Re-Visioning Retirement Planning?

President Obama has recently provided us with a peek into his vision for retirement savings he hopes to embed in the tax code. This, of course, can be found in the White House’s preliminary budget proposal, which will be volleyed about the halls of Washington over the coming months in an effort to compromise. I think it’s important to take a look at some of the proposals because of policy vision it provides, and how that vision could affect current financial plans in the future.

Here are 3 proposals within the budget and the likely effects on your financial plan:

SAVINGS CAP 

A per person savings cap would be established, which would be determined by calculating the lump-sum payment that would be required to produce a joint and 100% survivor annuity of $205,000 a year beginning when clients reach age 62. Confused yet? The initial formula would set the current cap at $3.4 million. This means that additional contributions to tax-favored retirement savings plans like IRAs & 401ks would not be allowed once this cap is hit.

If people determine that their annual retirement expense needs will exceed what the annual withdrawal from the capped account will be, then they will need to find different ways to save for retirement outside of deferred and tax-preferenced accounts.

EMPTYING INHERITED IRAs 

Right now, due to “stretch” IRA provisions, inherited IRAs (non-spouse) can be managed, withdrawn, and taxed over the life of the inheritor—basically allowing an inheritied retirement savings to retain its tax preferenced status over the life of the inheritor. This proposal would require to withdraw the savings in an inherited IRA by the end of the 5th tax year after the year of the original owner’s death.

This could be a big development as most people’s estate plan has considered the stretch IRA feature for their beneficiaries. This could mean that 20% of the account would need to be withdrawn per year as soon as the inheritor establishes the inherited IRA. If that person is in the height of their earning years, this withdrawal could be taxed at a very high tax bracket.

MANDATORY IRAs 

This proposal is aimed at closing the retirement savings gap that we are facing in the US. It requires employers with a certain number of employees to provide automatic enrollment in IRAs. If the employee does not make an election to contribute to the account, an automatic 3% of salary would be deferred (unless an employee explicitly opts out).

 Ultimately this is a good thing, as it should encourage more consistent savings into retirement accounts. It could prove more onerous for business owners, as they would be required to set up a plan.

Perspectives from Above the Noise – Week of August 26, 2013

3 Stories in the global economy that should not go un-noticed 

Uncertainty around the Fed’s tapering schedule drove much of market activity last week. While many Fed speakers have suggested that tapering may begin after the September FOMC meeting, they have cautioned that the Fed’s plans remain data dependent.

Markets ended the week mixed, showing an upward trend after the previous week’s losses, but still subject to investor nerves. For the week, the S&P 500 gained 0.46%, the Dow lost 0.47%, and the Nasdaq gained 1.53%.

Here are the 3 stories this week that rose above the noise:

Gold Rises amid Syria Fears, September Jitters 

Gold suffered severe losses through the first half of 2013, losing 27% of its value, but gold has rallied nearly 17% since its June 28 low. Gold has benefitted from a weaker dollar over the last two months, increased investor anxiety over the Congressional debt ceiling debates in September, and rising concern over the possibility that Syria is using chemical weapons on its own population. Gold is now over $1,400/oz. for the first time in nearly three months and could rally further if market volatility continues to rise, economic data weakens, or if a military intervention in Syria occurs.

Why Obama Is Being Pulled into Syria 

A potential military strike on Syria by the United States is weighing on capital markets recently, causing crude oil to rise over $3 today to $110 per barrel. An article by Gerald Seib of The Wall Street Journal reviews the recent history of U.S. policy in Syria with particular attention to the greater regional threat: Iran.

The United States has tried for years to contain Iran's development of nuclear weapons, with little success. President Obama has said it wouldn't be acceptable for Syria to use chemical weapons, just as he has said it wouldn't be acceptable for Iran to develop nuclear weapons. He now must ponder whether the credibility of the first statement will affect the credibility of the second.

Consumer Confidence Index in U.S. Increases to 81.5 

Confidence among U.S. consumers increased slightly in August, reversing a decline seen in the prior month. The Conference Board's index of sentiment advanced to 81.5 from a revised 81 the prior month. The August gains were driven by the Conference Board's measure of expectations for the next six months which rose to 88.7 from 86. However, the Present Situation Index decreased to 70.7 from 73.6. Consumers were moderately more upbeat about business, jobs and earning prospects.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of August 19 , 2013

3 Stories in the global economy that should not go un-noticed

Some strong economic data fueled concerns that the Federal Reserve will start tapering bond purchases after its September FOMC meeting. Thus, markets ended another week in the negative , pushed lower by mixed economic data and underlying fears about future Fed activity.

For the week, the S&P 500 lost 2.1%, the Dow lost 2.23% and the Nasdaq lost 1.57%.

Here are the 3 stories this week that rose above the noise:

Obama Focuses on Risk of New Bubble Undermining Broad Recovery

In recent weeks, President Obama has emphasized the need to break the boom-and-bust cycle that ultimately led to the dot-com bubble in the late 1990s and the housing market crash that paralyzed the economy as he entered office. Some market prognosticators are cautioning investors that artificial asset price bubbles are currently forming, including in the housing market.

It is true that housing prices are on an unsustainable growth rate (12 percent growth nationally over the previous year), especially in certain markets, including Las Vegas and Phoenix, but home prices are now back to an area that is considered fairly valued by historical standards and remain below the lofty levels reached during the peak in 2006. The acceleration of asset price growth in the housing and stock market should be monitored closely, but it is still premature to conclude that a bubble is forming. At present, housing and stock prices do not appear to be an “imminent risk” a ccording to former Fed official Robert Perli.

Fear of Fed Retreat Roils India

A recent article from The Wall Street Journal details the risks facing emerging markets given that global inte rest rates are on the rise. Many emerging countries have seen their exports deteriorate as global growth has waned, leading these economies to run large current-account deficits, which occur when imports outweigh exports. And, as money has fled out to developed countries, emerging countries face higher borrowing costs to finance the daily spending.

All of Your Egypt Questions Answered

An op-ed from Bloomberg columnist Jeffrey Goldberg sheds light on the conflict in Egypt and U.S. interests in the region. While the United States and its Western allies have supported democracy, the popular election win of Mohammed Morsi and his Muslim Brotherhood was followed by mismanagement an d increasingly anti - western policies. While counter - intuitive, U.S. and Western interests are more closely aligned with the military generals who are attempting to take power from the Muslim Brotherhood.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of August 12, 2013

3 Stories in the global economy that should not go un-noticed

Last week was light on economic data and investors focused on whether or not the Fed is going to start tapering bond purchases to begin winding down its stimulus program after the September FOMC meeting. Markets ended a slow trading week in the red, posting the biggest weekly decline since June.

For the week, the S&P 500 lost 1.07%, the Dow fell 1.49%, snapping a six-week winning streak, and the Nasdaq slid 0.80%.

Here are the 3 stories this week that rose above the noise:

Diversification Isn’t Broken, It Just Takes a While

A recent New York Times article provides a reminder that while diversification may not appear to be working at this precise moment, the benefits are witnessed over longer time periods. “It may seem counterintuitive, but if you have something in your portfolio that you’re complaining about, it’s a good sign you’ve built a diversified portfolio. And if that’s the case, you’re probably complaining right now about international mutual funds and wondering why you aren’t invested 100 percent in the S&P 500. But as Mr. Brown so wisely notes, ‘Five months still to go, anything can happen.’”

Bond Hubris Overwhelms Fed in Riskiest Credit-Market Sectors

Bloomberg published an article detailing an important reason why the Federal Reserve is likely to begin reducing its asset purchases sooner rather than later, which is due to signs of froth in the riskiest parts of the credit market. For example, covenant light loans have once again become common and the lowest-rated parts of the corporate bond market have experienced heavy inflows.

Fed officials have expressed concerns about investors reaching for yield and risk assets experienced a heavy sell-off in May and June after the Fed hinted at winding down its quantitative easing program. However, risk assets have now recovered most of those losses and concerns about signs of excessive risk taking may ultimately be the deciding factor in the timing and pace of the Fed reducing its asset purchases.

U.S. Retail Sales Quicken as Price Pressures Stay Tame

Retail sales rose 0.5 percent in July, which is the fastest pace seen in seven months. Retail sales, which don’t include cars, gas and building materials, account for about 70 percent of national output. Economists expected growth of 0.3 percent. The faster-than-expected pace of growth could enable the Fed to begin its tapering of asset purchases sooner rather than later.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of August 5, 2013

3 Stories in the global economy that should not go un-noticed

Markets closed out another positive week last Friday, driven upward by a better-than-expected GDP report and a reminder that the Fed won’t be pulling the plug on bond purchases this month. Nervousness ahead of a Fed policy meeting and the monthly jobs report contributed to volatility, but the rally pushed the S&P 500 to a new historic high.

For the week, the S&P 500 gained 1.07%, the Dow increased 0.64%, and the Nasdaq gained 2.12%.

Here are the 3 stories this week that rose above the noise:

Murky Data Complicate China’s Policy Choices

As China's growth slows toward a 20-year low, economists are calling for consumers to shoulder more of the burden of supporting the world's No. 2 economy. But the country's leaders are increasingly saying Chinese consumers aren't shirking their responsibility — they're just undercounted.

If China’s official data understates the country’s household consumption, a resilient China should continue to be a global growth driver, with stronger consumer demand being a boon for a variety of enterprises — from mobile phone providers selling phones to China's middle class, to copper miners in Chile supplying raw materials for China's expanding electrical grid. If China’s central bank officials are wrong in their assertion regarding the official data, a complacent government holding back from needed reforms risks a sharper slowdown, with global repercussions.

July's Jobs Bummer: Want Fries with That?

The U.S. economy added 162,000 non-farm payrolls in July, which was the 34th consecutive month for positive job growth, but below the average of 197,500 through the first six months of 2013. Additionally, the majority of the jobs added into the economy last month were in low-paying employment sectors including retail, hospitality and food services.

Another negative trend in the employment data is the increase in part-time hires. Last year, 15 percent of new jobs created were part-time, but the percentage increased to 35 percent in 2013. Positively, the unemployment rate is at its lowest level since 2008 (7.4 percent), but a few negative trends are developing in the labor market.

Well Oiled

Europe’s sovereign debt issues have not dominated the headlines since last summer. Over that time, we’ve seen other issues such as the fiscal cliff, the Presidential election, and rising U.S. interest rates get the attention of the press.

However, while things may have stabilized for Europe, a recent piece from The Economist reminds us that not much has been solved. Italy is a great example. Italy has covered 70 percent of its funding requirements for 2013 and foreigners now own less than 40 percent of Italian debt, as opposed to the 50 percent they owned four years ago.

So, while things have improved, is it enough to prepare Italy for its next potential crisis? With a debt-to-GDP of more than 130 percent and more than $325 billion in debt due for redemption over the next year, concerns over Italy and the rest of Europe could quickly resume.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of July 29, 2013

3 Stories in the global economy that should not go un-noticed

Markets closed mixed last week as stocks experienced a period of lackluster trading. While the Dow and Nasdaq indexes eked out gains, the S&P 500 notched its first loss in five weeks, driven lower by some earnings misses. With investment markets at near historic highs, it’s not surprising to endure a slow week halfway through earnings season. Thus far, more than 50% of S&P 500 companies have reported in, with 68% beating earnings expectations, above the historical rate of 63%, and 56% topping revenue estimates.

For the week, the S&P 500 lost 0.03%, the Dow gained 0.1%, and the Nasdaq gained 0.71%.

Here are the 3 stories this week that rose above the noise:

Inflation Is Rotten to the Core

Today core inflation, which excludes food and energy, is one of the main measures of inflation used by investors, economists and analysts. In this editorial, Irwin Kellner argues that core inflation is a flawed measure. Food and energy prices are two of the most important components of most peoples’ budgets.

In the ‘70s, the Fed started using core inflation because it felt it had no control over the supply of food and energy, which it argued were more influenced by factors like the weather and geopolitics rather than the economy. In reality, food and energy are susceptible to economic conditions, and while indicators like core inflation may not show much of an increase, more broad measures of inflation are likely different.

China Is Going to Slow down but it Can Handle It

Writing in the Financial Times, Michael Pettis outlines his opinion that GDP growth in China is highly likely to drop to 3 percent to 4 percent in the coming years. However, in contrast to many analysts, Pettis argues that this need not lead to widespread social unrest within the country. Rather he makes the case that as long as household incomes continue to rise at the pace of recent years the economy can continue its widely anticipated shift away from investment and toward consumption.

However, in order to do so without dangerous increases in already elevated debt levels implies investment growth rates of near zero and overall GDP growth of 3 percent to 4 percent. The author makes a convincing case that this can be accomplished without widespread social unrest or an economic crisis.

Companies Sitting on Cash Pile of over $1 Trillion

Over the last 20 quarters, U.S. corporations have hit a new record for cash reserves 18 times. That trend appears to have continued through the second quarter and S&P 500 firms now have almost $1.1 trillion in cash reserves. Companies have chosen to keep their cash on the sidelines until they feel more confident about future economic growth.

Cash reserves have not been used as much for capital expenditures, hiring, and expansion, but firms have been increasing dividend payouts and share buybacks with their excess cash, both of which are a positive for shareholders. Currently, the technology sector has the highest cash balance of any sector, which bodes well for future share buyback and dividend increases for technology firms.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.