U.S. stocks retreated from May 7-11, perhaps in part because of the news from the Eurozone. The concern may be whether we are going to have a replay of 2011 – a new round of EU squabbling that will increase Wall Street volatility.

Some analysts think U.S. stocks can ride through these anxieties without much damage. Others wonder how “decoupled” we are from the crisis.

What’s going on in Greece? On May 6, Greece had a national election in which no majority party emerged. From May 7-11, three attempts were made to form a unity government; they all failed. Hopefully – by the time you read this – current Greek president Karolos Papoulias will have negotiated his way to a coalition. Or, the nation’s next president could turn out to be Alexis Tsipras, leader of the radical-left Syriza party that gained ground in the with voters on its pledge to fight the austerity cuts that the Greek government agreed to as part of the latest EU/IMF bailout. If no coalition emerges in the Greek parliament, there could be another national election in June.^1,2

Greece made a deal with its bondholders months ago: they accepted write-downs on the bonds they held with the promise that those bonds would be swapped for new ones. If Greece backs out of this deal, who knows what happens. Some analysts think the hit would be primarily taken by Italy, Portgual and Spain – investors would probably call for higher interest rates on government bonds from these nations, which would push them further into debt. If investors pull their money out of the Spanish and Italian bond markets, Spain and Italy might end up needing bailouts.³

In the most severe scenario, Greece rejects the agreed-upon bailout deal and the euro along with it. That could lead to huge problems. A single rejection of the euro from an EU member might signal a deeply flawed currency. A perception of a failing euro would hurt the currency and the value of European equities and European bank debt; euro-denominated bonds would find fewer investors. So the global currency swap market could be damaged, with a multi-continent recession a possible consequence. Hopefully, things don’t go this far.³

What’s going on in France? President Nicolas Sarkozy lost a national election to Francois Hollande, a socialist who is widely considered a moderate. Hollande wants to see an economic stimulus for France even with the austerity measures coming, and he has indicated that he will propose the same thing for Germany when he meets with German chancellor Angela Merkel.³

Of course, Merkel and Sarkozy formed a united front these last couple of years – affirming their faith in the euro, helping to broker the Greek bailouts. Hollande and Merkel would seem to have immediate philosophical differences about fixing the EU economy, and any difference of philosophy between the leaders of the EU’s two most powerful economies doesn’t bode well for unity.

Defending the euro may be their most important task. It would be unimaginable to have one of the globe’s reserve currencies fall apart. If currency traders see a departing euro, then conditions would be right for another global credit crunch.

What does this mean for Wall Street? If the data stream from our recovering economy can drag Wall Street’s attention away from Europe – and if the EU and IMF leaders successfully hurdle this latest obstacle – then the impact on U.S. equities might be short-term.

Economists have warned of a fragmented Eurozone before, yet it has held together despite remarkable stress. Common ground was painful to reach, yet a feasible Greek bailout plan emerged from it. Now that common ground must be regained.

Citations.

1 – www.nytimes.com/2012/05/12/world/europe/impasse-in-greece-could-force-new-vote.html [5/12/12]
2 – www.npr.org/blogs/thetwo-way/2012/05/11/152516862/in-greece-third-bid-for-coalition-government-fails [5/11/12]
3 – www.sacbee.com/2012/05/10/4483985/as-europes-economic-outlook-darkens.html [5/11/12]

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A diversified portfolio is one that contains high risk investment opportunities, such as purchasing of single stocks and mutual funds, and low risk investments, such as a savings account, certificate of deposits, or treasuries. There are three main types of investment risk.

1) Market Risk

Market risk is inevitable. When choosing to invest, there is no escaping the concept of risk. Anything can affect the market and determine its risk factor. For example, inflation’s average increase of three percent per year is a common determinant in market risk. Another major example for many worldwide investors was the drop in the world economy. This drop plunged the stock market and affected millions of investors. The risk can also be company specific, such as low profitability.

2) Passive Management Risk

This type of risk can be personally managed by conducting research on the company in terms of its profitability and sustainability over a certain period of time. Studying the history of a company may give you a better view on that particular investment in terms of how it operates.

This type of investment is usually associated with index type investing, such as a mutual fund group with a diversified portfolio. The risk of losing or gaining in the investment is directly related to the overall management of the fund company. Management factors will determine the price of the fund in the market, either upwards or downwards.

3) Active Management Risk

Active risk refers to the risk involved with active trading of the fund or stock in the market. By being actively traded on the market with current prices, there could be a higher return on investment, but it comes with a high risk. In the investing world, this type of portfolio is of the highest risk, as the gains or losses are solely determined on the market fluctuations throughout the time the market is open.

The Bottom Line

Risk may not be able to be avoided, but there is always a way to reduce risk with a diversified financial portfolio. Investing is a reasonable way to earn extra income for retirement or any other major life event. It’s the longevity that influences your investment strategy.

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1. Stop Living Pay Check to Pay Check

Understanding your income in relation to your fixed and variable expenditures can immediately alleviate the syndrome of living pay check to pay check. With a clear picture of your total income minus your expenditures, you can immediately identify areas in your variable expenses that need to be adjusted to keep your budget balanced in the positive.

2. Reduce and Eliminate Debt

When you have all your creditors listed on your budget, you are forced to face your financial reality. Although it may hurt at first to face the truth about your debt, seeing the progress each month, as you pay down the lower balances first, might guide you into a positive feeling about following a budget that works.

Debt has a way of keeping you prisoner. The interest rates change, and you end up paying more for items that you bought on credit, in comparison if you bought the items with cash. Using a budget to track the progress of our diminishing debt can increase the positive feelings you hold for a future free of variable debt imprisonment.

3. Increase Emergency Savings

A budget can easily help you plan for those unexpected emergencies that happen in life. Let’s face it, life would be boring without those unexpected happenings. When you remain on a budget, each month you can take your extra money and put it into a savings account. This savings will build upon itself each month, giving you that extra security in life’s unpredictable plans.

4. Financial Security

Having a budget does not mean that you will be free from expenditures. There are certain items that must be paid each month, such as electricity, water, heat, rent, mortgage, phone, etc. There will never be a budget that does not have expenditures. The key is to slowly regulate those expenditures to just the necessities, decrease unnecessary debt, and live in a state of financial security.

Financial security means that you have a working budget that adjusts to each month’s circumstances, within the guidelines set in your initial budget. It means that you are able to live within your means and still enjoy life without being a slave to the corporate world of credit cards.

5. Save for the Future

The future can only be bright by following a budget. Before you know it, you will have your emergency fund saved, which is commonly six months of your regular gross salary. After you have achieved that goal, saving for the future begins. Whether you want to travel the world, drive cross-country, or take a vacation to your dream destination – you can make it happen when following a simple budget and living within your means.

There will come a time when you will be done working and will want to live a life enjoying the simple pleasures, such as visiting places that you only dreamed of. This is where a budget can help you realize that dream. Each penny saved is an additional penny for the future. It may be hard to see at the present moment, but the future comes quickly, so be prepared.

 The Bottom Line

Following a budget has more benefits than downfalls. It allows you the freedom to live and truly enjoy the life you were meant to live. So don’t delay: create your budget and start seeing the benefits role into your life.

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1) Your Current Situation

When beginning to plan for retirement and determining how much you will need to retire comfortably, consideration of your current situation plays a key role in your future. The two main determinants of your situation are your age and your current income.

The average age of retirement is 65, but many opt for retirement at 55. There is no preset age for retirement – these are just averages, as you can retire at any age you choose that is right for you. Your current income, if you have been planning for retirement, is what is left over after money has been placed into your retirement savings. This is what you are able to live on. You can use this total as a guide as how much you need for retirement.

2) Your Individual Goals

This is where you design a retirement plan. Several questions should be considered, one being if you can live on what you currently make, or if you can live on less. Defining your expenses and paying off lingering debt, including a mortgage, can mean more money in your pocket for retirement.

After planning what amount of money you need to live on yearly in relation to your expenses and lifestyle, it is wise to also consider inflation into your retirement financial plan. The average rate of inflation per year can be estimated at three percent.

3) Your Life’s Projections

In planning how much money should be placed on the side for retirement, your life expectancy should be taken into consideration for calculation purposes. The average life expectancy is age 90. Using this figure gives you an idea of how many years you need money for. For example, if you need $25,000 per year in retirement to live comfortably, and retire at age 65, you need $625,000 (90-65=25 x 25,000).

Other projections that play an essential role in how much money you need include social security, pensions, and other retirement plans. If you take into consideration social security, collecting at age 62 will deliver 75 percent of your benefits, with the most being at age 70 with 132 percent. In any retirement plan, the decision on how much to put away is based on the age you want to retire at. Putting away six percent of your earnings is conservative with 10 percent of your earnings being considered aggressive.

The key to retiring comfortably and being financially stable is in the planning. You are never too young or too old to start planning for retirement. Retirement is a nice time to enjoy life and take in the peace that life has to offer. Whether you want to travel or just simply relax without having to be anywhere at any particular time, retirement is made easier with planning.

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IRAs can be a great tax-advantaged method for you to put money away for the future.  There are two main types of IRAs that are commonly available:

1) ROTH IRA

With a ROTH IRA, monies can be contributed into a savings with taxes paid upfront to the government. A maximum income of $167,000 for a married couple, and a maximum income of $105,000 for an individual must be proved before a ROTH IRA can be opened.

At age 59 ½ you can begin withdrawing funds; however, this fund is flexible for early withdrawal. Dividends are earned based on an interest rate. Your ROTH IRA can grow with your yearly contributions and dividends to be part of a supplemental retirement package. If you are below age 50, you can contribute $5,000 a year maximum effective for tax year 2012.

2) Traditional IRA

Investing in a traditional IRA depends on your income. You must have a taxable income. Contributions are based on your gross income level of $125,000 or less if you are single and $183,000 if you are married. Monies are saved into this account tax free; however, upon withdrawal taxes must be paid on the amount of the withdrawal. Money in this account grows with contributions and interest payments.

Contributions are tax deductible, making a nice retirement savings for those within that particular tax bracket. Contributions can be withdrawn at age 70 ½ to supplement any other retirement plan that you may have. If you are over 50 years old, you can contribute up to $6,000 per year. This is part of the “catch up” method. If you are below age 50, you can contribute $5,000 a year maximum effective for tax year 2012.

Investing in either a ROTH or Traditional IRA can be considered a means to supplement other retirement benefits, such as a pension, 401k, and a regular savings account. Since these are retirement plans that you have to be committed to in regards to your contributions, you may try considering a “pay yourself first” attitude. Each pay day, take a portion of your pay and deposit in into an IRA.

Before you know it, those regular IRA contributions can add up to a larger retirement nest egg!

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