Financial Planning Mastered

What Type of IRA Should You Have?

2012-01-30T09:38:00.003-07:00

I have found that a lot of people are confused by the IRA rules: whether they should contribute to one, what type is best for them, or if they are even eligible to make a contribution at all.

There are four types of contributory IRA’s. Not all of them are available to everyone. There is the traditional deductible IRA, the non-deductible IRA, a spousal IRA and a Roth IRA.

Contributions to deductible IRA’s are limited by income phase outs. For a single taxpayer, the income phase out limit for 2011 is $56,000 to $66,000. For taxpayers who file married, filing jointly, the phase out is between $90,000 to $110,000 for 2011. These low income phase out limits mean that most people will not qualify for these accounts.

However, if you, and your spouse if you are married, do not have a company retirement plan available, these income limits do not apply and you may be eligible to make a deductible contribution to an IRA. Keep in mind that, if either you or your spouse are eligible for a company retirement plan, whether you are making contributions or not, you will not be able to make a deductible contribution to an IRA.

A spousal IRA is for a non-working spouse and allows contributions based on the working spouse’s income. The income phase out limits, as previously stated, apply to a spousal IRA, as well.

Taxpayers who are phased out of IRA contributions because of the income limits, can still make a non-deductible contribution to an IRA.

With a Roth IRA, contributions are not deductible, but the account grows tax free and is completely tax free when distributions are taken from it after retirement. Roth IRA’s also have income phase out limits. For 2011, a taxpayer filing single is phased out between $107,000 to $122,000. For married, filing jointly, the income phase out is between $169,000 to $179,000.

So, how do you know what type of IRA is best for you? Keep in mind that everyone’s circumstances are different and you should talk to your accountant before making a decision. However, here are some things to consider when deciding whether and what type of IRA to contribute to.

First, if you are eligible for a Roth IRA, but not a deductible IRA, definitely contribute to the Roth. The question becomes more difficult to answer if you are eligible for a deductible IRA. Depending on individual circumstances - including age, income level, risk tolerance - making a non-deductible contribution to a Roth IRA may still make more sense than taking a current-year tax deduction for your contribution.

What happens if you are not eligible for a deductible or a Roth IRA? Should you contribute to an IRA at all? Again, depending on individual circumstances, the answer is, “probably, yes”. Even if you don’t get a current tax break, nor receive tax-free withdrawals, the tax-deferred growth of an IRA is an important component in saving for retirement.

Lastly, think about what you’re saving for. People are often more inclined to take money out of a non-retirement account for current spending, instead of leaving it to grow for retirement. Most of us will hesitate to pay taxes and penalties on withdrawals from a retirement account if we have any other choice available.

Where Do You Keep Your Important Papers?

2012-01-24T06:41:00.003-07:00

We often talk about the things we need to do to take care of our families in case something happens to us: keeping beneficiary designations up to date, having a will in place, life insurance. But, how many of us take the time to keep a list of where everything is? Even the most organized person in the world, and it’s not me, has important papers in several places; sometimes in a home office, sometimes with an attorney, sometimes in a safe deposit box at a bank.
There are the obvious things that you know your family needs to know the location of: wills, Power of Attorney forms, life insurance policies, trust agreements.
But, if something happened to you, would your family be able to find these things:
Property and casualty insurance statements
Homeowner’s insurance policies
Car insurance policy
Bank statements and checks
A list of the checking and savings accounts you have
A list of credit cards you have
Statements for CDs, stocks, mutual funds; any investments accounts you might have
And, to go along with the last one, any stock certificates you have in your possession

How about:

Combinations to office or house safes
Titles to deeds of real estate
Titles to cars
Debt or loan agreements – debts you owe and debts owed to you
Lists of stored property, where it’s stored, and where the key to the storage unit is
Birth certificate, marriage certificate, social security card, military discharge papers
Passports
Lists of friends and relatives

When someone passes away, all of these things can become very important. The personal representative of the estate needs to have an easy way to find out what you have and where it is. A lot of accounts need to be paid off and closed. Something as simple as a cell phone account, not caught for several months, can add up to a lot of money that has to be paid; money that could have gone to heirs. Property may need to be sold for which a proof of ownership is necessary.

When my mom passed away a couple of years ago, I tried to notify as many of her friends as I could. Because she passed away near Christmas and we had her mail forwarded to me, I received her Christmas cards and was able to notify people that weren’t listed in any of her address books that we found.

We have a form in our office called “Document Location Records” that helps our clients keep track of where everything is and, should something happen to them, will help their personal representative track everything down. For anyone who would like a copy of this form, call my office at 208-319-3545 and leave a message on my voicemail with your name and address and I’ll get one in the mail to you. Keep in mind, however, that having the form doesn’t work if you don’t fill it out.

Good Debt?!? Is There Really Such A Thing?

2012-01-17T12:37:00.003-07:00

Good debt vs. bad debt. Yes, there really is such a thing as good debt!!!

Many of us think that all debt is bad; how is it possible to have good debt?

Believe it or not, it is possible to have “good debt”. Borrowing to increase your net worth, or for bills that can be quickly repaid is good debt.

On the other hand, bad debt is borrowing for things that don’t build wealth or that lose their value over time.

Let me give you examples of good debt and bad debt.

Bad debt would be borrowing for things such as restaurant meals, clothing, or home electronics.

Good debt would be a home mortgage, education debt, and sometimes a vehicle – for example if it can be used in a business.

Ideally, good debt will be deductible.

There are also some rules of thumb about how to pay for different size purchases.

For small purchases – under $500.

Use checks, cash or debit cards – this helps you avoid spending money you don’t have.
Use credit cards only if you are positive that you will pay the balance off immediately. Float, which is using the credit card company’s money for a month, is different than revolving debt.

Medium-size purchases – between $500 and $2000.

Save the money to make the purchase – reduce spending if necessary
If you have any emergency fund, now might be the time to use it.
Use a low rate – 6-12% credit card, but be sure to pay it off before the rate rises

Large purchases – above $2000

Consider a home equity line of credit, if it’s available to you. The interest rate is generally lower than other types of credit and is usually tax-deductible.

Even if you currently have no or only good debt, be sure to borrow only the amount you absolutely need, pay it off as quickly as possible and, avoid taking on new debt while you pay the loan off.

Always remember, when you pay interest, you buy nothing!

A Meaningful Retirement

2012-01-10T13:24:00.003-07:00

Let’s talk (meaningful) retirement!

For baby boomers, and those coming up behind them, retirement is what many of us are working toward and looking forward to. Many people would like to retire early. But, because of longer life expectancies, even those who are planning to wait until age 65 to retire need to plan for an extended retirement.

Depending on which tables you look at, average life expectancy is well into your 70’s. Keep in mind that “average” means 50% will not make it to that age, and the half that do can still expect to live for quite some time. None of us knows which side of average we’ll be on.

The big question I work through with people is, “What do you want your retirement to look like?” What are you going to do with your days when every day is a weekend? Where are you going to live? Do you want to travel? Do you have a hobby that you want to turn into an income source? Do you want to start a business? Are you interested in a second career or a part time job, either in your current industry or a different one? Are you thinking about taking occasional jobs to finance a special trip or purchase?

If 55 is truly the new 65, many of us are going to be retiring in better health and with the ability and desire to continue living life to its fullest. For many of us, what we will be looking for is a “meaningful retirement”.

I talk to a lot of people about meaningful retirement. What is going to get you out of bed in the morning? For a lot of people, it’s not television! I have a client who retired last summer and set a rule for herself that she must turn off the television by 9:00 am every morning. Her willpower is strong enough that she actually sticks to it, too!

I recommend to my clients to start thinking about their retirement vision sooner, rather than later. Think clearly about what you are going to do with 24 hours a day, seven days a week, 365 days a year, of vacation. You can only golf, fish, volunteer, do yard work, clean house, etc. for a few of those hours. What about the rest of them?

If you are with a life partner, have a serious conversation about what you both want out of retirement. I moderate these conversations often enough to know that, in spite of millennia of evolution, most couples still don’t read each others’ minds and are often surprised to hear what their partner’s idea of retirement really is. It’s okay to have different ideas of retirement, but you need to talk about it!

Retirement can, and should, be a glorious experience. A little planning, soul searching and serious conversation before you actually retire can go a long way toward making your retirement years be everything that you want them to be.

Is Your Portfolio "Concentrated"?

2012-01-03T08:42:00.003-07:00

How do you diversify a concentrated stock portfolio? Let’s talk, in particular, about retirement accounts with a large amount of company stock in them. A concentrated portfolio is, by definition, one where the account holds a large position, by percentage, in an individual stock.

Company retirement plans sometimes include contributions of company stock to employee 401(k) retirement accounts. A large allocation of company stock (especially coupled with a stock option plan) can potentially increase portfolio risk if it is not diversified with additional holdings. If it is allowed, an employee may wish to consider selling some of the company stock position in order to reduce the risk of over-concentration in the portfolio.

A study conducted by Fidelity Institutional Retirement Services showed an average of 17% of employer stock in average 401(k) account. Obviously, that 17% is an average, which means there are accounts with company stock holding in much more concentrated amounts. I see this phenomenon frequently in my practice, sometimes up to 25% or 30% (or even more) in company stock holdings.

So, what does an investor do if the company stock is restricted; where the employee is not allowed to sell the position?

I often see portfolios where an investor has attempted to diversify around the company stock with other stock mutual fund positions. This actually has the potential to increase the overall volatility of the portfolio for many reasons. One is that there may be too small a percentage of the portfolio available to diversify with after the company stock is taken into account.

Another is that the plan may not offer investment choices that have the potential to reduce the overall risk of the portfolio. For example, if the company stock falls into the large cap category, it would be appropriate to diversify with a mid or small cap stock fund. However, what if the plan doesn’t offer a mid or small cap fund as one of their investment choices?

A particularly effective way to reduce risk in a concentrated portfolio such as this would be to consider adding a bond position, or adding to an already existing bond position. I have found that most 401(k) plans offer at least one bond fund in their allocation mix.

While a higher overall proportion of bonds may not lower the overall portfolio risk, used properly, a bond position should help avoid increasing the risk and should be considered by anyone who has company stock in their 401(k) portfolio.

Options For Company Retirement Plans When You Leave The Company

2011-12-28T07:07:00.002-07:00

So, for whatever reason, you have a retirement plan - 401(k), 403(b) or other plan - at a company you no longer work for. What should you do with it?

There are several things you can do with a company plan from a previous employer. All of the options have pros and cons. Some come with tax consequences that you need to consider.

The easiest option is to just leave it where it is. Unfortunately, while this is usually not the best choice, it’s the one that many people default to. If they don’t know what to do with it, they just leave it there. Company plans often charge fairly high fees and may offer few investment options. Even if the investment options are good, over time, it may often be less expensive to move the money to a self-directed IRA with the mutual fund company.

Maybe you’re now working at a company that allows rollovers from other company’s plans. This option is called a “direct rollover”, which means that the money is going directly from one plan to another and won’t be subject to penalties or taxes. This can be a very good option if the plan offers a good mix of investment options.

Another form of direct rollover is to move your company plan directly to an IRA. You might already have an IRA that you are happy with or you might need to open a new IRA. Again, this option will not cause you to pay any taxes or penalties. This is also a very good option, especially if the new company’s plan is not a viable option for the money.

One way to move money from a company plan to an IRA is to get a check for the total, deposit it into your bank account and, within 60 days, deposit the same amount into an IRA. This is called a “rollover”, which is very different from a direct rollover. I never say never but, 99.9% of the time, this option should NEVER be used. Retirement plan rules require a mandatory 20% withholding of the balance. In order to avoid taxes and possible penalties, you must roll over the entire amount of the plan balance – making up the 20% out of your own pocket – within 60 days. When you file your taxes the next spring, you will then get back the 20% that was withheld. If you only rollover the 80% that they actually send you, you will then have to pay taxes (and penalties if you are under 59 1/2) on the 20% that was not rolled over.

The last option is, of course, to take a distribution from your plan and spend it. This is another option that I really hate to see someone take – for several reasons. First, any money you take out of retirement plans before retirement is money that can’t grow and be available to you when you are ready to retire. Second, you will have to pay both State and Federal income taxes on the full distribution in the year you take it. Not to mention, if you are under 59 ½, there is a 10% penalty assessed on the distribution, as well. Depending on your State and Federal tax brackets, plus the penalty, you may have to pay close to 50% of your distribution to the government. Unless this is truly necessary, this is usually the worst option to consider.

There are many choices for what to do with your retirement plan dollars from a previous employer but, finding the right one for you requires doing some research and understanding the consequences that come with your decision.

Looking For An Advisor? How Do You Know What To Look For?

2011-12-19T06:41:00.002-07:00

How do you find a professional you can trust? I have always been leery of just opening the yellow pages and choosing a company or person to provide a professional service for me, be it an attorney, a doctor, or a furnace repair person.

A person who has committed to a certain amount of education, ie: a doctor, lawyer, accountant, or engineer, is given the privilege of a designation after their name. Are they all equally good? Unfortunately, no. However, each of these professionals must meet certain standards of conduct and continuing education requirements or the entities that regulate them can impose penalties and sanctions against them. With the advent of the internet, these penalties and sanctions might even be made public.

So, what about the financial industry? Finding a person you can trust to handle and invest your hard-earned money is equally as important as finding a trustworthy doctor or other professional.

In the past, I’ve suggested ideas for finding a financial advisor. This can include asking for referrals from people you trust – family, friends or even your attorney or accountant. But, how do you really know that you’re getting an advisor who will only offer you the most appropriate information and investments for you?

One way is to look for an advisor who is a “fiduciary”. A fiduciary is a person who is expected to “act in the best interests of the person whose assets they are in charge of”. An advisor who is a fiduciary provides written disclosures of any conflicts of interest, how they are compensated and whether they work on a commission or fee-basis, or a combination of both.

It seems like it should be simple enough to find an advisor that is a fiduciary. Unfortunately, not all professionals in the financial industry act as fiduciaries for their clients. For those professionals who are not fiduciaries, their highest required legal level of advice is to make sure that each investment product they recommend has passed a due diligence standard. While most financial professionals attempt to provide investment products that fit a client’s needs, unless they are a fiduciary, they are under no legal obligation to do so. Congress is, in fact, still looking into the issue and trying to determine how to enact a law that will best address this issue with all of the diverse financial providers and their clients.

There are ways to search for a fiduciary advisor. The first, and easiest, way is to ask any advisor that you are considering working with if they are a fiduciary. An advisor who is regulated by the SEC will be a fiduciary. An advisor who charges fees, either management or hourly, for their work will be a fiduciary. An advisor who is a Certified Financial Planner® will be a fiduciary.

There are many designations that an advisor can attain. Some require much more study than others. A couple of resources for investors to find out about the financial industry designations, and more about financial professionals who are fiduciaries, are the FINRA and SEC websites. www.finra.org and www.SEC.gov. These are the two regulatory bodies that most investment professionals are licensed with. Some advisors will be regulated by one or the other, while others may be regulated by both.

Both of these websites have a wealth of information for investors, including a link to check on an advisor for past disciplinary history.

Doing a little research before you choose an advisor, will help you to find someone you know you can trust.

Life Lessons for Financial Planning

2011-12-12T10:51:00.000-07:00

I am taking horseback riding lessons. I know…I’m probably a little too old to be starting this now. I have wanted a horse since I was young and now seemed like a good time to do it. Unfortunately, like many other things in life, it’s not just as simple as buying a horse and riding off into the sunset.

I recently had a lesson that went so badly that I was ready to look for a different hobby. However, once I was able to back away from my initial frustration, my innate stubbornness set in. I realized I had lots more to learn, but that it was truly going to be worth the time and effort it was going to take to become the rider I want to be.

It got me to thinking about the number of people I talk to who are frustrated with their financial lives. Many people I speak with believe that financial savvy should come naturally to them, or they feel that, by virtue of their age, they should understand how financial planning works and just be able to apply the concepts to their situation.

What my experience got me thinking about, though, is that understanding financial terminology, concepts and techniques is not something that we are born with.

Financial planning knowledge isn’t acquired by osmosis. It is, like most subjects, something that needs to be learned. It is also something that you never stop learning about. Think about how many headlines we have seen in the past year saying that very few people have ever seen an economy and market like the ones we just lived through. Even people like me, who have been in the financial arena for many years, still have more to learn.

Another similarity with riding and finances is that there are often many ways to accomplish the same task and not all of them work for every horse or person. For example, some people do fine following a budget. However, there seem to be a lot more people like me. A budget is like every diet I’ve ever been on; they are often too rigid and difficult to stick to and so we don’t.

I think the “10-20-70 Plan” is easier to use than a budget. The simple strategy of 10-20-70 is this: every pay day, look at the amount of your take home pay. The first 10% goes into savings or investments (pay yourself first). The next 20% goes to build an emergency fund and/or pay down debt. The remaining 70% goes to pay for everything else – food, clothes, fixed expenses, etc. Using this plan gives you much more (guiltless) control, because it allows you to overspend on one thing knowing that you will need to under spend on something else but, you have just made the decision for yourself!

The moral of my story is that, while financial planning is not rocket science, there is a lot to it. If you want to do it right, you need to research and study to understand how it works, both in general and for your specific situation.

There are a lot of resources available - books, the internet, magazines. Unfortunately, it’s often difficult to know what really works and what doesn’t. Start by reading financial publications, even if you don’t yet understand the terminology. Over time, it will begin making sense to you and you can start putting the concepts into practice. I knew someone who, completely new to investing and financial planning concepts, purchased a subscription to The Wall Street Journal. At first, she just put it on the kitchen counter and walked by it. Eventually, she started reading little bits of it and, as she learned more, she read more. She’s now a fairly sophisticated investor, and all it took was a little perseverance.

You’re never too young or too old to learn, and use, solid financial concepts. Don’t give up! Like my riding lessons, it will be worth the time and effort you put into it!

End of The Year Tax Thoughts

2011-12-06T07:08:00.000-07:00

It’s time to be thinking about taxes. No, it’s not April 14th. However, it IS time to think about some of the things you can do before the end of the year that will impact your taxes next April. I wanted to talk today about charitable donations and harvesting losses.

First, if you have miscellaneous stuff around your house that you know you want to get rid of, but just haven’t had the time to deal with, now is a great time to donate those items. If you itemize deductions and aren’t fully phased out of such deductions, you get a tax deduction for such contributions. There are a number of organizations that will come to your house and pick those things up – you don’t have to take them anywhere and you don’t even need to be home when they stop by.

When determining the value of your donations, remember that the “fair market value” that you are allowed to declare is what a “willing buyer would pay a willing seller on the date the item was donated.” For example, garage sale or thrift store prices.

If you wish to donate cash, you can make a donation using a credit card as late as December 31st. The IRS considers the donation made when it’s charged, not when it’s paid.

The IRS requires that you must have a receipt or letter acknowledging the value of the item or items if the value is over $100.00. Keep the backup documentation with your tax return in case you ever get audited.

Also, the State of Idaho allows an extra deduction for donations to certain facilities and foundations based in Idaho. Check the website for the State of Idaho or with your accountant to get a complete list of these entities.

I mentioned “harvesting losses” earlier. This is not in an agricultural context. Harvesting losses is the term for taking short and long term losses in your investment portfolio to offset any gains that you might have taken during the year.

Keep in mind that the long term capital gains rate is 15%. However, if you have stocks that have lost value on paper and you have been considering whether to sell them, it might be the right time to take some losses in order to lower your capital gains.

If you have losses left after offsetting gains, you are allowed to use up to $3,000 of the loss against your ordinary income. You may also carryover losses from year to year until you are able to use them up.

Lastly, if you wish to harvest a loss and then repurchase the stock, please don’t forget that you MUST wait 31 days before you buy the stock back. If you repurchase within 30 days, the IRS considers your sale a “wash sale” and will disallow the loss on your taxes.

As with any tax issues, please contact your accountant before making any changes or selling any stocks.

Holiday Spending....Yikes!

2011-11-28T08:40:00.001-07:00

It’s time again to talk about strategies for not overspending on the holidays. The first thing to do is to set a limit on your spending. What was the final bill last year? Was it too much? Start with an estimate of how much you can comfortably spend.

Keep in mind that holiday spending goes beyond gifts. There are decorations, postage, extra food, new outfits for parties, the list goes on. Organize your expenses into categories and allocate your resources accordingly. If the total exceeds your stated limit, or is beyond what you can afford, you have to set priorities and cut back where you can.

Think about whom you are buying gifts for and what you would like to get them that is within your budget, then make a list. This will help you avoid costly impulse spending.

Making a plan is one thing, sticking to it is more difficult. Track your expenses as you shop. Write down the purchases or add them up on a calculator as you go. If you are not in the mood to shop, leave the store and go back another time. We all have a tendency to just “buy anything to get it over with” if we are tired.

Order mail order gifts early and ship early. If you can, have the gifts shipped directly to the recipient. If you have it shipped to you and then you have to ship it on, you’ve paid twice for the same thing. If you ship late, you may get hit with express or priority mail charges that could have been avoided.

Credit is a huge factor in our overspending. Beware of the department stores who offer a one-day shopping discount if you open or use their credit card. Department stores are not offering this discount to you as a favor. Their cards often carry interest rates of 20% or higher. If you don’t pay off the balance right away, you could lose any savings you gained.

Credit card companies often provide “convenience checks” to make things easier for you. Beware, these checks act as cash advances, which often carry a higher rate of interest than charges and the amount of the advance you take starts accruing interest immediately – there’s no float.

Of course, the best way to avoid overspending is to start saving early for next year. Consider putting just $2 a day, plus your pocket change, into a jar or piggy bank. If you start on January 1st, you could have close to $1,000 saved by the end of the year!

Buying A Mutual Fund Before The End Of The Year? Wait!

2011-11-14T12:10:00.000-07:00

It’s the time of year that investors need to beware of investing in mutual funds. If you are thinking about investing in a mutual fund in a non-retirement account – wait.

Tax rules require mutual funds to distribute their net capital gains from sales of stock directly to shareholders. Those distributions are typically made late in the year and we are coming into distribution season. Unfortunately, investors who purchase shares of a fund as it is about to make a distribution wind up realizing gains on their taxes in a fund that they haven’t made any money on – or worse, even if they’ve lost money in the fund.

So, how do you know if the fund you are considering is going to pay out gains? First of all, see if the fund family has a website. Fund families often publish potential distribution information on their website. You can also call the fund and see if they have the information available yet.

We have talked before, in a different context, about checking the turnover rate of a fund before purchasing it. A high turnover rate means that the fund does a lot of trading – possibly generating potential capital gains. A lower turnover rate may mean smaller gains.

Another clue source is the Morningstar page of the fund. There is a Potential Capital Gains Exposure figure in the tax analysis section. Add to that the fund’s performance for the past three years and you can get a sense of what to expect. If both of the numbers are relatively high, you can probably expect the fund to distribute some gains.

So, what do you do with this information? If a fund that you are considering is likely to pay a gain, wait until after distribution before buying it. If a fund still looks to have a large stake of unrealized gains (stocks that have appreciated, but haven’t been sold to realize the gain), you might consider purchasing the fund in a tax-deferred account, instead of a taxable account.

If you already own the fund, you should avoid adding to it, but don’t sell it to try to avoid the distribution. Chances are you have a gain yourself, plus you may end up paying transactions costs and get your entire allocation out of balance. In this case, a different option is to see if you have some losses in another area that you might be willing to harvest to offset the gain.

We all need to consider the tax consequences in many areas of our lives and all year round, not just in April, but, as always, it is best to consult your financial advisor or accountant before making any decisions to buy or sell positions in your portfolio.

November is National Long Term Care Month!

2011-11-07T10:50:00.001-07:00

November is, among other things, National Long Term Care Awareness Month. If you don’t have personal experience with a long term care need in your family, I’m sure you have friends or coworkers who do.

The American Association for Long Term Care published their 2011 LTC Sourcebook recently and I wanted to pass along some of the most interesting facts they found.

1) 67.4% of all new claims opened in 2011 started after the policy holder reached age 80.
2) Almost half of all newly opened claims were paid for home health care; only 27% paid for nursing home care.
3) 45% of those who applied for coverage between the ages of 70 and 79 were declined coverage for health reasons. Even if you might not need coverage until you are 80 years old, don’t wait too long to purchase it, or you might not be able to get it.
4) Nearly one in five persons receiving LTC benefits transferred from home health care to a facility in 2011.
5) Alzheimer’s disease was the leading cause of LTC insurance claims; stroke was second.
6) Women accounted for 65% of all newly opened claims in 2011.
7) Over 85% of women age 85 or older will be living alone.
8) The long-term care insurance industry paid out $6.1 billion in benefits in 2010.

Medicare does not pay for custodial care. Medicaid is paying for less and less care. As medical advances allow us to live longer, the need for long term care assistance, either at home or in an assisted living facility, is going to continue to grow.

I hear a lot of folks say that they don’t want to pay for insurance that they may never need. In reality, how many of us truly want to have to file a claim on our auto or homeowner’s insurance? We pay for it, hoping we never have to use it. Long term care insurance should be considered in a similar light.

There are many reasons to have long term care insurance in place, including some benefits available through federal and state programs. Speaking strictly from personal experience, though, I know that when my mother was in a situation where she had to move into an assisted living facility, I realized right then that the insurance we had been paying for turned out to be the cheapest thing we’d ever bought!

Stretch IRAs

2011-11-01T09:45:00.001-06:00

Some time back we discussed Stretch IRAs. I still get a lot of questions on this and it is such an important planning vehicle that I wanted to go over it again. Naming beneficiaries incorrectly on your retirement plans could turn your IRA or 401(k) into a savings account for the government.

Distribution laws on retirement plans changed in 2006. Up to that point, a non-spouse beneficiary who inherited a retirement plan had to take a full distribution of the plan, and pay the taxes on it, within five years of the date of death of the plan owner.

The law now states that beneficiaries may take distributions from the plan over their own life expectancy. ie: a 40-year old female beneficiary could stretch the distributions over her life expectancy of 43.6 more years. That means that the remainder of the money continues to grow tax-deferred for many years. A little-known rule also states that a beneficiary, no matter their age, may take penalty-free distributions above their RMD at any time.

For more than one beneficiary, the account can be split and each beneficiary can use their own life expectancy for distribution. However, and this is important, the splitting up of the account must be done before December 31st of the year after the date of death or the life expectancy of the oldest beneficiary will be used for distribution calculations. While it could create more paperwork, sometimes it’s best for the owner to actually split the IRA up and name each beneficiary separately.

IRA assets should virtually always pass to a beneficiary. If no beneficiary is listed the account goes into the estate. It then must be distributed by December 31st of the year after date of death and taxes paid on the entire amount at the estate’s income tax level. For 99% of circumstances, an estate should NOT be listed as beneficiary.

On the other hand, if someone wants to leave their retirement plan to a charity, that can be a good strategy. The proceeds are distributed completely tax-free. And, if someone would like to leave some of the money to charity and some to other beneficiaries, the law of splitting and stretching still applies – as long as the December deadline isn’t missed.

I always advise my clients to list not only a primary beneficiary, but contingent beneficiaries as well. The law allows a primary beneficiary to “disclaim” the IRA if they don’t need the cash and it can flow directly to the contingent beneficiaries – but only if contingents have been named.

Lastly, be sure that you keep a copy of your beneficiary designations. As a financial representative, I keep copies of those forms. However, custodians have a way of merging or being bought out, and those forms can be lost. If the form can’t be found, it’s possible that the estate will be the default beneficiary.

As with any decision that will affect your estate planning goals, you should consult with your estate planning attorney before making any changes to your beneficiary designations.

Where Do I Invest "Extra" Money?

2011-10-26T11:29:00.003-06:00

I recently had someone ask me about investing in a specific precious metal (not gold) because a friend had encouraged him to take a position in a company that mines the metal.

Without having enough information, my most common answer to questions like this (and the one I gave in this instance) is, “It depends”.

I have two issues associated with these types of questions. The first one being, who is your friend, what is their background and expertise in this type of investing, what due diligence/research have they done on it, and, most importantly, are they putting their own money into it?

The second set of questions to ask before making this investment, include but are not limited to: Does this investment fit with your other investments? If the precious metal goes up in value, will the shares of your particular mine go up as well? How efficiently is the mining company run? What type of earnings have they shown in the past, against what type of expenses? What country is the mine in? Is there a history of political unrest or government nationalization in the country? Is the US dollar currently going up or down versus that country’s currency? In order to diversify better, will you have enough cash to invest in more than one mine?

No matter what type of investment you are considering, these types of questions are just the tip of the iceberg when it comes to doing your research on investments. We all work too hard for our money to just take someone’s word for where we should make our investments, especially if the information is being supplied by someone without a financial background or license.

The old clichés that we have all heard over the years still apply: you get what you pay for and, if it sounds too good to be true, it probably is.

Professionals will never be right one hundred percent of the time, but investing doesn’t have to be a blind gamble. Do your own research, get professional advice, and don’t be swayed by fancy ads or media hype. If you are willing to dedicate a little time and effort in getting information, your chances of success with your invested assets will be substantially higher.

Need to File an Amended Tax Return?

2011-10-17T09:40:00.002-06:00

Filing income taxes is a fact of life. Most of us are pretty diligent in making sure that our tax returns are accurate and are filed on time. However, as with many things in life, “stuff happens”!

For example, using the documents provided by your bank and investment company, you filed your return in February. In March, you received a corrected tax document for one of your accounts. Maybe, you forgot to include a stock sale for a loss on your return. Or, especially considering the thousands and thousands of pages of tax code, you missed taking a substantial deduction that you are eligible to receive.

Whatever the reason, tax returns can be amended to reflect the correct amounts and/or information.

However, as with anything to do with the government, there are rules you must follow! If you are due to receive a refund when you amend your return, in most cases you have until three years from the April 15th date that you originally filed the incorrect return. Once that statute of limitations has passed, you can no longer file an amended return and receive a refund.

On the other hand, if you will owe additional taxes as a result of amending the return, interest and penalties will apply until you amend the return and pay the tax. Because there is no time limit to the accruing charges, it is best to file the amended return as quickly as you can to limit those charges.

If you owe additional taxes and wait until the inevitable letter from the IRS, you may take a risk that any factors in your favor will not be weighed by the IRS, because you have allowed those penalties and interest charges to add up. It can, in fact, take the IRS one or two years to match you to the missing information.

The fact that you amend your return does not automatically increase your chances of an audit. In fact, it might actually reduce your chances, since you are notifying the IRS of something they were going to find later.

Note that, when sending in an amended tax return, an IRS employee has to actually compare the new return with the original one. That is why it is vitally important to provide back-up documentation as to why you are filing an amended return and to prove that you are entitled to make the changes. If you don’t the IRS may want to dig deeper.

As always, be sure to consult with your accountant or CPA regarding your situation before filing an amended return.

Avoid Probate on Non-Retirement Accounts

2011-10-11T07:12:00.002-06:00

I frequently get questions regarding how to name a beneficiary on a non-retirement account. Previously, the only way to direct a non-retirement account was through a will, by putting the account in the name of a trust or by adding a name to the account. Times have changed.

It is now possible for someone to set up an investment account with a “Transfer on Death” designation and actually list the beneficiary who will receive the account on the owner’s death. (Keep in mind that bank accounts have a similar option, but a different designation – theirs is called “Pay on Death”)

This is essentially a simplification of the old procedure where a person would put a second (or more) names on their account as joint tenants. When the original owner died, the account belonged to the joint owner. The biggest problem with this was that, once the second name was put on the account, the new owner actually owned half of the account. This made the account vulnerable to withdrawals, lawsuits, etc. The original owner lost some amount of control over their asset.

The second problem with joint tenant accounts was, depending on the size of the account, the original owner might have to file a gift tax form with the IRS – a whole other can of worms that we won’t get into here.

Transfer on Death laws cover stocks, bonds, mutual funds, mortgage-backed securities, futures and options contracts, and shares of limited partnerships. Pay on Death laws cover bank accounts. In both cases, the assets belong solely to the original owner until their death.

These laws allow non-retire account assets to bypass probate, in a manner similar to retirement accounts, and to go directly to the beneficiary or beneficiaries named on the account.

This is not a substitute for a valid will. I still strongly recommend that everyone have a will in place. One of the drawbacks to this type of account is that, unlike through a will, you cannot name an unborn child or successor beneficiaries to the account. However, this technique is one way to lower probate fees and shorten the time frame for beneficiaries to receive their money.

As with any type of estate planning strategy, each person needs to look at their own circumstances to determine the best way to pass assets along to their heirs and consult with their attorney. But, this may offer a valid, relatively simple way to handle beneficiary transfers without probate.

Is It Open Season for Your Retirement Plan?

2011-10-04T11:38:00.000-06:00

This is the time of year that a lot of retirement plans have an “open season” or allow you to begin participating in the plan. I’ve mentioned before that, if a plan is available – especially a plan with an employer match – most everyone should be contributing. But, there are some other things you should know about your plan. Here are some questions that you should ask:

First, when can I join the plan? Okay, it’s open season, but are you actually eligible? Some plans are available to a new employee immediately, others have a waiting period of up to a maximum of one year. Another limitation is age. An employee can be older than 21 to be eligible, but a company has the option of making 21 years of age the prerequisite for enrolling in the plan. You also might be required to work a minimum number of hours. Typically, part time employees are not eligible to join the plan.

How do I enroll? Usually the information is supplied to an employee eligible for the plan. If not, contact your Human Resources or Benefits department for information.

What is the percentage I can contribute? Is there a minimum percentage? There is a government-mandated maximum that varies from plan to plan and from year to year. There is also the catch up” provision for those 50 and over.

Is there an employer contribution and, if so, what is it? This is one of the most important questions to ask. If you are not taking advantage of the matching funds, you are leaving money on the table. The amount of the match is most important for someone who cannot afford to max out their plan, because you’ll still want to try to contribute an amount that will allow you to receive the full company match.

Does the employer contribution have a vesting schedule? A vesting schedule determines the amount of the employer contribution that you own and is typically based on time in service at the company. Vesting schedules vary from immediate to a federally-mandated maximum. Some plans offer a laddered vesting schedule where you will be entitled to a percentage of the match, increasing every year, until you reach 100%.

Where is the money invested and how can I learn about the available investments? A company will sometimes offer a class or ask a financial professional to be available to explain the investment choices. At a minimum, most companies will give you some research material on the investment options. You can usually also check the internet for additional information on the funds you are choosing from.

Where and how often can I find out how the investments are performing and how often may I change my investments? Most plans provide quarterly statements showing how your account is doing, but some plans may provide annual statements. Some people have access to their plan over the internet and can check balances and move funds any time they wish. Other places may offer a window or “open season” for moving your investments. These options vary with every plan, so you’ll have to research what your plan allows.

Is It Open Season for Your Retirement Plan?

2011-10-04T09:13:00.001-06:00

This is the time of year that a lot of retirement plans have an “open season” or allow you to begin participating in the plan. I’ve mentioned before that, if a plan available – especially a plan with an employer match – most everyone should be contributing. But, there are some other things you should know about your plan. Here are some questions that you should ask:

First, when can I join the plan. Okay, it’s open season, but are you actually eligible? Some plans are available to a new employee immediately, others have a waiting period of up to a maximum of one year. Another limitation is age. An employee can be older than 21 to be eligible, but a company has the option of making 21 years of age the prerequisite for enrolling in the plan. You also might be required to work a minimum number of hours. Typically, part time employees are not eligible to join the plan.

How do I enroll? Usually the information is supplied to an employee eligible for the plan. If not, contact your Human Resources or Benefits department for information.

What is the percentage I can contribute? Is there a minimum percentage? There is a government-mandated maximum that varies from plan to plan and from year to year. There is also the catch up” provision for those 50 and over.

Is there an employer contribution and, if so, what is it? This is one of the most important questions to ask. If you are not taking advantage of the matching funds, you are leaving money on the table. The amount of the match is most important for someone who cannot afford to max out their plan, because you’ll still want to try to contribute an amount that will allow you to receive the full company match.

Does the employer contribution have a vesting schedule? A vesting schedule determines the amount of the employer contribution that you own and is typically based on time in service at the company. Vesting schedules vary from immediate to a federally-mandated maximum. Some plans offer a laddered vesting schedule where you will be entitled to a percentage of the match, increasing every year, until you reach 100%.

Where is the money invested and how can I learn about the available investments? A company will sometimes offer a class or ask a financial professional to be available to explain the investment choices. At a minimum, most companies will give you some research material on the investment options. You can usually also check the internet for additional information on the funds you are choosing from.

Where and how often can I find out how the investments are performing and how often may I change my investments? Most plans provide quarterly statements showing how your account is doing, but some plans may provide annual statements. Some people have access to their plan over the internet and can check balances and move funds any time they wish. Other places may offer a window or “open season” for moving your investments. These options vary with every plan, so you’ll have to research what your plan allows.

Tax Credits for Care Givers

2011-09-26T14:06:00.002-06:00

You’ve heard of the baby boom, gen Y and gen X generations. Another generation that we are hearing more and more about is the “sandwich generation”. The sandwich generation is made up of (mostly) baby boomers who find themselves needing to take care of both their own children and aging parents simultaneously. Unpaid caregiving in US households is rising and, in order to provide care, many caregivers have had to readjust their work hours or leave work completely. Even if you are not providing care for children but “only” aging parents, many of the stressors will affect you as well.

Caregiving can be difficult; it takes a lot of time, energy, emotion, and often, money. There can also be additional unseen monetary disadvantages to an informal caregiver in terms of lost Social Security benefits and lost pension benefits, ie: not paying into these accounts, as well as lost wages for the years out of the workforce.

The Child Care and Dependent Care tax credit is one way the government is recognizing and offering assistance to these caregivers. A lot of people hear “Child Care and Dependent Care tax credit” and think, “Oh, that’s just for people with kids.” However, the credit also includes elderly dependents, as well as disabled spouses.

As with any tax credit, you must meet certain qualifications to claim it. Some of these qualifications include, but are not limited to:

• The caregiver must be responsible for over 50% of the dependent’s household maintenance expenses. Keep in mind that this doesn’t necessarily mean the dependent must live with the caregiver, although that is the most common. I have a client who was making the mortgage payments on his grandfather’s home, as well as paying for upkeep and food.

• Expenses paid to household help that would be deductible with this credit may not have been paid to a child under 19 or a spouse or other dependent of the caregiver.

• Married couples claiming the credit must both work at least part time and file a joint tax return.

The tax credit may be worth up to $3,000 for one dependent or $6,000 for two or more dependents, which is a significant amount of money.

If you think you, or someone you know, may qualify for this credit, you can learn about the available services at www.eldercare.gov. or, for tax advice specific to your situation, contact your accountant or CPA.

Mortgages and Divorce

2011-09-20T14:48:00.002-06:00

Divorce is a fact of life in today’s world. Most everyone has known a friend or family member, if not themselves, who has gone through a divorce. There are some things in a divorce that are relatively common and, yet, are not addressed as they should be.

One of these things is what to do with the house and mortgage. It is not uncommon for one spouse to keep and live in the family home. It is also not uncommon for the spouse leaving the home to sign a quitclaim deed to the spouse remaining in the home. This document, when filed, removes the name of the spouse who left the home from the title to the property.

Unfortunately, what this document will not do is remove the spouse’s name from the mortgage loan. The lender doesn’t care that one spouse is no longer living in the home and that their name is no longer on the title. The lender still has a legal loan contract with both names on it. Even with a divorce decree that states that the spouse remaining in the house is responsible for the mortgage payments and the quitclaim deed has been filed, the bank or mortgage company has every right to, and will in fact, expect to receive their payments from either spouse.

If the spouse who remains in the house is late with payments, or misses one altogether, it will hurt not only their credit, but also the credit of the spouse who is no longer even living there.

Unfortunately, the only way to have a divorced partner’s name removed from the mortgage is for the property to be refinanced into the name of the spouse who is keeping the home. Listing this as a step in the divorce decree is a good start but, if the refinance isn’t actually completed, the decree, by itself, won’t keep the lender from turning to the divorced spouse for payment.

The only other option for removing names from the mortgage is to simply sell the property. Again, it may be a good idea to have this listed as a requirement in the divorce decree.

The bottom line is that divorce is difficult and there are a lot of details to work through. Unfortunately, this mortgage issue is one that often gets overlooked and it has the potential to cause great harm to credit ratings.

Of course, as with any legal issue, be sure to consult with your attorney before making any final decisions.

US Savings Bonds a Good Idea? It Depends!

2011-09-12T11:42:00.003-06:00

I have been on record for many years saying that I believe that US Savings Bonds are not a particularly good investment. They pay very low rates of interest, they may be used for education on a tax-free basis–but only under very limited circumstances, and they can be easily lost or misplaced. One unfortunate side-effect of a misplaced savings bond is “re-discovery” of that bond after a death, which may entail a fair amount of paperwork, often including legal documents, to sort out. Another issue with savings bonds is that interest stops accruing after a certain period of time.

US Savings Bonds are purchased at a substantial discount to their face value. Interest is credited every year until the actual cash-out value of the bond reaches its’ face value. At that time, the bond continues to accrue interest through an “extended maturity” time frame. Once it has reached the final maturity, the bond no longer pays interest and the value is locked in.

There are several bond issues that have already matured, outlived their extended maturity date, and stopped paying interest. These bonds include all Series E and Series H US Savings Bonds. The date that a particular bond stopped paying interest varies with the original issue date of the bond. For example: E Bonds issued from December, 1965 to June, 1980, had a final maturity date of 30 years. That means that a bond issued on May 31, 1980 stopped paying interest on May 31, 2010.

Series E and H bonds may still be turned into any Federal bank for cash. However, keeping them will not net you any additional interest.

EE and HH (Double E & Double H) savings bonds are still being issued by the government. Their final maturity date is 30 years and 20 years, respectively, after the original issue date of the bond. ie: If you have a HH bond whose issue date is before September, 1991, it has stopped paying interest and you should probably cash it in.

I say “probably” because you will pay taxes on the interest earned on the bond over the years. The sole exception to this is the scenario mentioned earlier that, under very limited circumstances, these bonds may be cashed and used on a tax-free basis for higher education. You should check your individual circumstances with your CPA before deciding to cash your bonds.

Keep in mind that, while the money is “safe” and not taxed while it remains in the bond, every inflation uptick we see decreases the value of the cash that you will receive from that bond. This should raise a red flag, especially if the bond is no longer paying any interest.

Savings bonds are a mixed blessing. They may be purchased for a small amount versus their face value or they may be “found money”, but there are probably better places for your money.

Roth IRA Withdrawals Aren't Always Tax-Free

2011-09-06T14:05:00.000-06:00

Roth IRAs have been around now for many years. Most people, even if they don’t have one, know that Roth IRA withdrawals are free from tax on both the state and Federal level. However, as with anything to do with the IRS and the tax code, there are rules that must be followed in order to actually make those withdrawals tax-free.

The first, most important, rule is that the account must be at least five years old before tax-free withdrawals can be made from it. For purposes of calculating the age of an account, an old Roth IRA rolled into a new Roth IRA is allowed to start counting from the opening date of the original account.

After the account aging requirement is met, one of the following additional requirements must be met: 1) The account owner must be over 59-1/2; 2) The funds are used for a qualified first-time home purchase (up to $10,000); or 3) The account holder becomes disabled or dies.

To clarify points 1 & 2, someone who opened a Roth IRA at age 58 cannot take a tax-free withdrawal until they meet the five-year aging requirement at age 63 and a first-time homebuyer is a person who has not owned a home within the past two years.

The good news is, even if the above requirements have not been met, any dollars contributed to a Roth IRA are available for tax-free withdrawal – at any time – because contributions to a Roth IRA are always made on an after tax basis. Any earnings above and beyond the contributed amounts would be taxable and, depending on other circumstances, possibly subject to other IRS penalties.

So, let’s assume your account doesn’t meet the criteria for tax-free withdrawals, how do you determine which dollars are withdrawn first and avoid those pesky taxes? The IRS has set up “ordering rules” to determine the sequence of withdrawals and the taxability of those withdrawals.

First, any funds you contributed are withdrawn tax-free. Second, any dollars converted from a traditional IRA or dollars rolled over from a previous Roth IRA are withdrawn, also tax-free. Lastly, any earnings on dollars previously invested in the account are withdrawn, subject to taxes and, possibly, early-withdrawal penalties. Keep in mind that multiple Roth IRAs, no matter where deposited, are treated as one for determining tax-free or taxable withdrawals.

Roth IRAs are a great source of tax-free money. However, there are still rules that have to be followed for you to get the tax-free benefit from your account. Be sure to consult with your CPA before you take any withdrawals from an IRA account.

Donate Your Vehicle to Charity

2011-08-31T14:31:00.001-06:00

So, you have an old car, boat or other vehicle that you are thinking about donating to charity. This can be a good way to support your favorite charity and take a deduction on your Federal taxes. However, as with anything to do with taxes, there are a number of procedures that need to be followed in order to take that deduction.

The first, most important, piece of the puzzle is to make certain that the charity that you would like to donate to is an IRS-recognized charitable entity. Tax code 501(c)3 is the IRS’ designation of an organization as a non-taxable, charitable organization. Any gift you make to an organization which is not a 501(c)3, will not be deductible on your taxes. IRS Publication 78, which has a list of qualified 501(c)3 charities, is available on the IRS’ website.

The amount that you may deduct on your taxes can vary greatly, depending on several factors. For example, if the value of the vehicle is between $500 and $5000, the size of the deduction allowed is determined by what the charity does with it after it is donated. If the organization sells it, the allowable deduction is for the amount of the sale. If the charity uses the vehicle in its’ business for a time before selling it, ie: for dropping off and picking up other donations, etc., the allowable deduction could be for the fair market value or, if it’s not the same amount, for the sales price.

One major caveat to the deduction equation is that you must itemize deductions on your taxes. If you take the standard deduction, you will do some good for your charity, but the donation will not benefit you on your taxes.

Other things to be aware of include what paperwork must be filed with your taxes for you to prove the value of the deduction. Just to add to the confusion, the IRS requires different types of documentation, depending on the value of the vehicle. The charity will provide you with a receipt, which includes the intended use and sale of the vehicle. They will also provide you another receipt for substantiation of the donation within 30 days of the date you sign the vehicle over to them or, if the car is sold, within 30 days of the sale date.

When considering donating a vehicle to charity, avoid the for-profit go-between companies who offer to streamline the sale of the vehicle and donation of the proceeds to the charity. These companies often keep the bulk of the proceeds for their “fee” for services. Also avoid any charities that don’t allow you to re-title the car to them when you donate it, as this opens you up to possible liability.

There are many factors that go into calculating the amount of any deduction that you will be allowed to claim on your taxes, as well as proof of value for the IRS, for donating a vehicle to a charity. Before deciding to make a gift of a vehicle to a charity, be sure to consult with your CPA or accountant.

Moving A Retirement Plan? Know The Rules or Pay The Price!

2011-08-24T10:20:00.002-06:00

Most folks are aware that it is possible to move an IRA or company retirement plan from one tax-deferred account to another with no tax consequences. However, there is more than one way to make a move like this and, if not done correctly, the move can result in tax consequences and, possibly, IRS penalties.

The IRS allows one rollover per year from one tax-deferred plan to another. This rollover must be completed within 60 days of the distribution from the original account. If the rollover misses the 60-day deadline by even one day, the rollover becomes an actual distribution and taxes, and possibly penalties, are due on the entire amount. While the IRS has the authority to waive that 60-day requirement, a taxpayer must request a private letter ruling, which can be expensive, and there is no guarantee that an extension will be granted.

For example, a request for an extension was recently made by a woman whose husband had turned 65 and taken a company-required distribution from his 401(k) plan. He deposited the money into a joint account with his wife, but passed away within the 60-day rollover window, but before he got the money moved to an IRA. The IRS denied the widow’s request for an extension because a spousal rollover can only be made when a surviving spouse receives the account following the death of the original owner. Because the money had been distributed out of the 401(k) to her husband, the request was denied and the wife had to pay taxes on the entire distribution.

I have also seen situations where an IRA owner has taken a distribution as a “short-term loan”, with plans to roll the money over within the 60-day window. This can be a very risky step, as the IRS has repeatedly denied private-letter ruling requests when funds have been used as a short-term loan and the rollover deadline is missed.

The safest way to move funds from one retirement account to another and to avoid tax consequences is to make a trustee-to-trustee transfer. These transfers are often called a “direct rollover” or a “direct transfer”. The money is moved directly from one account to another, without the plan owner taking possession of the funds. (Occasionally, transfer checks may be mailed to the plan owner for delivery to the new plan, but the check is made payable to the new trustee, so taxable distribution rules don’t apply here.)

Knowing the different rollover and transfer options, and their respective rules, for moving retirement plan dollars from one account to another is critical. None of us wants to make mistakes that could cost us significant taxes and penalties, especially when those taxes and penalties are easily avoided.

I Have Money, Where Should I Put It?

2011-08-15T09:48:00.002-06:00

I often get the question, “I have some money to invest, where should I put it?” My answer is, invariably, “That depends.” I am not trying to be evasive, but there are a lot of considerations. Here are a few of the questions to answer before making any decisions.

1) First of all, how much do you have to invest?
2) Do you have an emergency fund in place? Most financial advisors recommend having 3-6 months of living expenses in a safe place, just in case. If you don’t already have an emergency fund, the money needs to be put into a savings account and/or a CD ladder.
3) What are your plans for the eventual use of the money, and how soon do you think you will need it? Are you going to use it for a down payment on a house or a car? Is it for your children’s college? Is it for retirement?
4) If it’s for retirement, how old are you? If you are between 20 and 50, the investment recommendations for retirement money would probably be different than if you are over 50.
5) Have you fully contributed to an IRA or a Roth this year? You have until April 15th of 2012 to make a contribution for 2011. Then, after January 1st, you can make a contribution for 2012.
6) Do you want to use it for income or growth? In investing, the two are often mutually exclusive.
7) What is your tax bracket? Would it be in your best interests for it to be invested in a tax-deferred or tax-free vehicle?
8) Do you already have investments? If so, the money should be blended into your already-existing plan.
9) Are your existing investments properly diversified? If not, this money might need to be used to broaden the diversification of your investments.
10) If it’s for your children’s education, does a 529 college savings plan make sense, or would you prefer to make it a gift to the child, using a Uniform Gift to Minors Act account?
11) Where did the money come from? I see a lot of people who have inherited money that they are more emotionally attached to than if it was saved from earnings or another source and it is not unusual to invest an inheritance differently.

As you can see, there are many different options for how to save or invest money, and an investor needs to consider many things before making a decision on how best to treat it so that it works as hard for you as it can.

It's Hard Not To React To Market Volatility

2011-08-10T12:02:00.002-06:00

Well, last week’s blog was somewhat well-timed and yet, somewhat premature… Talk about bad economic news and we now have to include the S&P downgrade of US Treasuries last Friday, which has absolutely roiled the markets this week.

Diversification certainly helps a portfolio weather the type of ride the markets have given us recently. Not to mention, a well-diversified portfolio, invested correctly for your risk tolerance, should preclude you from making short-term changes to your investments. However, two additional things weigh in heavily on an investor’s need or desire to make changes in their portfolio when things are so volatile.

The first one is do you truly understand what type of investments you have; what is the purpose of each one in your portfolio and how does it act and react to changes in the markets? The key here is the research that you should do before you ever put a dollar into an investment. Do your investments actually follow the markets? Which index most correlates to each position you own? Is that particular index up or down right now? How do your investments move in relation to each other?

If you really understand how your investments should react as they follow the index they most closely correlate with, you won’t be surprised when they, in fact, do react. An investment that meets your expectations in both an up market and, more importantly, a down market, is one that you probably won’t be tempted to get rid of in a volatile market environment.

The second issue most investors have is the feeling that they should DO something, anything, when the markets are at their most volatile. There have been numerous studies conducted that show that investors are often their own worst enemy in rollercoaster markets. There is a saying in the investing world that says, “What works is not timing the market, but rather time in the market.”

If you have done your research, put your investments together correctly, and they react as you expect during periods of volatility, you will be more inclined to stay the course and not make knee jerk, short term trades in your portfolio. Your opportunity for better returns and your ability to sleep better at night during volatile markets will both be enhanced if you attend to these four things.

Greek Bailout, Debt Ceiling? Don't Make Short Term Moves in Your Portfolio!

2011-08-03T09:27:00.002-06:00

Greek bailout, deficit spending, high unemployment, weakening economy; it seems like all we hear is bad economic news around the world. Does it really make sense to be investing in this environment? How do you know, in this environment, what to invest in or when to make changes in your investments?

I talk about risk tolerance and diversification ALL of the time! The current investment environment is a perfect example of why it is so important to know your risk tolerance and to invest in a variety of investments that you understand.

Risk tolerance means knowing, without a doubt, that you will be able to hold onto good investments, no matter how far down in value they might go in the short term. Having tolerance for risk also means not making snap investment changes based on short-term issues in the markets. If you have a low tolerance for the ups and downs of the markets, you need to put your money into very conservative investments. Unfortunately, no matter how careful we are in determining our risk tolerance, many things can throw us off track.

Let’s use the recent debt ceiling debate as an example. Scary news but, are you sure you need to make changes? What changes would you have made to your investments? If you were pretty sure what changes to make, would you have had time to do it before the issue was resolved? If you made the changes, when will you put your portfolio back the way it was, or should you even do that?

Making moves based on short-term issues is almost always a bad idea. If you add in short term capital gains taxes and possible trading fees, you may actually lose money on the transaction, even if you made money on the actual investment!

A well-diversified portfolio allows you some breathing room when some of your investments go up and some down, sometimes a lot, while your overall portfolio holds up well in a difficult market.

Be aware that even a diversified portfolio still has to be tailored to your risk tolerance. A diversified portfolio for a 30-year old will probably have more stocks in it than a diversified portfolio for a 60-year old. Both may be diversified, but the aggressiveness versus conservatism of the overall investments likely will be very different.

The bottom line is, especially in today’s world, make sure that you know your comfort level with the amount of risk that you are willing to take on and make sure that your portfolio is diversified appropriately to reflect your level of tolerance for the ups and downs of the markets.

Like anything else in investing, do your research! If you put together an investment strategy that you understand and that fits you, it won’t be necessary to make changes when the economic news is as difficult as it has been recently and you will still be able to sleep at night.

It's Time For a Mid-Year Financial Checkup

2011-07-25T09:56:00.000-06:00

It’s time for a financial mid-year checkup. Now is a great time to take a look at your financial picture and make sure that you’re on the right road.

So, what are some of the things we should be looking at this time of year? Here are several questions to ask yourself:

Could you be saving more? This seems like a silly question; shouldn’t most of us be saving more?

Look at any changes to your income and expenses. Have you gotten a raise, had a child move out, or paid off a loan recently? If you have more disposable income, you should be increasing your 401 (k) contribution or adding to a savings account.

Next question, are you paying too much in taxes? This question seems even more obvious; everyone wants to pay the least amount of taxes they need to.

Sometimes changes happen during the year that we don’t think about in relation to our withholding. Have you taken out a new mortgage, gotten married, had a baby, added a parent as a dependent? If so, you may be having too much tax withheld. Check your withholding status now. The worst investment you can make is to give the government a tax-free loan every year.

How about this, have you made a dent in your debt?

If your credit card balances have been getting bigger, instead of smaller, now is a good time to get aggressive with your repayment plan. Carrying large balances on credit cards is actually a worse investment than paying too much in taxes. When you pay Interest you buy nothing.

The bottom line is we should be looking at our financial picture more than just annually. Things change so much, so quickly, we sometimes don’t even realize it. It’s a good idea to look at our financial picture both at the beginning of the year and at mid-year.

Retirement Plan Distributions and Taxes

2011-07-18T08:29:00.001-06:00

Making the switch from saving for retirement to spending from retirement accounts is often a scary and confusing concept. One of the major issues I have been seeing recently involves taking distributions from retirement plans and how much tax withholding is enough.

Many self-directed retirement plans offer the option of determining what dollar amount or percentage to have withheld and paid to the IRS for taxes, rather than requiring a specific amount to be withheld. Think about it this way, when you are working, you have taxes withheld and paid directly to the IRS. You settle up with the government every year – sometimes you pay them, sometimes they pay you.

In the eyes of the IRS, when you take money out of your retirement plans, it is the same as getting a “paycheck” and they want their tax dollars. If you don’t have anything withheld at the time you take the distribution, you will have to pay all of the taxes due in April of the next year.

Exactly as you “pay taxes as you go” when you are working, I typically recommend that a client have at least some amount of the future taxes withheld. Most of us truly don’t want to pay that bill in one lump sum.

The problem many people run into is trying to decide how much to have withheld from their distribution. Even for a retiree on a fixed income, tax brackets in retirement can be something of a moving target. The reason is that any distributions you take from your retirement plan add to your total income from all sources. In other words, a retirement plan distribution is not a stand-alone amount for tax purposes. Depending on your other income, a retirement plan distribution could potentially increase the average tax bracket on all of your income.

This is definitely not to say that you should avoid taking distributions from your retirement plans. The law requires that you begin taking minimum distributions at age 70½. Depending on the size of your retirement accounts, required minimum distributions could increase your taxable income and, consequently, your tax bill to unexpected levels and that’s a surprise that most of us don’t want! In many cases, blending withdrawals from both your taxable and tax-deferred accounts during retirement can be the most tax-efficient way to supply your income.

However, as with so many things in our lives, everyone’s circumstances are different. The amount one person should have withheld from their distribution could be radically different from the next person. In order to avoid nasty surprises in April, you should have a discussion with your CPA before you take a retirement plan distribution.

Stay At Home Spouses Need Retirement Plans, Too!

2011-07-13T07:01:00.000-06:00

In today’s world, saving for retirement is at the top of many family goal sheets. But, what about a stay-at-home spouse? What retirement are they building, or can they even build one?

The first place to start is with Social Security. A stay-at-home spouse who has little or no Social Security benefit built up is entitled to a spousal benefit equal to one-half of the benefit paid to the working spouse. If the working spouse dies, the spousal benefit goes away, but the stay-at-home spouse can receive survivor’s benefits – potentially up to his or her partner’s full benefit.

As we’ve discussed before, though, Social Security was never intended to provide a full retirement income. And, with company pensions becoming more and more a thing of the past, a couple with a stay-at-home spouse needs to be aware of these issues and not overlook retirement planning for a non-working spouse.

A stay-at-home spouse is eligible to make contributions to a Spousal IRA. Depending on total income, this IRA can take the form of a Deductible, Roth or Traditional (non-deductible) IRA. There are income phase out limitations and techniques for converting Traditional IRAs to Roth IRAs. As each couples’ individual circumstances will dictate the best IRA to use, speaking with a financial advisor or CPA is highly recommended.

If the working spouse is a business-owner, the stay-at-home spouse might be able to provide services to the business which, in turn, could generate earned income that might allow the spouse to qualify for the company’s retirement plan. Again, depending on the overall income situation, this could help shelter more of the couple’s income from current taxation and possibly generate income that the stay-at-home spouse could use to fund an IRA.

Another way to help at stay-at-home spouse create a retirement nest egg would be for the working spouse to make a gift of cash or securities to his or her spouse. This can help to create a balance of assets in a marriage where the majority of the retirement assets may be in the name of the working spouse.

Retirement planning is often an issue that is overlooked by couples where only one spouse works. Both spouses provide an important contribution to the lifestyle they have chosen, but it takes a little more awareness and planning to be certain that the financial needs of both spouses are being addressed.

Vacation the Smart Way!

2011-07-05T10:55:00.000-06:00

Vacation season is upon us again!

There are so many variations in our ideas of leisure. For example, vacations can mean anything from seeing new things, traveling to visit friends or relatives, doing household projects, or even just recharging our batteries through taking it easy.

During the height of the recent recession, many people opted for a “staycation”, which meant vacationing locally and spending much less money. The Association of Independent Consumer Credit Counseling Agencies is promoting a new type of vacation, called a “paidcation”.

The idea behind a paidcation is to help people manage the cost of their trip to avoid turning a vacation into long-term debt. Most people underestimate the cost of a vacation and, if the debt is not paid off in a relatively short time, it can add to their debt load, with its resultant increase in cash outflows for debt service.

A paidcation works by using a little advance planning and fitting the expenses into your existing household budget, paying (or saving) for the trip in advance, or managing the expenses so that credit cards can be paid off within three months of the trip. Interest charges add up much more quickly than people realize and, if you don’t pay a credit card off quickly, or at least pay more than the monthly minimum on it, you will wind up paying substantially more for the trip than just its’ actual cost. (To see how quickly interest charges can add up, see my earlier blog, “Credit Card Debt – Part 1”)

Planning ahead for a vacation is the key. Check the internet for travel deals for your destination, being sure to compare several travel sites. Even with the high price of gas, driving is still less expensive than other types of transportation. If you’re driving, think about taking picnics or snacks for the road. Look for hotels or condos with a kitchen or, at least, a refrigerator which offers you an opportunity to save money on meals.

If you want to take a major vacation, start planning and saving at least a year in advance. Part of the fun of a vacation can be in the anticipation and planning.

If your schedule permits flexibility, consider an off-season trip. With air conditioning, Las Vegas in July or August can be manageable – and the deals abound!

The key here is to make sure you don’t come home from vacation and regret your trip because you wind up paying for it for several years. Find a trip that fits your budget, or save for it in advance, and you will be able to enjoy the vacation more, knowing that you will not regret the aftermath!

Eggs, Baskets...What?!?!

2011-06-28T08:03:00.001-06:00

Pretty much everyone has, by now, heard the term “diversification”, which is just the financial industry’s term for, “Don’t put all of your eggs in one basket”. While this is an extremely important consideration in investing, not everyone knows what it actually means.

For example, one person might think it means having accounts at many different institutions, or with more than one financial advisor. Another person might think it means investing with several different mutual fund families or ETF providers.

At its most basic, this phrase refers to not putting all of your money in a single stock, mutual fund, ETF, or other investment. It also means not putting all of your money into a single sector or area of investments. If you own four different mutual funds, but they all invest in large company stocks, you have just put all of your eggs in one basket.

A consequence of putting all of your money in a single investment or market sector is that the level of risk in your investments may be astronomical because your portfolio lives and dies by the performance of that one investment. Not to mention, if you have ever moved your investments around because you were not comfortable with market movement and it’s effect on your investments, concentrating your money in just one sector will magnify that effect and may cause you to make bigger mistakes, more quickly.

On the other hand, if you work with an advisor who understands your circumstances, hold your investments with a reputable firm, and invest your money in different sectors of the markets, you will have effectively not put all of your eggs in one basket.

So, why does it seem as if I am lecturing on this? It is not unusual for me to meet with folks who are concerned about the wrong eggs and the wrong baskets. I see investors who are concerned about housing their money at different institutions, but then look for the highest returning investment and put the money held at each of those institutions into that one investment. This undoes everything the investor thinks he is trying to accomplish and his portfolio still may not be diversified.

Understanding what is and isn’t important in investing is almost as critical as choosing good investments. The best investment in the world will eventually have a downturn and you don’t want to make an investment mistake because you didn’t understand the actual definition of, “don’t put all of your eggs in one basket”.

Which Index Should I Follow?

2011-06-22T11:27:00.001-06:00

What do you think of when you hear daily reports on the stock market indexes? Do you equate the gains or losses to things happening in your personal portfolio? Do you know which index best reflects your portfolio’s holdings?

Each index is made up of its own unique set of stocks and each paints a very different picture of the US economy.

First, the Dow Jones Industrial Average, better known as the Dow 30, is made up of 30 stocks. The Dow represents the price-weighted average of 30 leading stocks. When it was originally formed, it was made up of industrial stocks, including several railroad companies. The stocks in the Dow have been changed over the years to better reflect our economy and this index is most heavily weighted in the banking, finance and insurance sectors. These 30 stocks make up less than one percent of the total number of companies traded on the New York Stock Exchange, but they represent about one-third of the market’s total value. That is why the Dow is often considered a good barometer of the overall US stock market.

The second most commonly known index is the S&P 500. It includes the stocks of 500 leading firms in leading industries. As with most indexes, it is an unmanaged index. The S&P 500 acts as a broad indicator of price movement for the overall stock market. Many people who hold an “index fund” own a fund that follows the S&P 500.

Keep in mind that it is not possible to invest directly in an index. If you own a fund that calls itself an “index fund”, you own a passively-managed fund that holds essentially the same components of the index that it reflects. Because of this, the performance of an individual index is not indicative of the actual performance of any particular investment.

The NASDAQ composite index tracks a mix of both large and small company stocks, many of which are in the technology and internet arenas. Some experts feel that the NASDAQ is a good representation of our increasingly technological economy. If you own technology stocks, you can get a good feel for how your portfolio is performing based on this index.

The Russell 3000 is an index of 3000 stocks that are mostly in the small company sector of the economy.

In the end, the indexes you follow will probably depend on the mutual funds or stocks that you hold personally.

As you can see, indexes may be comprised of many different combinations of industries and sizes of companies. That explains why you might hear someone say, “Gee, the market keeps going up and up, but my investments aren’t.” It’s really important to know which index most closely represents your individual investments.

We talk so often about concerns over what the market is doing and how your investments may be performing and all of the background noise we have to deal with. Unfortunately, I have seen investment mistakes made on the basis of what a particular index is doing, when it turns out the investor doesn’t even have any holdings represented by that index!

Fixed Income & Inflation

2011-06-13T09:55:00.002-06:00

I talk a lot about retirement savings, and how to use income plans, withdrawal rates and income ladders to keep your retirement income safe. Let’s talk about why this is so important.

As a retiree, most of us will be on a fixed income. You may receive a cost of living adjustment from Social Security or your pension, if you’re lucky enough to have one, but your income sources typically won’t include raises or bonuses – things you might be getting from your job now.

The biggest drag on retirement income is inflation – keeping up with the increasing costs of the things we buy. Everyone knows that prices for basic expenses – food, housing, transportation, utilities, etc. – go up over time. Unfortunately, most of us underestimate the impact that these increases can have on our standard of living in retirement. For many people, wages during our earning years mostly keep up with inflation, which is why so many retirees are unprepared for the consequences of inflation to a fixed income.

Keep in mind that the rate of inflation fluctuates over time. However, we’re going to take a look at what happens to the cost of goods and services when we experience just a minimal 3% rate of inflation over the years.

Let’s assume that you retire today with a current income need of $50,000. In just ten years at an annual inflation rate of 3%, you will need $67,196 simply to cover the same goods and services that cost you $50,000 today. In 20 years, your income must reach $90,306 annually to cover those expenses and in 30 years – which is not an unreasonable life expectancy for retirement in today’s world – your original $50,000 income must reach $121,363, just to cover your basic expenses. The questions you must ask yourself are, “Will your income double in 20 years during retirement? What will happen if you live longer than 20 years in retirement? ”

Sadly, this doesn’t even include the rising cost of healthcare. Medical and prescription costs, health insurance premiums and deductibles rose 149% between 2000 and 2009! According to a study conducted by the Center for Retirement Research at Boston College, it is estimated that an average, healthy, 65-year-old couple retiring today, will need $260,000 to pay for healthcare and assisted living or nursing home costs for the remainder of their lives. That amount is over and above the savings you have earmarked to cover your income needs during retirement!

If you don’t believe you are on track to cover your expenses in retirement, both basic living expenses and healthcare, you need to begin right now to consider your options and look at making the changes that will get you where you need to go!

Strategies for Reducing Credit Card Debt

2011-06-06T07:22:00.001-06:00

Credit Card Debt, Part 2

Any financial professional you talk to is going to tell you that carrying a lot of debt is one of the worst things you can do financially. And, most of us instinctively know that anyway. What you often don’t get to hear is how to go about shedding that debt in the most efficient way.

Here are some ideas that will help you get a handle on your debt.

The first thing you need to do is figure out exactly how much you owe and how much each loan costs you. Make a list of every credit card, school loan, car loan, line of credit, or any other loan you have. Then, arrange your list from highest to lowest rate of interest on each of those loans. The plan will be to get rid of the debt that’s taking the most money out of your pocket every month.

Why does it matter what order you pay off the debt? Take a look at my earlier blog, “Credit Card Debt, Part 1”, for the answer.

Next, take a look at your list. Are there any loans that you might be able to cut the interest costs on? For example, credit card companies will often lower your interest rate if you simply call and ask them to. This is a common practice and may actually be easier than you think. Obviously, certain types of loans have a contracted interest charge, ie: auto loans, that are not negotiable. But, if you have a loan that you think might be negotiable, by all means, make that call.

Another possibility to lower your interest charges is to move your balance to a lower-rate card. This strategy requires a bit more work, but may be worth a look. Most credit card companies charge you a fee to take a rollover balance, normally a percentage of the balance you wish to transfer. Also, those lower rates are often “teaser” rates and expire after a period of time. If, after the teaser rate expires, the rate goes up close to what you were already paying, or higher, and you know you won’t get the balance paid off before the rate changes, don’t make this move.

For some, restructuring credit card debt into a home equity line of credit, or HELOC, may be an option to look into.

Now that you have your list, begin paying as much as you can every month on the highest rate loan. Make the minimum payment on all of the rest. Once you have paid off the debt with the highest interest charges, begin paying as much as possible on the next highest rate debt, and so on, until all of the debt is paid off.

And, once you pay off a debt or credit card, be sure to close the account with the lender. Ask them to send you a letter stating that they have closed the account and check your credit history to make sure that the credit bureaus have been notified of the closure of the account.

Getting out of debt should be one of the highest priorities in your financial life. With every debt paid off, you will feel more empowered and you will begin to realize that you can take control of your finances and reach your goals.

Credit Card Debt - Part 1

2011-05-31T12:53:00.000-06:00

Credit Card Debt – Part 1

Do you pay the minimum amount on your credit card every month? Do you know what the interest rate is on your card(s)?

A couple of years ago, Congress passed a law increasing the minimum required payments on credit cards, by almost double. While that may have made it more difficult for some to make those payments, they actually were doing you a favor. Why?

Let’s say you have a $2,000 balance on a card that charges you 18%. Do you know how long it will take you to pay off that balance by sending in a minimum payment of $50?

At $50 a month, it will take you five years to get rid of that debt, and it’s going to cost you over $1,000 in interest alone. That’s more than 50% of the original balance!!!!

If you add another $50 to your payments and make $100 monthly payments, you can retire that same $2,000 debt in just two years, and it will only cost you $353 in interest.

Take a good look at those numbers. Doubling your monthly payment actually cuts the time and interest costs to pay off that debt by more than half.

Not only would you have saved $650 in interest charges, in three years, you can now take that $100 a month and use it toward savings or investing for your financial goals.

If you knew that you could make such a significant difference in your debt, in a short time, with a small amount of money, wouldn’t you do it?

Well, now you know.

Make Your Retirement Income Last!

2011-05-23T09:38:00.001-06:00

I have talked in the past about using appropriate withdrawal rates that will allow your portfolio to last as long as you do, as well as using an “income ladder” to provide a safe place to store cash for your monthly income while, at the same time, allowing part of your portfolio to be invested in more volatile areas of the market, such as stocks.

Both of the strategies are an important part of making sure that your retirement income lasts as long as you do. However, neither one of these strategies will work on a stand-alone basis.

An appropriate withdrawal rate is typically going to be 4% to 4 ½%. What this means is that you will receive an income stream based on the total value of your accounts, multiplied by 4%. ie: a million dollar portfolio will provide a $40,000 per year income stream.

An income ladder is a strategy that takes two or three years’ worth of your income and invests that portion in safe investments, such as bonds. The remainder of your account is invested in a diversified growth portfolio. This allows the growth part of your portfolio to weather the ups and downs of the markets, while keeping your income stream safe. If handled correctly, an income ladder also provides for an annual cost of living adjustment over the course of your retirement.

In order for these strategies to work correctly, they should be paired together and used simultaneously. If you are receiving an income stream of 4%, but your investments are all in fixed income vehicles generating less than that on an average annual basis, your portfolio has little or no opportunity to keep up with the withdrawals.

On the other hand, if your portfolio doesn’t have some portion of it invested safely for your income, you may be forced to sell shares when the market is down. This leads to reverse dollar cost averaging, which means you are selling more shares of an investment to cover your income need when the markets are down. A secondary problem to this is that your personal risk tolerance often goes way down if the markets are struggling and you may end up selling out at the bottom of a market cycle. Both of these scenarios are much too common and both may deplete your portfolio much too soon.

We have been programmed over the years to save and invest for retirement. One of the most difficult transitions for retirees is to understand how best to access their retirement accounts for their income. There are many ways to invest a portfolio while you are taking income from it. Be sure that you understand and are comfortable with the strategies you have in place. And, keep an eye on how the strategies are working. None of us wants to get to our later retirement years and run out of money. There are techniques to help you avoid that outcome – know what they are and learn how to make them work for you!

Your Mutual Funds Are Free? Are You Sure?

2011-05-16T06:59:00.001-06:00

Do your mutual funds have fees? A lot of people I talk to believe that, once they have paid sales charges, or if they bought a no-load fund, they are no longer paying any fees.

Mutual funds can charge up-front fees, called “loads”. These charges are made any time you purchase shares in a fund. (The load is not charged on shares purchased when dividends and capital gains are reinvested into the fund.) One way to avoid these sales charges is by purchasing “no-load” funds. There are also funds that have a “back-end load”. In other words, the fund doesn’t charge you a fee to purchase it, but rather charges you a fee if you redeem the shares during a certain time period.

However, mutual funds, whether load or no-load, also charge annual operating expenses. These charges vary dramatically from less than 1% a year to over 2%. How do you know what your fund charges? The prospectus of the fund states what these charges are.

The reason that most people don’t realize they are paying operating expenses is that these charges are levied against the return of the fund. For example, say your fund returns 10% in one year. If the annual operating expenses on the fund are 1%, your actual return is 9%, because the 1% operating expense is taken out of the total return of the fund. It is really important to know what your fund is charging you to own it. The higher the expenses, the less you receive in returns.

Another type of “charge” that you pay, but that doesn’t show up on your statement, is trading charges. Anyone who has ever traded individual stocks knows that they will pay trading and/or commission charges when both buying and selling those shares. Mutual fund companies are subject to trading and commission charges to buy and sell, as well. These types of charges are considered part of the actual trade and are netted within the purchase and sale price. Consequently, these charges are never seen by a mutual fund investor.

There is a way to compare these unseen charges between funds, however. The mutual fund research company, Morningstar, publishes the “turnover rate” of each fund. This rate indicates what percentage of the fund is “turned over” ie: sold and reinvested annually. The higher the turnover rate, the more your fund is paying in trading and commission charges.

There are a lot of reasons to buy a mutual fund, so these charges shouldn’t be the only thing you look at before you decide on a fund. However, finding out what you will be paying to own a fund is an important part of the research you should be doing anytime you are thinking about adding a fund to your portfolio.

Getting Your Beneficiaries Right

2011-05-10T09:01:00.000-06:00

The US Supreme Court recently disallowed a request by the daughter of a DuPont Co worker to receive her deceased father’s pension benefits. Instead, the benefits went to his ex-wife. Why did this happen?

The worker had divorced his wife who, in turn, waived her rights to the pension in the divorce decree. Unfortunately, the worker did not change the beneficiary designation on his retirement plan at work. Because of this, his ex-wife, by law, received his pension benefits after he passed away.

Accounts for which you must complete a beneficiary form, personal IRA, company retirement, insurance policy, annuities, are not governed by a will or divorce decree. A beneficiary form supersedes any other documentation. Beneficiary forms are actually called “will substitutes”.

I had a situation where a client who was dying of cancer told me she had changed her will to set up a trust for her children after she was gone. Unfortunately, she had an annuity and, thinking she had taken care of everything by updating her will, had not changed the beneficiary designation on it. We were able to update the beneficiary form before she passed away, so that the annuity became a part of the trust. If she had not told me about the change, the annuity would have been paid out to her children, free of the trust, which was counter to her wishes.

In this case, we were able to correct the situation before it became irreversible. Unfortunately, we are not always so lucky.

I recently did beneficiary reviews with all of my clients who have retirement accounts and annuities. In most cases, the beneficiaries were still valid, but we uncovered some instances where changes needed to be made.

Major life changes can happen quickly and we don’t always think about the consequences from them. Reviewing beneficiaries is relatively simple and something everyone should do on a regular basis.

This is not meant to provide legal advice and state laws may differ. It is best to consult an attorney before making changes.

Is It Possible to Invest Like Warren Buffett?

2011-05-02T12:57:00.002-06:00

How many times have you heard or read about Warren Buffett, the “Oracle of Omaha”, and thought to yourself, I wish I knew as much about investing as he does? Obviously, we can’t all be Warren Buffett and, sadly, we can’t all invest in the Berkshire Hathaway funds.

There have been many, many books published about Mr. Buffett’s investing strategies and yes, he’s a genius when it comes to investing. However, it’s not impossible to invest the way he does and be successful at it!

If you have ever listened to Mr. Buffett speak, you have heard him say that he only invests in companies that he understands. He was recently quoted saying that he won’t invest in Apple, Inc., because he doesn’t feel that he is able to come to a conclusion about what Apple will look like economically in five or ten years.

Go back in your mind to the years 1996 through 1999. We had a technology stock bubble building during those years which, as most people remember, burst in early 2000, taking the stock market and economy with it. Mr. Buffett’s holding company, Berkshire Hathaway, owned virtually no technology stocks then, nor does it still. Keep in mind that this is NOT to suggest you shouldn’t invest in technology stocks.

Mr. Buffett has always bought – and held for the long term – stocks of companies that he understands. He knows what products the company makes and sells, he has a pretty good understanding of the market for their products and, he understands the concept of “buy and hold”.

Is it as easy as he makes it seem? Absolutely not. But, again, not impossible!

First, how do you react when the economy is in a recession and the market is going down? Mr. Buffett looks for good stocks whose prices might have fallen and invests more money in a down market than an up market.

Second, how do you react when the economy is doing well and the market is up? Mr. Buffett revisits the research on his holdings, maybe sells the winners, if their price is what he had anticipated it rising to and often buys more shares of his “losers”, if he is convinced that the company is still worth investing in. This is simply rebalancing a portfolio, although it is one of the hardest things for most investors to do. We would prefer to sell our “losers” and buy more shares of our “winners”.

Third, how many times have you heard about a “can’t miss” investment? Where did you hear about it - a friend, relative, co-worker, friend of a friend or, even worse, TV? If you invested in it, did you actually do any research on the company and it’s products or services? Without knowing anything about the company you are investing in, you might as well be gambling in a casino with those dollars.

Does Warren Buffett know more about investing that the average person? You bet! But, if you stick to investing in companies you know and understand, add in some research, discipline and, most importantly, patience, you, too, should be able to invest intelligently.

What Social Security Tax Break???

2011-04-25T08:39:00.001-06:00

I recently talked about a survey that indicated that many of us “lose” money from our wallets, simply by not being aware of how much and where we are spending it.

A new online survey recently came to my attention from the National Foundation for Credit Counseling. It showed that 46% of the respondents were not even aware that Social Security taxes were cut by about one-third this year!

This tax break applies to the first $106,800 a taxpayer earns which, at that level, adds up to about $2,000 over the course of the year. While it may not be a significant amount in any one paycheck, one of the most basic things we need to be aware of in our financial life is how much money we make!

One question asked the respondents what they planned to do with the extra take-home pay and most said that it was news to them! How amazing is it that folks are not even aware that their paycheck is bigger?!?

Every single one of our spending decisions should be based, at a minimum, on how much we bring in each month in our paycheck. If a person doesn’t know what their take-home pay is, their odds of becoming financially stable are pretty slim.

Unfortunately, while this survey highlights the need for better financial literacy, it also suggests a failed effort to stimulate the economy.

We’ve all seen or heard stories in the media about the massive debt the country is taking on due to stimulus programs and the like. I talk to a lot of people who believe that they have never received any of that “stimulus” money. Guess what, these Social Security cuts are a stimulus that includes pretty much every taxpayer in the country!

Congress put these cuts in place hoping that you and I would spend this money! Sadly for the economy, when the survey asked the respondents what they were going to do with the money, 8% said they would save it, 3% said they will use it for retirement and only 1% said they plan to spend it!

If this cut is something you were not even aware of, take a close look at your paychecks from the beginning of the year, comparing them to last year. Add up the “extra” money and see if you know where it went. If not, it’s time to get a better handle on your finances!

The website for the National Foundation for Credit Counseling is www.nfcc.org. The information on this site is dynamic and extremely user-friendly. It is a great tool for anyone with any questions about debt management or financial literacy.

Beware of Social Security Strategy Changes

2011-04-18T10:57:00.003-06:00

The rules and strategies surrounding Social Security benefits have always been shrouded in mystery to the average person; even when you became eligible for and started receiving checks!

A strategy that had recently been drawing a lot of attention was that of starting the benefits that you were eligible for at age 62, but then reversing that election a few years later, paying back the benefits received, and then reapplying for the higher level of benefits you would be eligible for calculated on your older attained age.

That strategy essentially provided an interest-free, penalty-free loan from the government - money that could be invested during those intervening years with any gains accruing to the recipient on what was, in effect, a free-ride basis.

As with many government-provided loopholes, this strategy has passed into existence as only a fond memory.

This past December, with little fanfare or advance notice, the Social Security Administration effectively killed the strategy. New rules curtail the flexibility of this strategy as follows:

The time frame in which retirees can voluntarily withdraw an application for retirement benefits is now limited to within 12 months of starting Social Security payments, and a retiree can only withdraw one application in his or her lifetime.

Retirees can still suspend benefits and restart them at a later date, but benefits can be suspended retroactively only for the past months in which no benefits were entitled or received.

Retirees can no longer repay benefits and task the SSA to recalculate subsequent benefits based on their then-current age.

The low-key manner in which the Social Security Administration made these changes may have left many baby boomers who were considering this strategy, and advisers who have been discussing this strategy with their clients, unaware of these changes. Before you decide to try a strategy such as this, be sure you have all the facts on how they work! A great place to start is with the Social Security Administration's website at http://www.ssa.gov/.

Cash for Long Term Care Needs

2011-04-12T09:28:00.001-06:00

Long Term Care. The very term strikes fear into the hearts of many of us.

I talked about this recently, so why am I bringing this up again? I spoke with a dear friend this morning whose mother passed away last year. Unfortunately, because of the housing market, he has been unable to sell her house and, finally, just had to deed it back to the bank carrying the loan on it. He has also had to deal with a lawsuit from the assisted living facility she had been in because they didn’t want to allow him to just walk away from the house. They had expected to recoup some of the fees she hadn’t yet paid from equity in the house once it was sold.

He told me that she had been paying $5,000 a month for her care and asked me, “How can the average person expect to pay those kinds of charges for long?” And, he’s right!

The cost of care for those who need assistance can be expensive. Long term care insurance coverage is the best option for helping to cover these expenses. There are many variables you get to choose from which, in turn, will affect the premiums you pay. This makes it more probable that you will be able to put an affordable policy in place. However, as with any type of insurance, depending on your age, health and other circumstances, long term care coverage can be expensive or even denied altogether.

I mentioned a few weeks ago that there are now more ways to obtain dollars to pay for long term care needs and I wanted to elaborate on them.

Life insurance companies are beginning to offer life insurance with a rider that converts the face value into a monthly benefit to cover long term care needs. Using this coverage will, of course, decrease or even deplete the face value of the eventual life insurance payout. This insurance is subject to underwriting and you must be healthy enough to qualify for both life insurance and long term care insurance for the insurance company to agree to insure you.

Annuities are also becoming available with riders for long term care coverage. There are many types of annuities and riders, but I will give you one example of how one of these riders works: The annuity provides a guaranteed lifetime income stream. Someone who has a long term care need and who had purchased the long term care rider on their policy receives double the amount of the original income stream. Typically, the long term care rider on an annuity does not require underwriting, although it will often have a minimum time frame that the policy needs to be in place before it will pay on long term care. Please be aware that annuities can be complicated and you need to speak with someone knowledgeable about the pros & cons of the product before you invest.

The idea of long term care payments can be daunting, but there are new ways to help offset the cost of it. You owe it to yourself and your family to check it out!

Risk-Based Investing? Sounds Risky...

2011-04-05T11:26:00.002-06:00

Risk…noun…1. possibility of loss or injury. 2. a dangerous element or factor.

I talk about risk a lot with my clients. No matter what you may have heard, there is no such thing as a “risk free” investment. For example, US Treasuries are backed by the full faith and credit of the US government. However, their yield seldom keeps up with taxes and inflation.

Notwithstanding the dictionary definition of risk, in investing the word does not need to be synonymous with loss. A better way to look at risk is in relation to its potential to add value to an investment.

How many times have you been told that you must “diversify” your portfolio? All this means is you are spreading out the risks of your investments so that no single position has the potential to wreak havoc with your returns.

The term for this is “risk-based investing” but, it doesn’t mean avoiding all risk – which isn’t even truly possible.

Risk-based investing means three things: 1. That you understand the risks of each individual investment; 2. that you are comfortable that the size of the potential loss is within your tolerance; and 3. that after analyzing the risks, you believe that the investment potentially offers an appropriate return that will help you reach your investment goals. Sounds easy enough, doesn’t it? Unfortunately, even professional money managers don’t always follow these steps.

Just a few of the potential hazards to be aware of are:

Portfolio concentration – if you have a diversified portfolio but you haven’t rebalanced on a regular basis, this one can really get away from you. Be sure that you monitor it regularly to make sure your allocation percentages haven’t gotten away from what you originally intended. If they have, your risk level may be much higher than you want, so you’ll need to rebalance.

Complex securities – most everyone has heard the term “derivative” by now. These can be many types of things, but most of them are not very transparent and understandable. Derivatives, on their own, are not necessarily a bad investment; however, they can be extremely complicated. If you don’t have the sophisticated modeling and investment risk analysis tools needed to understand how these work, find an investment manager experienced in this type of analysis and investment.

Global exposure – we live in a 24-7 world where businesses may operate in many countries. Investing in those companies can be a great tool for diversification. However, investing globally requires modeling and investment risk analysis programs much like those for complex securities. Be prepared, or get professional advice.

Investing risk can never be avoided completely, but a wise investor can minimize his overall risk by diversifying that risk through an appropriate mix of investments.

Saving for College

2011-03-29T11:46:00.001-06:00

I am often asked about 529 College Savings Plans for children – are they a good idea, how do they work, what if my child doesn’t go to college, can I put all of my children on the same account, etc?

Saving for college is similar to saving for retirement. Because of the miracle of compounding, the earlier you start saving, the less you will need to save every month. The other unfortunate similarity between saving for retirement and saving for college is that the amount you need to plan for is often a moving target. College expenses go up at a greater rate than personal inflation but, make no mistake, inflation is always going to be there.

Here are some of the basics of 529 College Savings Plans:

After-tax money (federal) is deposited to the account. The balance grows on a tax-deferred basis and monies used to pay for qualified college expenses are withdrawn tax-free. Different states have different taxability issues for the 529 Plans they sponsor. In the State of Idaho, contributions made by Idaho residents to the plan for up to $4,000 filing single, or up to $8,000 married, filing jointly, qualify for a state tax deduction. As always, please consult with your CPA to discuss any potential tax benefits.

It doesn’t matter in which state the account was originally set up; the money in the account may be used to pay for expenses at most two- and four-year colleges in the United States, as well as graduate schools (ie: law or medical school), vocational/technical schools and qualified career retraining schools.

Each child must be the beneficiary on their own account. A parent or grandparent can be the custodian on multiple accounts, but each account can only list one individual beneficiary. However, unlike an UTMA (uniform transfers to minors act) account, the money is not required to be transferred to the child free and clear when that child turns 21.

If a child does not go to college, their account may be reassigned to another family member. If there is no family member to whom the account can be reassigned, the money may be withdrawn, but there will be taxes and penalties.

There are no income phase-out limits or age limits when setting up a plan. In fact, an adult may set up a plan and contribute to it for their own continuing education or retraining. The student doesn’t even have to be attending on a full-time basis for withdrawals to qualify for tax-free treatment.

There are many good reasons to consider saving for your child’s education using a 529 College Savings Plan. There are two websites that offer a wealth of information on these plans. The first is a national site which offers a lot of general information, as well as a link to virtually every State’s plan. That site is www.savingforcollege.com. The website for the Idaho 529 College Savings Plan is www.Idsaves.org.

What is Your Retirement Challenge?

2011-03-29T08:04:00.004-06:00

What is the biggest challenge in retirement?

Some folks might say finding things to keep you busy, while others might say finding time to do everything you want! The reality is that most of us are not independently wealthy, so our biggest challenge is going to be finding a way to make sure we don't run out of money.

New statistics released last week showed gains in life expectancy for children being born today. Not to mention, the US population over 60 is expected to increase to 26.4% by 2050, up from 16.7% in 2005.

With the increase in age of the population, government programs such as social security and Medicare will continue to struggle and will probably cover less and less as the years go by.

In today's world, few companies offer lifelong pensions. As a result, the bulk of retirement savings has fallen directly on workers.

I hate to be a "doom and gloomer", but all of these things add up to changes for all of us - whether we are saving for retirement or are already in retirement.

One of the best places to begin when focusing on these issues is to run a retirement calculation projection report. As with any type of future calculations, your answers will only be as accurate as the assumptions you provide.

Be as realistic and conservative as possible in your assumptions - assume you will save less, spend more and achieve lower returns on your investments. Use a life expectancy number of at least 100 years old.

If the numbers show you aren't saving enough to do what you are hoping and planning, what choices can you make to change the outcome of the answers? Will you need to increase your savings? Will you need to work longer? Can you get there by being a little less conservative in your investing? Will you need to do some combination of all of these things?

Once you have some of these answers, you will need to be brutally honest with yourself to determine if you believe you will truly be able to make the changes necessary to get you there.

The answers to these questions will be different for everyone and how we get there is up to each of us.

What is the same for everyone is that we are living longer and we all must take full responsibility for our own retirement circumstances.

Does Your Money Disappear? You're Not Alone!

2011-03-16T13:06:00.001-06:00

I came across an interesting study the other day. It was a poll taken by Visa USA, Inc. called the “Visa Mystery Spending Survey”. The findings were somewhat disturbing – at least to me.

Americans lose track of up to several thousand dollars each year. 48% of the 2,036 people polled said that they spent an average of $120 each week. Of that $120, an average of $45 simply vanished from their wallets.

Now, barring teenagers or spouses raiding the wallet, that means that we aren’t keeping very good track of where our money is going.

Although $45 a week seems small on a day-by-day basis, the missing money averages about $2340 over the course of a year. That’s a significant amount of money!!!

Those under the age of 35 seem to be the worst at monitoring cash flow. Men in this age range said that they lost track of an average of $59 a week, adding up to $3,078 a year. Women in this age group lost track of an average of $52 a week, adding up to $2,709 a year.

Interestingly, the survey went on to ask where the respondents felt they were losing the money. 56% of the males under 35 thought they lost their cash during nights out on the town, while 67% of the women thought their money was disappearing during shopping.

It’s understandable that we would lose track of some cash over the course of a week, but this is an amazing amount of cash going unaccounted for by the end of a week. It’s amazing how quickly a dollar here and a dollar there can add up.

I had a young client with cash flow problems keep a spending journal for one month – writing down every penny she was spending. She was amazed that, at the end of the month, she was able to save $200, when in the months before that, she never felt like she had any money left at the end of the month.

If you are losing track of close to $50 a week, it would be a good idea to keep a close eye on your spending habits for a period of time to really see where that money is going.

Beware! Medicare Doesn't Pay For Long Term Care Needs!

2011-03-08T14:45:00.001-07:00

We’ve talked before about long term care needs and insurance coverage. The odds of needing some sort of assisted living care, whether in your own home or in a facility, are fairly significant on an individual basis and are even higher that at least one of the partners in a couple will eventually need care.

Unfortunately, a lot of people have the mistaken belief that Medicare will cover this need. Medicare does not – and never will – cover assisted living costs.

Medicare pays only for skilled or rehabilitative care. Assisted living needs are considered custodial care and are not eligible for coverage by Medicare.

Medicare pays only for a maximum of 100 days – 100% of the cost for the first 20 days, after which the patient is responsible for the co-insurance payment for the remaining 80 days.

Medicare pays only in the above-mentioned cases – after a minimum 3-day hospital stay.

On the other hand, Medicaid does pay for a percentage of the amount of assisted living needs. Unfortunately, not every facility accepts patients on Medicaid and those that do typically have a limited number of beds available for Medicaid patients.

Another concern with Medicaid is that coverage is only available when a person can show a financial need and/or meets state spend-down requirements. What this means is that you cannot have above a stated amount of assets (which changes yearly) for Medicaid to cover you. For a couple where only one spouse needs coverage, this minimal asset rule often makes a pauper of the other spouse.

Another piece of the puzzle when attempting to qualify for Medicaid coverage is that the existing assets must actually be spent down for the benefit of the person who is applying for the coverage. There is a 3-year “look back” period where the state will consider what, if any, assets had been available during the previous three years and, if those assets are no longer available, what happened to them.

Before the 3-year look back period was signed into law in the mid-1980’s, it was not uncommon for a person to gift their assets to other family members in order to qualify for Medicaid coverage. The 3-year look back has eliminated that option. Not only will the state deny Medicaid coverage if they find evidence that those assets were not used for the care and benefit of the patient, there is also a multi-year penalty period enforced before the patient can even reapply for Medicaid benefits.

The bottom line is that most of us should be considering putting some type of long term care coverage in place. The good news is that there are many more options for coverage then in previous years and, if you haven’t looked into those options recently, you might be surprised by what is now available and how affordable they may be.

Presidents Pay Taxes, Too

2011-02-28T07:19:00.001-07:00

We are well into tax season – in fact it’s almost over. I’ve run across some interesting information about presidential tax returns.

Remember, even the President of the United States has to live by the same complex tax regulations as the rest of us. Income tax returns are considered to be private and are protected by law from unauthorized disclosure, including the returns of our Presidents and all other public figures. However, since the 1970’s, most presidents have opted to make their IRS tax filings public during the time they are in office.

I have some interesting facts from the tax archives of past US presidents.

In March, 1938, President Franklin D. Roosevelt wrote to the Commissioner of the IRS and informed him that he was unable to figure his tax for 1937. Apparently, income tax rates had changed 20 days before his second term began, and he couldn’t figure out how to apply the tax rates. He informed the Commissioner that because this was a math problem, he was enclosing a check for $15,000 and would wait to hear from the IRS as to the balance he needed to pay!

During his Presidency, Jimmy Carter filed an application for an extension of his tax return for 1979 – on April 11 – just days before the tax filing deadline!

Bill and Hillary Clinton’s tax return for 1996 showed that she reported more income than he did. A large portion of her income was from the book she wrote. She donated all proceeds from the book, after taxes and expenses, to charity and they were able to take a charitable deduction of more than $600,000!

Our presidents, and all US government office holders, must comply with ethics laws established since 1978, that impose financial reporting requirements and ethical standards. Blind trusts are often used by presidents, which are managed by independent trustees, approved by the Office of Government Ethics. These trusts help government officials to avoid any potential conflicts of interest.

Do You Have The Right Expectations for Social Security?

2011-02-23T11:55:00.003-07:00

We talk about social security income quite a bit. The reason for this is that it is way too easy to get the wrong idea about what it will and won’t do for you.

First of all, the age at which you can retire with full benefits is getting older. If you were born in the year 1937 or before, you can retire with full benefits at age 65. If your birthday falls between the years of 1937 and 1941, full retirement age increases by 2 months each year. For example, if you were born in 1939, you are eligible for full benefits at age 65 and 4 months. For those born after 1941, the age to receive full social security benefits continues to be pushed out.

Of course, we’ve also been hearing that social security might not even be there when some of us retire. The social security trust fund is expected to “run out of money” somewhere around the year 2030, maybe sooner. It recently came out that there are now more people drawing from social security than are working and paying into social security.

So, why is this happening? Social security was put into place in the 1930’s and paid benefits when a person reached age 65. However, at that time life expectancy was age 63, meaning that social security was designed only to pay someone who lived longer than was expected. (The government even had a name for people who lived past 65 and began drawing social security – malingerers!) If social security had been set up with a retirement age that increased along with life expectancy, using today’s actuarial life expectancy tables, we wouldn’t be eligible for benefits until around age 80-85.

Another problem is that social security was never intended to be a person’s only source of retirement. What a lot of people don’t realize is that social security benefits are capped at a maximum dollar amount for everyone, regardless of what your income had been. The higher your pre-retirement income, the less social security is going to replace. How big of a pay cut are you willing to take on the day you retire? If you don’t have a company pension and you haven’t been saving for retirement, that pay cut may be bigger than you are aware of or ready for!

So, what's to be done? We absolutely must take charge and save and invest for our future. If your company offers a 401(k) or other retirement plan option, be sure to take advantage of it. Adding to IRA’s or Roth IRA’s annually is also something that everyone is eligible for at some level. As with so many things in our lives, WE must take responsibility for ourselves. The best time to start saving for retirement was yesterday, but the next best time to start is today!

Need to File for A Tax Filing Extension? You're In Luck!

2011-02-15T13:05:00.001-07:00

There was a story in the Wall Street Journal in January of 1985, which told of a woman who asked the IRS for more time to file her return, saying: “My husband and my forms have been misplaced. Please send replacements.” The IRS replied, “Unfortunately, we could only replace the tax forms.”

Luckily for taxpayers who need, or want, to postpone filing their taxes, the IRS actually makes it easy to do so. By filing IRS Form 4868, officially named the “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return”, by April 15th, a taxpayer may receive an automatic six-month extension to October 15th. Even if you don’t owe anything in taxes, you must file for an extension if your return won’t be filed by April 15th. Failure to file for an extension can result in nondeductible penalties and interest charges.

The most important thing to keep in mind if you are going to file for an extension is that it is ONLY an extension for time to file, NOT time to pay. The payment doesn’t have to be the exact amount due, but payment must be attached to the extension to avoid major penalty and interest charges. The first penalty assessed for a late filing is, go figure, a late-filing penalty. This penalty is 5% of the balance due for each month, or part of a month that the Form 1040 is late, up to a maximum of 25% of the balance due – that’s huge! For example, on a balance due of $10,000, that works out to $500 per month. If the filing is four months late, that’s a penalty of $2500!

On top of that, if the IRS is able to establish that the late filing is fraudulent, the monthly penalty is 15% of the balance due, up to a maximum of 75%!

Filing for an extension but not making any installment payments will also not work with the IRS. For taxpayers who owe less than $25,000; who satisfy their liabilities for taxes, penalties and interest charges within five years; and are current with all previous tax obligations, the IRS automatically approves installment payments on their bill by filing Form 9465 – but some amount must be paid.

While many of the options the IRS offers you can be very helpful, don’t be too casual about their use. The IRS has the authority to retroactively revoke your extension, in spite of the fact that they may have already accepted it, and they can then add back the penalties for late filing and interest.

Keep in mind too, if you underpay your estimated taxes, the IRS will still charge interest on the additional taxes that you owe.

Lastly, remember that an extension for filing your taxes does not increase the IRA contribution deadline. If you are planning to make a contribution to an IRA or Roth IRA, you have until April 15th, regardless of any extension you may file for.

If you are self-employed and have a retirement plan for your business, fling an extension does extend your contribution deadline. But, only for business retirement plans for self-employed people, not for someone who is enrolled in their company’s 401(k) or similar plan.

IRAs - Roth or Traditional?

2011-02-07T07:22:00.001-07:00

I wanted to go into more detail about the Roth IRA. Most people have at least heard of the Roth, but a lot of people are confused by what it is and how it works.

A Roth IRA does not allow you do deduct your contribution from your current years’ taxes. Unfortunately, because the income phase outs are so low, most people are not eligible for a deductible IRA anyway.

If you are planning to fund a non-deductible IRA – and most of us should be – it often makes more sense to set up a Roth instead.

With a Roth, the dollars funding the account grow tax-deferred. Once you retire and begin to withdraw those dollars to spend, you do not pay any income taxes – ever. Proceeds are completely tax free. This is why, depending on your circumstances, you should consider the Roth, even if you may be eligible for a deductible IRA. You may come out ahead with future tax-free withdrawals, instead of a current deduction on your taxes.

As with traditional IRAs, you have to wait until you are age 59½ (or five years, whichever is longer) before you can access the growth in the account without a penalty or taxes. However, you may take out your original contribution or rollover dollars, at any time, without taxes. If you are under age 59½, you may still pay a 10% penalty.

One nice feature of the Roth is that you do not have to take required minimum distributions at age 70½. In fact, you never have to take distributions if you don’t need the money. Also, you can continue to contribute to the account past age 70½ if you are still working. Lastly, you can pass your account onto heirs tax-free.

The contributions limits are $5,000 this year, with a $1,000 catch up provision if you are over age 50. The income phase out limits for making contributions to a Roth start at $105,000 for singles or $167,000 for married couples filing jointly.

Keep in mind that everyone’s circumstances are different and you should consult your accountant or financial advisor before contributing to an IRA.

Should You Own International Stocks?

2011-01-31T07:36:00.001-07:00

Financial advisors often recommend that at least a small portion of most investors’ portfolios should be invested in the international markets. But, how do you know how those investments are doing? What indexes (indices) are available to keep track of these stocks?

First of all, if you invest in international mutual funds, you should look at a Morningstar research sheet to determine which countries the fund is invested in. For those who invest in individual foreign stocks, keeping track of those stocks, and the general country or vicinity can actually be tougher.

The performance of over 20 major global stock markets is reported daily in “The Wall Street Journal”, as well as numerous places online. Keep in mind that the daily numbers that are reported have meaning only in relation to what has happened on that exchange in the past. For example, the Nikkei Dow (Japan’s stock market) reports what happens in that market; it is unrelated to the index in Frankfurt, Paris, or London’s FTSE, pronounced footsie.

We’ve talked in the past about how our markets move based on the day-to day movement of individual stocks. Financial analysts tend to evaluate overseas markets by focusing on a country or region’s economic environment, rather than on the prospects of individual companies. Among the factors that make a country’s stocks attractive to investors are the underlying strength and stability of its economy, the value of its currency and its current interest rate.

Growing economies, strengthening currencies and flat or falling interest rates are generally good indicators of economic growth – sound like our economic news? Countries whose currencies are weak, with high interest rates or economies in recession don’t attract equity investors.

So what about investing in individual international stocks? Some of the most actively traded stocks on foreign exchanges are listed in a paper’s Foreign Markets column. Be aware that the closing prices and previous close are listed in the local currency of the country. Many corporations listed in their home country’s exchanges are also traded on US markets as ADR’s, or American Depository Receipts, or as US subsidiary companies. As a point of interest, until 1993 no German corporation had its stock traded in the US. On October 4, 1993, Daimler Benz began trading in the US.

Keep in mind, because prices on international stocks are quoted in different currencies and their markets are influenced by different, and sometimes unknown forces, there’s no easy formula to compare the returns on those international investments. However, because international and domestic stocks often move differently, it may be in an investor’s best interest to diversify by earmarking a portion of their assets into international investments.

"Express" Tax Refund? Be Cautious

2011-01-24T11:21:00.003-07:00

So, what's up with those express or rapid tax refund services?

You usually get your "refund" in one to three days. However, these are one of the worst deals ever for consumers because they are tax refund loans.

Tax preparers file your return electronically, charging huge fees to do something that would cost you $10 or $15 to do yourself. The refund passes through an account at the finance company - who is loaning you your own money - and then charging fees to do so.

The fees for this type of short-term loan can add up to an annual interest rate of 80% or more!!!! Most people who use these services don't understand the total cost and usually don't care because the fees aren't paid out of pocket. But, that's a high price to pay for impatience.

The quickest refund you can receive, without giving up any of your refund balance, is by filing electronically and having your refund deposited directly to your bank. Keep in mind that refunds may be delayed a bit this year because of legislative issues.

Similar issues arise regarding tax preparation ads from car and furniture sales outlets, as well as other retail stores. The ad offers a way to get your taxes done, filed and then allows you to use the refund as a down payment on a new vehicle, furniture, or other items, receiving the car or sofa immediately, as long as you buy from them.

The fees on this type of transaction are astronomical, but the consumer never sees them. Not to mention, these ads can cause someone to buy something that will add new debt to their cash flow when they really can't afford it.

File early, be patience, and get your entire refund. You can then use it to purchase things you would like, without losing a portion of it in fees.

Make An Early IRA Contribution? Why?

2011-01-19T12:27:00.001-07:00

If you haven’t already done so, now is the time to think about making your IRA contribution for 2010. You have until April 15, 2011 to make your contribution for 2010.

However, let’s say you’ve already made your 2010 contribution – or have a little extra money that you could put with your 2010 contribution that you are ready to make, if the maximum were higher – why don’t you make your 2011 contribution now? What difference does contributing early make? Well, I’ve talked about compounding before, but you’ll be surprised by the difference a few extra months can make.

Let’s look at two hypothetical IRA investors. Both are 49 years old and contribute $5,000 every year to their IRAs. The IRAs are invested the same, in this case returning a hypothetical average 8% annual return.

The only difference between our two investors is the time that they make their contribution. Our first investor makes her prior year contribution at the last minute every year – usually April 15th. Our second investor makes his current year contribution on January 1st of each year.

Now, after 15 years, our first investor has accumulated $130,789. But, our second investor, who made the same total contribution of $75,000 ($5,000 x 15 years), has accumulated $146,621. That’s $15,832 more, not by investing more, but by investing sooner!

That’s a significant difference and most of us would be wise to take advantage of something this powerful.

Lastly, the maximum IRA contribution for 2011 remains the same as for last year - $5,000 per person, plus a $1,000 catch-up contribution in you are age 50 or over. Keep in mind that a person turning 50 late in the year, on say December 31st, is eligible to make the catch-up contribution for this year.

Most of us know that saving for retirement should be a priority. An investment in a tax-deferred retirement account will always have a higher return than an identical investment in a taxable account.

Who Needs Life Insurance?

2011-01-10T07:24:00.002-07:00

I came across a fascinating survey the other day and I wanted to test you with the questions that were asked.

The survey was taken by The Life and Health Insurance Foundation for Education and deals with who should own life insurance.

So, here are your choices:

Out of these five fictional characters, which do feel is most in need of life insurance?

Spider-Man (the unmarried movie character)
Batman
Fred Flintstone
Harry Potter
Marge Simpson
Here’s the breakdown of the survey results:

28% picked the unmarried Spider-Man. Of course, it is possible that he has a financially dependent older relative that would warrant a life insurance need, but as he usually is portrayed as barely making a living, it’s pretty unlikely that he’s supporting someone.

18% chose Batman, a ridiculously wealthy bachelor. He might need life insurance for estate planning needs, but who is he covering, his butler?

Only 16% picked the character on the list that everyone should have picked – Fred Flintstone. He is a family man and the primary breadwinner in his family.

15% chose Harry Potter – a teenage student. Of course, one might be able to make the case that his untimely demise could inflict economic damage on his “mother” JK Rowling.

11% picked stay-at-home mom, Marge Simpson. She should have been the second choice, behind only Fred Flinstone.

I’ve talked before about the fact that not everyone needs life insurance. However, this survey points out that not everyone is sure exactly who does and who doesn’t need life insurance. If you are not sure whether you need life insurance, or if you have the correct amount of insurance, do some research.

If you would like to have your insurance needs and coverage looked at, but are concerned that you might be “sold” something you don’t need, consider paying for an hour of time with a financial advisor. You can get the answers you need, with no pressure to buy anything.

Pay Yourself First? There's More....

2011-01-03T09:53:00.000-07:00

We’ve talked before about the “Pay Yourself First” rule, but there is a second part to it that people aren’t always aware of and prepared for.

Financial advisors often recommend taking the first 10% of your take home pay into a savings or investment account. This is a good way to build assets and, if you have it done automatically, you will be surprised by how painless it is.

However, there is also something called “critical mass” when it comes to savings and investments. Keep in mind we’re talking about non-retirement accounts that are accessible no matter what age we are.

As we start to build our savings and investments, we can be surprised by how fast it grows. However, as it grows, we can often look at the number and be mesmerized by what it can buy us - $5,000 for a down payment on a car, $3,000 for an exotic or extended vacation, etc. Unfortunately, what happens is we spend the money and then have to start saving all over again. In this way, we never actually build our savings, the balance grows and gets spent, grows and gets spent.

On the other hand, if we can leave that account alone long enough without taking anything out, it eventually reaches critical mass. That’s the point where we look at the account and think, Man, that’s a lot of money. That number is different for everyone – my critical mass could be $10,000, while yours might be $7,000 or $8,000.

The critical thing (no pun intended!) is to allow the account to reach that level. Once an account gets to critical mass, it becomes very hard for us to spend any of it. We just want to see it grow and grow and grow.

There are few things as satisfying financially as seeing our savings or investments accounts grow; and few things as hard as not touching the account when we see something we want, before the account reaches the amount where we would rather save it than spend it.

So, when you are contemplating spending the money in your savings account, take a good look at how it got to where it’s at and weigh that against how much you really need whatever it is you want to spend it on. Give yourself and your savings a chance to reach critical mass and you’ll be well on your way to being financially sound and independent.

Even With A Will, Estate Planning Mistakes Can Be Made

2010-12-21T09:19:00.001-07:00

I often tell people that putting a will in place is one of the most important things they should do. However, there are some mistakes that people sometimes make when drafting their will that can cause almost as much trouble as not having one in the first place.

Make sure you update your will periodically. This is a trap that many of us fall into – we believe we’ve taken care of everything when we complete and sign that document. Unfortunately, circumstances are always changing, not to mention Congress is constantly tweaking estate tax laws – in fact, even as we speak! Review your will after every major life change and have it modified to a new states’ law if you move.

Think carefully if you have named a couple as guardians for your minor children. Maybe your sister is the best choice to take care of your kids, but what if the worst happens and she’s not around or is unable to care for them? Is your brother-in-law the person you want raising your children? Name a first choice as guardian and then name a backup guardian.

You might not want to name the same person guardian for the kids and trustee of their money. The person you most trust with your children might be the worst financial person you know. If one person doesn’t fit both jobs, separate them and give each job to the best person for that task.

Don’t be too specific about your property. If there is an heirloom that you truly want to go to a specific person, go ahead and put it in there. However, if you leave a list of all of your belongings and who should inherit them, you will need to redraft your will every time one of your possessions changes, gets sold, gets broken, etc. Think about leaving collections or groups of items instead. For example, all the jewelry goes to Sally, all the furniture goes to Fred.

Be sure to tell your family where to find everything. You don’t have to show them your will or other estate planning documents, but they should at least know where to find them, if something happens to you. Don’t leave the originals in a safe deposit box that might be sealed and inaccessible at your death. You’ve taken the time to put together an estate plan, but if your family can’t find it, they can’t use it!

As with any estate planning concern or question, please contact your estate planning attorney, who will provide advice based on your individual circumstances and state’s laws.

Trading Tips for Year End

2010-12-15T09:55:00.002-07:00

We’re close to the end of the trading period for the year. If an investor is thinking about making trades for tax purposes for the 2010 tax year, those trades must be executed by December 30th; a day earlier than usual as the New Year’s holiday falls on December 31st.

Before making trades for tax purposes, there are several things to think about.

First, tax efficiency is not the holy grail of investing, after tax return is. The name of the game is not to minimize taxes, but rather to make as much money as possible, with an understanding that the IRS has several ways to take some of that money away. Most importantly, paying taxes is inevitable and the issue becomes one of time value of money – when to pay the taxes, not if.

I have some ideas for efficient ways to minimize taxable gains and “harvest losses” out of your portfolio:

If you have purchased shares of stock in more than one transaction “tax lot accounting” allows you to look at all of the shares of that position and specify the ones you want to sell. Typically, you will match up the shares you are selling with the shares that cost you the most, thereby providing you with the smallest gain and the lowest tax liability. On the other hand, an investor, if he has losses that offset those gains, might choose to sell the shares that cause the biggest gain, allowing him to realize larger gains, but lower taxes.

Let’s say you have a position that is currently sitting at a loss, but you really like the industry. Be aware of the wash sale rule which states that an investor must wait 30 days after selling a position for a loss before he can repurchase the same position; if you don’t wait 31 days, the IRS will disallow the loss. If you don’t want to be without that particular industry in your portfolio for 31 days, you could consider purchasing a position in a similar industry.

You should think carefully before harvesting losses. After selling a position to harvest the loss and then purchasing a new position, you must wait a year before the holding period on the new position qualifies for a long term capital gain. It looks like Congress is going to leave the long term capital gains rate at 15% for most taxpayers. However, short term gains have always been taxed at the level of the investor’s income tax bracket. If it is necessary to sell your new position too soon, higher short-term tax rates could more than offset the benefit realized by harvesting the loss.

If you believe the market may not move too much between now and the first of the year, consider deferring gains into 2011. It is always better to pay the taxes a year later and have use of the money in the meantime.

It’s not too late to do some last-minute tax planning in your portfolio. However, before making any changes based on tax reasons, contact your CPA, who can help you decide if these strategies will be advisable for you.

Research is Key!

2010-12-07T10:39:00.002-07:00

Volatility is here to stay! There are very few sectors of the markets that are not subject to volatility. I talk to my clients a lot about the fact that volatility can be a long term investor’s best friend. However, you need to be able to hold on during the downswings in order to be able to take advantage of the upswings.

Changes in the market’s volatility and valuations can seem very ominous while we are living through them. However, over the years, I have found that it is pointless to obsess over the markets because, as investors, we have no control over what the markets are currently doing or going to do in the future. All we can do is determine what amount of risk and volatility we, personally, can handle in our portfolios and then invest accordingly.

Research is the key. In a volatile market, we need to recheck our research parameters. If the fundamentals of our investments haven’t changed, we have to remind ourselves to maintain our perspective and not to make a move based on fear or greed.

If your investments have shown volatility levels that make you uncomfortable, you should ask yourself how much volatility you are truly able to bear, and over what time frame. Keep in mind that, if you decide you can’t live with negative total return over the course of a year, be sure you take into account a full years’ performance in your decision making. Just because your investments have a down month or quarter may not mean that you need to make changes - yet.

On the other hand, if you decide you can’t live with negative returns in your portfolio over any time frame, you may not want to consider owning anything riskier than a money market or certificate of deposit - knowing the very low yields that these investments offer. Unfortunately, most investors who feel that money market funds and certificates of deposit are “safe” investments don’t realize that, after taxes and inflation, these investments often realize negative total returns, as well. In fact, CD’s have often been called “certificates of depreciation”.

There is a quote from John Maynard Keynes which states, “The markets can remain irrational longer than you or I can remain solvent”. Solid research, broad diversification and a bias toward high-quality investments will go a long way towards minimizing the roller coaster ride of a portfolio. If there is a market sell-off, lower-quality investments tend to be disproportionately hurt by the movement, where a high-quality portfolio will often hold its’ value better which, in turn, makes it easier to stay with our investments.

In the meantime, buckle your seat belts, volatility will be with us for awhile!

Clues That Your Identity Might Have Been Compromised

2010-11-16T09:20:00.000-07:00

I have some friends who recently became victims of identity theft. This is one of the biggest, not to mention fastest growing, crimes in the world. I often talk about checking your credit report at least once a year. Unfortunately, my friends hadn’t done that in about five years. In addition to checking your credit, my friends also passed along some other clues that they missed, but that we can be on the lookout for.

My friends reported that, as happened to them, identity thieves often start with very small charges – usually under $25 – for several months. If these charges don’t prompt you to call the credit card company, the thieves will then escalate their scam. I actually had a similar situation a few years ago. It didn’t spiral to actual identity theft and I just shrugged if off after the credit card company sent me a new card. It never occurred to me that what I was experiencing was the prelude to the theft of my identity.

In my case, I happened to see a charge that, I am ashamed to say, I missed for three or four months. I called the credit card company to ask about the charges. They removed them from my bill, moved that account to a new one, sent me a new card and that was the end of it. I had always prided myself on checking my credit card bill every month and verifying every charge although, apparently, I was not as diligent as I thought. I learned from that experience and am more careful about checking my charges now.

Unfortunately, my friends did not catch the small charges. They became concerned when, as they were getting ready to pay their monthly bills, they realized that they hadn’t received their statement from the credit card company. When they called, they were told that the address had been changed. As they and the credit card company started digging deeper, it turned out that the thieves had changed the address on their account and then charged a very large purchase to the card. They said that it has taken several weeks and countless hours on the phone to try to straighten this out.

After this happened, they decided to get a copy of their credit report to see if there was anything else they might have missed. They were amazed to find out how many old accounts they had forgotten about that they hadn’t used in years but, that were still open. They didn’t even have cards for many of those accounts anymore. More time was spent as they contacted companies and closed many of those accounts.

Check every charge on your statement every month. Make sure you know when your bill is normally due and, if you haven’t received it, call the company. Check your credit report at least every one or two years – preferably more often! You are entitled to a free credit report every year from each of the three credit bureaus, which means you can actually check your credit three times a year. HOWEVER, free credit reports do not come from freecreditreport.com. You must go to www.annualcreditreport.com to get it for free.

The bottom line here is that YOU have to be diligent about watching after your credit and your financial identity. Credit card companies are pretty good about contacting you if they see activity on your account that is not part of your regular pattern. However, if you are observant and spend a little time checking your statements, and your credit report, you can save yourself a lot of time and headaches later.

Gold ATM's? Seriously?!?

2010-11-01T07:09:00.000-06:00

How do you make money in the markets? The answer most people give to that question is, “Buy low and sell high”. So, how do you know when the best time to buy and the best time to sell are? Most of us have heard the old adage, “buy at maximum pessimism and sell at maximum optimism” or, in other words, do the opposite of what everyone else is doing. Both of these adages are true in theory, but extremely difficult in practice.

So, why am I bringing this up right now? Once we start seeing absolutely everyone – down to the local dog catcher – start talking about an investment, the odds are we’ve probably hit “maximum optimism” on it.

How many radio, newspaper or magazine ads, TV and internet ads, or financial news network’s talking heads, are we seeing and hearing talking about investing in gold? Well, apparently, there is a company in Germany that has installed gold ATMs in luxury hotels in several overseas locations and they are planning to expand into the US - in Florida and Las Vegas - next year!

Gold ATM’s? Seriously?

These vending machines update the price of gold every 10 minutes, accept cash and credit cards, and dispense both gold bars and gold coins.

First of all, be very wary of the gold spot prices quoted by these machines. Every investment has a bid/ask spread – the difference between what you can buy an investment for versus what you can sell it for. An “investment” purchased through a machine will include a premium in the price to provide a profit to the company who owns it. Be sure you know what that premium is!

Secondly, do you really want to be buying any investment using a credit card? You are leveraging the purchase with an interest rate anywhere from 9% to 24%, which ultimately increases your purchase cost and decreases any profit you might eventually see.

As with any investment you are considering putting money into, be sure to understand where it fits into your portfolio and why you want to own it. Simply buying it, “because everyone else has it” and you don’t want to “miss out”, is absolutely the wrong reason to make an investment in anything.

While I am not going to give anyone specific advice on buying or selling gold here, the bottom line is, when you start seeing investments being offered through vending machines, we’re probably coming pretty close to maximum optimism and it may be closer to time to sell than time to buy.

Underwriters Affect Your Insurance Premiums...

2010-10-25T12:20:00.000-06:00

Let’s talk about insurance underwriting. I know, not the most riveting subject! But it is a subject that affects almost every one of us at some point in our lives.

No matter whether you are talking life, health, disability, auto, home or long term care, insurance companies use the underwriting process to determine how large of a risk they are taking on by insuring you or your property. The bottom line is that insurance companies are not benevolent societies; they are in business to make money.

For an individual, the point behind insurance is to transfer the risk of a loss to the insurance company. You pay a minimal premium to avoid a potentially large out-of-pocket expense at some point in the future.

Insurance companies typically bundle their risk in a “block” of business that might include the best and worst risks, and everything in between. This helps them avoid “adverse underwriting”, which occurs when a large number of bad risks are pooled. Think group insurance - the people who are the least insurable on their own are the first ones to sign up for group insurance, where there is no underwriting and the insurance company has to cover everyone who applies.

Every type of insurance has a different underwriting focus. For example, life insurance underwriters are looking for medical conditions, family medical history, dangerous hobbies such as sky diving, and even driving habits that might shorten your life to determine how much they have to charge you for a premium to make the policy cost effective and profitable to them. On the other hand, long term care insurers will be looking at possible medical conditions and family health history that might cause you to require years of assistance in everyday living.

In order for an insurance policy to be cost effective and profitable to the insurance company, the policy has to be in effect, with premiums being paid regularly, for a minimum amount of time. The job of the underwriter is to hedge the risk that the insured will be paying premiums for a long enough period of time before there is a potential claim or cancellation.

So, what does all of this mean to you? If you are an “adverse risk” to the insurance company, you could pay higher premiums or you could even be declined coverage outright.

Not only are the underwriters tasked with making sure the policy will be profitable, that profitability affects the ultimate claims-paying ability of the company. No matter what company you use for your insurance needs, the underwriters will be a major part of the insurance-buying process.

Why Do Bonds Go Down in Value?

2010-10-18T09:24:00.001-06:00

It seems counterintuitive: when interest rates go down, bond prices go up – and vice versa. Many times, people who invest in bonds don’t realize that the value of their investment can fluctuate. The interest rate is fixed, but the value of the bond itself is not. So, how does that work?

First of all, remember that when you buy a bond, you are loaning money to the entity that issued the bond. That entity will be who eventually pays you back your principal, plus interest.

Let’s say you invest $5,000 in a bond paying 5%. You’ll receive $250 in interest every year, and you’ll get your $5,000 back when the bond matures.

But, six months after you invested, economic conditions have changed and interest rates go up. A bond similar to yours is now paying 6%, while you’re still getting 5%. Your bond isn’t as attractive to investors, who would rather get 6%, so the price of your bond goes down.

Keep in mind, the opposite is true, also. If a newer bond is paying 4%, your bond’s price would be higher, because 5% is more attractive to investors than 4%.

If you keep your bond until maturity, fluctuations in value won’t matter. However, if you want or need to sell your bond, you will get more or less than what you paid for it, depending on what interest rates are doing at the time you sell.

Another factor affecting interest rates and valuations on bonds is how risky the investment might be. A US Treasury bond is guaranteed by the full faith and credit of the US government. A corporate or other type of bond might be below investment grade. The riskiness of a bond is determined by the stability of the agency that you are loaning the money to. The issuer of a riskier bond typically must pay a higher interest rate on their bonds or investors won’t buy it. Investors demand higher returns in order to take on more risk.

The number of years until the bond matures, along with changes in interest rates, will also influence the value of your bond. A lot of interest rate changes, both up and down, happen over the years. To compensate for the risk in the value of your bond, based on how long you have to wait to get your money back, the higher the interest rate the bond should pay.

Although bonds are used by investors mostly for income and as a way to diversify a portfolio away from the stock market, a bond investor should always remember that the value of the investment itself can fluctuate. Investing in bonds for capital appreciation is difficult, at best.

Taxes, Taxes & More Taxes

2010-10-05T06:57:00.002-06:00

Unless Congress takes care of business when it returns from the fall break and the November elections, January 1st will usher in the largest set of tax hikes ever endured by taxpayers throughout the history of America. There have been some recent headlines about this issue, but most taxpayers have not given any consideration to an event so large that it will impact almost everyone and, in many cases, that impact will be negative.

The mid-term elections are almost here…the balance of power may be shifting in Congress…the direction of the economy is still murky and unpredictable…the Bush tax cuts are set to expire at the end of December. All of this uncertainty makes it next to impossible to predict what changes are coming to federal income tax rates and other proposed taxes. However, because of increased pressure on the government to be more fiscally responsible, there is no question in most peoples’ minds that taxes will be going up in 2011. Let’s look at a few of the changes that will affect the majority of taxpayers.

First, tax rates on ordinary income will be changing. The 10% tax bracket is set to expire, although the most likely outcome for this bracket is that it will remain in place. On the other hand, the odds that the top two brackets will stay the same are slim to none. The top two brackets are expected to revert to 36% and 39.6%, respectively. Keep in mind that these are also the top rates for taxable short-term gains, as well.

There is a proposed increase in the tax rate on qualified dividends from 15% to 20% for individuals with adjusted gross income above the 15% tax bracket, which ends at $35,000. This increase will capture the majority of taxable investors and, while 5% doesn’t seem like much, if you factor in the loss of compounding, it could become significantly detrimental to a long term investor.

The government is also proposing an increase in long-term capital gains from 15% to 20% for those above the 15% tax bracket. Again, this increase will affect the majority of investors because a single person only needs $35,000 in AGI (married filers hit the mark above $70,000 AGI) to qualify for the 20% tax.

Lastly, the most controversial tax is probably the estate tax. In 2010, the estate tax lapsed to zero. If congress doesn’t act, the estate tax will revert to a top rate of 55% and will affect estates valued above $1 million. It is likely that congress will compromise on this tax and set it at a top rate of 45%, affecting estates over $3.5 million. However, a 45% tax increase is not something to take lightly. For example, there was a rumor that if NY Yankees owner, George Steinbrenner, had died in a different year, his heirs might have had to sell the team to pay the estate taxes.

Complicated tax laws are about to become even more confusing. I’m not suggesting that anyone should invest based on possible changes to the tax code. However, flexibility and diversification are key, especially for investors with long investment horizons. We always talk about not putting all of your eggs in one basket. In this case, rather than diversified investments, we are talking about having a combination of types of accounts that diversify taxability, liquidity and risk. Being smart about how your accounts work together can help minimize fallout from the imminent tax changes.

Engaged? Time For Some Financial Planning

2010-09-29T07:03:00.000-06:00

So, you’re getting married! In today’s society, second and third marriages are not all that uncommon. So, how does a couple manage wealth and estate planning, especially if there are children from a previous marriage? Family dynamics are complicated. They can become even more complex when wealth, or the expectation of wealth, is involved.

Let’s start at the beginning. Should you put a prenuptial agreement in place? This doesn’t seem too romantic to most of us, but it could help avoid problems later on. There are a few circumstances in which a prenuptial agreement is advisable, including if one spouse owns a business, anticipates receiving an inheritance, has children from a previous marriage, or if one partner has significantly more money than the other.

Most people find it very difficult to discuss a prenuptial agreement, yet it provides for the opportunity to put everything on the table. One of the most-named reasons in a divorce is money issues. Couples don’t have to be in one hundred percent agreement on everything related to money, but we should, at the very least, try to understand where our partner is coming from and what their attitude is toward saving and spending money.

One important rule for a prenuptial agreement is that each person needs to employ their own attorney. Courts are upholding many more agreements than they have in the past but, if there is only one attorney representing both parties, the agreement may not stand up in court.

Next, who should own the assets; should you commingle your accounts, or keep them separate? There may not be an advantage to pooling assets that were earned before marriage and, in fact, there may be significant disadvantages. Idaho is a community property state. Any commingling of accounts means that each spouse is entitled to half of the value of that account – no matter whose money it was originally. However, similar to a prenuptial agreement, maintaining separate accounts can make it seem as if you’re not really willing to be a partner in this relationship.

One solution is to keep the premarital assets separate, but commingle any new wealth. The assets belong to both of you anyway and commingling can avoid a feeling of separateness.

What about beneficiaries on retirement accounts? One way to distribute wealth, making sure that you take care of your new spouse and any family or children from a previous marriage, may be to list them as co-beneficiaries on retirement accounts. As I mentioned, Idaho is a community property state. Your spouse is the default primary beneficiary on your retirement plans and that can only be changed if he or she signs a waiver – after the marriage – allowing you to name someone else as the primary beneficiary.

Many money issues in a marriage can be minimized, or avoided entirely, with a little planning and communication at the very beginning of your new life together.

Is It Safe To Invest In Municipal Bonds?

2010-09-21T11:37:00.002-06:00

When one thinks about the safest fixed income investments, municipal bonds often rise close to the top of the list behind US Treasuries. Lately, though, we’ve been exposed to headlines warning that the default levels of municipal bonds are increasing. So, are they safe, or aren’t they?

There was a recent headline that stated, “Thirty-five municipal bond issues totaling $1.5 billion defaulted in the first six months of 2010…” Scary, yes, but incomplete. Those 35 bond issues, worth $1.5 billion in a municipal bond market valued at $2.8 trillion, make the default rate about five-hundredths of one percent. Hardly an epidemic….

One other critical piece of information left out of the article was which types of municipal bonds carry a higher risk of default than others. Bonds are rated by several different agencies, Moody’s and Standard & Poors being two of the most well known. Moody’s reports that the default rate on investment grade municipal bonds is .06%. (The definition of an investment grade bond is one that is relatively safe, having a high bond rating such as BBB by Standard and Poors or Baa by Moody’s.) By way of comparison, investment grade corporate bonds have a default rate of around 2.5% over the same time period.

However, Moody’s also reports that default rates jump to 12.40% for non-investment grade bonds, rated single B by Moody’s. Added to that, research by Municipal Market Advisors showed that two-thirds of the municipal issues that were in default or had credit impairments by the end of June 2010, had originally been brought to the market without any credit rating.

Part of what makes some bonds riskier than others is the strength of the issuer and the ultimate source of the payments of interest and principal. For example, bond issuers may plan to pay the interest and principal from specific revenue sources, such as a library bond being supported by local taxes. Currently, some of the riskiest sectors are land-secured bonds. If you think about it, this makes a lot of sense coming out of what was partially a real estate-based recession. Other risky sectors include toll road/transit, general obligation, and sales-tax based bonds. Again, the risk of not being able to make the payments on these types of bonds makes sense as, during a recession travel and consumer purchases tend to slow.

Default risk in the municipal bond market is not to something to take lightly; in today’s economy there are a lot of municipalities dealing with budget issues. Bond investors need to be selective about the bonds they are considering adding to their portfolios but, staying diversified and sticking mainly with safer issuers and sectors will go a long way toward reducing the default risk of a portfolio. As with any investment you are interested in, be sure to do your research.

Why Should I Diversify?

2010-09-01T10:39:00.001-06:00

I talk about diversification all the time but, what does that really mean to an investor and his portfolio?

When the investments in a portfolio are well-blended, or “diversified”, it means that the portfolio has a mix of different types of investments. For example, stocks of large or small companies, stocks of international companies, high quality bonds, bonds that have long maturities vs bonds that have short maturities, etc.

Every investment has a certain amount of “correlation” to every other investment. Correlation speaks directly to how each asset class moves “in relation” to another asset class. Consider that, as a general rule, if stocks increase in value, bonds typically go down in value, and vice versa.

Proper diversification will provide a couple of key things to a portfolio: one, it can reduce the overall volatility of the entire set of investments and two, it may offer an opportunity for the investor to take advantage of the returns of the best performing asset class at that point in time.

Let’s look at these two things separately, starting with volatility, or risk. When your investments are highly correlated, it means that they move in lockstep with each other which, in turn, means the portfolio is subject to much higher risk. Think about it this way, if there is a downturn in the type of investments you have, all of your assets could go down and your portfolio would have no place to hide.

If the portfolio consists of investments that are not correlated, or don’t move together, just because one investment goes down, the other may not. This may allow the overall portfolio to weather a downturn in much better shape.

So, if asset classes don’t all move the same way at the same time, how do you know which ones to invest in?

That brings us to the second reason to diversify. The bottom line is no one really knows which asset class will be the one that will beat all the other asset classes at any given point in time. If you have put your portfolio together with a proper mix of the available asset classes it doesn’t matter which one is going up next, the chances are you already own it.

This sounds simple enough, but is harder than you might think. It is not unusual for investors to look at a list of returns and choose to invest in the one with the highest return. Unfortunately, that return has already happened – it’s too late, you’ve missed some, maybe all, of that return. But, if you were already holding that investment, along with the other asset classes in your portfolio, you would have owned it while it was going up in value.

Diversification is not just an industry buzzword; it is an investing strategy that works. If all of the individual holdings in your portfolio seem to go up or down the same way at the same time, you need to take a close look at what you own and consider adding some investments that are in a different sector than what you currently have.

Keep in mind, of course, that diversification neither assures a profit nor guarantees against loss.

Even Cash Has Risk!

2010-08-23T10:13:00.000-06:00

I talk to people all of the time about one of the best ways to lower the risk in a portfolio – diversification. However, while diversification is a basic step to building a portfolio, investors should also be aware that every investment has some risk to it. The definition of “risk” is “to expose oneself to the chance of injury or loss”. I can hear the question now, “Hey, cash doesn’t have risk, does it?”

Let’s talk about the different types of risk investors need to know about and what to watch for.

First, there’s capital risk. This is the risk that your principal could decline and won’t be returned to you intact. There is capital risk with many investments, but most people will think of the stock markets when they think of capital risk.

Credit risk pertains to income investments such as bonds. This is the risk that the issuer of the note will not be able to make the interest and principal payments on the note. In a worst case scenario, an issuer could default on the bond and the investor receives nothing back.

One risk that affects everyone is inflation risk. This one is the risk that cash is exposed to. Over time, rising prices erode the purchasing power of your dollars. Due to inflation, the goods and services you buy today will cost you more in the future. No one is immune to this risk, although people on a fixed income are often more affected by it.

If you have an investment and need to sell it quickly, you may be subject to liquidity risk. How easily can you turn that investment into cash and what will it cost you to do so?

Interest rate risk is felt when the value of an interest-sensitive investment moves when interest rates adjust. For example, if an investor is holding a bond that pays 4% when interest rates move up to 5%, the value of that bond will go down. Someone who is looking to invest in a bond would rather buy the 5% bond than the 4% bond, so our investor who owns the 4% bond would have to discount the price of the investment if he needed to sell it.

Reinvestment risk means that you might not be able to reinvest the dollars in something as good as what you already had. Think about CD’s and how much their interest rate has declined in recent years. If you had a CD in the past several years that has matured, you probably were not able to find another CD paying as high an interest rate.

What I’m getting at here is that it is impossible to avoid risk altogether. This is one of the ways that having a diversified portfolio can pay off for an investor. Not only does diversification help us avoid chasing markets, an appropriately-diversified portfolio can give us an opportunity to minimize the overall risk of our investments.

Choose Your IRA Beneficiaries Wisely

2010-08-16T08:47:00.002-06:00

Some time back we discussed Stretch IRAs. I still get a lot of questions on this and it is such an important planning vehicle that I wanted to go over it again. Naming beneficiaries incorrectly on your retirement plans could turn your IRA or 401(k) into a savings account for the government.

Distribution laws on retirement plans changed in 2006. Up to that point, a non-spouse beneficiary who inherited a retirement plan had to take a full distribution of the plan, and pay the taxes on it, within five years of the date of death of the plan owner.

The new law states that beneficiaries may take distributions from the plan over their own life expectancy. For example, a 40-year old female beneficiary could stretch the distributions over her life expectancy of 43.6 more years. That means that the remainder of the money continues to grow tax-deferred for many years.

For more than one beneficiary, the account can be split and each beneficiary can use their own life expectancy for distribution. However, and this is important, the splitting up of the account must be done before December 31st of the year after the date of death or the life expectancy of the oldest beneficiary will be used for distribution calculations. While it could create more paperwork, sometimes it’s best for the owner to actually split the IRA up and name each beneficiary separately.

IRA assets should always pass to a beneficiary. If no beneficiary is listed the account goes into the estate. It then must be distributed by December 31st of the year after date of death and taxes paid on the entire amount at the estate’s income tax level. For 99% of circumstances, an estate should NOT be listed as beneficiary.

On the other hand, if someone wants to leave their retirement plan to a charity, that can be a good strategy. The proceeds are distributed completely tax-free. And, if someone would like to leave some of the money to charity and some to other beneficiaries, the law of splitting and stretching still applies – as long as the December deadline isn’t missed.

I always advise my clients to list not only a primary beneficiary, but contingent beneficiaries as well. The law allows a primary beneficiary to “disclaim” the IRA if they don’t need the cash and it can flow directly to the contingent beneficiaries – but only if contingents have been named.
Lastly, be sure that you keep a copy of your beneficiary designations. As a financial representative, I keep copies of those forms. However, custodians have a way of merging or being bought out, and those forms can be lost. If the form can’t be found, it’s possible that the estate will be the default beneficiary.

As with any decision that will affect your estate planning goals, you should consult with your estate planning attorney before making any changes to your beneficiary designations.

Watch Out For Reverse Dollar Cost Averaging!

2010-07-26T11:37:00.001-06:00

Retirees, beware of reverse dollar cost averaging!

Virtually everyone has heard of Dollar Cost Averaging – the technique of investing a set amount of money on a regular basis. It allows an investor to take advantage of down periods in the market when it is possible to buy more shares of an investment at lower prices, which leads to a larger number of shares in your portfolio to gain in value when the market goes up.

However, someone taking income from their investments on a regular basis (ie: retirees) is subject to reverse dollar cost averaging – selling more shares of an investment when the market is down – which can be very detrimental to a portfolio.

Putting this into perspective, let’s assume a retiree whose investments provide a monthly income of $2,000 a month. If the investment is valued at $20 per share, 100 shares will be sold to meet the income need. Let’s say this is 2008 and the market is falling. If the value of the investment falls to $10 per share, we now would have to sell 200 shares to meet that same monthly income requirement.

Unfortunately, what happens when the markets and the investment increase in value is that there are then fewer shares in the account to help the portfolio recover its value.

Anyone taking systematic withdrawals from an investment needs to be aware of this major issue.

So, is there any way to stop the effects of reverse dollar cost averaging? I don’t know about stopping it completely, but it is certainly possible to minimize the effects.

One of the best ways is to make sure your portfolio is appropriately diversified. A wide range of investments that don’t all move in the same direction will go a long way toward evening out the volatility of an account.

Another way is to set up a cash flow reserve ladder, or what I call an income ladder. The way this works is to take 2 to 3 years’ worth of income out of the market and invest it in money markets and bonds. Every month, this “cash flow reserve account” moves the monthly income into a checking account. The remainder of the portfolio is then invested in the stock and bond markets, appropriately diversified of course, which allow the portfolio the opportunity to increase in value when the markets are going up, without jeopardizing our retiree’s income stream.

While reverse dollar cost averaging caused by systematic withdrawals can be detrimental to a portfolio, there are ways to minimize its’ effect and to help your money work FOR you!

Are Your Investment Returns "Real"?

2010-07-20T16:09:00.000-06:00

Let’s talk investment returns.

When you sit down to look over your portfolios’ performance, either with your financial person, or if you do it yourself, most people just look at the overall return they have received on their investments. Think also about the pages you may receive from your 401(k) company regarding the returns of the funds that are available to you through your plan.

Those returns are raw returns, or what we call “nominal” returns. They may be good, bad or flat, depending on the investment itself.

But, and this is a big but, in order to know how, or if, your portfolios are really growing, you need to determine your “real return”.

What is real return? That is the actual return your investments have produced after subtracting any management fees, taxes and inflation from your raw return.

Let’s look at a hypothetical example to see how this works. We’ll start with the assumption of an 8% raw return. Say your management expenses are 1%, your tax bracket is 25% (assuming investment expenses are deductible and 25% of 7% equals 1.75% taxes) and an average annual inflation rate of 3.33%. Subtracting these things from your 8% raw return leaves you with a 1.92% real return. (8% minus 1%, minus 1.75%, minus 3.33% = 1.92%)

So, what do you do with this real return number?

There are calculations that you can perform to determine what real return rate you need to get from your portfolio to sustain the withdrawals you will make for your income needs when you retire. Although the real return number from the example above may seem pretty low, it’s actually a pretty realistic number. While it may seem low, a reasonable real return, coupled with a reasonable rate of withdrawal can go a long way toward helping a portfolio continue to provide needed income.

The reason this is important is that, as many of us are retiring in better health today and expect to live many years in retirement, it is necessary to understand real return rates so that our portfolios aren’t invested too conservatively. We could run the risk of having a very low, or even negative, real return in the portfolio. If that should happen, the portfolios we work so hard to build for our golden years might not be able to sustain our income needs throughout our entire retirement.

Choose Home Improvement Projects Carefully

2010-07-12T07:41:00.003-06:00

I wanted to talk a little about home improvements today, specifically what a homeowner might need to think about when deciding what to remodel and how much to spend.

Most realtors tell prospective buyers that it’s best not to have the most expensive house on the block or in the subdivision. Appraisers compare the purchase price of similar homes in the area when determining the value of a home and, if your house is larger and more expensive than other houses in your neighborhood, it could affect the appraisal on your house.

Similarly, you need to consider what increase in value the home improvements might actually add. The general rule of thumb is that the total cost of any improvements, plus the current market value of your house, should not exceed the value of any other house in your neighborhood by 20%. For example, if you own a house valued at $100,000, where the larger houses are worth $110,000, you shouldn’t spend more than about $32,000 on home improvements.

So, what improvements bring the best return on your investment? To some extent, that depends on the part of the country you live in. Generally, interior upgrades, bathroom and kitchen renovations give the best return for your dollar. Other projects that offer good return are decks and fireplace additions. Not to mention, if you are so inclined, doing the work yourself can potentially add to your returns.

One improvement that offers good returns no matter where you live is adding siding. In most parts of the country, you can recoup close to 100% of the cost of siding when you sell your house.

Kitchen and bathroom remodels pay off fairly well, regardless of who does the work. However, take a close look at your floor plan, adding a new bathroom might net you more value than if you turn an existing one into a luxury bath.

If you are new to home improvement work, be careful when doing projects yourself. Appraisers say that a poor quality job may actually decrease the value of a home because a potential buyer may feel that they need to spend extra money to redo the remodel.

Lastly, there are some home improvements that may cost more than can be recovered in a sale. Some of these include in-ground swimming pools (unless you live in the desert), hot tubs and sliding glass doors. Instead of amenities, potential buyers may see hours of maintenance or security work.

If you want to make improvements because you are going to stay in the house for a long time and would like to enjoy them yourself, great; however, if you are looking to make renovations to make the house more valuable at sale time, choose your projects carefully.

The Social Security Dilemma...When Do You Take It?

2010-07-07T11:25:00.004-06:00

As the first wave of baby boomers begins to turn 60, the Social Security decision starts to loom. Unfortunately, there is no easy answer to figuring out the best time to start taking Social Security – everyone’s situation is different. In years’ past, the recommendation was often to start taking your benefit as soon as you were eligible. But, with people living longer in retirement, taking the benefit early may not actually be the best course of action.

First of all, let’s look at some of the things that can affect the level of your payout. Full retirement benefits are available when you reach “normal retirement age” which is a moving target. For anyone born after 1937, full retirement age is extended beyond age 65. For example, full retirement age for someone born in 1938 is 65 years and 2 months; 1939, 65 years and 4 months, and so on. Reduced benefits are, as always, accessible any time after age 62. Keep in mind that recent changes in the laws increased the penalty for taking early benefits and increased the amount of benefits for waiting.

If you plan to take your benefit early, but also want to keep working, be aware that your benefit may be reduced, depending on your age. The penalty stops once you reach full retirement age, although, depending on when your birthday falls in the year, some penalties may still apply in the year you turn 65.

There may be times when it makes sense to delay taking your benefits. For example, for those with enough outside sources of income at retirement, receiving a larger social security payment later may provide a type of longevity insurance that could kick in as outside investments begin to dwindle.

Men are typically older than their wives and, unfortunately, men’s life expectancy is less than women’s. For a woman whose social security benefit may not be very large, delaying the husband’s benefit could increase the wife’s benefit, should he predecease her.

Making the decision on when to take social security is one that should not be taken lightly. The payout option cannot be changed once you have selected it, so you will want to make sure you make the best choice for your individual circumstances the first time. A husband and wife are well advised to coordinate their benefits to maximize their incomes.

The social security website – http://www.socialsecurity.gov/ – has a wealth of information and calculators on it designed to allow the user to look at all of the options available to them. It is extremely user-friendly, too! This website is a must for anyone who is considering when best to begin taking their social security benefits.

Where Do I Invest My Emergency Fund?

2010-06-28T07:14:00.003-06:00

Okay, so you’ve listened to the financial community and now have your emergency fund built up and ready to invest. So, where do you put it?

An emergency fund is somewhat self-explanatory. The typical recommendation is to have three to six months of monthly living expenses put back – in case of emergency. The money needs to be safe, and yet accessible on a moment’s notice. However, most people want their emergency fund to grow, too.

The problem is - no matter what you might have heard or read - safety and high returns are mutually exclusive in investing. If a pool of money doesn’t have at least five years to be invested, it should NEVER be put into the market.

So, you want returns, but you also want safety; what should you do with your emergency fund? The plan that I suggest depends on how much you have saved. What I typically suggest is to split it into thirds. Leave the first third in a savings account that you can access 24-7-365. Then, take the next two thirds and put it into a CD ladder. (Note: If your emergency fund won’t split into thirds and still meet bank minimums for CDs, split out a few thousand for the immediately accessible savings account and then divide the remainder into the CD ladder.)

A CD ladder allows you to get a little more return on your money while, at the same time, keeping your money safe and accessible.

To set up a CD ladder, you will take the remaining two pieces of your emergency fund and purchase two CDs. One will be a CD that matures in six months and the second a CD that matures in one year. At the end of six months, you will take the matured CD and invest it in a one year CD. You now have two one year CD’s, but one matures every six months. Let them continue to rollover into a new one year CD at each maturity.

If you need to get to the money in the CD for an emergency, you can access it by liquidating the CD and paying the penalty. If you have to do this, though, be sure to let your accountant know at tax time. Penalties you pay on a CD can be deducted on your taxes.

An emergency fund is a critical piece of your financial security. Be sure that you take good care of it and it will be there when you need it.

Teaching Kids About Money

2010-06-21T07:11:00.000-06:00

Debt Reduction Services, a locally-based national company, recently graded parents on their children’s answers to questions from surveys provided by high school students. The answers and the parents’ grades led to the following Financial Literacy Homework Parental Assignments.

Because our schools don’t teach money management to our children, these homework assignments are valid for all parents.

Age 8 is not too early to start talking to your children about credit cards, budgeting, borrowing and debt. Talk to your children on an ongoing basis, at least monthly, about these subjects.

Consider providing a minimal allowance, not necessarily tied to household chores. Teach them to plan their savings and spending in advance by putting together a basic budget. There is a great budgeting sheet for middle schoolers on the DRS website. (www.debtreductionservices.org)

Don’t discourage ALL spending. Talk to your children about comparison shopping skills and expense tracking.

Open a savings account for your children if they don’t already have one. Help them make regular deposits. Although this is becoming less common in today’s world, especially for the younger ones, let them take the cash to the bank so they can experience the act of depositing the money themselves. The physical act of making the deposit is a starting place to understanding balances when they start getting direct or electronic deposits made to their accounts.

Teach your high school student that the value of a vehicle depreciates over time and that cars are simply meant to get us from point A to point B. They are not status symbols. Explain to them that a $5000 loan for five years at 8% will actually cost them $6000 by the time it’s paid off!

Open a checking account for teenage children and teach them how to use a debit card, including that most important aspect of entering the transactions in the check register. (Something I learned the hard way at age 18!) Make sure you teach them how to balance a checking account, as well. Explain to them that, just because you have checks left in the checkbook, doesn’t necessarily mean that you have money in the account!

As a parent, starting your children early with basic financial management training is the best gift you can give them.

Volatility Driving You Crazy? It's Here to Stay!

2010-06-15T11:16:00.002-06:00

Volatility is ever-present in investing. Anyone who has been investing for any length of time has seen a lot of it! So, can we learn to love volatility – or at least settle for being able to live with it? What can we, as investors, learn from the type of volatility we’ve seen in the past several years?

Market retreats have always been part of investing. Yet, the markets have followed every decline with new highs. The increases have not been straight up and they can take awhile to get started. But, every decline has been followed by an advance. In all the years I have been in this business, it seems that the markets goes down faster than it goes up, but it goes up farther than it goes down.

Large point drops can be deceiving. Because the Dow is so high, a large point drop isn’t necessarily a large percentage drop. If the market is at 10,000 points and drops 1000 points, that is a 10% drop. If the market drops 1000 points, but from a starting point of 5,000, that’s a 20% drop. Keep in mind, too, as long as you don’t sell your position, the loss is only on paper and, as I already mentioned, historically, every decline has been followed by an advance.

Because timing the market is next to impossible, withdrawing money during a decline is almost always a bad idea. To be successful you have to get lucky twice – knowing when the decline is about to start, and then knowing when the advance is about to take over. Otherwise, you risk withdrawing your money just when the worst is over and missing out on any gains.

Volatility is part of the fabric of investing. Overreacting to short term moves in the market, or daily media headlines, isn’t the best choice for long term investors.

If your investments are set up correctly for your age and goals, volatility should just be a passing thought and not a cause for alarm.

Volatility can create incredible opportunities for long term investors to take advantage of.

Beware of Background Noise!

2010-06-08T10:11:00.000-06:00

How many times have I talked about background noise in the financial industry? All of the radio, television, newspaper, magazine and internet articles, comments, blogs and opinions that bombard us every single day. Granted, the financial industry is not the only one that has an overabundance of background noise, but it’s one of the few in which an individual may be negatively impacted just by heeding the so-called “advice”.

When deciding what to invest your hard-earned money into, whether you should move your investments around, or whether you should take your money and run, there are several things to consider and questions to ask yourself – before you make a mistake.

First, what is the money going to be used for? Are you saving/investing for a rainy day, for retirement, for a college education, a down payment on a house, for a daughter’s wedding? Each of these goals, especially depending on the time frame before the funds are needed, mean you will be considering a different set of investment vehicles.

Next, who are you listening to? I read an article the other day about a former major league baseball player who had an investment advisory company, had to file bankruptcy and has now re-opened his investment advisory company. The bankruptcy notwithstanding, what qualifications does he have to be giving investment advice? There are many ways to research a financial advisor and their qualifications. Be sure you know, and can trust, the person whose advice you are following!

If you’ve read or heard about a “can’t miss” investment, find out the source. Is it from someone selling information? Is it from a friend, family member or co-worker? Is it unsolicited, generic advice from someone on a financial program or in a financial publication?

No matter what investment you are interested in you have to do some research on your own to determine, is it the right thing to go into your portfolio, does it fit in your risk tolerance, what is the investment expected to do and in what time frame, does it make sense for the money that you are thinking about using for that investment. If the answers to these questions don’t show the investment to be appropriate for your circumstances, ask more questions, do more research, or skip the investment entirely.

Remember, unsolicited advice is usually worth exactly what you pay for it!

How Can I Pay Down My Mortgage Faster?

2010-06-03T10:07:00.001-06:00

I get a lot of questions form clients about the best way to pay down on a mortgage to get it paid off more quickly.

There are many ways to do it and each situation is different. However, I have a couple of methods one might consider.

First, many of us have heard about making “one extra payment” a year. The problem with this is that most of us do not have a mortgage-sized chunk of extra money lying around – especially toward the end of the year. One way to get around this is to consider a bi-weekly mortgage.

By paying one-half of a typical monthly mortgage every two weeks, instead of one full payment every month, a 30-year mortgage can be paid off in approximately 20 years. 26 bi-weekly payments are the same thing as making 13 monthly payments during the year – thus achieving the “one extra monthly payment”, with a minimum of pain to your budget.

Bi-weekly mortgage payments are generally made by automatic withdrawal from the homeowner’s checking account every two weeks. Many lenders also give you a small break on your interest rate with this type of mortgage. If you are interested in this payment schedule, contact your mortgage lender or bank.

The second method is paying and extra $100 per month with your regular mortgage payment. This, too, is a relatively painless way to make additional payments and draw down the length of your mortgage.

The $100 per month goes directly to your principal. Depending on interest rate, size, and length of the loan, a $100 per month additional payment can substantially reduce the amount of time it takes to pay off the total mortgage. Your bank or mortgage lender can run the numbers for you and give you a more definitive time-frame based on your actual loan.

A lot of people, especially those who are getting closer to retirement and who may have refinanced recently to lower their interest rate, may be concerned about finding a way to pay off their mortgage early to avoid paying on it throughout their retirement.

Both of these methods employ a moderate way to pay down a mortgage, without jeopardizing the family budget.

Is A Reverse Mortgage a Good Idea?

2010-05-18T15:53:00.000-06:00

I wanted to talk a little bit about reverse mortgages. Do they make sense, who should consider them? A reverse mortgage is a special type of home loan that allows a homeowner to covert the equity they have been building up in their home into cash. The maximum loan amount depends on your age, the equity in your home and the interest rate at the time you close. You must be age 62 or over to qualify.

It must be the primary loan on your property. However, if your house is not paid off, you still may be eligible for a reverse mortgage. You may either pay off the remaining balance before you apply for the mortgage, or the balance will be paid off with the funds received from the mortgage. There are no requirements as to income, credit or health in order to qualify for this type of loan.

There are typically three ways to access the money: using a line of credit, taking a lump sum, or receiving fixed monthly payments for as long as you own and occupy your home as your principle residence.

During the life of the loan, there are no payments required. You continue to own the home during the length of the loan. However, you are still responsible for real estate taxes, insurance and upkeep.

The loan remains in effect until the last primary resident vacates the home. Then, the home will be sold and the proceeds used to pay off the amount borrowed, including interest, and any of the fees and costs financed as part of the mortgage. Any proceeds above the loan balance belong to you, your estate or your heirs.

The costs of this mortgage are similar to a regular home mortgage: appraisal, credit report fee, inspections, origination fee, mortgage insurance, servicing fees, and other standard closing costs. These costs can be taken out of the loan proceeds at closing or may be “financed”, which means that the fees are included in the loan and are paid when the loan is paid back.

A reverse mortgage a “non-recourse” loan, meaning that if the amount loaned exceeds the equity at the time of sale, the lender cannot look to you, your estate or your heirs to satisfy the balance. These loans are covered by insurance that will pay the lender if the loan exceeds the equity. The insurance premiums are collected as part of the fees charged for the loan and then added to the loan balance.

Counseling by an approved Reverse Mortgage Counselor is required before you can get a reverse mortgage. This is an educational session designed to inform and explain the mechanics of the mortgage. An attorney is not required in order to get a reverse mortgage, but anyone considering this program should seek advice from a family member, legal, tax or financial advisor before signing anything.

Reverse mortgages are similar to many products - they are definitely not for everyone but, in the right circumstances, they can be a viable option for income.

Buying Long Term Care Insurance? Here's What to Look For

2010-05-10T06:46:00.001-06:00

Financial professionals are starting to recommend including provisions for health care costs, insurance, and deductibles in retirement planning. Two things have dramatically affected the need for long term health care planning: advances in medical treatment which, in turn, have resulted in longer life expectancies.

Someone retiring today, at age 65, could spend an average of $200-250,000 over their lifetime for medical needs.

The average age for long term care needs is 82 and the average stay is 2.5 years. But, keep in mind these are just averages! Care may be provided by a nursing home, assisted living facility, adult day care center or through assistance in your home. The average cost of care is between $100-$200/day, depending on where you live.

A lot of people mistakenly believe Medicare will pay for long term care. Medicare currently only pays for skilled or acute nursing care in a facility. Medicare does not pay for any type of home care – visiting nurses, assisted living centers or adult day care. Medicaid may pay for long term care, but most states’ programs (including Idaho’s) require a person to spend down their assets to almost poverty levels to qualify for the assistance – possibly leaving an elderly spouse with relatively little to live on.

Long term care insurance is an option that is gaining more and more acceptance. It is best to purchase long term care insurance in your 50’s but, if one is in good health, coverage may be purchased into one’s 70’s.

So, what do you look for in a long term care policy?

What is the waiting period before coverage begins? Most policies give you several options, from zero days to 90 days or more. This is your “deductible”.

Does the plan cover degenerative diseases such as Alzheimer’s?

Does the plan offer inflation protection and, if so, do you need it? If you purchase LTC insurance at age 50, but don’t need the coverage until age 75, you have 25 years of inflation that has eaten into the value of your daily coverage. I always include a compounded cost of living rider on LTC insurance quotes.

Look for a waiver of premium clause that allows you to stop paying premiums while you are receiving the benefit.

Check the restrictions and exclusions in the contract. What triggers the policy to pay and what prevents the policy from paying? A policy that carries a lot of restrictions on when it pays may end up costing you more than you receive from it.

The need for long term care is something that, all too often, we don’t want to think about. It is a very individual decision. However, as medical advances become more sophisticated and we continue to live longer, it’s something that we should all address.

If It Sounds Too Good To Be True...

2010-05-06T13:18:00.000-06:00

I recently had a client bring in a letter for me to advise them on that they had received in the mail. It looked very formal and important, had a date to respond by and lots of bold lettering and underlining.

Why did they bring it to me?

I tell people all of the time that, “If it sounds too good to be true, it probably is”. I know that’s an old cliché, but it’s never more true than in the financial industry.

This letter was telling my client that, “…as an Idaho resident, you are NOW ELIGIBLE for government assistance for protecting your assets under a new state sponsored program”. It was offering “A FREE INFORMATION GUIDE” so that Idaho residents can see how they can “receive Medicaid payments for long-term care services without having to first SPEND DOWN their own savings to qualify”. The return card states, “YES! Send me information on the new state program that helps residents pay long-term care bills and protect their savings.” (Bolding and underlining are from the actual letter)

Way, way, way down at the bottom of the letter, in the smallest print on the entire page, was the statement, “An insurance agent may contact you.”

Hmmmmmm. While the information is “free”, the inevitable contacts from the insurance agent could end up costing a lot more, even if only in time, confusion and frustration.

Everything in this letter is truthful, but it is laid out in a way that focuses the attention on the State helping to pay long-term care bills. That is absolutely not what this program does. (Bolding added by the author)

This program requires a long term care insurance policy – paid for by the individual – to be in place. Once the entire policy benefit has been paid out, an amount of individual savings equal to the dollar amount of the benefit from the insurance policy can be shielded from the spend-down requirement necessary for Medicaid to pay for long term care needs.

This is a great program when EXPLAINED AND USED correctly, but don’t be fooled into thinking that the State is going to pay for your long term care needs, just because you live here.

My point with all of this is, be very wary of any unsolicited mail or advertising that you receive that makes saving, investing, paying down debt, insuring your assets, etc. sound easy. If it sounds too good to be true, it probably is.

Mars and Venus?

2010-04-26T07:05:00.003-06:00

This is, for a lot of people, the time of year that we do our financial planning for the coming year and beyond. One of the things I talk about a lot is education.

I came across two surveys done recently by Global Market Research that talked about how men and women feel about preparations for retirement.

First of all, let’s take a look at the views of men and women on retirement issues:

Both men at 68% and women at 73% are concerned about having adequate retirement income.
55% of men and 66% of women said they don’t know how much to save for retirement.

This one is scary – 46% of men and 53% of women plan to rely on Social Security for their retirement income.

We’ve talked before, specifically, about Social Security and the fact that it was never meant to be a person’s only source of income during retirement. Social Security was designed as a supplement to income during retirement for those people who lived beyond the normal life expectancy at that time – age 63 in the 1930’s.

On the other side of the coin, 73% of men, but only 57% of women, feel confident that their investments are on the right track.

71% of men, but only 56% of women, believe they have a good understanding of asset allocation.

71% of men, but only 48% of women, responded that they are confident of their ability to reach their retirement savings goals.

Ladies, we need to rethink our priorities!

However, it doesn’t matter whether you are male or female, your retirement is something that you must take responsibility for – no one else will do it for you.

There are many ways to get an education in personal finances, even if you think it’s too difficult or too late. One of the things that I have found is that a person is more comfortable with their investments if they have some knowledge of how investing really works.

It doesn’t take a degree in finance to reach your goals, but it is important to learn how to deal with the dollars that are going to see you through your later years.

How Do I Find A Financial Rep I Can Trust?

2010-04-19T11:08:00.001-06:00

Okay, you’ve decided it’s time to contact a financial planner. How do you go about finding one that fits for you?

Start with referrals – friends, family members, co-workers – ask them if they use someone and if they would recommend them. Satisfied customers are one of the best ways of judging the qualifications of a financial advisor.

Next, try professional referrals – your attorney or accountant probably knows and can recommend someone to you.

Look through the paper – seminars are often held by financial professionals – you can see them in action before making an appointment.

Once you have a list of candidates, start interviewing. Call each advisor on the list and ask them to send you a resume or biography and information on the company they work for. You should get information about their education, background, experience, and licenses. You should also expect to receive a list of the services the advisor provides.

Sit down and organize your thoughts – what types of services do you think you need, budgeting, investment analysis, insurance or tax planning, retirement or college education planning? I sometimes get folks who come in and want to start at square one – nothing wrong with that!

Next, ask questions – some examples:

What is your area of expertise; do your services include budgeting, investment review and planning; whatever type of planning you feel you need.
What kind of communications can I expect from you?
In general, what is your approach to saving and investing?
How often will you review my portfolio AND how often will we go over my portfolio?
How are you compensated – fees or commissions?
On average, how much can I expect to pay?
What do I receive in return for that fee?

From here, narrow your list down to the two or three who impressed you the most, and ask them for names and phone numbers of current clients as references. Call more than one!

Lastly, you can check with FINRA – our regulatory agency – and ensure that your candidate is a registered representative, as well as find out whether they have any disciplinary history. You can find them online at www.finra.org. Then, click on “Broker Check” and follow the instructions.

Be Sure You Name A Beneficiary On Your Roth IRA

2010-04-12T07:09:00.003-06:00

I often talk about the importance naming beneficiaries on IRAs and the value of inherited “stretch” IRAs. However, with the tax law changes that allow higher income individuals the opportunity to convert traditional IRAs into Roth IRAs, it seems like a good time to go over the rules as they specifically relate to Roth IRAs.

Most people know that a Roth IRA takes in after-tax contributions, while delivering tax-free withdrawals at retirement. That tax-free treatment applies to beneficiaries of a Roth IRA, as well. Because the tax treatment carries over to the beneficiary, Roth IRAs are often used in estate planning scenarios. But, in order to receive the maximum advantage of a Roth for your heirs, you absolutely MUST name a beneficiary. (Naming a contingent, or secondary, beneficiary is also a very good idea.)

The question I often get is, “Why, if the account is tax free to my heirs, does it matter if I put a beneficiary in place or not?”

If someone inherits a traditional IRA through a will (not as a named beneficiary), the account must be emptied within five years of date of death. If the original owner was over 70 ½ and had begun taking required minimum distributions, the heir can continue to take the distributions annually as the original owner would have. However, a Roth IRA owner NEVER has to take required minimum distributions, so someone who inherits the Roth through the estate – again, not as a named beneficiary) has to empty the Roth IRA within five years of the date of death of the original owner.

The next question I get is, “So, the money still comes out tax-free, doesn’t it?”

Yes, it does, but you lose all of those years where the majority of the account could have been growing tax free, while the beneficiary is only taking out a small amount each year, based on their own life expectancy.

Let’s assume grandpa has a $500,000 Roth IRA and leaves it to his 10-year old granddaughter. If it goes through the will (there is no named beneficiary) she will have to take the money out by the end of five years after grandpa dies. At that time, the value of the Roth, assuming a 7% rate of return, would be worth about $708,900.

While that is a nice windfall, there is a much better way! By naming the granddaughter the beneficiary on the account, it remains invested tax-free, she would take required minimum distributions based on her own life expectancy, and she could conceivably withdraw over $20 million – tax free - during her lifetime. That’s an expensive mistake that can easily be avoided

Make sure that you always fill out a beneficiary form for any retirement plans you have in place – traditional IRA, Roth IRA, 401(k).

Baby Boomers, Are We Going To Be Ready For Retirement?

2010-04-05T07:22:00.001-06:00

It is estimated that four million baby boomers will reach normal retirement age for Social Security benefits in each of the next four years. While some of them will have taken early retirement at 62, because the stock market has had virtually no returns, beyond dividends, in the past 10 years, many boomers are expected to make the decision to wait.

Because company-paid life-long pensions are a thing of the past for most of us, our retirement planning needs are very different than our parents’ and grandparents’. As baby boomers, we need to consider several “outside” influences on our retirement income stream.

First, many baby boomers have had low retirement savings rates which, coupled with the recent bear market, has made it difficult for them to create enough wealth to see them through their retirement years. While the majority of my clients have recouped the losses in their portfolios, not every investor has. Not to mention, the markets are expected to be sluggish and volatile for some time.

Next, many people downsize their homes after they retire. The kids have left the nest, so they are looking to take the equity out of their big house, buy something smaller and more manageable, and use the equity for part of their retirement nest egg. Unfortunately, with the value of their homes locked in the still-depressed housing market, downsizing may not be an option – possibly for quite awhile.

The third issue is one many people may not even be aware of. As we near the end of our working careers, many of us are at the top of our earnings potential. The Bush administration tax cuts are set to expire at the end of the year and many baby boomers will be caught with rising taxes, just at the time they need to be saving more for their retirement. Included in this concern is the expectation by most economists that the current administration is going to have to consider tax increases and spending cuts to bring the country’s deficit back to a more reasonable level, which could affect people at all income levels.

Lastly, retirement is typically a time for people to move at least part of their assets into bonds to reduce risk. Unfortunately, with interest rates having nowhere to go but up and the possibility of significant inflation, bonds, especially those with longer maturities, may not be a wise place to invest.

So, what is a baby boomer hoping to retire soon to do? Careful planning, coupled with appropriately-diversified retirement savings and investments will go a long way toward helping boomers be financially ready for their well-earned retirement.

What Does The Executor Of Your Estate Need To Do?

2010-03-29T10:50:00.001-06:00

Last week I talked about the things to think about when choosing an executor for your estate. Most of us choose someone we know well, often our spouse or one of our children. Being an executor can be time-consuming and may require some knowledge of real estate, taxes, investments, and legal entities, such as trusts and businesses.

Some of the duties and responsibilities an executor may be called upon for include:

Find the latest will and read it.
File a petition with the court to probate the will.
Locate all of the decedent’s assets:
Take possession of safe deposit box contents
Check with banks and savings and loans in the area to find all of the accounts of the deceased. Also check for cash and other valuables hidden around the home.
Transfer all securities to his or her name as executor and continue to collect dividends and interest on behalf of the heirs.
Find, inventory and protect household and personal effects and other personal property.
Collect all life insurance proceeds payable to the estate.
Find and inventory all real estate deeds, mortgages, leases and tax information.
Provide for immediate management of rental properties.
Arrange for administration of out-of-state properties.
Find and safeguard business interests, valuables, personal property, important papers, the residence, etc.
Inventory all assets and arrange for appraisal for assets, as needed.
Determine liquidity needs, assemble bookkeeping records, review investment portfolios, sell appropriate assets.
Pay valid claims against the estate – reject improper claims and defend the estate, if necessary.
Pay state and federal taxes due.
File income tax returns for the decedent and the estate.
File federal estate tax return.
Prepare statement of all monies income and outgoing. Pay attorney’s, CPA’s, financial advisor’s and other professional’s fees.
Distribute cash and property to beneficiaries

Administering even a small estate requires time and effort. Make sure the person you wish to name as executor is up to the task.

Naming an Executor for Your Estate? Things to Think About...

2010-03-22T07:47:00.001-06:00

I’ve mentioned before how important it is to have a will and the things you should consider and discuss before you go to see an attorney. Let’s talk now about the things you need to think about when choosing who to name as the executor of your estate.

The executor is the person or entity you trust to take care of the legalities of your estate. The executor is responsible for corralling and valuing the estate assets, filing tax returns, paying taxes and debts, distributing assets to beneficiaries and accounting for everything they’ve done. The executor may also have to distribute personal effects not specifically named in the will and might have to resolve family conflicts, as well as possibly manage or liquidate a business for the family.

So, who might be a good candidate for this position? In considering who to name as executor, look for some or all of these qualities:

The likelihood of them surviving you – possibly for many years.
Skill in managing legal and financial matters.
Familiarity with your estate and wishes.
Strong integrity, coupled with loyalty to you and your family.
Absence of conflicts of interest.

Let’s start with the obvious choices: family member or friend. Appointing a family member or friend might lower the costs of administering the estate and they are usually extremely loyal to the deceased. However, many people have minimal legal and financial training and skills, so they might need to pay for professional advice. Keep in mind, the executor is legally and personally responsible for administering the estate correctly. For small estates, most mistakes are not costly and, in general, nominating a family member or close friend is appropriate.

A corporate executor might be chosen if you are unable to select a family member or friend. Banks usually do a sufficient job in managing assets. However, because the estate is unknown to the bank, they might not offer as much of a personal touch and the costs are going to be higher.

Another option is a probate attorney. They usually do a good job in managing assets during probate and they have a uniquely qualifying background to perform such tasks as well. However, nominating your own probate attorney to administer your estate might cause an unhappy family member to decide to contest the will due to a conflict of interest. Successful will contests are relatively rare, but are not out of the question. A couple of ways to avoid problems of this sort are to use an attorney who is related to you, or have another, independent, attorney review the situation to determine if the nominated attorney is appropriate. The costs associated with an attorney performing probate tasks are also going to be higher.

One other important consideration in appointing an executor is to be sure to nominate a successor or alternate executor, in case your first choice is unwilling or unable to serve. If you don’t the courts will appoint someone for you and it might not be someone you want. Also, before naming an executor, you should confirm with them that they will be willing to take on this role. Next week I’m going to talk more specifically about the duties of an executor.

Accessing your IRA Penalty-Free Before Age 59 1/2

2010-03-16T06:54:00.001-06:00

Is it possible to take money out of an IRA penalty-free before age 59 ½? The short answer is, “Yes”, but there are several things to be aware of before you make a decision to access for IRA for cash.

This distribution plan is called “Substantially Equal Periodic Payments” (SEPP), and is found in the tax code in rule 72(t). This is often referred to as a “72(t) distribution.”

Keep in mind that you don’t get to decide how much you are going to take and how long you are going to take it. The government allows you to take the money out penalty-free, but they get to tell you how you are going to do it. Also, keep in mind that, while the distribution is penalty-free, you must pay the income taxes due on the distributions.

The amount you take out is determined by one of three formulas: Required Minimum Distribution, Fixed Amortization and Fixed Annuitization. Depending on which formula you wish to use, the amount of the distribution will vary. To get an idea of the amounts that might be available to you, check out one of the many 72(t) calculators on the internet. Once chosen, the distribution calculation remains the same with one exception: the IRS does allow for a one-time change from either the amortization or annuitization method to the RMD method.

Once you have begun taking distributions under 72(t), you must continue taking them for either five years, or until age 59 ½, which ever is longer. For example, if you are currently 58, you must take the distributions until age 63. If you are age 45, you must take distributions until age 59 ½. Once you have reached the mandated five years or age 59 ½, you may change or stop your distributions.

One other very important caveat is that you cannot in any way “modify” the IRA account you are taking the distributions from. You can rebalance or change investments within the account, but you cannot move any portion of the IRA to another provider or change the amounts you are withdrawing.

If you make any kind of modification to your plan, your distributions will be subject to a 10% early withdrawal penalty, plus interest, retroactive to the date you started taking distributions.

Finally, any money you take out of your retirement plans before retirement age will, of course, reduce the amount of money available to you during your golden years.

As with many things in the financial planning world, 72(t) distributions may be appropriate for a few people. For most of us, using this option to increase cash flow should be an absolute last resort.

Your Durable Power of Attorney May Not Be Good Enough!

2010-03-08T07:13:00.000-07:00

I often make the statement to my clients that, “Bottom line, this is YOUR money that we are investing.” Most of us, myself included, believe that, within federal tax law parameters, the money that is being held in our name at banks and brokerage (clearing) firms is accessible to us when we need it.

I have learned that, in spite of our best efforts, this is not always true.

As is the case most financial professionals, I counsel my clients to have a variety of estate planning documents in place. Ie: a will or trust, a living will, durable power of attorney, medical power of attorney, etc. Unfortunately, as laws change, the forms that were put in place may not work as they were originally intended.

I have recently been involved in two situations where an elderly parent had executed a Durable Power of Attorney (one as recently as 2007) giving one of their children authorization to take care of their affairs if they became unable to do it themselves.

Both of the parents are now in assisted living situations. For one of them, we have a doctor’s note stating that he is completely incapacitated. Each of them has investments that now need to be accessed to pay for their care.

Sadly, the brokerage clearing firms involved have refused to accept the powers of attorney as they were written and are, in effect, holding the client’s accounts hostage. They are requiring additional documentation from an attorney or judge which, of course, has the potential to run into a fair amount of money.

Until this documentation is provided, the accounts that were invested for these clients – in good faith – are now frozen. We cannot rebalance, invest, reinvest or distribute any of the assets held in them. Absent additional documentation, the only other way for the client to be able to access their money is to die. At that time, the accounts become “estate accounts” and the heirs will be able to access the money.

I’m not bringing this up in order to scare anyone. I only mention this so that anyone who has these documents in place is aware of a possible future issue with their forms. Anyone who has a Durable or Financial Power of Attorney in place might wish to have their financial representative confirm with the clearing firm holding the money that the documents will be honored as written.

It is best to find out if the document is acceptable before it becomes necessary to use it. In having this discussion, I hope to help others to avoid this terribly frustrating experience.

Are You Loaning Your Money Interest Free?

2010-03-01T17:01:00.000-07:00

Let’s talk interest-free loans – to the government!

Every year, almost three-quarters of tax returns filed result in refunds to the taxpayer. In other words, two out of every three taxpayers have more tax withheld from their paychecks than is required by law.

What does this mean, and why is it important? I enjoy receiving an unexpected windfall as much as the next person but, when you receive a tax refund from the government, you have given them an interest- free loan on your money!

Tax withholding can, and should be, corrected. W-4 forms can be obtained online or through your employer’s benefits department. The W-4 form includes a worksheet to calculate the proper number of allowances to claim.

Withholding allowances are based on a number of factors:

Number of household wage earners
Anticipated deductions and credits
Number of personal and dependent exemptions

Through withholding, these allowances should shield an amount of your salary equivalent to the value of a personal exemption. Ideally, you should owe little or nothing at tax time and get little or nothing back.

Unfortunately, it doesn’t always work that way. Employers use tables in IRS publications to determine the proper payroll withholding amount. However, they only consider your salary. If you are part of a two-earner couple, have investment income, a second job, or profit from self-employment, you may need to claim fewer allowances to have more money withheld to compensate.

Penalties can be assessed if you don’t have the proper amount withheld. Worse than paying the government too much money too soon is paying them penalty dollars for any reason!

The important thing is not to overdo it. If you’re claiming fewer withholding allowances than Form W-4 recommends, you’ll have less take-home pay to use for saving or reducing debt. How important is that? A $1,200 refund is equivalent to $100 in additional monthly income!

It is the law that none of us has to pay more than our fair share of taxes. We also shouldn’t pay those taxes any sooner than we have to!

Do It Yourself Stock Picking - Good Idea, or Bad?

2010-02-22T06:51:00.001-07:00

So, you want to do your own stock research and investing. If you have the time and energy to learn how to do it right, I’m all for it.

But, how do you go about researching stocks? There is an incredible amount of information on the internet, but what are you really looking for?

When you buy individual stocks, you have to have a method of selection. Just a few of the questions you should ask are:

Why do you want to own stock in this company?
Is it because of the product the company makes?
Is it because the company dominates its’ competitors?
Are you comfortable with how the stock is priced?

If you can’t answer these questions, chances are you’re just gambling.

How about risk and diversification? You can put together a fairly well-balanced portfolio with about 24 stocks, but knowing how to effectively diversify is tougher.

Academic research has shown that a portfolio of 10 randomly selected stocks isn’t much more risky than the overall market. For most investors, somewhere between 20-30 stocks are a manageable number to follow. However, be sure that your stocks are distributed over several market sectors. A portfolio of 16 technology stocks or 16 bank stocks is not diversified. Try to assemble a collection of stocks that won’t move in the same direction at the same time, for example: oil stocks usually do well when energy prices are high, while airline stocks tend to be hurt by rising oil prices.

Keep in mind, too, every company and industry brings its’ own specific set of risks that you need to know and understand. Research a stock or industry with some thought as to where it fits into the overall economy, as well as into your portfolio.

I often tell people that, “Investing isn’t rocket science, but there is a lot to it.” Don’t be fooled by websites or software programs that lead you to believe it’s easy to beat the market investing on your own. Do your research; be smart about it. If you truly don’t have the time to learn to do it right, hire a professional to help you.

Strategies for Increasing Your Emotional Risk Tolerance

2010-02-08T06:51:00.001-07:00

We talked last week about trying to understand what our emotional risk tolerance is. This week I wanted to give you some ideas that might help you become a little more comfortable with investing risk.

1) Do a little research and make yourself familiar with different investments and the type of risk you would be subject to with each one. As with so many things, the more we know about a subject, the more comfortable we are. Most of the time, comfort level with risk will increase as understanding increases.

2) This is important – especially considering what the market has done the past few years. Maintain REASONABLE return expectations. If you expect a return that is too high, not only will you be disappointed if the asset doesn’t perform, your tolerance for that investment will go down.

3) Don’t stockpile cash and then invest a large sum. If you invest small amounts, your risk doesn’t feel as great. Remember, we are talking about comfort level here, not actual investment risk.

4) If you would like to invest in more aggressive types of investments, but aren’t sure if you are ready to handle the risk, start with a small investment and then increase your investment amounts as you become more knowledgeable and, in turn, more comfortable with the risks.

These strategies can help you increase our personal risk tolerance and may offer you a way to increase your portfolio’s returns, without causing yourself sleepless nights.

Emotional Risk Tolerance

2010-02-01T08:46:00.000-07:00

We talk a lot about different types of investment risks. This time, I’d like to talk a little about “risk tolerance”. Risk tolerance refers to your ability to stay with an investment when the return is either less than you expected, or the investment declines in value.

It is important to only assume a level of risk you are comfortable with so that you aren’t tempted to sell an investment when it is at a low point. So often, investors hear that they should be willing to take on risk to generate a higher return. This generalization does not factor in anyone’s emotional tolerance for risk. Even though your personal situation may indicate that you could assume a higher level of risk, that may not be a good idea if you are uncomfortable taking those risks.

To try to get a feel for your emotional risk tolerance, ask yourself these questions (keeping in mind how you felt and handled the recent downs and ups we’ve had in the markets):

How much would I, realistically, be willing to lose in a one-year period before being tempted to sell an investment? 5%, 10%, 25%?

How long will I be willing to keep a losing investment before I sell it?

Will I sell it because it’s going down, or will I research it again to see if it’s still a viable investment in a difficult market, that has the opportunity to go back up?

What types of risks am I comfortable with and which are uncomfortable for me?

Now, you have some questions to ask yourself and some soul-searching to do. Next week, I am going to talk about some strategies to help you feel more comfortable taking on additional risk in your portfolio. Not strategies for lowering your investment risk, but ideas that might help you deal with the emotions of risk in investing.

What Does It Cost For Financial Advice?

2010-01-25T07:01:00.001-07:00

One of the things I get a lot of questions about is, “How much does it cost to go to a financial advisor.” There are several ways to pay for advice and usually everyone can find a pay plan that works for them. Unfortunately, it’s impossible to tell someone, with no discussion, what it might cost them for advice.

Why? Because there are several ways to pay for financial advice. The most common are:

Commissions
Fees that are based on a percentage of the balance of the portfolio, and
Hourly charges for straight advice

There is considerable variation in fees and commissions depending upon what type of assistance and advice you may be looking for or need.

With both commissions and fees, your account typically absorbs the charges. With hourly fees, you write a check for the advice. Not including hourly charges, you will usually pay for the advice based on the amount you have to invest. Most advisors, myself included, offer a complimentary initial consultation to help you determine what type of help is needed, how much it might cost, and how best to pay the fees.

I usually recommend that an investor interview for an advisor. The most important thing in dealing with an advisor and your finances is to find someone you trust. Be sure that you are getting your questions answered to your satisfaction. If the advisor won’t answer your questions about their fees, or any other questions you have, go somewhere else.

Some people are concerned that if you are with a commission planner, you have to worry about them moving your account around between investments. What this refers to is “switching”. 99.9% of advisors don’t switch their clients unnecessarily. If you are in a “wrap” account, an account in which you pay a quarterly management fee, its okay to move around between investments. As a very general rule, it is possible that it could make sense to move from a no-load fund to a load fund, or vice versa. There are even some circumstances where moving from a load fund to another fund may make sense. Just make sure you ASK WHY the change is being made.

Another question I get asked is, if an investor goes to someone new, will the advisor always make changes to the portfolio?

A good advisor will always look at your existing positions – otherwise how would they know what additional investments may work with what you already have? Again, if the new advisor wants to make a lot of changes, ASK THEM WHY. If they can’t or won’t tell you to your satisfaction, don’t do it. I try to keep good funds whenever possible.

On the other hand, if you go to a new advisor in order to gain access to their style of investing, expect to have your entire portfolio changed around.

As with anything in the investing world, paying for advice should be something you research to find out how much you will pay and, most importantly, what you should expect to receive for the fees you pay. Make sure you are comfortable with the answers before you make your decision.

Retirement Age Milestones

2010-01-18T08:44:00.002-07:00

I wanted to talk about age milestones in retirement.

Most people know that they shouldn’t take money out of their retirement plan before age 59-1/2 because of the IRS penalties – 10%, plus your tax rate.

However, here are other ages that we need to be aware of that can impact our retirement income.

It is possible to take a lump sum withdrawal out of your employer-sponsored plan, without a penalty, at age 55, if you leave your job. Of course, you still have to pay taxes on the withdrawal.

At age 59-1/2 you can make penalty-free withdrawals from your employer-sponsored plan even if you still work at the company. We have talked before about different employer plans having different rules. The plans at some companies may prohibit in-service withdrawals, so check with your benefits department if you are thinking about making withdrawals of this money.
Surviving spouses who haven’t remarried can begin collecting their deceased spouse’s Social Security benefits at age 60.

You can begin receiving Social Security benefits at age 62. This also includes Social Security that may be due through a spouse or former spouse.

At age 65, you now may be eligible for Medicare and can collect full SS benefits, depending on your date of birth, even if you are still working and regardless of other income you receive.

At age 70-1/2 you must begin taking minimum distributions from your retirement plans. You must take your first distribution by April 1st of the year following the year you turn 70-1/2. Be aware that, if you delay your first distribution until the following year, you still must take a distribution for that current year, which effectively gives you two distributions in the same year – taxable income to you.

Also, remember that the IRS assesses a penalty of 50% of the distribution amount if you fail to take it in the year it is required. (No, that’s not a typo – the penalty is 50%!)

For people who are in a 403(b) plan (this is essentially a 401(k) plan for non-profits, and state entities), you must begin taking required minimum distributions from those plans at age 75.

As you can see, age milestones are important in retirement. Contact your financial advisor if you have any questions about what you should be doing, before you pass your milestone.

Retirement Decisions To Make Before You Retire

2010-01-11T07:37:00.002-07:00

When we start to get closer to retirement and funding our retirement income, there are some things that we really need to consider, well before we actually pull the plug.

The very first thing to do when planning for lifetime retirement income is to figure out what your retirement is going to look like. All your weekdays are now weekends – what are you going to do with them. Where are you going to live? Are you going to downsize, or have you already done that?

What is the most important thing to you? Do you want to pass on a large legacy to your heirs, or do you want to spend every dime? Do you want to travel, or do you want to start a new career – part or full-time? Are there any health concerns – yours or your spouse’s?

In order to get a fairly accurate estimate of income needs, retirement lifestyle decisions must be considered. These decisions are deeply personal and each person or couple must make them for themselves.

The decision to save for retirement was itself a trade-off between spending now or spending later. Securing retirement lifetime income can also mean trade-offs. One of the most basic trade-offs involves the timing of one’s actual retirement date. Most retirees have enormous control over this decision. I talk to people all the time who are planning to “retire” and then go back to school so then can start a new career, or they want to start a business doing something they’ve always dreamed of.

However, few people realize how much a decision to delay retirement can contribute to income security later in life. If a person’s job provides medical benefits, remaining at work until age 65 eliminates the need to fund expensive personal medical insurance. At the same time, the retirement nest egg remains in place and may continue to compound.

The third leg of this is Social Security. Delaying social security payments until one is eligible for “full” benefits increases the payment amount. Not to mention, future inflation adjustments to social security income is calculated from a higher base amount. Also, current law is set to increase benefits for delaying retirement, while at the same time penalties for early retirement are going up.

This is a classic trade-off everyone gets to consider and, once the decision is made, it can’t be changed. If you retire at age 62 with a lower social security benefit, the amount does not increase once you attain “full retirement age”. Keep in mind, too, that the amount shown on the annual report you receive from Social Security reflects an amount that you might receive, assuming you continue working to the age shown. I have spoken with people who mistakenly believe they will receive the posted amount at the age shown, even if they stop working earlier. That is not true and needs to be taken into consideration when looking at retirement income.

Obviously, when to begin taking social security is not a decision to be made lightly. In fact, all of the trade-offs we’ve discussed need to be considered very carefully, in view of each person’s unique retirement needs and wants.

Financial Goals and Net Worth

2010-01-05T11:55:00.002-07:00

Let’s talk about net worth.

We talk a lot about setting short, medium and long term goals. How do you know if you are actually making progress toward your goals?

Simply put, net worth is “everything you own, minus everything you owe.”

Your net worth is a snapshot of your financial position at a specific point in time. It’s important because you need to be able to chart your progress toward your financial goals. The best “chart” you can use is to keep track of your net worth from year to year.

So, how do you figure your net worth?

First, make a list of all of your assets, including investments, savings, real estate and any other major possessions you have.

Next, total your outstanding debt: mortgage, car loans, credit cards, student loans and any other obligations you have. Don’t include your monthly bills.

Then, subtract your total debt from your total assets to come up with your net worth.

At least once a year (the best time for a lot of people is when they are putting together their tax information) you need to figure your net worth. Once you have done that, compare it to the goals you have set to see how you are doing.

One of the things I talk to clients about is that we need to keep looking at savings and investing goals versus actual results to see if we are on track to meet those goals. If not, or if something has changed in their goals, we need to determine what needs to be changed, if anything, to continue toward meeting the goals.

For example, if a client’s goals for their retirement are not going to be met, they have the option of working longer, adding more to their savings, taking less income from their retirement plans, or some combination of these. If you don’t know whether you are on track or not, you can’t make informed decisions about your future.

The most important thing is to set the goals and then keep checking to see if you are still on the right road toward reaching those goals. Figuring your net worth on a regular basis is one of the best ways to keep track of how you are doing and to chart the course for your future.

Crystal Balls and The Market

2009-12-28T07:16:00.001-07:00

So, I got out my crystal ball the other day and this is what I saw:

The US stock market experiences the worst crash in its history.
The United States is involved in a war.
Economic meltdowns in several foreign markets threaten the health of the global economy.
The Dow experiences the largest single-day point drop in its history.
The US economy is plagued by budget deficit problems
US corporate downsizing causes thousands to lose jobs.
Rampant acts of terrorism occur around the world,
The United States faces a potential military showdown with a world leader.

Hearing all that the future may hold, would you still buy stocks?

Interestingly, the crystal ball actually revealed the past, not the future! All of these events happened from 1987 to 2000!

What also happened, if an investor had stayed out of the market during those years, they would have missed the following:

Thirteen years of the greatest bull market in history.
The Dow Jones returning over 20% for three straight years.
The Dow passing 2,000, 4,000, 6,000, 8,000 and 10,000 points, along with virtually
every major market index hitting record highs.

The kind of market we have been dealing with is actually a long term investor’s best friend.

There are always reasons not to invest. But, it’s not timing the market that counts, it’s time in the market!

The biggest single obstacle to financial success isn’t lack of opportunity; it’s lack of patience!

Lessons from Breaking Bubbles

2009-12-07T07:22:00.000-07:00

Let’s talk about the making and breaking of stock market bubbles and what we, as investors, need to try to take away from these experiences. (This topic also goes along with the recent discussion on knowing when to sell a stock.)

Are bubbles fundamentally tied to human nature – the greed and fear syndrome? Can human nature change?

Human nature may change, but probably not over the short run. Here are six lessons that we might be able to use.

1. Don’t put much stock in Wall Street strategists. If they really knew what was going to happen, they wouldn’t need to sell the information to you.

2. Don’t put much stock in the financial media. We’ve talked about background noise – it’s only going to get worse. Unfortunately, members of the financial media don’t know much more than the strategists.

3. Don’t pay attention to anyone giving advice for the short-term. If you are going to invest in the market – you MUST be in it for the long term.

4. Markets are not always rational minute by minute, or even year by year. Even professional investors have a hard time maintaining a cool head in a bubble. But, markets will eventually reassess and head toward valuations that make sense with respect to economic reality. As investors, we need to learn patience and not get caught up in manias that can be so inviting. Resisting the trend is tough, but in the long run it pays off.

5. Markets seem to go through fads that are impossible to predict, but easy to get sucked into. A disciplined diversification can prompt you to take money out of frothy categories and put it where there might be more potential for gain. Emotionally, it seems silly to take money from a winning asset and buy into a loser, but data over decades show that is exactly the strategy that makes money in the long run.

6. Despite pockets of irrationality, the market is still one of the best ways to allocate capital to productive uses and get it back with a return in the future. Because markets do return to rationality, because earnings and valuations do matter, it’s not just a crap shoot, at least not for the investor who hangs on to rationality.