Nov 1 - midnight

We have discussed how an aging population is placing a burden on pensions that might be offered to you in the future. 

In this assignment, you will be required to examine the need and how to save for the future

Answer the following questions using reference data below (source 1 and 2) and secondary research

Research – What will be the status of pensions benefit (corporate pensions and social security) upon your retirement

Compound interest works magic when you start investing young.  Read Source 1and  link:  http://www.getrichslowly.org/blog/2008/04/02/the-extraordinary-power-of-compound-interest/

Report on why you should start investing now – give an example. 

Discuss compound interest and why it works for you

Read Source 1 and answer:Because your generation should start saving now for retirement, there are several vehicles that you can use to do this.

What is 401K?  Why should you take advantage of a 401K (discuss the tax implications and contribution aspects) 

What is the difference between a  tradition IRA and Roth IRA

How can you buy an IRA

When can you cash in a traditional IRA?

Read Source 1 - Should you pay off your student loan debt before you invest –why or why not?

According to Source 2 - Some countries have gone to negative interest rates. 

What are the economic pros and cons of this? 

Do you feel that at some point in time we will be changed fees to save our money – why or why not?

What are some of the current better interest rates on savings? See PowerPoint for link

Definitely you should be aware of alternate ways to put your money to work.Source 1, your notes or your own secondary research will help you answer the following questions:Among the most common investments are certificates of deposits or CD.  They are issued by banks.  You can buy CD’s at the bank or online

What are the advantages and disadvantages of buying a CD?

What are some of the best interest rates for CD and at what bank?  See PowerPoint for link for rates

What is a mutual fund – How do you invest in one – give examples of different kinds of mutual funds Source 1 and research

What is the difference between common and preferred stock? Would you rather invest in bonds or stock – why?  See Source 1

What is a money market fund – How do you invest in one - research

What is an index fund – give examples – How do you buy one – Source 1

Discuss fees paid in order to invest and how investments are taxed. – Source 1

Is buying a home a good investment?  If you are currently making $80,000 and are capable of putting $75,000 down on a new house, what is the suggested price of a home that you can afford?  What should be your credit rating in order to buy a home? Research

Source 1 -

Information for question on how to prepare for your future

Investing for your future - Generally, your investment plan starts with paying back debt, investing in 401K, then either save for a house and/or invest in IRAs……then build your portfolio of investments

Should you invest or pay back debt....

Whether it's a mortgage car loan, student loan, credit card, or medical bills, you probably have some amount of debt in your life. It is only natural that you want to pay it off as soon as possible. On the other hand, it is understandable that you want to start putting money away for your retirement some other important milestone in your life. Since there is only so much cash to go around, a decision normally has to be made between the two, neither of which leaves a person feeling completely satisfied.

What should you do? The answer depends on two variables: 1. the rate of after-tax interest you are paying on your debt
2. The after-tax rate of return you expect to earn on your investments

Before you answer the first question, you must understand that there are two different kinds of debt. On one end of the spectrum is high-interest credit card debt that originates from things such as credit cards and department store charge accounts. This type is the deadliest and generally should be avoided unless absolutely necessary. The second type of debt is the lower interest variety; your mortgage, student loans, etc. Often, the interest on these types is partially or wholly tax-deductible, making it even more attractive.

With that in mind, the answer to the debt reduction vs. investing problem can be solved with this one statement: If you can earn a higher after-tax return on your investments than the after-tax interest rate expense on your debt, you should invest. Otherwise, you should pay off your balance.

Example of debt reduction vs. investing calculation

Scenario 1
Assume you have a thirty year, $150,000 mortgage with a six percent rate. Also assume you are in the 25% tax bracket. Due to the itemized deduction of mortgage interest, your after tax annual percentage rate is really 4.02% (not the 6.00% you are paying). Hence, if you expect to earn an after-tax return higher than 4.02% on your investments (odds are substantial you will if you have a long-term horizon), then you should invest.

Scenario 2
You have a $10,000 balance on a credit card with a 22% annual percentage rate. Credit card interest expense is not tax deductible, meaning you should only invest if you think you can earn a 22% after tax return on your investments. Given that the historical long-term return on equities has been somewhere around 11-12%, this seems highly unlikely. In this case, it would be foolish to invest.

Before you start, be sure to know about taxable accounts.  This is important

Interest that you receive from investments  is added to your income and  taxed at your income tax rate (progressive – depends upon how much you earn)

Dividend income is taxed at a maximum tax rate of 20%- see PowerPoint notes

Capital gains (when you sell stock, house, etc. and you make a profit selling it)are taxed at a maximum rate of 20% - see Power Point. if you held that item for more than one year.  The profit is added to your income if you held it for less than a year.

The riskier and longer the investment the more you should get paid.  Can you afford to be risky?  What percentage of your portfolio should be risky?

Stocks outperform bonds in the long run but stocks are riskier.  Are you okay with sudden changes in the stock market?  Do you need your money soon?  Simple rule of thumb when saving for retirement, let your % bond market be equal to your age

What are the following investments and why are they right for you.

IRAs and 401K are typically used for saving for retirement. 

IRA- There are two types of IRAs – Traditional and Roth IRA

Traditional IRA – you receive a tax deduction for the amount of the contribution.  Typically, although not always, you can deduct the amount of the IRA off of your earned income; thereby, you will be taxed on less income.  Also, as long as the money remains in the account, it grows tax-free.  However when you do take the money out, the entire withdrawal is added to your income and taxed at that rate.  However, generally you will not be working so the rate is lower than it would have been when you were working.

You only are allowed to invest up to $5,000 into an IRA each year unless you are 50 or older in which case you can invest $6,000.  You must have earned as much of the IRA.

If your income reaches a certain level, you may no longer qualify to receive a deduction for the amount that you contribute to your IRA ($105,000 for single taxpayer)

Any withdrawals you make before age 59.5 will be subject to an extra 10% tax as well as your current tax for your income – exceptions

You become disabled

High medical expense over 7.5% of your adjusted gross income

To pay for qualified higher education

To buy or build your first home (only the first $10,000 is free

Roth IRA- Is very similar to a traditional IRA HOWEVER…..you do not get a deduction off your income tax for contribution to a Roth IRA.  Instead when you take money out, it will be tax-free.

Deciding where to open your Roth IRA is the most difficult part of the process! Many financial institutions offer IRAs. Each place has its own strengths and weaknesses. It’s important to search for a company that suits your needs. Questions to ask during your research include:

Is there a minimum initial investment? Minimum contributions?

What sorts of fees are assessed to the account?

Does the company offer automatic contributions?

What investment options are available? Can you invest in stocks? Mutual funds? Real estate?

Is it possible to download statements automatically into Quicken?

How reputable is the provider?

Who typically offers IRAs?

Some banks and credit unions – selection low

ING Direct (online) - $10 annual fee and no other commissions and fees – selection low

Examples of three large fund providers

Fidelity – no-fee IRA, $2,500 minimum initial deposit

Vanguard Group – must commit $1000 to the company’s mutual fund – No fee for IRA

T.Rowe Price charges $10/year for Roth IRA until you have a balance above $5,000 then no fee

401K – Employee can choose to have some of her wages/salary deposited into a tax-deferred investment account.  This is like having a traditional IRA but now it is provided by your employer. 

The investments in your 401 K is pre-selected group of mutual funds  and your broker usually charges a large fee for managing this fund

Like the IRA, you cannot remove the money until you are 59.5 without a penalty unless you   become disabled or medical expenses are more than 7.5% of Adjust Gross Income

Often the employer matches the amount you put in.    ALWAYS TAKE ADVANTAGE OF A MATCHING 401k

When you leave your job, you can either transfer (roll over) your 401K into an IRA.  It offers more investment options and it is cleaner once you retire. 

Stocks are a piece of ownership in a company.  When I company needs money they sell the stock of a business- the company decides how much stock to offer.

Stock typically takes the form of common stock.  With this stock you have not only have ownership but voting rights.  The way you make money with this stock is to hope that the value of the stock increases and then you sell it for a profit. Be careful, if the company fails, common stock holders are the last to receive back their investment (if there is money available at that time)

Preferred stock is another stock.  With this stock you also have ownership in the company but fewer voting rights.  Generally, you receive dividend payments

Diversify your investment portfolio.  Always have some income/low risks investment and stocks.  People sometimes consider the international stock markets to be PART of their portfolio because they have performed better than US stocks…..but who knows if that will continue (plus it is hard to pick international stock).  Also, be sure the currency is stable.  You may lose money if the value of the currency goes down

Bonds are a loan made by an investor to a company or government.  The value of the bond lies in the fact the borrower agrees to pay interest to the lender.  Companies and governments issue bonds to fund their day-to-day operations or to finance specific projects. When you buy a bond, you are loaning your money for a certain period of time to the issuer, be it General Electric or Uncle Sam. In return, bond holders get back the loan amount plus interest payments.

With a bond, you always get your interest and principal at maturity, assuming the issuer doesn't go belly up

You should know three things about any bond before you buy it: the par value, the coupon rate, and the maturity date. Knowing about these three items -- and a few other odds and ends, depending on what kind of bond you're buying -- allows you to analyze the bond and compare it with other potential investments.

Par value is the amount of money the investor will receive once the bond matures, meaning that the entity that sold the bond will return to the investor the original amount lent out, called the principal. Par value for corporate bonds is normally $1,000, although for government bonds, it can be much higher.

The coupon rate is the amount of interest the bondholder will receive, expressed as a percentage of the par value. Thus, if a bond has a par value of $1,000 and a coupon rate of 10%, the person holding the bond will receive $100 a year. The bond will also specify when the interest is to be paid, whether monthly, quarterly, semiannually, or annually.

The maturity date is the date when the bond issuer has to return the principal to the lender. After the debtor pays back the principal, it is no longer obligated to make interest payments. Sometimes, a company will decide to "call" its bond, meaning that it is giving the lenders their money back before the maturity date of the bond. All corporate bonds specify whether they can be called and how soon they can be called. Federal government bonds are never called, but state and local government bonds can be.

How to calculate bond yields
The most important piece of information for comparing a bond with other potential investments is the yield. You can calculate the yield on a bond by dividing the amount of interest it will pay over a year by the current price of the bond. If a bond that's worth $1,000 pays $75 a year in interest, then its current yield is $75 divided by $1,000, or 7.5%

Mutual fund - is a collection of stocks bonds or other investments that have been chosen by a professional investor (fund manager).  These fund managers are actively searching for investments that they believe will earn above average returns

Exchange Traded Funds are investments that like mutual funds, own other investments.  Unlike mutual funds ETFs are bought and sold on the regular stock market

Index FundsSome mutual funds are not actively managed but passively managed.  These are index funds.  They are designed to mimic performance of given index (particular group of investments).  An example is the Standard and Poor (S&P 500) tracks the 500 largest companies in the U.S; therefore, your mutual fund would have stocks of the S&P  500.  Most investors actually would be better off in index funds.  Why?  Because due to the high cost of active management the majority of actively managed fund fail to outperform their respective indexes.  Less than 34% of the US stock funds managed to outperform their respective indexes

Be careful some index funds do change hefty managing fees

Which funds to use - Vanguard Index funds are always a good way to go.  However, you should understand the expenses or fees plus the minimum investment, customer service of online interface

Most popular index – track their growth

S& P 500 is the most frequently tracked index

Wilshire 5000 second most tracked.  More stock in this

Wilshire 4500

FTSE All-World Index tracks 2,700 stocks both in the US and abroad

Barclays US Aggregate Bond Index – performance of the entire US bond market including government securities, mortgage-backed securities, asset-backed securities and corporate securities.

Buying and selling individual stocks and bonds can be expensive and risky

One option is to buy through a brokerage – They make the decision for youbut be aware of the fees

Another option is investing online –

If you are going to buy and sell individual stocks online, it is your duty to keep as well informed as possible about what is going on with the company in question. Don't just settle for the hype about hot stocks! Go to the company's Web site and download its prospectus. Take advantage of free services that allow you to get automatic e-mail messages whenever there is news about your stock.

Even if online brokerage costs are lower than those of full-service brokers, they can still add up, particularly if you do a lot of buying and selling. Online brokerages firms also impose a number of other fees and charges that you should study closely. The federal capital gains tax is also something with which you must reckon.

If you are going to do your own investing online, you need to learn how to use the tools available to avoid potentially steep losses and to buy or sell a stock at attractive prices. Just because you click buy doesn't mean that your stock or mutual fund will be purchased at or even anywhere near that particular moment in time. Sometimes -- particularly during heavy trading periods in the markets and as a result of computer problems -- your online order will be processed minutes or even hours later.As a result, an order for stock at $10 per share could go up (or down) by the time your purchase is actually executed.

Here are three "orders" that you should use to avoid having your stock sold at the wrong price or wrong time.

A MARKET order is an instruction to buy or sell a specified amount of a stock (or other security) at the current market price. The advantage of a market order is you are almost always guaranteed your order will be executed - as long as there are willing buyers and sellers. Depending on your firm's commission structure, a market order may also be less expensive than a limit order.

A LIMIT order allows you to avoid buying or selling a stock at a price higher or lower than what you specify. A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. By contrast, a market order only guarantees you the best available price -- not the limit order's specified price.

A STOP-LOSS order sets a sell price for a broker. When the price of the stock drops below this level, it automatically is sold. Also: Take the time to learn about "stop orders," "day orders" and "good-till-cancelled" order. Buying and selling individual stocks and bonds can be expensive and risky

Source 2. 

Imagine a bank that pays negative interest. Depositors are actually charged to keep their money in an account. Crazy as it sounds, several of Europe’s central banks have cut key interest rates below zero and kept them there for more than a year

Banks have different ways of passing the negative rates on to depositors, often framed as fees for keeping money in an account, which is basically negative interest rates by another name.

But don’t people just withdraw cash rather than pay to deposit it at their bank or buy a government bond that will give them back less than they paid?

You’d think, right? This was exactly why economists had long thought that negative interest rates were impossible. It helps explain why central banks first turned to other tools, including quantitative easing, when they saw a need to ease monetary policy despite interest rates that were already near zero.

But it looks as if the convenience of keeping money in a bank account is worth a small negative interest rate or fees for most consumers and businesses, at least at the only slightly negative rates currently in place. Storing and providing security for cash may be more expensive than a small bank charge.

How is this supposed to help the economy?

Pretty much the same way it always is supposed to help the economy when a central bank cuts rates. Lower rates encourage business investment and consumer spending; increase the value of the stock market and other risky assets; lower the value of a country’s currency, making exporters more competitive; and create expectations of higher future inflation, which can induce people to spend now.

What are those downsides?

The global financial system is built on an assumption of above-zero interest rates. Going below zero could cause damage to the very architecture by which money and credit zoom through the economy, and in turn inhibit growth.

Banks could cease to be viable businesses, eliminating a key way that money is channeled from savers to productive investments. Money market mutual funds, widely used in the United States, could well cease to exist. Insurance companies and pension funds could face their own major strains.

In a speech last year, Hervé Hannoun, then the deputy general manager of the Bank for International Settlements, even argued that this could “over time encourage the use of alternative virtual currencies, undermining the foundations of the financial system as we know it today.”

So what are some of the weird things that could happen in a world in which negative rates become routine?

The policies in Europe and Japan are still relatively new and involve rates only slightly below zero. But if the policies become long-lasting, or negative rates go much lower, there are a lot of mind-bending ways it could affect routine transactions.

For example, would people start prepaying years’ worth of cable bills to avoid having money tied up in a money-losing bank account? How about property taxes? Would companies and governments put in place new policies prohibiting people from paying their bills too early?

Or consider this: Many commercial transactions now take place with some short-term credit attached — for example, a company that gets a 60-day grace period to pay bills from its suppliers. Would that flip, and suddenly suppliers would prohibit upfront payment and insist that their customers wait 60 days to pay?

Might new businesses sprout up that allow people to securely store thousands of dollars in bundles of $100 bills, or could people buy physical objects as stores of value that the banks can’t charge a negative interest rate on?