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May newsletter

  1. 1. Market-Moving Indicators for Monitoring EuropeAmeriprise Financial If youve struggled to make sense of the However, investor reaction also can be ongoing European debt debacle, youre not unpredictable. For example, Standard & PoorsGreg Younger, CRPC® alone. Its difficult even to keep track of all the January downgrade of nine sovereign nationsFinancial Advisor pieces of this financial Rube Goldberg puzzle, and the European Financial Stability Fund was300 First Executive Ave let alone understand how they can influence largely met with a shrug by investors. TheresSuite D one another. been so much pessimism about Europe for soSt. Peters, MO 63376 Though new aspects of the situation seem to long that in some cases, markets may already have priced in much of the bad news.636-405-5004 crop up every month, here are some of most common factors that either reflect or affect Monitor credit default swap sentiment about whats happening in Europe. A credit default swap (CDS) is a form of Knowing about them might help you understand insurance against the possibility that a bond why markets react to a seemingly obscure issuer might default or fail to make a payment headline. After all, one of the few things that on its obligations. Bondholders buy a CDS from almost everyone seems to agree on is that the a financial institution or insurance company that situation isnt likely to be solved overnight. promises to reimburse the bondholder for any Take an interest in interest rates losses sustained in the event of a default. The Interest rates on sovereign debt are perhaps cost of that insurance is seen as a proxy for the the most closely watched indicator. When perceived risk involved in investing in a demand for a countrys bonds is low because particular countrys bonds. The higher the cost investors are concerned about the possibility of a CDS on, say, Italian sovereign debt, the that they might not be repaid in full and on time, greater the anxiety about whether the bond that country must offer a higher interest rate in issuer will default and the CDS issuer will have order to borrow money to finance its day-to-day to pay. operations. Follow the money Interest rates become particularly worrisome To prevent credit markets from seizing up, the when they reach or exceed 7%. Thats the level European Central Bank late last year provided that prompted Greece, Ireland, and Portugal to almost €500 billion in three-year loans to seek bailouts from their European peers, and European banks, making it easier for them to its widely seen as unsustainable. When a refinance their debt. The level of borrowing at country must pay that much simply to service the ECB is seen as one indicator of how banks its debt, investors become concerned that high are being affected by their holdings of borrowing costs will make a countrys financial sovereign debt. The greater the need to borrow situation even worse. from the ECB, the greater the banks perceived Watch credit ratings level of vulnerability. Troubled European countries are struggling to Bailouts: Nein nein nein? deal with a devilish Catch-22. In many cases, U.S. voters arent the only ones who are unsustainable debt burdens have led to sensitive about bailouts; so are Germans. As stringent austerity measures; however, such Europes most powerful economy and the oneMay 2012 measures also can hamper economic growth, with the best credit rating, Germany is theMarket-Moving Indicators for Monitoring which reduces tax revenue and can potentially tentpole upon which European financial stabilityEurope increase deficits. Higher deficits can lead to a hangs. However, by the end of 2011, the lower credit rating that in turn can mean higher German economy had begun to slow. AnyRetirement Rules of Thumb borrowing costs, bringing on the problems indications that economic pressure couldOf Taxes Past, Present, and Future discussed above and potentially launching a threaten Germanys ability and willingness toWhat happens to my retirement benefits new downward economic cycle. Thus, a remain strong in its support of the eurozone canif my employer goes out of business? downgrade to a countrys credit rating tends to spook anxious investors. raise concerns. Page 1 of 4 See disclaimer on final page
  2. 2. Retirement Rules of Thumb Because retirement rules of thumb are rule of thumb has critics, and there are other guidelines designed for the average situation, strategies and models that are used to theyll tend to be "wrong" for a particular retiree calculate sustainable withdrawal rates. For as often as theyre "right." However, rules of example, some experts suggest withdrawing a thumb are usually based on a sound financial lesser or higher fixed percentage each year; principle, and can provide a good starting point some promote a rate based on your investment for assessing your retirement needs. Here are performance each year; and some recommend four common retirement rules of thumb. a withdrawal rate based on age. Factors to consider include the value of your savings, the The percentage of stock in a portfolio amount of income you anticipate needing, your should equal 100 minus your age life expectancy, the rate of return you anticipate Financial professionals often advise that if from your investments, inflation, taxes, and youre saving for retirement, the younger you whether youre planning for one or two retired are, the more money you should put in stocks. lives. Though past performance is no guarantee of You need 70% of your preretirement future results, over the long term, stocks have historically provided higher returns and capital income during retirementRules of thumb are usuallybased on a sound financial appreciation than other commonly held Youve probably heard this many times before,principle, and can provide a securities. As you age, you have less time to and the number may have been 60%, 80%,good starting point for recover from downturns in the stock market. 90%, or even 100%, depending on who youreassessing your retirement Therefore, many professionals suggest that as talking to. But using a rule of thumb like thisneeds. you approach and enter retirement, you should one, while easy, really isnt very helpful begin converting more of your volatile because it doesnt take into consideration your growth-oriented investments to fixed-income unique circumstances, expectations, and goals. securities such as bonds. Instead of basing an estimate of your annual A simple rule of thumb is to subtract your age income needs on a percentage of your current from 100. The difference represents the income, focus instead on your actual expenses percentage of stocks you should keep in your today and think about whether theyll stay the portfolio. For example, if you followed this rule same, increase, decrease, or even disappear at age 40, 60% (100 minus 40) of your portfolio by the time you retire. While some expenses would consist of stock. However, this estimate may disappear, like a mortgage or costs for is not a substitute for a comprehensive transportation to and from work, new expenses investment plan, and many experts suggest may arise, like yard care services, snow modifying the result after considering other removal, or home maintenance--things that you factors, such as your risk tolerance, financial might currently take care of yourself but may goals, the fact that bond yields are at historic not want to (or be able to) do in the future. lows, and the fact that individuals are now living Additionally, if travel or hobby activities are longer and may have fewer safety nets to rely going to be part of your retirement, be sure to on than in the past. factor these costs into your retirement expenses. This approach can help you A "safe" withdrawal rate is 4% determine a more realistic forecast of how Your retirement income plan depends not only much income youll need during retirement. upon your asset allocation and investment choices, but also on how quickly you draw Save 10% of your pay for retirement down your personal savings. Basically, you While this seems like a perfectly reasonable want to withdraw at least enough to provide the rule of thumb, again, its not for everyone. For current income you need, but not so much that example, if youve started saving for retirement you run out too quickly, leaving nothing for later in your later years, 10% may not provide you retirement years. The percentage you withdraw with a large enough nest egg for a comfortable annually from your savings and investments is retirement, simply because you have fewer called your withdrawal rate. The maximum years to save. percentage that you can withdraw each year However, a related rule of thumb, that you and still reasonably expect not to deplete your should direct your savings first into a 401(k) savings is referred to as your "sustainable plan or other plan that provides employer withdrawal rate." matching contributions, is almost universally A common rule of thumb is that withdrawal of a true. Employer matching contributions are dollar amount each year equal to 4% of your essentially "free money," even though youll pay savings at retirement (adjusted for inflation) will taxes when you ultimately withdraw them from be a sustainable withdrawal rate. However, this the plan. Page 2 of 4, see disclaimer on final page
  3. 3. Of Taxes Past, Present, and Future With the 2011 tax filing season behind us, gains are generally taxed at a maximum rate of much attention is being paid to the expiring 15%. And, if youre in the 10% or 15% marginal "Bush tax cuts"--the reduced federal income tax income tax bracket, a special 0% rate generally rates, and benefits, that will expire at the end of applies. Starting in 2013, however, the 2012 unless additional legislation is passed. In maximum rate on long-term capital gains will fact, though, several important federal income generally increase to 20%, with a 10% rate tax provisions already expired at the end of applying to those in the lowest (15%) tax 2011. Heres a quick rundown of where things bracket (though slightly lower rates might apply stand today. to qualifying property held for five or more years). And while the current lower long-term Whats already expired? capital gain rates now apply to qualifying A series of temporary legislative "patches" over dividends, starting in 2013, dividends will be the last several years has prevented a dramatic taxed at ordinary income tax rates.Qualified charitable increase in the number of individuals subject todistributions Other provisions expiring at the end of the year: the alternative minimum tax (AMT)--essentiallyA popular provision allowing a parallel federal income tax system with its • 2% payroll tax reduction-- The recentlyindividuals age 70½ or older to own rates and rules. The last such patch extended 2% reduction in the Social Securitymake qualified charitable expired at the end of 2011. Unless new portion of the Federal Insurancedistributions of up to $100,000 legislation is passed, your odds of being caught Contributions Act (FICA) payroll tax expires atfrom an IRA directly to a in the AMT net greatly increase in 2012, the end of 2012.qualified charity expired at the because AMT exemption amounts will beend of 2011. These charitable • Itemized deductions and personaldistributions were excluded significantly lower, and you wont be able to exemptions-- Beginning in 2013, itemizedfrom income, and counted offset the AMT with most nonrefundable deductions and personal and dependencytowards satisfying any required personal tax credits. exemptions will once again be phased out forminimum distributions that you Other provisions that have already expired: individuals with high adjusted gross incomeswould have had to take from (AGIs).your IRA for the year. • Bonus depreciation and IRC Section 179 expense limits-- If youre a small business • Tax credits and deductions-- The earned owner or self-employed individual, you were income tax credit, the child tax credit, and theReturn of the "marriage allowed a first-year depreciation deduction of American Opportunity (Hope) tax credit revertpenalty"? 100% of the cost of qualifying property to old, lower limits and (less generous) rulesTax changes that were acquired and placed in service during 2011; of application. Also gone in 2013 is the abilityoriginally made to address a this "bonus" depreciation drops to 50% for to deduct interest on student loans after theperceived "marriage penalty" property acquired and placed in service first 60 months of repayment.expire at the end of 2012. If during 2012, and disappears altogether inyoure married and file a joint New Medicare taxes in 2013return with your spouse, youll 2013. For 2011, the maximum amount that you could expense under IRC Section 179 New Medicare taxes created by the health-caresee the effect in the form of a reform legislation passed in 2010 take effect inreduced 2013 standard was $500,000; in 2012, the maximum isdeduction amount, as well as in $139,000; and in 2013, the maximum will be just a few short months. Beginning in 2013, thelower 2013 tax bracket $25,000. hospital insurance (HI) portion of the payrollthresholds in the tax rate tables tax--commonly referred to as the Medicare • State and local sales tax-- If you itemize your portion--increases by 0.9% for high-wage(i.e., couples move into higherrate brackets at lower levels of deductions, 2011 was the last tax year for individuals. Also beginning in 2013, a new 3.8%income). which you could elect to deduct state and Medicare contribution tax is imposed on the local general sales tax in lieu of state and unearned income of high-income individuals. local income tax. Who is affected? The 0.9% payroll tax increase • Education deductions-- The above-the-line affects those with wages exceeding $200,000 deduction (maximum $4,000 deduction) for ($250,000 for married couples filing a joint qualified higher education expenses, and the federal income tax return, and $125,000 for above-the-line deduction for up to $250 of married individuals filing separately). The 3.8% out-of-pocket classroom expenses paid by contribution tax on unearned income generally education professionals both expired at the applies to the net investment income of end of 2011. individuals with modified adjusted gross income Whats expiring at the end of 2012? that exceeds $200,000 ($250,000 for married couples filing a joint federal income tax return, After December 31, 2012, were scheduled to and $125,000 for married individuals filing go from six federal tax brackets (10%, 15%, separately). 25%, 28%, 33%, and 35%) to five (15%, 28%, 31%, 36%, and 39.6%). The rates that apply to long-term capital gains and dividends will change as well. Currently, long-term capital Page 3 of 4, see disclaimer on final page
  4. 4. Ameriprise Financial What happens to my retirement benefits if my employerGreg Younger, CRPC® goes out of business?Financial Advisor If your employer goes out of money to cover all benefits that participants300 First Executive Ave business, any retirement plan have accrued up to the plan termination date, your employer sponsored will then the PBGC will permit a "standardSuite D be terminated. If the plan is a termination," and your employer will eitherSt. Peters, MO 63376 401(k) or other defined contribution plan, your purchase an annuity from an insurance636-405-5004 benefits are held in trust, apart from your company (which will provide lifetime employers assets, and youll generally be when you retire) or, if your plan permits, let entitled to receive your full account balance in a choose a lump-sum equivalent. lump sum. (You can take the cash, or roll your However, if the plan doesnt have enough payout into an IRA or another employers plan.) money to pay all promised benefits earned up But if your employer sponsors a defined benefit until plan termination (that is, the plan isThe information contained in this material is being plan, it gets a little more complicated. A defined "underfunded"), the PBGC will take over theprovided for general education purposes and with the benefit plan promises to pay you a specific plan as trustee in a "distress termination," andunderstanding that it is not intended to be used orinterpreted as specific legal, tax or investment monthly benefit at retirement. While defined assume the obligation to pay basic planadvice. It does not address or account for your benefit plan assets are also held in trust (or benefits up to legal limits. For plans ending inindividual investor circumstances. Investmentdecisions should always be made based on your insurance contracts), apart from your 2012, the maximum annual benefit (payable asspecific financial needs and objectives, goals, time employers assets, whether a particular plan a single life annuity) is $55,840 for a workerhorizon and risk tolerance. has enough cash to pay promised benefits who retires at age 65. If you begin receiving depends on your employers contributions and payments before age 65, or if your pensionThe information contained in this communication,including attachments, may be provided to support the plans investment earnings and actuarial includes benefits for a survivor or otherthe marketing of a particular product or service. You experience. beneficiary, or if your plan was adopted (orcannot rely on this to avoid tax penalties that may beimposed under the Internal Revenue Code. Consult When a defined benefit plan is about to amended to increase benefits) within five yearsyour tax advisor or attorney regarding tax issues terminate, the Pension Benefit Guaranty of the termination, the maximum amount isspecific to your circumstances. Corporation (PBGC), a federal agency created lower. According to the PBGC, only 16% ofNeither Ameriprise Financial Services, Inc. nor any of specifically to protect employees covered by retirees in recent years have seen their benefitits employees or representatives are authorized to these plans, is notified. If the plan has enough reduced because of the annual dollar limits.give legal or tax advice. You are encouraged to seekthe guidance of your own personal legal or taxcounsel. Ameriprise Financial Services, Inc. MemberFINRA and SIPC. What is the Pension Benefit Guaranty Corporation?The information in this document is provided by a The Pension Benefit Guaranty plans ending in 2012, the maximum annualthird party and has been obtained from sources Corporation (PBGC) is a amount (based on a single life annuity) isbelieved to be reliable, but accuracy and federal agency created by the $55,840.92 (or $4,653.41 per month) for acompleteness cannot be guaranteed by AmeripriseFinancial Services, Inc. While the publisher has been Employee Retirement Income worker who retires at age 65. According to thediligent in attempting to provide accurate information, Security Act of 1974 (ERISA) PBGC, most people receive the full benefit theythe accuracy of the information cannot beguaranteed. Laws and regulations change frequently, to help protect pension plan benefits. When a had earned before the plan terminated.and are subject to differing legal interpretations. pension plan ends (a "plan termination") without However, this amount may be lower than theAccordingly, neither the publisher nor any of itslicensees or their distributees shall be liable for any enough money to pay all benefits owed to benefit you had counted on from your plan atloss or damage caused, or alleged to have been participants, the PBGC takes over and retirement.caused, by the use or reliance upon this service. assumes the obligation to pay those benefits. The PBGC maintains two insurance programs: The PBGC only protects defined benefit the single-employer program protects about plans--that is, qualified employer pension plans 33.6 million workers and retirees in about that promise to pay a specific monthly benefit at 27,600 pension plans, and the multiemployer retirement, based on your pay and years of program protects 10.4 million workers and service with your employer. The PBGC doesnt retirees in about 1,500 pension plans. protect 401(k) or other defined contribution (Multiemployer plans are set up by collectively plans, plans not covered by ERISA (for bargained agreements involving more than one example, governmental plans and certain unrelated employer, generally in one industry, church plans), or plans offered by professional such as trucking or construction.) service employers (such as doctors and The PBGC isnt funded by general tax lawyers) with fewer than 26 employees. revenues. Rather, the PBGC collects insurance The PBGC guarantees that youll receive basic premiums from employers that sponsor insured pension benefits up to a specified dollar pension plans, receives funds from the pension amount. Basic benefits include normal and plans it takes over, and earns money on its early retirement benefits, survivor annuities, investments. Employers are required by ERISA and disability benefits. The maximum pension to pay insurance premiums to the PBGC. benefit is set by law and adjusted yearly. For Page 4 of 4 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012