Friday Financial Five – August 10th, 2012

Friday, August 10, 2012


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The important financial numbers continue to change at a glacial pace. . .

RI unemployment numbers are still dismal

The latest unemployment numbers continue to disappoint for Rhode Island, coming in at 11.2 percent, second highest in the country. The most pressing issue is creating job opportunities for the state’s lower to middle earners. It sounds simple, but the unemployment number won’t come down until red tape is cut and incentives increased for entrepreneurs. The onus isn’t simply on political leaders to get us out of the economic doldrums. Economic initiatives are useless unless small business owners take advantage of incentives and inexpensive borrowing costs to create jobs.

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Health care and increased taxes

With President Obama’s health care reform upheld, 2013 will bring two new taxes on higher income earners, so incorporate that into your financial strategy. The big one will primarily consist of a 3.8% surcharge on net investment income. That means you might consider reducing or avoiding annuity income, rents, taxable interest, and dividends in order to escape this tax. You might also consider increasing your municipal bond holdings in taxable accounts. The second tax is the Medicare Hospital Insurance Tax of 0.9%, which is based strictly on wage income. If you’re near the income thresholds, you might increase retirement plan contributions or take advantage of other pre-tax methods to save yourself the near 1% surcharge.

Investment Spotlight: Room to run for REITs?

The yearly return for REITs has topped 30% for the last 3 years, including 8% last year when the S&P was basically flat. The inflow of money has sent the prices on real estate related securities skyward, and in turn, decreased the dividend yield below 4% in many cases. For those looking for income, that still might be a high enough yield to justify continued exposure to the real estate sphere. Keep in mind that if you own investment property, you’re already exposed to this asset class and should include it when evaluating your investment allocation. You may not want to double down by also owning a large percentage of REITs in your portfolio.

Not So Easy Target

A feature of many auto-enrolled retirement plans is the use of target date funds based on the participant’s age and perceived retirement year. If you’re currently 45 years old, this might mean using a target date fund of 2035. There are a few things to consider here. As the 2008 crisis taught us, some of these funds are managed with assumptions that may not match your goals, such as working into retirement or taking on a riskier portfolio mix. The other consideration is the menu of available funds outside of the target date funds. Using a mixture of funds may allow for greater control and diversification than a target fund that’s primarily focused on investing in domestic equities.

Unclaimed property

A pet project is making sure as many people as possible visit (partnering with the state) to check and see if they have unclaimed property awaiting them. It may be residual money from when you lived at a prior address, but it’s still your money. Don’t be discouraged if you submit a claim and the response is slow. That seems to be par for the course. There’s no reason to let your money sit there when it could be working for you.

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Dan Forbes is a regular contributor on business financial issues. His office is in Providence, RI. He leads the firm Forbes Financial Planning and can be reached at [email protected]


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