Fed Policy, Inflation, and Interest-Rate Risk
With interest rates still relatively low, the question today is by how much they are likely to rise. Historically, the 10-year Treasury bond has yielded, on average, about 2.5% over the inflation rate. With inflation at 1.5%, the 10-year Treasury bond typically would yield about 4.0%. In an attempt to support economic and job growth, the Federal Reserve has been purchasing long-term Treasury and mortgage-backed bonds to artificially keep interest rates low. As long as the Fed kept this asset purchase program up, 10-year Treasury yields remained relatively low. However, the Fed has begun tapering, and interest rates are likely to rise significantly in the near future. Both investors and advisors should be aware of the implications of rising interest rates.
Property and Casualty Insurance
Just as in driving, when planning your finances you have to learn to be defensive. While the word "insurance" makes some people cringe, it might not seem so bad if you can find ways to protect your family and save money at the same time. Let’s investigate homeowners, auto, and umbrella insurance coverage.
Homeowners Insurance: As scary as it might be to even think of, homeowners are at the risk of losing their property to a fire. Those who live in certain parts of the country are also prone to floods, tornadoes, hurricanes, you name it. Unfortunately, none of us is immune. Homeowners insurance protects what is most likely your biggest investment (your house) and all of its contents. It also provides much-needed liability coverage in case you are ever sued. Because disasters happen when we least expect them, proper preparation is a must. It is recommended that homeowners take an inventory of the contents of their houses, preferably on videotape if possible. Then put the video record in a safe deposit box or a flame-resistant home safe. Next, take a closer look at your insurance policy. Does it provide for 100% guaranteed replacement value for your house and possessions? Is there an inflation clause? Is there "loss of use" coverage that pays for expenses while you can't live in your house? What are the limits on items such as computers, cameras, jewelry, furs, or other valuables? If you've accumulated more "stuff" over the past few years, have you included it in your inventory of assets? Most people should update that at least every two years. Also, it never hurts to comparison shop. You can obtain free insurance quotes from a number of companies on the Internet. Be sure to get the best bang for your buck. For renters, you should be covered by renters insurance. The building owner's property coverage will not pay to replace your apartment's contents. You never can predict if an upstairs neighbor will leave a candle lit or trip over one of your kids' roller skates.
Auto Insurance: Most importantly, your auto insurance policy needs to cover liability. It is not unusual for people to end up in multimillion-dollar lawsuits if they were at fault in an auto accident. You might also need medical coverage, but check your health policy to make sure you are not duplicating coverage. Furthermore, be sure you have protection from uninsured or underinsured drivers—not everyone is as responsible as you are. Physical damage is another important aspect of car insurance. There are two basic types of coverage: collision and comprehensive. As the value of your car goes down, it may not make sense to continue collision coverage. You can check out the value of your car according to Kelly Blue Book. If you know you'll replace your car if you have an accident, you probably don't need the collision protection. Comprehensive covers all risks other than collision (fire, theft, storm damage, etc.).
Umbrella Insurance: Umbrella coverage gets its name because it sits on top of your homeowners and auto insurance. It extends the liability coverage of those policies. You must have the underlying coverage (assuming you own the asset) in place. Be careful to read the underlying coverage liability limits. You don't want to have a gap between what the homeowners coverage pays for and what the umbrella policy pays for. If you do, you will be responsible for the gap. Be sure to check into discounts if you purchase all of these policies from the same insurance company. Umbrella insurance may be worth considering especially if you have a swimming pool, a big dog, teenage drivers, or if you employ babysitters or cleaning people. Here's the good news: this coverage is cheap. It will cover accidents at your home, in your car, slander, defamation of character, invasion of privacy, libel, and plagiarism. The more assets you have, the more you need this coverage.
So remember to protect those assets that you've worked so hard to accumulate. You never know when something unexpected can ruin not just your day but your financial plans for the future.
Simple Steps for Late Savers
The sooner you start putting aside money for retirement, the more you might have once that highly anticipated day arrives. Saving for college tuition, purchasing a new home, unforeseen medical expenses, or life’s other necessities, surprises, or even enjoyments can cause investors to postpone saving. Starting the retirement planning process late in one’s life can be daunting, but it is by no means impossible.
Crunch the Numbers: The first step to getting back on track is to put together a budget—this will force you to focus on your financial situation and can serve as a road map to success. Once you have outlined all of your expenses, simply subtract the total from your net income. The result will give you a clear indication of how much you can potentially save, and also help you identify areas in which you may be spending too much.
Cut Any Unnecessary Expenses: There are essential expenses that cannot be eliminated: food, electricity, etc. However, most people can identify some areas, like entertainment, that are not vital to one’s existence and can be cut back on. The more areas that you can trim will lead to more money that can be earmarked for retirement.
Take Advantage of Catch-up Contributions: Catch-up contribution limits allow investors age 50 and above to increase their contribution. For example, they can make an extra contribution of $5,500 to their 401(k) in 2013, equating to a maximum contribution of $23,000. IRA catch-ups are $1,000 in 2013, leading to a maximum contribution of $6,500.
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