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Ask the CFP: How Does the Federal Reserve Bank Raising Rates Affect Me?

 

Hello everyone and welcome to this month’s Ask the CFP segment. This month’s question is, “how does the Federal Reserve Bank raising rates affect me?” It’s common knowledge today that interest rates are increasing to fight high levels of inflation. Interest rates vary for many reasons but are largely based on the rate set by the Fed for lending between banks. If lending between banks becomes more expensive because of higher rates, those banks pass on the higher costs to businesses and consumers through higher rates on loans. This is where we find the answer to this month’s question.

How the Fed rate increases affect someone’s finances depends on their financial situation. For example, if you’re close to retirement and have a pension, rate increases are likely to affect the actuarial assumptions used within the pension. If you have the option of taking a lump-sum payout, your lump-sum estimate may decrease as rates increase. That’s because lump-sum pension payouts are based on the amount of money needed to provide income through someone’s life expectancy. If the pension can rely on higher rates of return on bonds, then less money would be needed to provide that income through life expectancy. Lump-sum pension payouts aren’t for everyone, but if you’ve been considering it, now may be a good time to review your options.

Aside from pensions, some people may welcome the idea of higher interest rates, especially if they use CDs, money market funds or other fixed income investments. Higher rates mean higher rates of return for these types of products. However, for anyone that already owns fixed income investments such as bonds, it means your bonds will be decrease in value – at least on paper. A bond purchased four years ago may be worth less today since someone could buy a similar bond at a higher rate today. This has been a tough market for bond owners because of this inverse relationship between bond values and interest rates. Keep in mind though, as bonds mature, they generally receive their bar value back. This means the lower value you see on paper for a four-year-old bond may rise back to it’s original par value if held to maturity.

Lastly, for anyone relying on debt, such as mortgages, business loans or student loans, the cost to borrow will likely increase as the Fed increases rates.  Mortgage rates have already seen increases from 2-3% to 5-6%. For this reason, if you need a loan, it may be wise to lock in a fixed rate now before further rate increases occur. When it comes to funding college, this is a great example of how proper planning and saving to a 529 plan can reduce or eliminate the need for student loans in the future. Cash isn’t always king, but it certainly helps to have it when loan rates increase.

Overall, rate increases cause change and change causes volatility. During this volatility, we must remember why the Fed is increases rates. It’s all in an effort to lower inflation to around 2% long-term. If you have a question about this topic or have a question for next month’s video, please send it to TFreeman@MonetaGroup.com. Thanks for watching and we’ll see you next month.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please speak with a qualified tax or legal professional before making any changes to your personal situation.

©2022, Moneta Group Investment Advisors, LLC. Trademarks and copyrights of materials referenced herein are the property of their respective owners. These materials have been prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Past performance is not indicative of future returns. You cannot invest directly in an index. These materials do not constitute an offer or recommendation to buy or sell securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed investment professional before making any investment decision.

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What to Expect When You’re Expecting — to Retire

Kevin Ward, Advisor

Retirement is a sprawling topic. The word alone can raise questions, emotions, and concerns—about how exactly your future will look, what life will entail as the day-to-day changes, how the financial situation will unfold, and more. Though far from exhaustive, we will lay out herein a few of the major areas to think about and what to expect when you’re approaching retirement, broadly broken into two buckets: financial considerations and lifestyle and emotional considerations.

Naturally, some of retirement’s most significant shifts involve money and expenses, a major one of which is health insurance. Most full-time employees today receive health insurance through their employers—narrowing their range of choices and mitigating their premium costs, which are typically covered partially or fully by their employers. In contrast, retirement opens a world of health insurance options, which can be daunting to decipher. Further, prices can vary dramatically, as can coverage levels.

For most retirees 65 years and older, Medicare is an option offering generally lower premiums than many private plans—though private plans may offer coverage more suited to your health situation. Retirees under age 65 may similarly purchase a plan through the federal marketplace established under the 2010 Affordable Care Act, through their state insurance exchange, or a private insurance provider. We could easily write a short novel on all the health insurance options available—and there are many good resources available online that outline significant differences and considerations—but suffice it to say among the critical factors are:

• How much you will pay in monthly premiums.
• How high the deductible is, what is and isn’t covered.
• Whether your current doctors are in the network of the plan you’re contemplating.

Another important monetary shift in retirement is your income source, which will no longer be primarily your employer. Planning is key—understanding your expenses and income sources and budgeting well in advance will help ease the anxiety that can accompany the cessation of regular paychecks. As with health insurance, government programs like Social Security for eligible retirees 62 years and older can help provide some monthly income. If you have an equity portfolio, you may be able to replace some or all monthly income via dividends and interest payments. Similarly, investment or rental properties may generate monthly cash flow. Establishing monthly or bi-monthly recurring transfers or deposits into your checking account can serve as a paycheck replacement and help you maintain a consistent approach to your household budgeting and spending once you’ve retired.

It’s also worth considering where you will live. Perhaps you already live in your dream home, can afford to keep and maintain it, and have no interest in moving. But you’ve always thought about a second home—maybe in a warmer location, maybe nearer the ski slopes for some winter recreation. Or, perhaps your home isn’t practical for the lifestyle you anticipate in retirement—maybe you’d like to be nearer to other family members, or you’d like a smaller place that’s easier and more cost-effective to maintain. These are all things that may shift as you approach and enter retirement.

Finally, think about whether there are other ways in which your financial goals will change—no longer will you strive for retirement, but you may have new financial goals, whether paying for your grandchildren’s educations or purchasing a second home. Your focus may shift from covering your own living expenses to thinking about leaving a legacy or supporting causes about which you are passionate.

Critical to all financial shifts in retirement, whether insurance, investments, or real estate, is planning for them sufficiently in advance—particularly if they require meaningful changes in your savings or investment strategy. Planning early will ensure you can position yourself as well as possible and increase the likelihood you can feasibly accomplish your goals and live the life you’ve envisioned for yourself and your family.

There are also important lifestyle and emotional shifts in retirement—where and how you will spend your time and how your daily emotional and physical realities will change when you’re no longer going to a job or an office. When it comes to keeping busy, the options are myriad and exciting. Perhaps you’re not ready to retire entirely and would like to work part-time, whether for your existing employer or elsewhere. Alternatively, you could offer the benefit of your years’ experience and wisdom gained via consulting, either through an independent consulting firm you establish on your own or through an existing one. Your experience could also tremendously benefit any number of boards—non-profit or for-profit, depending on your interests.

Then, of course, there are the many ways to spend time that doesn’t involve work at all, but instead family, friends, travel, and the pursuit of passions often deferred during your prime working years. Perhaps you’ve long wanted to travel the world with your spouse or other family members or friends. Maybe you’ve eagerly awaited the day you could teach your grandchildren the finer points of golf or the piano. Maybe you’re ready to take the senior tennis world by storm yourself.

However you plan to spend your time, one thing is assured: Your days will look different. And these changes can evoke confusing and challenging emotions. Shifting from going to a specific place or doing a particular set of daily tasks to planning your own time with much more autonomy can overwhelm you. It’s advisable to think about these changes and the potential emotions in advance—not necessarily so you can avert them or manage them perfectly, but so you won’t be surprised when they arise. Also important is planning with your spouse and other family members whom you anticipate will be impacted—for example, your children and grandchildren who live nearby. Envisioning your new daily life with those who regularly participate can help manage and mitigate the jolt from stepping away from a career.

As with all significant life changes and milestones, retirement introduces a wealth of considerations; financial, personal, emotional, and otherwise. Though it can be easy during your prime working years to focus on your career and keep your head down, it’s important to lift it periodically to assess your situation—where you are, where you’d like to go—and ensure you’re positioning yourself to meet those goals. Leveraging the experience of a trusted financial advisor to help you create a plan that can flex as your circumstances change will help you navigate the complex world of retirement.

If you have more questions, please reach out to our team at breckenridgeteam@monetagroup.com.

© 2022 Moneta Group Investment Advisors, LLC. All rights reserved. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information and opinions contained herein are subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

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source https://monetagroup.com/blog/what-to-expect-when-youre-expecting-to-retire/

Moneta Partner Lynn Dunston featured by Local Denver 7 News

Local Denver 7 News turned to Moneta Partner Lynn Dunston to discuss the topic of retirement planning in a volatile market environment.

Here is an excerpt of Dunston’s insight from an article posted on thedenverchannel.com:

“So, a really good retirement plan is flexible and adaptable,” said Lynn Dunston, a partner at the wealth management firm Moneta.

Dunston says a good tip anyone should consider, even those not working with a financial advisor, is to keep some cash aside so it is not exposed to market volatility. The report from BMO showed this is happening more as more people are making yearly budgets and planning for the future, even if it is at a slower rate.

To read the full story on the Local Denver 7 News website, click here.

©2022, Moneta Group Investment Advisors, LLC. These materials have been prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Past performance is not indicative of future returns. You cannot invest directly in an index. These materials do not constitute an offer or recommendation to buy or sell securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed investment professional before making any investment decision.

The post Moneta Partner Lynn Dunston featured by Local Denver 7 News appeared first on Moneta Group.

source https://monetagroup.com/blog/moneta-partner-lynn-dunston-featured-by-local-denver-7-news/

Moneta Partner Lynn Dunston featured by Local Denver 7 News

Local Denver 7 News turned to Moneta Partner Lynn Dunston to discuss the topic of retirement planning in a volatile market environment.

Here is an excerpt of Dunston’s insight from an article posted on thedenverchannel.com:

“So, a really good retirement plan is flexible and adaptable,” said Lynn Dunston, a partner at the wealth management firm Moneta.

Dunston says a good tip anyone should consider, even those not working with a financial advisor, is to keep some cash aside so it is not exposed to market volatility. The report from BMO showed this is happening more as more people are making yearly budgets and planning for the future, even if it is at a slower rate.

To read the full story on the Local Denver 7 News website, click here.

©2022, Moneta Group Investment Advisors, LLC. These materials have been prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Past performance is not indicative of future returns. You cannot invest directly in an index. These materials do not constitute an offer or recommendation to buy or sell securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed investment professional before making any investment decision.

The post Moneta Partner Lynn Dunston featured by Local Denver 7 News appeared first on Moneta Group.

source https://www.monetagroup.com/blog/moneta-partner-lynn-dunston-featured-by-local-denver-7-news/

Ask the CFP: Can I Borrow From My Own Portfolio?

 

Hello everyone and welcome to this month’s Ask the CFP segment. This month’s question is, “Can I borrow from my own portfolio?” People often associate debt with poor financial decisions. We’re usually taught in our youth that credit cards are bad and paying off your mortgage as quickly as possible is good. While some types of debt are certainly bad, using debt as leverage for other financial strategies can be good. Two reasons for using debt include leverage for potentially higher gains and to avoid taxation.

Many 401(k) plans in America allow employees to borrow against their retirement plans. While I’m generally not a fan of this strategy, one reason some people use 401(k) loans instead of early withdrawals is to avoid triggering income taxes. The IRS views borrowing differently than distributing. While 401(k) loans are common knowledge, two lesser-known strategies to borrow against one’s portfolio also exist. Keep in mind, these only exist for taxable, non-qualified investment accounts, not IRAs.

First, investors can establish what’s called a securities-based line of credit. If someone has $1 million in an investment account, they can pledge their investment account as collateral on a loan. Banks will review the types of investments held in the account to determine how much it may fluctuate. An account with all stocks will obviously fluctuate more than an account with all bonds, so banks may be willing to lend more for portfolios with less volatility. A $1 million portfolio with a mix of stocks, bonds and real estate might be approved for $700,000, for example. Once approved, these dollars can’t be used to buy more investments, but they can be used for home improvements, buying real estate, business ventures and more. Monthly payments are generally interest-only, but principal can be paid back at any time and even re-borrowed again later.

Second, investors can establish margin loans on their non-qualified investments. Similar to securities-based lines of credit through banks, brokerage firms make margin loans available to customers based on their account balances. You can generally borrow up to 50% of the value of your investments on a margin loan. This type of loan doesn’t require a lengthy underwriting process or a credit check, so it’s generally much easier to establish. Interest accrues to the account and the brokerage firm will let you know if you need to add cash or sell securities to maintain enough equity in the account.

These two types of borrowing methods can be wise in a low interest rate environment. If someone needs cash to buy a home before they’ve sold their current home, they might consider selling some of their investments. However, if that would trigger taxable gains, it may be a poor choice for a short-term cash need. That’s one reason why borrowing against a portfolio can make financial sense. These loan types typically offer more competitive interest rates than traditional financing thanks to the investments that back up the loan. It’s less risk for the lender, so they generally offer a competitive interest rate.

So can you borrow from your own portfolio? If you have non-qualified assets, yes, it’s an option and one you should consider if you need cash and want to avoid taxes on appreciated assets. Leveraging debt is completely fine if used wisely. If you have a question about this topic or have a question for next month’s video, please send it to TFreeman@MonetaGroup.com. Thanks for watching and we’ll see you next month.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please speak with a qualified tax or legal professional before making any changes to your personal situation.

©2022, Moneta Group Investment Advisors, LLC. Trademarks and copyrights of materials referenced herein are the property of their respective owners. These materials have been prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Past performance is not indicative of future returns. You cannot invest directly in an index. These materials do not constitute an offer or recommendation to buy or sell securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed investment professional before making any investment decision.

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Game On: Fed Raises Rates to Combat Inflation

Aoifinn Devitt, MBA | Chief Investment Officer
Chris Kamykowski, CFA, CFP® | Head of Investment Strategy and Research

After hesitating for months around whether inflation was transitory and to what extent, the US Federal Reserve has “taken the gloves off.” By raising rates today by 75 bps (the largest single increase since 1994) the Fed indicated it is committed to addressing persistently high inflation via monetary policy. In straying from its earlier commitment to 50 bps at this meeting, it responded to inflation that became stubbornly high – as well as “sticky” – and generally heeded the growing rallying cry by investors to do more, faster.

The problem is that monetary policy is not a precision instrument when it comes to fighting inflation. Inflation is driven by both demand and supply, so factors choking off economic activity through higher rates can only affect part of it.  Much of the current inflation is a result of supply-side increases such as input costs and the cost of energy in particular.

Furthermore, the consumer (a key component of demand) is still artificially propped up by the overhang of Covid-induced excesses, such as occasional windfalls in the form of stimulus payments, enhanced unemployment benefits, and excess savings that occurred when travel and other services were curtailed. This “overhang” might now be seen as pent-up demand, whether for “revenge tourism” or other services. No matter how much the Fed wishes to tame the consumer through interest rate hikes, perhaps that horse has bolted.  Maybe after two years of Covid restrictions the consumer cannot – at least for a spell – be tamed.

When we think about the Fed’s mission, we might think in terms of a journey and a destination.  What is the destination? Clearly the Fed – and indeed any central bank – is aiming not only for lower actual inflation prints, but also lower inflation expectations.  If consumers expect inflation to remain high, this may fuel a “buy now” mentality by consumers, which only exacerbates the trends in prices.

How they get there – the “journey” – is now clearly diverging around the world.  A central bank may – as is the case with the ECB – delay action with rates given flailing economic activity across the Eurozone. On the other hand, a central bank may operate with clarity of purpose (like the Bank of England) to address potential hazards with an unflinching approach to raising rates month on month.

Based on the latest Fed announcement today, the Fed’s actions are more akin to the Bank of England. They are perhaps keen to avoid the “gradualist” approach to curtailing inflation that stymied the Fed for most of the 1970s. This only ended when Paul Volcker took charge and made crushing inflation and inflation expectations, THE priority. The guide for addressing persistently high inflation is in the Fed’s hands. Luckily, elevated inflation is a fairly recent nuisance versus the multiple years of double-digit inflation seen in the 1970s.

The Fed now must decide what speed to take on its journey to improve its chances of reaching its destination sooner. Move too slow and it faces the risk of inflation becoming unhinged and stagflation growing in possibility; move too fast and it faces the risk of driving the economy into a deep recession.

For all these reasons, we are wary of expecting central bank policy to be any kind of silver bullet for today’s market strains.

Therefore, as we navigate markets today, we are taking stock of the rapid information discovery that it is allowing. The swift correction in valuations has taken Price/Earnings multiples closer to historic averages while earnings have stayed relatively stable.

Source: Bloomberg. As of June 14, 2022. See important disclosures at the end of this article.

We are also focusing on maintaining portfolio breadth; while the overall stock market as expressed by the S&P is now in a bear market (defined as down more than 20% from its peak), the pain has been quite sector specific and not universally felt. For example, sectors such as financials, industrials, health care, materials, consumer staples and utilities – while weak – have been less weak than consumer discretionary and technology stocks, which have dominated the sell-off.

Source: Morningstar. As of June 14, 2022. See important disclosures at the end of this article.

This is why we maintain a balance between value and growth sectors, and a blend of passive and active solutions so that when dispersions in sectors and stocks emerge, there is a higher likelihood of taking advantage of them through active stock-picking.

We are also witnessing the true behavior of dazzling objects – old and new. Gold is the original shiny new portfolio object as it was expected to behave as an inflation hedge and diversifier in a portfolio; yet, it has been an abject disappointment year-to-date despite the rising inflation indicators. Similarly, the new-fangled shiny object of cryptocurrency – which was expected to behave as an inflation hedge, portfolio diversifier and return enhancer – has tumbled amid the recent volatility and delivered on none of those expectations.

Source: Morningstar. As of June 14, 2022. See important disclosures at the end of this article.

The “old faithfuls” in terms of inflation protection – real estate, infrastructure and real assets – are reeling somewhat from the current shocks, but still protecting capital relative to mainstream markets.

As of June 14, 2022. See important disclosures at the end of this article.

During periods of extreme volatility like this, we try not to get too focused on technical levels – historic market support, for instance – as these have only limited value, like guard rails on a highway. Just as a tractor trailer can plough through the guardrails, an unprecedented confluence of risk factors such as what markets face today may push markets outside their traditional guardrails.

We focus instead on what we do know: labor markets remain strong, consumer spending is robust despite falling confidence levels, and this spending is supporting company margins. We know innovation is still rife and can often thrive amid a market upset. We know the focus on energy security will drive investment in renewable energy sources, and that Covid vaccine development will herald a new era of faster-paced drug development. A well-diversified portfolio will help investors stay the course.

Definitions

• Forward Earnings: Index estimated earnings for next fiscal year based on the best estimate for each member.
• Price-to-Forward Earnings: Current index price level vs estimated earnings for next fiscal year based on the best estimate for each member.
• The S&P Sector and Industry Indices represent sub-sets of the S&P 500 index and measure segments of the U.S. stock market as defined by GICS®.
• LBMA Gold Price is administered independently by ICE Benchmark Administration and utilizes its auction platform on which the LBMA Gold Price is calculated. Daily auctions are held in London twice a day and final auction prices are posted in US Dollars.
• CoinShares Physical Bitcoin (BITC) is a physically backed Exchange Traded Product. BITC trades on a regulated exchange, can be bought and sold like an equity, and provide direct exposure to the price of Bitcoin.
• The S&P 500 Index is a free-float capitalization-weighted index of the prices of 500 large-cap common stocks actively traded in the United States.
• The S&P Global Infrastructure Index provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe. To create diversified exposure across the global listed infrastructure market, the index has balanced weights a cross three distinct infrastructure clusters: Utilities, Transportation, and Energy.

Disclosures

© 2022 Moneta Group Investment Advisors, LLC.  All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Trademarks and copyrights of materials referenced herein are the property of their respective owners. Index and/or Style returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. You cannot invest directly in an index. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

The post Game On: Fed Raises Rates to Combat Inflation appeared first on Moneta Group .

source https://monetagroup.com/blog/game-on-fed-raises-rates-to-combat-inflation/