RMR Wealth Management Blog

Formula: How Much To Put In A Retirement Account - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, October 02, 2013

(originally written by William Baldwin)


Do you have enough money in your 401(k)? I have a formula that answers that question. You may not like the answer.


Here’s the bottom line, in tabular form:



If you’re making $100,000 and you’re 35, you should have $100,000 saved up in your thrift plan, IRA or other retirement pot. Ten years later, you should have $300,000.

This is the savings trajectory you are supposed to be on. Stick with it and you’ll have a comfortable retirement, defined here to mean a steady income equal to 85% of your pretax pay when you were working. The income in question includes Social Security payments.

Do most people have anything like these amounts? No, which is one of the three reasons why John Bogle, the founder of Vanguard, is talking about a coming “train wreck” for retirees (the other two problems: the underfunding of traditional pension plans and the insolvency of Social Security).

But you can stick to the guideline, if you save a very large fraction of your income. Between age 35 and 45 the $100,000 employee is supposed to see a $200,000 growth in savings. That’s $20,000 a year.

Earnings on the account, of course, will help. But remember that the goal post is probably moving farther away. Some career advancement or just inflation might mean that the age 35 $100,000 worker is making $140,000 ten years later, which means that $100,000 account has to grow into $420,000.

The only way to keep up is to have something well above 10% of salary pouring into your retirement account, between your own contributions and your employer’s. That’s not easy, especially for someone paying off college debts, starting a family and buying a house. You just have to do it if you don’t want to be eating cat food at age 75.

The most that someone under the age of 50 can put into a 401(k) is $17,500 a year. This means that high-pay workers have to do some of their saving outside the tax-sheltered retirement plan.

The assumptions behind the salary multiples are optimistic. Among them: Stock and bond markets deliver returns well ahead of inflation, you have an uninterrupted 42-year career and Congress does not punish you for saving by clipping your Medicare and Social Security coverage.

Don’t be overconfident that the government won’t come after your savings. There is already in place a penalty on prosperous retirees in the form of a Medicare premium that scales up with income. Talk is in the air of rescuing Social Security by making the payouts “means-tested.”

Now let’s consider what would happen with two pessimistic but not implausible assumptions: (1) Your retirement lasts as long as your career, and (2) your investments just keep up with inflation.

Pessimistic assumption (1) comes into play if you start your career at age 30, stop at 60 and live to 90. Your career might start late if you’re in med school or trying to become a novelist. It might end early in a layoff or disability.

Assumption (2) is relevant if you cower in low-risk investments or have bad luck with high-risk ones. Earlier this year the yield on 20-year inflation-protected Treasury bonds dipped below zero. In other words, you salt away your savings and are guaranteed to have less purchasing power after two decades than you started with. The 20-year TIPS yield has since crept up to 1%, but money market funds still have a negative real return.

Higher-risk investments like stocks will probably deliver good real returns, but they might not. The Japanese stock market is 24 years into a bear market.

With negligible help from Social Security, a zero real return and with a retirement as long as your career, your savings target is easy to calculate. You have to save half your pay.

If that’s too frightening a prospect to consider, go back to the more optimistic assumptions. But even the optimist has to face up to the reality that a typical retirement contribution (6% of salary, with a 3% employer match) just don’t cut it. You should aim for double those numbers.

Increase your odds by keeping your costs down. If your thrift plan offers a brokerage window, use it to get dirt-cheap exchange-traded funds investing in a mix of U.S. stocks, foreign stocks and high-grade corporate bonds. Here are some ETFs to consider, with a suggested allocation: Schwab U.S. Broad Market (SCHB, 35%), Vanguard TSE All-World ex-U.S. (VEU, 15%), iShares iBoxx Investment Grade Bond (LQD, 30%), Vanguard Mid-Cap (VO, 10%) and Vanguard Small-Cap (VB, 10%).

Annual Deadlines For Starting A Safhe Harbor 401(k) Plan Fast Approaching - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, September 18, 2013

(originally written by Stuart Robertson)


For many small business owners, September is a frantic month with the summer season coming to an end, back-to-school in full swing, and business picking up as we head into fall. So it’s not surprising that many owners miss the deadline to start a special hassle-free 401(k) plan referred to as a “Safe Harbor 401(k)” as it is the most popular plan type purchased by small businesses for several reasons.  Here’s a quick Q&A with important facts to know.

What is the Deadline?

There are two actually: The first is Oct. 1, the government-mandated deadline to start a Safe Harbor 401(k) plan for a business running a calendar fiscal year.

The other is Sept. 25 – as it typically takes 401(k) providers five or more days to get this type of plan set up before the government-imposed deadline.  So get your questions answered and plan purchased by Sept. 25 if you want to take advantage of a Safe Harbor plan.

What is a ‘Safe Harbor’ 401(k) plan? How is it Different from a traditional 401(k)?

Safe Harbor plans enable small business owners and other highly compensated employees to contribute the maximum amount of their annual income into a tax-deferred retirement account and also automatically satisfy government required non-discrimination compliance tests.  The ability to save more with less hassle makes it a popular solution.

By providing a ‘Safe Harbor’ qualifying match – the amount an employer puts into an employee’s 401(k) account as a percentage of an employee’s salary – any employee including the owner can give the maximum to the plan and receive the match.

401(k) plans must be run in the best interest of employees.  Frequently in smaller companies with a traditional 401(k) plan that offers no match or a very low amount, the more highly compensated employees (such as owners) are restricted on how much they can contribute to the plan if employees don’t contribute a high enough percentage of their salaries (on average) to the plan.  Essentially the U.S. Government wants to ensure that 401(k) plans do not favor “highly compensated employees” (currently considered those earning more than $115K) over non-highly compensated employees.

The government has established required compliance tests to verify all employees have fair representation in a plan. That’s where the Safe Harbor saves the day for businesses that go with this plan type.

What is the maximum annual amount that an owner can contribute to a 401(k)?

In 2013, it’s $17,500 and $23,000 for owners who’ll be age 55 or older by the end of the year.  When you consider employer contributions to each employees account, the limit on both is $51,000 or $56,500 if you are 55 plus.

Who benefits the most from a Safe Harbor plan – business owners or employees?

Both. It lowers personal taxes in the current year for the owner and each employee that contributes tax-deferred.  Owner and employees also benefit from receiving the match.  Lastly, the business is able to report any match as a tax-deductible expense to minimize this cost to the business for providing retirement plan benefits.  

Any other details to be aware of?

Any business with a headcount below 100 employees and opening their first 401(k) plan can also receive a tax credit up to $500 for the first three years of the plan to offset setup and/or administration costs.

The Wild Card That Could Destroy Your Retirement - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, August 21, 2013

( originally written by Frank Armstrong III )


Could you withstand a half million dollar or more hit to your retirement savings? Even for many one percenters that could be the difference between a comfortable retirement and destitution. Yet, the odds that you may someday get this hit are uncomfortably high.

Long-term care costs are a wild card that can wipe out the most careful lifetime investment planning. And the event is so random and capricious that it’s difficult to impossible to simulate in a financial plan. And no matter how carefully you have saved, how good your asset allocation plan and investment strategy is, the results may be ruined if you, your spouse, or another family member need long-term care.

Unless you are already destitute and eligible for Medicaid, no present or planned government program is going to step in and save you. You are on your own. For instance, nursing home care isn’t covered by your health insurance, and isn’t covered by Medicare. Once a hospital releases you to any kind of long- term care facility, your medical coverage quits paying for your care. And, you may not be hospitalized even a single day before you need long-term care.

Costs vary widely, but in my home town of Miami, the average bill is $93,440 a year for a semi private nursing home room at and private room at $116,216 a year for private room. (Home health care and assisted living facilities are somewhat less, but not insubstantial.) Not many people put that item into their retirement budget.

The odds that you might need some form of long term care for some period during your life are frighteningly high.

Research shows that at least 70 percent of people over 65 will need long-term care services at some point in their lifetime1. And while most people think of long term care as impacting only those in senior years, 40 percent of people currently receiving long term-care services are ages 18 to 64.22. Of those that require long term care, about 80 percent will need five years of service or less.

For a couple, the odds that one of you might need LTC are a great deal worse. And I have clients that are providing care for one or more parents and a spouse. It’s a crushing burden for all concerned.

That leaves two choices: Either you assume the risk, or you lay it off. Long-term care insurance has evolved to cover this risk for you. But, it’s an expensive complex product that’s becoming more difficult to get.

It’s expensive because the risk is high for the insurance company. As people live longer, there is a much greater chance that they will need the benefit at some point, and that they will need it for longer periods. I don’t have a great love for insurance companies, but when you see a hundred carriers leaving the market it’s a strong hint that they are losing money providing the coverage.

It’s complex because there are different triggering events, waiting periods before coverage starts, coverage amounts, and length of time that coverage continues. Then there are different payment plans. For instance you could pay for your entire life, or only pay for 20 years, or pay until you reached age 65. Each factor adjusts the premium.

It’s getting harder to get because too many people want to wait until just before they need it. Any agent can tell you stories of clients that waited to apply for LTC until they were in their late 70s, taking 12 medications each day, and just about to have a hip replaced. Insurance companies are generally not stupid so it’s logical that they would like to know that you are not already brain dead.

Nevertheless, adverse selection is still a huge problem for the insurance companies. People that think they may need the coverage soon will apply in larger numbers than people that are healthy.

Waiting isn’t a great idea because 45 percent of applicants 70-79 and 66 percent of age 80 and over applicants are being declined, so it makes sense to purchase it between ages 40’s to 60’s.

Being expensive, complex, and hard to get, far too many people will procrastinate or never even consider the option. Big mistake! If you are really rich you might reasonably decide to self insure. If you are really poor, you might have to accept whatever Medicaid will supply. But if you are in the great middle class you owe it to yourself to wade through the options to make an informed decision.

Starting early, limiting years of coverage, and accepting longer elimination periods before coverage kicks in will all help in keeping premiums tolerable.

I’d advise finding an agent that is an expert in long-term care insurance and working with him/her. Your average life agent may not have the necessary expertise. Look for an insurance company with extensive experience in long-term care, a commitment to that market and the financial resources to pay up when and if you need it. There are still a half dozen great carriers in the market that deserve your confidence. If you are in your forties to sixties, and still in reasonably good health there’s a good chance they can tailor something to your needs.

Make sure any policy you get is “guaranteed renewable”. That means the insurance company can never cancel your policy, although they may increase premiums for an entire class of policy holders, but only after state regulators approve.
The bottom line here is that with both high risk and devastating consequences everybody ought to carefully consider their options. Don’t let the flying fickle finger of fate ruin your retirement.

College Tax Strategy: Wipe out $25,000 Of Capital Gains Per Year - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, July 31, 2013

(originally written by Troy Onink)


Many families simply earn too much for their child to qualify for need-based college aid, so they need to shift their focus to what I call tax aid; tax savings that help lower the overall cost of college. With the stock market at all-time highs, parents can combine their investment gains with this tax strategy to wipe out $25,000 in capital gains each year while a child is in college.That’s a pretty good way to save for college, and it can pay dividends in retirement, too.

In the following hypothetical example you will gift your daughter appreciated stock or other investments like mutual funds or ETFs, and your daughter will use the standard deduction, personal exemption and American Opportunity Tax Credit to offset $25,000 of long-term capital gains in a single year.

Standard Deduction and Personal Exemption

Typically parents will claim the $3,900 personal exemption for their child because the parents are providing greater than half of the child’s support throughout the year. However, during the college years, if your daughter uses her own income and assets to provide more than half of her own support (roughly half the total cost of college), then she would also be able to claim the personal exemption of $3,900 (for 2013) for herself, instead of you (the parent) claiming it.

The standard deduction (for 2013) for a dependent child (i.e. parents claim the personal exemption for the child), is the child’s earned income +$300 up to the maximum of $6,100. However, if you child is claiming the personal exemption for herself (i.e. passed the support test), then she can automatically claim the personal exemption and the full standard deduction of $6,100, regardless of earned income.

American Opportunity Tax Credit

Furthermore, as long as you do not claim the AOTC on your tax return, and do not claim your daughter as a personal exemption, she can claim the AOTC on her tax return.

The AOTC is worth up to $2,500 per student for four academic years. The income phase-out is $160,000 – $180,000 of modified adjusted gross income on joint tax returns. The amount of the credit is calculated as 100% of the first $2,000 in qualified tuition and fees costs paid, plus 25% of the next $2,000 paid for such fees.

Kiddie Tax

The kiddie tax is a tax on unearned income paid to minors. For 2013, the first $1,000 of such income is tax free, the second $1,000 is taxed to the child at his/her tax rate and all unearned income over
$2,000 is taxed at the parents’ tax rate. The kiddie tax rule now applies to children under age 19 and full-time college students under the age of 24.

In 2013, the only way that college students under age 24 will be able to avoid the kiddie tax is if they provide over half of their own support from their own earned income (i.e., wages and salaries, not income from selling stocks). Notice that this is different from the support test for the personal exemption mentioned above which allows the student to use their earned income in addition to their unearned income and personal assets to pass the test.

Tax Saving Example

Let’s assume that you have been gifting your daughter appreciated assets ($14,000 per year, per donor permitted in 2013; $28,000 on joint return) over the years and your daughter will sell some of the assets during each year of college, realizing $25,000 in long-term capital gains. She will use the proceeds from the sale of assets to pay to enroll at a flagship state university with a total cost of attendance of $46,000 per year, including out-of-state tuition.She will be able to take advantage of the standard deduction, personal exemption and the American Opportunity Tax Credit to offset her $25,000 of unearned (long-term capital gains) each year.

The standard deduction and personal exemption will reduce her capital gain income of $25,000 ($25,000 – $3,900 – $6,100 = $15,000), leaving a remaining taxable income of $15,000 that is taxed at the parent’s capital gain tax rate of 15%, for a total tax of $2,250.

Her overall federal tax of $2,250 will be eliminated by the American Opportunity Tax Credit (see the math below).

Long-term capital gains                                 $25,000

Student’s personal exemption                        –$3,900

Student’s standard deduction (single)            –$6,100

Net taxable income                                         $15,000

Capital gains rate (parents’ rate of 15%)          x 0.15

Gross federal tax                                             = $2,250

American Opportunity Tax Credit                    ($2,500)

Federal tax due                                                        $0

For clients in the highest tax bracket who are subject to the 3.8% net investment income surtax, the capital gains tax would be 23.8%, or $5,950 per year on $25,000 in gains. The child’s tax would be $500 (20% x $15,000 = $3,000 – $2,500 AOTC = $500; and the 3.8% surtax would not apply to the child), thus saving the family $5,450 per year in taxes; $21,800 over four years of college, even under kiddie tax rules. Even with a modest rate of return, the $21,800 in tax savings should grow to $50,000 by the time most parents reach retirement age. This underscores my longstanding philosophy that college planning is retirement planning.

Gandolfini's Will: A Case Study on What Not To Do - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Friday, July 26, 2013

(originally written by Kelley Holland)


That the late James Gandolfini was a beloved actor is without question. Now that his will has been revealed, he has a new fan: The IRS.

Gandolfini's will was written in a way that estate planning experts say skipped many options for minimizing his tax bill.

One example: Gandolfini left just under 20 percent of his assets to his wife, with the rest going to his sisters and infant daughter. (He made "other provisions" for his son from a previous marriage, the will says.) With less than 20 percent of the assets covered by Gandolfini's will going to his wife, close to 80 percent could be subject to state and federal taxes that together can reach a rate of 55 percent.

Certainly, Gandolfini may have had priorities other than taxes, like wanting to make sure his son would not be dependent on his stepmother for his inheritance.

"I very often have clients that make very well informed decisions that might not be the most tax efficient," said Mickey Davis, a partner at Davis Willms.

Gandolfini may also have had assets like retirement accounts and life insurance policies that are not covered by the will and its tax rules.

But legal and tax experts say that if minimizing taxes was a priority, Gandolfini's will could have been better written.

"You don't know what was explained to him and you don't know what his choices were," said Christina Mason, a partner at Kelley Drye & Warren. "Probably three-quarters of people approach it in the most tax efficient way, but the others don't." From what's been revealed about his estate, Gandolfini seems to have been in the latter camp, she added. "On the face of it, it looks as though it's very tax inefficient."

So how can you be smarter than James Gandolfini when it comes to estate planning?

For starters, consider taking greater advantage of the marital deduction. This tax deduction allows a spouse to transfer an unlimited amount of assets to their surviving spouse, and deduct it from the amount subject to estate tax.

Trusts are another tool for managing sizable estates. Gandolfini "could have made some significant gifts to his siblings and to his daughter and put them in trust and told the trustee 'don't distribute these until I'm gone, but grow these during my lifetime,'" Davis said. "Once he's put them in trust, the assets would avoid the estate taxes."

Still, trust assets have to have time to grow, and Gandolfini died at age 51. To make sure trusts have value at any time, Davis says Gandolfini could have created trusts and had the trustees take out life insurance on him. That way, the insurance would have provided for his heirs even if the trusts themselves were still small.

Another issue with Gandolfini's will is the plan to leave assets for his infant daughter that become hers free and clear when she turns 21.

"Our recommendation is typically to put it in trust until 25, because that gets the kids through college," Mason said. "Even if they're completely spendthrift, at least they've gotten a college education paid for."

Davis says older may be even better. His younger clients, he says, often opt to have children come into half of their assets at age 25 and half at 30. "Often later they come back to us and say 35 and 40."

Then there is the matter of real estate. Gandolfini owned a home in Italy, and in his will he give each child a 50 percent stake. But there is no mention of how to pay for upkeep——and there seems to be no reference to Italian laws that would come into play. For example, in some European countries there are laws governing who inherits real estate.

"If you've got a client with a house in Italy or a flat in London, they need to be talking to local counsel," Davis said.

In the end, no one in Gandolfini's family is likely to come up short. But paying lower taxes would have left them even better off.

FOMC Summary of Economic Projections

RMR Wealth Management - Wednesday, July 10, 2013

FOMC Summary of Economic Projections


FOMC minutes

RMR Wealth Management - Wednesday, July 10, 2013




A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, June 21, 2011, at 10:30 a.m. and continued on Wednesday, June 22, 2011, at 9:00 a.m.

Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
Elizabeth Duke
Charles L. Evans
Richard W. Fisher
Narayana Kocherlakota
Charles I. Plosser
Sarah Bloom Raskin
Daniel K. Tarullo
Janet L. Yellen

Jeffrey M. Lacker, Dennis P. Lockhart, Sandra Pianalto, and John C. Williams, Alternate Members of the Federal Open Market Committee

James Bullard, Thomas M. Hoenig, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively

William B. English, Secretary and Economist
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
David J. Stockton, Economist

James A. Clouse, Thomas A. Connors, Steven B. Kamin, Loretta J. Mester, David Reifschneider, Harvey Rosenblum, Daniel G. Sullivan, David W. Wilcox, and Kei-Mu Yi, Associate Economists

Brian Sack, Manager, System Open Market Account

Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors

Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors

Robert deV. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors

William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors

Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors

Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director, Board of Governors

Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors; Michael Foley, Senior Associate Director, Division of Banking Supervision and Regulation, Board of Governors; Lawrence Slifman and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors

Andrew T. Levin, Senior Adviser, Office of Board Members, Board of Governors

Joyce K. Zickler, Visiting Senior Adviser, Division of Monetary Affairs, Board of Governors

Daniel M. Covitz and Eric M. Engen, Associate Directors, Division of Research and Statistics, Board of Governors; Trevor A. Reeve, Associate Director, Division of International Finance, Board of Governors

Egon Zakrajsek, Deputy Associate Director, Division of Monetary Affairs, Board of Governors

Beth Anne Wilson, Assistant Director, Division of International Finance, Board of Governors

David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors

Brahima Coulibaly, Senior Economist, Division of International Finance, Board of Governors; Louise Sheiner, Senior Economist, Division of Research and Statistics, Board of Governors

Jean-Philippe Laforte,1 Economist, Division of Research and Statistics, Board of Governors

Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors

Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors

Jeff Fuhrer, Executive Vice President, Federal Reserve Bank of Boston

David Altig, Glenn D. Rudebusch, and Mark E. Schweitzer, Senior Vice Presidents, Federal Reserve Banks of Atlanta, San Francisco, and Cleveland, respectively

Michael Dotsey,1 William Gavin, Andreas L. Hornstein, and Edward S. Knotek II, Vice Presidents, Federal Reserve Banks of Philadelphia, St. Louis, Richmond, and Kansas City, respectively

Marco Del Negro,1 Joshua L. Frost, Deborah L. Leonard, and Jonathan P. McCarthy, Assistant Vice Presidents, Federal Reserve Bank of New York

Jeff Campbell,1 Senior Economist, Federal Reserve Bank of Chicago

Developments in Financial Markets and the Federal Reserve's Balance Sheet
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on April 26-27, 2011. He also reported on System open market operations, including the continuing reinvestment into longer-term Treasury securities of principal payments received on the SOMA's holdings of agency debt and agency-guaranteed mortgage-backed securities, as well as the ongoing purchases of additional Treasury securities authorized at the November 2-3, 2010, FOMC meeting. Since November, purchases by the Open Market Desk of the Federal Reserve Bank of New York had increased the SOMA's holdings by nearly the full $600 billion authorized.

In light of ongoing strains in some foreign financial markets, the Committee considered a proposal to extend its dollar liquidity swap arrangements with foreign central banks past August 1, 2011. Following their discussion, members unanimously approved the following resolution:

The Federal Open Market Committee directs the Federal Reserve Bank of New York to extend the existing temporary reciprocal currency arrangements ("swap arrangements") for the System Open Market Account with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank. The swap arrangements shall now terminate on August 1, 2012, unless further extended by the Committee.

Dynamic Stochastic General Equilibrium Models
A staff presentation provided an overview of ongoing Federal Reserve research on dynamic stochastic general equilibrium (DSGE) models. DSGE models attempt to capture the dynamics of the overall economy in a way that is consistent both with the historical data and with optimizing behavior by forward-looking households and firms. The presentation began by discussing the general features of DSGE models and considering their advantages and limitations relative to other approaches of analyzing macroeconomic dynamics; with regard to the latter, the presentation noted that while the current generation of DSGE models is still somewhat limited in the range of policy issues these models can address, further advances in modeling should increase the usefulness of DSGE models for forecasting and policy analysis. The presentation then reviewed some specific features of DSGE models that are currently being studied at the Federal Reserve Board and the Federal Reserve Banks of New York, Philadelphia, and Chicago. This review included the four models' characterizations of the forces affecting the economy in recent years and the models' current forecasts for real economic activity, inflation, and short-term interest rates. In discussing the staff presentation, meeting participants expressed the view that DSGE models are a useful addition to the wide range of analytical approaches traditionally used at the Federal Reserve, in part because they provide an internally consistent way of exploring how the behavior of economic agents might change in response to systematic adjustments to policy. Some participants also expressed interest in seeing on a regular basis projections of key macroeconomic variables and other products from the DSGE models developed in the System. Finally, participants encouraged further staff work to improve these models by, for example, expanding the range of questions they can be used to address.

Exit Strategy Principles
The Committee discussed strategies for normalizing the stance and conduct of monetary policy, following up on its discussion of this topic at the April meeting. Participants stressed that the Committee's discussions of this topic were undertaken as part of prudent planning and did not imply that a move toward such normalization would necessarily begin sometime soon. For concreteness, the Committee considered a set of specific principles that would guide its strategy of normalizing the stance and conduct of monetary policy. Participants discussed several specific elements of the principles, including how they should characterize the monetary policy framework that the Committee would adopt after the conduct of policy returned to normal and whether the principles should encompass the possible timing between the normalization steps. At the conclusion of the discussion, all but one of the participants agreed on the following key elements of the strategy that they expect to follow when it becomes appropriate to begin normalizing the stance and conduct of monetary policy:

  • The Committee will determine the timing and pace of policy normalization to promote its statutory mandate of maximum employment and price stability.
  • To begin the process of policy normalization, the Committee will likely first cease reinvesting some or all payments of principal on the securities holdings in the SOMA.
  • At the same time or sometime thereafter, the Committee will modify its forward guidance on the path of the federal funds rate and will initiate temporary reserve-draining operations aimed at supporting the implementation of increases in the federal funds rate when appropriate.
  • When economic conditions warrant, the Committee's next step in the process of policy normalization will be to begin raising its target for the federal funds rate, and from that point on, changing the level or range of the federal funds rate target will be the primary means of adjusting the stance of monetary policy. During the normalization process, adjustments to the interest rate on excess reserves and to the level of reserves in the banking system will be used to bring the funds rate toward its target.
  • Sales of agency securities from the SOMA will likely commence sometime after the first increase in the target for the federal funds rate. The timing and pace of sales will be communicated to the public in advance; that pace is anticipated to be relatively gradual and steady, but it could be adjusted up or down in response to material changes in the economic outlook or financial conditions.
  • Once sales begin, the pace of sales is expected to be aimed at eliminating the SOMA's holdings of agency securities over a period of three to five years, thereby minimizing the extent to which the SOMA portfolio might affect the allocation of credit across sectors of the economy. Sales at this pace would be expected to normalize the size of the SOMA securities portfolio over a period of two to three years. In particular, the size of the securities portfolio and the associated quantity of bank reserves are expected to be reduced to the smallest levels that would be consistent with the efficient implementation of monetary policy.
  • The Committee is prepared to make adjustments to its exit strategy if necessary in light of economic and financial developments.

Staff Review of the Economic Situation
The information reviewed at the June 21-22 meeting indicated that the pace of the economic recovery slowed in recent months and that conditions in the labor market had softened. Measures of inflation picked up this year, reflecting in part higher prices for some commodities and imported goods. Longer-run inflation expectations, however, remained stable.

The expansion of private nonfarm payroll employment in May was markedly below the average pace of job gains in the previous months of this year. Initial claims for unemployment insurance rose, on net, between the first half of April and the first half of June. The unemployment rate moved up in April and then rose further to 9.1 percent in May, while the labor force participation rate remained unchanged. Both long-duration unemployment and the share of workers employed part time for economic reasons continued to be elevated.

Total industrial production expanded only a bit during April and May after rising at a solid pace in the first quarter. Shortages of specialized components imported from Japan contributed to a decline in the output of motor vehicles and parts. Manufacturing production outside of the motor vehicles sector increased moderately, on balance, during the past two months. The manufacturing capacity utilization rate remained close to its first-quarter level, but it was still well below its longer-run average. Forward-looking indicators of industrial activity, such as the new orders diffusion indexes in the national and regional manufacturing surveys, weakened noticeably during the intermeeting period to levels consistent with only tepid gains in factory output in coming months. However, motor vehicle assemblies were scheduled to rise notably in the third quarter from their levels in recent months, as bottlenecks in parts supplies were anticipated to ease.

Growth in consumer spending declined in recent months from the already modest pace in the first quarter. Total real personal consumption expenditures only edged up in April. Nominal retail sales, excluding purchases at motor vehicles and parts outlets, increased somewhat in May, but sales of new light motor vehicles declined markedly. Labor income rose moderately, as aggregate hours worked trended up, but total real disposable income remained flat in March and April, as increases in consumer prices offset gains in nominal income. In addition, consumer sentiment stayed relatively low through early June.

Activity in the housing market remained depressed, as both weak demand and the sizable inventory of foreclosed or distressed properties continued to hold back new construction. Starts and permits of new single-family homes were essentially unchanged in April and May, and they stayed near the very low levels seen since the middle of last year. Sales of new and existing homes remained at subdued levels in recent months, while measures of home prices fell further.

The available indicators suggested that real business investment in equipment and software was rising a bit more slowly in the second quarter than the solid pace seen in the first quarter. Nominal orders and shipments of nondefense capital goods declined in April. Business purchases of light motor vehicles edged up in April but dropped in May, while spending for medium and heavy trucks continued to increase in recent months. Survey measures of business conditions and sentiment weakened during the intermeeting period. Business expenditures for office and commercial buildings remained depressed by elevated vacancy rates, low prices for commercial real estate, and tight credit conditions for construction loans. In contrast, outlays for drilling and mining structures continued to be lifted by high energy prices.

Real nonfarm inventory investment rose moderately in the first quarter, but data for April suggested that the pace of inventory accumulation had slowed. Book-value inventory-to-sales ratios in April were similar to their pre-recession norms, and survey data also suggested that inventory positions generally remained in a comfortable range.

The available data on government spending indicated that real federal purchases increased in recent months, led by a rebound in outlays for defense in April and May from unusually low levels in the first quarter. In contrast, real expenditures by state and local governments appeared to have declined further, as outlays for construction projects fell in March and April, and state and local employment continued to contract in April and May.

The U.S. international trade deficit widened slightly in March and then narrowed in April to a level below its average in the first quarter. Exports rose strongly in both months, with increases widespread across major categories in March, while the gains in April were concentrated in industrial supplies and capital goods. Imports grew robustly in March, but they fell slightly in April, as the drop in automotive imports from Japan together with the decline in imports of petroleum products more than offset increases in other imported products.

Headline consumer price inflation, which had risen in the first quarter, edged down a bit in April and May, as the prices of consumer food and energy decelerated from the pace seen in previous months. More recently, survey data through the middle of June pointed to declines in retail gasoline prices, and prices of food commodities appeared to have decreased somewhat. Excluding food and energy, core consumer price inflation picked up in April and May, pushing the 12-month change in the core consumer price index through May above its level of a year earlier. Upward pressures on core consumer prices appeared to reflect the elevated prices of commodities and other imports, along with notable increases in motor vehicle prices likely arising from the effects of recent supply chain disruptions and the resulting extremely low level of automobile inventories. However, near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers moved down a little in May and early June from the high level seen in April, and longer-term inflation expectations remained within the range that has generally prevailed over the preceding few years.

Available measures of labor compensation showed that labor cost pressures were still subdued, as wage increases continued to be restrained by the large amount of slack in the labor market. In the first quarter, unit labor costs only edged up, as the modest rise in hourly compensation in the nonfarm business sector was mostly offset by further gains in productivity. More recently, average hourly earnings for all employees rose in April and May, but the average rate of increase over the preceding 12 months remained quite low.

Global economic activity appeared to have increased more slowly in the second quarter than in the first quarter. The rate of growth in the emerging market economies stepped down from its rapid pace in the first quarter, although it remained generally solid. The Japanese economy contracted sharply following the earthquake in March, and the associated supply chain disruptions weighed on the economies of many of Japan's trading partners. The pace of economic growth in the euro area remained uneven, with Germany and France posting moderate gains in economic activity, while the peripheral European economies continued to struggle. Recent declines in the prices of oil and other commodities contributed to some easing of inflationary pressures abroad.

Staff Review of the Financial Situation
Investors appeared to adopt a more cautious attitude toward risk, particularly later in the intermeeting period. The shift in investors' sentiment likely reflected the weak tone of incoming economic data in the United States along with concerns about the outlook for global economic growth and about potential spillovers from a possible further deterioration of the situation in peripheral Europe.

The decisions by the FOMC at its April meeting to continue its asset purchase program and to maintain the 0 to 1/4 percent target range for the federal funds rate were generally in line with market expectations. The accompanying statement and subsequent press briefing by the Chairman prompted a modest decline in nominal yields, as market participants reportedly perceived a somewhat less optimistic tone in the Committee's economic outlook. Over the remainder of the intermeeting period, the expected path for the federal funds rate, along with yields on nominal Treasury securities, moved down appreciably further, as the bulk of the incoming economic data was more downbeat than market participants had apparently anticipated. Consistent with the weaker-than-expected economic data and the recent decline in the prices of oil and other commodities, measures of inflation compensation over the next 5 years and 5 to 10 years ahead based on nominal and inflation-protected Treasury securities decreased considerably over the intermeeting period.

Market quotes did not suggest expectations of significant movements in nominal Treasury yields following the anticipated completion of the asset purchase program by the Federal Reserve at the end of June. Although discussions about the federal debt ceiling attracted attention in financial markets, judging from Treasury yields and other asset prices, investors seemed to anticipate that the debt ceiling would be increased in time to avoid any significant market disruptions.

Yields on corporate bonds stepped down modestly, on net, over the intermeeting period, but by less than the decline in yields on comparable-maturity Treasury securities, leaving credit risk spreads a little wider. In the secondary market for syndicated loans, conditions were little changed, with average bid prices for leveraged loans holding steady.

Broad U.S. stock price indexes declined, on net, over the intermeeting period, apparently in response to the downbeat economic data. Stock prices of financial firms underperformed the broader market, reflecting the weaker economic outlook, potential credit rating downgrades, and heightened concerns about the anticipated capital surcharge for systemically important financial institutions. Option-adjusted volatility on the S&P 500 index rose somewhat on net.

In the June 2011 Senior Credit Officer Opinion Survey on Dealer Financing Terms, dealers pointed to a continued gradual easing over the previous three months in credit terms applicable to major classes of counterparties across all types of transactions covered in the survey. Dealers also reported that the demand for funding had increased over the same period for a broad range of securities, with the exception of equities. More recently, however, against a backdrop of disappointing economic data, heightened uncertainty about the situation in Europe, and, possibly, concerns about the U.S. federal debt ceiling, market participants reported a general pullback from risk-taking and a decline in liquidity in a range of financial markets.

Net debt financing by nonfinancial corporations was strong in April and May. Gross issuance of both investment- and speculative-grade bonds by nonfinancial corporations hit a record high in May before slowing somewhat in June, and outstanding amounts of commercial and industrial (C&I) loans and nonfinancial commercial paper increased. Gross public equity issuance by nonfinancial firms maintained a solid pace over the intermeeting period, and most indicators of business credit quality improved further.

Commercial mortgage markets continued to show tentative signs of stabilization. In recent months, delinquency rates for commercial real estate loans edged down from their previous peaks. However, commercial real estate markets remained weak. Property sales were tepid, and prices remained at depressed levels. Issuance of commercial mortgage-backed securities slowed somewhat in the second quarter.

Conditions in residential mortgage markets were little changed overall but remained strained. Rates on conforming fixed-rate residential mortgages declined about in line with 10-year Treasury yields over the intermeeting period. Mortgage refinancing activity picked up, on net, over the intermeeting period but was still relatively subdued. Outstanding residential mortgage debt contracted further in the first quarter. Rates of serious delinquency for subprime and prime mortgages were little changed at elevated levels. The rate of new delinquencies on prime mortgages ticked up in April but remained well below the level of a few months ago. In March and April, delinquencies on mortgages backed by the Federal Housing Administration declined noticeably.

The Federal Reserve continued its competitive sales of non-agency residential mortgage-backed securities held by Maiden Lane II LLC over the intermeeting period. Although the initial offerings of these securities were well received, investor demand at the most recent sales was not as strong, a development consistent with the declines in the prices of non-agency residential mortgage-backed securities over the intermeeting period.

Conditions in consumer credit markets continued to improve. Growth in total consumer credit picked up in April, as the gain in nonrevolving credit more than offset a further contraction in revolving credit. Delinquency rates for consumer debt edged down further in recent months, with delinquency rates on some categories moving back to pre-crisis levels. Issuance of consumer asset-backed securities remained robust over the intermeeting period.

Bank credit was flat, on balance, in April and May. Core loans--the sum of C&I, real estate, and consumer loans--continued to contract modestly, pulled down by the ongoing decline in commercial and residential real estate loans. In contrast, C&I loans increased at a brisk pace in April and May. The most recent Survey of Terms of Business Lending conducted in May indicated that banks had eased some lending terms on C&I loans. The survey responses also suggested that the average size of loan commitments and their average maturity had trended up in recent quarters

M2 expanded at a robust pace in April and May. Liquid deposits, the largest component of M2, maintained a solid rate of expansion, likely reflecting the very low opportunity costs of holding such deposits. Currency continued to advance, supported by strong demand for U.S. bank notes from abroad.

The broad nominal index of the U.S. dollar fluctuated over the intermeeting period in response to changes in investors' assessment of the outlook for the U.S. economy and the situation in the peripheral European economies. Since the April FOMC meeting, the dollar rose modestly, on net, after depreciating over the preceding several months. Headline equity indexes abroad and foreign benchmark sovereign yields declined over the intermeeting period in apparent response to signs of a slowdown in the pace of global economic activity and reduced demand for risky assets. Concerns about the possibility of a restructuring of Greek government debt drove spreads of yields on the sovereign debts of Greece, Ireland, and Portugal to record highs relative to yields on German bunds.

In the advanced foreign economies, most central banks left their policy rates unchanged, and the anticipated pace of monetary policy tightening indicated by money market futures quotes was pared back. However, central banks in several emerging market economies continued to tighten policy, and the monetary authorities in China increased required reserve ratios further.

Staff Economic Outlook
With the recent data on spending, income, production, and labor market conditions mostly weaker than the staff had anticipated at the time of the April FOMC meeting, the near-term projection for the rate of increase in real gross domestic product (GDP) was revised down. The effects of the disaster in Japan and of higher commodity prices on the rate of increase in real consumer spending were expected to hold down U.S. real GDP growth in the near term, but those effects were anticipated to be transitory. However, the staff also read the incoming economic data as suggesting that the underlying pace of the recovery was softer than they had previously anticipated, and they marked down their outlook for economic growth over the medium term. Nevertheless, the staff still projected real GDP to increase at a moderate rate in the second half of 2011 and in 2012, with the ongoing recovery in activity receiving continued support from accommodative monetary policy, further increases in credit availability, and anticipated improvements in household and business confidence. The average pace of real GDP growth was expected to be sufficient to bring the unemployment rate down very slowly over the projection period, and the jobless rate was anticipated to remain elevated at the end of 2012.

Although increases in consumer food and energy prices slowed a bit in recent months, the continued step-up in core consumer price inflation led the staff to raise slightly its projection for core inflation over the coming quarters. However, headline inflation was still expected to recede over the medium term, as increases in food and energy prices and in non-oil import prices were anticipated to ease further. As in previous forecasts, the staff continued to project that core consumer price inflation would remain relatively subdued over the projection period, reflecting both stable long-term inflation expectations and persistent slack in labor and product markets.

Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, all meeting participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections of output growth, the unemployment rate, and inflation for each year from 2011 through 2013 and over the longer run. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. Participants' forecasts are described in the Summary of Economic Projections, which is attached as an addendum to these minutes.

In their discussion of the economic situation and outlook, meeting participants agreed that the economic information received during the intermeeting period indicated that the economic recovery was continuing at a moderate pace, though somewhat more slowly than they had anticipated at the time of the April meeting. Participants noted several transitory factors that were restraining growth, including the global supply chain disruptions in the wake of the Japanese earthquake, the unusually severe weather in some parts of the United States, a drop in defense spending, and the effects of increases in oil and other commodity prices this year on household purchasing power and spending. Participants expected that the expansion would gain strength as the influence of these temporary factors waned.

Nonetheless, most participants judged that the pace of the economic recovery was likely to be somewhat slower over coming quarters than they had projected in April. This judgment reflected the persistent weakness in the housing market, the ongoing efforts by some households to reduce debt burdens, the recent sluggish growth of income and consumption, the fiscal contraction at all levels of government, and the effects of uncertainty regarding the economic outlook and future tax and regulatory policies on the willingness of firms to hire and invest. Moreover, the recovery remained subject to some downside risks, such as the possibility of a more extended period of weak activity and declining prices in the housing sector, the chance of a larger-than-expected near-term fiscal tightening, and potential financial and economic spillovers if the situation in peripheral Europe were to deteriorate further. Participants still projected that the unemployment rate would decline gradually toward levels they saw as consistent with the Committee's dual mandate, but at a more gradual pace than they had forecast in April. While higher prices for energy and other commodities had boosted inflation this year, with commodity prices expected to change little going forward and longer-term inflation expectations stable, most participants anticipated that inflation would subside to levels at or below those consistent with the Committee's dual mandate.

Activity in the business sector appeared to have slowed somewhat over the intermeeting period. Although the effects of the Japanese disaster on U.S. motor vehicle production accounted for much of the deceleration in industrial production since March, the most recent readings from various regional manufacturing surveys suggested a slowing in the pace of manufacturing activity more broadly. However, business contacts in some sectors--most notably energy and high tech--reported that activity and business sentiment had strengthened further in recent months. Business investment in equipment and software generally remained robust, but growth in new orders for nondefense capital goods--though volatile from month to month--appeared to have slowed. While FOMC participants expected a rebound in investment in motor vehicles to boost capital outlays in coming months, some also noted that indicators of current and planned business investment in equipment and software had weakened somewhat, and surveys showed some deterioration in business sentiment. Business contacts in some regions reported that they were reducing capital budgets in response to the less certain economic outlook, but in other parts of the country, contacts noted that business sentiment remained on a firm footing, supported in part by strong export demand. Compared with the relatively robust outlook for the business sector, meeting participants noted that the housing sector, including residential construction and home sales, remained depressed. Despite efforts aimed at mitigation, foreclosures continued to add to the already very large inventory of vacant homes, putting downward pressure on home prices and housing construction.

Meeting participants generally noted that the most recent data on employment had been disappointing, and new claims for unemployment insurance remained elevated. The recent deterioration in labor market conditions was a particular concern for FOMC participants because the prospects for job growth were seen as an important source of uncertainty in the economic outlook, particularly in the outlook for consumer spending. Several participants reported feedback from business contacts who were delaying hiring until the economic and regulatory outlook became more certain and who indicated that they expected to meet any near-term increase in the demand for their products without boosting employment; these participants noted the risk that such cautious attitudes toward hiring could slow the pace at which the unemployment rate normalized. Wage gains were generally reported to be subdued, although wages for a few skilled job categories in which workers were in short supply were said to be increasing relatively more rapidly.

Changes in financial market conditions since the April meeting suggested that investors had become more concerned about risk. Equity markets had seen a broad selloff, and risk spreads for many corporate borrowers had widened noticeably. Large businesses that have access to capital markets continued to enjoy ready access to credit--including syndicated loans--on relatively attractive terms; however, credit conditions remained tight for smaller, bank-dependent firms. Bankers again reported gradual improvements in credit quality and generally weak loan demand. In identifying possible risks to financial stability, a few participants expressed concern that credit conditions in some sectors--most notably the agriculture sector--might have eased too much amid signs that investors in these markets were aggressively taking on more leverage and risk in order to obtain higher returns. Meeting participants also noted that an escalation of the fiscal difficulties in Greece and spreading concerns about other peripheral European countries could cause significant financial strains in the United States. It was pointed out that some U.S. money market mutual funds have significant exposures to financial institutions from core European countries, which, in turn, have substantial exposures to Greek sovereign debt. Participants were also concerned about the possible effect on financial markets of a failure to raise the statutory federal debt ceiling in a timely manner. While admitting that it was difficult to know what the precise effects of such a development would be, participants emphasized that even a short delay in the payment of principal or interest on the Treasury Department's debt obligations would likely cause severe market disruptions and could also have a lasting effect on U.S. borrowing costs.

Participants noted several factors that had contributed to the increase in inflation this year. The run-up in energy prices, as well as an increase in prices of other commodities and imported goods, had boosted both headline and core inflation. At same time, extremely low motor vehicle inventories resulting from global supply disruptions in the wake of the Japanese earthquake--by contributing to higher motor vehicle prices--had significantly raised inflation, although participants anticipated that these temporary pressures would lessen as motor vehicle inventories were rebuilt. Participants also observed that crude oil prices fell over the intermeeting period and other commodity prices also moderated, developments that were likely to damp headline inflation at the consumer level going forward. However, a number of participants pointed out that the recent faster pace of price increases was widespread across many categories of spending and was evident in inflation measures such as trimmed means or medians, which exclude the most extreme price movements in each period. The discussion of core inflation and similar indicators reflected the view expressed by some participants that such measures are useful for forecasting the path of inflation over the medium run. In addition, reports from business contacts indicated that some already had passed on, or were intending to try to pass on, at least a portion of their higher costs to customers in order to maintain profit margins.

Most participants expected that much of the rise in headline inflation this year would prove transitory and that inflation over the medium term would be subdued as long as commodity prices did not continue to rise rapidly and longer-term inflation expectations remained stable. Nevertheless, a number of participants judged the risks to the outlook for inflation as tilted to the upside. Moreover, a few participants saw a continuation of the current stance of monetary policy as posing some upside risk to inflation expectations and actual inflation over time. However, other participants observed that measures of longer-term inflation compensation derived from financial instruments had remained stable of late, and that survey-based measures of longer-term inflation expectations also had not changed appreciably, on net, in recent months. These participants noted that labor costs were rising only slowly, and that persistent slack in labor and product markets would likely limit upward pressures on prices in coming quarters. Participants agreed that it would be important to pay close attention to the evolution of both inflation and inflation expectations. A few participants noted that the adoption by the Committee of an explicit numerical inflation objective could help keep longer-term inflation expectations well anchored. Another participant, however, expressed concern that the adoption of such an objective could, in effect, alter the relative importance of the two components of the Committee's dual mandate.

Participants also discussed the medium-term outlook for monetary policy. Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation. Others, however, saw the recent configuration of slower growth and higher inflation as suggesting that there might be less slack in labor and product markets than had been thought. Several participants observed that the necessity of reallocating labor across sectors as the recovery proceeds, as well as the loss of skills caused by high levels of long-term unemployment and permanent separations, may have temporarily reduced the economy's level of potential output. In that case, the withdrawal of monetary accommodation may need to begin sooner than currently anticipated in financial markets. A few participants expressed uncertainty about the efficacy of monetary policy in current circumstances but disagreed on the implications for future policy.

Committee Policy Action 
In the discussion of monetary policy for the period ahead, members agreed that the Committee should complete its $600 billion asset purchase program at the end of the month and that no changes to the target range for the federal funds rate were warranted at this meeting. The information received over the intermeeting period indicated that the economic recovery was continuing at a moderate pace, though somewhat more slowly than the Committee had expected, and that the labor market was weaker than anticipated. Inflation had increased in recent months as a result of higher prices for some commodities, as well as supply chain disruptions related to the tragic events in Japan. Nonetheless, members saw the pace of the economic expansion as picking up over the coming quarters and the unemployment rate resuming its gradual decline toward levels consistent with the Committee's dual mandate. Moreover, with longer-term inflation expectations stable, members expected that inflation would subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, many members saw the outlook for both employment and inflation as unusually uncertain. Against this backdrop, members agreed that it was appropriate to maintain the Committee's current policy stance and accumulate further information regarding the outlook for growth and inflation before deciding on the next policy step. On the one hand, a few members noted that, depending on how economic conditions evolve, the Committee might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run. On the other hand, a few members viewed the increase in inflation risks as suggesting that economic conditions might well evolve in a way that would warrant the Committee taking steps to begin removing policy accommodation sooner than currently anticipated.

In the statement to be released following the meeting, all members agreed that it was appropriate to acknowledge that the recovery had been slower than the Committee had expected at the time of the April meeting and to note the factors that were currently weighing on economic growth and boosting inflation. The Committee agreed that the statement should briefly describe its current projections for unemployment and inflation relative to the levels of those variables that members see as consistent with the Committee's dual mandate. In the discussion of inflation in the statement, members decided to reference inflation--meaning overall inflation--rather than underlying inflation or inflation trends, in order to be clear that the Committee's objective is the level of overall inflation in the medium term. The Committee also decided to reiterate that economic conditions were likely to warrant exceptionally low levels for the federal funds rate for an extended period; in addition, the Committee noted that it would review regularly the size and composition of its securities holdings, and that it is prepared to adjust those holdings as appropriate.

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:

"The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to complete purchases of $600 billion of longer-term Treasury securities by the end of this month. The Committee also directs the Desk to maintain its existing policy of reinvesting principal payments on all domestic securities in the System Open Market Account in Treasury securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."

The vote encompassed approval of the statement below to be released at 12:30 p.m.:

"Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability."

Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, Charles I. Plosser, Sarah Bloom Raskin, Daniel K. Tarullo, and Janet L. Yellen.

Voting against this action: None.

External Communications
In follow-up to discussions at the January meeting, the Committee turned to consideration of policies aimed at supporting effective communication with the public regarding the outlook for the economy and monetary policy. The subcommittee on communication, chaired by Governor Yellen and composed of Governor Duke and Presidents Fisher and Rosengren, proposed policies for Committee participants and for Federal Reserve System staff to follow in their communications with the public in order to reinforce the public's confidence in the transparency and integrity of the monetary policy process. By unanimous vote, the Committee approved the policies.2 Participants all supported the policies, but several of them emphasized that the policy for staff, in particular, should be applied with judgment and common sense so as to avoid interfering with legitimate research.

It was agreed that the next meeting of the Committee would be held on Tuesday, August 9, 2011. The meeting adjourned at 12:10 p.m. on June 22, 2011.

Notation Vote
By notation vote completed on May 17, 2011, the Committee unanimously approved the minutes of the FOMC meeting held on April 26-27, 2011.


William B. English

1. Attended the portion of the meeting relating to dynamic stochastic general equilibrium models. Return to text

2. The policies are available at http://www.federalreserve.gov/monetarypolicy/files/FOMC_ExtCommunicationParticipants.pdf and http://www.federalreserve.gov/monetarypolicy/files/FOMC_ExtCommunicationStaff.pdf. Return to text

Why Baby Boomers Need To Get Real About Health & Long-Term Care Costs In Retirement - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Tuesday, May 28, 2013

(originally written by Howard Gleckman)


Baby Boomers are in serious denial when it comes to their medical and long-term care costs in retirement. Yes, Medicare provides excellent health insurance (subsidized in large part by taxpayers). But it doesn’t come close to paying for a senior’s medical costs. And doesn’t pay for long-term supports and services at all.

Those holes in the Medicare system mean a couple turning 65 today will pay an average of $220,000 in out-of-pocket medical costs before they die, according to a new study by Fidelity Benefits Consulting. Those out-of-pocket costs include premiums, co-pays, and deductibles. On top of their medical care, two-thirds of those 65 and older will have some long-term care needs. And other studies estimate that each spouse can expect to pay an average of $50,000 on average for that care, on top of their health care costs.

That means a typical couple will need to put aside roughly $300,000 to pay for their care in old age. But Census Bureau reports the median net worth of an average couple at age 65 was only about half that in 2010. It is probably more now since the housing and stock markets have recovered from their lows, but it is still not close to $300,000.

Even more worrisome, Boomers think they’ll need only about $50,000 to pay for their health care in retirement.  And many think Medicare will not only pay for health care but also for long-term supports and services. Sadly, they are wrong and wrong.

Medicare does pay for health care. And, as my Urban Institute colleague Gene Steuerle has shown, it provides very generous benefits. He estimates that a two-earner couple that turned 65 in 2010 can expect  $387,000 in Medicare benefits, far more than the $122,000 they paid in Medicare taxes. A Boomer couple that turns 65 in 2020 will get $499,000 in Medicare benefits over their lifetimes.

But even with generous government benefits, they will still have to pay hundreds of thousands of dollars out of pocket.

Now, estimates of care costs in old age are all pretty rough. Other analysts come up with somewhat different projections for the lifetime health costs of seniors. For example, the Employee Benefit Research Institute calculated in 2012 that a couple would need to put aside about $165,000 at age 65 to have a 50 percent chance of paying for their lifetime medical (but not long-term care) costs. EBRI figured they’d need to put aside about $225,000 to have a 75 percent chance of paying all their medical costs in old age.

These estimated costs are falling a bit to reflect more generous Medicare benefits. They may decline further if the recent slowdown in the growth of overall medical costs has staying power. But even so, costs will be far beyond what many Boomers will be able to pay.

EBRIs presentation is especially valuable since it tries to reflect the uncertainties of predicting the future. Some of us will pay less than the average, but some of us will pay much more.

We know, for example, that a typical male over 65 will need a little less than 2 years of long-term supports and services over his lifetime, while a typical woman will need about 3 years of assistance. But those are just averages. A study completed several years ago found that one-third of those 65 and older will  need no assistance at all, but one in five will need help for five years or more.

A separate EBRI study shows that household wealth crashes when someone has a long stay in a nursing home or uses a home health aide for long time. For instance, it finds the median household wealth falls from $102,000 when someone enters a nursing facility to just $60,000 after six months.

And that’s the real problem. Millions of Baby Boomers are totally unprepared for the medical care and personal care they are likely to need in retirement. All the denial in the world won’t make those needs go away. And the consequences of ignoring the problem can be catastrophic.

7 Retirement Planning Mistakes to Avoid, by Brian Mayer, RMR Wealth Management

RMR Wealth Management - Tuesday, May 21, 2013

(originally written by Rodney Brooks)


It's complicated, this retirement thing.


We keep hearing we need to save more money than we've saved. We're worrying about if we have enough to survive a health-care crisis in retirement. And in the middle of all that, we're trying to figure out if we can, indeed, wait a few years before we start taking those Social Security checks like all the financial advisers are telling us.


There's a lot at stake, and most of us can't afford to screw up. So, we talked to financial planners about some of the most frequent mistakes they've seen. Of course, they have seen a lot. Here are the top seven.


1. Are you really going to spend less when you retire? High on the list of financial planner Joe Heider, regional managing principal for Rehmann Financial Group in Westlake, Ohio, is the assumption that you will spend less money in retirement than you do in your working years.

The rule of thumb among some financial planners is that most people will spend 80 percent of what they spend while working — the assumption being that you won't have to pay for that daily commute, that work wardrobe, lunches, etc. But, Heider says, that assumption is wrong, especially in the early years.

"Most people, in my opinion, initially after they retire, actually spend more money than when they were working," he says. "When you have a job, you are in your office and you are not spending money. But now you have 24/7 to shop, travel and do all the things people couldn't do before."

2. Do you really need that much money in bonds when you retire? The old rules of retirement were to go 60 percent stocks 40 percent bonds as you neared retirement, and go 80 percent bonds when you actually reach retirement. That would be a huge mistake today, says Karen Wimbish, director of retail retirement at Wells Fargo.

"Today if you go that conservative, you won't be able to keep up with inflation," she says. "The old formula was based on your parents, who lived 10 years in retirement. People today will live a lot longer. They need to keep growth in their portfolio. The mix should be 50-50 (50 percent in stocks, 50 percent in bonds) instead of 80/20."

"I don't think they appreciate how much money it takes to fund their lifestyle," says Heider, "particularly where we are with historically low interest rates. It takes a lot more money to fund a lifestyle today if you fund it on lower-risk, fixed-income types investments."


3. Are you taking into account inflation? "There is a tendency for people in retirement to be way too conservative in their investments," says Heider. " They think that they no longer feel a need to hedge against inflation. Assume you'll have 25 years of retirement with 3 percent inflation: "Unless you have growing income, you would have a significant decrease in purchasing power," Heider says.


4. Does your spouse have power of attorney, and are all accounts held jointly? "I had a client with $756,000 in financial assets, of which $686,000 was in the husband's name in retirement accounts," says Curt Knotick, investment adviser with Accurate Solutions Group in Cleveland. "He was sole breadwinner, and she was a stay-at-home mom. But he had a stroke. His wife had no access to those assets because she had no power of attorney. With an IRA or qualified assets, the spouse is not a joint owner but a beneficiary. The spouse had to petition the court. That can be completely avoided with a $100 power of attorney."

Also, make sure you have an estate plan, says Mike Piershale of Piershale Financial Group in Crystal Lake, Ill. "My wife died prematurely of cancer," he says. "People think that can never happen. If there is not an estate plan, it can lead to a lot of costs and expenses that can set a retirement back for a surviving spouse."

Also, Piershale says, many married couples have accounts in just one spouse's name. "If that spouse passes away, it goes through probate before the surviving spouse gets the money. With death of second spouse, it goes to probate again."

5. Are you assuming that because you haven't saved enough for retirement, you can keep working into your 70s? "How many people do you see on your job in their 70s?" asks Wimbish. "Many of us assume we will find a job or keep our current job or be healthy enough. It is questionable whether you will be able to work that long."

People don't view retirement in the long term, says Heider. "If a married couple retires at 65, there's a 50 percent chance one will live into their mid-90s. If you live another 25 years, you're in retirement for half of your working life. If you retire at 60 you are almost in retirement as long as you were working, and you need to account for inflation."


6. Are you underestimating health care costs? "People are living longer, so they will have health care," says Wimbish. "Many people think Medicare will cover all their medical expenses." It doesn't. Payment depends on the type of treatment. "And it also doesn't cover dental, vision and hearing," Wimbish says. "Older people need one or all of them. They underestimate what they will have to pay. It could be a substantial amount of money. It could be $250,000 in retirement. And that doesn't cover skilled nursing."


7. Are you prepared psychologically for retirement? "The psychological mistakes are tougher in my opinion," says Heider. "Many people identify what they do as who they are," he says. "It is their identity. It can be difficult to let go of that. People need to look at what are their hobbies. People retire and they don't have hobbies, things they enjoy doing.


"We've seen where people retire and are miserable," he says. "It puts a strain on marriages. Couples have different views on what retirement will be. Children are raised, and now they are spending 24/7 with each other. It can put a strain on relationships. The nature of a marriage or relationship changes dramatically when you are together 24/7 compared to being together after 5 until you go to bed."

Are Your Parents Prepared For Retirement? - posted br Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Friday, May 10, 2013

(originally written by Abigail Dalton)


When Eileen Crehan thinks about her parents’ retirement plans, she worries.

The 27-year-old PhD candidate, like many young adults, knows that her parents’ future finances aren’t only a source of concern for them—they directly impact her life as well.

“They are careful spenders and savers, but they hit some bad luck when the mortgage broker industry tanked and some medical issues came up suddenly and they have been recovering since,” Crehan says. “This is a major source of stress but it’s also a motivator. Part of my goal in going to grad school is to be able to get a job where I will have some financial wiggle room to help them out.”

Crehan, who knows her parents aren’t in a place financially where they’ll be able to retire on their own, has been thinking about this issue for a few years, and says that “part of me is just really sad … because they most likely will not get to retire when they thought they would.”

For many of us with aging parents, their retirement may not even be on our radar. Who can think about someone else’s retirement plans when we’re busy enough trying to keep our own heads above water?

But as time rolls on and we start to get our own finances in order, we might start to worry about our parents’ financial future. After they’ve done so much for us, how, exactly, can we help?

Start a Conversation

Crehan is lucky that her parents have been willing to talk about their situation fairly freely, and they “do talk specific numbers about some things, like mortgage and salary,” she says. But for many families, money is emotional and off-limits.

Scott Word, a lawyer from Virginia who specializes in estate planning, suggests using a third party to introduce the subject of retirement and planning with your parents—it can be easier, he says, to tell them about a friend who had to go through a lot of trouble to get his finances in order because his parents hadn’t made sure everything was accurate and up-to-date. “Often,” Word says, “parents do want to share and tell the children what they’ve set up.”

Review Beneficiary Information

Also essential is making sure that your parents have all of their paperwork in order, and that their children either have copies of that paperwork or know someone who does. Word says that one of the things he often sees mistakes with are beneficiary designations—that is, making sure you’ve told your retirement account holder or life insurance company who will get your money after your death.

It can be easy to fill this information out when setting up an account and forget about updating it as time passes. This information should be reviewed yearly, and ideally, your parents should be reviewing it with a lawyer. Check with your parents to find out if you’re their beneficiary, and if so, make sure you have the account information you need, or know the contact information of the lawyer who does.

When it comes to selecting a beneficiary and managing accounts, Word is quick to point out that all families are different. While not many clients meet with their children, he has noticed that some children bring their parents in to review beneficiary and asset allocation as their parents get older.

There are key questions anyone should ask when deciding whom to make a beneficiary or whom to put in charge of financial choices (should a parent be unable to make them for themselves). These include:

•Does she or he have the necessary financial experience and judgment?
•If there are two or more children, will feelings be hurt by selecting just one?
•Can the responsibility be shared among children (all or some)?

Make Sure You Have Access to Their Information

Nicole Francis, a Financial Adviser at Hudson Advisory Group in New York City, recommends keeping important information on hand, including account information, phone numbers of relevant contacts (like a trusted financial planner or lawyer), and any legal paperwork your parents are willing to share. For a comprehensive list of materials your parents should ideally have on hand (and share with you, if they’re willing), she recommends the aptly named website Get Your Sh** Together. If your parents don’t want to share important documentation with you, make sure you have the names and contact information of someone who does have that information, like a lawyer.

Consider Getting Expert Help

Details on the full sum your parents may have saved aren’t particularly helpful, Francis says, because, not knowing their spending habits or being able to predict their expenses, you don’t know how long that money will last. “The first year of retirement is an experiment,” says Francis. “You’re figuring out how you’ll spend your money.” For instance, how will being home all day affect the way your parents spend money? Are your parents relocating? There might be living costs associated with a new location that they don’t yet know about. For questions like these, it’s a good idea to make sure your parents are meeting with someone who can help them with financial specifics, rather than your feeling personally responsible to make sense of your parents’ retirement assets.

Put Your Finances First

Francis says that children in this situation are part of the “sandwich generation”—young people who are supporting both parents and young families of their own. While it might be tempting to put aside money for your parents as they age, she explains, “there’s no way that you can save $250 a month and say, ‘That’s for Mom and Dad.’ It’s not feasible.”

Francis suggests that those children concerned about their parents are better off planning as best they can for their own lives and including their welfare in your decisions. If you’re buying a house, for instance, you might want to think about having a place for your parents to live with you as well. If you have siblings, you might want to discuss how you might sell your parents’ home or assets later on in life to help them financially.

Of course, not all children have parents who are so forthcoming about their finances or plans, or perhaps, like Crehan, have parents who won’t have the income needed to retire. While her parents have never specifically asked for financial assistance, she’s always considered it a given that she’d help. “I think this was just something that was a part of how I was raised to think about family,” she says. “We help each other out.”

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