The “Who” of Earning More

While we’ve all read the articles about the gender pay-gap in the US, I’d like to discuss why it’s important that women start earning more and provide one perspective on how we can go about doing that.

First I’d like to mention that despite earning more college degrees than men, and now, more advanced college degrees, women still make on average 27% less than their male counterparts. That’s a glaring disconnect and it’s significant considering that most women outlive men by roughly five years in the U.S. We’re also the sole or primary source of income for 40% of households with children. That’s up from only 11% in 1960. Thus, a higher income in our working years is crucial if we want to adequately provide for both our children’s and our futures.

While it’s clear the female gender has the intelligence and discipline to master higher education, what isn’t clear is why we don’t reach the same levels of success in the workplace. I can’t claim to know the answer for all women, but I can speak from my own experience. As the first of my sisters to go to college I had little guidance. Fortunately, once I learned the system, established good study habits, and got clear about why I wanted a degree, I started to excel. In college, succeeding meant knowing the material, acing tests, and generally holding myself accountable. I didn’t necessarily need strong interpersonal skills or external confidence. I simply needed to know the subject matter and master tests and assignments.

My first job in finance was a very different experience. In comparison to school, the working world – particularly in the male-dominated world of finance – was much more about confidence, speaking up, and did I mention confidence? Yes, intelligence and a job well-done were important, but I noticed that those who had the confidence to take on challenging projects, talk to the executives with ease, and court clients with swagger seemed to get ahead. Interestingly, I had this confidence outside of work, but in the office my voice cracked, my brain froze up at inopportune times, and my words were often awkward. It was doubly painful to watch myself make blunder upon blunder, all the while knowing that in other environments I was relaxed, confident, capable – in a word, myself. What was happening? Where did I go?

It’s been twelve years since landing my first financial job and since that time my confidence has grown. I believe the biggest contributors to bridging the gap between the outside-work me and the at-work me were awareness, compassion, and trust. Although at times I felt insecure, incapable, and frustrated on the job in those early years, having awareness of the confident, capable version of myself was an important touchstone in the office. It allowed me to notice what triggered my nerves or caused my thoughts to freeze up, instead of believing that that was who I was. With awareness, I could proactively prepare for those moments, give myself a break when I did have a blunder, and trust that in time, I would grow more confident. It wasn’t always easy, but having an image of who I wanted to be at the office spurred me on. So did identifying role models at work, both male and female, and reaching out to those people. Knowing where I wanted to go, what that looked like, and most importantly, who I wanted to be at work were my guideposts.

There were certainly bumps along the way, including raises that were not granted, wrong career turns, and staying in some positions for too long. Despite the setbacks and challenges, I remained focused on my “who” at work and had a willingness, and perhaps a penchant for embarrassing blunders. Money was important to me, and although I aspired to grow my income, it wasn’t my main focus. Surprisingly, my commitment to being more myself and a willingness to work with new, uncomfortable situations had the happy side-effect of promotions and pay raises.

Money is important. Considering that we women often outlive men and are shouldering more and more responsibility for our dependents and ourselves, it’s even more important. The good news is that while money is not always our first priority, from my experience, it doesn’t have to be. A commitment to being more fully ourselves in any environment and a willingness to stretch ourselves with uncomfortable, yet meaningful challenges frequently has the happy side-effect of higher earnings.

Regardless, becoming more fully ourselves brings with it the capacity to weather any financial situation and is, in the end, its own reward.

Carrie Tallman, CFA

Director of Research

?????????????????????????????????????????????

GREAT NEWS ON INCOMES, SPENDING AND INFLATION

The Bureau of Economic Analysis (BEA) hit a trifecta in its March 2 release, “Personal Income and Outlays: January 2015.” As the chart below shows, the first piece of wonderful news was that real disposable personal income (DPI), which is what you have left of your income after taxes and inflation, hit a new record in January of $12.246 trillion at a seasonally adjusted annual rate. That finally eclipsed the old record of $12.214 trillion at a seasonally adjusted annual rate set in December 2012. That old record was an unsustainable outlier at the time, which was caused by many people who had the ability to bring income such as bonuses and special dividends forward to avoid the higher tax rates of 2013, doing exactly that.

Untitled

Conversely, the January 2015 record was driven by a seasonally adjusted increase of $42.4 billion in wage and salary income from December. That accounted for a very healthy 83.5 percent of the total increase in personal income of $50.8 billion, seasonally adjusted. That strong performance of wages and salaries suggests that, driven by ever-growing employment, disposable personal income will set many more records in 2015 and 2016.

Even more astonishingly, real disposable personal income rose by 0.9 percent in January from December. That was the biggest increase since—you guessed it—the 2.84 percent spurt in December 2012, which was on top of a very strong increase of 1.44 percent in November 2012. Of course, real DPI plunged by 5.9 percent in January 2013, the biggest drop in over 50 years. That is most unlikely to occur this time, as we will see when we get the data for February 2015 on March 30.

This 0.9 percent increase in real DPI in January is even more amazing, because January wages and salaries are hit every year by increases in Social Security taxes on both employees and employers. Every employed person who exceeded the $117,000 taxable maximum in 2014 before December 31 had to start paying again on January 1. This year the tax covers wages and salaries up to $118,500. That change subtracted an additional $7.9 billion in January.

Note the phenomenal growth in real DPI in the previous chart. It is now six times higher than in 1959, triple the 1973-1975 level and double where it was in 1987-1988. It’s up more than 20 percent since 2009. Most countries would be delighted to have such terrific growth in DPI over comparable periods.

The second piece of great news in the report was the fact that real personal consumption expenditures (PCE) set a new record in January of $11.164 trillion at a seasonally adjusted annual rate, as shown in the following chart. That was up 0.3 percent from December and a very impressive 3.4 percent from January 2014. Because real PCE makes up by far the largest share of real GDP (68.2 percent in 2014), this strong beginning to 2015 reinforces the consensus forecast that this will be the first year since 2005 to see real GDP growth of 3.0 percent or more.

Untitlewd

The third piece of wonderful news was the continued low rate of increase of so-called “core” inflation, the implicit price deflator for PCE less food and energy. The chart below shows how this measure rose in the late 1970s and early 1980s hitting a peak of 4.02 percent in January 1981. It is probably not a coincidence that that was the month when President Reagan took office, as his first official act was to deregulate oil prices. While both energy and food are excluded from this index, the impact of that decision had far-ranging consequences in reducing inflation.

Untitled3

The overall PCE deflator fell 0.5 percent in January from December and was only 0.2 percent above January 2014. That was primarily because “Energy goods and services” registered price declines of 10.4 percent in January from December, and fell a whopping 21.2 percent from January 2014.

This very small increase in the overall PCE deflator made a big contribution to the 0.9 percent jump in real DPI. The rest came from the large increases in nominal income.

This BEA report is one of the best ones we’ve had in many years. It should be followed by much more good news on income and spending by consumers in coming months.

Dr. James F. Smith
Chief Economist

?????????

Living Healthier – Better for your Wallet, Not Just your Waistline.

Untitled

A couple of years ago I made a significant lifestyle change. After gaining post-college weight, I realized that the carefree metabolism of a 20-year old went out the window at 21. I made the decision to stop eating unhealthy food and develop a workout regimen that I could stick to. At first I worried that I couldn’t afford to live “healthy.” I believe that this is a normal and reasonable reaction. $120 for a gym membership? WHAT! $10 for organic breakfast? HUH? Thankfully, what I realized was that I was incorrect to think that “healthy lifestyles” and “expensive lifestyles” were synonymous. I actually saved money! Here are just a few ways that you can get healthy, save a dollar or two, slim down and be happier.

  1. Get rid of your expensive bad habits:
  • Do you pay $10 a day for a double pump, venti, skinny, salted caramel mocha frappuccino? Stop it! First, whoever told you that this was “skinny” was lying to you. Second, these things add up. What bad habits do you have? Is it the lunch time soda? The mid-afternoon candy bar from the vending machine? The two packs of cigarettes a day? Once you write down your vices, tabulate them to see how much those bad habits cost over a week, a month, a year, a lifetime.
  • Example: A pack of cigarettes in North Carolina costs $4.45. You could spend more than $49,662 on smoking a pack a day for 30 years. According to the American Cancer Society, each pack of cigarettes on average will cost you $35.00 in health care costs. That’s $383,250 in health care costs due to smoking for 30 years. Is it worth it?
Vice Per day Per 30 Years 30 Yr Health Cost Total 30 Yr Cost
Cigarettes $4.45 $49,662 $383,250 $432,912

 

  1. Reduce your medical bill:
  • It’s impossible to ignore the fact that eating healthy and exercising can reduce visits to the doctor. There are a plethora of studies out there that prove a healthier diet can reduce your risk of heart disease, lower your cholesterol, reduce stress on joints from excess weight, etc. To give you a personal example, I have always had trouble with stress management. I’m a worrier (#shegetsitfromhermama). Since I was a child I have racked up numerous medical bills related to anxiety, including medications, sleep studies and doctor visits. Had I known much earlier that by slapping on a pair of running shoes and going for a jog, I could eliminate a lot of my stress, I would have saved myself and my parents a lot of money. Running is a much more affordable way to blow off steam than medication. With my routine, I was able to ditch the expensive medications and doctors’ visits.
  1. Waste not:
  • I’m marrying a Dutchman soon… literally. One thing I learned from him and his Dutch family is to waste nothing and use everything. When I first started dating Chris I couldn’t understand how he would eat 2-3 times more food than I did and spend 2-3 times less money than I did. The answer simply was he didn’t waste anything. Now, this was a bit harder for me to do. Chris could sit down and eat hummus with a spoon, but if I didn’t have crackers to eat the hummus I’d let it sit there, go bad, and then I’d throw it out. So how did I fix this little problem and save hundreds of dollars doing it? Planning! How did I shed some pounds? Planning! Sit down at the beginning of the week and plan out all your meals. When you plan ahead of time you’re more likely to make healthier choices. You also are less likely to go out and eat when you have already planned, purchased and prepped your healthy food choices. Once you realize the savings potential you start using the “waste not” mentality in other facets of your life.
  • Tip: when planning your meals ahead of time, leave yourself a day to go out and splurge. Without the occasional “cheat” you may go crazy and give up.
  1. Cut on transportation cost:
  • Now this isn’t possible for everyone, but for a lot of people you can quickly save some money, cut cost and your waistline by switching up your transportation methods. Bike and walk to work. Is there a train nearby? Then walk to the train rather than driving to your office. If you are eating out for lunch, pick a restaurant that you don’t have to drive to. A lot of people say that the time spent walking is a great way to meditate, and reflect on their day. This can offer a peace of mind that can’t be achieved with the stresses of the road.
  1. Create healthy family outings:
  • Skip the $30 movie, popcorn, and 2 hours of inactivity and do something active with your family. Spend $15 on a soccer ball and go to the park on Sunday afternoon. Take the dog on a hike or a walk. This brings up another point… working out and being active is always more rewarding and sustainable when you have a support group or community of people that you workout with. If healthy outings cannot be accomplished with busy family members, then join a running club, a biking group or a community gym.

I could write an entire blog series on ways to be healthier and save money… but the key is to start small! Pick an area that needs improvement in your life and manage it. Use the momentum of a small change to snowball into an entire lifestyle change. Fatten up that wallet by trimming up the love handles!

Ashley Woodring, CFP®

Financial Advisor

Ashley_Woodring(b)

 

Social Security: The Spousal Benefit

If you are nearing the age of Social Security benefits, you are probably thinking about how you can maximize your benefit. If you are married, it becomes more complicated because one person’s benefit may affect his or her spouse’s benefit. File and suspend is an optional method that may help you maximize your spousal benefit.

File and suspend is a benefit allowed to those who qualify for Social Security who are full retirement age (FRA). FRA is a technical term determined by the year you were born. For example, if you were born between 1943 and 1954, your FRA is age 66.

Taking Social Security Based on Your Spouse’s Record

If you are married you have the option to take your Social Security benefit, or half of your spouse’s benefit, whichever is higher (there are some technicalities here that we won’t get into for the sake of brevity). If your Social Security benefit is less than what your spousal benefit would be, it would be more advantageous to apply for a spousal benefit. In order to take your spousal benefit, your spouse has to have filed for Social Security. If your spouse is not ready to take Social Security, the file and suspend strategy is the only way to accomplish this. Only one member of a couple can file and suspend so that the spouse can collect spousal benefits.

Why Your Spouse May Not Want to Take Social Security Right Away

If a person chooses not to take Social Security once he or she reaches FRA, those benefits will continue to increase by 8% per year until age 70 (for those born after 1943). This is called delaying retirement credits. Many people choose to delay retirement credits so they will have a larger Social Security payment later, or because they are still working and don’t have a need for the current cash flow.

Your Spouse Must File and Suspend in Order for You to Take a Spousal Benefit

The file and suspend benefit allows your spouse to delay his or her retirement credits, so that his/her Social Security benefit can continue to grow, but at the same time allows you to collect a spousal benefit on your spouse’s record. You cannot take a spousal benefit until your spouse has filed for Social Security (or filed and suspended).

Alternative Options

There are several ways to maximize your spousal benefit. If your spouse is not FRA but you would like to begin receiving benefits, you can take Social Security on your own record. Later when your spouse files for Social Security at his/her FRA, you can switch to take a spousal benefit if it is higher.

Another option is to delay your own credits while you take a spousal benefit. If you have reached FRA, you may take a spousal benefit while you allow your own retirement credits to be delayed so that they continue to grow. At age 70 you may then switch to take benefits based on your own record if they are higher.

A note regarding Medicare: Medicare is not subject to these various timing schemes. Medicare benefits begin at age 65, regardless of your FRA. You should apply three months before reaching age 65.

Consult a Professional

We recommend that you discuss your personal situation with your financial advisor to determine the best option for you. Also, the Social Security Administration is available to help you determine how you may maximize your family’s benefit. There are many details to consider when planning for Social Security benefits and they are certainly not all presented here – so be sure to consult a professional when making decisions.

Harli L. Palme, CFA, CFP®

Partner

???????????

Why Not Use Margin?

Recent data indicate that margin debt has increased significantly over the past 12 years, although it is currently below the peak levels seen in 2000 and early 2014.

Margin is a feature that you can add to a taxable (non-IRA) brokerage account that enables you to borrow money against the value of your investments in the account. Initial margin, or the amount that you can borrow, is generally 50% of the value of the account. On a $100,000 account, you could borrow up to $50,000. The money can be used to buy more investments, or it can be taken out of the account and used for some other purpose.

Say you have an account that contains $100,000 in stocks. You write a check for $50,000 to purchase a new car. You still have stocks worth $100,000 in the account, but you owe the brokerage firm $50,000. Your net equity in the account is $50,000 (the $100,000 market value of your investments minus the $50,000 you owe).

Maintenance margin is the level of net equity which must be maintained in the account. If the equity in the account falls below this level, usually 30% of the account value, then a deposit must be made to the account or investments will be sold to reduce the margin loan balance.

Say the stock market experiences a correction and falls 15%. Your $100,000 in stocks are now worth $85,000. However, you still owe $50,000 to the broker. Your equity in the account is $35,000, or 41%. If the stock market continues to decline and your equity falls below 30%, some or all of your investments will be liquidated by the broker to reduce your margin loan. This is not good timing because you are being forced to sell stocks when they are down.

There are several other disadvantages to borrowing on margin that investors should be aware of. Interest rates are high; particularly when you consider that the lender is fully secured. Currently, the interest rates at major custodians are in the 5.5%-8% range, depending on the amount borrowed. Also, the interest rates are floating, so there is no protection against rising rates. Tax deductibility of margin interest is complex and more restrictive than other interest deductions such as on your home mortgage.

Using margin always increases your portfolio risk, particularly if you use the proceeds to buy more stock. Let’s go back to the previous example of the $100,000 account, but this time you take a $50,000 margin loan and use it to increase your stock holdings. You now have $150,000 in stock and owe the broker $50,000. Your net equity is $100,000. Say the stock market falls 20%; your stocks are now worth $120,000. You still owe $50,000 to the broker, and you’ve lost 20% of 150,000 instead of 20% of 100,000. In other words you have a $30,000 loss instead of a $20,000 loss. You’ve lost 30% of your initial $100,000 on a 20% market decline. Your loss was 1.5 times that of the overall market, plus you paid interest on the margin loan. Not a good outcome.

There are some situations where margin can be appropriate, say for short- term needs where the amount borrowed is a small percentage of the account value. We generally advise against using margin on a longer term basis.

Bill Hansen, CFA

Managing Partner

Bill

2014 IRA Contribution Rules

The deadline to make IRA contributions for tax year 2014 is April, 15 2015.  The maximum contribution is $5,500 of earned income or $6,500 for those 50 and over.   These amounts will stay the same in 2015.

There are income limits which determine whether you can deduct your Traditional IRA contribution or if you qualify to make a Roth contribution.  The following table gives the phase-out range for the most common circumstances.

Do you qualify to deduct your   Traditional IRA contribution?

If   your income is less than the beginning of the phase-out range, you qualify.  If your income is over the phase-out range, you do not.  If your income falls inside the range, you partially qualify.

Modified   Adjusted Gross   Income  Phase-Out   Range
Single,   participates in an employer-sponsored retirement plan: $61,000-$71,000
Married (filing jointly), participates in an employer-sponsored retirement plan: $98,000-$118,000
Married (filing jointly), your spouse participates in an employer-sponsored retirement plan, but you do not: $183,000-$193,000

Do you qualify to contribute   to a Roth IRA?

Single: $116,000-$131,000
Married, filing jointly: $183,000-$193,000

If your filing status differs from those listed above, please contact your advisor and he or she can help you determine whether you qualify.

Harli Palme, CFA, CFP®
Partner

???????????

Market Update through 12/31/2014

as of Dec 31, 2014
Total Return
Index 12 months YTD QTD Dec
Stocks
Russell 3000 12.56% 12.56% 5.24% 0.00%
S&P 500 13.69% 13.69% 4.93% -0.25%
DJ Industrial Average 10.04% 10.04% 5.20% 0.12%
Nasdaq Composite 14.75% 14.75% 5.70% -1.09%
Russell 2000 4.89% 4.89% 9.73% 2.85%
MSCI EAFE Index -4.90% -4.90% -3.57% -3.46%
MSCI Emerging Markets -2.19% -2.19% -4.50% -4.61%
Bonds
Barclays US Aggregate 5.97% 5.97% 1.79% 0.09%
Barclays Intermediate US Gov/Credit 3.13% 3.13% 0.89% -0.32%
Barclays Municipal 9.05% 9.05% 1.37% 0.50%
Current Prior
Commodity/Currency Level Level
Crude Oil $53.27 $91.16
Natural Gas $2.89 $4.12
Gold $1,184.10 $1,211.60
Euro $1.21 $1.26