January 20, 2015

Swiss Surprise

Central banks have been full of surprises lately, but not too many people saw this one coming. For aficionados of the board game Clue, here's the gist of it: Thomas Jordan did it in Switzerland with monetary policy.

Last week, Swiss National Bank (SNB) Chairman Thomas Jordan told the world the SNB would no longer cap the value of the Swiss franc at 1.2 per euro because the policy was no longer needed. The decision triggered an exceptional response. The Economist reported:

"Currencies don't normally move that far on a daily basis - 2-3 percent is a big shift. The exception is when a country on a fixed exchange rate suffers devaluation; then a 20-30 percent fall is a possibility. But a 20-30 percent plus upward move is almost unprecedented. That, however, is what happened to the Swiss franc on January 15^th..."

The SNB's decision roiled global financial markets. The Swiss market lost about 10 percent of its value on the news and U.S. markets slumped, too. Anxiety was particularly acute in central Europe where many people hold loans and mortgages denominated in Swiss francs.

The SNB currency peg was introduced just three years ago, when things were grim in the euro region, and money was pouring into safe-haven Switzerland. The value of the Swiss franc increased significantly, making Swiss exporters – watchmakers, chocolatiers, luxury goods manufacturers – far less competitive. The SNB's solution was a currency peg.

So, how does a central bank maintain the value of its currency? Well, among other things, it prints money (in this case, Swiss francs) to buy more of the peg currency (euros). Today, with the European Central Bank expected to begin a round of quantitative easing that may reduce the value of the euro, the BBC speculated the Swiss could no longer afford to maintain the peg.

Motives aside, the move may have produced results the SNB didn't anticipate. An expert cited by the International Business Times said, "The Swiss bank thought that by removing the cap and activating a negative interest rate, the currency would weaken. In this case, the surprise is going to bite them back." Did it ever.

Retirement Just Got Cheaper

Good news for anyone in retirement or retiring soon: The amount of savings needed to cover health insurance premiums and out-of-pocket care expenses fell for a second straight year, according to the Employee Benefits Research Institute (EBRI).

Okay, get ready for the governmental alphabet soup! The savings needed to pay Medigap premiums, Medicare Part B premiums, Medicare Part D premiums, and out-of-pocket drug expenses (if you retired at age 65 in 2014) was estimated to be:

For men:

• $64,000 (50% chance of savings covering all expenses)
• $93,000 (75% chance of savings covering all expenses)
• $116,000 (90% chance of savings covering all expenses)

For women:

• $83,000 (50% chance of savings covering all expenses)
• $106,000 (75% chance of savings covering all expenses)
• $131,000 (90% chance of savings covering all expenses)

For married couples:

• $147,000 (50% chance of savings covering all expenses)
• $199,000 (75% chance of savings covering all expenses)
• $241,000 (90% chance of savings covering all expenses)

That's 2-10 percent less than the savings needed in 2013. How is it possible these estimates are moving lower? Retiree spending on healthcare has dropped, according to U.S. News & World Report:

"A flood of 77 million people from the baby boomer generation have been turning 65, the age of Medicare eligibility, since 2011. These younger enrollees have been a leading factor driving down the rate at which health care spending is increasing, because the younger boomers tend to be healthier than older enrollees and therefore use fewer medical services... Also contributing to the slowdown are changes in the way medicine is being practiced, the lingering effects of the Great Recession, and the shift in usage from high-priced prescription drugs to less costly generic alternatives."

EBRI's estimates use Congressional Budget Office and Centers for Medicare & Medicaid Services projections regarding future premium and health care cost increases. These projections for spending growth have slowed in recent years.

Weekly Focus - Think About It

"As a player, it says everything about you if you made the Hall of Fame. But, then again, boy... there's something about winning a Super Bowl."

—Terry Bradshaw, American football player and NFL analyst

Best regards,
Sean M. Dowling, CFP, EA
President, The Dowling Group Wealth Management