Crystal Ball Gazing: Factors That Could Impact Your Finances in 2016


February 2016 — This column is provided by the Financial Planning Association® (FPA®) of Michigan, the principle professional organization for Certified Financial PlannerTM (CFP®) professionals. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Michigan if you use this column in whole or in part. The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.

Some things in your financial life you can control, like your spending habits, how much money you put aside toward retirement, having a financial plan and sticking to it, etc. But your finances also are impacted by factors largely out of your control, whether it’s the behavior of the stock market, changes in government policy or fluctuations in the price of energy and consumer goods.

So with 2015 now history, what does 2016 hold in terms of the trends that may impact your wallet, the value of your assets (investments, home/real estate, etc.) and other areas of your financial life? Here, the personal finance professionals at the Financial Planning Association offer a glimpse at some of the financial and economic trends that could shape your finances in the year ahead.

Interest rates: The Federal Reserve Board’s decision in December 2015 to raise short-term interest rates for the first time in several years (by a very modest 0.25%, to between 0.25 and 0.50%) is expected to only minimally increase the interest rates consumers pay for mortgages, auto loans, credit card balances and the like. However, according to a report from Reuters, many economists expect the Fed to further increase rates in 2016, perhaps to 1.25%. Any such increases likely will make it more expensive to borrow money (through a bank loan) or carry credit card debt.

Borrowing money: The potential silver lining to higher interest rates is that they may encourage banks to more readily loan money to consumers through mortgages and the like. “Banks can make more money with loans when interest rates are higher, so they may be more inclined to lend people money,” explains Theresa M. Rosen, a Certified Financial Planner™ with Prudence Financial in Sudbury, Mass.

Inflation: This measure of the price of goods and services has held at relatively low levels for several years (including below 1% for 2015) and the consensus among economists is that the inflation rate likely won’t increase much in 2016, unless interest rates increase more than expected (because inflation and interest rates tend to correlate positively). So the prices you pay - in 2016 aren’t likely to change much from 2015, predicts Rosen.

Investing: Market observers like Rosen expect the stock market to continue its rollercoaster ride in 2016. Despite the volatility, most observers agree a well-diversified portfolio of equity investments (stocks, mutual funds, exchange-traded funds and the like) is still among the most reliable vehicles for delivering long-term growth to investors.

Real estate: Residential property values are strong in many areas of the country, according to Rosen, as is demand for rental housing. She expects those trends to continue in 2016, which bodes well for residential property owners.

Taxes: Changes to the tax code are inevitable, and 2016 is no different. For example:

  • Higher earners will be on the hook to pay a new 0.9 percent Medicare tax.

  • Income tax rates remain unchanged from 2015, ranging from 15 to 39.6%; however, tax brackets have been adjusted slightly for inflation.

  • The estate and gift tax exemption for 2016 is $5.45 million per individual, up from $5.43 million in 2015. The annual gift exclusion remains at $14,000.

  • The Child Tax Credit of $1,000 per qualifying child has been extended permanently and now includes a new refund provision for low-income families.

  • The Earned Income Tax Credit was also permanently extended, with an expansion for families with three or more children made permanent as well.

  • The U.S. Congress also permanently extended and expanded tax credits for college expenses. The American Opportunity Tax Credit provides a $2,000 credit for tuition and qualified expenses.

  • Congress also approved an extension to the provision allowing people over age 70-and-a-half to directly transfer up to $100,000 from an individual retirement account to a qualified charity without penalty.

Some of the aforementioned tax breaks may be reduced or unavailable to higher-income individuals and households.

Social security: The “file and suspend” strategy that for years helped married couples maximize Social Security benefits will be phased out 2016. The spousal benefit claiming option is also being eliminated. Meanwhile, the Social Security Administration announced there will be no increase in monthly Social Security benefits in 2016, and that the maximum amount of wages subject to Social Security taxes will also remain unchanged at $118,500.

Retirement plan contribution limits: The annual contribution limit holds steady in 2016 at $18,000 for employees participating in 401(k), 403(b) and most other types of plans. The catch-up contribution limit for employees age 50 or older in these plans also remains at $6,000 this year. Likewise, the $53,000 contribution limits remains the same for participants in SEP IRAs and Solo 401(k)s. No change in the $5,500 or $1,000 catch-up limits on annual contributions to an IRA either.

Energy prices: The prevailing low price for oil (and oil-derived fuels such as gasoline) puts money back in consumers’ pockets — money they can put toward savings and other goals.

Financial protections for consumers: As the calendar turned to 2016, the U.S. Congress and the Obama Administration were moving toward establishing new policies designed to require all retirement advisors to put the interests of their clients first — i.e. to act as fiduciaries for their clients. While the details of these policies had not been finalized as of this writing, Rosen says she expects new rules to take hold sometime in 2016. Whether they accomplish the goal of further protecting consumers remains to be seen, however.

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