May 12, 2009
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Vol 2, Issue 5
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| Greetings! |
Good morning. I hope this newsletter finds you well! You're receiving the newsletter a bit later in the month than normal because I was on vacation last week. True vacations are much too rare for most of us -- the kind where you really relax, turn off the blackberry, and take time to enjoy different activities than your daily routine. I'm happy to share that I accomplished this last week and am back at the office refreshed and energized.
The markets are on a great run (yesterday's loss not withstanding). The S&P 500 is up 34% from it's March 9 low. Of course we still have a long way to go to see most portfolios fully recover, and the market is definitely running ahead of most substantive improvements in economic fundamentals we'd like to see. But these short-term good results should give us encouragement in sticking to our long-term plans even when things become less favorable in the future.
In this newsletter, we have information on investing in a low-interest rate environment, charitable giving, divorce financial planning, and more. As always, feel free to e-mail me at [email protected] with requests for newsletter topics you'd like to see covered. Thank you, and Live Well. |
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Treasury Extends Money Market Guarantee |
 On March 31, 2009, the Department of the Treasury extended its temporary guarantee program for money market mutual funds through September 18, 2009. The program, which had been scheduled to expire on April 30, 2009, guarantees a participating money market fund's $1 per share value through September 18, 2009 for assets held in a fund as of the close of business September 19, 2008, or to shares held in the fund when a guarantee payment is made, whichever is less. Investors cannot acquire Treasury protection for investments made after September 19, 2008, and closing or transferring an account would mean losing the guarantee for those assets. |
| Investing when Interest Rates are Low |
 Low interest rates create a dilemma. Do you accept a low return because you feel you must protect your principal? Or do you take on greater investment risk in order to try for a higher return? In balancing those two concerns, here are some factors to think about.
Consider laddering your CDs
When yields on Treasury bonds began dropping last year, many investors were attracted to certificates of deposit (CDs) offered by banks that needed to attract capital. However, interest rates won't stay low forever, and at some point you may want access to your money before a CD matures. One way to achieve higher rates while retaining flexibility to adjust your strategy over time is to ladder CDs. Laddering involves investing in CDs with varying maturity dates. As the shorter-term CDs mature, you can reinvest in one with a longer term and higher rate. Over time, laddering can give you both the higher rates typically offered by longer-term CDs and the ability to adjust as interest rates change.
Example: Susan wants to invest $60,000 in CDs. She puts $20,000 in a six-month CD that pays 2.6%, another $20,000 in a three-year CD that pays 3%, and the final $20,000 in a five-year CD that pays 3.5%. When the six-month CD matures, she reinvests that money in another five-year CD. When her two-year CD matures, she reinvests it in still another five-year CD. At that point, funds from a maturing CD will be available roughly every other year, but will earn the higher five-year rate. If rates are lower when a CD matures, she has the option of investing elsewhere. (This is a hypothetical example and doesn't represent the results of any specific investment.)
Pay attention to expenses
Low returns magnify the impact of high investing expenses. Let's say a mutual fund has an expense ratio of 1.00, meaning that 1% of its net asset value each year is used to pay operating expenses such as management and marketing fees. That 1% represents a bigger relative bite out of your return when the fund is earning 3% than it does if it's earning 10%. At the higher number, you're losing only about 10% of your return; at 3%, almost a third of your return goes to expenses. Before investing in a mutual fund, carefully consider its fees and expenses as well as its investment objective and risks, which can be found in the prospectus available from the fund. Read the prospectus carefully before investing. If you prefer individual stocks, keep an eye on trading costs.
Think about your real return
Low interest rates may not be quite as problematic as they seem. Even if you're earning a low interest rate, your real return might not suffer too much if inflation is also low. Real return represents what your money earns once the impact of inflation is taken into account. With an annual inflation rate of 0.1%--the December 2008 Consumer Price Index (CPI) figure--a bond that pays 3% would produce the same real return as a bond that pays 5% when annual inflation is running at 2.1%.
Compare interest rate and yield spreads
When market instability drove many investors to the safety of Treasury bonds, their prices rose and yields fell. As a result, the spreads between Treasury yields and those of corporates and municipals have been relatively high over the last year because non-Treasury bonds have to offer higher yields to compensate for investors' anxiety about the safety of their principal and possibility of default.
Consider small changes
You may not need to remake your portfolio completely to seek a higher return. For example, if you're in Treasuries, you could move part of that money to municipal bonds, which may involve greater risk of default but whose net returns are boosted by their exemption from federal income tax. Or you could shift a portion of your stock allocation to dividend-oriented stocks and ETFs, or preferred stock.
Look for buying or selling opportunities
Interest rates also can be used to help evaluate equities. Some analysts like to determine the relative value of the stock market using the so-called Fed market valuation model. (Though not officially endorsed by the Federal Reserve Board, the method evolved based on a 1997 Fed report.) The model compares the earnings yield on the S&P 500 to the 10-year Treasury bond's yield. If the S&P's yield is higher than the T-bond's, the model considers the market undervalued relative to bonds. If the Treasury yield is higher, the market is overvalued. However, this is only one of many valuation models and shouldn't be the sole factor in your decision.
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| Tax Benefits of Giving to Charity |
 Do you give regularly to a religious organization? Perhaps you make an occasional gift to a charity like the Salvation Army, United Way, or Red Cross? It's said that a good deed is its own reward, but when it comes to your federal income tax return, there's a little more to it than that--Uncle Sam rewards your generosity by allowing a deduction for qualified charitable contributions. The rules, however, can be confusing.
Itemizing deductions
First, in order to deduct a charitable contribution, you've got to file IRS Form 1040 and itemize your deductions on Schedule A. So, if your allowable charitable deduction plus all your other itemized deductions doesn't add up to more than your standard deduction (for example, married couples filing a joint return are entitled to an $11,400 standard deduction in 2009), you generally won't realize a tax benefit from the charitable contributions you've made. And because total itemized deductions are currently reduced for higher incomes (this won't be the case in 2010, but it is for 2009), your charitable deduction may consequently be limited as well.
Qualified organizations
You can only deduct contributions that are made to qualified organizations. Churches, synagogues, temples, and mosques automatically qualify. Almost all other organizations have to apply to the IRS. An organization should generally be able to tell you if it is a qualified organization. You can also check IRS Publication 78, Cumulative List of Organizations Described in Section 170(c) of the Internal Revenue Code of 1986, which is available online at www.irs.gov.
Did you receive a benefit?
Generally, if you make a contribution and receive a benefit as a result, you can only deduct the amount that's more than the value of the benefit you receive (for contributions over $75, the charity must give you a statement describing the value of the goods and services provided to you). So, if you pay $200 at a charity auction for a weekend getaway that has a fair market value of $150, your deductible charitable contribution is $50.
You can, though, deduct your entire payment to a qualifying organization if you receive only a token item or benefit in return, and the organization determines that the value is not substantial and tells you that you can deduct the full amount of your payment. (Special rules apply to payments made to colleges and universities for the right to buy tickets to athletic events.)
Your deduction for charitable contributions generally can't be more than 50% of your adjusted gross income (AGI) for the year. A lower percentage AGI limitation may apply to:
- Contributions made to certain organizations (e.g., veterans' organizations, fraternal societies)
- Contributions made "for the use of" any organization (contributions held in trust for the qualifying organization)
- Gifts of capital gain property
If these limits prevent you from deducting your contributions in the current year, you're able to carry forward your excess contribution for up to five years.
What if you volunteer your time?
If you volunteer your services to a qualified organization, you are allowed to deduct unreimbursed amounts that are directly connected with the services you provide. You can deduct out-of-pocket expenses that are directly related to the use of the vehicle in providing services. You can use actual expenses, or base your auto deduction on the standard mileage rate (currently 14 cents per mile). You can also deduct parking and tolls. You can't, though, deduct the value of your time.
Recordkeeping
Make sure that you keep records that document the contributions that you make during the year. For cash contributions, you'll need a bank record (e.g., a canceled check or a credit card statement), or a receipt from the organization that includes the name of the organization as well as the date and amount of the contribution. If you make an individual contribution of $250 or more, you'll need a written acknowledgement from the organization that meets specific requirements. If you made noncash contributions, the specific documentation that's required depends upon the amount of the deduction.
For additional information, see IRS Publication 526, Charitable Contributions, and discuss your situation with a tax professional.
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| Divorce Financial Planning |
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I recently obtained the Certified Financial Divorce Practitioner (CFDP) designation and joined the Academy of Financial Divorce Practitioners. As many of you know, having been through a divorce myself, I have a passion for helping people avoid many of the pitfalls I experienced in going through that process. I decided to pursue the CFDP designation because of the nuances of divorce financial planning. This does not replace my comprehensive financial planning work; it simply provides an additional service I am now equipped to offer.
 A divorce financial planner works with your attorney to provide expertise on the financial consequences of property settlements, alimony, and maintenance. I have acquired sophisticated divorce-planning software which allows me to evaluate pensions, calculate tax consequences of stock and home sales, and run multiple "what if" scenarios quickly and easily. It also allows me to project effects on net worth and cash flow for different settlement for each spouse up to 30 years in the future. It's so important to fully understand the financial effect the divorce will have as soon as possible so that each party retains as much control over their financial future as possible.
If you know anyone going through a divorce, I would be honored to help them through this difficult time with some additional clarity on their financial situation. | |
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I hope you found this newsletter informative. KFP offers a free, no-obligation initial consultation to start the financial planning process. To learn more or schedule a time, call 817-993-0401 or e-mail [email protected].
Sincerely,
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Jean Keener, CRPC, CFDP
Keener Financial Planning
Keener Financial Planning provides hourly, as-needed financial planning and advice on a commission-free basis to people at all financial levels.
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