SECURE Act Seeks to Help Americans Save More for the Golden Years

SECURE Act Seeks to Help Americans Save More for the Golden YearsAt the end of 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act as part of a year-end appropriations package. This bill is designed to address specific issues related to retirement savings plans in an effort to help Americans save more for retirement.

Retirement Plan Contributions

People are living longer, and a decrease in employer-sponsored pensions has resulted in retirees relying more on Social Security benefits than in the past. So first, the SECURE Act eliminated the age limit on traditional IRA contributions so that people who work into their 70s and beyond may continue to contribute to the traditional IRA up to the annual limit. In 2020, the limit for all IRAs – traditional and Roth combined – is $6,000; $7,000 for individuals age 50 and older.

Retirement Plan Distributions

The SECURE Act also extends how long retirees may keep money invested in their traditional IRA, 401(k)s and other defined-contribution plans before mandating distributions. Starting this year, people who turn 70½ after Dec. 31, 2019 may delay having to start taking annual required minimum distributions (RMD) until age 72.

Inherited IRAs Reigned In

The Stretch IRA is an advantage bestowed to non-spouse beneficiaries who inherit an IRA. While a benefit still exists, the SECURE Act makes it somewhat less advantageous. Starting in 2020, assets in these inherited accounts must be fully distributed by Dec. 31 of the 10th year following the death year of the IRA owner. This means that annual distributions will be larger and the investment will no longer be able to grow beyond 10 years.

Employer-Sponsored Retirement Plans

The SECURE Act also made changes to employer-sponsored retirement plans. For example, it allows employers to increase the cap on automatic payroll contributions to 15 percent (up from 10 percent) of an employee’s paycheck. Research has found that automatic payroll deductions have been instrumental in improving both participation and savings rates among employer retirement plans. However, employees continue to have the ability to retain their current contribution level (or opt-out of the plan entirely).

The legislation also requires employers that sponsor a defined-contribution plan to offer it to any long-term, part-time workers. The criteria for this requirement are that individuals must be age 21 or older and work at least 500 hours each year, for three years in row. However, the measurement time for this requirement doesn’t start until 2021.

The SECURE Act attempts to replace the secure pension plan by making it more attractive for employers to offer a lifetime income option as part of their 401(k) plan. Also known as an annuity, this option allows the worker to use his or her retirement plan contributions to purchase an annuity contract over time.

In the past, employers were reluctant to include an annuity option because they could be held liable if the annuity provider is unable to fund the retirement income guaranteed by the annuity contract. To help alleviate this concern, the SECURE Act protects the employer from liability as long as it chooses an annuity insurer that, for at least seven years, is 1) licensed by that state’s insurance commissioner; 2) has filed audited financial statements in accordance with state laws; and 3) maintains the statutory requirements for reserves among all states where the provider does business.

Employers that offer an annuity option must now issue a customized statement each year that estimates how much plan participants would receive in monthly retirement income based on the current balance of their annuity. When employees retire or take a new job, they can transfer their in-plan annuity to another 401(k) or an IRA without incurring fees or surrender charges.

The SECURE Act also provides new benefits for small businesses that sponsor a retirement plan for employees. They may now receive up to $5,000 to offset retirement plan startup costs, and can get an additional $500 tax credit per year for three years if their plan features auto-enrollment for new hires. The bill makes it possible for small employers in unrelated industries to open a multiple-employer 401(k) plan (MEP) in order to share administrative costs.

Conclusion

Overall, the various provisions of the SECURE Act described above are designed to make retirement savings easier and more accessible. Small businesses will find it less burdensome to offer both full- and part-time employees 401(k) plans by providing tax credits and protections on collective Multiple Employer Plans. Individuals will find they have more flexibility in managing their accounts later in life. Overall, the SECURE Act should ease the coming retirement crisis as demographics change by helping people prepare better.

Coronavirus: Black Swan or Buying Opportunity?

Coronavirus Stock Market, Covid19 Stock MarketAccording to the World Economic Forum (WEF), the spread of the coronavirus will impact the world’s economy. Whether it’s a Reuter’s poll from economic experts projecting growth in China slowing to 4.5 percent in Q1 of 2020, in contrast to China’s Q4 GDP of 6 percent; or the International Energy Agency (IEA) saying world desire for oil will be lower due to the coronavirus; or global companies reducing or temporarily closing their Chinese factories, change is on its way. Based on this data, what does the global economic outlook entail?

In order to understand how the coronavirus might impact global economies, it’s important to put this in context of other global events. Based on a February 2020 Monetary Policy Report from The Federal Reserve, there’s a mixed outlook for recent and projected economic activity. While the Fed notes that oil prices have increased over the past six months of 2019, in part due to OPEC members cutting production and brief tensions with Iran in January 2020, The Fed attributes more recent drops in oil prices to the coronavirus and associated lowered global demand.

Due to China’s already slowing economy, the IEA is projecting 435,000 fewer barrels of oil on an annual basis during Q1 of 2020, the worst in a decade. Looking at statistics from the United Nation’s International Civil Aviation Organization (ICAO), airlines are expected to see revenue losses of between $4 billion and $5 billion in the first three months of 2020. With the coronavirus impacting China, thereby reducing outbound travel to Japan and Thailand, losses could be as big as $1.29 billion and $1.15 billion for each respective country.  

The Fed explains that in 2019, manufacturing has been challenged both globally and domestically. Citing the industrial production (IP) index, the first six months of 2019 saw declines in both domestic and global activity. For 2019, U.S. production dropped by 1.3 percent for durable and non-durable goods. This is attributed to trade issues with China, soft economic growth worldwide, less than aggressive investment from businesses, declining oil prices that lower continued production by crude producers and production issues with Boeing’s 737 Max airplanes.

However, despite the manufacturing slowdown in China, the United States’ manufacturing base shouldn’t see the same impact from the coronavirus. The Fed says that factoring in purchasing materials for production on the input end, and transporting, wholesaling and retailing products post-production, the drop of 1.3 percent on the industrial production index equates to a 0.5 percent drop in U.S. GDP. For context, compared to the U.S. manufacturing employing 30 percent of workers 70 years ago, it presently employs 9 percent of workers.     

One way to see how the coronavirus might play out is to look at how SARS impacted China in 2003. Based on data from the National Bureau of Statistics in China, it took three months, during Q1 of 2003, where China’s economic growth dropped to 9.1 percent, from 11.1 percent. While a much smaller economy, on a global scale, in future quarters China was able to grow at an annualized rate of 10 percent, per Refinitiv. However, economists note that if SARS didn’t impact China, there could have been another 0.5 percent to 1 percent increase in annual growth.   

Another comparison with SARS is China’s retail sales. Refinitiv shows that May 2003 retail sales dropped to 4.3 percent. This is compared to between 8 percent and 10 percent for retail sales figures in March 2003 and July 2003, showing how serious the impact SARS made, but also China’s resiliency.

While the Chinese economy impacts the global economy today more than when SARS hit, it also has a more responsive economy and a larger middle class. Only time will tell as to the coronavirus’ impact, but based on past experience, it should only be a matter of time before China’s (and the global) economy bounces back to greater economic output. 

4 Common Liquidity Ratios in Accounting

4 Common Liquidity Ratios in AccountingOne way a business can manage its books and viability in the near and long terms is to see how liquid its assets are. Businesses that have better cash positions are naturally geared toward sustaining continued success. One important reason for a business to measure and maintain healthy levels of liquidity is because it promotes better odds that a company will be able to satisfy its short-term debts. There are many ways a business can accomplish this, and below are four common ways it can be done.  

Current Ratio

One of the few liquidity ratios is what’s known as the current ratio. It’s a way to determine how well a company can pay back its debts.

The current ratio is also known as the “working capital ratio,” showing how well a business can satisfy financial obligations that must be paid back within 12 months. Using an example is a good way to see how it works:

Let’s assume a company has the following assets, it would use the following ratio:

Current Ratio = Current Assets / Current Liabilities

Marketable Securities such as stocks, bonds or purchase agreements maturing in 12 months or less can be considered a current asset. Businesses may also consider cash, accounts receivable, prepaid expenses, office supplies and saleable inventory they have in stock as current assets.

Outstanding bills or accounts payable and short-term debt – within the next 12 months as described above – are considered current liabilities. Other expenses can be interest payable, income and payroll taxes payable, which can also be considered current liabilities.

If the current assets of a business are $250 million, and that is divided by current liabilities of $75 million, the Current Ratio would be 250 / 75, or 3.33

With a current ratio of 3.33, the company is in good financial health because it can pay off its debts easily.

Acid-Test Ratio

The Acid-Test Ratio determines how capable a company is of paying off its short-term liabilities with assets easily convertible to cash.

Also known as the quick ratio, the formula is as follows:

Acid-Test Ratio = Current Assets – Inventories / Current Liabilities

Current assets consist of cash and similar assets (savings/checking accounts, deposits becoming liquid in three months or less), marketable securities and accounts receivable. From there, the summation is divided by the company’s current liabilities expected to be paid in 12 months.

The other way to calculate the acid-test ratio or quick ratio is as follows:

The first step is to look at the company’s current assets that can be liquidated within 12 months. Then inventory must be valued – that which is intended to be sold for purchase. From there, the inventory value is subtracted from the current assets. The resulting value is then divided by the business’ current liabilities.

The acid-test ratio is one way to determine a company’s ability to satisfy current liabilities without selling inventory or getting more lending. With the uncertainty and profitability of selling inventory, one can argue that it gives a better picture of a company’s financial fitness.   

For example, if a company comes out with a ratio of 3, this means that a business has $3 for every $1 of liabilities. However, as a company’s quick ratio increases, it might show there’s too much money not being reinvested to increase the company’s efficiency and profitability. A higher quick ratio figure can also indicate that there are too many accounts receivable that are owed but uncollected by the company.

Cash Ratio

As the name implies, the cash ratio determines how financially able a company is to satisfy short-term liabilities with cash and cash equivalents.

Also referred to as the cash asset ratio, this tells how capable a business is of satisfying short-term debts, usually 12 months or less, with cash and cash equivalents only. This ratio is as follows:

Cash Ratio = Cash and Cash Equivalents / Current Liabilities

Examples of cash and cash equivalents include physical currency, minted coins, and checks. Cash equivalents include money market accounts, Treasury bills and anything that can be converted into cash in almost real-time.

When it comes to current liabilities, accrued liabilities, short-term debts and accounts payable are examples that are due within one year.      

From there, the ratio is as follows to determine a company’s cash asset ratio:

Cash and Cash Equivalents (Cash: $25,000 + Cash Equivalents: $100,000) / Liabilities (Accounts Payable: $30,000 + Short-term debt: $25,000)

$125,000 / $55,000 = 2.27

Based on this calculation, the company would be able to pay off 227 percent of present liabilities with its cash and/or cash equivalents. For creditors and investors evaluating a company, it can show the company has ample liquidity. Creditors are naturally more willing to lend to companies with more cash flow; and investors are interested to see how liquidity is being managed.

Operating Cash Flow Ratio

This ratio measures how efficiently a business can meet present liabilities from the cash flow of its core business operations. It tells a company the number of times over it can satisfy its liabilities based on the amount of cash it generated over a certain time-frame.

This ratio can also include accruals, giving a fair estimate of a business’s short-term liquidity. The formula to determine this ratio is as follows:

Operating Cash Flow Ratio = Cash Flow from Operations / Current Liabilities

The statement of cash flow is where the operation’s cash flow is found. It can also be calculated by determining a company’s net income, plus non-cash expenses, plus working capital changes.

Current liabilities are defined as financial obligations due within the next 12 months. Common ones are accrued liabilities, accounts payable and/or short-term debt.

Once the operating cash flow ratio is calculated, a company’s financial health can be determined. If the ratio is 1.5 or 2, for example, it means the company can cover 1.5 times or double its present liabilities. However, if the ratio is less than 1, then the amount of cash generated from operations is insufficient to satisfy short-term liabilities.

As part of a comprehensive accounting practice, businesses that run these ratio calculations will be able to identify where there’s too little or too much liquidity and reduce current and future financial peril.

Taxes and Tariffs: The U.S. Response to France’s Digital Tax

France's Digital TaxHow it All Started

Back in July of 2019, France passed what was dubbed a “digital tax” targeting the largest tech companies. Impacting approximately 30 big companies such as Amazon, Google, Facebook and Apple, the tax applies to revenues earned from digital services of companies that earn more than $830 million in total and at least $27.86 million in France. The tax levy is a 3 percent charge on revenue from digital services.

The United States soon responded with threatening 100 percent tariffs on certain classes of French luxury goods, such as wine, champagne, cheese and makeup. These tariffs were estimated to cover more than $2.4 billion in French goods per year.

Responses on Both Sides

French President Emmanuel Macron came out to comment that the digital tax is not intended to be an anti-American move, and that big tech companies of all stripes could be covered by the tax. The criteria that determines who is subject to the digital tax, however, means that essentially only American companies are the ones being taxed.

Some in the United States claim it’s as simple as jealously over our strong technology sector, while others say that the main motivation for the French tax is a need to mitigate burgeoning budget deficits.

President Trump’s Reaction

Rarely one to back down on international trade issues, President Donald Trump criticized the digital tax for unfairly targeting American tech companies, going so far as to call out the European Union as behaving worse than China in its trading relationship with the United States. He reiterated his stance that he’s willing to fight tariffs with tariffs.

Negotiations with the EU

U.S. and European Union officials are negotiating an agreement over taxing big tech, but that didn’t stop the current treasury secretary from threatening more retaliatory tariffs. Steven Mnuchin, the treasury secretary, recently said that the United States will impose new tariffs on French automobile imports if the issue isn’t resolved to America’s satisfaction. He claimed the digital tax is purely arbitrary, hence his random call for taxing automobiles in response. Moreover, Mnuchin called the tax “discriminatory in nature” at the World Economic Forum in Davos Switzerland.

Taxes and Tariffs on Hold

For now, France is delaying the implementation of its digital tax through the end of 2020 in response to U.S. pressure on threatened luxury goods and automobile tariffs. They aim to come to a resolution before year-end with the Trump administration. French Finance Minister Bruno Le Maire is optimistic an agreement can be worked out and believes entering a trade war with the United States would be foolish.

The Future

Currently, other European countries, including Britain and Italy, are acting against big tech companies they believe don’t pay their fair share of taxes to their countries. Treasury Secretary Mnuchin said that the United States is willing to go to bat and protect its companies with retaliatory tariffs in these cases as well. For now, not much is settled – but we should see a clearer direction before the year is out.

Blocking Robocalls, Stepping Up Suicide Prevention for Vets, and Appropriating Funds for a New Space Force

Pallone-Thune Telephone Robocall Abuse Criminal Enforcement and Deterrence Act (S 151) – Approximately 58.5 billion robocalls were made in the United States last year, a 22 percent increase over 2018. That works out to an average of 178.3 robocalls per person, per year. Perhaps it’s no wonder then that this law was passed by an overwhelming bipartisan majority in Congress. The legislation requires that phone companies ensure all calls come from real numbers, do not charge extra to block robocalls, and authorize government regulators to punish scammers with fines of up to $10,000 per call. This legislation was sponsored by Sen. John Thune (R-SD) and Frank Pallone Jr (D-NJ); it was signed into law by the president on Dec. 30, 2019.

Building Blocks of STEM Act (S 737) – This bill modifies National Science Foundation (NSF) grant programs that support STEM education (science, technology, engineering and mathematics) to promote the role of teachers and caregivers in encouraging participation by female students in STEM activities. Specifically, the bill authorizes the development of gender-inclusive computer science enrichment programs in pre-kindergarten through elementary school. The legislation was sponsored by Sen. Jacky Rosen (D-NV). It was introduced on March 11, 2019, and signed into law by the president on Dec. 24.

Support for Suicide Prevention Coordinators Act (HR 2333) – This legislation requires the Government Accountability Office to report on the responsibilities, workload, training and vacancy rates of suicide prevention coordinators. The bill responds to reports that coordinators are overworked and unable to keep up with their many responsibilities, particularly in light of the recent increase in veteran suicides. The Act was introduced on April 18, 2019, by Rep. Anthony Brindisi (D-NY); it passed the House in May, the Senate in December and was signed into law on Dec. 20, 2019.

Further Consolidated Appropriations Act, 2020 (HR 1865) – This annual appropriations bill sets government spending limits for the current fiscal year (Oct. 1, 2019, through Sept. 30, 2020). Among a myriad of provisions, the bill extends funding for various health-related programs; deters pharmaceutical companies from blocking lower-cost generic alternatives from entering the marketplace; and repeals the Cadillac tax on expensive employer plans, the medical device excise tax, and the health insurance fee that was initially imposed by the Affordable Care Act. The final version of the bill was passed by the House and Senate in mid-December and signed by the president on Dec. 20, 2019.

National Defense Authorization Act for Fiscal Year 2020 (S 1790) – This $738 billion defense bill authorizes fiscal year 2020 appropriations and policies for the Department of Defense. Provisions include authorization for a sixth, stand-alone branch of the U.S. military service (Space Force); guaranteed 12 weeks of paid parental leave for federal workers; a 3.1 percent pay raise for active-duty personnel; allows for Liberian nationals living in the United States under Deferred Enforced Departure to apply for permanent residency; funding for improvements to military housing and health care; funding to purchase 60 F-35s for the Air Force; and a dictate that prohibits Turkey from participating in the F-35 program as long as it maintains a Russian-made missile system. Note that passage of this bill does not provide budget appropriations, which is authorized in subsequent legislation. This bill was passed in both the House and Senate on Dec. 17, 2019, and signed into law on Dec. 20, 2019.

FUTURE Act (HR 5363) – This bill permanently authorizes funding for historically Black colleges and universities and other minority-serving institutions, and increases appropriations for Pell Grants. The legislation was introduced by Rep. Alma Adams (D-NC) on Dec. 9, 2019, passed in both the House and Senate on Dec. 10, 2019, and signed into law on Dec. 19, 2019.

How Businesses Benefit from Big Data Analytics

Previously we looked at the key technology trends in accounting to watch out for in 2020. Among the trends are big data and data analytics, which can have a great impact on businesses.

Business data has existed for a long time, whether in filing cabinets, ledgers or storage devices. But today businesses both large and small have to deal with huge collections of data every day. This has seen the rise of data analytics trends that include deep learning, machine learning and dark data.

Unfortunately, small and medium businesses (SMB) have to struggle with making a decision on implementing data analytics. This is largely because many SMB owners assume that data analytics is strictly for large organizations – especially because of the expectation that it’s expensive and complicated.

Luckily, reduced tech costs have made it possible for small and medium businesses to afford technologies that were previously only cost-effective for big organizations.

Is the Cost and Effort Worth It? 

Before the advent of big data analytics, customer data was collected using surveys or customer feedback forms. Analyzing such data is tedious, and it’s possible to miss out on important trends.

Also, imagine running marketing campaigns and having no way to track how effective the campaign was. If you do this in your business, you have no way to know who saw the ad or even the response.

Enter big data and analytics and the whole marketing landscape changes. With big data, a business has clear insights about customer behavior. This is possible because we now can track visitors to a website, the time a visitor spends on a given page, action taken such as making an order, the location the purchase came from and so many other details that help a business refine its marketing strategy.

Is it costly? You’d be surprised to know that you don’t need to purchase expensive software. You’ll find, for instance, that you can take advantage of data collected by the QuickBooks accounting software. And depending on your business needs, the software can be connected with low-cost platforms that enable more detailed analytics.

You also can get free platforms such as Google analytics to analyze website traffic and gain insight into consumer behavior. Whatever your company size, you can take advantage of big data insights to better understand your customers.

Here are some reasons why it’s worth it:

  • Analytics help to launch effective marketing campaigns that result in better ROI.
  • Analytics help to track the customers in their sales cycle.
  • It’s possible to track the outcome of business decisions, such as promotional strategies.
  • You get to know which suppliers or other business partners to work with.
  • Provides insights on customers who are likely to pay on time based on historical payment data.
  • Improves customer service. This is possible when customer conversations from different channels are analyzed.
  • It helps to improve the product or service offered by a business.  
  • Identifies trends and patterns. For instance, you can track frequently asked questions and then create a page to handle the common questions.
  • Helps create a strong bond with customers. By understanding customer interests, a business will then engage with their customers by creating personalized offers and campaigns.
  • On the tech side, big data is being used to detect and prevent fraud.  
  • Analytics identify problematic areas of a business, and this makes it easier to come up with a response quickly before the problem escalates.

Become Smarter

When used correctly, data analytics can help a business gain a competitive advantage over other businesses. At the same time, it will also boost your business conversions and revenue. But collecting just any piece of data can be overwhelming and even a waste of time. The secret is in collecting data that will help you reduce business costs and increase your revenue.

6 Ways to Keep Safe When Using Mobile Banking

For the most part, smartphones are your lifeline to the world. You connect with friends and family, shop and update your status on social media. However, you also store all your personal information on them and, these days, use them to do your banking. That’s why you need to take precautions. Here are a few critical things to do to make sure your information isn’t compromised.

Protect Your Smartphone

Your desktop and laptop are secure with anti-virus software and firewalls; the same should go for your phone. Here are five basic things you need to do ASAP: 1) Use a 4-digit PIN to lock your screen. If your phone is stolen, it’s harder for a thief to unlock it. Also, check to see if your phone has a feature that allows you to locate and remotely lock or erase data, should you lose it. This is called a “kill switch.” 2) Back up your data. Kind of basic, but it’s always important to be reminded. 3) Use location-based software to find your lost phone. 4) Install an antivirus app and software to erase the contents of a lost phone. And finally, 5) Update your apps to the latest versions and when downloading them, only choose those from publishers you trust.

Create a Strong Password

This is a no-brainer, but it’s imperative. Don’t use any part of your name or numbers from your birthday, or anything remotely personal. Make your password as complex and obscure as you can. Thieves can be smart. Don’t give them any chance to wreak havoc in your life.

Don’t Use Public Wi-Fi to Access Your Bank

Public Wi-Fi doesn’t have heightened levels of security, so make sure you use your phone’s data network or a secured Wi-Fi network when accessing sensitive information. If you don’t do this, you become vulnerable to hackers. You can never be too careful.

Don’t Save Usernames and Passwords in Your Browser

Sometimes, browsers give you the option to save your username and password. As convenient as this is, don’t do this. It could be easy for someone to gain direct access to your bank account if your phone is lost or stolen.

Don’t Follow Links

If you get an email or text from your bank, don’t click. It could be a phishing scam and could lead you to a “spoofed” website, which is a fake site created to look just like your bank’s official site. Always go to your bank’s site directly. Enter your bank’s web address into your phone and bookmark it. This way, you’ll avoid bogus sites and keep your money safe.

Log Out After Use

Even if you haven’t saved your credentials, it’s always important to do this when you’re finished banking. While this is convenient for the next time you do your banking, it’s leaving thieves an easy way in to steal all your assets should you leave your phone unattended, or worse, if it’s lost or stolen.

In a world that’s getting more and more digitized every day, shoring up your personal banking information just makes good sense. No one wants to put all that they’ve worked so hard for in jeopardy.

Sources

https://www.discover.com/online-banking/banking-topics/how-to-stay-safe-with-mobile-banking/

https://money.howstuffworks.com/personal-finance/online-banking/5-mobile-banking-security-tips.htm

https://en.wikipedia.org/wiki/Phishing

https://www.indiatoday.in/technology/tech-tips/story/tech-tips-wifi-can-be-used-to-hack-your-phone-here-s-how-to-prevent-it-1397211-2018-11-27

https://us.norton.com/internetsecurity-wifi-why-hackers-love-public-wifi.html

Safety vs. Probability: Planning For Retirement

As we progress through life, we find there are certain things we can control and others we cannot. However, even with the things we can’t control, we can exercise good judgement based on facts, due diligence, historical patterns and a risk/reward calculation.

These strategies play an important role in retirement planning. When it comes to accumulation, spending and protecting your nest egg, financial analysts rely heavily on safety and probability planning strategies.

For example, a probability-based approach generally refers to investing. In other words, prices of stocks and bonds will vary over time, and as investors we do not have control over the factors that cause those price swings – such as poor company management, a dip in sector growth, an economic decline, political instability and even global economic implications. We basically have to do our due diligence to ensure the securities we invest in are stable and well-managed, but in the end it’s a bit of a leap of faith. The markets will inevitably rise and fall and our equity investments will be impacted.

When it comes to retirement, financial advisors often recommend the following probability-based investments because they tend to be more stable and reliable:

  • Investment-grade bonds
  • High dividend-paying stocks
  • Real estate investment trusts (REITS)
  • Master limited partnerships (MLPs)

On the other hand, the safety side of the equation involves insurance products. Note that all guaranteed payouts are backed by the issuing insurer, not the Federal Deposit Insurance Corporation (FDIC) or the U.S. Treasury Department. So even though insurance products represent strategies that we consider “safe,” they are only as secure as the financial strength of the issuing insurance company.

Insurance contracts are based on insurance pools. This means they spread the risk of losing money across a wide pool of insured participants, betting that a portion of that pool will die early while others live longer. However, that risk is managed by the insurer instead of the contract owner, who is guaranteed to get paid no matter what happens in the investment markets or how many people in the insurance pool live a long time.

Among safety-based vehicles, you might want to consider a long-term care insurance policy to cover expenses should you need part- or full-time caregiving in the later stages of your life. Like homeowner’s insurance, this type of contract leverages manageable premiums to pay for expenses that you might otherwise not be able to afford.

Another safety contract is an income annuity, which offers the option to pay out a steady stream of income for the rest of your life and the life of your spouse – even if the payouts far exceed the premiums you paid. This is a way of ensuring you continue to receive income even if you run out of money.

 

A retirement plan doesn’t have to rely on safety or probability alone – you can combine these strategies. Many retirees feel more comfortable knowing they have a growth component in their portfolio to help offset the impact of long-term inflation. And within the safety allocation, you can even combine strategies. For example, a hybrid life insurance policy that offers a long-term care benefits rider allows you to draw from the contract if you need to pay for your own long-term care, which simply reduces the death benefit for your heirs. This way you don’t have to pay for coverage you don’t need, but it’s there if you do.

How Will 20-Year Treasury Bonds Impact the Economy?

According to a Jan. 16 press release from the U.S. Department of the Treasury, within the first six months of 2020, the federal department will begin issuing a 20-year Treasury bond. This is the U.S. government’s attempt to maintain and support the federal government’s ability to borrow into the future. This action will also have an impact on the markets going forward, especially when it comes to the Federal Reserve and its monetary policy.  

The Federal Reserve’s many purposes include promoting stability and growth in the economy by keeping prices stable and healthy employment levels. The ways The Fed does this is by influencing short-term interest rates, being active in Open Market Operations (OMO) and impacting reserve requirements.

The Federal Reserve Bank of St. Louis details that along with providing banks with loans from the federal funds market to support adequate reserves and liquidity, it’s important to understand how Open Market Operations function.

Much like individuals and institutions can buy or sell securities, The Fed can buy or sell securities, including U.S. Treasury bonds. The buying and selling are the operations portion. The open market refers to the fact that The Fed doesn’t transact directly with the U.S. Treasury, but works on the open market via auctions through the Trading Desk of the New York Fed.

Assuming there’s a modification to the federal funds rate’s target range by the Federal Open Market Committee (FOMC), the directive starts the reaction to either purchase or sell government securities to meet the new target. The OMO is one way the Fed adjusts its two-pronged mandate of promoting employment and maintaining target inflation.       

If the Fed wants to stimulate the economy, it can do so through Treasury bond purchases. This occurs when the Fed makes a deposit into the seller’s bank account via the Trading Desk. This purchase increases the reserve balance of the bank offering the Treasury bond for sale, which increases the bank’s ability and willingness to lend.

In the opposite scenario, the Fed can reduce the amount of money available that banks can use for lending. This time the Fed sells government securities, prompting banks to remove money from their bank accounts, reducing the amount available for lending. As pressure on the federal funds rate increases, rates will go up, making loans cost more for borrowers and incentivizing savings.

During the financial crisis, the FOMC engaged in quantitative easing (QE) after it brought the federal funds rate to near zero. This approach consisted of buying longer-term U.S. Treasury securities and mortgage-backed securities (MBS) through open market operations. As the St. Louis Fed explains, in exchange for the Fed buying these securities, banks receive a credit that increases their reserve balances above reserve requirements. While this was far more prevalent during the financial crisis, the 20-year U.S. Treasury bonds will undoubtedly make QE easier to re-engage in.

While the government may benefit from the direct investment and its ability for the Fed to guide the economy, there are a few potential risks for those who invest in U.S. Treasury bonds. Compared to many other investments, Treasury bonds have lower yields, which are even lower when inflation runs high. Another risk is that when rates rise, the value of the Treasury bond goes down, creating less attractive debt if the owner wants to sell it.

The Jan. 16 press release noted that more details on the 20-year bond will be available in the U.S. Treasury’s quarterly refunding statement on Feb. 5. Only time will tell the level of interest among investors and how effective this instrument will be in creating further cash flow for the U.S. Treasury.

Understanding Four Types of Depreciation

Depreciation is an accounting process where the cost of an asset is accounted for and expensed over its useful life. It shows how the value of the asset decreases over time. Assets that can be depreciated include buildings, fixtures, production equipment, etc. For intangible assets, including many types of intellectual property, this process is called amortization. For commodities mined or harvested from the earth, such as lumber, crude oil or natural gas, this process is called depletion. Here are four common types of depreciation.

Straight Line Method

In order to determine depreciation using this method, the following formula is used:

Depreciation = (Asset cost – Salvage value) / Useful life

The salvage value is the asset’s remaining value after its useful life, and the remaining amount from the asset’s cost is depreciable. The depreciable amount is divided by the asset’s useful life that’s used for depreciation expensing.

Double Declining Balance Depreciation

In order to calculate this method of depreciation, the first step is to look at the asset cost. From there, its useful life must be established. Let’s assume an asset’s book value is $75,000, it has a useful life of 10 years and a salvage value of $8,050.

Depreciation = (100 percent / asset’s useful life) X 2

= (100 percent / 10) X 2 = 20 percent

Year 1 depreciation expense = $75,000 X 20 percent = $15,000

Year 2 depreciation expense = $60,000 ($75,000 – $15,000 from Year 1) X 20 percent = $12,000

When beginning the first year, the book value is used as a basis for the asset’s value. The ending book value, which is determined after subtracting depreciation, is the following year’s new book value that will be used to establish next year’s depreciation expense. After it’s repeated through its useful life, the salvage value is left.     

Units of Production Depreciation Method

This type of depreciation method depreciates a business’ asset by the units it produces or how many hours the asset is to be run for production over its useful life.

Depreciation = (Number of items manufactured / useful life in measured units) X (asset cost – salvage value)

Let’s assume a supplement pill machine cost $50,000; it can produce 200 million vitamins over its lifetime; and it will have a salvage value of $2,500. This assumes it will produce 20 million vitamins in the first 12 months of operation.  

(20 million / 200 million) = 10 percent X ($50,000 – $2,500) = $47,500

If the machine produces 10 percent of vitamins over its expected 200 million vitamin unit life, the resulting depreciation amount is $4,750. At the end of the first year the book value will be $45,250. Production amounts in future years will dictate how much may be depreciated.

Sum of the Years Digits Approach

Similar to other methods of depreciation, the Sum of the Years Digits (SYD) depreciation method is another type of depreciation that assigns the bulk of depreciation in the beginning years of an asset’s useful life. Looking at the formula is the best way to understand how it works.

Expensing Depreciation = (Asset’s remaining life / Sum of the years digits) X (Asset’s cost – salvage value)  

If a machine that’s going to be used by a company to produce widgets costs $50,000, has a useful life of 16 years and a salvage value of $3,000, it would look as follows:

1. $50,000 – $3,000 = $47,000 Depreciation Base

2. With 16 years of useful life for the asset, the sum of the years would be: 1 + 2 + 3 + 4 + 5 +6 + 7 + 8 + 9 + 10 + 11 + 12 + 13 + 14 + 15 + 16 = 136. Using the machine referenced above during the first year would equal a Remaining Life of 16. Then, the Remaining Life of 16 years would be divided by the SYD of 136.

3. Using this example, for the first year of using the machine, the formula would be as follows:

16 years (remaining life) / 136 (SYD) = 0.11764. Then, 0.11764 X $47,000 (Depreciation Base) = $5,529.08

The next (or second) year’s depreciation expense would by 15 / 136 = 0.110294. Then, 0.110294 X $47,000 = $5,183.82

Each subsequent year the SYD would be divided by the remaining years until it’s exhausted and the salvage value should be met.

Depending on the type of business, the type of asset and the accounting approach, there are different ways to expense for property acquired during the course of business.