As I’ve mentioned before, asset allocation is essential for both investment returns and your peace of mind and I’ll explain how it relates to your finances. Asset Allocation is the process of dividing an investment portfolio among different asset categories, like stocks, bonds, and cash.
Using different asset categories is important because historically the returns of each category have not moved up and down at the same time. So, by investing in more than one category, you’ll reduce the risk of losing money in any one type of market.
So how do you decide how much money to devote to each asset type?
- Get an idea of your risk tolerance – How much risk can you handle? Do you have time to let your money grow and discipline to leave it alone through market downturns?
- Figure out if you need income from your investments or cash on hand for large expenses – Use this risk tolerance assessment to help you get started.
- Choose an asset allocation – Once you decide how much risk you’re comfortable with, you’re ready to choose an asset allocation. Use this asset allocation key as an example of a portfolio that would be appropriate for your risk tolerance.
In the 60’s we fought the establishment, in the 70’s we educated ourselves, in the 80’s we raised kids, in the 90’s we were going to change the world, but instead tried to accumulate wealth. Then, the 2000’s hit and we found out things don’t always go as planned.
If we look at investment returns for the last decade, we’re certainly disappointed at best. We thought that equities would continue to return their historical average of 10%, when in fact they had a return of approximately zero! Needless to say… it’s put a crimp in our projections. The big question for not just our generation, but all investors is what will happen over the next ten years?
Will Baby Boomers that are approaching retirement retreat to bonds, which had a total return of almost 6% over that same decade? It’s possible and it may be a mistake given that interest rates are currently at very low levels. Investments are critical to our retirement. The issue of preservation of principal has entered into the equation. Remember that your asset allocation is essential not only for returns but your peace of mind. What should we be doing with our money? Stop by next week to find out.
In the meantime, what are you doing to save? Share your tips with all our readers.
Or if you are looking for more information on planning for your retirement, Click Here>>
Let’s get back to discussing the retirement issues that Baby Boomers, the almost 80 million individuals that range in age from 46-64, are currently facing. One question that anyone on the brink of retirement needs to ask is:
How ready am I for retirement and is this going to be a problem?
Statistics tell us that the average baby boomer has approximately $50,000 in retirement accounts. By retirement accounts, I’m talking about profit sharing, 401(k)s, IRAs, and similar instruments. I’m not including pension plans where the employee receives a stated monthly benefit and not a lump sum.
Let’s think about this; if you have $50,000 in retirement and you receive the average social security payment of $1,200 per month, will you be able to maintain your current lifestyle? This is largely dependant on how well you have prepared for your retirement. Have you been reviewing your finances regularly? If not, why? Social security will be around, but it is only one aspect of a secure retirement plan. If you have delayed in reviewing your finances, please do not put it off any longer. These 2 steps are a great way to get started:
- Look at your numbers, how much money do you have to meet your retirement needs
- Begin to define what your retirements needs are
What other steps are you taking to prepare for your retirement? Share here to help your fellow Boomers.
For more information on planning for your retirement please click here>>
Our discussion on economic fault lines will now cover the housing market.
During the first quarter, the housing market showed signs of improvement, thanks to government assistance like the $8,000 first-time-homebuyer tax credit and the Federal Reserve's purchase of more than $1 trillion in mortgages. Now that those programs have come to an end, what will happen to the housing market?
Already we have seen a drop in construction. Last month, home construction dropped 10%, to the lowest level since December. Applications for new building permits, an indicator for future activity, have also fallen to the lowest level in a year.
Foreclosures are still on the rise. A record 14.7% of mortgage loans in the 1st quarter were either delinquent or in foreclosure. Which means that people are still struggling to make payments. Locally we had 300 homes placed in foreclosure in Winnebago County last month, which puts us on pace for a yearly record, if this trend continues. Let's hope that this is a short-term trend.
We have entered into a difficult cycle where we need jobs to spend money, pay bills, and buy houses. With the job outlook being bleak, it may be some time before we turn around. It could take years before we see a turn in housing. However, the good news is that real estate is as cheap as it has been in years! Who would have ever thought that real estate which increased in value for 40 consecutive years would drop in value for now 3 years in a row?
We started discussing economic fault lines last week, or areas of the economy that are still struggling. Last week I covered unemployment; this week I want to talk about the credit markets. Banks have struggled since late 2007 with several issues. Among those issues are: commercial real estate, bankruptcies, falling real estate values, and a very weak economy. These issues caused financial institutions to focus their energies on capital and asset quality.
Banks need capital to make loans to businesses. This refocusing of priorities from growth to capital and asset quality has caused lending to dry up. It does not appear as though this trend will change in the next 12 months. Remember, in order for the economy to grow, the credit markets must be in a growth mode. So it appears that our number two obstacle for growth will remain well into 2011. The good news here is that we are seeing some light at the end of this banking crisis tunnel. Problem loans, as defined by regulatory authorities, have peaked as of year-end and have shown further improvement at the end of the first quarter.
We must have a strong banking system that is dependent on not just making new loans but repaying existing loans! Let me assure you, the banking system is strong. Next week, we will delve into residential home sales and foreclosures and their effect on the economy. Thanks for reading.
This week we'll continue our discussion about Greece and its effect on the rest of the European Union.
Ireland and Spain have announced austerity plans of their own to reduce debt and cut budget deficits. The European Union has called on euro-member governments to crack down on debt, demanding tighter oversight to keep countries within tough deficit limits.
High unemployment and slow economic recovery are hindering the effectiveness of austerity measures. Governments will need to cut back on spending, raise tax revenues, or both.
You may be wondering how the United States compares. We hear about the national debt and budget deficit all the time in the news. So are we on the same path as Greece?
Probably not.
Greece's debt equals 115% of its gross domestic product. The United States' is 67%. And though the U.S. may be headed for financial problems of its own down the line if spending doesn't change, it is unlikely to get into the situation that Greece is in any time soon. One advantage of the United States is that it has control of its currency. If the United States needs to print more money, it has that ability. Greece is at the mercy of the European Union to make decisions about the money supply.
It seems in order for the global economy to recover, countries all over the world must make an effort to cut back on spending. Greece has about twice as much debt as the United States; it's not too late to turn this ship around, let's tighten our belts and improve our finances!
Greece is in trouble. The European Union recently agreed on a $146 billion bailout for the county to keep it from defaulting on its government debt. The 16 countries that share the euro currency agreed there was no other option but to rescue Greece from defaulting to keep the euro out of trouble. Other countries like Portugal and Spain are debt strapped as well.
How did Greece get into this mess? The short answer is years of unrestrained spending, cheap lending, and failure to implement financial reforms. The country held on to government programs that it couldn't afford, like a pension program that allowed workers to retire on a lifetime pension equivalent to 80% of their final salary. Also, tax evasion had become commonplace. The country had been hiding the severity of its mounting debt problems until the new Prime Minister was faced with a crop of government debt coming due and was forced to come clean.
Greece's national debt was reported at $415 billion. That's 115% of GDP. The Greek government initiated austerity measures that cut spending and government benefits, but current debts still remain. Investors feared a default that would threaten other eurozone countries.
The IMF, the world's lender of last resort, negotiated a nearly $1 trillion global emergency rescue package of standby funds and loan guarantees that could be tapped by eurozone governments in peril. This should help calm investors bring confidence back to the euro.
Is the United States far behind? Stop by next week and you will find out.
The state of Illinois is in a budget crisis. According to the Wall Street Journal, the state is expecting a nearly $13 billion deficit for the upcoming fiscal year. The latest count puts Illinois' unpaid bills at around $5 billion; is bankruptcy a real possibility?
Ratings agency Fitch, downgraded Illinois' municipal bond rating to A-. That makes Illinois the second-lowest rated state in the nation, after California.
Governor Pat Quinn recently unveiled a budget for the 2011 fiscal year that centers on what he calls "Five Pillars of Recovery". These are: creating jobs, cutting costs, strategic borrowing, continued federal assistance, and increased state revenues.
According to Quinn, cuts will be made through employee furlough days, renegotiated contracts, pension stabilization, in which the state is supposed to pay $5.4 billion next year and $10 billion the year after that, and services like home care for older adults, child care, and reducing community mental health services.
Education will suffer cuts as well. $1.3 billion will be cut from general state aid, student transportation, grants and universities. School districts across the state have already begun eliminating programs and teachers.
Governor Quinn has launched a website inviting everyday residents to make suggestions about the budget. I invite you to leave me a comment on what you think should be done in Illinois. Should further cuts be made? Should taxes be raised? Should we vote legislators out of office? I want to hear your thoughts.
Have you ever wondered how much you pay in taxes? And not just for your income taxes, for everything: property taxes, sales tax, school tax, and so on. How much is it all together?
When you combine federal, state, and local taxes, the average American has to work 99 days to earn enough money to pay for them. That's over a third of the time you spend working! According to the Tax Foundation, Americans have to work 32 days to pay individual income taxes, 25 days to pay social insurance taxes, 15 days to pay sales and excise taxes, 12 days to pay property taxes, and 15 days to cover all the rest. Americans will spend more on taxes in 2010 than food, clothing, and shelter combined.
Let's look at Social Security. The income subject to social security tax will remain the same in 2010 as 2009, at $106,800. That means you will have to pay Social Security tax of 6.2% on income you earn up to the limit.
The Tax Foundation puts together a handbook each year that breaks down average taxes by state. It shows everything from the average tax burden of each resident, to the average tax on a gallon of gas. Each category is ranked from highest taxes to lowest so you can see how states compare. Now you can see why people are angry over taxes. To view the handbook click here>>
Thanks for reading.
Tomorrow is tax day. Are you prepared? Don't forget to file your tax return on time. The penalty for filing late is 5% interest on the amount you owe for each month that you don't file, up to 25%. If you know you won't be able to complete your return on time, file an extension. You'll be glad you did.
Another reason to file your taxes is the tax refund. The vast majority of filers are due refunds. According to early data from the IRS, almost 90% of returns processed so far have resulted in a refund. And the average refund for 2009 has reached $3,036, which is $266 higher than last year. This increase is partly due to new tax benefits enacted in 2009. Among these were, the first-time home buyer credit, sales tax deductions on new car purchases, credits for homeowners who made their homes more energy efficient, and the first $2,400 of unemployment benefits were tax free.
These larger refunds have increased the number of households that end up owing nothing in federal income taxes. According to estimates by the Tax Policy Center, roughly half of households, or 71 million, will not owe any federal income tax in 2009. These households include almost all that earn up to $30,000 as well as half of households that earn between $30,000 and $40,000.
The top 1% of households paid 39% of all individual income taxes. And the top-earning 25% paid more than four out of every five dollars collected by the federal income tax! Let's all pay our taxes and thanks for reading.