Fill ‘er up, Siri

You can get groceries delivered right to your door – you can get a cooked dinner delivered – you can get books and shirts and shoes delivered.  And maybe one of these days – those toilet-paper-delivering drones will finally be airborne.

But – how about gas for your car?  Yes, that’s happening now too.  Not here yet – but Shell is testing out the idea in the Netherlands, in the city of Rotterdam.

How easy is it?  This easy: “It’s three clicks.  You set the time, set the location and then it’s done.”  That’s a Dutch customer explaining how it works on his smartphone, and yeah, that sounded like just two clicks to us also (but we think that third click is the “send” button).

The service is called Shell TapUp, and using their app on your phone (if you were in Rotterdam), you can order up a delivery of gas or diesel, to your car or truck, at home or at work, wherever your ride may be parked, when you need it.  A digital fill-up.

This pilot program is to test out the tech, and also to see how people like it.  The tech testing?  That’s still ongoing.  But the people test?  It’s a hit.

And if you’re wondering, since this is the Netherlands – yes, Rotterdam has canals, but no, Shell doesn’t send the gas boat to your car.  It’s a truck.

So get ready for one day and, “Siri, the car needs gas.”

Pretty Fly (for a shoe)

It’s tough.  It’s light.  It’s sustainably made.  It’s… “a little like baking a cake”!

And…it’s a shoe.  Yep.  Nike’s line of shoes made from Flyleather.

Flyleather is made from leather, but leather plus.  WIRED Magazine laid out the Nike formula: “…[Flyleather] combines leather scraps and polyester blend fibers.  While traditional leather-makers discard parts of the hide that are blemished or too soft and stretchy, Nike takes those pieces and grinds them into a fine dust before combining it with polyester fabric and water.  ‘It’s a little like baking a cake’ says Tony Bignell, VP of Nike’s footwear innovation.” (So yes, we are serious about that.)

If you’re a tennis player, you can pick up some Flyleather right now at the Nike shop online.  And what you get – is a shoe that Nike believes looks exactly like leather but:

  • Is 40 percent lighter
  • Is 5 times more durable
  • Uses 50 percent recycled leather
  • Uses 90 percent less water to make.
  • And looks like this.

In leather manufacturing, typically as much as a third of each cow hide can be tossed out.  Combining that scrap leather with polyester (which in turn is made using petrochemicals) – makes a smart, sustainable combination that couldn’t exist with just one or the other.  Welcome, Flyleather.

Make Mine Plastic: Plastic Wine Bottles

Here in March, it’s hard to imagine summer, well, period – let alone a day when we can spread a blanket out on the grass, open up a picnic basket and worry about ants instead of ice.

(And thanks Punxatawney Phil, for giving us six more weeks of winter!)

So here’s a jump start for your imagination, and a soon-to-come addition to those picnics – the plastic wine bottle.

The folks at Amcor make it (Amcor is a plastics company in Michigan).  The folks at Naked Winery fill it (a winery in Oregon).

And why might you want it?  First, no more “oops”.  No more “after a long hike in to your lovely picnic spot, nicely shaded under a big old tree, and as your (sweaty) hands reach for the wine bottle that you’ve packed in all that way, oops.”  No wine, and a mess of broken glass to clean up.  That, and, a plastic bottle weighs a lot less – so your hike in (and out) to your picnic spot is a lot more comfortable.

Your new bottle keeps your wine fine for at least a year, comes with the modern post-cork topper (a metal screw top), and is made from PET plastic.

Right now, Naked Winery is filling those bottles with a rose, a couple of whites and a Cabernet/Merlot blend.  But stay tuned, because we think other wineries will be following suit.

Salud!

(Oh, and if you’re the kind of person who wonders about this kind of thing, “PET” stands for polyethylene terephthalate.  But you could call it just another way that petrochemicals make life, and picnics, better.)

There’s an app for that (getting gas delivered to your car)

“Two orders of dumplings, spicy beef with eggplant, sweet and sour soup, rice – oh, and ten gallons of gas.”

Yep, that could happen.  And in fact, if you just want the gas delivered – it can happen right now.

You can get a weekly fill-up, gas when you need it, air for your tires (and our readers know how important that is for good gas mileage), an oil change, a car wash – wherever your car is parked, whether or not you are there – and you arrange it all, on an app, on your phone.

So you can skip the drive to the gas station or the car wash, and have your car taken care of, while you are taking care of something else.

Now you can’t do this everywhere – yet.  But if you’re in or around Minneapolis-St. Paul, you can now.  Cleveland or St. Louis?  Also available for you now.  And if you live in Austin or Atlanta, Nashville or Tampa or Chicago, LA or the San Francisco Bay Area – you could already be signed up.

Never heard of this?  Yoshi is the name of this service (the fuels partner is ExxonMobil).  You can find their app wherever you usually find your apps, or you can check them out online:  Yoshi.

Why “Yoshi”?  Well, that we don’t know, so you’ll have to ask ‘em.

And maybe one day – you WILL be able to get that pizza delivered, along with that tank of gas – so everyone (and everything) can get a fill-up at the same time.

Mirai Nagasu and “the tale of the tape” (the petrochemical-based tape)

Maybe you watched Mirai Nagasu land a triple axel Sunday night (Monday night, if you were there in South Korea) – the first-ever American woman to do it at the Olympics.

And maybe, when you got over that — you were one of many people who wondered – what was that “thing” on her thigh?

Tattoo?  No.  Bruise?  No.  Turns out – it was “USA” – printed on the KT Tape she was wearing under her tights.

And KT Tape turns out to be the Official Kinesiology Tape Licensee for the U.S. Olympic team (Admit it, THAT’s a category you’d never heard of before.  We hadn’t either.).

What’s that all about?  Petrochemicals, of course.

Now that’s not why our Olympians wear it.  They like it because – well, let’s have KT Tape tell the “tale of their tape”: “an elastic sports tape designed to relieve pain while supporting muscles, tendons, and ligaments – helps reduce pressure to the tissue – without restricting comfort and range of motion.”  And some athletes in outdoor events, skiers for instance, are even wearing the tape on their faces – to keep their skin from freezing.

But what makes that possible is the petrochemical touch.  In particular (for you chemists), it’s all about the polyacrylate, a polymer resin made from propylene (which is one of your basic petrochemicals).  It’s the petrochemical touch which makes a tape that can fit precisely to your muscles, and stay flexible enough to expand and contract with them.  That “touch” also repels water and wicks moisture away, so Olympic (and weekend) athletes can concentrate on their performance.

In a way though, this petrochemical connection is no big deal.  No big deal – because it might be harder to find a sport without some polymer-based material, without some synthetic fiber, in short, without a petrochemical connection.

Last week, we did a little Sports Petrochemical 101 on the Games – how petrochemicals are used in making skis and skates and sleds – helmets and pads – jackets and pants and brooms (the ones for curling).   Petrochemicals can even be used to help make the snow and the ice!

So, like most of us, you might be likely to make a triple bogey than a triple axel – but if you play a sport at any level, your game is probably better thanks to – petrochemicals.

Plastic Makes Perfect (Figs!)

There’s no time like mid-winter for thinking about something completely different – the fruits of mid-summer.

In this case, we’re thinking about fresh figs.  And while (other than idle daydreaming) would a news page about petroleum and petrochemicals be thinking about figs?  We’ve got an answer for that.  Or actually, Matthew Naitove, at Plastics Technology magazine has an answer:

“If you’re a fan of fresh figs (as I am), then you may have resigned yourself (as I have) to the fact that when you buy figs in a plastic mesh-style box, the fruit on the top may look great, but the figs on the bottom will be mashed, mis-shapen, and quite possibly moldy as a result.

“Well, I am resigned to such disappointment no longer, thanks to a more imaginative use of plastics [and there’s your connection!].  For the first time since I have been living in New York City … I found a supermarket that stocks fresh figs in thermoformed PET clamshells, where each piece of fruit (six to eight) is held snugly in its own separate pocket.  No bouncing around, no mashing, no squishing, no leaking of juice to promote mold growth.”

It’s clear, it’s strong, it’s lightweight – you heat it, mold it, turn it into the perfect carrying case for figs.  It’s recyclable when you’re done.  And it’s only made possible by the petrochemicals needed to make that modern plastic.  Not bad, even if the closest you come to a fig, is a Fig Newton.

Putter – Driver – Sand Wedge – Oil?

What do Jordan Spieth and Kyle Busch have in common?

Success?  Yes.  Cool heads under pressure?  That too.  But neither of them could do their job without something else they have in common – a barrel of oil.

Now Busch is obvious, since a race car without gasoline is no race car at all.

But Spieth?  Yep, Jordan isn’t powered by oil, but he couldn’t hit a golf ball without it – because there wouldn’t be any modern golf balls without oil.

In the beginning, all you needed was a tree, since both clubs and balls were wood.  Then came feathers (that was the inside) in a leather cover.  It’s said the featherie was a fine ball, but since even an expert could make only a handful a day, many of us would be out of balls long before we hit the back nine.  That was followed by gutta percha and rubber (back to trees again, although you could make these balls and still leave the trees standing).

Finally, we get to the modern golf ball, and oil.

Of course, it isn’t oil anymore by the time Titleist or Callaway enter the picture.  They are using petrochemical products at that stage, which is to say, chemical building blocks made from oil.

Making a typical ball – means mashing, stretching, chopping and molding synthetic rubber with other ingredients to form a core, and then a cover (urethane or Surlyn®) is molded around that.  And those petrochemical building blocks (for the chemists among us) – most often are ethylene for the cover, and butadiene for the core of the ball.

You can tweak that mix for durability, for distance, for drop and stop on the greens.  Oh, and price too.  And given that by one estimate, there are 300 million golf balls lost each year, just in the United States –  that’s a mighty good thing.

Skin in the game – if you’re a robot

Imagine meeting a robot one day.  A friendly robot.  It whirs and beeps and blinks a bit, and then sticks out a robotic hand.  “Hello, human.  It is a pleasure to meet you.”  Very cool.

Global Business Handshake

And then.  “Ouch!”  That’s you, as your new robotic friend gives you a vice-like, mechanical squeeze/hand shake.  Not so cool.

Now though, there may be a fix for that:  e-skin.

The latest version of e- (for “electronic”) skin, is being developed at the University of Colorado, Boulder.  It’s made of very thin, very supple, polymer called polyimine – reinforced with silver nanoparticles for strength – with sensors for pressure, humidity, temperature (so the “skin” knows what it is doing).

And while shaking hands with a robot would be cool, there is much more this skin could do.  It could, for example, allow robots to perform a wide range of delicate tasks, even perhaps, checking a child’s forehead for fever (because it could sense the heat if there was a temperature, and could touch gently so the child would be safe).  The same skin could be used on a prosthetic limb, to give a human user all the same benefits of a finer touch.

E-skin won’t feel like our skin – but to a remarkable degree, e-skin will be able to function like our skin – sending the same messages to an e-brain or our brain:  this is hot, this is cold, hold this tighter, hold this gently.

This latest e-skin even has the ability to heal itself (with a little chemical help), so if it does get a cut, you won’t have to worry about your robot rummaging around under the sink for a bandage.

Since it is an artificial skin, it can also be recycled – which might sound a little weird, but makes this more environmentally-friendly, and less expensive to produce.

And, do we need to mention it?  The polymer (the cool word for “plastic”) is made possible by the petrochemical para-xylene. (which in turn is made from oil).

So someday soon, if you run into C3PO on the street, you’ll be able to high five him.  Safely.

Doctor, Soldier, Farmer – Oil Company? Yes.

What do a doctor, a soldier, a farmer, a homeowner – each have in common with a big oil company?

They use some of the same tools every day.

The same ultrasound that doctors use to check that all is well with a baby-to-be?  British Petroleum (BP) uses to check for early warning signs of corrosion in storage tanks.

The military uses thermal imaging cameras to see inside buildings, and BP uses those cameras to see through pipes and catch leaks.

Farmers use drones to look over their fields, to see quickly and efficiently, what plants might need water or fertilizer.  BP uses drones to look over its operations out in the field to quickly and efficiently look over its far-flung operations.

And you might put a security camera out by the front door, to wirelessly keep an eye on things – in the same way that BP uses wireless sensors in its refineries to keep an e-eye on those miles and miles of pipes, tubes and pumps.

Which is how a big oil company puts high tech tools in the service of the highest level of safety.

The Oscars: Lights! Camera! Petrochemicals?

Oscar night!  The winners.  The losers.  The mixed-up envelopes.  And – the “what were they wearing” (sometimes accompanied by “what were they thinking!”)?

If you’re an Oscar watcher, you’ve probably got your own list of best- and worst-ever looks.  But to jog your memory, we’ve borrowed a few from each category from Cosmopolitan’s list of “The most memorable Oscar dresses”:

On the “ooh” side of the ledger, you’ll find Audrey Hepburn in white Givenchy (1954); Anne Hathaway in Armani Prive, 2009; and Halle Berry, 2002 in Elie Saab.

Then over on the “urk” side, how about Gwyneth Paltrow, in the see-through top, 2002; or maybe you remember Bjork in 2001, complete with swan; or, umm, Cher, in well, whatever that thing was.  1988 Oscar for Moonstruck, yes.  1988 outfit for the Oscars – no.

But we digress.  Because the point of this story, is that the oohs and the urks (and the in-betweens) on Oscar night, often owe something to petrochemicals.

Synthetic fibers (made using petrochemicals), like polyester and nylon, are used in making all sorts of fabrics – from satin and chiffon, to lace and velvet – and used in dresses that you might find on the rack, on the runway, or on stage at the Oscars.

Of course, that doesn’t mean that the folks who produce petrochemicals are responsible for the actual looks that end up at the Academy Awards.  So if you’re thinking back to 1995 for example, and the “famous” dress made from American Express Gold Cards – that was strictly Lizzy Gardiner’s idea (the Oscar-winning costume designer who made and wore that costume.  Even if it’s true that credit cards are also made with – yep, plastic made from petrochemicals).

Dresses aside though — maybe there wouldn’t be any Oscars at all without petrochemicals.  That’s because much of today’s film is made with polyester – and without film, no movies; and without movies, well, no Oscar.

Now if you keep up with the industry, you know that the movies have gone digital.  In fact, in most theaters, you won’t even find film projectors anymore.  But – petrochemicals are at the heart of everything digital too.  That’s a story for another time though.

Keeping it Clean

When you think of a “clean room” – maybe you think of workers in helmets and gloves and big white suits, airlocks, bright lights, and of course, shiny spotless surfaces.  You might think of finding clean rooms in places like NASA, as scientists work on a space telescope or a probe to another planet.  And you’d be right.  But you’d also be right if you thought about plastics manufacturers (at least when those plastics are being used in the world of medical care).

That’s a good thing too, because these are plastics you want to be really, really clean.  Clean, as in beyond sparkling.  Clean, as in sterile.

That’d be plastics that go into us, as in pacemakers and stents, artificial hearts and artificial limbs.  And sometimes medical products like plastic bags and tubes for blood and other IV infusions, and plastic syringes, are also manufactured in a clean room.

So a clean room is a good thing.  But those advanced medical plastics (and most plastics, period) require something else too – petroleum and natural gas – because that’s where the petrochemical building blocks (like ethylene and propylene), that are essential for making those plastics, come from.

“Make mine seawater” (petrochemicals make desalinization practical)

“Water, water every where,

Nor any drop to drink”

(Which, as it turns out, is how the Rime of the Ancient Mariner actually puts it – though most of us have probably heard it as “and not a drop to drink”.)

In the poem, it’s the plight of sailors adrift in the ocean, literally on a sea of water, but suffering from thirst, because you can’t drink seawater.

But that was then (1797, to be exact).

Now we can (thanks to desalinization, taking the salt out of sea water).  And that is a good thing, because now it isn’t just sailors at sea who need water – it’s hundreds of millions of us on land too – people who live in places where traditional sources of water are falling short.

But desalinization traditionally uses massive amounts of energy (which also makes it massively expensive).  And that, is why even in cities by the sea, we don’t see much desalinization today.

Now comes a new technology, a membrane for filtering seawater that mimics the membrane of a living cell.  This new filter doesn’t require forcing the water through it (which is what takes all that energy and costs all that money) – but still does the work of producing clean, drinkable water – straight out of the sea.

But this new membrane has another plus as well.  It turns out that seawater has a lot of lithium in it, and this new process can filter out that lithium.  That’s good because this is the same lithium that goes into lithium-ion (Li-ion) batteries – the batteries that run laptops when they’re not plugged.  Also cell phones, tablets, digital cameras, and cordless power tools (like sanders, drills, hedge trimmers).  And yes, electric car batteries too.  Which means, like clean drinking water, the demand for lithium is also putting pressure on the supply.

So you might say truly, this is a magic membrane, that might be the answer to two critical shortages at once.  And the starting point for this magic – is toluene.  Now, if you don’t know what that is, you’re not alone.  Toluene is a petrochemical, made from petroleum, working quietly in the background.  In this case, toluene is used in step one of a series of chemical reactions, which eventually gets us to a zeolitic imidazolate framework, which is the basis of the new membrane filter.

And that – could get us to a virtually inexhaustible source of fresh drinking water (and a lifetime supply of cellphone batteries).  Guess it’s a good thing oil and water don’t mix.

Why Market Returns May Be Lower and Global Diversification May Be More Important in the Future

By VEERAPAN PERIANAN

MARCH 06, 2018

Key Points
  • Market returns on stocks and bonds over the next decade are expected to fall short of historical averages.
  • The main factors behind the lower expectations for asset returns are low inflation, historically low interest rates and elevated equity valuations.
  • International stocks appear more attractive than U.S. stocks based on valuations, underscoring the importance of investing in a diversified portfolio.

Market returns on stocks and bonds over the next decade are expected to fall short of historical averages, while global stocks are likely to outperform U.S. stocks, according to our 2018 estimates.¹

This article provides a broad overview of the methodology used for calculating our capital market return estimates and highlights the importance of global diversification and maintaining long-term financial objectives that are based on reasonable expectations.

The main factors behind the lower expectations for market returns are below-average inflation (despite a recent rise in expected inflation), historically low interest rates and elevated equity valuations.

The reduced outlook follows an extended period of double-digit returns for some asset classes, as shown in the chart below. As such, now may be a good time for investors to review, and consider resetting, long-term financial goals to ensure that they are based on projections grounded in disciplined methodology and not historical averages.

Our estimates show that, over the next 10 years, stocks and bonds will likely fall short of their historical annualized returns from 1970 to 2017. The estimated annual expected return for U.S. large-cap stocks from 2018 to 2027 is 6.5%, for example, compared with an annualized return of 10.5% during the historical period. Small-cap stocks, international large-cap stocks, core bonds and cash investments also are projected to post lower returns through 2027. However, the expected annual return for international large-cap stocks is 7.2% over the next 10 years, which is higher than the expectations for U.S. large-cap stocks.

Here are answers to frequently asked questions about these market estimates:

Why are long-term estimates of returns important?

How do you calculate your long-term forecasts?

Why do you expect long-term returns to be lower than historical averages?

What could lead to higher returns?

Why do you expect international stocks to outperform U.S. stocks?

What can investors do now?

Why are long-term estimates of returns important?

A sound financial plan serves as a road map to help investors reach long-term financial goals. To get there, investors need reasonable expectations for long-term market returns.

Return expectations that are too optimistic, for example, could lead to a delayed retirement or make it difficult to pay for a big expense such as a college education.  If return expectations are overly pessimistic, too much may be saved in the nest egg at the expense of everyday living.

How do you calculate your long-term forecasts?

The long-term estimates cover a 10-year time horizon. We take a forward-looking approach to forecasting returns, rather than basing our estimates on historical averages.

For U.S. and international large-cap stocks, we use analyst earnings estimates and macroeconomic forecast data to estimate two key cash-flow drivers of investment returns: recurring investment income (earnings) and capital gains generated by selling the investment at the end of the forecast horizon of 10 years. To arrive at a return estimate, we answer the question: What returns would investors make if they bought these assets at the current price level to obtain these forecasted future cash flows?

For U.S. small-capitalization stocks, we forecast the returns by analyzing and including the so-called “size risk premium.” This is the amount of money that investors typically expect to earn over and above the returns on U.S. large-capitalization stocks.

For the U.S. investment grade bonds asset class, which includes Treasuries, investment-grade corporate bonds and securitized bonds, our forecast takes into account both the yield-to-maturity (YTM) of the 10-year U.S. Treasury note and a corporate credit risk premium.² We believe the future level of returns an investor will receive, even if interest rates rise, is reflected with YTM. YTM is the return an investor can expect to receive if the bond is held till maturity. Although cash yields are currently negligible, we believe cash will keep up with the rate of inflation over the long run. Our inflation rate forecast is the consensus forecast of economists

Why do you expect long-term returns to be lower than historical averages?

Three primary factors are behind the forecast for reduced returns: lower inflation, low interest rates and elevated equity valuations.

  • Low inflation. Inflation averaged 4% annually from 1970-2017. Our forecast is for inflation to average 2.2% from 2018-2027. This is a slight increase from last year. It is still, however, much lower than the historical average. When the rate of inflation is low, bond yields also have been low. That is because bond investors generally do not require as much yield premium to compensate for the erosion in buying power that inflation can inflict on a portfolio. For stocks, low inflation historically has meant low nominal (before inflation) returns.
  • Low rates.  Lower inflation generally means low nominal (before inflation) interest rates. This affects yields on everything from cash to 30-year Treasury bonds. By historical standards, we are also in an era of low real rates (i.e., rates after adjusting for inflation) and this is likely to continue because the consensus forecast for global economic growth is much lower. Low yields mean investors earn less from the fixed-income portion of their portfolios. Stock returns tend to be higher than bond yields due to the relatively greater risk in holding stocks. When bond yields are lower, stock returns tend to be lower.
  • Elevated equity valuations. Most equity markets appear to have moved considerably higher during 2017 than justified by their earnings growth expectations, resulting in high valuations. We acknowledge that current expectations for earnings growth are improving relative to previous years, in part due to the recent corporate tax rate changes in the U.S. and better economic growth prospects for many countries. However, we would like to see further evidence of earnings growth to justify higher returns on stocks going forward.

Curb Your Expectations and Consider Going Global

What could lead to higher returns?

Returns could exceed our expectations if the U.S. economy grows more than economists anticipate. According to consensus forecasts, economists expect 2.1% annual gross domestic product (GDP) growth over the next 10 years, even after accounting for the recent corporate tax rate changes.  Higher-than-expected economic growth would likely lead to higher earnings growth, driving stock and bond returns higher. An example of the economy growing faster than expected occurred from 1990-1999. During that period, economists expected annual GDP growth of 2.4%, while the U.S. economy actually grew at a much higher rate of 3.2% annually on average. Corresponding returns from U.S. large-capitalization stocks were 18.2% on average and core bonds averaged 7.7% despite severe market turbulence in 1998.

Also, it is important to note that tax policy changes alone cannot support earnings growth. Corporations leveraging tax savings for long-term capital investments would be important to helping boost earnings on a sustainable basis, which would, in turn, lead to better return expectations.

Why do you expect international stocks to outperform U.S. stocks?

As shown in the chart above, U.S. large-cap stocks are expected to return 6.5% annually over the next 10 years, compared to a higher return expectation of 7.2% for international large-cap stocks. This is mainly due to the current elevated valuations for U.S. stocks compared to international stocks.

What can investors do now?

Thanks to the power of compound returns, what investors do (or don’t do) today can have big implications on their ability to meet their long-term goals.

Here are a few things to consider doing. First, if you don’t have a long-term financial plan, now is a good time to put one together. Second, try to minimize fees and taxes, particularly in a lower-return environment. And last but not least: Build a well-diversified portfolio.

¹ Charles Schwab Investment Advisory, Inc., a separately registered investment advisor and an affiliate of Charles Schwab & Co. Inc., annually updates the capital market return estimates.

² Treasury notes generate what is considered a “risk-free” rate, or yield, because of the negligible chance of the U.S. government defaulting on its debt obligations. A corporate credit “risk premium” is the amount of money that investors expect to earn above and beyond the yield because of the chance of a default by the corporation that issued the bond.

Important Disclosures

Schwab Intelligent Portfolios® is made available through Charles Schwab and Co., Inc. (“Schwab”) a dually registered investment adviser and broker dealer. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are affiliates and subsidiaries of The Charles Schwab Corporation.

Please read the Schwab Intelligent Portfolios disclosure brochure for important information.

All forward looking statements contained in this article, including any forecasts and estimates, are based on Charles Schwab Investment Advisory’s outlook only as of the date of this material.  Charles Schwab Investment Advisory, Inc. (“CSIA”) is an affiliate of Charles Schwab & Co., Inc. (“Schwab”).

Investing involves risk including loss of principal.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.  Data here are obtained from what are considered reliable sources; its accuracy, completeness or reliability, however, cannot be guaranteed.

Past performance is no guarantee of future results.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

International investments are subject to additional risks such as currency fluctuation, geopolitical risk and the potential for illiquid markets.

Small cap funds are subject to greater volatility than those in other asset categories.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed‐income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

U.S. Large Cap total returns 

Standard & Poor’s market-capitalization weighted index focuses on the large-cap segment of the U.S. equities market.  It consists of 500 widely traded stocks that are chosen for market size, liquidity, and industry group representation.  S&P 500 is a registered trademark of, and proprietary to, S&P Dow Jones LLC.

U.S. Small Cap total returns

Russell indices are market-capitalization weighted and subsets of the Russell 3000® Index, which contains the largest 3,000 companies incorporated in the United States and represents approximately 98% of the investable U.S. equity market.  The Russell 2000® Index is composed of the 2000 smallest companies in the Russell 3000 Index.  The Russell 2000® Growth Index contains those Russell 2000 securities with a greater-than-average growth orientation.  The Russell 2000® Value Index contains those Russell 2000 securities with a less-than-average growth orientation.  The Russell 1000® Growth Index contains those Russell 1000 securities with a greater-than-average growth orientation.  The Russell 1000® Value Index contains those Russell 1000 securities with a less-than-average growth orientation.

International Large Cap total returns

MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI EAFE Index consists of the following 22 country indices: Australia, Austria, Belgium, Denmark, France, Finland, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

U.S. Investment Grade Bonds

The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS. The U.S. Aggregate rolls up into other Bloomberg Barclays flagship indices, such as the multi-currency Global Aggregate Index and the U.S. Universal Index, which includes high yield and emerging markets debt. The U.S. Aggregate Index was created in 1986, with index history backfilled to January 1, 1976.

Barclays Global Aggregate Bond Index provides a broad-based measure of the global investment-grade fixed-rate debt markets. The three major components of this index are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. The Global Aggregate Bond Index ex US excludes the U.S. Aggregate component.

Cash Investments

This index measures the total return equivalent of 3-month U.S. Treasury securities.  The index consists of the last three 3-month Treasury bill issues, based on the month-end rate.  Returns for the index are calculated on a monthly basis only. The index is published by Citigroup Index LLC.

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Roth vs Traditional IRAs: Which Is Right for Your Retirement?

By ROB WILLIAMS

MARCH 01, 2018

Both traditional and Roth IRAs can be effective retirement savings tools, but eligibility limitations mean one or both may not be right for you. Here’s a guide to help you choose.

What’s the difference between a traditional and Roth IRA?

A traditional IRA is an individual retirement account that allows you to make contributions on a pre-tax basis (if your income is below a certain level) and pay no taxes until you withdraw the money.¹ This makes traditional IRAs an attractive option for investors who expect to be in a lower tax bracket during retirement than they are now.

On the other hand, Roth IRA contributions are made with after-tax dollars. The benefit of a Roth IRA is that you can withdraw your contributions and earnings tax-free after 59½, if you’ve had the account for at least five years, or you meet certain other conditions.²  In addition, your after-tax contributions to the Roth account can be withdrawn at any time, tax and penalty-free (however, if you make an early withdrawal of any earnings you will have to pay taxes and penalties on them).

This makes a Roth an attractive option for investors who expect to be in a higher tax bracket during retirement than they are now. A Roth IRA can also offer some spending flexibility in retirement, as money can be withdrawn without increasing your tax bill and you won’t have to take annual required minimum distributions (RMDs) after you turn 70½.

How much can I contribute?

For the 2017 and 2018 tax years, the maximum amount you can contribute to a traditional or Roth IRA is $5,500 ($6,500 if you’re age 50 or older). However, there are some rules that affect IRA contributions and deductibility. Here’s an overview:

Traditional IRA

There is no income limit for contributing to a traditional IRA, and the contribution is fully deductible if neither you nor your spouse was covered by a retirement plan at work during the tax year. However, if either of you was covered by a workplace retirement plan, deductibility phases out depending on your filing status and income:

Source: Internal Revenue Service

Roth IRA

Roth IRA contributions are made with after-tax dollars. You can contribute to a Roth IRA only if your income meets certain limits:

Source: Internal Revenue Service

So if you do qualify for a traditional IRA (with the ability to deduct contributions) and a Roth IRA, how do you choose between them? Here are thoughts and guidelines to help you make a decision:

If you think your tax bracket will be higher when you retire than it is today, you should probably consider a Roth IRA—especially if you’re a younger worker who has yet to reach your peak earning years.

Roth and traditional IRA, now and in retirement

Note: Calculations assume a $5,000 starting pretax contribution in the deductible IRA and a $3,750 post-tax contribution, at a 25% tax rate, in the Roth IRA. The hypothetical examples assume a 6.5% average annual return over 25 years. The traditional deductible IRA taxes at withdrawal are a based on a 30%, 25%, and 20% marginal income tax rate.

  • If you think your tax bracket will be lower when you retire, you may be better off taking the up-front deduction of a traditional IRA. If you think your tax bracket will be the same when you retire, it’s almost a wash for income tax purposes. However, you aren’t subject to RMDs with a Roth, and if you leave it behind when you die, your heirs can stretch out their own tax-free withdrawals. A Roth IRA can also be a flexible source of retirement funding: You can withdraw a large sum, if you have a large one-time expense or other needs in retirement, without increasing your tax bill. Allocating a portion of your retirement savings to a Roth can increase the flexibility you have to manage taxes in retirement.

    Another advantage of a Roth IRA is that contributions may be withdrawn any time for any purpose without tax or penalty. However, just because you can do this doesn’t mean you should. The opportunity costs are high—taking money out of your Roth IRA means you may miss out on compounding interest. When you can put in only $5,500 for 2018, plus an additional $1,000 “catch-up” contribution if you’re age 50 or older, taking out previous contributions may be hard—or even impossible—to make up.

Direct rollovers

If you change jobs, you have the option to convert a traditional 401(k) directly into a Roth IRA without having to roll it into a traditional IRA first. Just remember you must pay federal income tax on pretax contributions and earnings at the time of the rollover. Also, remember that you have other options, including keeping your assets in your former employer’s plan, rolling over assets to your new employer’s plan, or taking a cash distribution (on which taxes and possible withdrawal penalties may apply).

Roth 401(k)

An increasing number of employers are offering Roth 401(k) options in addition to traditional 401(k)s. With a Roth 401(k), you can contribute a portion or all of your paycheck up to certain limits. You can also choose to have some of your paycheck go pre-tax into a traditional 401(k) and some post-tax into a Roth 401(k). Any employer match or contribution, however, must go into a traditional 401(k).

Unlike Roth IRAs, Roth 401(k) contributions are not subject to earnings limits. This means that if you aren’t eligible to contribute to a Roth IRA because your income is too high, you may be able to contribute to a Roth 401(k). Distributions from a Roth 401(k) are subject to the same general tax rules as a Roth IRA, with exception of an RMD requirement starting at age 70 ½. You can avoid this by rolling over a Roth 401(k) balance into a Roth IRA. So if you’re eligible, don’t forget the Roth 401(k) option if a Roth makes sense to you.

Roth IRA conversions

If you’re ineligible for a Roth IRA, some investors maximize contributions to a traditional IRA so you can convert to a Roth. However, there are some caveats:

You can’t pick and choose which portion of traditional IRA money is converted. The IRS looks at all traditional IRAs as one when it comes to distributions (including Roth conversions). Traditional IRA balances are aggregated so that the amount converted consists of a prorated portion of taxable and nontaxable money. So making nondeductible contributions to a traditional IRA with the goal of later converting to a Roth IRA would likely work best if you have little or no existing deductible IRA balance to muddy the waters. Still, any earnings leading up to conversion would be subject to income tax (which, as always, is best paid from outside funds).

High earners not eligible to make Roth contributions could make nondeductible contributions to a traditional IRA and then convert to a Roth (sometimes called a “backdoor Roth conversion”). The process is similar to any other Roth conversion, but typically takes place very soon after contributing funds to a traditional IRA. There is some debate among tax professionals about whether doing this conversion immediately or repeatedly could be outside Congressional intent when they changed the Roth conversion law in 2010.

The IRS has not formally weighed in on this topic, so be aware that there may be some risks to this strategy. If the IRS decides to question the conversion, you may owe a 6% tax or other taxes for overfunding your Roth. For some investors, this type of Roth conversion could be a viable way to obtain the benefits of tax-free growth, so long as they’re comfortable with the potential uncertainty, and work with a certified public accountant (CPA) or tax professional. If your employer offers it, you might also choose to make a contribution to a Roth 401(k). These have no earnings limits and have higher contribution limits.

The bottom line

A Roth IRA can be a great long-term savings tool, so try to take advantage of these rules if you can. Just remember that tax laws are subject to change, so check out the IRS’s Latest News page regularly for important updates. Also, be sure to talk with your accountant or other professional tax advisor about whether a Roth IRA makes sense for you.

¹ If you withdraw money from a traditional IRA before age 59½, your deductible contributions and earnings (including dividends, interest, and capital gains) will be taxed as ordinary income. You may also be subject to a  10% penalty on early withdrawals, and a state tax penalty may also apply. Consult IRS rules before contributing to or withdrawing money from a traditional IRA.

² If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) in certain situations. If you’re older than 59½ but haven’t met the five-year holding requirement, your earnings may be subject to taxes but not penalties. If you’re under age 59½ and your Roth IRA has been open five years or more, you may be able to avoid taxes on the earnings in certain situations. Consult IRS rules before contributing to or withdrawing money from a Roth IRA.

Important Disclosures

Schwab Intelligent Advisory is made available through Charles Schwab & Co., Inc., a dually registered investment advisor and broker-dealer.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, or legal, tax, or investment advice, or a legal opinion. Individuals should contact their own professional tax advisors or other professionals to help answer questions about specific situations or needs prior to taking any action based upon this information.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

The type of securities and accounts mentioned may not be suitable for everyone.

Investing involves risk, including loss of principal.

Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.

A rollover of retirement plan assets to an IRA is not your only option. Carefully consider all of your available options which may include but not be limited to keeping your assets in your former employer’s plan; rolling over assets to a new employer’s plan; or taking a cash distribution (taxes and possible withdrawal penalties may apply). Prior to a decision, be sure to understand the benefits and limitations of your available options and consider factors such as differences in investment related expenses, plan or account fees, available investment options, distribution options, legal and creditor protections, the availability of loan provisions, tax treatment, and other concerns specific to your individual circumstances.

When a participant rolls a Roth 401(k) balance to a new Roth IRA, the five‐year qualification period starts over. This may impact the rollover decision. If the participant has an established Roth IRA, then the qualification period is calculated from the initial deposit into the IRA and the rollover will be eligible for tax‐free withdrawals when that five‐year period has ended (and the age qualifier has been met).

Each Roth conversion has a separate five-year holding period for determining withdrawal penalties.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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