The Trend is Your Friend Til the End
2010 Interest Rates on 10 Year Bonds
1. In 2010, bond yields have moved 1.7% from peak (4.0%) to trough (2.3%)
2. In 2010 the Fed has changed rates ZERO times.
Interest rates move up and down in small increments all day, every day. Over time these small movements can have tremendous effects on your investments.
It is imperative to understand that rate movements are determined by the market, not the Fed. This is contrary to the way most people think of interest rates. Rates can start moving up without any decision from the Fed, and that should negatively effect your portfolio.
We’re coming out of a declining interest rate environment that lasted for 30 years! This has been a friendly climate for fixed income investments. What will the next 30 years be?
How susceptible is your portfolio? If you would like to review your investments, please don’t hesitate to call.
Remember: The purchase of bonds is subject to availability and market conditions. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.
NO MORE DO-OVER
Social Security Alert 
Effective immediately, the Social Security Administration has revised the withdrawal provision (a.k.a. “the Do-over”) in which a beneficiary can withdraw benefit application, payback all benefits received, and file a new application (with new benefit amount).
This revision limits the time period to withdraw to within 12 months of first month of entitlement, and only one withdrawal per lifetime. This is a direct result of the media promoting the withdrawal as a means for retirees to acquire an interest free loan. The costs of this “loan” were a burden on the Social security Trust fund and administration employees.
There is a lot of nuance to the Social Security code as we have talked about many times before. If you are interested in discussing retirement income strategies , don’t hesitate to call us at 610-862-0068.
10 Year End Tax Moves
1. Maximize your 401k 
contribution
The maximum amount an employee can contribute to a 401k plan is $16,500. This does not include the $5,500 catch-up contribution for anyone over 50 years old. Do what YOU can; if you are contributing $5000 this year, can you do $1000 more?
2. Take your RMD!
In 2009 the Requirement was waived, but it has returned in 2010. If you are over 70 ½ years old, you are required to withdraw from any retirement plan (with exception of ROTH) and the penalty for failing to take RMD is 50% of the amount that should have been withdrawn.
3. Convert to a ROTH IRA
This opportunity has been extended beyond 2010, however in 2010 only you can spread the tax consequence over the next 2 years. Additionally, you can avoid RMD in a ROTH IRA.
4. Sell!
Do you have any capital gains? How about unrealized losses? You may want to realize some losses if you have gains to offset tax liabilities. This needs to be evaluated on a case by case basis. Every individual’s situation is different- speak to your advisor before taking any action.
5. Give the gift of Green
Give cash, $13,000 to unlimited family members (or anyone, really) tax free. If you are looking to reduce your estate this is the easiest, fastest, tax free method.
6. Write checks for education
If you write a check directly to an educational institution for children/grandchildren/anyone it is not considered a gift. You can still gift $13,000 from #5 without tax liability.
7. Give to your favorite charity
If you made qualified donations this year, you may be able to take a tax deduction if you itemize on IRS Form 1040, Schedule A.
8. Make energy improvements
Qualifying improvements earn a Federal tax credit of 30% of costs up to total credit of $1500. Must be installed by 12/31/10 at your principal residence.
9. Get married!
Spouses can transfer assets between them tax-free. Ok, maybe this is excessive.
10. Have a baby!
This may open a different can of worms, but you can claim your child as a dependant and qualify for numerous credits including the child tax credit, the child care credit, and the earned income credit. Unfortunately, diapers are not deductible.
Retirement Mathematics
Lump Sum 
$1.92 million (pre-tax) is required today to fund a payment stream of $100,000 annually for 30 years. This assumes 2.5% inflation and a 6% rate of return annually.
1% Change in Rate of Return (RoR):
-1% : A 5% RoR increases your lump sum need by 13% to $2.16 million.
+1%: A 7% RoR decreases your lump sum need by 10% to $1.72 million.
These calculations do not account for any taxes due as a result of withdrawal from any pre-tax retirement account.Are you wondering what your lump sum number is? Is your nest egg big enough? Will you outlive your money?
We’d be happy to do the math for you. All you have to do is provide the following variables, and we will do the rest:
« Your current age, your spouse’s current age
« Your expected date of retirement
« Your annual income need in retirement
« Your existing streams of income
- Your social security benefit
- Your spouses social security benefit
- Pensions / Annuities / etc.
« We will use Inflation assumptions of 2.5% (unless requested otherwise)
« We will assume market returns of 6% (unless requested otherwise)
« We will use a life expectancy of 95 (unless requested otherwise)
Click here to submit your request
P.S. Here are some helpful hints:
If you don’t know your monthly need, click here for a budget template.
Want to find out your Social Security benefit? Click here.
Rising Rate Portfolio Prep
Interest Rates 1970-2010, as of 12/17/2010
When interest rates go up, the price of bonds goes down.
Take a look at this graph of interest rates going back to 1970. Rates are at 40 year lows, aside from a short lived blip during the 1st quarter of 2009 when the economy nearly halted.
In the short term, it is possible that rates stay here or go down more. But in the long run an increase in rates is inevitable, with the enormous deficit and the amount of money being printed. Once the economy starts to pick up steam, we will see a reversal in rates and UP will be the new long term trend.
If you hold fixed income investments such as bonds, you need to take a look at the duration in your portfolio. Duration is different than maturity– this is an important distinction. Duration can be used to calculate the effect each 1% increase in interest rates will have on your investment.
The economy is still soft, and the fed intends to keep rates low.. for now. Once the economy picks up however we may see a vicious cycle of rate increases and the subsequent decrease in the price of bonds.
Duration matters. Now is a good time to evaluate your investments and prepare for the future. There are steps you can take to reduce the interest rate risk in your portfolio. Call us today to discuss appropriate strategies.
No Social Security Increase for 2011
No surprise, as the COLA is tied to CPI-W, which set the last high watermark in 2008. Good news is no increase in earnings limits or any other categories that normally change annually.
Are You Fearful or Greedy?
It was 2 years ago this week (10/16/08) that Warren Buffet wrote his “Buy America, I am.” Op-ed article in the New York Times. Buffett encouraged investors to “be fearful when others are greedy, and be greedy when others are fearful.” In the 2 years since the article was written, the S&P500 has gained +29.1% on a total return basis through the close of trading last Friday (10/8/10).
Buffet is clearly a natural at removing any emotional connection to investing. In May 2009 I wrote about the risks of investing based on your emotions in Buy Low, Sell High. Where are we now?, and I still find the chart a valuable resource in analyzing the emotional analysis of where we are in the market any given day.
In my daily conversations, I ask everyone I talk to what they think of the economy and where they think the markets are going. In summary: There is not a lot of greed in today’s environment.
If you ask me, I would point directly between HOPE and RELIEF on the chart. What do you think?
take the emotions out of investing
The Muni Bond TEY Party
It’s time to consider municipal bonds.
Especially if you think tax rates are going up. As your tax bracket goes up, so does your TEY.
Last year I wrote about the power of municipal bonds here: 2 reasons to love munis. Below are the updated rates and TEY’s.
Rates as of 9/27/2010.
Remember: it’s not what you earn, it’s what you keep.
Did you know…
- Municipal Bond interest is Federal income tax-free, but may be subject to state and local taxes, and interest income may be subject to federal alternative minimum tax (AMT).
- As interest rates rise bond prices fall because rates are inversely related to bond prices
- Nobody knows where interest rates are going in the future. A bond ladder can strategically balance current income needs while reducing the risk of reinvesting at tomorrow’s interest rates.
- The purchase of bonds is subject to availability and market conditions
- Some bonds have call features that may affect your income.
I passed the CFP® Exam!
Stock Market and Elections Fun Fact
“In the 17 midterm elections since 1942, the stock market over the next 200 days has gone up 100% of the time, with an average gain of 18.3%.”
This research was done by Leuthold Weeden Capital Management, and I found it online. Of course, past performance is not indicative of future results.
It doesn’t matter what your political persuasion is; 100% is pretty impressive! 
