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Archive for Investing

Don’t Bet Your Retirement On An 8% Return

Posted by Emily Beatmann 
· Wednesday, January 18th, 2017 

Planning for Retirement

Planning for retirement can seem overwhelming. Here are Section 705’s suggestions for a successful future! In investing, time in the market is crucial. If past growth rates continue, the time you leave your savings alone actually matters more than the amount you save. Retirement Planning: IRA, 401K, and Stock Market

The problem with that, though, is that past growth rates probably won’t continue. Over the last 30 years, the stock market has averaged 7.8% growth, a rate that is the foundation of many retirement plans. If you’ve invested your whole 401(k) in total market index funds hoping for that growth, you may be unpleasantly surprised.

The 7.8% growth is a historical anomaly driven by demographic factors. Because of slowing industrial growth, decreasing population growth, and competitive overseas markets, that rate is projected to slow to 2% in the next year, and possibly past that.

This drop has significant ramifications. For 25-year-olds saving for retirement, a two-point drop over the next decade could necessitate saving twice as much before they retire.

Dealing with macroeconomic trends can be overwhelming. These steps can prepare your portfolio for struggling gains.

1.) Max out employer match

About 31% of American workers with access to a 401(k) don’t use it. Beyond the missed savings, employees are losing out on matching funds programs.

Matching funds programs are essentially interest payments. Your company will pay 100% interest on your 401(k) deposits. Increasing your 401(k) contributions to the maximum match level will minimize the impact of slow growth within your portfolio.

2.) Watch the fees

Ask your HR representative for a breakdown of your company’s investment management fees.

Review your fees and gauge if they’re reasonable. Most large companies have fees of 0.5%, with the numbers increasing for smaller companies to about 1.4% If you’re paying more, consider switching the funds you’re using.

3.) Revisit the Roth question

With the assumption that taxes usually increase over time, a Roth 401(k) generally makes sense for young people. However, with returns expected to drop and savings amounts likely to be a larger determinant of total wealth accumulation, it’s time to rethink this conventional wisdom.

If a tax deduction now in the form of a traditional 401(k) contribution would enable you to save more, it might be worthwhile. Growing your nest egg is essential; you can find ways to manage taxes once you’ve got enough saved for retirement.

4.) Look for predictable returns

As interest rates rise, growth slows as a result of decreased credit availability. That same force makes savings through other instruments more valuable.

An Individual Retirement Account (IRA) can hold savings certificate funds, like those available at 705 Federal Credit Union. These offer a predictable rate of return that isn’t dependent on macroeconomic forces, thus minimizing risk.

The principles of smart retirement planning don’t change. Spend less than you earn. Avoid debt. Invest as much as you can, as often, and as cheaply as possible. With a bit of planning, you’ll enjoy a prosperous retirement.

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Categories : Budget, Credit Union, Retirement
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The Two Kinds of Interest: Earning V Paying

Posted by Emily Beatmann 
· Tuesday, June 14th, 2016 

Two Kinds of Interest: Earning V Paying Interest

Interest Rate 101!

Albert Einstein once claimed the most powerful force in the universe was compound interest.  That’s pretty impressive praise from the person whose work helped create nuclear power and atomic bombs.  While interest can be powerful, it can also be confusing, because when people talk about it on the news, they mostly talk about it in terms of vague forces and odd numbers.  Here’s a quick rundown on what interest is, as well as how it affects your life today and in the future.
 
When someone borrows money, they pay back more than they borrow.  Whatever extra money they pay back is called interest, and that’s one way that financial institutions and credit card companies make money. That money is basically paying the lender for the risk they take, since there is a chance some of the money wouldn’t get paid back. So interest rates can go up or down depending on how likely the money is to be paid back.  Credit unions like 705 Federal Credit Union work in a lot of the same ways, except that the money they make from interest is shared with credit union members, like you and your family.
 
So, a high interest rate must be bad, because that means people have to pay more money back, right? Well, it’s not really that simple. If it were that easy to understand, then interest rates wouldn’t be on the news all the time.  There’s another kind of interest, which is what you earn on your money.  At a credit union interest on savings accounts is referred to as “dividend” because it is what you are paid for your share of the cooperative.
 
When you deposit money into your savings account, it’s like we’re borrowing money from you.  After all, we’re holding onto your money, so we pay you dividends.  The more money you put into your account, the more we pay you.  So, when you save money, you want a higher dividend rate, which allows you to make more money as your savings account balance increases.
 
That’s the confusing part about interest: Some people want a high rate and others want a low rate.  Unfortunately, those rates are part of everything around you:  If you own your home, you’ll want a low interest rate.  If you’re saving money for college, you’ll want a high dividend rate.  Just about any business that wants to open new locations or get new equipment is going to need a loan, so they’ll want low interest rates.  Retired people who have money saved are wise to seek out the highest dividend rates so their retirement savings will last.
 
Trying to balance all of these people is difficult, which is why the government created a central bank, known as the Federal Reserve (or the Fed) to manage all of this.  It can raise or lower the rates for everyone, but it can’t do both at the same time.  The Fed spends a lot of time figuring out what’s best for the country, and it tries to keep its work secret until it’s ready to reveal whether it’s going to raise or lower rates.  It sends out secret shoppers to check the prices on thousands of goods around the country, and uses all that information to figure out what to do.
 
Hopefully, the next time you’re watching the news, it’ll be more interesting when they talk about interest rates.  It might sound like boring business talk and math, but really it’s a report on secret government shopping spies who are working to figure out whether we need businesses to open up new locations or your college fund to grow.
 
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Categories : Credit, Credit Union, Finances, Loans
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