Outlook for the Stock Market

Extracted from Morningstar's September 2011 Quarter-End Insight

Uncertainty and equity market volatility will continue into the fourth quarter as European states struggle to balance the economic imperatives of their polities with their commitment to currency union. If uncertainty regarding the viability of the European Union deepens or if a determined and credible solution to the eurozone's structural weaknesses is not found soon, the impacts to global trade will likely be material over the short- to medium-term.

Companies in the U.S. are generally well-positioned to survive a downturn, having greatly improved the condition of their balance sheets and taken steps to increase profitability since the 2008-2009 downturn.

The European debt and fiscal crises have continued and deepened over the past three months to the extent that more and more observers are beginning to openly question the political viability of the European Union. The Greeks long for the ability to devalue their way to export prosperity that an independent Drachma would grant them while chafing at EU-imposed austerity measures; German voters grumble about picking up the tab for Greek profligacy.

In the U.S., what had long been considered a procedural matter of voting an increase in the debt ceiling limit to fund spending already approved by Congress turned into a full-blown political battle. The showdown ended up nearly halting government services and prompted the first agency downgrade of U.S. sovereign debt in history. The ugly political wrangling, combined with high levels of unemployment and an overall tepid recovery contributed to a drop in consumer confidence to 2009 crisis levels and set the ball rolling on what is feeling more and more like an equity bear market.

The one bright spot amid the gloom and concern has been falling energy prices. Gasoline prices have fallen for three consecutive months.

The two greatest contributors to U.S. GDP growth since the 2008-2009 downturn were the consumer and exports. We believe that consumer spending is likely to come under pressure for the prospects of higher taxes and lingering high unemployment levels, and also fear that a breakup or partial breakup of the eurozone or a dragging on of uncertainty over viable solutions to its structural problems could well crimp U.S. exports.

While these may sound like gloomy pronouncements, we must also note that thanks to steps taken during the recent downturn and an increased economic exposure to more rapidly expanding developing economies, many U.S. companies find themselves in enviable positions in terms of profitability and balance sheet strength. Profit margins are running at all-time highs, and the aggregate amount of cash on U.S. corporate balance sheets amounts to over $2 trillion--a record amount.

Women Face Extra Retirement Challenges

Women who take charge, do the math, plan for contingencies and work with their partners and/or financial advisors have a better chance of securing their finances in retirement than those who shrink from the process, according to a new study.

The MetLife Study of Women, Retirement, and the Extra-Long Life: Implications for Planning shows women face a number of unique financial risks—including outliving retirement funds, aging single, lower retirement incomes, greater health care costs and added care-giving responsibilities—and have not planned adequately to address these concerns.

The study examines the thinking and practices of mature women, ages 50 to 70, in the context of the "extra" challenges they may experience in retirement. According to the report, women expect to live until age 85, some until age 90, and are more concerned than men about the costs of health care and long-term care and outliving their assets.

Slightly more than half of the women surveyed know the likely amount of their retirement income/assets and only 44% have calculated the amount of their essential expenses, according to the study. Approximately one-in-six (16%) reported that they have or plan to delay retirement, on average, four years.

The data suggests that women who work collaboratively with spouses, partners, financial advisors and even knowledgeable friends, report higher confidence in their retirement security. Among men and women, men are more likely, by a margin of 65% to 55%, to calculate retirement income.

"The combination of risks for women and their relatively inadequate retirement planning has become known as the ‘perilous paradox,' but the message is clear that women are able to avoid that," said Sandra Timmermann, director of the MetLife Mature Market Institute. "The risks and costs of ‘living long and living female' call for an ‘affirmative action' plan. We find that those who plan for a steady stream of income, along with some flexibility for the unexpected, are best prepared for what can be an extended future."

Longer life spans for American women—who live longer than men, on average—creates additional costs and financial constraints that can lead to greater financial challenges in retirement, according to the study. As of 2009, women aged 65 years or older had significantly lower annual retirement incomes than men—an average of $21,500 vs. $37,500. American women are more likely to experience retirement alone since many never marry or are widowed or divorced.

More than half of the women, 54% compared to 44% of men, report that they are very or somewhat concerned about outliving their retirement resources, according to the study. Of women who were at least somewhat confident about their ability to live comfortably in retirement, 66% attributed this to having a guaranteed stream of income. Of those not confident, 61% said they lacked sufficient savings to last their anticipated lifetime.

From: Financial Advisor Magazine, 27 September 2011

401k Hardship Withdrawal & 401k Loans

It may be possible for you to access 401k money if the following four conditions are met (note that employers are not required to provide 401k hardship withdrawals, so check with your plan administrator):

• The withdrawal is necessary due to an immediate and severe financial need
• The withdrawal is necessary to satisfy that need (i.e., you can’t get the money elsewhere)
• The amount of the loan does not exceed the amount of the need
• You have already obtained all distributable or non-taxable loans available under your 401k plan

If these conditions are met, the funds can be withdrawn and used for one of the following six purposes:

• A primary home purchase
• Higher education tuition, room and board and fees for the next twelve months for you, your spouse, your dependents or children (even if they are no longer dependent upon you)
• To prevent eviction from your home or foreclosure on your primary residence
• Severe financial hardship
• Tax-deductible medical expenses that are not reimbursed for you, your spouse or your dependents
• Funeral expenses

All 401k hardship withdrawals are subject to taxes and the ten-percent penalty. This means that a $10,000 withdrawal can result in not only significantly less cash in your pocket (possibly as little as $6,500 or $7,500), but causes you to forgo forever the tax-deferred growth that could have been generated by those assets. 401k hardship withdrawal proceeds cannot be returned to the account once the disbursement has been made.

Non-Financial Hardship 401k Withdrawal

Although the investor must still pay taxes on non-financial hardship withdrawals, the ten-percent penalty fee is waived. There are five ways to qualify:

• You become totally and permanently disabled
• Your medical debts exceed 7.5 percent of your adjusted gross income
• A court of law has ordered you to give the funds to your divorced spouse, a child, or a dependent
• You are permanently laid off, terminated, quit, or retire early in the same year you turn 55 or later
• You are permanently laid off, terminated, quit, or retired and have established a payment schedule of regular withdrawals in equal amounts of the rest of your expected natural life. Once the first withdrawal has been made, the investor is required to continue taking them for five years or until he/she reaches the age of 59 1/2, whichever is longer.

Loan Alternative

Remember, once you take the money out of your plan using a hardship withdrawal, you can't put it back in and you lose for life the tax advantage on those funds.

A hardship withdrawal is not a loan. You can't repay it. You should see if your plan offers a 401k loan as an alternative to taking a financial hardship withdrawal. Plan loans are not subject to taxes or penalties, and you can continue to contribute to the plan while you repay the loan. (Some plans will even require you to exhaust your possibilities for a loan before taking a hardship withdrawal.)

However, if you leave your employer before the loan is repaid, you must pay back the remaining balance otherwise it will be considered a withdrawal and subject to applicable taxes and penalties.

As always, consult with your financial and tax professional for advice specific to your situation.

The REIT Way

The abundance of investment vehicles out there creates a challenge for the average investor trying to grasp what they're all about. Stocks are the mainstay of investing, bonds have always been the safe place to park your money, options have increased leverage for speculators, and mutual funds are considered one of the easiest vehicles for investors. One type of investment that doesn't quite fall into these categories and is often overlooked is the real estate investment trust, or REIT.

What Is a REIT?
A REIT trust company that accumulates a pool of money, through an initial public offering (IPO), which is then used to buy, develop, manage and sell assets in real estate. The IPO is identical to any other security offering with many of the same rules regarding prospectuses, reporting requirements and regulations; however, instead of purchasing stock in a single company, the owner of one REIT unit is buying a portion of a managed pool of real estate. This pool of real estate then generates income through renting, leasing and selling of property and distributes it directly to the REIT holder on a regular basis.

Advantages
When you buy a share of a REIT, you are essentially buying a physical asset with a long expected life span and potential for income through rent and property appreciation. This contrasts with common stocks where investors are buying the right to participate in the profitability of the company through ownership. When purchasing a REIT, one is not only taking a real stake in the ownership of property via increases and decreases in value, but one is also participating in the income generated by the property. This creates a bit of a safety net for investors as they will always have rights to the property underlying the trust while enjoying the benefits of their income.

Another advantage that this product provides to the average investor is the ability to invest in real estate without the normally associated large capital and labor requirements. Furthermore, as the funds of this trust are pooled together, a greater amount of diversification is generated as the trust companies are able to buy numerous properties and reduce the negative effects of problems with a single asset. Individual investors trying to mimic a REIT would need to buy and maintain a large number of investment properties, and this generally entails a substantial amount of time and money in an investment that is not easily liquidated. When buying a REIT, the capital investment is limited to the price of the unit, the amount of labor invested is constrained to the amount of research needed to make the right investment, and the shares are liquid on regular stock exchanges.

The final, and probably the most important, advantage that REITs provide is their requirement to distribute nearly 90% of their yearly taxable income, created by income producing real estate, to their shareholders. This amount is deductible on a corporate level and generally taxed at the personal level. So, unlike with dividends, there is only one level of taxation for the distributions paid to investors. This high rate of distribution means that the holder of a REIT is greatly participating in the profitability of management and property within the trust, unlike in common stock ownership where the corporation and its board decide whether or not excess cash is distributed to the shareholder.

Read more: http://www.investopedia.com/articles/03/013103.asp#ixzz1Yc81ZueF

5 Common Mistakes Young Investors Make

When learning any skill, it is best to start young. Investing is no different. Missteps are common when learning something new, but when dealing with money, they can have serious consequences. Investors who start young generally have the flexibility and time frame to take on risk and recover from their money-losing errors, but sidestepping the following common mistakes can help improve the odds of success.

1. Procrastinating
Procrastination is never good, but it can be especially detrimental while investing because the markets move so quickly. Good investment ideas are not always easy to find. If, after doing research, a good investment idea arises, it is important to act on it before the rest of the market takes note and beats you to it. Young investors can be prone to not acting on a good idea out of fear or inexperience. Missing out on a good idea can lead a young investor to two very bad scenarios:

1. The investor will revise his opinion upward and still purchase an asset when it is not warranted. Perhaps the investor rightly develops an opinion that an asset priced at $25 should be worth $50. If it moves up to $50 before he or she buys it, the investor may artificially revise the price target to $60 in order to rationalize the purchase.

2. The young investor will look for a replacement. In the previous example, the investor who failed to buy the asset that rose from $25 to $50 may quickly try to identify the next asset that will double. As a result, the investor might purchase another asset quickly, without doing the proper work and research, in order to try to make up for the previous "missed opportunity."

2. Speculating Instead of Investing
A young investor is at an advantage in his or her investing life. Holding the level of wealth constant, an investor's age affects how much risk an he or she can take on. So, a young investor can seek out bigger returns by taking bigger risks. This is because if a young investor loses money, he or she has time to recover the losses through income generation. This may seem like an argument for a young investor to speculate, but it is not.

Any young or novice investor will have an inclination to speculate if they do not fully understand the investment process. Speculation is often the equivalent of gambling, as the speculator does not necessarily have a reason for a purchase except that there is a chance that it may go up in value. This can be dangerous, as there are many experienced professionals waiting to take advantage of their less-experienced counterparts.

Instead of speculating and gambling, a young investor should look to invest in companies that have higher risk but greater upside potential over the long term. So, while a diversified portfolio of small-cap growth stocks would not be appropriate for an investor nearing retirement, a young investor is better equipped to take on that risk and can take advantage accordingly.

A final risk of speculation is that a large loss can scar a young investor and affect his or her future investment choices. This can lead to a tendency to shun investing altogether or to move to lower or risk-free assets at an age when it may not be appropriate.

3. Using Too Much Leverage
Leverage has its benefits and its pitfalls. If there is ever a time when investors have the ability to add leverage to their portfolios, it is when they are young. As mentioned earlier, young investors have a greater ability to recover from losses through future income generation. However, similar to speculation, leverage can shatter even a good portfolio.

If a young investor is able to stomach a 20-25% drop in his or her portfolio without getting discouraged, the 40-50% drop that would result at two times leverage may be too much to handle. The consequences of such a drop are similar to those resulting from a loss due to speculation: the young investor may become discouraged and overly risk adverse for the rest of his investing life.

4. Not Asking Enough Questions
If a stock drops a lot, a young investor might expect it to bounce right back, but more often than not, it is down for good reason. One of the most important factors in forming investment decisions is asking why. If an asset is trading at half of an investor's perceived value, there is a reason and it is the investor's responsibility to find it. Young investors who have not experienced the pitfalls of investing can be particularly susceptible to making decisions without locating all the pertinent information.

5. Not Investing
As mentioned earlier, an investor has the best ability to seek a higher return and take on higher risk when they have a long-term time horizon. Investors have their longest time horizons, and therefore a high tolerance for risk, when they are young. Young people also tend to be less experienced with having money. As a result, they are often tempted to focus on how money can benefit them in the present, without focusing on any long-term goals (such as retirement). Spending money now instead of saving and investing can create bad habits and contribute to a lack of savings and retirement funds.

The Bottom Line
Young investors should take advantage of their age and their increased ability to take on risk. Applying investing fundamentals early can help lead to a bigger portfolio later in life. There are also many risks that a young/less-experienced investor will face when making decisions. Hopefully, avoiding some of the common mistakes above will help young people learn investing early and embark on a fruitful investing career.

Read more: http://www.investopedia.com/articles/younginvestors/09/common-mistakes-young-investors.asp#ixzz1Yc65T31t

Fact Check: Tax Rates (not the rhetoric)

An analysis by the nonpartisan Tax Policy Center projects that for 2011, households with more than $1 million in income will have an average federal tax rate of 29.1%, compared to a rate of about 12.4% for households with income of $40,000 to $50,000. The center counts all federal taxes, including income, payroll and estate taxes.

Internal Revenue Service data suggest a similar pattern for individual income tax, according to an analysis by the Tax Foundation, a nonpartisan research group. It found that households with income between $40,000 and $50,000 have an average tax rate of about 6.8%, while households with income over $1 million have an average rate of 24.6%.

Source: Wall Street Journal

Term or permanent life insurance?

Few people who have bought insurance -- or even window-shopped for quotes -- have escaped the debate over term versus permanent insurance.

And the wrong kind of life insurance can do more damage to your financial plans than just about any other financial product today. So, the first and most important decision you must make when buying life insurance is: term, permanent or a combination of both? Let's look at each.

Term life policies offer death benefits only, so if you die, you win (so to speak). If you live past the length of the policy, you (or, more specifically, your family members) get no money back.

Permanent life policies offer death benefits and a "savings account" (also called "cash value") so that if you live, you get back at least some of, and often much more than, the amount you spent on your premium. You get this money back either by cashing in the policy or by borrowing against it.

Permanent life insurance is more expensive

As you might expect, permanent life insurance premiums are more expensive than term premiums because some of the money is put into a savings program. The longer the policy has been in force, the higher the cash value, because more money has been paid in and the cash value has earned interest, dividends or both.

The debate is all about that cash value. If you buy a policy today, your first annual premium is likely to be much higher for a permanent life policy than for term.

However, the premiums for permanent life stay the same over the years, while the premiums for term life increase. That extra premium paid in the early years of the permanent policy gets invested and grows, minus the amount your agent takes as a sales commission. The gain is tax-deferred if the policy is cashed in during your life. (If you die, the proceeds are usually tax-free to your beneficiary.)

The saying you always hear is, "Buy term and invest the difference." The fact is, it depends on how long you keep your policy. If you keep the permanent life policy long enough (and the market ever fully rebounds), that's the best deal. But "long enough" varies, depending on your age, health, insurance company, the types of policies chosen, interest and dividend rates, and more. The reality is that there is not a simple answer, because life insurance is not a simple product.

Guidelines to live by when buying

Even with all of these variables, there are some guidelines you can follow. The key is how long you plan to keep the policy. If the answer is less than 10 years, term is clearly the solution.

If it is more than 20 years, permanent life is probably the way to go. The big gray area is in between. Here is where you need an expert to run the term vs. permanent analysis for you. Of course, this assumes you keep the policy in force. Most people drop their policies within the first 10 years, but if you do your homework now, that shouldn't be the case for you.

How to choose

Categorize your insurance needs by their use. If you need $60,000 for college and your youngest child will graduate in three years, you need $60,000 of term insurance as a short-term hedge against your death, thus insuring that your child can finish his or her education. Meanwhile, if your estate will owe $200,000 in taxes at your death, you probably need permanent insurance, because you're not likely to die in the next 20 years (you hope). You also may want to re-evaluate your estate plan, but that's a different issue.

Once you figure out your needs, it's time to choose the type of policy that makes most sense for you.

Term insurance

Term insurance is relatively easy. You can buy term insurance that stops after 10 or 20 years, or that can be continued beyond age 70. You can choose for your premium to increase each year (annual renewal term) or to remain at the same amount for a fixed number of years.

Most term policies offer both a current payment schedule and a maximum rate for each year. With some policies, the company reserves the right to increase premiums if company costs increase. With others, your health may be a factor in determining rates. At certain "re-entry" ages, you may have to prove your good health in order to keep the lower premium.

Most term policies are convertible to permanent ones without evidence of good health.

Types of permanent life

The real wild card in terms of price is permanent insurance, because most policies have guaranteed and nonguaranteed portions. There are three main types of permanent insurance.

Traditional whole life: This type offers the most guarantees. The annual premium is guaranteed, and there are minimum guaranteed cash values and death benefits. Most whole life policies these days are "participating," meaning that the dividends they earn can be used to increase the cash value and/or death benefits, decrease the premiums or be refunded in cash.

If you are a conservative investor and also have trouble saving, traditional whole life makes sense.

Universal life: If you need premium flexibility, especially in the early years of the policy, universal life is for you. Universal life insurance was developed in the 1970s, when insurance-industry regulations changed to allow insurers to be more competitive with other financial-services providers.

Universal life insurance is more flexible than traditional whole life, because premiums can vary from year to year and sometimes can even be skipped. Universal life has maximum guaranteed premiums and minimum guaranteed cash values and death benefits. Instead of dividends, universal life policies earn interest at the credited interest rate determined each year.

Variable life: If you consider yourself a knowledgeable and risk-accepting investor, check out variable life. Variable life insurance has the fewest guarantees and therefore offers the greatest potential for cash-value increases.

There are required guaranteed annual premiums and a guaranteed minimum death benefit. However, there is no guaranteed cash value, and you have to select the investments for your policy.

Buyers typically are offered a variety of mutual fund accounts, ranging from money market funds to aggressive growth funds.

Not an investment tool

Life insurance should never be purchased solely as an investment. After all, some of your premiums are being used to buy death-benefit coverage and to cover other expenses (including sales commissions). Life insurance should not be purchased on children as a way to save for college, and make sure you (and your spouse) have all the coverage you need on yourselves before you buy any coverage on a child.

When you make your purchase, avoid all of the fancy riders, but do consider the waiver of premium, which suspends your premium payments but keeps the policy in place if you become disabled.

http://money.msn.com/life-insurance/term-or-permanent-life-insurance.aspx