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What Are I Bonds And How Do They Work

July 14, 2022 By Lauri Salverda, CFA, CFP®, AIF®

There has been a lot of talk lately regarding investing in I Bonds while inflation is high. They seem to be a great investment at this time, but you should know all the facts.

The first question you may have, what is an I Bond.  It is a Series I Savings Bond issues by the US Treasury, that earns interest based on combining a fixed rate and an inflation rate.  How is the rate calculated?  It is a combination of the fixed rate, which is currently 0% and the semiannual CPI U (the consumer price index for all urban consumers, includes gas and food) which is currently 4.81%.  The actual calculation is the Composite rate = [fixed rate + (2 * the semiannual inflation rate) + (fixed rate * semiannual inflation rate)].  An example of today’s rate is:

[0.00 + (2 * 0.0481) + (0.00 * 0.0481)

[0.00 + .0962 + 0.00] = 9.62%

You might say that is too good to be true.  It is true, but you need to know all aspects of the bond.  The interest rate is reset every six months from the time you purchase the bond.  The Treasury resets interest rates on the first business day of May and November and what the date is that your bond resets (every six months from the purchase date) it will use the rate which has been set by the Treasury.  Keep in mind inflation may not be here forever, and there may even be times of deflation.  The I Bond interest rate will never go below 0%.

Another item to know about is when can you redeem your I Bonds.  I Bonds will pay interest for 30 years from the date of purchase.  You can redeem them starting 12 months after the date of purchase, however, if you redeem them within the first five years you will be charged a fee consisting of the last 3 months of interest. This would not be much of a penalty if your bond was earning 0% interest.  If you were to need the money and you were earning a higher interest rate this could be costly.  You do not have to redeem the entire bond at one time, you can redeem bonds in as low as $25 increments.

Are you thinking how much and where can I purchase I Bonds?  Each individual can purchase up to $10,000 annually.  This is not a get rich quick scheme.  You cannot purchase these from a financial advisor, bank or broker.  These can only be purchased from the Treasury Department at www.treasurydirect.gov or via your federal tax refund.

I Bonds can be a great way to balance out your investment portfolio if you have some extra money floating around that you may not need for 5 years.  Remember, it is always important to know the facts before being caught up in the hype.

Filed Under: Blog Posts Tagged With: I Bonds, inflation, Series I Savings Bond, US Treasure

When You or Someone You Love Receives the Diagnosis

June 21, 2022 By Lauri Salverda, CFA, CFP®, AIF®

Parkinson’s Disease is becoming more prevalent in the United States and in Minnesota.  In 2020 there were just under 1 million individuals living with Parkinson’s and by 2030 it is expected to rise to $1.2 million, based on a recent study done by the Parkinson’s Foundation.  Additionally, the cost of treating the disease is increasing.  Medications alone cost an average $2,500 annually and therapeutic surgery can cost up to $100,000 per person. There are so many unknows as to how the disease will affect you and how long and the quality of the life that remains.  It is not just Parkinson’s Disease; these steps would assist anyone receiving a life-threatening diagnosis.

What are the steps you need to take once a diagnosis is received?

  • Inform

Start by informing your professionals.  For financial purposes this would include your attorney, insurance agent, and your financial planner.  Estate planning documents need to be reviewed to make sure they are up to date, and people you have assigned in difference roles are still those you want in those roles.  Talk to your insurance agent to determine what may be covered under your home owner’s policy.  Financial plans need to be updated along with adding new assumptions.  Beneficiaries need to be reviewed and updated.

  • Identify

Identify changes that need to be made to your estate planning documents and your financial plan.  On the legal side, make sure your estate documents are up to date.  You need a Will, Durable Power of Attorney for Finance, Health Care Directives and if necessary, Trust documents.  Talk with your attorney along with the people you have selected as you attorney-in-fact, trustees, and personal representatives to make sure they are willing to take on those duties.  I was working with a couple where the husband was dying.  The wife, although listed as the health care representative, knew when the end came, she would not be able to make the decision to take her husband off life support.  His brother was then assigned as representative, and things went much more smoothly, and the wife was not tasked with that awful decision at a very emotional time.

On the financial side, assumptions for expenses need to include increased medications expenses and medical costs, also long-term care expenses may have to be added.  If special gifts are left to individuals or foundations, money will have to be identified and earmarked for those purposes.

  • Organize

Start making lists for others.  The lists you keep will help others be organized so things are not missed, such as bills if you are incapacitated or who to call if a specific medication is not working for you.  Make a list of your medical team which includes contact information, roles and medications prescribed.  Keep lists of your financial service contacts and where documents are located.  Maintain lists of user IDs and passwords.  LinkedIn and Facebook are just two of the many sites where people can go to get photos and identify who needs to be kept informed. 

  • Revisit

There is a very good possibility that wishes and scenarios will change as the disease progresses.  Legal and financial documents will need to be updated periodically.  The one thing we realize is that everything is changing and in order to have your wishes carried through, attention needs to be paid to both legal and financial aspects.

There are many sources available to you to help organize information, including our website. Visit www.Castlerockfp.com for resources including Personal and Financial Inventory, Digital Asset Management and Guide When a Loved One Dies.

Filed Under: Blog Posts Tagged With: finance, Parkinson’s Disease, power of attorney, trust documents, wills

Are ETFs Truly the Best Way to Invest?

September 24, 2021 By Lauri Salverda, CFA, CFP®, AIF®

There has been a lot of talk recently about how it is best for individual investors to invest in Exchange Traded Funds (ETFs) vs. Mutual Funds.  Although some of the rationale is strong, you need to know in what you are actually investing. Let’s start with the basics.

What is an ETF?

Exchange Traded Funds (EFTs) is an investment that pools money from investors and uses those funds to buy a basket of stocks, bonds or other securities. You purchase a share of an ETF just as you would purchase a share of a stock. ETFs typically track a market index or commodity, although actively managed ETFs are becoming more popular. An active fund manager tries to outperform an index by being more selective in the investments it owns. 

What is a Mutual Fund?

A mutual fund is an investment that pools money from investors and uses those funds to buy a basket of stocks, bonds or other securities. You purchase a mutual fund directly from the fund company. The manager of the fund and their analysts try to pick the best investments available rather that a set group of stocks or bonds.

Similarities and Differences

  • Pricing: The pricing difference can be significant. Mutual funds are priced once a day after the market closes and the value of the stocks at the end of the day. ETFs are traded while the market is open similar to stocks. The value of the EFT is determined by the bid and ask price, i.e., the price at which someone would pay for a share of that ETF vs. the price at which someone would sell that ETF.  If the market is volatile the difference between the bid and ask price could be significant. 
  • Expense Ratio: The internal costs or operating expenses of the fund expressed as a percentage of the funds value is the expense ratio.  This includes portfolio management, trading expenses, marketing, administrative and distribution expenses among others.  Although in the past it was typical for an ETF to have a lower expense ratio than a Mutual Fund, this trend, although still exists, is narrowing.  Mutual Funds are reducing expense ratios to be more competitive and as actively managed ETFs are becoming more popular some ETF expense ratios are increasing.
  • Holdings: I believe that what is actually held by a Mutual Fund or ETF can be the most important aspect of the fund.  Unfortunately, this research, although readily available, is not typically performed by purchasers. Here are a couple of examples:
    1. two seemingly identical Standard & Poor’s 500 stock index (a large company index) ETFs have very dissimilar returns. That is because one purchases the same number of shares of each stock in the index, while the other purchase an equal dollar amount of each stock in the index.
    2. I was just looking up a tech company in the Netherlands. It was a large company stock that had been over valued (the value of the stock vs. its price) by Morningstar (a rating company) for the last 4 years.  I then looked at the funds that had the largest holdings in this stock.  The top three funds were a low-priced stock Mutual Fund, a Standard & Poor’s 500 Index, and a mid-cap stock index.  By looking at the titles of these funds this stock, a member of the Standard & Poor’s 500, only should have been in the Standard & Poor’s 500 Index. The stock is not a low-priced stock nor is it a mid-cap stock.

The point of this is that you are responsible to know what you are purchasing and to make sure you are investing in what you are thinking you are.  Look at how much it is costing you to invest in the fund and that when you choose to buy or sell you are getting a fair price. You would not purchase a car without doing your research and looking under the hood, do the same with your investments.

Filed Under: Blog Posts

Castle Rock named one of Top Financial Advisors in St. Paul by Expertise for Third Year Running

August 1, 2021 By Lauri Salverda, CFA, CFP®, AIF®

Thanks to review specialist Expertise for ranking Castle Rock as one of the Best Financial Advisors in St. Paul for the third year in a row! Expertise reviewed more than 80 financial advisors serving the St. Paul area, rating across more than 25 variables to determine the best local experts. Castle Rock is thrilled to have made the shortlist of the Top 17 Financial Advisors in St. Paul! Thanks to the team at Expertise for their research, focus on quality, and commitment to ensuring all consumers can make confident decisions in the experts they select.

Filed Under: Blog Posts

Making Summer Jobs More Lucrative for Your Children and Young Adults

July 4, 2021 By Lauri Salverda, CFA, CFP®, AIF®

I have been thinking about the long-term impact of high school and college kids finding work during the summer.  One thing I think we can do as adults to encourage young adults to work is educate them about how a job is a form of investing in themselves and their future. 

Start with talking about saving for retirement.  (I know, what could be less interesting to kids than talking about retirement!)  One important piece of information to highlight is that there is a special account designed for them with many special benefits: we are talking about a Custodial Roth IRA.  Laugh as you may, but there can be some hidden benefits that would entice any kid to start saving.

Let’s talk about the benefits

  1. You can save up to the lesser amount of either earned income (i.e. W-2 wages) or $6,000 in 2021.
  2. Parents can make contributions to a custodial Roth IRA on behalf of their children as long as the total contribution, both parent and child, remains at the lesser amount of either earned income (i.e. W-2 wages) or $6,000 in 2021.
  3. The money goes into the account after taxes are paid, but the child typically has a 0% tax rate. And the interest earned or capital gains on the Custodial or regular Roth IRA are never taxed. 
  4. Once the account has been open for 5 years, the principal can be taken out without penalty.  The earnings have to be left in the account or there will be a 10% penalty due. The 5-year rule is based on a calendar year.  If the Roth is open on December 31st of 2021 on January 1st, 2026 the 5-year rule has been met.
  5. While it is expected that 20% of children’s assets are to be used each year to pay for college expenses each year when applying for financial aid via a FAFSA (Free Application for Student Aid) application, retirement assets are not included for either adults or student.

Ways to discuss the benefits and teach financial concepts

  1. Help them to set up a budget to determine how much they can save.  Calculate what their expected earnings are, what are reasonable expenses and do they need additional money during the school year to pay for books or pizza.
  2. Take the opportunity to teach them about investing, such as:
    1. the difference between a stock (ownership in a company) and a bond (lending to an entity);
    1. the difference between a mutual fund (a group of stocks and/or bonds) and an ETF, Exchange Traded Fund, (a group of stocks and/or bonds that follow an index);
    1. the risk of declining or increasing in value; and
    1. the average on the S&P 500 (an index of 500 large capitalized firms) average annual market return is still 10% over the last 300 years.
  3. Take them to a meeting with your financial advisor and have them explain the markets, and how to select a stock, bond, mutual fund or ETF as their first opportunity to invest.  Alternatively, have them pick a company that they like or use their products, or think is cutting edge and let them buy that company’s stock.
  4. Offer to match what they put in as an incentive or gift them the first $100 to get them started.
  5. The 5-year rule is important simply because the money that is put into the account may be available to help pay student loans, put a down payment on a first apartment or the down payment on their first home.  Meanwhile the remaining earnings in the account can continue to grow.
  6. And best of all, if they leave the money alone, they will have a great start at funding their retirement.  Say they are going to be a senior in high school, if they invest $500 over the next 4 years, a $2,000 investment at an average annual return of 10% they will have $186,000 at their full retirement age of 67.  This also brings up the chance to teach the Rule of 72, take the number 72 and divide it by the expected return on your investment and the answer will tell you how long it takes for your money to double.  An example, if your expected return is 10% take 72/10=7.2, in 7.2 years your money will double in 14.4 years you will have 4x what was originally invested and in 21.6 years you will have 8x the original investment and that is without contributing a penny more.  The joy of compounding!

As adults, we can make it fun for your children and young adults to see the benefits of saving money for future needs, whether it is retirement or a down payment on a home.  It provides future freedom from financial worries and the ability to reach their goals.

Filed Under: Blog Posts

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Recent Posts

  • What Are I Bonds And How Do They Work July 14, 2022
  • When You or Someone You Love Receives the Diagnosis June 21, 2022
  • Are ETFs Truly the Best Way to Invest? September 24, 2021
  • Castle Rock named one of Top Financial Advisors in St. Paul by Expertise for Third Year Running August 1, 2021
  • Making Summer Jobs More Lucrative for Your Children and Young Adults July 4, 2021
  • What is all the talk about NFTs? April 5, 2021
  • How do you value a bond? January 7, 2021
  • ESG Investing: the What and the Why October 1, 2020
  • Women financial planners group rings in 25th anniversary with $25,000 donation to promote women, diversity in the industry August 6, 2020
  • Planning Your Estate June 22, 2020

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Castle Rock Financial Planning
2267 Waters Drive
Mendota Heights, MN 55120
lauri@castlerockfp.com
651-294-0013

Recent Blog Posts

  • What Are I Bonds And How Do They Work July 14, 2022
  • When You or Someone You Love Receives the Diagnosis June 21, 2022
  • Are ETFs Truly the Best Way to Invest? September 24, 2021

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