TABLE-Japanese insurers' investment plans in 2014/15
A financial advisory practice of Ameriprise Financial Services, Inc.
(Reuters) - Japanese life insurers, which have combined assets of more than 180 trillion yen ($1.84 trillion) under management, are planning to shift some of their funds from domestic bonds to foreign bonds, as the Bank of Japan's massive easing has suppressed domestic bond yields.
Below is a summary of the investment plans of Japan's biggest life insurance companies for financial year to March 2015, as obtained by Reuters in interviews and at news conferences this month.
FOREIGN BONDS
Nippon Life to keep hedged bonds steady or trim them, to buy unhedged bonds if yen rises Dai-ichi to allocate more funds than past, both those with and without FX hedging Meiji Yasuda to increase holdings Sumitomo to increase holdings by less than Y500 bln, reduce hedging Mitsui plans to increase holdings by Y50 bln, including FX-hedged/unhedged bonds Taiyo to maintain current holdings, might reduce hedge ratio Daido to increase holdings after buying Y100 billion last FY Fukoku to increase Y30 bln after having bought Y20 bln more than planned Asahi to increase holdings, may reduce hedging on dollar bonds slightly.
JAPAN BONDS
Nippon Life to increase holdings but closely eyeing yield levels Dai-ichi will not buy at current yield levels, may reduce holdings Meiji Yasuda to increase holdings but be prepared for potential yield spike Sumitomo to increase holding, but reduce buying in super-long JGBs Mitsui to increase holdings by around Y100 billion Taiyo to maintain holdings after selling Y80 billion last FY Daido to maintain holdings after selling Y110 billion last FY Fukoku to mildly increase to Y10 bln Asahi to maintain holdings flat after increasing Y90 bln last .
FY JAPAN STOCKS
Nippon Life to keep holdings steady Dai-ichi to look for chances to buy on dips Meiji Yasuda to cut holdings Sumitomo to keep holdings steady Mitsui has almost finished long-term objective of reducing Japanese stocks Taiyo no plans to increase after selling Y10 billion last FY Daido to maintain holdings after buying Y5 billion last FY Fukoku increase Y10 bln, increase is 1st time in 6 years Asahi to maintain holdings steady.
FOREIGN SHARES
Nippon Life to keep foreing share holdings steady, see opportunity in loans Dai-ichi to increase holdings in foreign shares, invest in growth areas Meiji Yasuda to increase investment in shares, keep alternatives steady Sumitomo to invest up to around Y50 bln in growth areas in infrastructure, Asia Mitsui n/a Taiyo n/a Daido to maintain holdings Fukoku n/a Asahi to slightly increase alternative investments.
EXPECTED MARKET RANGES
Dollar/yen Euro/yen NIKKEI JGB 10-yr US 10-yr Nippon Life Y105 - 115 Y133 - 147 15,500 - 19,000 0.6 - 1.2% n/a Dai-ichi Y98 - 113 Y130 - 155 13,500 - 18,500 0.55- 1.20% 2.5 - 3.75% Meiji Yasuda Y98 - 110 Y130 - 150 13,000 - 18,500 0.5 - 1.1% 2.4 - 3.4% Sumitomo Y95 - 120 Y130 - 150 13,300 - 18,600 0.4 - 1.0% 2.4 - 3.7% Mitsui Y102 - 112 Y141 - 153 15,500 - 18,500 0.4 - 1.0% 2.5 - 3.9% Taiyo Y95 - 110 Y130 - 150 13,000 - 17,000 0.5 - 1.2% 2.5 - 3.5% Daido Y95 - 120 Y125 - 160 13,000 - 18,000 0.5 - 1.0% 2.3 - 3.8% Fukoku Y95 - 110 Y135 - 155 13,000 - 17,500 0.55 - 1.0% 2.3 - 3.5% Asahi Y97 - 115 Y132 - 154 12,500 - 17,500 0.5 - 0.9% 2.4 - 3.7% (Reporting by Tokyo Markets Team; Editing by Anand Basu).
Ameriprise Financial in Asia: Tokyo retreats in wake of Wall Street sell-off
Stocks in Tokyo came under pressure on Monday after negative cues from Wall Street while investors turned cautious as the earnings season kicks off.
The benchmark Nikkei 225 fell 141 points or 0.98% at 14,288 while the broader Topic closed down nine points at 1,160. The Hang Seng lost 91 points at 22,132.
There was also some caution ahead of key economic data including China manufacturing data April, due out Thursday. In the US, the Federal Reserve's policy meeting will conclude on Wednesday while Friday will see the release of monthly US labour data.
Markets were also reacting to Japanese retail sales data which showed that growth came in at a 17-year high in March as shoppers rushed to stores ahead of the planned increase in the national sales tax which began at the start of April.
Sales rose at an annual rate of 11% last month, up from 3.6% the month before and in line with forecasts. However, analysts are now concerned that the strong sales growth acceleration in March will lead to a decline in consumer spending in April.
In earnings news, car giant Honda Motor tumbled 4.5% after it gave a disappointing earnings outlook on Friday. It expects full-year net profit to come in well below forecasts at ¥595bn. Peer Mazda Motor fell ahead of its results, due out on Friday.
Elsewhere shares of Japan Display sank 16% after it reduced its earnings outlook by 15% only a month after its initial public offering.
Meanwhile nerves about escalating tensions in Ukraine drove demand for the yen, sending a string of Japanese exporters lower.
A sell-off among US tech stocks on Friday rippled into Monday's session in Hong Kong with shares of internet heavyweight Tencent dragging a further 2.6% on the market.
Among financials, Construction Bank shrugged off an otherwise lacklustre session, after it said first-quarter net profit climbed 10% from the same time a year earlier following growth in fees and commissions.
However Hong Kong real estate stocks were friendless with shares of Evergrade Real Estate off 2.3% while Agile Property lost 2%.
Are you looking for ways to reach your financial goals in today's volatile market? Working together, Ameriprise Financial Abney Associates Team will work to find investing opportunities in today’s uncertain market that are aligned with your financial goals. Together, we can bring your dreams more within reach.
Abney Associates Financial Advisory: Confidence key to emerging markets
At the beginning of the year, there were three potential areas of asset allocation that very few global portfolio managers wanted to consider seriously. As I travelled around the United States and elsewhere in the world, almost none of our clients wanted to hear about Japan, commodities or emerging markets, Ameriprise Financial Abney Associates Team.
So far they have been wrong about commodities, which are a part of my radical asset allocation and have broken out of their trading range and headed higher. The standard of living continues to improve in the developing world, and one of the first things consumers do when their income increases is start to eat better. This means more meat and poultry where grains are used for feed as well as more consumption of grains by individuals. As a result of continuing growth in the developing world and flat to uneven agricultural production because of variable weather, prices for corn, wheat and soybeans have risen.
As for the other two areas of investor disinterest – Japan and emerging markets (both also in my radical asset allocation) – performance this year has been poor. Japan has been hurt by the increase in its sales tax to 8 per cent from 5 per cent in April as well as concern about a weakening Chinese economy.
During March, I travelled to Chile and Colombia in Latin America. In April, I flew to Sydney and Melbourne and Kuala Lumpur, Singapore, Hong Kong, Beijing, Seoul and Tokyo. I talked to our clients and knowledgeable observers in these areas. While each region faces challenges, I believe the emerging markets generally present opportunities but it is unclear when investors will start to appreciate them.
Emerging markets have suffered for two reasons. The first is the belief that continued Federal Reserve tapering will cause interest rates in the US to rise and the dollar to strengthen. This would be bad for those whose assets are in emerging market currencies. As a result there has been selling of equities in Asia and Latin America by local and global investors in spite of the fact that growth in those areas is considerably above that in the developed world.
The Russia/Ukraine situation has also had a broad influence in the emerging markets because it has highlighted the second reason for investor concern, the issue of political risk. The governments in many of these countries have only a tenuous hold on the power to influence the future course of economic growth. While Ukraine was never an area of investor interest, Russia’s action there caused concern throughout the developing world.
KOREAN UNIFICATION
At this point, I do not believe Putin will move further toward strong military action, although there is much informed opinion on the other side. The new presence in Ukraine of armed gunmen in unmarked uniforms occupying government buildings replicates the situation in Crimea prior to the referendum. If Putin moves to take over eastern Ukraine, I think it would be a strategic mistake for him. The response from the West would be a strong, and the sanctions already imposed have had a negative impact on Russia.
He would be much better off waiting until later or moving very slowly now. Some of Putin’s closest advisors are for cooling the situation down but Russia’s leader is both ambitious and unpredictable. One would be wrong to be complacent about the situation. Ukraine has revived concerns about political instability in the developing world hurting emerging market equities across the board.
During my trip I had an email exchange with my former Morgan Stanley colleague Steve Roach, who was in Asia discussing his book on the rebalancing of the Chinese economy. He and I have been in a dialogue over the last few months about how much the Chinese economy will slow down if the consumer segment becomes the dominant driver of growth rather than credit-driven spending on state-owned enterprises and infrastructure.
Roach believes the economy may not weaken as much as I fear because the service sector is becoming more important and each service sector percentage point of growth generates 30 per cent more jobs than a point of growth in the manufacturing sector. He thinks growth will moderate very gradually and a considerable number of new jobs will still be created each year, reducing the likelihood of social unrest.
One investor I discussed this with pointed out that it may be true that a percentage point of service sector growth produces more jobs than one in manufacturing, but many pay low wages and may not do a lot to increase the importance of the consumer in the economy.
CHINA’S POLLUTION PROBLEM
Several discussions in Beijing yielded insights worth passing on. One investor was concerned about similarities between China now and Japan in the 1980s. During the 1980s numerous books were written about how Japan was doing everything right, with robotics increasing productivity, very strong export growth and soaring real estate values. Japanese technology and consumer electronics stocks were US sharemarket favorites back then. Suddenly it was all over and the Nikkei 225 declined 75 per cent, and today it is trading at 35 per cent of its peak level.
I pointed out some significant differences. China has a population 10 times that of Japan. Its per capita income is one-tenth of that of the US, and by improving its standard of living, China can hope to see its economy grow for a long time, especially if it is successful in shifting the components of growth toward the consumer. Also, China has a centralised government structure that can make decisions quickly and implement them without delay. This is in sharp contrast to the Japanese Diet, where the legislative process can drag on endlessly in a manner similar to the US Congress.
What China must do is deal with its enormous pollution problem. My eyes burned and my throat was sore while I was in Beijing. It was worse on this trip than in previous years. There are reports that 280 million people do not have access to safe drinking water, resulting in high cancer rates. Ground pollution from industrial waste is also a serious problem. The pollution condition must be faced if China expects to have an increasingly important role in the world economy and geopolitics.
Another investor asked me what I would do to get Chinese consumers to spend more. I told him that improving the social safety net would help. The Chinese save for the after-school education of their children, healthcare and their retirement. If the government played a greater role in providing services in these areas, perhaps the Chinese would spend more time at the malls.
That change is not likely to come quickly. Some investors are also concerned that the economy is slowing because of a lack of both domestic and export demand, which could reduce job creation, causing problems for the authoritarian government. Most Chinese would want to have a lot of cash on hand if that happened.
WIDE-RANGING GEOPOLITICAL CONCERNS
Everywhere I went in Asia, investors were sceptical about their home markets, but Japan was extreme in this respect. Perhaps it was because the Nikkei 225 had a difficult first quarter and is down 14 per cent in yen and 11 per cent in dollars so far this year. In the longer term, the ageing population will cause the work force to peak in the next few years and this would make growth difficult. The country has initiated a guest worker program to mitigate this.
Prime Minister Shinzo Abe’s first two arrows, fiscal and monetary expansion, have produced growth of 1.5 per cent and inflation approaching 2 per cent, achieving two of his objectives. The third arrow, regulatory reform and sustainable growth, requires legislative action and that will be harder to achieve.
Investors wondered why my asset allocation had a 5 per cent position in Japan in the face of all of these problems. My response was Japan was clearly out of favour, few institutions held positions, the economy was finally growing and recent data was quite positive. Finally, there were a number of reasonably valued stocks available. I thought the risk of a further decline was low and there was an opportunity to make money from these levels if and when investors turned constructive.
While monetary growth and bank loans have slowed recently, and this may have dampened the enthusiasm of some investors, I believe there is no chance that Prime Minister Abe will let the country slip back into a deflationary recession and another round of stimulus is ahead if it is needed.
In discussions with Asian investors, I addressed their geopolitical concerns, which focused on Russia and Ukraine, Israel and Palestine, the Iran nuclear threat and, particularly, the disputes between Japan and China over islands and fishing rights in the South China Sea. The thrust of their questions was whether the world is on the brink of armed conflict in a number of different places and this would destabilise the markets.
My views on Russia/Ukraine were described earlier. Regarding Iran, I think the sanctions are working and I probably would have demanded that Iran dismantle its centrifuges before offering any relief, but that may have been diplomatically impossible. Now we have to hope that Iran is serious about reducing its nuclear effort; we should have the answer to that in a few months.
Everyone I talk to who is close to the situation is sceptical and reluctant to trust the Iranian government’s commitment, but the people of Iran feel they have been repressed for too long. They want the sanctions lifted so they can participate in the economic opportunity that should emanate from their vast oil resources. The new government in Iran appears ready to respond to the demands of its constituents.
REASONABLE VALUATIONS
The Israel/Palestine conflict seems unresolvable. Neither a one-state nor a two-state solution appears possible. The Arab world refuses to acknowledge Israel’s right to exist and Israel refuses to reduce the settlements in territory it feels is legitimately part of Israel. Even US Secretary of State John Kerry is frustrated by his inability to make progress there.
As for the South China Sea, which is so important to that region, I am hopeful that a diplomatic solution can be reached. China is very proud of its military progress, but is more concerned with the growth of its economy and not anxious to be distracted by armed conflict with anyone at this time, in my opinion. Perhaps I am naïve in thinking hostilities are not going to take place in any of the major trouble spots in the near term, but over the past decade I think everyone has learned how little has been gained by going to war.
Investors were concerned that the recent sharp decline in the technology, social media and biotechnology stocks signaled the end of the bull market or even the bursting of a bubble in equity prices that began with the market’s rise in 2009. After all, they reasoned, stocks have been rising for most of the past five years and that is the usual duration of a positive cycle. I pointed out that valuations were still reasonable at 16 times forward operating earnings and the US economy was expected to pick up momentum after the brutal weather of the first quarter.
The present multiple of the market is about equal to the long-term median. The previous bull market that ended in 2007 reached a multiple in excess of 20 times and the frothy dot.com market which ended in 1999 had a peak multiple in excess of 30 times.
I still believe the US economy will move toward real growth of 3 per cent and the S&P 500 will turn in a strong performance before year-end. The stocks that have been hit hardest are the big winners of the past year where investors did not want to see their profits melt away. This has been true of the exchange-traded funds of the favoured sectors where selling has been particularly furious, resulting in sharp liquidation of the underlying stocks.
Asian investors were focused on the tapering by the Federal Reserve, which has hurt the emerging markets and many wonder if it will continue. My response was that it will as long as the US economy is growing above 2 per cent, but it might be suspended for a while if the pace falters. As for Europe, there was concern about deflation, but I said that it looked like growth in the euro zone would be 1 per cent in 2014 and that diminished the deflation threat.
The mood in Asia was clearly subdued even though the economies there seem to be doing reasonably well. The International Monetary Fund estimates world growth for 2014 at 3.6 per cent, the US at 2.8 per cent, the euro zone at 1.2 per cent and emerging markets at 4.8 per cent. With the developing world growing so much faster than its mature brethren, you would think there would be opportunities there.
What is needed is renewed confidence on the part of local investors and a willingness to put money into their home market. Right now they are pulling money out. One attitudinal difference between Asian investors I talked with and their American counterparts is their fear that a geopolitical event will send equities tumbling everywhere. American investors are more complacent. I certainly hope the Asians are wrong.
Abney Associates Team A financial advisory practice of Ameriprise Financial Services, Inc. : Understanding investment terms and concepts
Below are summaries of some basic principles you should understand when evaluating an investment opportunity or making an investment decision. Rest assured, this is not rocket science. In fact, you'll see that the most important principle on which to base your investment education is simply good common sense. You've decided to start investing. If you've had little or no experience, you're probably apprehensive about how to begin. It's always wise to understand what you're investing in. The better you understand the information you receive, the more comfortable you will be with the course you've chosen.
DON'T BE INTIMIDATED BY JARGON
Don't worry if you can't understand the experts in the financial media right away. Much of what they say is jargon that is actually less complicated than it sounds. Don't hesitate to ask questions; when it comes to your money, the only dumb question is the one you don't ask. Don't wait to invest until you feel you know everything.
UNDERSTAND STOCKS AND BONDS
Almost every portfolio contains one or both of these kinds of assets.
If you buy stock in a company, you are literally buying a share of the company's earnings. You become an owner, or shareholder, of the company. As such, you take a stake in the company's future; you are said to have equity in the company. If the company prospers, there's no limit to how much your share can increase in value. If the company fails, you can lose every dollar of your investment.
If you buy bonds, you're lending money to the company (or governmental body) that issued the bonds. You become a creditor, not an owner, of the bond issuer. The bond is in effect the issuer's IOU. You can lose the amount of the loan (your investment) if the company or governmental body fails, but the risk of loss to creditors (bondholders) is generally less than the risk for owners (shareholders). This is because, to stay in business and continue to finance its growth, a company must maintain as good a credit rating as possible, so creditors will usually pay on time if there is any way at all to do so. In addition, the law favors a company's bondholders over its shareholders if it goes bankrupt.
Stocks are often referred to as equity investments, while bonds are considered debt instruments or income investments. A mutual fund may invest in stocks, bonds, or a combination.
Don't confuse investments such as mutual funds with savings vehicles such as a 401(k) or other retirement savings plans. A 401(k) isn't an investment itself but simply a container that holds investments and has special tax advantages; the same is true of an individual retirement account (IRA).
Note: Before investing in a mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Read it carefully before investing.
DON'T PUT ALL YOUR EGGS IN ONE BASKET
This is one of the most important of all investment principles, as well as the most familiar and sensible.
Consider including several different types of investments in your portfolio. Examples of investment types (sometimes called asset classes) include stocks, bonds, commodities such as oil, and precious metals. Cash also is considered an asset class, and includes not only currency but cash alternatives such as money market instruments (for example, very short-term loans). Individual asset classes are often further broken down according to more precise investment characteristics (e.g., stocks of small companies, stocks of large companies, bonds issued by corporations, or bonds issued by the U.S. Treasury).
Investment classes often rise and fall at different rates and times. Ideally, in a diversified portfolio of investments, if some are losing value during a particular period, others will be gaining value at the same time. The gainers may help offset the losers, which can help minimize the impact of loss from a single type of investment. The goal is to find the right balance of different assets for your portfolio given your investing goals, risk tolerance and time horizon. This process is called asset allocation.
Within each class you choose, consider diversifying further among several individual investment options within that class. For example, if you've decided to invest in the drug industry, investing in several companies rather than just one can reduce the impact your portfolio might suffer from problems with any single company. A mutual fund offers automatic diversification among many individual investments, and sometimes even among multiple asset classes. Diversification alone can't guarantee a profit or ensure against the possibility of loss, but it can help you manage the types and level of risk you take.
RECOGNIZE THE TRADEOFF BETWEEN AN INVESTMENT'S RISK AND RETURN
For present purposes, we define risk as the possibility that you might lose money, or that your investments will produce lower returns than expected. Return, of course, is your reward for making the investment. Return can be measured by an increase in the value of your initial investment principal, by cash payments directly to you during the life of the investment, or by a combination of the two.
There is a direct relationship between investment risk and return. The lowest-risk investments --for example, U.S. Treasury bills--typically offer the lowest return at any given time The highest-risk investments will generally offer the chance for the highest returns (e.g., stock in an Internet start-up company that may go from $12 per share to $150, then down to $3). A higher return is your potential reward for taking greater risk.
UNDERSTAND THE DIFFERENCE BETWEEN INVESTING FOR GROWTH AND INVESTING FOR INCOME
As you seek to increase your net worth, you face an immediate choice: Do you want growth in the value of your original investment over time, or is your goal to produce predictable, spendable current income--or a little of both?
Consistent with this investor choice, investments are frequently classified or marketed as either growth or income oriented. Bonds, for example, generally provide regular interest payments, but the value of your original investment will typically change less than an investment in, for example, a new software company, which will typically produce no immediate income. New companies generally reinvest any income in the business to make it grow. However, if a company is successful, the value of your stake in the company should likewise grow over time; this is known as capital appreciation.
There is no right or wrong answer to the "growth or income" question. Your decision should depend on your individual circumstances and needs (for example, your need, if any, for income today, or your need to accumulate retirement savings that you don't plan to tap for 15 years). Also, each type may have its own role to play in your portfolio, for different reasons.
UNDERSTAND THE POWER OF COMPOUNDING ON YOUR INVESTMENT RETURNS
Compounding occurs when you "let your money ride." When you reinvest your investment returns, you begin to earn a "return on the returns."
A simple example of compounding occurs when interest earned in one period becomes part of the investment itself during the next period, and earns interest in subsequent periods. In the early years of an investment, the benefit of compounding on overall return is not exciting. As the years go by, however, a "rolling snowball" effect kicks in, and compounding's long-term boost to the value of your investment becomes dramatic.
Abney Associates Team Ameriprise Financial: Sudden wealth
What would you do with an extra $10,000? Maybe you'd pay off some debt, get rid of some college loans, or take a much-needed vacation. What if you suddenly had an extra million or 10 million or more? Whether you picked the right six numbers in your state's lottery or your dear Aunt Sally left you her condo in Boca Raton, you have some issues to deal with. You'll need to evaluate your new financial position and consider how your sudden wealth will affect your financial goals.
EVALUATE YOUR NEW FINANCIAL POSITION
Just how wealthy are you? You'll want to figure that out before you make any major life decisions (e.g., to retire). Your first impulse may be to go out and buy things, but that may not be in your best interest. Even if you're used to handling your own finances, now's the time to watch your spending habits carefully. Sudden wealth can turn even the most cautious person into an impulse buyer. Of course, you'll want your current wealth to last, so you'll need to consider your future needs, not just your current desires.
Answering these questions may help you evaluate your short- and long-term needs and goals:
- Do you have outstanding debt that you'd like to pay off?
- Do you need more current income?
- Do you plan to pay for your children's education?
- Do you need to bolster your retirement savings?
- Are you planning to buy a first or second home?
- Are you considering giving to loved ones or a favorite charity?
- Are there ways to minimize any upcoming income and estate taxes?
Note: Experts are available to help you with all of your planning needs. If you don't already have a financial planner, insurance agent, accountant, or attorney, now would be a good time to find professionals to guide you through this new experience.
What will you do with your new assets? Consider these questions:
- Do you have enough money to pay your bills and your taxes?
- How might investing increase or decrease your taxes?
- Do you have assets that you could quickly sell if you needed cash in an emergency?
- Are your investments growing quickly enough to keep up with or beat inflation?
- Will you have enough money to meet your retirement needs and other long-term goals?
- How much risk can you tolerate when investing?
- How diversified are your investments?
The answers to these questions may help you formulate a new investment plan. Remember, though, there's no rush. You can put your funds in an accessible interest-bearing account such as a savings account, money market account, or short-term certificate of deposit until you have time to plan and think things through. You may wish to meet with an investment advisor for help with these decisions.
Once you've taken care of these basics, set aside some money to treat yourself to something you wouldn't have bought or done before--it's OK to have fun with some of your new money!
It's sad to say, but being wealthy may make you more vulnerable to lawsuits. Although you may be able to pay for any damage (to yourself or others) that you cause, you may want to re-evaluate your current insurance policies and consider purchasing an umbrella liability policy. If you plan on buying expensive items such as jewelry or artwork, you may need more property/casualty insurance to cover these items in case of loss or theft. Finally, it may be the right time to re-examine your life insurance needs. More life insurance may be necessary to cover your estate tax bill so your beneficiaries receive more of your estate after taxes.
Now that your wealth has increased, it's time to re-evaluate your estate plan. Estate planning involves conserving your money and putting it to work so that it best fulfills your goals. It also means minimizing your taxes and creating financial security for your family.
Is your will up to date? A will is the document that determines how your worldly possessions will be distributed after your death. You'll want to make sure that your current will accurately reflects your wishes. If your newfound wealth is significant, you should meet with your attorney as soon as possible. You may want to make a new will and destroy the old one instead of simply making changes by adding a codicil.
GIVING IT ALL AWAY--OR MAYBE JUST SOME OF IT
Is gift giving part of your overall plan? You may want to give gifts of cash or property to your loved ones or to your favorite charities. It's a good idea to wait until you've come up with a financial plan before giving or lending money to anyone, even family members. If you decide to give or lend any money, put everything in writing. This will protect your rights and avoid hurt feelings down the road. In particular, keep in mind that:
- If you forgive a debt owed by a family member, you may owe gift tax on the transaction
- You can make individual gifts of up to $14,000 (2013 limit) each calendar year without incurring any gift tax liability ($28,000 for 2013 if you are married, and you and your spouse can split the gift)
- If you pay the school directly, you can give an unlimited amount to pay for someone's education without having to pay gift tax (you can do the same with medical bills)
- If you make a gift to charity during your lifetime, you may be able to deduct the amount of the gift on your income tax return, within certain limits, based on your adjusted gross income
Note: Because the tax implications are complex, you should consult a tax professional for more information before making sizable gifts.
Are you looking for ways to reach your financial goals in today's volatile market? Whether you’re saving for retirement, college for your kids or other needs, you may be unsure about what to do next or whether you can do anything at all. That's where we can help. We'll take the time to listen to you and understand your goals and dreams. We'll help you build a plan to get back on track toward reaching them. Working together, we will work to find investing opportunities in today’s uncertain market that are aligned with your financial goals. Abney Associates Team A financial advisory practice of Ameriprise Financial Services, Inc. can bring your dreams more within reach.
Financial Advisory Abney Associates: Life insurance at various life stages
Your need for life insurance changes as your life changes. When you're young, you typically have less need for life insurance, but that changes as you take on more responsibility and your family grows. Then, as your responsibilities once again begin to diminish, your need for life insurance may decrease. Let's look at how your life insurance needs change throughout your lifetime.
As a young adult, you become more independent and self-sufficient. You no longer depend on others for your financial well-being. But in most cases, your death would still not create a financial hardship for others. For most young singles, life insurance is not a priority.
Some would argue that you should buy life insurance now, while you're healthy and the rates are low. This may be a valid argument if you are at a high risk for developing a medical condition (such as diabetes) later in life. But you should also consider the earnings you could realize by investing the money now instead of spending it on insurance premiums.
If you have a mortgage or other loans that are jointly held with a cosigner, your death would leave the cosigner responsible for the entire debt. You might consider purchasing enough life insurance to cover these debts in the event of your death. Funeral expenses are also a concern for young singles, but it is typically not advisable to purchase a life insurance policy just for this purpose, unless paying for your funeral would burden your parents or whomever would be responsible for funeral expenses. Instead, consider investing the money you would have spent on life insurance premiums.
Your life insurance needs increase significantly if you are supporting a parent or grandparent, or if you have a child before marriage. In these situations, life insurance could provide continued support for your dependent(s) if you were to die.
Married couples without children typically still have little need for life insurance. If both spouses contribute equally to household finances and do not yet own a home, the death of one spouse will usually not be financially catastrophic for the other.
To make sure either spouse could carry on financially after the death of the other, both of you should probably purchase a modest amount of life insurance. At a minimum, it will provide peace of mind knowing that both you and your spouse are protected.
Again, your life insurance needs increase significantly if you are caring for an aging parent, or if you have children before marriage. Life insurance becomes extremely important in these situations, because these dependents must be provided for in the event of your death.
When you have young children, your life insurance needs reach a climax. In most situations, life insurance for both parents is appropriate.
Single-income families are completely dependent on the income of the breadwinner. If he or she dies without life insurance, the consequences could be disastrous. The death of the stay-at-home spouse would necessitate costly day-care and housekeeping expenses. Both spouses should carry enough life insurance to cover the lost income or the economic value of lost services that would result from their deaths.
Dual-income families need life insurance, too. If one spouse dies, it is unlikely that the surviving spouse will be able to keep up with the household expenses and pay for child care with the remaining income.
For many people, career advancement means starting a new job with a new company. At some point, you might even decide to be your own boss and start your own business. It's important to review your life insurance coverage any time you leave an employer.
Keep in mind that when you leave your job, your employer-sponsored group life insurance coverage will usually end, so find out if you will be eligible for group coverage through your new employer, or look into purchasing life insurance coverage on your own. You may also have the option of converting your group coverage to an individual policy. This may cost significantly more, but may be wise if you have a pre-existing medical condition that may prevent you from buying life insurance coverage elsewhere.
Make sure that the amount of your coverage is up-to-date, as well. The policy you purchased right after you got married might not be adequate anymore, especially if you have kids, a mortgage, and college expenses to consider. Business owners may also have business debt to consider. If your business is not incorporated, your family could be responsible for those bills if you die.
SINGLE AGAIN
If you and your spouse divorce, you'll have to decide what to do about your life insurance. Divorce raises both beneficiary issues and coverage issues. And if you have children, these issues become even more complex.
If you and your spouse have no children, it may be as simple as changing the beneficiary on your policy and adjusting your coverage to reflect your newly single status. However, if you have kids, you'll want to make sure that they, and not your former spouse, are provided for in the event of your death. This may involve purchasing a new policy if your spouse owns the existing policy, or simply changing the beneficiary from your spouse to your children. The custodial and noncustodial parent will need to work out the details of this complicated situation. If you can't come to terms, the court will make the decisions for you.
Once you retire, and your priorities shift, your life insurance needs may change. If fewer people are depending on you financially, your mortgage and other debts have been repaid, and you have substantial financial assets, you may need less life insurance protection than before. But it's also possible that your need for life insurance will remain strong even after you retire. For example, the proceeds of a life insurance policy can be used to pay your final expenses or to replace any income lost to your spouse as a result of your death (e.g., from a pension or Social Security). Life insurance can be used to pay estate taxes or leave money to charity.
Abney Associates Team A financial advisory practice of Ameriprise Financial Services, Inc.: Deciding what to do with your 401(k) plan when you change jobs
When you change jobs, you need to decide what to do with the money in your 401(k) plan. Should you leave it where it is, or take it with you? Should you roll the money over into an IRA or into your new employer's retirement plan?
As you consider your options, keep in mind that one of the greatest advantages of a 401(k) plan is that it allows you to save for retirement on a tax-deferred basis. When changing jobs, it's essential to consider the continued tax-deferral of these retirement funds, and, if possible, to avoid current taxes and penalties that can eat into the amount of money you've saved.
When you leave your current employer, you can withdraw your 401(k) funds in a lump sum. To do this, simply instruct your 401(k) plan administrator to cut you a check. Then you're free to do whatever you please with those funds. You can use them to meet expenses (e.g., medical bills, college tuition), put them toward a large purchase (e.g., a home or car), or invest them elsewhere.
While cashing out is certainly tempting, it's almost never a good idea. Taking a lump sum distribution from your 401(k) can significantly reduce your retirement savings, and is generally not advisable unless you urgently need money and have no other alternatives. Not only will you miss out on the continued tax-deferral of your 401(k) funds, but you'll also face an immediate tax bite.
Working together, Ameriprise Financial Abney Associates Team will work to find investing opportunities in today’s uncertain market that are aligned with your financial goals. Together, we can bring your dreams more within reach.
First, you'll have to pay federal (and possibly state) income tax on the money you withdraw (except for the amount of any after-tax contributions you've made). If the amount is large enough, you could even be pushed into a higher tax bracket for the year. If you're under age 59½, you'll generally have to pay a 10 percent premature distribution penalty tax in addition to regular income tax, unless you qualify for an exception. (For instance, you're generally exempt from this penalty if you're 55 or older when you leave your job.) And, because your employer is also required to withhold 20 percent of your distribution for federal taxes, the amount of cash you get may be significantly less than you expect.
Note: Because lump-sum distributions from 401(k) plans involve complex tax issues, especially for individuals born before 1936, consult a tax professional for more information.
Note: If your 401(k) plan allows Roth contributions, qualified distributions of your Roth contributions and earnings will be free from federal income tax. If you receive a nonqualified distribution from a Roth 401(k) account only the earnings (not your original Roth contributions) will be subject to income tax and potential early distribution penalties.
LEAVE THE FUNDS WHERE THEY ARE
One option when you change jobs is simply to leave the funds in your old employer's 401(k) plan where they will continue to grow tax deferred.
However, you may not always have this opportunity. If your vested 401(k) balance is $5,000 or less, your employer can require you to take your money out of the plan when you leave the company. (Your vested 401(k) balance consists of anything you've contributed to the plan, as well as any employer contributions you have the right to receive.)
TRANSFER THE FUNDS DIRECTLY TO YOUR NEW EMPLOYER'S RETIREMENT PLAN OR TO AN IRA (A DIRECT ROLLOVER)
Just as you can always withdraw the funds from your 401(k) when you leave your job, you can always roll over your 401(k) funds to your new employer's retirement plan if the new plan allows it. You can also roll over your funds to a traditional IRA. You can either transfer the funds to a traditional IRA that you already have, or open a new IRA to receive the funds. There's no dollar limit on how much 401(k) money you can transfer to an IRA.
You can also roll over ("convert") your non-Roth 401(k) money to a Roth IRA. The taxable portion of your distribution from the 401(k) plan will be included in your income at the time of the rollover.
If you've made Roth contributions to your 401(k) plan you can only roll those funds over into another Roth 401(k) plan or Roth 403(b) plan (if your new employer's plan accepts rollovers) or to a Roth IRA.
Note: In some cases, your old plan may mail you a check made payable to the trustee or custodian of your employer-sponsored retirement plan or IRA. If that happens, don't be concerned. This is still considered to be a direct rollover. Bring or mail the check to the institution acting as trustee or custodian of your retirement plan or IRA.
You can also roll over funds to an IRA or another employer-sponsored retirement plan (if that plan accepts rollover contributions) by having your 401(k) distribution check made out to you and depositing the funds to your new retirement savings vehicle yourself within 60 days. This is sometimes referred to as an indirect rollover.
However, think twice before choosing this option. Because you effectively have use of this money until you redeposit it, your 401(k) plan is required to withhold 20 percent for federal income taxes on the taxable portion of your distribution (you get credit for this withholding when you file your federal income tax return for the year). Unless you make up this 20 percent with out-of-pocket funds when you make your rollover deposit, the 20 percent withheld will be considered a taxable distribution, subject to regular income tax and generally a 10 percent premature distribution penalty (if you're under age 59½).
Assuming that your new employer offers a retirement plan that will accept rollover contributions, is it better to roll over your traditional 401(k) funds to the new plan or to a traditional IRA?
Each retirement savings vehicle has advantages and disadvantages. Here are some points to consider:
- A traditional IRA can offer almost unlimited investment options; a 401(k) plan limits you to the investment options offered by the plan
- A traditional IRA can be converted to a Roth IRA if you qualify
- A 401(k) may offer a higher level of protection from creditor
- A 401(k) may allow you to borrow against the value of your account, depending on plan rules
- A 401(k) offers more flexibility if you want to contribute to the plan in the future
Finally, no matter which option you choose, you may want to discuss your particular situation with a tax professional (as well as your plan administrator) before deciding what to do with the funds in your 401(k).
