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Financial resolutions for the New Year

Scott-Johnson---Head  About 45 percent of Americans usually make New Year’s resolutions, according to a survey from the University of Scranton.
  But the same survey shows that only 8 percent of us actually keep our resolutions. Perhaps this low success rate isn’t such a tragedy when our resolutions involve things like losing a little weight or learning a foreign language. But when we make financial resolutions — resolutions that, if achieved, could significantly help us in our pursuit of our important long-term goals — it’s clearly worthwhile to make every effort to follow through.
  So, what sorts of financial resolutions might you consider? Here are a few possibilities:
  • Boost your contributions to your retirement plans. Each year, try to put in a little more to your IRA and your 401(k) or other employer-sponsored retirement plans. These tax-advantaged accounts are good options for your retirement savings strategy.
  • Reduce your debts. It’s not always easy to reduce your debts, but make it a goal to finish 2014 with a smaller debt load than you had going into the new year. The lower your monthly debt payments, the more money you’ll have to invest for retirement, college for your children (or grandchildren) and other important objectives.
  • Build your emergency fund. Work on building an “emergency fund” containing six to 12 months’ worth of living expenses, with the money held in a liquid account that offers a high degree of preservation of principal. Without such a fund, you might be forced to dip into your long-term investments to pay for emergencies, such as a new furnace, a major car repair, and so on. You might not be able to finish creating your emergency fund in one year, but contribute as much as you can afford.
  • Plan for your protection needs. If you don’t already have the proper amounts of life and disability insurance in place, put it on your “To Do” list for 2014. Also, if you haven’t taken steps to protect yourself from the considerable costs of long-term care, such as an extended nursing home stay, consult with your financial professional, who can suggest the appropriate protection or investment vehicles. You may never need such care, but that’s a chance you may not want to take — and the longer you wait, the more expensive your protection options may become.
  • Don’t overreact to market volatility. Too many people head to the investment “sidelines” during market downturns. But if you’re not invested, then you miss any potential market gains— and the biggest gains are often realized at the early stages of the rally.
  • Focus on the long term. You can probably check your investment balance online, which means you can do it every day, or even several times a day — but should you? If you’re following a strategy that’s appropriate for your needs, goals, risk tolerance and time horizon, you’re already doing what you should be doing in the long run. So there’s no need to stress yourself over the short-term movements that show up in your investment statements.
  Do whatever you can to turn these New Year’s resolutions into realities. Your efforts could pay off well beyond 2014.

Scott Johnson, CFP, is a financial advisor with Edward Jones, 8146 W. 111th St., Palos Hills, 974-1965. Edward Jones does not provide legal advice. This article was written by Edward Jones for use by your local Edward Jones financial advisor.

Assumptions can be dangerous to investors

Scott-Johnson---Head  Every day of our lives, we make assumptions. We assume that the people we encounter regularly will behave in the manner to which we are accustomed. We assume that if we take care of our cars, they will get us to where we want to go. In fact, we need to make assumptions to bring order to our world. But in some parts of our life — such as investing — assumptions can prove dangerous.
  Of course, not all investment-related assumptions are bad. But here are a few that, at the least, may prove to be counter-productive:
  • “Real estate will always increase in value.” Up until the 2008 financial crisis, which was caused, at least partially, by the “housing bubble,” most people would probably have said that real estate is always a good investment. But since then, we’re all more painfully aware that housing prices can rise and fall. That isn’t to say that real estate is always a bad investment — as a relatively small part of a diversified portfolio, it can be appropriate, depending on your goals and risk tolerance. But don’t expect endless gains, with no setbacks.
  • “Gold will always glitter.” During periods of market volatility, investors often flee to gold, thereby driving its price up. But gold prices will fluctuate, sometimes greatly, and there are risks in all types of gold ownership, whether you’re investing in actual bars of gold or gold “futures” or the stocks of gold-mining companies.
  • “I can avoid all risks by sticking with CDs.” It’s true that Certificates of Deposit (CDs) offer a degree of preservation of principal. But they’re not risk-free; their rates of return may be so low that they don’t even keep up with inflation, which means you could incur purchasing-power risk. Again, having CDs in your portfolio is not a bad thing, but you’ll only want to own those amounts that are suitable for your objectives.
  • “The price of my investment has gone up — I must have made the right decision.”
  This assumption could also be made in reverse — that is, you might think that, since the price of your investment has dropped, you must have made the wrong choice. This type of thinking causes investors to hold on to some investments too long, in the hopes of recapturing early gains, or selling promising investments too soon, just to “cut their losses.” Don’t judge investments based on short-term performance; instead, look at fundamentals and long-term potential.
  • “If I need long-term care, Medicare will cover it.” You may never need any type of long-term care, but if you do, be prepared for some big expenses. The national average per year for a private room in a nursing home is nearly $84,000, according to a recent survey by Genworth, a financial security company. This cost, repeated over a period of years, could prove catastrophic to your financial security during your retirement. And, contrary to many people’s assumptions, Medicare may only pay a small percentage of long-term care costs. You can help yourself by consulting with a financial professional, who can provide you with strategies designed to help cope with long-term care costs.
  You can’t avoid all assumptions when you’re investing. But by staying away from questionable ones, you may avoid being tripped up on the road toward your financial goals.

Scott Johnson, CFP, is a financial advisor with Edward Jones, 8146 W. 111th St., Palos Hills, 974-1965. Edward Jones does not provide legal advice. This article was written by Edward Jones for use by your local Edward Jones financial advisor.

Reinvesting dividends could be a smart move

Scott-Johnson---Head As an investor, you’ll eventually need to make all sorts of decisions — and some will be difficult. But there’s one choice you can make that can be relatively easy: reinvesting stock dividends.
  It’s simple to reinvest dividends — you just need to sign up for a dividend reinvestment plan. Once you do, you won’t receive dividends directly as cash; instead, your dividends will be directly reinvested in the underlying equity. Be aware, though, that you may incur a fee when reinvesting dividends.
  By doing some research, you can find companies that have not only consistently paid dividends year after year but also increased those dividend payments regularly. (Keep in mind that companies are not obligated to pay dividends and can reduce or discontinue them at any time.)
  By reinvesting dividends, you may be able to realize some key benefits. First, you’ll be building your share ownership, which can help you build wealth. No matter what the market is doing, adding shares can be beneficial — but may be especially valuable when the market is down. When share prices are low, reinvesting dividends — which don’t typically fluctuate with share price — can help boost your investment reach further, simply because each reinvested dividend can buy more shares than at the previous higher share price.
  Consider this: It took investors 25 years to recover from the Crash of 1929 if they did not reinvest their dividends — but it only took them 15 years to recover from the crash if they did reinvest dividends, according to Ned Davis Research. And we’ve seen the same phenomenon in more recent years, too. Since 1987, according to Ned Davis Research, we’ve had three major market corrections: Black Monday in 1987; the bursting of the dot-com bubble from 2000 to 2002; and the bursting of the subprime and credit bubbles in 2008. The S&P 500 rose following those market corrections. Investors who stayed invested during those corrections had the opportunity to participate in rising markets. Those investors participating in a dividend reinvestment plan may have been able to buy more shares at a lower price. Of course, past performance doesn’t guarantee future results and the value of your stock shares can fluctuate, including the loss of principal.
  While reinvesting your dividends clearly can be beneficial, you do have to be aware that, even if you aren’t receiving the dividends as cash, you will be taxed on them. But the dividend tax rate remains quite favorable — if you’re in the 25%, 28%, 33% or 35% brackets, your dividends will be taxed at 15%. If your taxable income is more than $400,000 (or $450,000 for couples), your dividend tax rate is 20%. If your adjusted gross income is $250,000 or more (for married couples filing jointly) or $200,000 or more (if you’re single), you’ll also have to pay a 3.8% Medicare tax on your dividends.
  While taxes are a consideration when investing, they should never be thedriving factor. Consider also that investing in dividend-paying stocks does carry some risk — specifically, the value of your investment may fluctuate, causing you to lose some, or all, of your principal. But you may be able to reduce the impact of this possible volatility by sticking with quality stocks as part of a diversified portfolio.
  As we’ve seen, reinvesting dividends can help you build your investment portfolio — so consider putting this technique to work in your investment strategy.

Scott Johnson, CFP, is a financial advisor with Edward Jones, 8146 W. 111th St., Palos Hills, 974-1965. Edward Jones does not provide legal advice. This article was written by Edward Jones for use by your local Edward Jones financial advisor.

Time to check your progress toward your retirement goals

Scott-Johnson---HeadNow that another year is ending, it’s a good time to take stock of where you are on your journey toward financial security. Of course, you could find many different measuring sticks to assess your progress, but you can certainly gain considerable information by asking yourself some basic questions.
  Here are a few to consider:
  • How close am I to my retirement goals? Your comprehensive investment strategy should include a reasonably good estimate of how much money you will eventually need to sustain the retirement lifestyle you’ve envisioned. At least once a year, you should evaluate how much closer you’ve gotten to your goals than the year before.
  • Am I making sufficient progress toward my goals? When assessing your progress, try to determine if your portfolio is properly allocated between stocks, stock-based vehicles, bonds, government securities, certificates of deposit and other investments. If you’re “overweighted” in a particular asset class, such as cash, you may be impeding your ability to move toward your goals.
  • Am I adhering to my investment strategy? To stick with your investment strategy, you need to invest at regular intervals and meet regularly with your financial professional to review your progress and make adjustments — such as rebalancing your portfolio — when necessary. Of course, even with regular progress reviews and portfolio rebalancing, it can be challenging, psychologically and emotionally, to stick with a strategy. For example, during any given year the financial markets could be down, and your results might be disappointing. Nonetheless, if you have built a diversified portfolio containing quality investments, and your portfolio is well suited to your own risk tolerance and time horizon, you don’t necessarily need to make changes following a down year in the markets.
  • What aspects of my life have changed in the past year? Your investment strategy should be based entirely on your individual needs and circumstances — so if these have changed during the past year, you may also have to adjust the way you invest. Consider any and all changes in your life — marriage, new children, divorce, remarriage, new job, new home, etc. — and then try to determine what impact these changes might have on your long financial strategy and if you need to adjust that strategy in response.
  • Have I changed my thinking on my retirement goals? Over time, you might undergo some changes in your thinking about retirement. For example, perhaps you’ve decided that you no longer want to retire early and travel the world. Instead, you’ve discovered a growing desire to open a small business or do some consulting. Any significant changes you make to your retirement plans will likely have a big effect on your savings and investment strategies, so you’ll want to incorporate these changes into your planning as soon as possible.
  By asking, and answering these questions at the end of each year, you should always have a good sense of where you are in pursuit of your long-term goals — and what you need to do to bring the realization of those goals closer to reality.

Scott Johnson, CFP, is a financial advisor with Edward Jones, 8146 W. 111th St., Palos Hills, 974-1965. Edward Jones does not provide legal advice. This article was written by Edward Jones for use by your local Edward Jones financial advisor.

Sharing your bounty can be rewarding

  Thanksgiving is here. If you have the financial resources to provide a comfortable life for your family, you have reason to be thankful. And if you can afford to share some of your “bounty” with charitable organizations, you may want to be as generous as possible — because your gifts may allow you to both give and receive.
  By donating cash or other financial assets, such as stocks, to a qualified charity (either a religious group or a group that has received 501(c)(3) status from the IRS), you help benefit an organization whose work you believe in — and, at the same time, you can receive valuable tax benefits.
  To illustrate: If you give $100 to a qualified charity, and you’re in the 25 percent tax bracket, you can deduct $100, with a tax benefit of $25, when you file your 2013 taxes. Therefore, the real “cost” of your donation is just $75 ($100 minus the $25 tax savings).
  Furthermore, if you donate certain types of non-cash assets, you may be able to receive additional tax benefits. Suppose you give $1,000 worth of stock to a charitable group. If you’re in the 25 percent bracket, you’ll be able to deduct $250 when you file your taxes. And by donating the stock, you can avoid paying the capital gains taxes that would be due if you had eventually sold the stock yourself.
  To claim a charitable deduction, you have to be able to itemize deductions on your taxes. Charitable gifting can get more complex if you choose to integrate your charitable giving with your estate plans to help you reduce your taxable estate. The estate tax is consistently debated in Congress, and the exemption level has fluctuated in recent years, so it’s not easy to predict if you could eventually subject your heirs to these taxes. Nonetheless, you can still work with your tax and legal advisors now to take steps to reduce any possible estate tax burden in the years ahead.
  One such step might involve establishing a charitable remainder trust. Under this arrangement, you’d place some assets, such as appreciated stocks or real estate, in a trust, which could then use these assets to pay you a lifetime income stream.
  When you establish the trust, you may be able to receive a tax deduction based on the charitable group’s “remainder interest” — the amount the charity is likely to ultimately receive. (This figure is determined by an IRS formula.) Upon your death, the trust would relinquish the remaining assets to the charitable organization you’ve named. Keep in mind, though, that this type of trust can be complex. To establish one, you’ll need to work with your tax and legal advisors.
  Of course, you can also choose to provide your loved ones with monetary gifts while you’re still alive. You can give up to $14,000 per year, per individual, to as many people as you choose without incurring the gift tax. For example, if you have three children, you could give them a cumulative $42,000 in a single year — and so could your spouse.
  Thanksgiving is a fine time to show your generosity. And, as we’ve seen, being generous can be rewarding — for your recipients and yourself.

Scott Johnson, CFP, is a financial advisor with Edward Jones, 8146 W. 111th St., Palos Hills, 974-1965. Edward Jones does not provide legal advice. This article was written by Edward Jones for use by your local Edward Jones financial advisor.