan. By contributing pretax dollars to your plan account, you’re deferring anywhere from 10% to 39.6% in taxes, depending on your federal tax rate. You’re able to put money that would ordinarily go toward taxes to work immediately.

Your choice doesn’t have to be all or nothing

The decision about whether to save for retirement or pay off debt can sometimes be affected by the type of debt you have. For example, if you itemize deductions, the interest you pay on a mortgage is generally deductible on your federal tax return. Let’s say you’re paying 6% on your mortgage and 18% on your credit card debt, and your employer matches 50% of your retirement account contributions. You might consider directing some of your available resources to paying off the credit card debt and some toward your retirement account in order to get the full company match, and continuing to pay the tax-deductible mortgage interest.

There’s another good reason to explore ways to address both goals. Time is your best ally when saving for retirement. If you say to yourself, “I’ll wait to start saving until my debts are completely paid off,” you run the risk that you’ll never get to that point, because your good intentions about paying off your debt may falter at some point. Putting off saving also reduces the number of years you have left to save for retirement.

It might also be easier to address both goals if you can cut your interest payments by refinancing that debt. For example, you might be able to consolidate multiple credit card payments by rolling them over to a new credit card or a debt consolidation loan that has a lower interest rate.

Bear in mind that even if you decide to focus on retirement savings, you should make sure that you’re able to make at least the monthly minimum payments owed on your debt. Failure to make those minimum payments can result in penalties and increased interest rates; those will only make your debt situation worse.

Other considerations

When deciding whether to pay down debt or to save for retirement, make sure you take into account the following factors:

  • Having retirement plan contributions automatically deducted from your paycheck eliminates the temptation to spend that money on things that might make your debt dilemma even worse. If you decide to prioritize paying down debt, make sure you put in place a mechanism that automatically directs money toward the debt–for example, having money deducted automatically from your checking account–so you won’t be tempted to skip or reduce payments.
  • Do you have an emergency fund or other resources that you can tap in case you lose your job or have a medical emergency? Remember that if your workplace savings plan allows loans, contributing to the plan not only means you’re helping to provide for a more secure retirement but also building savings that could potentially be used as a last resort in an emergency. Some employer-sponsored retirement plans also allow hardship withdrawals in certain situations–for example, payments necessary to prevent an eviction from or foreclosure of your principal residence–if you have no other resources to tap. (However, remember that the amount of any hardship withdrawal becomes taxable income, and if you aren’t at least age 59½, you also may owe a 10% premature distribution tax on that money.)
  • If you do need to borrow from your plan, make sure you compare the cost of using that money with other financing options, such as loans from banks, credit unions, friends, or family. Although interest rates on plan loans may be favorable, the amount you can borrow is limited, and you generally must repay the loan within five years. In addition, some plans require you to repay the loan immediately if you leave your job. Your retirement earnings will also suffer as a result of removing funds from a tax-deferred investment.
  • If you focus on retirement savings rather than paying down debt, make sure you’re invested so that your return has a chance of exceeding the interest you owe on that debt. While your investments should be appropriate for your risk tolerance, if you invest too conservatively, the rate of return may not be high enough to offset the interest rate you’ll continue to pay.

Regardless of your choice, perhaps the most important decision you can make is to take action and get started now. The sooner you decide on a plan for both your debt and your need for retirement savings, the sooner you’ll start to make progress toward achieving both goals.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, Chevron, Pfizer, AT&T, Bank of America, Qwest, Verizon, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Linda Bullwinkle, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Linda Bullwinkle is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Inflation-Fighting TIPS

It’s easy to see how inflation affects your daily life. Gas prices are higher. Electric bills are steeper. Wallets are thinner. But what inflation does to your investments isn’t always as obvious. Let’s say your money is earning 4% and inflation is running between 3% and 4% (its historical average). That means your so-called “real return”–the stated return minus inflation–is only 1% at best. After you subtract any account fees, taxes, and other expenses, you could actually end up with a negative number. What can you do to keep from losing the race against inflation? One way is to buy investments that are designed to keep pace automatically.

Take stock of TIPS

Since the U.S. Treasury introduced them in 1997, Treasury Inflation-Protected Securities (TIPS) have become the most widely known example of what are generally referred to as “inflation-protected securities.” TIPS may be attractive to long-term investors who want to preserve the purchasing power of their money over time. Investors also may like the security of knowing their investment is backed by the U.S. government as to the timely payment of principal and interest.

Like other Treasury bonds or notes, TIPS are basically loans to the U.S. government. You receive interest payments every six months based on a fixed interest rate specified in advance. With most bonds, it’s easy to know the exact amount of money you’ll receive each year. You simply multiply the principal–the amount of your initial investment–by the interest rate.

TIPS work a little differently. Instead of guaranteeing how much you’ll be paid in interest, an inflation-protected security guarantees that your real return will keep up with inflation. The interest rate stays fixed; what you won’t know is the exact dollar amount of the payments you’ll receive. If inflation goes up, your return will increase to match it. With TIPS, you’re trading off the certainty of knowing exactly how much you’ll receive for the knowledge that, as long as you hold the bond until it matures, your investment will maintain its buying power.

How do TIPS work?

TIPS pay slightly lower interest rates than equivalent Treasury securities that don’t adjust for inflation. The reason for that reduced rate? Your TIPS principal is automatically adjusted twice a year to match any increases or decreases in the Consumer Price Index (CPI), a widely used measure of inflation. If the CPI increases, the Treasury recalculates your principal to reflect the increase.

For example, let’s say you buy $20,000 worth of TIPS that pay a fixed interest rate of 2.5%. Over the next six months, the CPI rises at an annual rate of 3%. Your $20,000 principal would go up by 1.5% (half of the 3% annual inflation rate) to $20,300.

This adjustment will affect the amount of your semiannual interest payments. Even though the interest rate stays the same, it’s applied to the recalculated amount of your principal. In this example, the 2.5% interest rate would be applied to the new $20,300 figure. The actual dollar amount paid in interest goes up because it’s based on a higher principal; instead of $250, your next semiannual payment would be $253.75. If inflation goes up again, your next payment will be higher still. (The return on a specific bond may be different, of course, since this is only a hypothetical illustration designed to show how the return on a TIPS is calculated.)

If the CPI figure is lower in six months, your principal will be adjusted accordingly when it’s recalculated; that in turn will affect the amount of your next interest payment. If there’s a period of deflation and the CPI is actually a negative number, your principal and interest payment would both drop.

The inflation adjustment feature means that if you hold a TIPS until it matures, your repaid principal will likely be higher than when you bought the bond. Even if the CPI turns negative and the economy experiences deflation, the amount you’ll receive when the bond matures will be the greater of the inflation-adjusted figure or the amount of your original investment.

Calculating the TIPS Advantage

How do you know whether owning a TIPS makes sense? Subtract the TIPS interest rate from the rate for an equivalent bond without the inflation protection feature. If the inflation rate is higher than the difference between the two rates, the TIPS may have an advantage.
If a TIPS pays… And equivalent non-TIPS yield is… Inflation rate needed for a TIPS advantage is…
2.5% 4.5% More than 2%
3% 6% More than 3%

Things to think about

You can still lose money with a TIPS if you don’t hold it until it matures. Inflation rates rise and fall, and as with any bond, the returns offered by other investments can affect the market value of your TIPS. Also, if inflation turns out to be less over time than you had anticipated when you invested, the total return on a TIPS could actually be less than that of a comparable Treasury security without the inflation-adjustment feature.

If the inflation rate over time isn’t high enough to make up for the difference between the lower interest rate of a TIPS and that of an investment without inflation protection, the TIPS has no advantage. That’s why TIPS may only be appropriate for part of your bond holdings.

There’s another catch. You’ll also need to think about the federal taxes that will be due each year on the interest and any increases in your principal. Even though the Treasury records the changes in your principal every six months, you don’t actually receive that money until the TIPS matures. However, the government still taxes that increase each year as if you’ve received the cash. Many investors prefer to postpone that tax bill by holding TIPS in a tax-deferred account such as an IRA.

How can I buy TIPS?

You can buy TIPS individually, with maturities of 5, 10, or 30 years, and in $100 increments (although individual brokers may have higher minimum purchase requirements). You could choose a selection of TIPS that mature at different times. When the shorter-term bonds mature, you could reinvest that principal into either another TIPS or some other type of bond. Known as “laddering,” this strategy gives you flexibility as interest rates change. If interest rates are higher than the bond that’s maturing, you can invest at a higher rate; if rates are lower, you might prefer an investment that offers a higher return. Also, if you will need some of your principal for a specific goal, such as college tuition, you can select maturity dates that return your principal at the right time.

Another possibility is a mutual fund, which may invest in TIPS only or mix them with inflation-protected securities from other entities, such as foreign governments. Typically, a fund invests in a variety of debt instruments to balance the higher interest rates usually offered by longer-term bonds with the flexibility of shorter maturities. A TIPS mutual fund pays out not only the interest but also any annual inflation adjustments, which are taxed as short-term capital gains. Some exchange traded funds (ETFs) also invest in an index composed of TIPS with various maturities.

Note: Before investing in a mutual fund, carefully consider its investment objective, risks, fees, and expenses, which are contained in the prospectus available from the fund. Review it carefully before investing.

Your financial professional can help you decide which choices may be appropriate as you race to keep up with rising costs.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Linda Bullwinkle, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, Bank of America, Raytheon, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Hughes, Qwest, Chevron, Northrop Grumman, Verizon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Linda Bullwinkle is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.