Stocks: The New Better Bonds

With all the headlines bonds have been making lately—and most aren't good—it's hardly surprising that many pros have been moving away from this nearly $36 trillion business. But that doesn't mean they haven't found a doppelganger of this once-steady form of income. After all, millions of Americans at or near retirement need enough steady income every few months to pay for the basics, finance vacations or even buy a few rounds of golf. The answer: stocks that act like bonds, only better.

Indeed, dividend-paying stocks are fast becoming the "bonds" of the future, with more than $5 billion having gone into funds that invest in them since October, according to fund research firm Lipper. And it's not just the same old names, like IBM and Johnson & Johnson, crowding the portfolio lineups; pros say there are also some great finds among smaller and more obscure firms. Many of these smaller fries are generating plenty of cash and have long records of paying or boosting their dividends, with yields that stack up well against most government bonds. But perhaps the biggest draw is how dividend-paying firms, especially those with a history of raising payouts, can withstand inflation, which can diminish a bond's value fast. With a bond, once you buy it, you are locked in at that rate. But with a stock, you could get a higher dividend.

Investors are beginning to buy the argument. While most stock funds had more money go out the door than they attracted in 2010, equity income funds, most of which concentrate on dividends, pulled in a total of $7.8 billion, according to Lipper. While many of those funds focus on the blue chip names, many smaller companies, from food distributor Sysco to asset manager Federated Investors, have been paying dividends for decades. In the sweet spot are smaller firms with a history of paying dividends and the wherewithal to boost the payouts in the future.

Some analysts expect dividend payouts to continue to increase this year, as pressure increases for firms sitting on lots of cash to do something with it. Yes, that means Cisco might use some of its nearly $40 billion in cash and short-term investments to pay a dividend, but smaller firms, such as retailer Kohl's, are also looking at instituting a dividend. More than half of the firms in the Russell 2000 small-cap index already pay dividends, bucking the common perception that smaller companies just plow all their cash back into their businesses to grow. Dividends in the small-cap world are really a well-kept secret.

Companies that pay dividends also tend to be less volatile. The payout signals that the firm's management believes their profits aren't going to disappear if the economy turns south. That puts these companies in an "elite class". In fact, over the past 20 years small-cap firms with a dividend outpaced their non-dividend-paying peers by an average of 14 percent a year. In contrast, large firms that paid dividends beat their non-dividend-paying peers by only 5.3 percent a year, according to financial research firm Ned Davis Research.

While bond investors might be tempted to buy stocks with the highest dividend yields, strategists recommend focusing instead on dividend growth potential and companies that are not yet paying out large amounts of their profits. Lofty payouts and yields also could be a sign of struggling companies.

To be sure, all stocks, even dividend-paying ones, can lose value. Small and midsize stocks also have been among the best market performers over the past two years. But the dividend payers in these groups have cheaper valuations than those not paying dividends, according to Ned Davis Research. Dividends from smaller firms are also slightly lower, on average, than those of larger companies. Mid- and large-size companies, for example, pay an average dividend of 1.4 percent, compared with 1.8 percent for large companies. But their average dividend growth rates are similar, with midsize and large companies alike increasing payouts by, on average, about 5 percent annually.

Considering that rising interest rates could swamp the bond market (bond prices move in the opposite direction of interest rates) and that the broad stock market is not cheap, strategists say getting income from different types of investments is key. You need all parts of your portfolio producing income.

Read more: Stocks: The New Better Bonds - SmartMoney.com http://www.smartmoney.com/investing/bonds/stocks-the-new-better-bonds-1301084723198/#ixzz1IE20s7Xi

Investor Spring Cleaning - 2011

Call it what you will, cyclical bull market or secular bear market, there's no denying that the last two years have been good to Wall Street.

Fueled by better-than-expected corporate earnings and aggressive steps by the Federal Reserve to pump more money into the economy, the S&P Index has nearly doubled from its bear market bottom of March 2009. The Dow Industrials have also surged back.

For many investors, though, the wounds inflicted by the two most recent bear markets — the dot-com collapse in 2000 and the financial crisis seven years later — have permanently altered their appetite for risk.

Some still sit on the sidelines, mere spectators of the current rally, while others are letting their emotions dictate their equity positions.

What they should be doing instead is revisit their asset allocation to determine whether it still fits their financial profileand rebalance as needed to insulate against future market dips.

In light of the rapid recovery of the stock market it is extremely important for investors to look again at asset allocations for two main reasons. First, the growth of all asset classes has not been equal, which causes riskier assets to outpace safer investments. This growth causes portfolios to unintentionally drift toward a more aggressive position.

Secondly, the “mathematical underpinning” of valuation in all asset classes has changed dramatically: “Just because you liked certain assets at their unbelievable low valuations in March of 2009, does not mean you like them equally today.”

Given the state of geopolitical instability worldwide, however, and growing economic threats domestically, building a bulletproof portfolio these days takes more than stocks, bonds and cash.

In order to be considered diversified, an investor must now include alternatives in their portfolio.

The traditional asset classes that help make a portfolio more conservative, including bonds and cash, have excess risk at this time due to inflationary pressures that have already shown signs of working their way into our economy. Due to this fact, bonds and cash should be minimized in favor of alternatives and dividend-producing stocks.

With too much “easy money” in the system, a function of the Federal Reserve’s series of quantitative easing, signs of inflation are already working their way into the system, and interest rates are likely to rise over the next two to three years, putting bond holders in a position to lose money.

Christine Benz, director of personal finance for fund tracker Morningstar, agrees inflation is a wild card.

Because rising interest rates often accompany higher-than-average inflation, she says, investors should be cautious about venturing into long-duration bonds and bond funds.

“Investors should therefore consider building their positions over a period of several months rather than adding exposure in one fell swoop,” she says.

Historically, exposure to emerging markets like Latin America and developing Asia has also served as an effective inflation hedge, since those countries tend to be heavy on basic-materials producers, and are beneficiaries of higher demand and prices.

Getting Pickier About Stocks

While investors should generally be diversified across all stock sectors, those looking for short term tactical moves, according to Schwab’s latest Sector Views report, should consider energy stocks which will continue to benefit from increased global demand and a regulatory environment in Washington that could improve with the new congressional mix.

Despite its outperform rating, though, Schwab suggests “investors who racked up nice profits during the past month look to take some off the table as a near-term pullback is certainly possible.”

Schwab also gives the information technology sector a rating of “outperform.”

With large cash balances, increasing dividend payments, solid management and tight inventory controls, the tech sector is far more stable than it was in the late 1990s environment that so many still remember. “We believe those who remain invested in tech will be rewarded with outperformance in the coming months.”

Over the short term, financials are also expected to benefit from increased business loan demand, merger and acquisition activity, and the continued wide interest rate spread.

And while the firm acknowledges the challenges facing utilities, it notes that sector too remains “somewhat attractive” as investors search for areas of the market that pay a bit more in dividends.

“We’re still bullish on the U.S., particularly large cap stocks,” says Schwab. “There’s a very accommodating Fed policy right now for larger companies. Interest rates are low and able to really drive bottom line profits and earnings expectations, and we think that’s going to continue” for the near term.

Europe, particularly Spain, Portugal, Italy and Ireland, merits caution, he says; Germany is still “absolutely” on his investment radar screen.

For the non-equity portion of its balanced growth portfolio, the remaining 30 percent should be allocated to bonds, 5 percent to cash, and 11 percent to alternative investments like real estate investment trusts and commodities.

For tactical investors, commodities have been hard to ignore, posting some impressive gains over the last year, led by oil and gold.

Selecting an asset allocation that’s appropriate for you will not only serve to minimize risk in your overall portfolio, but also help you achieve your long-term financial goals.

Perhaps the biggest benefit, though, is that it gives you the intestinal fortitude to stay the course when the bottom falls out of the market. And it will happen again.

http://www.cnbc.com/id/41855090//

Happy 65th birthday, boomers. Now what?

By Donna Rosato, Money Magazine — 03/10/11

The first wave of baby boomers -- including Cher, Steven Spielberg, George W. Bush, Bill Clinton, and nearly 3 million other Americans -- will turn 65 this year. If you're among those celebrating in 2011 or the next few years, you may be feeling a bit gloomy about a birthday that officially crowns you a senior citizen. You're too young to be old, right?

Adding insult to arthritis, this big birthday doesn't offer all the perks it used to: You can't collect full Social Security benefits at age 65 anymore; boomers qualify between 66 and 67, depending on their birth year. And most "senior" discounts -- from travel bargains to blue-plate specials -- kick in from 50 to 60 nowadays, as horrifying as that may be. (See seniordiscounts.com for a comprehensive list.)

That's not to say that this trip over the hill isn't a financial milestone at all. There are still a few important actions to take and things to think about as you approach this new mark of, um, maturity.

1. Get set with Medicare

The biggest change that happens at 65 is that you're eligible for Medicare, the federal health insurance program for seniors. If you're already collecting Social Security benefits, you're automatically enrolled. Otherwise, you must sign up.

"If you don't take Medicare at the appropriate time, you face a lifetime of penalties and will have gaps in coverage," says Ilene Stein, a lawyer at the Medicare Rights Center.

You can enroll, at medicare.gov or by calling 800-772-1213, from three months before you turn 65, and Medicare will kick in the first day of your birth month. You have three months after your birthday to enroll without penalty -- unless you're still working and have comparable insurance through your job, in which case you have eight months after that coverage ends to join up.

Deciding between original Medicare (Parts A and B) and privately run Advantage plans (Part C) can be overwhelming. But you can compare premiums and out-of-pocket costs for all your options at medicare.gov. Just be sure to narrow your Advantage choices to plans that get four or five stars from Medicare.

Facing higher costs under health care reform, some plans may slash benefits or raise premiums. But as of 2012, the highest-rated plans will get federal bonuses to help prevent this.

2. Slash your taxes

At 65 you're entitled to some tax breaks that can add up to serious savings. These include:

• A larger federal deduction. The standard deduction increases for taxpayers 65 and older -- good news for those who don't itemize. For singles it goes from $5,700 to $7,100; for couples in which one partner is 65 it rises from $11,400 to $12,500; when both spouses are 65 or older, it's $13,600. That last boost, for those in the 28% bracket, knocks $616 off your tax bill.
• Property tax breaks. Forty-five states and the District of Columbia give seniors a break on real estate taxes for a primary residence, says analyst Cathleen Calhoun of tax information service CCH; in the vast majority of them you must be 65 to qualify.

The deals vary: In Ohio the Homestead Exemption cuts about $400 off yearly property taxes. In Illinois the assessment on your home is frozen when you or your spouse turns 65. Check with your tax assessor's office to see what's offered and if there are any income limits or prerequisites.

3. Assess retirement plans

Sixty-five may no longer be the retirement turning point it used to be, but it's still a watershed year psychologically. If you're still working -- nearly half of leading-edge boomers are, a recent AARP survey found -- you may be feeling an itch to get out. Put that desire to use by thinking about how you'd like to spend your retirement. Will you travel? Will you work at all? Will you move?

Next, figure out how much your dream life will cost, and stress test your nest egg. The Retirement Income calculator can help you determine how much income your savings, Social Security, and any pension will provide. If it isn't enough, you could dial back your plans or work a few more years to postpone drawing on your savings and collecting Social Security.

Delaying the latter beyond your full retirement age increases your benefit 8% a year. Determine what your payout will be with the Retirement Estimator at ssa.gov. Who says you can't always get what you want? Oh, just some old dudes.

Top Five Retirement Myths

1. $1 Million Will Be Enough

Hardly—and don’t rely on simple retirement calculators for help. To come up with a number, calculators essentially take one figure that retirees seldom predict accurately (how much they'll spend every year) and multiply it by another (how long they'll live). Advisors and planners say the most effective calculators use dozens of variables and ask for frequent updates. But even then, anything unexpected can derail a boomer's plans.

2. You'll Spend Less When You're Older

Boomers approaching retirement are likely to run into a rule of thumb like this, from one brokerage's online calculator: "You need about 70% to 80% of your annual pre-retirement household income during retirement." That figure seems to reflect reality: The Federal Bureau of Labor Statistics reports that in 2009 the average person in the 65-to-74 age range spent about $43,000, while the average person age 55 to 64 spent more than $52,000. Over time, the idea that spending falls in retirement has become a mantra of financial planning. No more commutes, no more kids to feed—and no more business attire.

The question, of course, is whether retirees spend less by choice—or because they don't have a better choice, financially. A deeper dive into the federal statistics shows some interesting wrinkles. The spending categories that drop the most after age 65 include education (presumably, the kids have grown) and pensions (no more paychecks means no more payouts for 401(k)s or Social Security), but most other categories drop only slightly.

3. Older People Need More Bonds

Even a cursory look at the headlines shows it's a shaky time for bonds, with inflation fears rising and government finances in bad shape. But while some Main Street investors are finally pulling money out of bond funds, the industry is still pumping out new products in response to the bond boom of two years ago: Last year the number of bond exchange-traded funds—products that track bond indexes but trade like stocks—rose by 51 percent, to 137, according to research site ETFdb. And many companies have been redesigning their 401(k)s to funnel investors into target-date funds, which automatically steer older investors into— you guessed it—bonds.

4. Your Money Lasts Longer if You Move

For boomers in expensive coastal cities, the idea of leaving town has become a linchpin of retirement strategy. Who wouldn't want to trade Boston's dreary winters for the Gulf beaches of Texas—where there's no income tax and housing costs only a third as much as in Beantown? Still, a lower housing price tag doesn't guarantee low overall expenses. Couples report having learned that giving in to the desire to go home can get awfully expensive—and staying put can also cost you.

5. Uncle Sam Has Got Your Back

The recent health care reform debate underscored how much Americans rely emotionally on Medicare's safety net. But evidence suggests that most people saving for retirement don't realize how much Medicare doesn't cover—such as routine eye care, dental work and some prescription drugs. Medicare co-pays can range from 20% to 45% of the cost of many types of outpatient medical care. And the most painful bite, by far, comes from nursing home and home-health care, where the average cost for a private room was more than $75,000 a year in 2010.

http://www.advisorone.com/article/top-five-retirement-myths

How to Outsmart Global Crises

Drama is everywhere.

We have the unfolding crisis in the Middle East (Libya, Egypt, Iran and Saudi Arabia), the ongoing sovereign debt worries from countries in the European Union (Greece, Spain and Portugal), and now Japan faces its worse crisis since World War II. The United States still struggles as it emerges from the worst downturn since the Great Depression.

There is no shortage of challenges facing the world today and many investors are frozen waiting for clarity in these times of uncertainty. The problem is, in all likelihood, the world will not settle down any time soon and we will surely continue to see geopolitical shifts and unrest plaguing the investment world.

So what are investors to do?

How is an investor to make these decisions given how fast changing the global environment is moving?

1. First, recognize that volatility is not going away anytime soon; it is the new reality. Fluctuation based on headlines is here to stay.
2. Second, assess whether the crisis is short- or long-term in nature. As always, time horizon is a a crucial assessment factor.
3. Lastly, analyze how great the impact of the condition. Determine how fundamentals will be affected.

Here are a few current headlines that are impacting investors today. These comments are representative of the type of analysis that will serve you well as you make your own decisions. Whether you agree or not is not the point; assess and decide not based on emotion but your own rational thought. That's the lesson here.

While Japan certainly is struggling in the short term under great burdens, it is our view that the long-term impact from the earthquake, tsunami, and radiation crisis will likely be muted and overwhelmed by a massive reconstruction effort.

Rating agency Moody's notes that while risks to the Japanese economy have clearly risen, it still expects the economy to resume growth in the second half the year. Moody's forecasts that reconstruction efforts will lift overall growth by 2.3%. Bet on a recovery in Japan and on companies like Toyota and Sony to bounce back.

The European Union's challenges with debt appear long term in nature and are likely a significant structural problem that will impact EU GDP growth for a significant period of time. European companies like Nokia will face headwinds as core markets struggle under huge debt.

The United States is not without it's problems. Recent housing reports suggest that housing prices are now at a nine-year low with some communities suffering an even greater downturn. For example, it is estimated that 20% of all properties in Florida are currently vacant which certainly does dampen optimism that a housing rebound is imminent. We don't believe housing will rebound for years and this will likely weigh on the US GDP growth.

Civil unrest in Libya and Egypt are causing great uncertainty today, but these conflicts are not the real issue. The core concern is the world's reliance on a depleting resource, oil. The world's dependence on oil is a long-term problem and will need to be resolved through some alternative means.

There is growing pessimism about the future of nuclear energy given Japan's reactor problems and, for that reason, natural gas might be the next best resort. Companies like Chevron will benefit from current oil pricing conditions as will natural gas producers like Chesapeake Energy.

This is a small selection of the drama playing out each day in the news. Simply look at the headlines and you will read about countless challenges impacting investors. Many will react with emotion; the wise will react with careful and balanced thought.

Investing based on geopolitical uncertainty requires taking a stand and making reasoned judgments about where you think the future is headed. Investing when uncertainty is in the minds of most investors is usually where money is to be made; a willingness to live with ambiguity can prove profitable.

Take action and don't wait for a calm world. Assess, contemplate, decide and act. Don't wait; the world won't be calming down anytime soon.

Michael Yoshikami, President & Chief Investment Strategist, YCMNET Advisors
http://www.cnbc.com/id/42230895

Exchange-Traded Funds: What You Need to Know

Exchange-traded funds, also known as ETFs.’s, have surged in popularity in recent years, and the number and types of products have proliferated.

Many ETFs are simply mutual fund-like but specifically pegged to financial indexes and with an added benefit: They can be traded throughout the day just like a stock, where traditional mutual funds are priced only once a day, at the end of trading. A good example is State Street's SPDR S&P 500 ETF (SPY) which mirrors the S&P 500. Many other ETFs hold a basket of stocks which are not actively bought and sold as they are in mutual funds. An example here is Vanguard's Dividend Appreciation ETF (VIG) which holds blue chip companies with a ten year history of delivering dividends to investors.

Many people like exchange-traded funds, or ETFs, for the same reasons they like index funds: they provide easy access to broad spheres of the market, while keeping costs and taxes low. Because they are not actively managed like mutual funds, management fees associated with mutual funds are significantly reduced. And because there is not active buying and selling within the ETF, capital gains from the result of those trades are minimized and as a result not passed on to the ETF investor.

When choosing an ETF, stick with well-known and time-tested providers such as Barclays Global Investors, Vanguard, and State Street. In most cases, you want to invest in the least expensive funds with recognizable indexes. It’s also wise to invest in larger funds with more assets, which means they will be easier and less expensive to trade.

Load versus no-load funds

Is there ever a reason for an investor to buy a load mutual fund? Is there an advantage to that? If someone is working with a broker and advisor, and you’re getting good advice—then that’s money well spent.

But if you’re doing all the homework yourself and you are investing, no reason not to opt for a no-load fund.

Why High Oil Prices Are Here to Stay

Oil prices swung wildly this week, rising to near 30-month highs after Saudi Arabia sent troops to Bahrain, then plummeting to less than $100 a barrel on expectations that an earthquake-ravaged Japan would demand less oil.

The ride is not over yet, say economists: There may be ups and downs, but long term, high oil prices are here to stay. On top of volatility caused by natural catastrophes and political upheavals, a tight oil supply and increasing demand promise to keep driving prices up steadily over time. Prices could fluctuate between $60 to $200 a barrel, but probably will not go back to $30 or $50 anytime soon. Higher prices are going to be part of the environment for the next few years. There just isn't a lot of surplus oil.

The fallout from the 8.9-magnitude earthquake and tsunami in Japan has added to oil market confusion. Oil prices are being pulled in two opposite directions. The disasters in Japan are pulling prices down in anticipation of slower Japanese growth in the short term, and because their oil refineries are damaged and they will order less crude oil. Lifting prices higher, however, is the civil unrest in Bahrain now that Saudi Arabia and other Gulf nations have sent troops into Bahrain. The net result will still be higher oil prices because of the fear that Saudi Arabia is now completely encircled by countries that are unstable. Expect oil to remain in triple digits and gasoline prices to stay above $3 for the rest of the year.

Every $10 increase in price per barrel translates into about a 25-cent increase per gallon of gas. Before the Japanese earthquake, the U.S. Energy Information Administration forecast a gallon of gas to average $3.56 in 2011, with a 25% chance that gas could top $4 during the summer.

http://news.morningstar.com/articlenet/SubmissionsArticle.aspx?submissionid=114392.xml

It rarely pays to sell into a panic

(MarketWatch) That’s worth keeping in mind today as panic grips global stock markets.

Perhaps the closest recent domestic analogy to what Japan is going through right now is the 9-11 terrorist attacks on the World Trade Center and the Pentagon. Just as is the case with the Japanese stock market, Wall Street plunged on the day it eventually reopened following those attacks.

But the market quickly recovered.

Consider an investor who was unlucky enough to have invested in the stock market at the close on Sept. 10, 2001, the day before the attacks. Believe it or not, within just two months that investor would have been in the black.

Making this result even more striking: It came within the context of the 2000-2002 bear market and the associated bursting of the Internet bubble.

Even industries that were otherwise decimated by the 9-11 attacks, such as airlines, recovered smartly. Six months after the attacks, for example, the NYSE ARCA Airline Index was just 2.3% below where it close on Sept. 10, 2001, the day before those attacks—despite the decision of numerous travelers to never fly again.

You might object that it’s dangerous to draw investment conclusions from this one turn of events.

But the market’s behavior after 9-11 was right in line with historical precedent. Consider a study conducted by Ned Davis Research, the quantitative research firm. It identified what it considered to be the 28 worst political or economic crises over the six decades prior to the 9-11 attacks—beginning with the Fall of France in 1940 and Pearl Harbor in 1941.

In 19 of these 28 cases, according to the firm, the Dow Jones Industrial Average was higher six months after the crisis began. The average six-month DJIA gain following all 28 crises was 2.3%.

http://www.marketwatch.com/story/it-rarely-pays-to-sell-into-a-panic-2011-03-15

More workers have a gloomy retirement outlook

More workers are pessimistic about their retirement future than at any time in the past two decades, according to the Employee Benefit Research Institute 2011 Retirement Confidence Survey.

The percentage of workers who are not at all confident about saving enough money for a comfortable retirement reached 27% in 2011, compared with 22% last year. When combined with those who said they are not too confident, the total reaches 50% of workers.

Among the findings:

• The number of workers who are saving money for retirement declined slightly from 60% last year to 59% in 2011.

• Quite a few workers virtually have no savings or investments. In 2011, 29% said they have less than $1,000. And 56% said that their savings and investments, excluding their home value, totals less than $25,000.

• The number of workers who have dipped into their savings to pay for basic expenses or to take a loan has reached 34%.

• And 22% of workers said their debt is a major problem.

Even though workers have not started making major changes, at least 62% of workers say it is possible for them to save $25 a week for retirement.

One expectation may need to be adjusted. Among the 1,004 workers surveyed by EBRI, 74% say they plan to work in retirement to supplement their savings, but just 23% of the 254 retirees surveyed say they have worked in retirement.

There is a disconnect between people's perception and the reality. Among the reasons retirees are not able to stay in the workforce are health problems and work skills that have eroded.

There are no guarantees. But if someone starts planning ahead of time, it's more likely that they can work longer and save more for retirement.

http://www.usatoday.com/money/perfi/retirement/2011-03-15-1Aretireconfidence15_ST_N.htm

Stock Investors Are Jittery

While Tuesday's sharp drop in global stocks may have seemed like panic selling, it's far from the 2008 market meltdown that devastated many investors' portfolios.

On most trading floors, in fact, the mood instead was serious concern—not hysteria—that the snowball of global and geopolitical events was about to choke off the market's two-year rally.

The huge market drop, then, was not 2008 all over again, but rather a warning shot that many investors have their fingers on the "sell" button should the Japan natural disaster or the Middle East tumult take a serious turn for the worse.

"If we can avoid a (further) major catastrophe in Japan and people are capable of going back to work and society can go on there, then there is a chance for this only being a corrective-type pattern," said Brian LaRose, strategist at United-ICAP in New York. "Fundamentally this would appear to be a safety play, not necessarily a panic move out of the market."

The most serious question at this point seems to be how bad the nuclear situation is in Japan. Should a Chernobyl-level meltdown occur, that also would strangle Japan's economy and put a huge dent into global demand, in addition to the unimaginable human toll.But the chance of that happening is seen as remote, at least for now.

The sell-off was more about buyers heading for the sidelines than sellers taking over the market.

A lot of people are saying, 'I don't know what's going to happen. It's uncertain, therefore I'm going to take profits,' and then you have that selling. And of course, some of it is just panic. You want to get into cash and just wait to see what happens.

The delicate nature of the situation in Japan made impulse-selling tough to resist, as the world literally was watching which way the wind was blowing to see where radiation from the nuclear plants would drift.

You liquidate and you get a position where you can get defensive. Tactically you get ready to do something because there's so little information. If we're using the wind direction to make an investment decision, that's not good strategy. So go to the ground.

http://www.cnbc.com/id/42090835

BlackRock Weekly Investment Commentary

Risk assets experienced a setback last week in the face of rising tensions in Libya and the Middle East. Additionally, the massive earthquake that hit Japan on Friday resulted in a sharp downturn in Japanese equities on Monday and increased the sense of investor unease. For the week, the Dow Jones Industrial Average lost 1.0% to 12,044, the S&P 500 Index declined 1.3% to 1,304 and the Nasdaq Composite fell 2.5% to 2,716.

The human costs of the earthquake in Japan are obviously foremost in everyone’s mind at this time, but the potential economic and market implications are also being weighed by investors. In the short term, the earthquake and resulting turmoil add to global market risks and will almost certainly depress the Japanese economy. It is still too early to definitively assess the potential long-term results (particularly as it relates to the problems facing some of Japan’s nuclear reactors), but we will point out that disasters, natural or otherwise, usually have only a temporary economic impact unless there is a sizeable and permanent policy response. The struggling Japanese economy has a great deal of excess capacity, and it is possible that Japanese officials will use this occasion to undertake some desperately needed structural reforms to make the country’s economy more competitive.

The ongoing turmoil in Libya and the Middle East has continued to weigh on markets and the resulting oil price spike at a minimum reduces some of the upside potential for global economic growth and adds to potential volatility in the financial markets. At this point, most market observers are viewing higher oil prices as a temporary condition, but if prices stay where they are for longer than expected, or move noticeably higher, global GDP growth forecasts will be negatively impacted. One of the main questions investors are asking is whether we will see some sort of political crisis in Saudi Arabia. The Kingdom of Saudi Arabia has relatively strong economic and political fundamentals when compared to its neighbors, and at present most view the risks of political unrest in that country as low. In any case, however, as long as anxiety over the Middle East remains high, so will investor uncertainty.

Regarding the US economy, we do not believe oil prices have advanced to the point that they will derail the economic recovery. In our analysis, it would take another $20 to $30 a barrel increase before that would happen. Geopolitical risks are, of course, impossible to predict and oil markets are notoriously volatile, but we are not expecting prices to climb that high. Barring further cuts to oil supplies and/or significant oil price increases, we still believe that a 3% real GDP growth figure for 2011 makes sense. Demand levels remain strong in the United States, and monetary policy remains growth-friendly. Recent data has continued to show that the economy is improving. Last week, for example, February retail sales figures were released and showed that higher energy prices have not stopped consumers from spending.

The US economy has now experienced six consecutive quarters of positive growth since the recession officially ended in the middle of 2009. Growth now appears to be settling into a trend-level pace for 2011. Manufacturing levels have been experiencing strength, and although the labor market remains troubled, that also is improving. The US consumer sector has been repairing itself to some degree, but still has further to go. Since the recession ended, consumer spending has accounted for only 55% of US GDP growth, well below its historic average of 70%.

From a markets perspective, global equities have corrected somewhat amidst rising oil prices and escalating geopolitical risks. However, outside of region-specific downturns in the Middle East (and more recently in Japan), downturns have been relatively modest. The turmoil in the Middle East is unlikely to be resolved quickly or easily, meaning that oil market volatility is likely to remain high. Economic fundamentals, however, remain sound. Investors have ample cash to put to work and are still underweight equities. Our base forecast remains that the markets should continue to move in an upward direction over the long term, but we may need to see some additional clarity on the geopolitical front before that can occur.

(Bob Doll is Chief Equity Strategist for Fundamental Equities at BlackRock^®, a premier provider of global investment management, risk management and advisory services.)

Japan earthquake adds uncertainty to global outlook

The tragic earthquake and subsequent tsunami has caused a significant disruption in Japanese economic activity. In the most affected areas, transportation and production interruptions have caused severe supply-chain difficulties. The damage to electrical power facilities, including two nuclear plants, has created power shortages that have had ramifications throughout the country. With Japan’s economy having already slowed in recent months, the recent events are likely to contribute to significant economic weakness in the near-term.

On the other hand, natural disasters in developed economies have typically put into motion a series of policy and other actions that begin to create a positive counter-effect. Specifically, the initial fall in production and consumption often gives way to a pick-up in economic activity driven by a restoration of the damaged capital stock. Historically, government spending, monetary stimulus, and insurance payouts lay the foundation for a reconstruction phase, in which businesses and households rebuild lost and damaged infrastructure.

For example, after the Kobe region earthquake in 1995, Japanese industrial production fell by 2.6% during the month of the earthquake but had fully recovered to pre-earthquake levels just two months later. While there are many differences between the Kobe quake and today in terms of the damage inflicted and the overall economic environment, the general historical pattern of sudden decline followed by a reconstruction-led recovery holds across many examples of natural disasters in various developed economies.

On March 14, the first day of trading since disaster struck, the Japanese stock market dropped 6.2%. An initial sell-off in the aftermath of a natural disaster is a common historical pattern in stock markets, as uncertainty may cause some short-term selling while investors re-assess the outlook. However, the sell-off also makes Japanese equities cheaper, which underscores an important difference between now and the post-Kobe earthquake in 1995.

Japan is the world’s third largest economy, in addition to being a significant link in the global manufacturing supply chain. As a result, lost output in Japan and disruption to industrial production will undoubtedly have a negative near-term impact on the global economy. At the same time, Japan was not considered to be a major driver of the current expectations for a solid year of global growth in 2011. Most global growth was expected to come from developing economies and the United States, with Japan accounting for 0.1% of the expected 4.2% real global GDP growth projected by the International Monetary Fund (see Exhibit 2, below). As a result, a temporary decline in Japanese output would likely not be a show stopper for the global economic expansion.

Another potential impact of the Japanese crisis is on world energy and other commodity markets. In the near-term, the decline in Japanese economic output will likely result in lower crude-oil demand, as Japan is the world’s third-largest petroleum importer. On the other hand, if the damaged nuclear power plants remain off-line, Japan will have to make up the lost electrical output with fossil fuels, such as natural gas. A rebuild of Japanese infrastructure would likely result in more commodity-intensive activity than expected, which ultimately could increase demand for crude oil and other natural resources.

On March 14, stock markets in Asia and most of the rest of the world declined, but for the most part the losses (outside of Japan itself) were relatively modest. While there has been some speculation that Japanese investors may sell U.S. Treasury bonds to repatriate the proceeds to Japan, long-term bond yields in the United States declined on March 14. Still, given the potentially large reconstruction funding facing Japan, any reduction in foreign demand for U.S. assets may raise the prospects for higher volatility in U.S. Treasury rates.

All in all, the fallout from the Japanese disaster may not in and of itself be enough to derail the global economy, but it is one more source of uncertainty for world financial markets to digest. With markets already jittery due to unrest in the Middle East and North Africa and the rise in crude-oil prices, this development interjects another source of volatility in the outlook for asset prices.

https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/fidelity-japan-earthquake-adds-uncertainty&topic=investing

Gen Yers Get Early Start On Financial Responsibility

Generation Y is taking responsibility for their finances at an earlier age than their predecessors and they're not afraid to ask for advice—from anyone, according to TD Ameritrade. Sixty percent of those between the ages of 22 and 34 say they turn to friends, relatives and colleagues to stay informed about the events shaping the economy and financial markets, according to TD Ameritrade's annual Investor Index survey. By comparison, 43% of their parents' baby boom generation, and only 31% of those in their grandparents' age group said they would do the same. One in three Gen Yers, or Millennials, said they viewed social media as a valued source of financial information. "Millennials have come of age at a time when the economy has seen considerable turmoil and many of them witnessed their parents' and grandparents' financial struggles firsthand," said Stuart Rubinstein, managing director of client engagement at TD Ameritrade. "The good news is that they are taking financial responsibility earlier, and their collaborative nature will help them work together to learn from the past and better prepare for their future." The study also showed Gen Y is skeptical of professional investment advisors, with only 10% of respondents trusting them the most as a valued source of news. They also showed signs of being financially responsible at a young age, with 69% indicating they took responsibility for their finances in their teens, and 47% reporting they were taught about money and personal finance at age 12 or younger. "The younger generation is truly embracing the saying that nobody cares more about your money than you," Rubinstein continued. "They're not afraid to ask for help or information—in fact, the more the better. At the end of the day, they just want to be able to make educated decisions, and that's a very healthy attitude for today's investors to have." http://www.fa-mag.com/fa-news/6983-gen-yers-turning-to-social-media-for-financial-advice.html

Another Retirement Warning for Boomers

One of the most challenging aspects of retiring today is fully comprehending how long this period of your life could be. The implications are profound. And scary.

In other words, profoundly scary.

Based on census data from 2000, if you planned on living to an “average” life expectancy, the Society of Actuaries (SOA) calculated that would be age 85 for a male who was 65 that year (2000) and 88 for a female.

But here's the problem: By definition, "average” means half of those who meet these criteria will die before they reach their “average” life expectancy, and the rest will live longer. So if you only plan on your money lasting for an “average” retirement, you’ve got a 50% chance of outliving your assets.

What length of time should you plan for? According to the SOA, if you were age 65 and male in the year 2000, you have a 1 in 4 chance of living to age 92; the same odds for females puts you at 94. Thus, at the very least, you should expect your savings to cover a 30-year retirement.

Thirty years in retirement?! Correct.

That’s like living half your life over again.

Unfortunately, our brains don’t seem to be wired to think and plan that far out. That’s one reason we underestimate how much money we’re going to need when we have to start generating our own “paychecks” to replace the ones we received from our former employer.

“People have two, three, four hundred thousand in their 401(k) and they hope it will last the rest of their life,” says Steven Vernon, one of the actuaries who oversaw the latest report from SOA. He adds, “Hope is not a good strategy.”

Another factor that contributes to underestimating how large a nest egg we need and over-estimating how much we can spend is something called “The Law of Small Numbers.” In a nutshell, it means that a tiny amount--such as inflation--compounded over a large period of time, such as two to three decades, can have significant consequences.

On an annual basis, 3% doesn’t sound like much. But if you have 3% inflation year after year (the average is 2.9% over the past 25 years) after 24 years you’ll need twice as much retirement income just so you can afford the same lifestyle you had when you quit work. (Never mind that medical expenses tend to increase at a much higher rate than general inflation.)

The SOA’s report concludes that far too few boomers are actually doing any planning. Instead, they are essentially flying blind and taking their chances. “…people are far from rational, planning inadequately, if at all, then scrambling to adjust as they approach retirement with funds inadequate to support their expectations.” Many expect to retire at the same age as their parents did even though “things have changed since their parents retired.”

“You need to have a plan,” advises Vernon, who has just launched a free guide for retirees, www.moneyforlifeguideonline.com . He admits you might get sticker shock at the price of what retirement will cost, but adds that, if possible, working a couple of years longer than you expected can make a big difference.

Although baby boomers are the most educated generation to head into retirement, don’t feel as if you have to do this on your own. In fact, you’re probably better off seeking outside advice; it’s natural to get emotional when you’re dealing with your own money and that’s when you’re liable to make dumb mistakes. An unbiased, experienced financial advisor can be invaluable.

http://www.foxbusiness.com/personal-finance/2011/03/07/retirement-warning-boomers/

Hey, my taxes went up!

Did you notice your take home pay is a little smaller these days?

The reason for the withholding tax increase stems from the Making Work Pay (MWP) tax relief program that ended in 2010. The MWP program temporarily decreased tax withholding rates in checks in 2009 and 2010. This was to stimulate the economy by putting more take home pay in your pocket.

The program wasn’t extended for 2011 so the tax tables reverted back to the regular tax withholding rate tables. Higher withholding, lower take home pay.

This is not a tax increase. You won’t pay more taxes. It means you have more taxes taken out of your pay and you’ll probably get a larger tax refund next year.

Why Millionaires Switch Advisors

The biggest pet peeve for most millionaire investors are advisors who don't call them back promptly, according to a study released Tuesday by the Spectrem Group. Among the main reasons cited for leaving their financial advisor, 73% of respondents said the top reason was an advisor not returning phone calls in a timely manner. In that vein, other big reasons included unhappiness with slow email response (57%) and an advisor who wasn't proactive in contacting them (56%). Surprisingly, these communication-related gripes seemed to hold equal or greater weight to bail on an advisor as failure to provide good ideas and advice (57%). The Millionaire Investor 2010 study, which covered investors with a net worth between $1 million and $5 million, also found 72% of millionaires expect their advisor to call back within 12 hours. But that's not fast enough for some clients, as 26% expect a callback within two hours and 14% expect a response in one hour. "Advisors who don't respond promptly to their millionaire clients' calls are playing with fire," said George H. Walper, Jr., Spectrem Group's president. "Indeed, slow callbacks rank as the number one reason millionaires switch advisors. Importantly, it's also a very simple one to address." Only 37% of respondents were satisfied with advisors responding to email by the next day, and 16% expect a response within two hours and 8% look for a reply within one hour. Nearly all respondents listed honesty and trustworthiness as their top reason for choosing a new advisor, with 96% looking for an advisor who keeps clients informed of what they are doing and 90% seeking an advisor with a strong investment track record. http://www.fa-mag.com/fa-news/6962-millionaires-to-advisors-call-us-back-pronto.html

How to deal with inflation risk in retirement

BOSTON (MarketWatch) — In 1960, the median value of a home in the U.S. was $11,900. Today, some 50 years later, you’d be hard pressed to buy a decent car for that amount given that the average price in 2010 was close to $30,000. And in 50 more years, you might find it impossible to buy a car for $170,000, which was the median sales price of a single-family home in the U.S. in 2010.

And that, my friends, is inflation — one of the most insidious risks Americans will face in retirement. Yet despite years of witnessing firsthand the insidious effects of inflation, many Americans are not taking into account the adverse effects inflation can have on their retirement plans.

Compared to other planning activities, only 72% of pre-retirees and 55% of retirees are calculating the effects of inflation on their retirement planning. And this highlights the need for individuals to better understand and manage inflation and longevity risks when planning for retirement.

Individuals always need to take inflation into consideration and now is the time to take action to address these inflation and longevity concerns by planning for multiple scenarios.

When it comes to inflation risk, every retiree should, for example, understand the basic fact that if annual inflation is 3% on average, in just 10 years a retiree will need to withdraw 30% more money, or more than $13, from their nest egg to purchase the same goods and services that cost $10 today. And much more disturbing, in 20 years that retiree will need to withdraw 80% more, or $18 to maintain today’s lifestyle.

One of the best ways to address the risk of inflation is to delay your Social Security, if possible, till age 70. Doing so, experts suggest, will give you the highest possible, inflation-adjusted, guaranteed stream of income possible from Social Security. Depending on your age, you could increase your annual benefit up to 8% percent per.

Investing in common stocks is certainly among the way to address the risk of inflation. Common stocks have outperformed inflation in the long run. There’s even one school of that suggests that retirees invest in the common stocks of those companies that represent the expenditures they have in retirement, such as health care, transportation, utilities and the like. That way, their portfolio will — at least according to the theory — grow in line the rising cost of expenses in retirement.

Still investing in commons stocks is not without its own risks. Such assets are poor short-term hedges against inflation. What’s more, investing in common stocks means that you sometimes trade inflation risk for investment risk. The historically higher returns from stocks are not guaranteed and may vary greatly during retirement years

http://www.marketwatch.com/story/how-to-deal-with-inflation-risk-in-retirement-2011-03-07?pagenumber=1

Let the 401(k) investor beware

A new report from the Government Accountability Office warns employees to watch out for biased investment guidance from the financial companies paid to set up and run their 401(k) plans.

The Employee Retirement Income Security Act, or ERISA, says investment education is supposed to consist of general information, such as generic asset allocation models that are not tailored to a particular individual. But if an employee does get individual investment advice, it should be in that person's best interest and tailored to his or her particular needs. However, "in certain situations, participants face conflicts of interest from providers that have a financial interest when providing investment assistance," the GAO said.

"If left unchecked, conflicts of interest could lead plan sponsors or participants to select investment options with higher fees or mediocre performance, which, could amount to a significant reduction in retirement savings over a worker's career," the GAO report said.

http://www.washingtonpost.com/wp-dyn/content/article/2011/03/05/AR2011030503707.html

Should You Take Social Security Early?

Leave it boomers to flout one of the long-held rules of retirement planning. Afraid lawmakers will soon lift the retirement age of Social Security or shrink benefits, many ae ignoring the traditional advice of financial planners and retirement experts everywhere and taking their benefits as soon as possible. Are they right to rebel?

The number of Americans opting to take Social Security at 62 – currently the youngest age allowed – is on the rise. In 2009, 42% of 62-year-olds claimed benefits, up from 38% in 2007, according to economists at the Brookings Institution in Washington, D.C. And while more recent data is not yet available, financial planners and industry experts say the ranks of early claimers are still growing. This, despite the fact that by delaying benefits individuals stand to boost their payments by 7% to 8% each year until age 70. "The mentality is that getting something now is better than nothing later," says Richard Rosso, an adviser with Charles Schwab Corp. in Houston, who says he's been "begging" many of his clients to delay claiming Social Security – often to no avail.

While some boomers have been driven to tap Social Security early out of necessity after losing jobs or savings during the downturn, many are reacting to the growing chorus of politicians calling for Social Security reform, says Gary Burtless, an economist at the Brookings Institution. Last month, New Jersey Gov. Chris Christie urged lawmakers to increase the retirement age of Social Security, while Senators Lindsey Graham and Rand Paul have proposed reducing payments to wealthier Americans. More than half of Americans support both initiatives, as long as they take effect in the distant future, according to a new Wall Street Journal/NBC News poll. As a result of all the political rhetoric, fears about Social Security, once at a hum, "have risen to a crescendo in the last six weeks," Rosso says.

Are all those fears realistic? Most adviser and retirement planning pros say no. "It's so off the mark," says Alicia H. Munnell, director of the Center for Retirement Research at Boston College. "There is no question the benefits will be paid. The worst that could happen is that the system would be able to provide only 80% of the benefits under current law." The Social Security Administration has estimated that beginning in 2037 benefits could be reduced by 22% and could continue to decline, barring any changes to the system.

But even these shortfalls are a ways out, and do little to explain why boomers are scrambling now to claim benefits. Likewise, the proposals being floated in Washington seem to target younger generations of Americans, say advisers. "When we look at the proposals, very few would impact those in or near retirement," says Chad Terry, director of retirement solutions at the Principal Financial Group. He says longevity and inflation could be more of a risk to portfolios, but "there are some who will take it [Social Security benefit] no matter what," he says. "They feel I've contributed, I'm eligible, I'm going to take it."

Another explanation: Advisers say the average pre-retiree typically underestimates the impact of taking benefits early. For example, a top-earner retiring at 62 would get $1,803 a month. By waiting until 66, he'd increase that amount to $2,442, and delaying until 70 would bump the monthly payment to $3,256, according to Rande Spiegelman, vice president of financial planning at the Schwab Center for Financial Research. Another way to look at it: someone who delays taking Social Security until 66 rather 62 will collect more money over time if they live until at least age 77.

That could have an enormous impact on retirement income, says Christine Fahlund, senior financial planner at T. Rowe Price. She says, for example, a couple who earns $100,000 a year and has $500,000 saved could expect to receive about $50,000 a year in Social Security payments and other income if they claim at 62; that same couple would get almost twice as much a year in Social Security benefits ($96,000) if they wait until 70, says Fahlund.

In specific situations, the decision to claim does make sense, say advisers, like if you're in poor health or unemployed. Otherwise, they recommend delaying retirement (and social security payments) in order to boost their retirement savings, which likely took a serious hit during in 2008. A February report by the non-profit Employee Benefit Research Institute found that nearly half of the early boomers -- those 56 to 62 -- are at risk of not having enough retirement income for "basic" costs in retirement such as food, transportation and housing. And taking social security early won't help as much as it seems.

Read more: When Should You Take Social Security? - SmartMoney.com http://www.smartmoney.com/investing/stocks/when-should-you-take-social-security-1299171485337/#ixzz1FjGBZZxo

Turning hobby into business means tax breaks

Hobbies provide a great way to relax from the daily grind. For many people, they also offer a way to make extra spending money.

Be aware, however, when your hobby produces income, you owe tax on it.

You can reduce your taxable hobby income by deducting your hobby expenses, but this tax break is limited.

Allowable hobby deductions

You can only deduct expenses up to the amount of money you make on the hobby. Even then, hobby expenses, along with other miscellaneous expenses you itemize on Schedule A, must come to more than 2 percent of your adjusted gross income before you can deduct them.

If you find you are regularly making money from your hobby, it might be to your tax advantage to turn the sideline into a business.

It's not as difficult as you might think. If you operate as a sole proprietor, you report the income on your 1040 tax return and you have more options when it comes to deducting your expenses.

Hobby vs. business

The Internal Revenue Service defines a hobby as an activity you pursue without expecting to make a taxable profit. Basically, you do it because you like it, regardless of the cost.

But if you demonstrate that you are involved in an activity with the expectation of making money on it, the IRS will consider it a business. As such, you'll be able to deduct expenses directly from your income. You even can deduct overall business losses in the years you don't turn a profit.

You must, however, make the right moves to convince the IRS that your sideline is a legitimate business.

What constitutes a business

The IRS uses two tests in determining whether your activity is a business rather than a hobby.

First, the profit test demands that you show you earned money on the activity in three out of five years.

If you can't meet the profit test, you get another chance to convince the IRS that you are running a business by passing the factors-and-circumstance test. Here, the tax agency takes a subjective, individualized look at your pursuit.

IRS looks at everything

In determining whether you are carrying on an activity for profit, the IRS says all the facts are taken into account. No one factor alone is decisive. So be prepared to come through in several areas to convince the IRS that you're making a good-faith attempt to run a business and not just looking to illegally claim the more-expansive business tax breaks.

By successfully transforming your hobby into a business, you'll be able to deduct your associated expenses on Schedule C or C-EZ without worrying about a percentage limitation. You might even find a few more you can take, such as one for the home office you set up to take care of your new endeavor's administrative chores.

And if you have an occasional year where you lose money, the loss can help reduce your other income and lower your tax bill.

By Kay Bell, Bankrate — 03/03/11

Fad Diets and Fad Investing Plans Rarely Work

Forget about those ‘Make 534% On Every Trade’ ads that you see on many financial websites. Real wealth is built with sweat equity and a sound financial plan. The only people making money off fad investments are the people selling them. To understand what will and will not work in the future you must understand the concepts that have worked in the past. Granted, each success story is different, but there are common traits as Philip E. Humbert noted when he studied successful people and came up with the “Top 10 Traits of Highly Successful People.” Here are 3 traits that we can apply to our investments:

1. Highly successful people work hard

They get up early, rarely complain. They expect high performance from others, but they expect extraordinary performance from themselves. Success starts with a recognition that hard work pays off. Highly successful investors don’t waste time trying to find an quick and easy way to get rich in the stock market.

2. Highly successful people are self-reliant and take responsibility

How many times have you heard, ‘I am fat because of my genes, my thyroid, my wife, my husband, …’ Or how many times have you heard, ‘I am broke because, I don’t make enough (my boss’ fault), things are so expensive (companies’ fault), Social Security will fund for my retirement, …’

3. Highly successful people “look over the horizon” to see the future

We live in a society of instant gratification. There is no planning for the future and certainly no foresight what the future will bring. A successful retirement just doesn’t happen – it is build with a plan over many decades.

Dividend Stocks To Help Grow Your Wealth

A long-term buy-and-hold investing approach focusing on quality dividend growth stocks has has provided the means for many investors to enjoy a comfortable retirement. If you start early enough, you will go beyond a comfortable retirement into the realm of building long-term wealth.

Fund an IRA, cut your taxes

As you tackle your 2010 tax return, make sure you haven't overlooked one of the best ways to cut your tax bill and secure your future -- funding a traditional IRA. (There is no upfront tax break for funding a Roth IRA.)

You can make a 2010 IRA contribution up until the time you file your tax return, due April 18, 2011--three days later than usual due to Emancipation Day, a legal holiday in Washington, D.C., which will be observed on April 15. Depending on your income, you may be able to deduct your IRA contribution even if you or your spouse are covered by another retirement plan at work. To contribute to a traditional IRA, you or your spouse must have earned income from a job and be younger than 70½.

The IRA deduction is an "above the line" adjustment to income, meaning you don't have to itemize your deductions to claim it. It will reduce your adjusted gross income dollar-for-dollar, lowering your tax bill. And your lower adjusted gross income (AGI) could make you eligible for other tax breaks, which are tied to income limits.

Who qualifies

If you are single and don't participate in a retirement plan at work, you can make a tax-deductible IRA contribution of up to $5,000 ($6,000 if you are 50 or older) regardless of your income. If you are married and your spouse is covered by a workplace-based retirement plan but you are not, you can deduct your full IRA contribution as long as your joint AGI doesn't top $167,000 for 2010. You can take a partial tax deduction if your combined income is between $167,000 and $177,000.

But even if you do participate in a retirement plan at work, you can still deduct up to the maximum $5,000 IRA contribution ($6,000 if you're 50 or older) if you are single and your income is $56,000 or less ($89,000 if married filing jointly). And you can deduct some of your IRA contribution if you are single and your income is between $56,000 and $66,000, or if you are married and your income is between $89,000 and $109,000.

Spouses with little or no earned income for 2010 can also make an IRA contribution of up to $5,000 ($6,000 if 50 or older) as long as their spouse has sufficient earned income to cover both contributions. The contribution is tax-deductible as long as your household income doesn't exceed the limits for married couples filing jointly.

Double tax break

Some low- and moderate-income taxpayers get an extra break for contributing to an IRA or other retirement account.

In addition to the usual IRA deduction, you may qualify for a Retirement Savers tax credit of up to $1,000 for contributions to an IRA or other retirement tax plan. (A tax credit, which reduces your tax bill dollar-for-dollar, is more valuable than a deduction, which merely reduces the amount of income that is taxed.)

The actual amount of the credit depends on your income. It ranges from 10% to 50% of the first $2,000 contributed to an IRA or other retirement account. To be eligible, your 2010 income can't exceed $27,750 if you're single; $41,625 if you are the head of a household with dependents; or $55,500 if you are married filing jointly. The lower your income, the higher the credit. But you can't claim the Retirement Savers credit if you are under 18, a student, or can be claimed as a dependent on someone else's tax return.

By: Mary Beth Franklin, Kiplinger's Personal Finance

Buying CDs? Maybe think again?

Many people are purchasing certificates of deposit to hold their funds. While those investments are FDIC insured, other risks could significantly reduce your investment.

Certificates of deposit are not liquid. If you buy a CD you are bound by the terms of it. You have committed your money for a defined period. Need your money earlier? Pay a penalty for that.

CD interest rates are not particularly good. Today, a simple 5 year duration certificate of deposit will pay anywhere from 2.0% to 2.5%. And that interest rate is locked in for 5 years. Now lets say inflation rears it's ugly head as many economists predict. Academic predictions aside, take a look around. Have prices for food and gas increased this past year. You betcha. Each tick of inflation will erode the locked-in interest rate of a CD. If inflation reaches 3%, your investment is earning less than zero.

And what happens when interest rates rise to more normal rates - and they inevitably will. Your investment would be significantly underperforming. Not good.

So what is an option?

How about investment-grade corporate bonds? Blue chip companies routinely float investment grade bonds to finance acquisitions, upgrades, and expansion. The interest on these bonds is typically several notches about those for US Government issued T-bills and Treasury bonds. These are companies like: AT&T, Wells Fargo, JP Morgan Chase, Walmart, Verizon, Goldman Sachs, General Electric, Prudential, MetLife and Comcast. And the current yields are more than double that of a comparable duration certificate of deposit.

While you can purchase investment grade corporate bonds individually, the best way is through a mutual fund or an exchange traded fund. With these investments you get a basket of investment grade corporate bonds and a monthly income stream.

Risk? Nothing is perfect, but these are considered "investment grade" bonds for a reason - quality companies with solid financials and the ability to repay the debt to bondholders.

Liquidity? You can cash out whenever you like without penalty.