Retirement Planning Can Start with an IRA

These accounts make a good “first step” in retirement saving. 

Sooner or later, people decide to start saving and investing for retirement. When that starting point arrives, taking that “first step” can seem like a big deal. Opening an Individual Retirement Account (IRA) amounts to an easy “first step” in retirement saving for many.

When you invest through a traditional or Roth IRA, you give those invested assets the potential to grow with compounding and you also position yourself for present or future tax savings.

How does an IRA work? An IRA is not an investment in itself, but an account into which various investments can be placed. It is yours; you control it. In that way, it differs from an employer-sponsored retirement account that you lose immediate control over when you leave a job.1

IRAs are tax-advantaged. In both Roth and traditional IRAs, account earnings compound with tax deferral until withdrawn – that is, they grow without being taxed.

With a traditional IRA, contributions are usually tax-deductible, based on your income, but withdrawals are taxed as ordinary income after age 59½ (a 10% penalty often applies to withdrawals made before that). With a Roth IRA, tax-deductible contributions are not permitted, but your earnings can be withdrawn tax-free. (Contributions will not be taxed when you withdraw them either, as long as you are the original IRA owner and have had the Roth IRA for more than five years.)1

So there you have the main difference between a traditional IRA and Roth IRA: while both give you a chance to build retirement savings with tax advantages, the traditional IRA offers you a sizable tax break today while the Roth IRA offers you a big tax break tomorrow. Or to put it another way (as some have), a traditional IRA lets you amass tax-deferred savings while a Roth IRA lets you amass tax-exempt savings.1,2

Should you open a traditional IRA or Roth IRA? Several variables should be considered as you make your choice, and a chat with a financial professional can help you weigh them. One key question to consider: do you think you will be in a lower tax bracket when you retire? If you do, a traditional IRA might be the better choice. If you have decades to go until retirement and think you will retire to a higher tax bracket than you are in today, the Roth IRA may be the better choice. Some savers “hedge their bets” and open Roth and traditional IRAs.3

Given compounding, the future tax break offered by a Roth IRA may be profound indeed. Roth IRAs also have two other compelling features. One, you never have to make mandatory withdrawals from them starting in your seventies (as with traditional IRAs). Two, you can keep contributing to them all your life, whereas contributions to a traditional IRA are prohibited after the year in which you turn 70½. Certain couples and individuals cannot have Roth IRAs, however, as they have incomes well over $100,000 (the precise thresholds are periodically adjusted upward for inflation).1

Some traditional IRA owners convert their accounts to Roth IRAs. That is a taxable event, and if the traditional IRA is large, a Roth conversion may not be worth the effort: the resulting income tax bill may be too large to handle and even offset the potential long-range benefits.3

How do you open an IRA? Just about any financial professional can help you do that; you can even do it online and at many bank and credit union branches. You should try to open one with low annual fees, as even a 1% annual account fee subtly eats into your IRA balance. Quite often, opening an IRA is just a matter of filling out an application (and a beneficiary form) and writing a check. Alternately, you may be able to transfer money from a bank account to start an IRA.4

What are the drawbacks of IRAs? First, their annual contribution limits. Right now, you can only contribute a maximum of $5,500 a year to a traditional or Roth IRA ($6,500 if you are 50 or older). If you have multiple IRAs, your total yearly contributions to all of them must not exceed that limit or you will incur an IRS penalty. This annual contribution ceiling is low compared to common workplace retirement plans such as 401(k)s and 403(b)s.5

Many Americans would like a retirement account that never loses money. A Roth or traditional IRA is not that account. IRA assets are not usually allocated to riskless investments, and when you have investment risk, you have potential for investment losses. IRAs are not insured by the FDIC or any other federal agency.1

In response to the desire for riskless retirement saving, the federal government recently created the myRA, a Roth IRA whose value is guaranteed to increase. Its return is pegged to the return of the government securities fund for federal employees, which averaged 3.39% a year from 2003-2013. The myRA yearly contribution limits are exactly the same as yearly Roth IRA contribution limits. After 30 years or when its balance hits $15,000, a myRA converts to a private-sector Roth IRA. A myRA is basically a vehicle to help Americans who have few or no avenues to save for retirement due to their line of work or income levels.6,7

Citations.

1 – us.hsbc.com/1/2/home/invest-retire/retirement/ira [2/16/15]

2 – fool.com/money/allaboutiras/allaboutiras03.htm [2/16/15]

3 – schwab.com/public/schwab/nn/articles/Roth-IRA-Conversion-Look-Before-You-Leap [5/1/14]

4 – fool.com/money/allaboutiras/allaboutiras14.htm [2/16/15]

5 – fool.com/retirement/iras/2015/01/11/ira-contribution-limits-in-2014-and-2015-and-how-t.aspx [1/11/15]

6 – money.usnews.com/money/retirement/articles/2014/11/24/how-retirement-benefits-will-change-in-2015 [11/24/14]

7 – myra.treasury.gov/about/ [11/24/14]

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, Glaxosmithkline, Merck, AT&T, Bank of America, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Pfizer, Verizon, 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.

What Does the Devalued Yuan Mean for the U.S.?

A look at China’s unexpected move & its potential impact.

China has surprised global investors by weakening the yuan almost 5%. Its central bank may even weaken it further.1,5

Why did the PRC make this move? Its long-booming economy is in a slump. Most notably, Chinese exports have taken a major fall. In July, they were down 8.3% year-over-year. By depreciating the yuan, China is trying to help its exports maintain their competitive edge.2

Some of China’s other economic indicators have also disappointed lately. Chinese imports have retreated for nine straight months, slipping 6.1% for June and another 8.1% in July. The pace of retail sales in China slowed to a 15-year low in July. Producer prices in the PRC suffered their largest annualized slip since 2009 last month. Lastly, the nation’s economy may grow less than 7% this year – which would be the worst showing since the 1990s.1,2

How may this impact America? The effects could be felt in several areas of our economy, and there could be some positives as well as negatives.

The Federal Reserve might decide to postpone a rate hike. Our central bank appears committed to raising interest rates before the year ends, perhaps as early as next month. A repeatedly devalued yuan might make the Fed think twice about that, however. China has effectively strengthened the dollar versus the yuan, making Chinese imports to America cheaper. That could lower consumer inflation pressure, and since annualized inflation in this country is already low, there would be less incentive for the Fed to raise rates. That would be bad news for savers but better news for some mortgage holders.3

Consumers could benefit more than businesses. As referenced above, a weakened yuan makes imported goods from China less expensive for Americans. Conversely, it also makes it that much harder for U.S. businesses to sell their products in the PRC, as Chinese consumers will have reduced purchasing power.3

You may see less hiring. A mightier greenback relative to the yuan means new hurdles for U.S. businesses in China, which could cut into earnings growth. While scores of American firms sell directly to Chinese consumers, others have strong ties to Chinese factories: look at Apple, which outsources the production of its iPads and iPhones to the PRC. A devalued yuan essentially whittles down the income U.S. businesses create in China and makes outsourced manufacturing costlier for American firms. You can draw a fairly direct line here: less income and lower earnings for American businesses could lead to slimmer payrolls. In particular, firms in the technology, energy and materials sectors could be impacted.1,3

Oil & gas could become even cheaper. Oil is a dollar-denominated commodity, so a newly weakened yuan will test China’s demand for it. A stronger dollar relative to the yuan means that oil and oil-based products will be costlier in China. The Chinese might react by decreasing oil consumption. If China’s demand for oil lessens, that would help to keep oil prices low and American drivers would likely see lower gas prices as well.3

How about the markets? Equities seem to have regained their footing. When the PRC started devaluing the yuan on August 11, Wall Street read the move as a distress signal. The Dow opened with a triple-digit drop August 11 and lost 212 points for the day. On August 12, it took an even bigger fall at the open on news of the yuan weakening again, but it was down just 0.33 points at the close. The week’s subsequent trading days brought no further dives at the opening bell. Looking at the global picture, the DAX, CAC 40, Nikkei 225, and Shanghai Composite were all up 1% or more shortly after they opened Thursday.4,5

As for the forex market, the yuan has certainly sunk versus other key currencies. By August 13, it had lost nearly 3% against the dollar over the past five trading days, and almost 5% against the euro.6

Is a global currency war about to heat up? The People’s Bank of China insists it does not seek to start one. A Barclays client report released August 13 noted the PBC “downplaying the need for a weaker yuan” at a press conference and refuting claims it wanted to devalue the currency at least 10% to support exports. Yi Gang, one of the PBoC’s deputy governors, stated that there was “no basis for a persistent weakening in the yuan… and that the aim of the PBoC is to have the market determine the exchange rate.”5

If the yuan does keep sliding and global markets slump significantly, the Federal Reserve and the European Central Bank could react supportively, providing investors with some reassurance. A weakened yuan presents another challenge to the Fed’s plans to tighten.

Citations.

1 – foxbusiness.com/markets/2015/08/12/us-stock-futures-slump-as-china-devalues-yuan-again/ [8/12/15]

2 – marketwatch.com/story/chinas-economy-enters-second-half-of-2015-on-weak-note-2015-08-09 [8/9/15]

3 – usatoday.com/story/money/business/2015/08/12/yuan-and-you-how-chinas-devalued-currency-affects-us-consumers/31524925/ [8/12/15]

4 – money.cnn.com/data/markets/dow/ [8/13/15]

5 – usatoday.com/story/money/markets/2015/08/13/market-calm/31610769/ [8/13/15}

6 – money.cnn.com/data/currencies/ [8/13/15]

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, Qwest, Chevron, AT&T, Glaxosmithkline, Merck, Hughes, Northrop Grumman, Bank of America, Alcatel-Lucent, Raytheon, ExxonMobil, Pfizer, 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.

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.