August 2017 Perspectives – Synchronized swimming

From talking about the U.S. economy’s treading water in last quarter’s Perspectives, we’ve now moved to “synchronized swimming” in our current issue. Synchronized swimming, you ask? We think that’s a fitting metaphor for the global expansion we’re seeing from the world’s major economic players.

International equity markets have led the way so far this year, and in this quarter’s Perspectives, we take a look at what’s been driving their performance. We also consider whether more interest-rate hikes are back on hold and look ahead to the second half of 2017 and the market and economic questions that may help shape it.

Read our August 2017 Perspectives below, or click here to download >>

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Market Summary: May 2017

Calm economics, turbulent politics

Once again, international stocks led the way. Developed-market stocks, which make up most of the value of international stocks, closed up +3.67% (MSCI EAFE index). Emerging-market stocks also did well, ending May up +2.96% (MSCI Emerging Markets index) and bringing year-to-date returns to +14.01% for developed-market and +17.25% for emerging-market stocks. Domestic stocks saw mixed returns. While large-cap stocks, which dominate the U.S. market, rose by +1.41% (S&P 500), small- and mid-cap stocks fell by -2.13% (S&P 600) and -0.49% (S&P 400). Bonds slipped early in the month as interest rates inched up, but they came back by mid-month to end slightly up at +0.77% (Barclays Aggregate index). A brief burst of volatility shook things up mid-month with a down day on May 17. This was the only day in May that the S&P 500 moved by +/-1%.

June 2017 Mailbag | Straight Talk from Financial Engines

From how world events and legislative actions might affect you to impacts of recent stock market activity, let our latest Mailbag help guide you.

At Financial Engines, we give you the objective, straightforward information you need to help reach your goals.

Download Mailbag now! >>

Have a question of your own? Click here to ask us >>

 

©2017 Financial Engines, Inc. All rights reserved. Financial Engines® is a registered trademark of Financial Engines, Inc. All advisory services are provided by Financial Engines Advisors L.L.C. or its affiliates. Financial Engines does not guarantee results and past performance is no guarantee of future results. CPY19153

Should You Refinance Your Student Loans?

The latest figures from the Federal Reserve show that Americans are weighed down by more than $1.4 trillion in student loan debt.1

The goal for many people with student loans is to get out from under that debt load as quickly as possible. This is especially true if the interest rates on the debt are high relative to current interest rates.

Getting rid of your debt.

There are three ways to pay down a loan and reduce the amount of total interest you owe:

  • Increase the amount of each payment to shorten the loan term.
  • Qualify for a lender’s interest rate reduction program (if available).
  • Refinance to a lower interest rate.

Most federal and private student loans let you increase the amount you pay and how often you pay it. If you have the monthly cash flow, this may be the easiest and fastest way to get rid of your debt. Even adding an extra $50 a month to your payment may end up saving you thousands.

Some loan servicers will reduce your interest rate if you enroll in an automated payment plan or if you’ve made a certain number of payments on time. Check with your loan servicer to see if this option is available for you.

Refinancing federal loans.

Refinancing a mortgage is often a no-brainer. But with student loans, refinancing may not always be the best choice.

If you have a federal student loan, you can’t refinance it into another type of federal loan. This is because interest rates on federal loans are fixed by law. You can, however, refinance a federal loan into a private loan. But if you do this you’ll give up federal loan protections, including income-based repayment plans and loan forgiveness.

Refinancing private loans.

Interest rates in the United States continue to be at all-time lows. That means many bank and non-bank lenders have deals for people who want to refinance student loans.

Yet, there are some catches. To get the lowest rates from private lenders, you’ll need to show steady employment, a good monthly income and a strong credit score. You also can’t have much other debt. This is different from most federal loans, which do not consider your credit. If you’re a rock star in all these areas, you may be able to qualify for interest rates in the 2%-3% range. If your current loan rates are several points higher, this could save you some serious cash.

Keep in mind that when you refinance your student loan, you reset your loan term. You get a lower interest rate, which could reduce your monthly payments. On the flip side, you could be making those lower payments longer, which could increase the total amount you end up paying. One way to work around this is to refinance to a lower interest rate but keep making the higher payments that you were before. This will pay off your new loan faster at a lower interest rate.

Should you or shouldn’t you?

Did you recently graduate? Is your employment situation unstable? Do you have federal loans with reasonable fixed rates? If you answered yes to any of these questions, then it may be smart to keep your loans set up the way they are now. One of the biggest advantages to this is that you’ll keep your flexible repayment options.

If you have private loans and a stable job, compare rates and requirements from several lenders to see if refinancing makes sense.

There’s no “one-size-fits-all” answer to if and how you should refinance student loans. Just as you did your research as a student, you should do your research on how it makes the most sense to pay off your loans. The right approach can help you pay off your debt sooner and save you money in the long run.

 

1 (17 May 2017). U.S. Student Loan Debt Statistics for 2017. Student Loan Hero. Retrieved May 20, 2017, from https://studentloanhero.com/student-loan-debt-statistics/

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Why a Health Savings Account Could be Right for You

Health savings accounts (HSAs) can be an essential part of both your health care and retirement savings strategies. In fact, more and more people are enrolling in them. A new survey found that “enrollment in employer-sponsored HSA/high-deductible plans more than doubled from 5% in 2005 to 11% in 2015.”1

If you’re not familiar with an HSA and how it works, you could be confused about why it may benefit you. Here are the basics.

What is an HSA?

An HSA is an account that you can use to pay medical bills. It’s available to people enrolled in a high-deductible health plan (HDHP). Money in an HSA can also be invested, like money in a 401(k) plan.

What is an HDHP?

An HDHP is a health insurance plan that has lower premiums and higher deductibles.

  • The deductible is the amount that you pay out of your own pocket to your doctor before an insurance company will pay extra expenses.
  • The premium is the amount you pay each month to your health insurance company.
  • In an HDHP, you’ll pay less each month to the health insurance company but will pay more each time you go to a doctor.

What are the benefits of an HSA?

It can pay medical expenses: First and foremost, an HSA is an important complement to an HDHP. It’s money that’s set aside to pay for what your HDHP won’t. This includes medical expenses like doctor’s visits, prescription drugs and dental care.

Your money can grow: You can invest your HSA balance in mutual funds or other investments. This may help increase your balance over time.

It offers a triple tax advantage:

  • Contributions to an HSA are tax-deductible. They’re either taken from your paycheck after taxes (which reduces your take-home pay) or are made before taxes are deducted, which lowers what you owe.
  • Interest from your HSA investment is not taxed either.
  • Withdrawals from your HSA are also not taxed if they’re used for qualified medical expenses.

There aren’t any required distributions: Traditional 401(k) plans and IRAs require a minimum distribution at the age of 70 1/2. This rule does not apply for an HSA. Money contributed into an HSA can stay there as long as the account owner wants it to. Also, unused funds roll over each year.

It doesn’t fall under the Federal Insurance Contributions Act (FICA): Contributions to an HSA are not subject to the FICA tax, which is a combination of Social Security tax and Medicare tax. In 2017, the FICA tax is 7.65%.2 This means if you contribute $100 from your paycheck to your HSA, $100 would end up in your account (in most states). If you did this same transaction with a 401(k) plan – which is subject to the contribution tax – only $92.35 would wind up in your 401(k) plan.

Employers can contribute: Like a company match in a 401(k) plan, employers can contribute to your HSA.

Is an HSA right for you?

It’s worth looking into. Do your homework first and understand how it works. We’re here to help you with that.

 

1 More Employers View HSAs as Part of Retirement Strategy. Employee Benefit Adviser retrieved May 12, 2017, from https://www.employeebenefitadviser.com/news/more-employers-view-hsas-as-part-of-retirement-strategy

2 Publication 15 – Introductory Material. Internal Revenue Service. Retrieved June 1, 2017 from https://www.irs.gov/publications/p15/ar01.html

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In Whose Best Interest?

The overwhelming majority of Americans think that financial advisors for retirement should be legally required to put their clients’ best interest first. The reality is, though, that many aren’t. And even more troubling, more than half of Americans misunderstand their advisor’s priorities.

 

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How Can You Tell if Your Financial Advisor Is a Fiduciary?

Are you one of the 60%?

Here are some questions to ask your current or potential advisor and what to look for in their answers.

  • Are you a fiduciary? A direct question deserves a direct answer. Pay attention to how the advisor responds. If your advisor has told you that he or she is acting as a fiduciary, ask them to show that to you in writing.
  • Do you receive any type of compensation in addition to what I’m paying you? Some advisors receive commissions or other product-based compensation when they steer clients into particular investment products (such as mutual funds, annuities and variable annuities). This is a clear conflict of interest and can indicate that the advisor is not, in fact, a fiduciary. Make sure your advisor is providing unbiased advice and not simply selling you investment products.
  • Are you “dual-registered”? Some advisors are registered as both investment advisors and broker-dealers. Often, a broker-dealer is acting in the role of salesperson. If your advisor is also a broker-dealer, make sure you understand which hat they are wearing when providing advice to you.
  • Have you ever been cited by a professional or regulatory organization for disciplinary reasons? To be extra sure, you can look up the advisor’s records on FINRA’s BrokerCheck to find out if they have any complaints. Keep a close eye out for complaints related to providing financial and advisory services.

 

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Worrying Is Like a Rocking Chair

The Employee Benefit Research Institute (EBRI) recently released their 2017 Retirement Confidence Survey, which found Americans are stressed about retirement. But despite reporting high stress levels, many aren’t preparing for retirement.

About 30% of workers feel “mentally or emotionally stressed about preparing for retirement,” according to the survey. Yet only 61% “say they have saved for retirement,” and only 41% “have tried to figure out how much money they will need in retirement.”1

You know how the adage goes: Worrying is like a rocking chair. It gives you something to do but gets you nowhere.

Don’t let today’s worry get in the way of planning for tomorrow’s financial success. Here are a few places to start:

Take full advantage of your employer’s company match.

If your employer offers a 401(k) or other defined contribution plan, they want you to save for your retirement. One way to help you is by matching your own contributions according to a preset formula and up to a certain amount.

Our 2015 report2 found that the typical employee leaves $1,336 of unclaimed money on the table each year because they don’t save enough in their 401(k) to receive the full company match.

Don’t borrow against your 401(k).

While you can borrow from many employer-sponsored retirement plans, it generally isn’t a good idea to do so. One downside to borrowing against your 401(k) — it can result in lower ending balances.

Your 401(k) can benefit from the compounding of returns. Money you earn on your balance (your “return”) can itself earn returns when invested. When you take money out of your 401(k), you have a smaller balance upon which to earn returns. This may not make much of a difference over a few months, but it can add up over several years.

Instead of borrowing against your 401(k), create a financial plan that focuses on building your savings and emergency fund. With that cushion, you won’t find yourself feeling like you have to take money out of your 401(k) before retirement.

Calculate how much you’ll need in retirement.

Determine how much income you’ll need in retirement. While your needs and hopes for retirement are your own, many financial planners estimate that a person needs about 70% of their current salary to live comfortably during retirement.3

Be mindful of Social Security claiming strategies.

Regardless of whether you’ll retire in a few months or a few years, start exploring Social Security claiming strategies now. Social Security is a complex program with a lot of options, so take the time to learn about it to help yourself feel prepared (and a little less stressed!). Try our Social Security Planner to learn more about claiming strategies that work best for you.

Set up a financial plan.

A financial plan helps investors see the big picture of their financial life. You can set long- and short-term goals and provide direction in making financial decisions.4 If you are one of those without a formal plan, the time to start is now. You can begin by putting the pieces together yourself or looking for a financial advisor in your area.

It’s understandable to stress about retirement, but we all know worrying gets you nowhere. Instead, start taking steps today toward achieving the retirement you want — and have worked hard for — in the future.

 

1, 4 (21 March 2017). Employee Benefit Research Institute. 2017 RCS: Many Americans Are Stressed about Retirement, Aren’t Taking Steps to Prepare. Retrieved April 28, 2017, from https://www.ebri.org/pdf/surveys/rcs/2017/PR.1185.RCS17.21Mar17.pdf

2 (May 2015). Financial Engines. Missing Out: How Much Employer 401(k) Matching Contributions do Employees Leave on the Table? Available at https://financialengines.com/workplace/resources

3 (21 December 2012). Financial Engines. Retirement Planning Checklist. Available at https://financialengines.com/education-center/retirement-planning-checklist/

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Top Senior Travel Rewards

For more than 39 million Americans, summer means one thing: travel time!1

That’s right, almost 12% of the U.S. population is expected to hit the roads, skies or rails to kick off the summer vacation season. If you’re a retired senior, some benefits could save you money along the way.

Flying the friendly skies.

The number of airlines offering senior discounts has dwindled in recent years, but some still do, including United, Southwest and Delta. Each defines ‘senior’ in its own way. For some, it’s anyone over age 50, while for others, it’s age 62 or 65.2 Most airlines also provide tips on how to make the most of your experience. This can come in handy if you’re not an experienced flyer. Search for ‘senior discounts’ on each airline’s website for information such as identification requirements and route restrictions.

If the senior deals aren’t cutting it for you, see if you can adjust your arrival and departure dates. Take advantage of your flexibility and save money by traveling during off-peak times.

Hitting the open road.

If you prefer the open road and want to avoid wear and tear on your own car, look at the major car rental companies for discounts for your next trip. For example, National offers up to 30% off rentals for AARP (formerly known as the American Association of Retired Persons) members. Avis, Hertz and Alamo provide 25% discounts to AARP members.3

Let them do the driving.

If you want someone else to drive during your trip, you can always take the train or bus and save on your fares. Both Amtrak and Greyhound offer reduced rates for seniors. If you’re age 62 or over, you can save 15% on the lowest available fare on Amtrak trains.4 Greyhound offers 5% discounts on tickets for anyone over age 52.5

Now that you’re there, where do you stay?

Unlike the airline industry, hotel discounts for seniors aren’t going away. In fact, they seem more abundant than ever. With just a little online research, you’ll find that small, mid-size and large hotel chains offer markdowns for vacationing seniors. Ask at the front desk if the place you’re staying offers discounts for seniors through AARP or the American Automobile Association (AAA). A lot of times you won’t even need to show your membership card to qualify.

Where do you want to eat?

A big part of travel involves food. You have plenty of options for markdowns on meals while you’re on the road. Fast food chains like McDonald’s, Wendy’s, Denny’s, Dunkin Donuts and IHOP offer bargains for seniors. So do restaurants like Outback Steakhouse, Bubba Gump Shrimp Company and Old Country Buffet. In most cases, all you’ll need is your AARP card to get the discount.5

And that brings up a good point. If you’re a senior with travel in your future, you may want to join an organization like AARP or AAA. Both offer a variety of discounts for members. You’ll pay a small annual fee to join, but it can be worth it if you travel often.

Cruises are vacations, too!

Don’t forget about cruise travel, which offers a lot for seniors, including planned activities, accessibility and comfortable accommodations. If you want to hit the high seas for a vacation, most of the major cruise lines like Princess, Carnival, Royal Caribbean, Disney and Norwegian offer reduced rates for seniors. You’ll find helpful information on each cruise line’s website.7

Retirement is a great time to get out and see the world, especially if you weren’t able to travel much during your working years. Take advantage of all available options to make the experience both affordable and enjoyable.

 

Disclosure:

Information about discounts included in this article were obtained by third-party sources and may be subject to change or no longer available.

1 Trejos, N. (2017, May 17). More people to travel this Memorial Day, says AAA. USA Today. Retrieved May 17, 2017, from https://www.usatoday.com/story/travel/roadwarriorvoices/2017/05/17/more-people-travel-memorial-day-says-aaa/101782130/

2, 3, 7 (n.d.). Retrieved May 18, 2017, from http://www.cheapflights.com/news/how-to-find-senior-airfare-discounts/

4 Passenger Discount for Seniors. (n.d.). Retrieved May 16, 2017, from https://www.amtrak.com/seniors-discount

5 (n.d.). Retrieved May 16, 2017, from http://www.seniordiscounts.com/FeaturedDiscounts/Greyhound.aspx

6 Cattanach, J. (2017, May 15). These 100 Fantastic Senior Discounts Make Us Look Forward to Turning 65. Retrieved May 16, 2017, from https://www.thepennyhoarder.com/deals/best-senior-discounts/

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What’s the Difference Between a Mutual Fund And a 401(k)?

As an investor, it’s easy to be confused about the different places you can park your money, which is understandable. Sometimes investing seems like a foreign language!

We’re here to help translate.

One common misunderstanding is the difference between mutual funds and 401(k) plans.

A mutual fund is an investment product. A 401(k) is an account that contains different investment products. Think of a mutual fund as a jetliner filled with travelers, while a 401(k) plan is more like an airport hangar with many jetliners parked inside.

The two can be related, though. Read on for more details.

What is a mutual fund?

A mutual fund is an investment vehicle designed to invest in securities—such as stocks or bonds. The “mutual” part of the term means that thousands of individual investors mutually agree to pool their money in the fund. Then, the fund’s manager can invest the money in a way consistent with the fund’s strategy. Fund investors mutually share in any profits (or losses) the fund has.

What is a 401(k) plan?

A 401(k) plan, also called an “employer-sponsored plan,” is a retirement savings program offered by a company as a benefit to their employees. Employees who take part in their company’s 401(k) plan direct part of their salary to their 401(k) plan account. Participants can then direct their contributions into the various investment options in the plan. These often include mutual funds.

How are a mutual fund and 401(k) plan related?

If you save in a 401(k) plan, you choose from various mutual funds and other investments available in your 401(k) portfolio. Your employer provides this savings option. If you want to invest in a particular mutual fund, you don’t always need your employer’s plan for this. You can do it on your own. Know, though, that taxes will be different in each situation.

The bottom line?

Mutual funds can be a great way to invest in a diversified portfolio. A 401(k)—which can include a variety of mutual funds—is a great way to save for retirement. One builds upon the other.

So the next time you read about mutual funds, 401(k)s and how they fit together, understand that they’re related—and for a reason. It’s less about financial jargon and more about how your hard-earned money can work for you.

 

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