The Equifax Data Hack: To lock or Freeze your File?

Updated September 20, 2018

The recent revelation of a massive data breach at Equifax potentially affecting 143 million consumers brought back memories of my own 2001credit fraud experience in Boston; it was an unnerving and horrific experience. Upon hearing the news of this most recent breach, I immediately checked out the link at Equifax.com and learned that, unfortunately, my credit file was among those compromised.

In light of the shocking news of the Equifax data hack and having been a victim of ID theft in the past, I thought I would share some “do’s and don'ts" to help calm your concerns and provide clarity on the differences between a credit freeze, credit lock, and fraud alert.

Do this first: Go to the official link being provided by Equifax

www.equifaxsecurity2017.com.

Type this address into your browser yourself. Click on:
1. "Read" button, 
2. "Enroll" button, and,
3. "Begin Enrollment" button.

You will be prompted to type in your last name and the last six digits of your Social Security Number (SSN). The next screen will inform you if your personal information has been compromised. Even if Equifax says your file wasn't compromised, assume it was and take the necessary steps to protect yourself.

Equifax is offering free identity theft protection and credit file monitoring to all U.S. consumers for one year only. The offering is called "TrustedID Premier" and includes a lock (not freeze) on your credit file.

Credit Freeze, Credit Lock or Fraud Alert?

Equifax has revised its botched response to their data breach since last week and is now waiving the typical "freeze" fee if you act before November 21. Even if you miss the deadline, many states allow you to add or lift a freeze, (not “lock") for free as long as you're a victim of ID theft. Given Equifax’s numerous missteps since announcing the breach on September 7, waiving fees to freeze your credit file is the least management can do.

While a credit freeze and credit lock have similarities, the difference between the two is highlighted below:

• Credit freeze: Locks your credit file to creditors and should prevent bad people from taking out loans and opening credit card accounts in your name. A security freeze remains on your credit file until you remove it. While a freeze may be the best option to guard against fraud, it may involve fees to add or lift it from your account — the cost of which varies by state but generally costs between $5 - $10. credit-freeze-information-by-state. (*see footnote: New legislation allows consumers to lift or add a freeze without charge as of May 24, 2018).

  If you're applying for credit, you will also need to plan in advance and notify a credit bureau to lift your freeze. It takes about 3 days for your freeze to thaw. Equifax and Experian have a link in their footers to add a security freeze under the heading “Support.” Type this link in you browser to add a security freeze to your TransUnion credit file: https://www.transunion.com/credit-freeze.
  
  

• Credit lock: Locking your account prevents unauthorized credit activity and puts you in control with no waiting, no PIN to remember, and no additional paperwork. You can unlock your credit report at any time with ease. TransUnion makes it easy to find their credit report lock on their home page under a big, blue button. Type this link into your browser to compare Experian's offerings: https://www.experian.com/consumer-products/compare-to-lifelock.html
  
  

• Fraud alert: When placed on your credit file, an alert merely cautions creditors that your information may have been stolen. But many creditors don't even check this; it’s also temporary.

The breach at Equifax has led many experts to recommend that consumers lock their credit reports. The three credit bureaus may also encourage you to "lock" instead of “freeze” your credit file. Why? Because it's easier and credit freezes are regulated by law while locks aren't; no waiver terms or binding arbitration can be imposed on consumers who request a credit report freeze. Plus, if your credit file is frozen, the bureaus can’t sell your information to creditors and other companies for marketing purposes.

Do keep this in mind: The breach at Equifax is severe, and criminals will be able to use the information they've obtained five years from now and beyond — one year of protection being offered through Equifax's Trusted ID Premier is a start, but it isn't enough. Also, Equifax does not notify other national consumer credit reporting agencies of your request to lock or freeze your credit report. You will need to contact them separately to add a lock or freeze to your file.
 

Now for Some Don'ts

• Don’t click online ads or links you see in news stories related to the Equifax hack; always re-type a link into your browser. There are links being circulated by data theft rings. Beware of phishing and malicious links. Urgent-sounding, legitimate-looking emails are intended to tempt you to accidentally disclose personal information or install malware. Don’t open links or attachments from unknown sources. Enter the web address in your browser. The only links you should click on are on the Equifax.com, TransUnion.com, or Experian.com websites.
  

• Don’t provide information to companies that send you emails or call you on the phone. Fraudsters move quickly and never miss an opportunity to take advantage of a crisis like the historic Equifax data breach. They may try to fool you because they will know your Social Security number and other personal information. Remember, your bank, personal financial advisor, and credit card companies do not need to contact you to confirm personal information or ask you for money – they already have it.
  

• Don't worry about changing your investment, checking, or savings account numbers. These numbers are not in your credit files. It's also not necessary to cancel your credit card accounts. However, you still need to regularly monitor your bank and credit card accounts just in case thieves use your stolen information to impersonate you and gain access to your accounts.
  

• Don’t leave bill payment envelopes in your mailbox with the flag up for pick up. Promptly remove incoming mail to guard against theft. And, do not drop off bill payment envelopes in the big blue USPS mailboxes after pickup hours - fraudsters can monitor your patterns and “fish out” your mail with rodent glue traps.
  

• Don't believe that if you freeze or lock your account, you can now relax. The overwhelming majority of fraud involves existing accounts, not new ones.
  
  

More on best practices

Cybercrime and fraud are constant threats in today’s digital, age and vigilance is key. Since being a victim of credit fraud in 2001, I regularly monitor my personal and business credit card accounts, bank accounts, and credit report. I've set up alerts on my checking and credit card accounts, so anytime there's activity over a certain dollar amount, I'm notified.

I encourage you to follow the best practices highlighted in this post and apply caution when sharing information or executing transactions. It will make a big difference in protecting your financial information and give you peace of mind.

Visit these sites for more information and best practices:

• StaySafeOnline.org: Review the STOP. THINK. CONNECT™ cybersecurity educational campaign.

• OnGuardOnline.gov: Focused on online security for kids, it includes a blog on current cyber trends.

• FDIC Consumer Assistance & Information, https://www.fdic.gov/consumers/assistance/protection/idtheft.html
  
   

For a free copy of your annual credit report, only go to:

www.annualcreditreport.com

Call: 877-322-8228

Send a request via certified mail: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, Georgia 30348-5281.

Equifax dedicated call center: 866-447-7559, every day (including weekends) from 7:00 a.m. – 1:00 a.m. Eastern Time.

Footnote:

*On May 24, 2018, President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act. The new legislation will allow consumers to “freeze” their credit files at the three major credit reporting bureaus — Equifax, Experian and TransUnion — without charge. Consumers can also lift a security freeze temporarily or permanently, without a fee.

Disclosure:
The information contained in this piece is intended for information only, and should not be considered financial planning advice. The information and opinions expressed herein are obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by Cambridge Wealth Management, LLC. Opinions expressed are current as of the date of this publication and are subject to change. Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.

Will Your Money Last? Risks to Retirement Income

In brief:

• A sound retirement income plan takes into account several financial risks including the potential for the retiree to outlive his or her assets and the effects of inflation on future income.

• Other considerations include rising living and healthcare costs, as well as taking excess withdrawals from your retirement account and uncertainty about the future of Social Security benefits.

• The overall objective of planning should be to create a sustainable stream of income that also has the potential to increase over time.

With so much at stake when planning a retirement income stream, it pays to take a step back and see whether your plan takes into account the major obstacles to retirement income adequacy. When you take this big-picture view, there are two major challenges that most retirees face:

• Longevity risk: the possibility that you will outlive your savings. We’re living longer, healthier lives.

• Investment risk: the possibility that an actual return on investment will be lower than your expected return.

There are other important considerations that can impact your long-term financial security too, including factors like rising living and healthcare costs, as well as uncertainty about the future of Social Security benefits. Understanding and addressing each of these challenges can lead to more confident retirement preparation.

Longevity risk

While most people look forward to living a long life, they also want to make sure their longevity is supported by a comfortable financial cushion. As the average life span has steadily lengthened due to advances in medicine and sanitation, the chance of prematurely depleting one's retirement assets has become a matter of great concern.

Consider a few numbers: According to the latest government data, average life expectancy in the United States climbed to 77.9 years for a child born in 2007, compared to 47.3 years in 1900. But most people don't live an average number of years. In reality, there's a 50 percent chance that at least one spouse of a healthy couple aged 65 will reach age 89 (see table below).1
 

Perspectives on Longevity
 

Chance of Living to a Specific Age

50%         25%

Male aged 65:                        age 83      age 88

Female aged 65:                     age 86      age 90

50% chance at least one of a 65-year-old couple will reach age 89.
Source: Social Security Administration, Period Life Table, 2007.

>> Related: Use the Social Security Administration's life expectancy calculator to estimate your longevity.

Investment Risk

The decision about how much money may be safely withdrawn each year from a retirement nest egg needs to take into consideration all the risks mentioned above. But retirees also must consider the fluctuating returns that their personal savings and investments are likely to produce over time, as well as the overall health of the financial markets and the economy during their withdrawal period.

The stock market's collapse in 2008, after a short bull market run following the Tech Bubble, illustrates the dangers of withdrawing too much too soon. Investors have short memories and often forget that the market was down 50% from it's high in March 2009. Withdrawing 7 percent or even more per year from a retirement portfolio during the bull market years might have seemed a reasonable rate. But the ensuing bear market in stocks raised the possibility that the value of a retiree's portfolio might be reduced as a result of stock market losses, increasing the chance that the retiree would outlive his assets.

According to one analysis, the average maximum sustainable withdrawal rate over any 30-year period for a balanced portfolio of stocks and bonds was 6.3 percent after adjusting for inflation. One strategy that may potentially avoid premature exhaustion of assets is to adopt a relatively conservative withdrawal rate of 4 percent a year. The same study showed that a withdrawal rate of 4 percent was sustainable in 95 percent of the periods studied.2
 

Inflation and cost of living

The increase in the price of certain items varies over time as well as from region to region and according to personal lifestyle. Through many ups and downs, U.S. consumer annual inflation has averaged about 3 percent since 1926. If inflation were to continue increasing at a 3 percent annual rate, a dollar would be worth only 54 cents in just 20 years. Conversely, the price of an automobile that costs $23,000 today would rise to more than $41,000 within two decades.

For retirees who no longer fund their living expenses out of wages, inflation affects retirement planning in two ways:

• It increases the future cost of goods and services, and

• it potentially erodes the value of assets set aside to meet those costs -- if those assets earn less than the rate of inflation.
   

Healthcare costs

The cost of medical care has emerged as a more important element of retirement planning in recent years. That's primarily due to three reasons:

• Healthcare expenses have increased at a faster pace than the overall inflation rate.

• Many employers have reduced or eliminated medical coverage for retired employees.

• Life expectancy has lengthened.

In addition, the nation's aging population has placed a heavier burden on Medicare, the federal medical insurance program for those aged 65 and older, in turn forcing Medicare recipients to contribute more toward their benefits and to purchase supplemental insurance policies.

The Employee Benefit Research Institute has estimated that if recent trends continue, a typical retiree who is age 65 now and lives to age 90 will need to allocate about $180,000 of his or her nest egg just for medical costs, including premiums for Medicare and "Medigap" insurance to supplement Medicare. Because of the higher cost trends affecting private health insurance, the same retiree relying on insurance coverage from a former employer may need to allot nearly $300,000 to pay health insurance and Medicare premiums, as well as out-of pocket medical bills.
>> Related: CWM White paper - Retiree Healthcare: What Will It Cost You?

Future of Social Security

The demographic forces that have led to an increasingly older population are expected to continue, putting more pressure on the financial resources of the Social Security system -- the government safety net that currently provides more than half of the income for six out of 10 Americans aged 65 or older. This isn’t a pressing issue at the current time, but with ongoing discussions about how to revamp Social Security to keep it solvent for longer, it is wise to consider Social Security maximization strategies in your retirement planning.
 

Addressing these risks

While the risks discussed above are common to most people, their impact on retirement income varies from person to person. Before you can develop a realistic plan aimed at providing a sustainable stream of income for your retirement, you will have to relate each risk to your unique situation. For example, if you are in good health and intend to retire in your mid-60s, you may want to plan for a retirement lasting 30 years or longer. And when you estimate the effects of inflation, you may decide that after you retire you should continue to invest a portion of your assets in investments with the potential to outpace inflation.

Developing a realistic plan to address the financial risks you face in retirement may seem beyond you. But you don't have to go it alone. At Cambridge Wealth Management, we offer an array of financial planning and investment services. So no matter where you are in life – whatever complexities you may face – Cambridge Wealth is equipped to help you guide you along the best path toward achieving your retirement life goals.

Source/Disclaimer:
1. Source: Social Security Administration, Period Life Table, 2007 (latest available).
2. Source: DST Systems, Inc. This example is a compilation of all 30-calendar-year holding periods from 1926 to 2015, based on a portfolio of 60% U.S. stocks and 40% long-term U.S. government bonds, with annual withdrawals adjusted for actual historical changes in the Consumer Price Index. The example is not intended as investment advice. Actual sustainable withdrawal rates ranged from 3.7% to 11.4% in the periods studied. Please consult a financial advisor if you have questions about choosing a withdrawal rate and how it relates to your own financial situation.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

Investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this piece is intended for information only, is not a recommendation and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances. Cambridge Wealth Management reorganized parts of the introduction, middle, and closing paragraphs, added the clickable links, and the chart titled "Retirement costs soar for Uncle Sam." All data are driven from publicly available information and has not been independently verified by Cambridge Wealth Management, LLC. Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.

Tax Strategies for Retirees

In Brief:

Managing taxes in retirement can be complex. Thoughtful planning may help reduce the tax burden for you and your heirs.

• Consider the tax implications of different investments—such as municipal bonds and index funds—and maintain a portfolio that fully utilizes the range of tax-efficient strategies available.
  

• Rethink how you allocate investments to—and make withdrawals from—taxable and tax-deferred accounts. Tax-deferred investments have greater earning potential than their taxable counterparts due to compounding, yet withdrawals from tax-deferred accounts are subject to higher taxes than investments held for a year or more in taxable accounts.
  

• You will need to work out a comprehensive estate and gifting plan with competent professionals so you can make the most of your money while you are alive and maximize what you pass on to heirs.

“Nothing in life is certain except death and taxes.”

— Benjamin Franklin

That saying still rings true roughly 300 years after the former statesman coined it. Yet, by formulating a tax-efficient investment and distribution strategy, retirees may keep more of their hard-earned assets for themselves and their heirs. Here are a few suggestions for effective money management during your later years.
 

Less Taxing Investments

Municipal bonds, or "munis" have long been appreciated by retirees seeking a haven from taxes and stock market volatility. In general, the interest paid on municipal bonds is exempt from federal taxes and sometimes state and local taxes as well (see table).1 The higher your tax bracket, the more you may benefit from investing in munis.

Also, consider investing in tax-managed mutual funds. Managers of these funds pursue tax efficiency by employing a number of strategies. For instance, they might limit the number of times they trade investments within a fund or sell securities at a loss to offset portfolio gains. Equity index funds may also be more tax-efficient than actively managed stock funds due to a potentially lower investment turnover rate.

It's also important to review which types of securities are held in taxable versus tax-deferred accounts. Why? Because the maximum federal tax rate on some dividend-producing investments and long-term capital gains is 20%.* In light of this, many financial experts recommend keeping real estate investment trusts (REITs), high-yield bonds, and high-turnover stock mutual funds in tax-deferred accounts. Low-turnover stock funds, municipal bonds, and growth or value stocks may be more appropriate for taxable accounts.
 

The Tax-exempt advantage: when less may yield more

Would a tax-free bond be a better investment for you than a taxable bond? Compare the yields to see. For instance, if you were in the 25% federal tax bracket, a taxable bond would need to earn a yield of 6.67% to equal a 5% tax-exempt municipal bond yield.
Federal Tax Rate	15%	25%	28%	33%	35%	39.6%
Tax-Exempt Rate	Taxable-Equivalent Yield
4%	4.71%	5.33%	5.56%	5.97%	6.15%	6.62%
5%	5.88%	6.67%	6.94%	7.46%	7.69%	8.28%
6%	7.06%	8%	8.33%	8.96%	9.23%	9.93%
7%	8.24%	9.33%	9.72%	10.45%	10.77%	11.59%
8%	9.41%	10.67%	11.11%	11.94%	12.31%	13.25%
The yields shown above are for illustrative purposes only and are not intended to reflect the actual yields of any investment.

Which Securities to Tap First?

Another major decision facing retirees is when to liquidate various types of assets. The advantage of holding on to tax-deferred investments is that they compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts.

On the other hand, you'll need to consider that qualified withdrawals from tax-deferred investments are taxed at ordinary federal income tax rates of up to 39.6%, while distributions—in the form of capital gains or dividends—from investments in taxable accounts are taxed at a maximum 20%.* (Capital gains on investments held for less than a year are taxed at regular income tax rates.)
 

The Ins and Outs of RMDs

The IRS mandates that you begin taking an annual RMD from traditional IRAs and employer-sponsored retirement plans after you reach age 70½. The premise behind the RMD rule is simple—the longer you are expected to live, the less the IRS requires you to withdraw (and pay taxes on) each year.

RMDs are now based on a uniform table, which takes into consideration the participant's and beneficiary's lifetimes, based on the participant's age. Failure to take the RMD can result in a tax penalty equal to 50% of the required amount. TIP: If you'll be pushed into a higher tax bracket at age 70½ due to the RMD rule, it may pay to begin taking withdrawals during your sixties.
 

Estate Planning and Gifting

There are various ways to make the tax payments on your assets easier for heirs to handle. Careful selection of beneficiaries of your money accounts is one example. If you do not name a beneficiary, your assets could end up in probate, and your beneficiaries could be taking distributions faster than they expected. In most cases, spousal beneficiaries are ideal, because they have several options that aren't available to other beneficiaries, including the marital deduction for the federal estate tax.

Also, consider transferring assets into an irrevocable trust if you're close to the threshold for owing estate taxes. In 2017, the federal estate tax applies to all estate assets over $5.49 million. Assets in an irrevocable trust are passed on free of estate taxes, saving heirs thousands of dollars. TIP: If you plan on moving assets from tax-deferred accounts, do so before you reach age 70½, when RMDs must begin.

Finally, if you have a taxable estate, you can give up to $14,000 per individual ($28,000 per married couple) each year to anyone tax free. Also, consider making gifts to children over age 14, as dividends may be taxed—or gains tapped—at much lower tax rates than those that apply to adults. TIP: Some people choose to transfer appreciated securities to custodial accounts (UTMAs and UGMAs) to help save for a grandchild's higher education expenses

Strategies for making the most of your money and reducing taxes are complex. Your best recourse? Plan ahead and consider meeting with a competent tax advisor, an estate attorney, and a financial professional to help you sort through your options.

Source/Disclaimer:

1. Capital gains from municipal bonds are taxable and interest income may be subject to the alternative minimum tax.
2. Withdrawals prior to age 591/2 are generally subject to a 10% additional tax.
* Income from investment assets may be subject to an additional 3.8% Medicare tax, applicable to single-filer taxpayers with a modified adjusted gross income of over $200,000 and $250,000 for joint filers.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content. Cambridge Wealth Management updated the federal estate tax exemption. © 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

Investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this piece is intended for information only, is not a recommendation and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances. All data are driven from publicly available information and has not been independently verified by Cambridge Wealth Management, LLC. Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.

Should you convert to a Roth IRA?

In Brief:

Investors at any level of income can convert assets from a traditional IRA to a Roth IRA. This article explains the potential benefits and tax implications of a conversion.

There are several key differences between a traditional IRA and a Roth IRA that can impact your wallet. So, are there benefits to converting all or a portion of your traditional IRA assets into a Roth? The answer to this query likely depends on:

• The amount of time you plan to leave the assets invested,
• Your estate planning strategies, and
• Your willingness to pay the federal income tax bill that a conversion is likely to trigger.
   

Two Types of IRAs

Each type of IRA has its own specific rules and potential benefits. These differences are summarized in the table below.

Conversion: Potential Benefits ...

Potential benefits of converting from a traditional IRA to a Roth IRA include:

• A larger sum to bequeath to heirs. Since lifetime RMDs are not required for Roth IRAs, investors who do not need to take withdrawals may leave the money invested as long as they choose which may result in a larger balance for heirs.
   
• Additional planning consideration – estate taxes: State estate taxes do not provide an IRD deduction (income in respect of decedent). Therefore, estate tax savings must be balanced against future income tax rates for you and your heirs. In short, estate tax benefits are greater at the state level, and only relevant at the Federal level for IRA-centric estates. Note: After an account owner's death, beneficiaries must take required minimum distributions, although different rules apply to spouses and non spouses.
   
• Tax-free withdrawals. Even if retirees need withdrawals for living expenses, withdrawals are tax free for those who are age 59½ or older and who have had the money invested for five years or more.
   

... As Well as a Potential Drawback

• Taxes upon conversion. Investors who convert proceeds from a traditional IRA to a Roth IRA are required to pay income taxes at the time of conversion on investment earnings and any contributions that qualified for a tax deduction. If you have a nondeductible traditional IRA (i.e., your contributions did not qualify for a tax deduction because your income was not within the parameters established by the IRS), investment earnings will be taxed but the amount of your contributions will not.
   
• The conversion will not trigger the 10% additional tax for early withdrawals.
   

Which Is Right for You?

If you have a traditional IRA and are considering converting to a Roth IRA, here are a few factors to consider:

• A conversion may be more attractive the further you are from retirement. The longer your earnings can remain invested, the more time you have to help compensate for the associated tax bill. Pay the tax when your tax rate is anticipated to be the lowest.
   
• Tax equivalency principle: Your current and future tax brackets will affect which IRA is best for you. If you expect to be in a lower tax bracket during retirement, sticking with a traditional IRA could be the best option because your RMDs during retirement will be taxed at a correspondingly lower rate than amounts converted today. On the other hand, if you anticipate being in a higher tax bracket, the ability to take tax-free distributions from a Roth IRA could be an attractive benefit.

There is no easy answer to the question "Should I convert my traditional IRA assets to a Roth IRA?" As with any major financial decision, careful consultation with your financial advisor and accountant is a good idea before you make your choice.

Source/Disclaimer:

1. IRA account holders (both traditional and Roth) may avoid the 10% additional federal tax on withdrawals before age 59½ only if they meet specific criteria established by the IRS. See Publication 590-A for more information.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content. Cambridge Wealth Management rewrote parts of the introduction, closing paragraph, and added the section titled "Additional planning consideration – estate taxes," and the term "tax equivalency principle." © 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

Investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this piece is intended for information only, is not a recommendation and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances. All data are driven from publicly available information and has not been independently verified by Cambridge Wealth Management, LLC. Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.

Ready Your Bond Portfolio For Reflation

In Brief:

• Donald J. Trump’s surprise election victory is a sea change, opening the way for substantial tax and regulatory reforms that should lead to reflation: improving growth, wage gains, and concomitant inflation.

• Post-election, the shorter end of the yield curve immediately steepened, suggesting bond investors see more growth in the near term. However, the long end of the yield curve has flattened, signaling that fiscal stimulus now may become a fiscal drag over the long term.
   
• We expect to see a modest rise in the 10-year Treasury from the current level of about 2.4 percent (watch 2.60 percent level).
   

The Yield curve "Tell"

First, let’s begin by defining a yield curve. A yield curve is a line that plots the interest rates, at a point in time, of bonds having equal credit quality but differing maturity dates. The most commonly reported yield curve compares the three-month, two-year, five-year, 10-year, and 30-year U.S. Treasury debt. [1}

Read more: Yield Curve Definition | Investopedia

The yield curve reflects the collective wisdom of millions of bond investors, and historically, it has been a strong predictor of economic booms and busts. The steepness or flatness of the yield curve is an indication of economic growth. The steeper the curve, the more investors expect inflation and interest rates to rise in the future. Conversely, when the yield curve flattens (or inverts -- shorter-term rates are higher than long-term rates), then investors expect a slowing economy. Also, our Federal Reserve Bank’s buying programs exert influence on the shape of our yield curve.

With the post-election spike in the 10-year Treasury, the bond market is telling us that Trump’s proposed policies are reflationary (see chart below). Over the short run, the bond market is signaling that moderately improving economic growth will lead to gradually rising interest rates. However, the long end of the yield curve has flattened, which means that Trump’s fiscal stimulus plans of lower tax rates and trillion-dollar infrastructure spending could become an economic drag later. And if Trump’s policies add to our $20 trillion in national debt, future costs of servicing our national debt due to higher interest rates could present a real drag on GDP.

The congressional budget office numbers

Each year in February, we review the CBO Budget and Economic Outlook report. According to this year’s report:
“As the slack in the economy continues to diminish, the Federal Reserve will continue to reduce its support of economic growth, in CBO’s view. Thus, the federal funds rate — the interest rate that financial institutions charge one another for overnight loans of their monetary reserves — is expected to rise gradually over the next few years, reaching 1.1 percent in the fourth quarter of 2017 and 1.6 percent in the fourth quarter of 2018, and 3.1 percent in the later part of the projection period. [2]
 

Our bond portfolio base case

• We advocate holding Treasury Inflation-Protected Securities (TIPS) in bond portfolios.
• We favor shortening interest rate exposure. (Floating rate bonds look pricey).
• We prefer financial paper, selective U.S. fixed rate bank preferreds, and investment-grade corporate bonds over Treasuries.
• President Trump's proposed tax reforms could reduce the attractiveness of municipal bonds and presents risks for investors.
• We recommend a simple laddered bond strategy.

Historically, the sweet spot in the yield curve during a rising rate environment has been the five-to-seven-year maturity range. While we expect rates to rise from current levels, they should remain low by historical standards for several reasons: slower growth in the labor force, diminishing productivity growth, and continued strong demand for U.S. Treasuries from the European Central Bank and the Bank of Japan.

Footnotes:
1. Investopedia: yield curve definition
2. Congressional Budget Office Report, "The Budget and Economic Outlook: 2017-2027," January 2017.

Investing involves risk, including possible loss of principal, and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Indices are unmanaged, do not consider the effect of transaction costs or fees, do not represent an actual account and cannot be invested to directly. The information contained in this piece is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances.

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Pre-retirement Anxiety

“Cultivate your intuition to improve your decision making.”

— Herbie Hancock

On February 23, I had a second meeting with a couple nearing retirement. One spouse, whom I will call Sarah, is retiring the end of April.

It was another brutally cold February evening. We were finally meeting again after two major snowstorms had postponed our second meeting.

We began our initial meeting on December 29 by talking about Sarah’s retirement concerns.

 #1 CONCERN:  You may have guessed it already…Sarah is retiring at age 62 and will not have a steady paycheck for the first time in many years. She's concerned about being able to maintain her standard of living. The uncertainty is creating anxiety and keeping Sarah up at night lately.

GOAL:  Create a steady income at 70-80% of her current net salary.
Sarah and her husband agreed to a financial planning engagement after our initial meeting that included an analysis of their budget, liabilities, Sarah’s retirement income plan, and their investment portfolio. Her husband, whom I will call Bob, is retiring in 2017 at age 64. Bob has a six-figure income, and when he retires, he will earn about 75% of his final pay. Bob is one of the few retirees today who has a guaranteed pension that includes health care coverage. Besides a few small student loans from their son and daughter’s education, they only have $35,000 remaining on their mortgage. 

So, you might be asking, what’s the issue? Change of any kind is unsettling, and retirement is a significant life transition. Sarah has a case of pre-retirement anxiety. It’s well founded in reality as she’s unsure about:
•    Which pension option out of five choices to take — she has small defined benefit plan
•    ESOP options
•   401k options — where, how, and if to roll over the balance
•   Social Security — Sarah filed for Social Security in November to have some form of an income
•   Student loans from her son and daughter’s college education are still being paid — Sarah is concerned about meeting their cash-flow needs

SOLUTION:  At the core of Sarah’s anxiety, like many pre-retirees, is fear…the fear of making the wrong decisions with all the above options and not having a steady paycheck. And like many couples, Sarah and Bob have been too busy with life to address Sarah’s retirement planning needs. Fear, as we know, stems from a lack of knowledge, confidence, and trust. Sarah and Bob have worked with a few advisors over the years. However, their advisors were not Certified Financial Planners nor interested in completing a formal “cash flow-based” financial plan. Note: Many advisors use “goals-based” planning software - it’s takes less time and expertise.

I analyzed their budget and learned that $700 of their $1,200 monthly student loan payment would be paid off in two months. The remaining student loan balance at an 8% APR is only $8,000. After analyzing their current investment portfolio, I suggested rebalancing in line with Sarah's current risk profile and retirement income goal. Next, I suggested selling a Rochester NY municipal bond holding (a great time to sell as it holds Puerto Rico bonds) to pay off the remaining student loan balance, solving an immediate retirement cash-flow concern. Further, the muni bond sale will generate minimal capital gains. We addressed all of the above bullet points and created five actionable steps for Sarah's pre-retirement meeting with her company HR department.

I also suggested consolidating existing IRA's and other investment accounts with Cambridge to implement Sarah's immediate retirement income plan. Sarah and Bob agreed with my recommendations — they have accounts in many different places.

I will be setting up a monthly electronic funds transfer (EFT) into Sarah's bank account from an existing annuity and one of her smaller IRAs (another tax-advantaged strategy). Sarah's perceived need to generate 70% of her income is no longer necessary as $1,200 of debt payments will be paid off over the next 60 days. Once the EFT plan and her defined benefit plan payment are implemented, Sarah can suspend her Social Security and wait until age 64 to file for her benefit.

At the end of our meeting, Sarah smiled and looked as if a huge burden had just been lifted from her life. She said, “I've been worrying about my retirement income — I should be able to sleep much better now.” I had helped Sarah cure her pre-retirement anxiety by defining a clear, practical retirement income strategy.

Please stop by again. Ill share with you the solution I designed for Sarah and Bob’s Social Security strategy…it will surprise many of you!