With the presidential election still fresh on everyone’s mind, achieving your financial security plan should be a personal priority. As future policies are hashed out in Washington, you’ll need to navigate the environment at home by making decisions on everything from low interest rates to tax-saving opportunities. Here are some strategies to consider.
A new perspective on ‘environmental impact’
The low-interest-rate environment is getting a lot of attention from people who want to invest their funds carefully but worry about the impact of relatively small returns. The positives – namely record-low borrowing costs – are offset somewhat by limited growth in conservatively invested portfolios.
As we approach year-end, a number of potential tax code changes are up for consideration. In addition, the Federal Reserve has indicated it will keep interest rates low through mid-2015.
The more you think about the implications of these decisions on your financial plan now, the better you’ll be able to weather whatever changes the future may bring. Here are some ways to take advantage of the upside while preparing for adjustments ahead:
Lock in for the right reasons – With borrowing costs at or near all-time lows, now may be an ideal time to re-evaluate any debt. If you haven’t already, investigate options to refinance your mortgage, consolidate loans or renegotiate credit card balances at lower rates.
Focus on capital preservation – Rather than spending considerable effort growing returns in this environment, look at strategies that will help you maintain the assets you have.
When it comes to saving, it may not be the best time to invest in long-term, fixed-interest-rate vehicles. It may be better to direct some assets to another part of your portfolio that would allow flexibility for future growth.
Stay diversified – It’s a good time to evaluate your diversified portfolio and reallocate if needed to adapt to the current environment and possible changes ahead. Be sure it can deliver a reasonable rate of return while reflecting your risk tolerance and time horizon.
Even in the fixed-income segment, which is traditionally viewed as a more conservative marketplace, don’t put all your eggs in one basket. Within the fixed-income market, there are many sectors you can invest in – from corporate and municipal bonds to U.S. treasuries.
Re-think risk – Work with your financial adviser to be sure you are aware of the risks you are taking that can affect your ability to fund your financial plan or achieve other goals, such as taking care of loved ones. You can help manage those risks through a financial plan that includes disability insurance, life insurance and a strategy to pay for long-term care needs.
This protection is even more important when low interest rates may limit growth in your assets. Ask about a waiver of premium option that keeps the insurance in force if you become unable to work. You may also be interested in learning about the option to have benefits increase with inflation.
Maximize your retirement savings – Regardless of the economic environment, saving for retirement is essential, but adding to your 401K or Individual Retirement Account (IRA) is especially important in these uncertain tax times.
Work with your financial representative to evaluate your investment choices to make sure they work for you within these savings vehicles – and to help you determine the mix of investments that align with your goals, time horizon and risk tolerance.
Pay attention to after-tax returns – Consider the impact of taxes on your overall financial picture. In light of potential tax law changes, be sure to consult your tax professional to learn about moves you may be able to make before the end of 2012 to take advantage of current tax rates.
You might consider converting to a Roth IRA, making gifts to family members or assessing assets that would be subject to capital gains taxes.
Take advantage of the power of compounding – Whatever your age or life stage, the reinvestment of income is a powerful tool to help your assets grow. From simple savings accounts to retirement and investment portfolios, over the years you can multiply your assets simply by letting them grow through the power of compounding.
Watch your personal balance sheet – You can’t invest in a vacuum, but you need to be conscious of all aspects of your financial picture, especially in a low-interest-rate environment.
Pay close attention to your personal spending by setting and following a household budget. You can impact your own “rate of return” by spending less than you make and saving consistently so your assets continue to grow.
A low-interest-rate environment presents both challenges and opportunities for investors. Contact your financial adviser and CPA to discuss which strategies might make sense for your specific needs and ways to incorporate them into your financial security plan. PD
Donald DeJonge is a financial adviser with Northwestern Mutual. Northwestern Mutual is the marketing name for the sales and distribution arm of The Northwestern Mutual Life Insurance Company.
Donald DeJonge
Financial Adviser
Northwestern Mutual
