The Ups and Downs of a Dropping Unemployment Rate

In College Economics 101 (which I’ll admit was one of my favorite classes despite the risk of sounding like a nerd), one of the first things that we learned was that unemployment is a lagging indicator of a recession.  So generally speaking, it is one of the last aspects of the economy to recover after going through a recession like we did in 2008 and 2009.  We also learned that lower unemployment is good, which is pretty logical.  The reason looks like this to me:

So when I saw a headline that unemployment falling is having a negative impact on our state, it made me stop and scratch my head.

While the unemployment line in Michigan getting shorter is good news for many, about 10%, or 30,000 of the states’ long-term unemployed have lost their benefits because of this.  Wait, how can people going back to work cause others to lose their benefits?  It’s all in the fine print.

For new initial unemployment claims regular state unemployment benefits run for 20 weeks.  In addition, those who still have not found a job after 20 weeks can receive an extension from the federal government’s Emergency Unemployment Compensation fund for up to an additional 33 weeks.  The federal extended benefits program then provides another 20 weeks of unemployment benefits to those that exhaust even the 53 weeks of benefits without finding a job.

But (and there’s always a “but”) the state needs to meet a couple of requirements for their residents to qualify for those final 20 weeks of benefits.  First, the unemployment rate of the state has to be above 6.5% (Michigan is at 9.3% so no problem there).  However, the unemployment rate also needs to be 10% higher than the average total jobless rate for the same period in any of the last three years, or above 9.9% now.  As of January 28th Michigan does not meet the second requirement, resulting in this loss of aid to those people.

So, forget your textbook definitions.  Falling unemployment can be good in a lot of ways, but there is a downside too.  And when it comes to the jobless, that downside means the difference between getting some much-needed help and going it alone.

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Source: Michigan.gov
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James.

Three Legged Stool Strategy

Generating income in retirement is one of the most common financial goals for retirees and soon to be retirees.  The good news is that there are a variety of ways to “recreate your paycheck”. Retirement income might be visualized using a “Three Legged Stool”.  The first two sources or legs of retirement income are generally social security and pensions (although fewer and fewer retirees are covered by a pension these days). The third leg for most retirees will come from personal investments (there is a potential fourth leg – part time work – but that’s for another day).  It is this leg of the stool, the investment leg, that requires preparation, planning and analysis. The most effective plan for you depends on your individual circumstances, but here are some common methods for your consideration:  

1. Dividends and Interest
2. 3 – 5 Year Income Cushion or Bucket
3. The Annuity Cushion
4. Systematic Withdrawal or Total Return Approach 

Dividends & Interest:

Usually a balanced portfolio is constructed so your investment income – dividends and interest – is sufficient to meet your living expenses.  Principal is used only for major discretionary capital purchases.  This method is used only when there is sufficient investment capital available to meet your income need after social security and pension, if any. 

3-5   Year Income Cushion or Bucket Approach:

This method might be appropriate when your investment portfolio is not large enough to generate sufficient dividends and interest. Preferably 5 (but no less than 3) years of your income shortfall is held in lower risk fixed income investments and are available as needed. The balance of the portfolio is usually invested in a balanced portfolio. The Income Cushion or Bucket is replenished periodically.  For example, if the stock market is up, liquidate sufficient stock to maintain the 3-5 year cushion. If stock market is down, draw on the fixed income cushion while you anticipate the market to recover.  If fixed income is exhausted, review your income requirements, which may lead to at least a temporary reduction in income. 

The Annuity Cushion

This method is very similar to the 3-5 year income cushion. A portion of the fixed income portfolio is placed into a fixed-period immediate annuity with at least a 5-year income stream.  This method might work well when a bridge is needed to a future income stream such as social security or pension. 

Systematic Withdrawal or Total Return Approach

Consider this method again if your portfolio does not generate sufficient interest and dividends to meet your income shortfall. Generally speaking, a balanced or equity-tilted portfolio in which the income shortfall (after interest income) is met at least partially from equity withdrawals.  Lastly, set a reasonably conservative systematic withdrawal rate, which studies suggest near 4% of the initial portfolio value adjusted annually for inflation. 

After helping retirees for the last 27 years create workable retirement income, we have found that many times one of the above methods (and even a combination) works in re-creating your paycheck in retirement.  The key is to provide a strong foundation – or in this case – a sturdy stool. 

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Investments mentioned may not be suitable for all investors.  Dividends are not guaranteed and must be authorized by the company’s board of directors.  There is an inverse relationship between interest rate movements and fixed income prices.  Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices generally rise.  Investing involves risk and you may incur a profit or loss regardless of strategy selected.

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Retiring Comfortably

According to the Employee Benefit Research Institute the past few years saw a sharp decline in Americans’ confidence about their ability to obtain a financially comfortable retirement.  The 2011 Retirement Confidence Survey finds that the percentage of workers reporting they are not at all confident in a comfortable retirement has climbed to a new high of 27% (up from 22% in 2010 and a recent low of 10% in 2007).

If you believe you are behind in preparing for retirement there is no need to make the fundamental tenants like saving money and repeating the process over and over more complex. Here’s how to get started today:

1.  Remember your investment time horizon is the rest of your life . . .  and not your retirement date.  This means if you are 45 today and live to age 90, you have 45 years for your money to be working for you.
2. Ramp up retirement savings by contributing the maximum amount to your 401k plan; ($17,000 for 2012 and if you are over 50 the extra “catch-up” amount is $5500).  IRA and Roth IRA limits for 2012 are $6000 and the extra catch-up amount for those 50 and older is $1000.
3. Avoid speculative investments to try and make up for lost time or money.  If you don’t already have a financial plan to help guide you to a comfortable retirement make it a goal to call a financial planner today.   

It’s fair to say that retirement in the 21st century will be quite different than generations before. But that doesn’t mean you aren’t in control. By focusing on your own behavior, you do have the ability to create a map for your own future.

Please watch for our next post where we discuss generating income in retirement. 

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

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Gunthers Make Landfall in Landfall

It was hard to leave our beloved Michigan, but Ron and I put down roots in Landfall, a large community  near the beach on the outer edge of Wilmington, NC.  Picture not one, but two golf courses (lovely, even though we don’t golf), a great sports facility, 25 tennis courts, pool and work out rooms (that’s where you’ll find us most days).  It’s not a traditional retirement community. In fact, we have over 1000 kids in Landfall. Our neighborhood is mostly seniors but we love the mix of ages throughout.  What we noticed early on was how friendly and welcoming the people are here.

Ron and I truly enjoy the many opportunities this university town provides—we find ourselves on campus many times a month for lectures and classical concerts, recently seeing the Soweto Gospel Choir from South Africa.  We love the live theatre and the fun people the film industry brings to town plus, down here you get to hear “real” blue grass music.

But despite the beaches and beauty, Wilmington isn’t all culture and charm. Now that Wilmington is home, we also see need. I am on the board of directors for the Landfall Foundation, raising money for nonprofit organizations in our community. Luckily, this is an affluent area and the commitment of the folkshere involved in the foundation is inspiring.  Since 1995, the Foundation has given over $2.4 million to carefully screened non-profits in the areas of education, health and welfare, and the arts. Additionally, I represent our foundation on an advisory board at the University, focusing on Quality Education for Non Profit Organizations (QENO). Running seminars and classes for directors and boards of non-profits, we help them to be more effective and efficient.

Ron is taking a more hands-on approach, donating several mornings a week to our local food bank.  He is also on our neighborhood board of directors. We both find it rewarding to get involved in our new community and to have the chance to give back.

Michigan is and will always be in our blood.  We take people to task when they talk about the car industry and I proudly wear my Detroit T-shirt when I work out.  Of course, we miss home, but most of all we miss friends.  Clients are special friends, you know, and the Center is a very special place.  As I learned in Girl Scouts, “Make new friends and keep the old, one is silver the other gold”.  Aren’t we lucky to have both in our lives?  Our doors are open to visitors.  We make good tour guides and if you’re not careful, you might fall in love with Wilmington, too!

Where Did It Go?

Do you find that you ever have too much month at the end of your money? Be honest, in the blink of an eye, extra money seems to vanish. For those still in their earnings years, one of the keys to accumulating wealth, thus achieving your financial objectives, is to stop the disappearing act. Transfer dollars from your monthly cash flow to your net worth statement by adding funds to your savings accounts, taxable investment accounts, and retirement accounts (such as employer sponsored 401k and 403b accounts) and IRA’s (Traditional or ROTH).  Another smart move is to use funds from your monthly cash flow to pay down debt … also improving your net worth statement.

Saving money and improving your overall financial position is easier said than done.  The truth is that saving money is more than simply a function of dollars and cents; it requires discipline and perseverance.  You may have heard the strategy of “paying yourself first”.  The most effective way to pay yourself first is to set up automatic savings programs.  The 401k (or other employer plan) is the best way to do this – but you can also establish similar automated savings plans with brokerage companies and financial institutions such as banks or credit unions.

Just as important, be intentional with your 2012 spending.  Rather than thinking in terms of a budget (which sounds a lot like dieting) – think about establishing a “spending plan” instead. Planning your expenses as best you can will help ensure that you spend money on the things that add value to your life and should help keep your money from mysteriously vanishing at the end of the month.

For a free resource to help track your cash flow email: Timothy.Wyman@CenterFinPlan.com

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Sandy Adams Appointed to the Wayne State University Institute of Gerontology’s Board of Visitors

Sandy Adams was recently appointed to the Board of Visitors for the Institute of Gerontology (IOG) at Wayne State University.  Sandy, who also serves on the Legal and Financial Advisory committee for the IOG, has served as the liaison to the Board of Visitors for the last two years.  “I am very excited to be involved with the Institute of Gerontology through the Board of Visitors to assist in further research, outreach and advocacy for older adults,” Sandy expressed, of her recent appointment.

 The Board of Visitors is a selected group of individuals with a commitment to and support of the mission of the Institute of Gerontology at Wayne State University.  They serve the IOG on a volunteer basis by assisting in fundraising activities, providing advisory council to the Director and select staff and by acting as ambassadors in the community. Center for Financial Planning, Inc.  continues to be a partner of the Institute of Gerontology,supporting the IOG’s mission to conduct research in the social and behavioral sciences and cognitive neuroscience to issues of aging and urban health.  The IOG uses this research to provide further education to the professional community and the public through outreach and professional partnership.

Salad Surprise

A friend of mine, let’s call him Tom, is constantly put on a diet by his wife.  One of the ways Tom appeases her is by ordering taco salads in a restaurant instead of a traditional entree.  She assumes he’s being healthy, but little does she know, some of the worst taco salads can pack in as many as 1,700 calories and over 100 grams of fat! Someone needs to do her homework.

As important as it is to the success of dieting to understand what you are eating, it is equally important to understand what you are buying when making an investment.  The due diligence process is initiated with the establishment of current tactical allocation, which you can read more about here.  With the asset classes identified, it is time to start doing your homework by researching to identify the appropriate securities to fill each asset bucket.

• Define and Research:  Review asset category and characteristics of the category.  Consider opportunities and risks.
• Know what you own:  Look at a prospectus or Statement filed with the SEC to make sure you are buying what you think you are buying (is it a healthy salad or, in Tom’s case, the equivalent of 37 strips of bacon?). 
• Quantitative Review: Review of performance and risk characteristics of investment options within the category.  Criteria may include:
  • Look at performance standouts over different time periods – 1, 3, 5, 10 years.
  • Review performance in difficult time periods (bear markets or periods of performance difficulty for the asset category). 
  • Check out standard deviation, or risk, relative to similar investments.
• Establish reasons for conviction:  This can prevent you from falling into a common investor behavior of selling the investment when it is out of favor (which is usually the best time to purchase it).

Do your investment “waistline” a favor and do your homework. Don’t be fooled by taco salads, make sure you are really getting what you want when it comes to investing by having a defined buying process or talking to your financial planner today about establishing one that is appropriate for you!

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  Past performance may not be indicative of future results.

Hello 2012!

If you extrapolate last year's lessons, diversification could be seen as the biggest threat to a portfolio. Traditional US Large Company Stocks and US Government Bonds sprinted past limping "diversifiers" such as international stocks, non-traditional bonds, and alternative investments. Over history, clients have generally benefited from diversification. But this pillar of investment discipline turned into a headwind last year.

For equity investors, flat domestic returns did not tell the whole story. Consider that the return of the S&P 500 index last year was 2.1% including dividends. US Companies took a roller coaster ride to get back to their starting point - disappointing summer news was eventually overcome by maintained slow growth and exceptional corporate profits.

Source: Morningstar, Inc.

For investors,

staying the course was a challenging proposition last year. The return landscape was even more challenging for portfolios with exposure to international markets. A natural disaster and nuclear situation in Japan first set things on edge followed by enduring concerns about debt which continues to engulf the Eurozone.

Bonds were king in 2011

with long bonds issued by the US government ruling the roost. Key interest rates found new lows (insert hyperlink to interest rate chart from RJ). This was helpful if you were in the position to refinance your mortgage and was also helpful from a portfolio perspective. However, those investors who anticipate a rate rise in the future and have positioned portfolios to attempt to minimize the risks did not fully participate in the boom for fixed income investments.

Our resident economist,

Angela Palacios, CFP ®, notes that unemployment has continued its downward trend since August and is currently at 8.5% nationally which is the lowest level in more than three years according to the United States Department of Labor, Bureau of labor Statistics. Retail, manufacturing, transportation and health care are a few of the sectors enjoying job growth. Based on initial claims so far this month it also looks like we will see another decline in the rate even though it is normally high in the first two months of the year with temporary holiday workers being laid off. This reduction in unemployment is a lagging indicator of the economy showing the pickup in economic growth even though it may be slow.

Short-term lessons don't always help investors focused on the long-term results. We still believe there are critical benefits to diversification and maintain portfolios with a variety of distinctive asset categories and strategies. Our process-driven investment strategy is also designed to avoid performance-chasing sirens in favor of disciplined investing.

Sincerely,

Melissa Joy, CFS

Partner, Director of Investments

Financial Advisor, RJFS

Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market. The Barclays Capital Aggregate Index measures changes in the fixed-rate debt issues rated investment grade or higher by Moody's Investors Service, Standard & Poor's, or Fitch Investor's Service, in that order. The Aggregate Index is comprised of the Government/Corporate, the Mortgage-Backed Securities and the Asset-Backed Securities indices. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow”, is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Russell 1000: Measures the performance of the 1,000 largest companies in the Russell 3000 Index. MSCI EAFE (Europe, Australasia, Far East): A free-float adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States and Canada. The EAFE consists of the country indices of 21 developed nations. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Diversification does not assure a profit or protect against loss. Investments related to a specific sector, where companies engage in business related to a particular industry, are subject to fierce competition, the possibility of products and services being subject to rapid obsolescence, and limited diversification. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss, including the loss of all principal.