Inside This Issue:
Planning 2015:
Focus on Your
Financial Future
Vacation Real Estate:
More Than a
Getaway Destination
Student Debt:
An Epidemic in the Making
Get a Handle on Your Personal Inflation Rate
The Financial Standard

Planning 2015:

Focus on Your
Financial Future

With a new year comes the opportunity to take a fresh look at your financial life. This should include reviewing your investments, your retirement and college savings plans, as well as your debt situation.

Investment Review

Setting your asset allocation—your mix of investments—should not be a one-time event.1 Market cycles, life circumstances, even changes in your attitude toward risk can create a need to review and adjust your allocation.

To appreciate how time and performance swings can affect an investment mix, consider the following hypothetical example. Say you had a portfolio with a 70% allocation to U.S. stocks, 20% to bonds and 10% to Treasury bills.2 During the 20 years through December 31, 2013—if left unchanged—the original 70% allocation to stocks would have grown to 84%, while allocations to bonds and Treasury bills would have shrunk to 12% and 4%, respectively.3

If a portfolio becomes overweighted with stocks, you may be exposed to more short-term market risk than you intended. Alternatively, if your fixed-income allocation becomes overweighted, your portfolio may not have the growth potential you need to pursue long-term goals.

To help manage these risks, you should "rebalance" your portfolio to bring your allocations back to their intended targets. Rebalancing can be accomplished in one of two ways: shifting money out of the overweighted asset classes or adding new money to the underweighted asset classes.

Retirement and College Savings Plans

How confident are you in your ability to retire in financial comfort? One annual survey found a marked increase this year in retirement confidence among current workers who participate in one or more retirement plans—including defined contribution plans, defined benefit plans and/or IRAs.4

In order to gauge your own retirement readiness, ask yourself a few questions: When do you plan to retire? Do you have a general idea of how much it will cost? Take the time to conduct a retirement needs calculation—many assessment tools and calculators are available online—or to update your estimated goal if it has been a while since you ran the numbers.

Be sure to consider your college savings plan, too. Are your college savings efforts keeping pace with rising costs? Are you already making the most of 529 college savings plans, Coverdell accounts, tax breaks and financial aid? Using a combination of these strategies could help you meet your college savings goals.

Debt: Is It Holding You Back?

Today, Americans are carrying a staggering $3 trillion of all types of consumer debt. Of that, revolving debt (the vast majority of which is credit card debt) accounts for nearly $856 billion.5 If debt is thwarting your efforts to achieve your financial goals, consider these strategies:

Stay within your limit. Experts say your total monthly debt load (including mortgage payments) should not exceed 40% of your gross monthly income.

Put a dent in credit card debt. Try to pay off your balance each month, or at least pay more than the monthly minimum. For example, assume you have a $2,000 balance on a credit card that charges 18% interest. The first minimum monthly payment on the credit card would probably be 5% of your balance, or $100, and thereafter, a minimum monthly payment of $10. If you made only the minimum payment each month, it would take you 89 months—that's more than 7 years!—and cost more than $800 in interest to pay off that $2,000.6

Work With a Pro

It has been said that when you take care of your money, your money will take care of you. When faced with these and other important financial planning issues, a trusted advisor can be an invaluable resource in helping you create and maintain a comprehensive financial plan.

1Asset allocation does not assure a profit or protect against a loss.
2Investing in stocks involves risks, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, offer a fixed rate of return and fixed principal value.
3Source: Wealth Management Systems Inc. Stocks are represented by the total returns of Standard & Poor's Composite Index of 500 stocks, an unmanaged index that is generally considered representative of the U.S. stock market. Bonds are represented by the total returns of the Barclays Aggregate Bond index. Money markets are represented by the total returns of the Barclays 3-Month Treasury Bills index. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.
4Source: Employee Benefit Research Institute, "2014 Retirement Confidence Survey," March 18, 2014.
5Source: Federal Reserve's G.19 report on consumer credit, release date January 8, 2014.
6This example is hypothetical and for illustrative purposes only.

Vacation Real Estate:

More Than a
Getaway Destination

A vacation home can become a beloved family retreat that is enjoyed for generations as well as a savvy investment, offering asset diversification and tax benefits.

Market on the Rise

Vacation home sales increased sharply in 2013—jumping nearly 30% to an estimated 717,000 sales compared with 553,000 sales in 2012—and accounting for 13% of all housing transactions, their largest market share since 2006, according to the National Association of Realtors® (NAR).1 The median purchase price also rose significantly in 2013 to $168,000—a 12.5% spike from $150,000 in 2012.1

What's driving the renewed interest in second-home purchases? According to economists at the NAR, the rebound in stock prices has buoyed investor confidence and improved the financial outlook for high-net-worth consumers—the target market for such luxury purchases.

Reasons to Buy Now

When asked what motivated them to purchase vacation real estate at this time, the vast majority of buyers indicated that lifestyle factors drove their decision: 87% said they intended to use the property for family vacations, 31% planned to make the home their primary residence in the future, and 22% said they hoped it would be used by a family member, friend or other relative. Twenty-eight percent indicated that they viewed the purchase as a good opportunity to diversify their asset base—and overwhelmingly, 80% of buyers said they believed it was a good time to buy.

Tax Considerations

While vacation property can serve many functions depending on your objectives, whatever your reason for buying, one of the biggest advantages comes in the form of tax breaks.

Aside from the standard deductions for mortgage interest and real estate taxes, the capital gains exclusion that applies to qualified real estate sales can be beneficial for individuals who own highly appreciated residential property. The basic IRS qualification states that you must have owned and used the property as your primary residence for at least two years out of the five-year period ending on the date of the sale. Single homeowners who qualify can exclude $250,000 in gains on the sale of the property, while married couples may exclude double that amount—$500,000—in capital gains as long as one or both of them satisfied the ownership test and both satisfy the use test.2

How can individuals apply this rule to their advantage? Consider the following example:

Mr. and Mrs. Jones own two homes. The primary home qualifies for the $500,000 exclusion. The Joneses sell the property tax free and move into their vacation home in Palm Springs, California, where they live for two years, sell the property and once again claim the $500,000 exclusion. Theoretically, if conducted within the IRS-stated guidelines, homeowners could practice the "use and sell" strategy indefinitely, excluding gains all along the way.

Keep in mind, however, that tax laws governing such transactions are complex and require detailed documentation. Be sure to seek advice from a respected tax attorney or other tax and/or real estate professional, particularly regarding state-specific income taxes, before conducting any real estate transactions.

1National Association of Realtors® news release, "Vacation Home Sales Surge in 2013, Investment Property Declines," April 2, 2014.
2Internal Revenue Service, Publication 523, "Selling Your Home."

Student Debt:

An Epidemic in the Making

The college graduating class of 2014 left campus with more than a degree to call their own. They also closed out their undergraduate career with a dubious distinction: they are the most indebted class ever.

Those who took out student loans to help finance their educations racked up an average debt burden of $33,000—an amount that has nearly doubled in the past two decades.1

Lives Interrupted

This debt load has made it harder for young adults to get on with their post-college lives. For instance, one study found that 27% of those polled who had taken out student loans were finding it difficult to afford daily necessities; 63% said that debt had impacted their ability to make larger purchases, such as a car; 76% said college debt had affected their decision or ability to buy a home; and 43% said it had caused them to delay starting a family.2

Student Loan Defaults: A Good News, Bad News Story

One consequence of mounting student debt is loan default. A recent report from the Department of Education offered some good news in that, nationally, the number of borrowers who had defaulted on their federal student loans within three years of leaving college had fallen from 14.7% to 13.7% in 2013. Still, that rate is considered too high—and likely underestimates the problem since, according to the government, only individuals who have missed payments for 360 days are officially in default.3

According to the Consumer Financial Protection Bureau, "Defaulting on a federal student loan has serious consequences. Unlike other consumer credit, borrowers in default on a federal student loan might see their tax refund taken and their wages garnished without a court order."4 (See "Did You Know?" for more.)

Did You Know?

Some two million Americans age 60 and older are holding student loan debt. Roughly a third of seniors are in default and are seeing their Social Security checks garnished as payment. With an average monthly benefit of just over $1,200, it is easy to see how involuntary reductions in benefits could put retirees in financial jeopardy.5

Repayment Plan Choices

Fortunately for those who have difficulty repaying a loan, there are alternative, hardship-based repayment programs such as the following:

  • Borrowers looking to reduce their payments can choose an income-based plan in which payments are tied to a portion of their income, but eligibility is contingent upon income documentation. The newest of these plans, Pay As You Earn, requires borrowers to pay roughly 10% of their income above the poverty line. After 20 years, any balance still outstanding is forgiven.
  • Another type of plan that requires less documentation allows borrowers to extend and/or gradually increase their incremental payments, but in so doing, incur more interest.

Obama Calls for College Rating System

Given spiraling college costs and mounting student debt, the federal government wants to intervene by establishing a rating system to assist families in evaluating whether the colleges and universities they are considering are worth the price tag. The proposed system would compare institutions on factors such as cost, graduation rates, student debt amassed and average earnings post-graduation.

The goal of the plan is to tie federal student aid to college performance, so that schools that receive top ratings would be able to offer more federally funded student aid than those that receive low ratings.

1Source: The Wall Street Journal, "Congratulations to Class of 2014, Most Indebted Ever," May, 16, 2014.
2Source: American Student Assistance®, "Life Delayed: The Impact of Student Debt on the Daily Lives of Young Americans," October 3, 2013.
3Source: The Wall Street Journal, "Defaults on Federal Student Loans Decline," September 24, 2014.
4Source: The Consumer Financial Protection Bureau, "A closer look at the trillion," August 5, 2013.
5Source: The New York Times, "Student Loan Debt Burdens More Than Just Young People," September 12, 2014.

Get a Handle on Your Personal Inflation Rate

The inflation rate—or the gradual increase in the cost of goods and services—is measured using a barometer called the CPI, or Consumer Price Index. The CPI tracks price changes for hundreds of consumer goods and services that together provide a picture of what the average U.S. consumer might buy.

Inflation has been largely a non-issue for many years now—averaging 2% to 3% for the past several decades—but depending on the economy and the Federal Reserve's next moves, that could soon change.1

It pays to understand how your unique buying patterns work to create your own personal inflation rate. Use the worksheet below to get a general idea of how your inflation rate differs from the nation's as a whole—which is currently 1.7%.2

Instructions: In Column B, fill in the percentage of your monthly budget that each category represents. (For example, the percentage of your budget allotted to housing will typically be more than your clothing costs.) Then multiply Column B by Column A to calculate your own inflation rate (Column C) for each item (see example provided). Finally, add the numbers in Column C to determine your overall personal inflation rate.

CPI Category A
% of Monthly Budget
Your Inflation
2.9% 15%
(.15 x 2.9 = 0.435)
Food/beverages 2.9%
Housing 2.6%
Clothing 0.0%
Transportation -0.8%
Medical care 2.0%
Recreation 0.1%
Education/ communication 1.3%
Your Personal Inflation Rate =     %
Current U.S. Inflation Rate = 1.7%2

*Source: U.S. Bureau of Labor Statistics. Represents average rise in price for each category for the one-year period ended September 30, 2014.

1Source: U.S. Bureau of Labor Statistics, Consumer Price Index.
2Source: U.S. Bureau of Labor Statistics, through September 30, 2014.

The opinions voiced in this newsletter are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested in directly.