Wealth Management Articles

The Personal Saving Rate: What It Doesn’t Mean to You
A few years ago, when the economy was humming along at a brisk pace, the nation’s personal saving rate hovered around the 0% mark, even falling below zero briefly in 2005. The headlines noted the decline as a dramatic departure from historical norms. Some observers framed it as bad news for the U.S. economy—evidence that American consumers had gone wild, spending their tomorrows on trips to the mall. Fast forward to today: The saving rate has recovered to more normal levels (about 4% to 6% of disposable income)—yet now it is tisk-tisked as too high for an ailing economy, one that needs Americans to return to their profligate ways in order to boost the recovery. Why the focus on the nation’s personal saving rate? Should a high rate—or a low one—concern you? Is there some useful comparison with your own saving habits? Read more...

Variable Annuities Add Guarantees
A recent survey of financial advisors revealed that 83% of their investor clients aged 55 to 70 think that a guaranteed income is more important than above-average investment gains. Investors who would rather not choose between these two options may want to consider variable annuities with living benefit guarantees, which are available at an extra cost. A variable annuity is a long-term financial vehicle designed for retirement purposes. The contract holder makes payments to an insurance company in exchange for the promise of a future income stream or a lump-sum payment. The insurance company invests some of the payments in sub-accounts selected by the investor that pursue investment gains in various asset classes, including stocks. Read more...

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Wealth Management Bullets

• Health insurance is in the news and environmental legislation news has receded somewhat. The debate on “cap and trade” hasn’t really taken place. If President Obama loses a significant portion of his health care plan, it may not bode well for cap and trade. This issue doesn’t get debated with quite the same passion as health care but it probably should. Although the Congressional Budget Office cites lower figures, some have estimated that between now and 2020, if the cap and trade legislation passes, utility costs could increase 50% on average across the country, and that doesn’t include any increase due to lower supply and/or higher demand. In some places, this increase is projected to be as much as 100%. Nuclear power won’t save anyone because the process to get a nuclear power plant permitted, built and in operation is just too long. Give the French credit for recognizing the short-term expense versus the long-term advantages of nuclear power. Some argue that gasoline and other transportation fuels could go up as much as $2 per gallon during that same period of time because of the legislation. All this is expected to have a huge ripple effect through the economy with prices going up across the board. A client who has spent the vast majority of his career in the utility field pointed out that since taxes are based on dollars of revenue, this is really a subtle and indirect manner to raise tax revenue without admitting that taxes have been increased dramatically. Unfortunately, this is one of those items that could “slip through” because it doesn’t carry the same emotion as health care.
• While there has been a lot of talk and concern about inflation due to the massive amount of government money being pumped into the system to combat the sliding economy, inflation has not shown up yet. In July, wholesale prices fell 0.9% and that meant for the last 12 months prices have actually fallen about 6.8%. While much of this could be attributable to the decrease in the price of oil (remember it was only last July that it reached $147 per barrel), this is the biggest decline in 60 years. “Core inflation”, i.e., everything except food and energy, was also reported to have dropped 0.1% in July, so not all of the drop was attributable to the significant decline in the price of oil.
• The economic news continues to be mixed and is being reflected in the up and down days of the stock market. If you listen to the “Talking Heads,” one day the bear market is going to come back with a vengeance, and the next day the bull market will not only be extended but reinvigorated. The fact is, although we appear to have achieved stabilization in the economy and the market, we are still a long way from seeing vast and fast economic gains. There is still a lot of vetting that needs to happen in several places within the economy. For example, according to the Mortgage Banker’s Association, we now find that 13% of American homeowners are behind on their mortgage payments or are in foreclosure. This is comprised of 4% in foreclosure and 9% behind by one or more mortgage payments. While much of this is still being driven by the sub-prime markets of the past, it is beginning to spill over into the traditional mortgage arena as well. The plus for much of this, however, is that home prices have come down so much that at least some of the inventory is being depleted as both investors and homeowners see opportunities in today’s residential real estate market. Should we focus on the bad numbers or on the good news? We need to continue to pay attention to both. The only difference between this recovery and past recoveries will be the velocity of the recovery.
• The first of two steps in the protection for credit cardholders kicked in over the past two weeks. The second step will occur in February 2010. Have you ever been frustrated when you receive your credit card bill and realize that if it is not paid within a week it will be late? Now, credit card companies must mail their notices 21 days ahead of the due date or they cannot classify a payment late. If they intend to change the interest rate or fees on the card, they must now provide consumers a 45-day notice of these changes. While these seem to be simple steps, it is anticipated that this will save credit card holders hundreds of millions of dollars in interest rate costs and fees. In February, there will be additional restrictions placed on interest rate increases. For people who carry balances on their credit cards, there will also be some changes as to how their payment is applied and some restrictions on the issuance of credit cards to college students. For people who pay their credit card balances every month, most of the changes will have little to no effect, but for others it will provide them with some rights they did not have in the past.
• As we reported earlier, come January, Social Security recipients are likely to be shocked. They are accustomed to receiving a cost of living adjustment (COLA) as they have each year since 1975. The lowest increase occurred in 1986, with a paltry 1.3% adjustment, and the increase was only 1.4% in 2002. Over the past 20 years, the COLA has averaged 3.04% including the 5.8% this past year, (which was the largest in 20 years). Given the recession and the decrease in prices, especially for energy and food, there is likely to be no COLA adjustment for the current year. By law, it cannot go negative. Having said that, because of the increased expenses associated with Medicare, it is possible that some Social Security recipients will actually end up with less money. (Source: Social Security)
• In a somewhat surprising move (for timing not substance), President Obama nominated Bernard Bernanke for a second four-year term as Chairman of the Federal Reserve Board. This took away a lot of the potential worry in the markets during a very critical time. The Chairman of the Federal Reserve Board is appointed by the President with advice and consent of the Senate. Although appointed by the President, the Chairman serves at the pleasure of Congress, who can fire him at any time.
• It probably doesn’t come as a big surprise to learn that the Federal Deposit Insurance Corporation (FDIC) is running low on funds. In fact, the FDIC is expected to run out of money before the year is over. First of all, you don’t need to worry, as the FDIC is backed by the full faith and credit of the U.S. government, so no matter what happens to it, the taxpayers will step in. That’s the point of this Bullet. With FDIC’s funding running so low, there is a hidden tax for savers. FDIC will need to replenish its funds, and how that will be done is to increase fees to the banks it serves. This will raise the expenses of the banks, which will lower the interest rates that they will pay to savers. This is just another “hidden” tax and a way that all taxpayers will have to pay for the repair of the economy.

Somerset's Wealth Management Team is pleased to provide this reprint with permission from ProVise Management Group, LLC, a SEC Registered Investment Advisor

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