Issue: #  33   SEPTEMBER 2011
Bautis Financial
Dear ,
 

Welcome to the September 2011 issue of The Wealth Chronicle.   

 

Feature Article 

Five Things to Know About the Eurozone Debt Crisis

 

It's been about 18 months since Europe's debt crisis began attracting attention on the global stage.  Since then it's grown to be the biggest challenge the European Union has faced and a threat to the global economy.

 

During the past 18 months, Greece, Portugal, Ireland, Italy and Spain all have spent time in the forefront as they are on the brink of economic collapse.  Germany and France are considered healthy economies but have so much tied to the well-being of the other European countries that they are also approaching the brink as well.

Here are 5 things about the crisis to keep an eye on:

  1. The Stability Fund is not very stable - In July European political leaders announced a set of proposals to address the crisis.  The centerpiece of the agreement was the reform of the European Financial Stability Fund.  The Stability Fund was initially created last year to facilitate low cost loans for struggling EU members.  Under the reform the 440 billion euro fund would be able to buy bonds issued by distressed euro area governments directly from investors in the secondary market.  This would help stabilize prices and yields of the distressed bonds.  The changes are expected to go into place in October but economists worry that the fund would not be big enough if Spain or Italy are in need of rescue. A comparable situation would be your FDIC insured savings account.  If just your bank goes under you would be made whole buy the FDIC but if every bank goes under the FDIC cannot make everyone whole because they do not have enough money set aside to do so.
  2. Greece and Italy are teetering on the brink of collapse - In addition to the Stability Fund reform in July a 109 billion euro bailout package was agreed to for Greece to prevent it from defaulting on its loans.  Greece has the meet certain conditions (expense cuts, tax raises) to receive the bailout.  Greece's impact, if they defaulted, would be relatively small.  Italy, on the other hand, is experiencing also experiencing a debt problem and would be a big deal should they default.  Italy is the third largest economy in Europe and its decade long economic slump is making it difficult to pay its debts.
  3. Banks under heavy pressure - The banks are exposed to these government defaults to the tune of 300 billion euros.  This is quite similar to the scenario we were in 2008, when the US banks suffered a crisis this downfall spread to the entire economy.  You could look at the banks as the pipes of the economy allowing money to flow to different areas.  Banks are usually one of the first sectors to take off after a recession and the first to go down when a recession first starts.
  4. Economy is in the dumps - If the economy was growing at a normal pace, there would not be an overall issue as the weaker members of the Eurozone would be able to pay their debts without bailouts or stability funds.  
  5. Fate of the Eurozone is at risk - Euro leaders said they will do whatever is necessary to preserve the Euro but at some point the sentiment may change.  The stronger members of the Eurozone are being forced to help support less competitive members that have spent beyond their means.
Investors have been calling for the creation of a Eurobond.  This would be backed by all 17 Eurozone members.  Issuing a common form of debt would ease borrowing costs for the weaker members of the union, but it would also drive up rates for the stronger nations and could jeopardize their credit ratings.
eurozone
Article

 

The Benefits and Traps of a 529 College Savings Plan

 

It's no secret that the economy and job market are on shaky group.  Houses and 401k plans are worth less than they were a few years ago.  One area that seems to be out of sync with the rest of the economy is the cost of college.  Tuition prices of private and public schools have gone up more than 60% and 100% respectively over the past 10 years.  Sure there are student loans, but not everyone is eligible and they can decisions young adults make: whether they can go to graduate school, buy a house or event start a family.

 

One savings plan that is worth considering is a 529 plan.  The mechanics of a 529 plan are similar to a Roth IRA.  Your contributions are made with after tax dollars with the benefit that you do not have to pay taxes on the interest or gains in your account ever again.  Over 10 to 15 years those tax savings could be thousands of dollars.  A common misconception is that investments in a 529 plan have to be made in the stock market.  Your 529 account contributions could be invested in securities as risky as emerging market stocks to as secure as a money market fund.  When you take a distribution from a 529 plan it does have to be used for education related expenses, but what is included in education related expenses has expanded over the past couple of years.  In addition, the funds could be used amongst different family members.

 


While we are on the topic of college education my alma mater, Seton Hall University, was in the news this week for changes they are making to their financial aid practices.  Seton Hall isSeton Hall University radically restructuring its tuition next year by slashing costs more than 60% for all incoming students who achieved a set of academic standards in high school.  Seton Hall's tuition is $31,440 annually but students who graduate in the top 10% of their class and achieve a combined 1200 score on the SAT's will see their tuition reduced to $10,104 which is the same tuition charged by Rutgers.  Wow!  Now that's something to be admired!

 

Time to Refinance?

 

Over the past couple of years home interest rates have dropped, causing waves of people to refinance their mortgage to a lower rate.  Rates are once again dropping and are making historical lows.  The reason rates have been declining is that the government is keeping rates down to provide an indirect stimulus to homeowners.  Refinancing could save homeowners hundreds of dollars per month that could be spent on other areas in the economy.

 

Even if you have refinanced recently it may be worth it to look into whether refinancing again makes sense.  If the interest rate you are currently paying is 5% or more it may be worth the time to take 5 minutes to see if a refinance makes sense.  If you would like to have help analyzing your situation, I can provide the contact information of a Mortgage Banker who will give an honest opinion on whether it makes sense to refinance, or not.


 

The Power of Deferring Taxes on your Investments

 

There are different strategies to minimize the amount of taxes that you pay on your Compound Interestinvestments.  One strategy that flies under the radar is deferring the paying of taxes on interest, dividends, and capital gains that your investments may earn.  It would not seem like deferring taxes would be that beneficial, being that you are going to have to pay those taxes eventually.  However deferring taxes employs triple compounding: it pays interest on the principle, interest on the interest, and also interest on the taxes that you would have paid if you were in an investment that was taxed annually.  Let's look at an example:

 

At age 40 you make a $100,000 investment that earns a 9% annual return.  Every year you pay 33% in taxes on that 9% return.  In 24 years, that $100,000 will be worth $400,000.

If at age 40 you make that same $100,000 investment earning 9% annual return, yet you defer taxes until you withdraw the money, that same investment will grow to $800,000.  If you withdraw all of the money 24 years later (age 64), and are taxed at the same 33% rate, you will be left with $536,000 which is much better than the $400,000 in the first scenario.   

Even if in those 24 years tax rates are raised to 50%, you will still come out ahead.  $450,000 (your $700,000 gain X 50% tax = $350,000 + your $100,000 initial investment)

 

Tax Deferral Graph

 

So now you must be asking, what investment vehicles allow you to defer taxes?  Take a look at retirement plans such as IRA's, 401k's, 403b's, Annuities, and Life Insurance. 

 

 

 

 

 

 


September is Life Insurance Awareness Month 

 

This year's spokesman is Lamar Odom.  Yes the same Lamar Odom of the LA Lakers who is often know now as as Mr. Khole Kardashian.  HowEggs in one basket - insurance imageever Lamar was not always a reality star, nor an NBA star player.  Lamar was once a young boy who grew up without his mother. 

 

Lamar's mother, Cathy Mercer, passed away after a battle with cancer.  Lamar learned at a young age the necessity and appreciation for life insurance.  If it wasn't for Cathy planning ahead for Lamar's future by purchasing a life insurance policy, Lamar would have never been able to pursue his college and NBA dreams. 

 

Lamar always carries his mother's memory with him, whether it's in his mind or on his shoes where he writes her name before every game.  Lamar is honoring his mother's memory by doing this part to make sure more Americans are as insured as he was.  Lamar created the below PSA to promote Life Insurance Awareness Month.

 

http://www.youtube.com/watch?v=URLPkhiv6Oo

 


The Watercooler

 

How much did Countrywide really cost Bank of America: In January 2008, Bank of America entered into a deal to acquire mortgage lender Countrywide for $4 billion.  The deal has turned into a disaster.  Countrywide, the largest mortgage lender, was at the front of the mortgage credit crisis by underwriting so many of the toxic subprime loans that caused the financial crisis.  BofA  Reuters estimate that writedowns and legal costs have pushed the estimated cost of the Countrywide purchase to $30 billion.  

 

Hurricane Irene's Financial Cost - Hurricane Irene is expected to cost between $4 and $7 billion dollars worth of financial loss.  First there is the real property damage caused by water and wind of the hurricane.  The cost of goods like roofing shingles and fruits and vegetables whose harvests are decimated increases.  If oil rigs are shut down, supply is reduced and fuel prices rise.  When airline flights are cancelled, the price of flights is increases to help the airline recover from lost fares. There is also loss from worker productivity.   Irene's dollar amount of damage was not as much as previous storms.  Hurricane Katrina cost $45 billion in 2011 dollars, and Hurricane Andrew cost more than $22 billion when it hit in 1992.
 

Irene

 

Michael Vick's Cleanup Plan - Michael Vick signed a $100 million contract which guarantees Vick about $40 million.  This obviously makes Michael Vick happy, but also makes Joseph Luzinski, the trustee overseeing Vick's bankruptcy plan very happy as well.  Vick filed for Bankruptcy in 2008 while serving 23 months in jail on dog-fighting charges.  Creditors looking for a piece of Vick's money include the Atlanta Falcons, his agent, Wachovia and RBS.

 

Fantasy football and workplace productivity - It is no secret that our economy is not growing as fast as we would like it to.  One thing the politicians won't be able to blame for our slow growth is Fantasy Football.  Challenger, Gray & Christmas, Inc. recently released a study that concluded that the 32 million people that participate in fantasy football does not have a negative impact on productivity in the workplace.  However Challenger neglected to say whether or not the study was financed by Roger Goodell, Fox, CBS, or NBC.

 

How much stock should we put in Credit Ratings?  In August Standard & Poors (S&P) stripped the US of its top AAA ranking saying Washington politics was making the country less credit worthy.  Meanwhile, the company has stamped a AAA rating on more than $36 billion of securities backed by subprime loans, the same type of investments that led to the worst financial crisis since the Great Depression. 


Please contact me if you have any questions about the articles above or about your personal or business finances.

  

Sincerely,

Marc Bautis
Wealth Manager

office: 201-842-7655
cell: 201-221-6895
fax:  201-754-9760

Disclaimer:The information contained in this newsletter is for information purposes only and may not be suitable for your specific financial situation.  You should consult a financial advisor before making any investment decisions relating to the information contained in this newsletter

What's Inside?
Eurozon Debit Crisis
529 Plans: Benefits & Traps
Time to Refinance?
Power of Deferring Taxes
Life Insurance Awareness Month
The Watercooler
Marc Headshow w Skyline, 9-2011
MEET MARC  

Marc Bautis is a Wealth Manager specializing in working with young families as well as retirees and those nearing retirement. He understands that everyone wants to not only protect their principal, but also be sure that their money lasts.  He is committed and proud to deliver independent advice, always in the interest of his clients.

Marc is the creator of the Retirement Fitness Challenge™,  a program designed to be sure his clients enjoy the retirement years as they have always envisioned them.  Marc's program is designed to prevent outliving your money but also to minimize expenses during retirement and find the best time to start taking Social Security benefits.   

Marc is a graduate of Seton Hall University.  He is a Bergen County native, from Lyndhurst, where much of his extended family still resides. He currently lives in Hasbrouck Heights with his wife Katie and Old English Bulldog, Winnie.

 

Quick Links
BF_Website
 
Newsletter Archive
 
 blog

Facebook

Twitter

Business Network