retirement ready

Reassessing Retirement Assumptions

Posted by Mike Bonacorsi CFP® | Posted in May 10, 2013 | No Comments

What makes financial sense for some baby boomers may not make sense for you.

Provided by Mike Bonacorsi, CFP®

There is no “typical” retirement. Many baby boomers want one and believe that they will have one, and their futures may indeed unfold as planned. For others, the story will be different. Just as there is no routine retirement, there are no rote financial moves that should be made before or during this phase of life, and no universal truths about the retirement experience.

Here are some commonly held assumptions – suppositions that may or may not prove true for you, depending on your financial and lifestyle circumstances.

#1. You should take Social Security as late as possible. Generally speaking, this is a smart move. If you were born in the years from 1943-1954, your monthly benefit will be 25% smaller if you claim Social Security at 62 instead of your “full” retirement age of 66. If you wait until 70 to take Social Security, your monthly benefit will be 32% larger than if you had taken it at 66.¹

So why would anyone apply for Social Security benefits in their early 60s? The fact is, some seniors really need the income now. Some have health issues or the prospect of hereditary diseases influencing their choice. Single retirees don’t have a second, spousal income to count on, and that is another factor in the decision. For most people, waiting longer implies a larger lifetime payout from America’s retirement trust. Not everyone can bank on longevity or relative affluence, however.

#2. You’ll probably live 15-20 years after you retire. You may live much longer, especially if you are a woman. According to the Census Bureau, the population of Americans 100 or older grew 65.8% between 1980 and 2010, and 82.8% of centenarians were women in 2010. The real eye-opener: in 2010, slightly more than a third of America’s centenarians lived alone in their own homes. Had their retirement expenses lessened with time? Doubtful to say the least.²

#3. You should step back from growth investing as you get older. As many investors age, they shift portfolio assets into investment vehicles that offer less risk than stocks and stock funds. This is a well-regarded, long-established tenet of asset allocation. Does it apply for everyone? No. Some retirees may need to invest for growth well into their 60s or 70s because their retirement savings are meager. There are retirement planners who actually favor aggressive growth investing for life, arguing that the rewards outweigh the risks at any age.

#4. The way most people invest is the way you should invest. Again, just as there is no typical retirement, there is no typical asset allocation strategy or investment that works for everyone. Your time horizon, your risk tolerance, and your current retirement nest egg represent just three of the variables to consider when you evaluate whether you should or should not enter into a particular investment.

#5. Going Roth is a no-brainer. Not necessarily. If you are mulling a Roth IRA or Roth 401(k) conversion, the big question is whether the tax savings in the end will be worth the tax you will pay on the conversion today. The younger you are – roughly speaking – the greater the possibility the answer will be “yes”, as your highest-earning years are likely in the future. If you are older and at or near your peak earning potential, the conversion may not be worth it at all.

#6. A lump sum payout represents a good deal. Some corporations are offering current and/or former workers a choice of receiving pension plan assets in a lump sum payout instead of periodic payments. They aren’t doing this out of generosity; they are doing it because actuaries have advised them to lessen their retirement obligations to loyal employees. For many pension plan participants, electing not to take the lump sum and sticking with the lifelong periodic payments may make more sense in the long run. The question is, can the retiree invest the lump sum in such a way that might produce more money over the long run, or not? The lump sum payout does offer liquidity and flexibility that the periodic payments don’t, but there are few things as economically reassuring as predictable, recurring retirement income. Longevity is another factor in this decision.

#7. Living it up in your 60s won’t hurt you in your 80s. Some couples withdraw much more than they should from their savings in the early years of retirement. After a few years, they notice a drawdown happening – their portfolio isn’t returning enough to replenish their retirement nest egg, and so the fear of outliving their money grows. This is a good argument for living beneath your means while still carefully planning and budgeting some “epic adventures” along the way.

Your retirement plan should be created and periodically revised with an understanding of the unique circumstances of your life and your unique financial objectives. There is no such thing as generic retirement planning, and that is because none of us will have generic retirements.

Mike Bonacorsi may be reached at (603) 769-3111 or Mike.Bonacorsi@lpl.com www.MikeBonacorsi.com

Mike Bonacorsi is a Registered Representative with and, securities are offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Mike Bonacorsi LLC, a registered investment advisor and a separate entity from LPL Financial.

*Traditional IRA account owners should consider the tax ramifications, age and income restrictions to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – www.forbes.com/sites/janetnovack/2011/02/15/the-big-decision-when-to-take-social-security/ [2/15/11]
2 – money.usnews.com/money/retirement/articles/2013/01/07/what-people-who-live-to-100-have-in-common [1/7/13]

When a Family Member Dies

Posted by Mike Bonacorsi CFP® | Posted in April 8, 2013 | No Comments

A financial checklist for the most difficult of times.

Provided by Mike Bonacorsi, CFP®

The passing of a loved one irrevocably alters family life. When a family member dies, there is so much to attend to that addressing financial matters related to a family member’s passing may be put on hold. This should be done, though, and it is better to do it sooner rather than later. Here, then, is a list of what commonly needs to be looked after.

Request copies of the death certificate. Depending on where you live, you have two or three places to turn to for this document. You can phone, email or personally visit the office of the county recorder (or county clerk, as the term may be). You can alternately contact your state’s vital records department (sometimes called the state registrar or department of health), though it may take a little longer to get the document this way. In addition, some large and mid-sized cities maintain their own registrars of births and deaths.

Call advisors, executors & business partners as applicable. The deceased’s lawyer and CPA should be quickly notified, along with any business partners and the executor of his or her estate. You must have a say in the decision-making that follows. The goals of protecting family assets, carrying out your loved one’s bequests, and determining the next steps for a business will follow.

Call your loved one’s current or former employer(s). Notify them even if he or she left the work force years ago, as retirement savings or pension payments may be involved. As the conversation develops, it is perfectly appropriate to ask about pertinent financial matters – say, 401(k) or 403(b) savings that will be inherited by a beneficiary or what will happen to unused vacation time and/or unpaid bonuses.

Funds amassed in a qualified retirement plan sponsored by an employer (or an IRA, for that matter) commonly go to the primary beneficiary who has been named on the most recent beneficiary form filled out by the account owner. That sounds simple enough – but certain rules and regulations can make things complicated.¹

As a general rule, if the late 401(k) or 403(b) account owner was your spouse, then you are the presumed beneficiary of the 401(k) or 403(b) assets. Under the Employee Retirement Income Security Act (ERISA), workplace retirement plans are directed to abide by this guideline. If someone else has been named as the primary beneficiary of the account with your consent, then the assets will go that person.¹

If the late 401(k) or 403(b) account owner was single, the assets in the account will go to whoever is designated as the primary beneficiary. The beneficiary designation will override any wishes stated in a will (for the record, the Supreme Court ruled so in 2009).¹

To arrange and confirm the transfer or distribution of such assets, the beneficiary form must be found. If you can’t locate it, the employer and/or the financial firm overseeing the retirement plan should provide access to a copy. The financial firm should ask you to supply:

*A certified copy of the account owner’s death certificate

*A notarized affidavit of domicile (a document certifying his or her place of residence at the time of death)

If the named beneficiary of the retirement plan assets is a minor, his or her birth certificate will be requested. If the named beneficiary is a trust, the financial firm will want to see a W-9 form and a copy of the trust agreement.²

As to what to do with the retirement plan assets, there are really only three courses of action: you can a) transfer the assets into an IRA, b) transfer them into an IRA you own if the account owner was your spouse, or c) take the assets as a lump sum and pay the resulting income tax on that money, with the possibility of moving into a higher tax bracket.²

The value of these assets will be included in the estate of the deceased, unless the named beneficiary is a spouse or a charity.³

If you have been widowed, call Social Security. If you already receive benefits, you may now be eligible for greater benefits.

If your spouse received Social Security and you did not, you may now qualify for survivors benefits – and you should let Social Security know as soon as possible, as these benefits may be paid out relative to your application date rather than the date of your loved one’s death.

If this is the case, you may apply for survivors benefits by phone or by visiting a Social Security office. You will need to have some extensive paperwork on hand, specifically:

*Proof of the death (death certificate, funeral home documentation)

*Your late spouse’s Social Security #

*His/her most recent W-2 forms or federal self-employment tax return

*Your own Social Security # & birth certificate

*Social Security #s & birth certificates of any dependent children

*Your marriage certificate or divorce papers, as relevant

*The name of your bank & the number of your bank account for direct deposit purposes

If you have reached full retirement age, you will likely get 100% of the basic benefit amount that your late spouse was receiving. If you are in your sixties but haven’t yet reached full retirement age, you may receive anywhere from 71-99% of that amount. If you have a child younger than 16, you will get 75% of your late spouse’s basic benefit amount and so will your child.⁴

Call the insurance company. Assuming your loved one had some form of life insurance, contact the policyholder services department of that insurer and confirm the steps for claiming the death benefit. A claimant’s statement will have to be filled out, signed and presented to the insurance company (one for each named beneficiary of the policy), and a certified copy of the death certificate must be attached to said statement(s). Some insurers also want you to fill out a W-9 form, which tells the IRS about any interest paid on the value of the policy.⁵

Death benefits are generally paid out within days of a claim. Presumably, they will be paid out in a lump sum. If that is the case, they won’t be taxable. Occasionally, insurers will allow the beneficiary to receive the payout as a stream of monthly income.⁵

It isn’t unusual for people to own multiple life insurance policies. The AARP, AAA and myriad banks and non-profits market group life coverage to members/customers, and mortgage lenders and credit issuers offer forms of life insurance for borrowers. Tracking all of this coverage down is the problem, and canceled checks and bank records don’t always provide ready clues. Not surprisingly, companies have appeared that will help you search for obscure life insurance policies (for a fee, of course), and you should be able to locate these businesses through your state insurance department.⁵

If the family member was a veteran, call the VA. Your family may be entitled to funeral and burial benefits. In addition, the Veterans Administration offers Death Pensions and Aid & Attendance and Housebound Pensions to lower-income widows of deceased wartime veterans and their unmarried children.

These pensions are needs-based. To be eligible for the Death Pension, a widow or child’s “countable” income must fall below a certain yearly limit set by Congress. (A “child” as old as 22 may be eligible for the Death Pension.) The deceased veteran must not have received a dishonorable discharge, and he or she must have served 90 or more days of active duty, at least 1 day of it during wartime. If he or she entered active duty after September 7, 1980, then in most cases 24 months or more of active duty service are necessary for a Death Pension to eventually be paid. The Aid & Attendance and Housebound Pensions provide some recurring income to pay for licensed home health aide or homemaker services.⁶

It is wise to contact a Veterans Services Officer before you file such a pension claim, as he or she can be a big help during the process. You can find a VSO through your state veterans’ affairs department of or through the VFW, the Order of the Purple Heart, the American Legion or the non-profit National Veterans Foundation.⁶

A final individual income tax return may be required for the deceased. You or your tax advisor should consult IRS Publication 17 for more detail. Also, search for “Topic 356 – Decedents” on the IRS website. Deductible expenses paid by the deceased before death can generally be claimed as deductions on such a return.⁷

If you have been widowed, consider the future. In the coming days or weeks, you should arrange a meeting to review your retirement planning strategy, and your will, beneficiary designations and estate plan may also need to be updated. The passing of your spouse may necessitate a new executor for your own estate. Any durable powers of attorney may also need to be revised.

Mike Bonacorsi may be reached at (603) 769-3111 or Mike.Bonacorsi@lpl.com www.MikeBonacorsi.com

Citations.

1 – online.wsj.com/article/SB10001424053111904007304576496612749922654.html [9/7/11]

2 – www.schwab.com/public/file/P-1625576/CS13416-02_MKT13598-10_FINAL_118091.pdf [12/10]

3 -www.americanbar.org/groups/real_property_trust_estate/resources/estate_planning/planning_with_retirement_benefits.html [2/11/13]

4 – www.ssa.gov/pubs/10084.html#a0=2 [2/11/13]

5 – www.360financialliteracy.org/Topics/Insurance/Life-Insurance/Claiming-Life-Insurance-Benefits [3/20/13]

6 – nvf.org/death-pension [3/20/13]

7 – www.irs.gov/taxtopics/tc356.html [1/29/13]

A Primer for Estate Planning

Posted by Mike Bonacorsi CFP® | Posted in April 3, 2013 | No Comments

Things to check and double-check before you leave this world.

Provided by Mike Bonacorsi, CFP®

Estate planning is a task that people tend to put off, as any discussion of “the end” tends to be off-putting. However, those who leave this world without their financial affairs in good order risk leaving their heirs some significant problems along with their legacies.

No matter what your age, here are some things you may want to accomplish this year with regard to estate planning.

Create a will if you don’t have one. Some people never get around to creating a will, even to the point of buying a will-in-a-box at a stationery store or setting one up online.

A solid will drafted with the guidance of an estate planning attorney may cost you more than a will-in-a-box, and it may prove to be some of the best money you ever spend. A valid will may save your heirs from some expensive headaches linked to probate and ambiguity.

Complement your will with related documents. Depending on your estate planning needs, this could include some kind of trust (or multiple trusts), durable financial and medical powers of attorney, a living will and other items.

You should know that a living will is not the same thing as a durable medical power of attorney. A living will makes your wishes known when it comes to life-prolonging medical treatments, and it takes the form of a directive. A durable medical power of attorney authorizes another party to make medical decisions for you (including end-of-life decisions) if you become incapacitated or otherwise unable to make these decisions.

Review your beneficiary designations. Who is the beneficiary of your IRA? How about your 401(k)? How about your annuity or life insurance policy? If your answer is along the lines of “Mm … you know … I’m pretty sure it’s…” or “It’s been a while since …”, then be sure to check the documents and verify who the designated beneficiary is.

When it comes to retirement accounts and life insurance, many people don’t know that beneficiary designations take priority over bequests made in wills and living trusts. If you long ago named a child now estranged from you as the beneficiary of your life insurance policy, he or she will receive the death benefit when you die – regardless of what your will states.¹

Time has a way of altering our beneficiary decisions. This is why some estate planners recommend that you review your beneficiaries every two years.

In some states, you can authorize transfer-on-death designations. This is a tactic against probate: TOD designations may permit the ownership transfer of securities (and in a few states, forms of real property, vehicles and other assets) immediately at your death to the person designated. TOD designations are sometimes referred to as “will substitutes” but they usually pertain only to securities.²

Create asset and debt lists. Does this sound like a lot of work? It may not be. You should provide your heirs with an asset and debt “map” they can follow should you pass away, so that they will be aware of the little details of your wealth.

* One list should detail your real property and personal property assets. It should list any real estate you own, and its worth; it should also list personal property items in your home, garage, backyard, warehouse, storage unit or small business that have notable monetary worth.

* Another list should detail your bank and brokerage accounts, your retirement accounts, and any other forms of investment plus any insurance policies.

* A third list should detail your credit card debts, your mortgage and/or HELOC, and any other outstanding consumer loans.

Think about consolidating your “stray” IRAs and bank accounts. This could make one of your lists a little shorter. Consolidation means fewer account statements, less paperwork for your heirs and fewer administrative fees to bear.

Let your heirs know the causes and charities that mean the most to you. Have you ever seen the phrase, “In lieu of flowers, donations may be made to …” Well, perhaps you would like to suggest donations to this or that charity when you pass. Write down the associations you belong to and the organizations you support. Some non-profits do offer accidental life insurance benefits to heirs of members.

Select a reliable executor. Who have you chosen to administer your estate when the time comes? The choice may seem obvious, but consider a few factors. Is there a stark possibility that your named executor might die before you do? How well does he or she comprehend financial matters or the basic principles of estate law? What if you change your mind about the way you want your assets distributed – can you easily communicate those wishes to that person?

Your executor should have copies of your will, forms of power of attorney, any kind of healthcare proxy or living will, and any trusts you create. In fact, any of your loved ones referenced in these documents should also receive copies of them.

Talk to the professionals. Do-it-yourself estate planning is not recommended, especially if your estate is complex enough to trigger financial, legal and emotional issues among your heirs upon your passing.

Many people have the idea that they don’t need an estate plan because their net worth is less than X dollars. Keep in mind, money isn’t the only reason for an estate plan. You may not be a multimillionaire yet, but if you own a business, have a blended family, have kids with special needs, worry about dementia, or can’t stand the thought of probate delays plus probate fees whittling away at assets you have amassed … well, these are all good reasons to create and maintain an estate planning strategy.

*LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

Mike Bonacorsi may be reached at (603) 769-3111 or Mike.Bonacorsi@lpl.com www.MikeBonacorsi.com

Citations.

1 – www.knoxnews.com/news/2012/may/07/retirement-accounts-not-governed-by-wills/ [5/7/12]

2 – www.investopedia.com/university/estate-planning/estate-planning5.asp#axzz1vjRm6aPe [3/20/13]

The Latest on Social Security

Posted by Mike Bonacorsi CFP® | Posted in April 2, 2013 | No Comments

Benefits increase for 2013. Ideas for reform are numerous.

Provided by Mike Bonacorsi, CFP®

Social Security benefits have increased 1.7% this year. This doesn’t come close to the 3.6% boost retirees got for 2012, but it does mark the second straight annual cost-of-living adjustment. (After a hefty 5.8% COLA for 2009, there were no COLAs for 2010 or 2011).^1,2

So for 2013, the average monthly Social Security payment going to a single retiree is $1,261 ($21 larger than last year). The average retired couple gets $2,048 per month in 2013 (a $34 monthly increase). A single retiree claiming benefits at the full retirement age of 66 this year could get a maximum monthly Social Security payment of $2,533.²

Of course, COLAs have also occurred to Medicare premiums and the payroll tax ceiling for employees.

However, Medicare premiums are eating into that COLA. The good news for 2013 is that Part B premiums didn’t rise as much as some analysts expected. Medicare’s trustees, for example, anticipated a $9 monthly increase in these premiums. Instead, the increase was slightly more than $5. Part B premiums are now $104.90 per month, as opposed to $99.90 in 2012. (The annual Part B deductible is $7 greater for 2013 at $147, and the Part A deductible is $28 greater at $1,184.)^2,3

So how much does the rise in Part B premiums reduce the 2013 Social Security COLA? If you receive S2,000 a month in Social Security benefits, your effective COLA for 2013 is 1.45% ($29 a month more). If you get $1,000 of Social Security benefits each month, your net COLA is actually 1.2% ($12 a month more).³

Few Social Security recipients have annual ordinary incomes in excess of $85,000 (single filers) or $170,000 (joint filers). Unfortunately, those that do will see their total Part B monthly premiums rise anywhere from $147-336 a month thanks to surcharges (and that isn’t counting surcharges paid on Part D prescription drug plans).³

Social Security’s retirement earnings test amounts have also risen. If you receive Social Security benefits and you will be younger than full retirement age at the end of 2013, $1 of your benefits will be withheld for every $2 that you earn above $15,120 (the 2012 limit was $14,640).⁴

If you receive Social Security benefits and reach full retirement age during 2013, $1 of your benefits will be withheld for every $3 that you earn above $40,080 – but that restriction applies only to earnings in the months prior to attaining full retirement age. (The applicable 2012 threshold was $38,880.) There is no limit on earnings starting the month an individual attains full retirement age.⁴

As always, part of your Social Security benefits may be taxed. This may happen if you exceed the program’s “combined income” threshold. (Combined income = adjusted gross income + non-taxable interest + 50% of Social Security benefits.)⁵

If you are a single filer with a combined income between $25,000-34,000, you may have to pay federal income tax on up to 50% of your Social Security benefits this year. That also goes for joint filers with combined incomes of $32,000-44,000.⁵

If you are a single filer with a combined income of more than $34,000, you may have to pay federal income tax on up to 85% of your 2013 Social Security benefits. Likewise for joint filers whose combined incomes top $44,000. ⁵

Those married and filing separately will “probably” have their Social Security benefits taxed in 2013, according to the program’s website.⁵

The Social Security wage base is 3.3% higher for 2013. In 2012, the federal government levied payroll tax on the first $110,100 of employee income. In 2013, individual wages up until $113,700 are subject to the tax. The payroll tax for employees is also back to 6.2% this year. So an individual worker could pay as much as $7,049.40 in Social Security taxes in 2013 as opposed to a maximum of $4,624.20 in 2012.^2,4

How will the sequester cuts affect Social Security? Basically, they won’t. There will be no reduction in Social Security, Supplemental Security Income, Veterans Affairs or SNAP benefits under such circumstances. However, the Social Security Administration may suffer budget cuts that result in reduced hours (or closed doors) at its offices and an even longer wait to process disability claims. The sequester cuts will not affect Medicare or Medicaid benefits either, though Medicare payments to doctors face a 2% cut.⁶

What about Social Security’s projected long-range shortfall? Social Security projects that it can tap its surplus of roughly $2.7 trillion to pay 100% of scheduled retirement benefits through 2032. Yet in 2010, it began paying out more than it took in, a condition that may last for decades thanks to the aging of the baby boomer demographic. Because of this reality, Social Security’s trustees have forecast a $623 billion deficit for 2033, expanding to $1 trillion by 2045 and almost $7 trillion by 2086.⁷

How does America fix that? The simple fix many legislators have suggested is to hike the full retirement age to 70 from 67. If that happened now, the Congressional Budget Office says the program could keep about 13% more money each year. Of course, the social and economic effects of this could be devastating for many retirees.⁸

The White House fiscal commission has proposed raising the FICA cap – that is, the payroll tax cap would gradually increase between now and 2050 so that 90% of wages earned in America would be subject to Social Security tax by the middle of the century. (This is how it used to be.) Under this plan, the taxable maximum would be $190,000 by 2020.⁹

Another fix that has been proposed is indexing Social Security COLAs to price growth instead of average wage growth – that is, to “chained” CPI rather than the Consumer Price Index. Rep. Paul Ryan (R-WI) mentioned the idea in his controversial “Path to Prosperity” plan (the so-called “Ryan roadmap”) late in the 2000s. The Business Roundtable, a coalition of 210 CEOs of major American companies, has also pitched the idea. Detractors note that linking COLAs to chained CPI means lower COLAs and a marked reduction in Social Security benefits especially affecting women.¹⁰

The conservative Heritage Foundation recently advanced the idea of cutting Social Security benefits for the richest 9% of retirees, offering a $10,000 tax exemption for seniors who work past Social Security’s full retirement age, and protecting all Social Security income from taxation.¹¹

Other pundits want to see retirement planning left solely to individuals. They cite what Chile did in the early 1980s: it replaced its federal pension program with a system of privately managed personal retirement investment accounts, allowing participants to set their own contribution levels, risk tolerance and retirement date. The effort yielded better than a 9.2% compounded annual return across its first 30 years.¹²

Several fixes were suggested in a 2010 report issued by the U.S. Senate Special Committee on Aging, including: 1) a 3% cut in benefits, 2) raising the payroll tax to 7.3%, 3) hiking the full retirement age to 68 or older, 4) increasing the Social Security averaging period that determines SSI, 5) reducing the typical yearly COLA by 1% or .5%, 6) reducing spousal benefits, 7) investing some of Social Security’s trust funds in equities, 8) directing some estate tax revenues into Social Security’s trust fund.¹³

Perhaps a fix lies somewhere within these proposals; unmodified or altered, alone or in combination.

How much retirement income do you have these days? With Social Security’s future still a question mark, you may be thinking about where your retirement income will come from in the years ahead. A chat with the financial professional you know and trust may lead to some ideas.

Mike Bonacorsi may be reached at (603) 769-3111 or Mike.Bonacorsi@lpl.com www.MikeBonacorsi.com

Citations.

1 – www.ssa.gov/pressoffice/pr/2013cola-pr.html [10/16/12]

2 – www.forbes.com/sites/janetnovack/2012/10/16/social-security-benefits-to-rise-1-7-workers-face-up-to-2425-payroll-tax-hike/ [10/16/12]

3 – www.reuters.com/article/2012/11/16/column-miller-medicare-idUSL1E8MGBM420121116 [11/16/12]

4 – www.ssa.gov/pressoffice/factsheets/colafacts2013.htm [10/16/12]

5 – www.ssa.gov/planners/taxes.htm [1/14/13]

6 – www.aarp.org/politics-society/government-elections/info-02-2013/how-the-sequester-could-affect-social-security-and-medicare.html [2/19/13]

7 – www.csmonitor.com/Business/Latest-News-Wires/2012/0813/Social-Security-Surplus-dwindling-huge-shortfall-looms [8/13/12]

8 – www.bankrate.com/financing/retirement/social-security-fix-it-now/ [12/3/12]

9 – money.cnn.com/2011/10/19/pf/taxes/social_security_tax/ [10/19/11]

10 – www.bankrate.com/financing/retirement/bipolar-fixes-for-social-security/ [1/18/13]

11 – www.savingthedream.org/how-it-affects-you/retirees/ [10/21/11]

12 – www.investors.com/NewsAndAnalysis/Article/586464/201109291833/Cains-Chilean-Model.htm [10/12/11]

13 – money.usnews.com/money/blogs/planning-to-retire/2010/05/18/12-ways-to-fix-social-security [5/18/10]

Can Stocks Advance Further Without a Weak Dollar?

Posted by Mike Bonacorsi CFP® | Posted in April 1, 2013 | No Comments

Are we seeing the early signs of a dollar bull run?

Provided by Mike Bonacorsi, CFP®

What happened to the weak buck? In recent years, stock market gains have been associated with a weak dollar (among other factors). This latest rally on Wall Street seems to be an exception: years of dollar weakness may be giving way to renewed foreign investment in U.S. currency, spurred by global belief that things are getting better in America.

If the trend keeps up, it threatens to toss a wet blanket on a sizzling market. As the Dow and S&P 500 have logged gains, so has the U.S. Dollar Index. The USDX is up since the start of February, and it reached a six-month peak against a basket of foreign currencies on March 13. On that day, the euro sank to a three-month low against the dollar while the yen approached a four-and-a-half-year low against the buck.^1,2

If a rising dollar does pressure stocks, the pressure may subside. High unemployment and slow growth may signal that the country is still in an economic recovery. In response, the Federal Reserve is keeping interest rates at historic lows and creating dollars to buy bonds. So even if stocks pull back a bit in the coming weeks, you could still see central bank policy encouraging a soft dollar.

While printing money can promote inflation, the Fed faces little pressure to stop easing – at last look, yearly gains in consumer and producer prices were well within its annualized target. For Fed policy to change, inflation would have to pose a real macro threat. It doesn’t today and it probably won’t until GDP and wage growth approach historical norms. That may not happen until 2014 or 2015.

What if this show of strength isn’t fleeting? If the U.S. is leading the way in a global recovery –as it has in many past economic cycles – we could see a bull market in the dollar in the distant future, and it could coincide with a bull market in equities.

For a dollar rally to happen, you need three conditions in place. The dollar has to be cheaply valued; the U.S. economy has to be on the upswing, especially relative to the rest of the world; and, interest rates need to rise.

At the moment, defense spending isn’t on the rise and the NASDAQ is a long way from 5,000. While times have certainly changed, other conditions might function as catalysts for a sustained strong dollar anyway: a very weak euro, a yen slipping into a bear market, and America’s decreasing reliance on foreign oil. All of these conditions may persist for some time.

Some statistics worth noting: here in March, the yield on the 10-year Treasury has risen to its highest premium in 19 months versus the yield on Japan’s 10-year note. The yield on our 2-year note is nearly 0.20% higher than that of Germany’s, the biggest gap in yield since early January. As for the USDX, it is currently more than 30% below its 2001 peak.³

It is also worth noting that the dollar bull markets of the 1980s and 1990s did not obstruct the concurrent bull markets in U.S. stocks. A dollar rally can be rough for emerging markets, however – witness the debt crises that hit Latin America in the 1980s and Southeast Asia in 1997.

Maybe the relationship is changing. It could be that the recent correlation between a weak dollar and a bull market is fading, and that the course of the dollar is in sync with the course of the market – that is, leading the way for the rest of the world. As CEF Holdings CEO Warren Gilman told CNBC, “The dollar is the best currency among a sad group [of currencies] and that will continue as anticipation of strength in the economy grows.” Relatively speaking, the dollar looks good – and perhaps U.S. stocks will look even better as the year continues.⁴

Mike Bonacorsi may be reached at (603) 769-3111 or Mike.Bonacorsi@lpl.com www.MikeBonacorsi.com

*Stock investing involves risk including loss of principal.

**The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

***International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

Citations.

1 – online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [3/14/13]

2 – abcnews.go.com/blogs/business/2013/03/economic-boost-from-stronger-us-dollar/ [3/14/13]

3 – www.ft.com/cms/s/0/1dd0417e-8a61-11e2-9da4-00144feabdc0.html#axzz2NYTQsFke [3/12/13]

4 – www.cnbc.com/id/100541247 [3/11/13]

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