By now just about everyone in the country is acutely aware of the economic and personal financial disaster the so-called “fiscal cliff” poses to just about every American household. The looming deadline of January 1st, 2013 draws nearer with every wakened morning, and Congressional members as well as the President are all-consumed in resolving this coming crisis. But many retirees, perhaps readers of this letter included, are asking: what exactly is the fiscal cliff, and why should I be concerned with it? These are simple and reasonable inquiries. But the answer you’ll receive depends on who you ask. But if you’re reading this letter, then you’re asking us. And if you’re asking us, you’re going to get an accurate, straight-forward answer that’s not specifically designed for...

As expected, the Federal Reserve announced a quantitative easing program that is intended to boost economic growth and help decrease the stubbornly high unemployment rate. One part of the program will be the Fed’s purchase of $40 billion worth of mortgage securities each month, with no end date at this time. That should help keep mortgage rates low, and could even lead to a drop in the interest rates on mortgages. A decline in interest rates should help increase home prices, and that is believed by many experts to be a vital step towards a sustained economic recovery. The Fed also said that it will hold the short-term interest rate that it controls near zero until at least 2015. That means we are likely to be watching political ads for the 2016 elections before the Fed acts to raise inte...

Many potential retirees welcomed the end of the bear market in 2002 and breathed a sigh of relief that market gains would once again increase their retirement account balances. After a rapid run up in the 1990s, the stock market had declined suddenly starting in the spring of 2000 and many investors lost half or more of their savings. In hindsight, many future retirees with the assistance of their financial planners decided they had been investing too aggressively and some decreased their exposure to the badly beaten down tech stocks. Of course those were the stocks that delivered strong gains for the next five years. A closer look at the “irrationality” of the markets In 2007, many investors were relieved to see their retirement account balances growing again and returning to ...

After the Federal Reserve announced that it would continue to implement aggressive policies that are designed to increase economic growth while decreasing the unemployment rate, some analysts wrote that they believe the moves will also help home prices. According to the Financial Times, “In the US, the housing market appears to have finally bottomed out. But real estate securities, particularly commercial mortgage-backed securities [MBS], are staging an even more robust comeback, because they are the closest substitutes for the MBS the Fed is likely to purchase.” The Fed will be buying $40 billion worth of MBS a month, in what is an open-ended commitment to that market. The Fed’s goal is to push down mortgage rates by lowering the cost of funds for mortgage providers. The Times noted...

After its latest meeting, the Federal Reserve announced a program that is being referred to as QE3, the Fed’s third quantitative easing program. The Fed will be buying mortgage backed securities, an action that should help the housing market. In addition to that, the Fed also extended its interest rate guidance for continued low federal funds rates to mid-2015. Previously the Fed had promised to maintain interest rates at historically low levels until at least late 2014. Investors can now count on low rates for the next three years. Even when the Fed eventually increases interest rates, they may do so much slower than they have in the past. While announcing QE3 the Fed also noted, “To support continued progress toward maximum employment and price stability, the Committee expects that a...

In August, the Consumer Price Index (CPI) increased by 0.6 percent. Not surprisingly, higher energy prices were the biggest driver of the higher CPI. Retail gasoline prices rose by 9.0 percent and that alone was responsible for about 80 percent of the inflation reported in August. Also not surprisingly, experts said this gain was only temporary – economists disregard changes in gas and food prices because they are so volatile. This month, they cited increasing tensions in the Middle East and reduced refining capacity as a result of Hurricane Isaac as the primary factors behind higher prices at the pump. What the rest of the CPI data shows The food and beverage index, a component of the CPI, was up 0.2 percent in August, a little more than the 0.1 percent gain seen in July. Consumer food ...

The Wells Fargo Securities Economic Research team recently presented a summary of how demand in the housing market has been increasing this year. The economist wrote, “The housing market itself has shown consistent, albeit begrudging, improvement over the past year.” Demand for housing continues to look up According to the report, sales of existing homes through the first seven months of this year are running 7.9 percent above their year-ago level and the inventory of existing homes has dipped down to just a 6.3-month supply. For the first seven months of 2012, new homes sales have also perked up, rising 20.8 percent from their year-ago level. All of this creates an environment where inventories of new homes are at an all-time low, potentially spurring home construction  if builde...

Low interest rates are a tool that policy makers use in an effort to boost economic growth. With low rates, the cost of credit for businesses and consumers is lower. The Federal Reserve hopes that the low-cost money will lead to increase spending. Ideally businesses will access credit to expand and hire more employees. Consumers will increase spending, in theory, using inexpensive loans to fund large purchases like homes and autos. The downsides of low interest rates While low rates benefit borrowers, they hurt savers. Many people have followed the advice of financial planners over the years and diversified their savings into stocks and bonds. Using history as a guide, almost everyone, including many experts, expected the interest rates on bonds and other fixed income investments to provid...

Most financial planning models assume that retirees will spend less than they did while they were working. A commonly cited figure is that retirees will face expenses that are only about 80 percent of their pre-retirement needs. This is an average figure and specifics will vary by individual, but this 80 percent rule offers a valuable starting point to think about retirement income needs. In the past, other research has found that spending decreases with age. A recent article in Morningstar explained that, “Households led by people age 65-74 spent, on average…12% less than those in the 55-64 age band. Those age 75 and above demonstrated an even sharper drop-off in spending: Their average expenditures…were 24% lower than those of the 65-74 cohort.” This means a couple making $50,000...

Many states are grappling with how to fund pensions they have agreed to provide for public workers. California has been in the spotlight as reforms have been discussed and enacted. Most agree that the system needs some changes and California has been leading in the way with small changes to the pensions that can yield big savings to the state budget. Florida has taken a different approach and proposed a large change that puts pensions at a greater degree of risk. How Florida is putting retiree’s pensions at risk Almost all pensions and Social Security benefits have been indexed to inflation for some time. This allows retirees to maintain some sense of financial security. Although the largest expenses retirees face usually rise faster than the general level of inflation, indexed payme...