Focus on Your
Vacation Real Estate:
More Than a
An Epidemic in the Making
Get a Handle on Your Personal Inflation Rate
Focus on Your
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.
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
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
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
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.
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
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."
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
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
problem since, according
to the government, only
individuals who have
missed payments for
360 days are officially
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
Repayment Plan Choices
Fortunately for those who have difficulty repaying a loan, there
are alternative, hardship-based repayment programs such as
- 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
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
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.
% of Monthly Budget
(.15 x 2.9 = 0.435)
|Your Personal Inflation Rate =
|Current U.S. Inflation Rate =
*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.