Getting Your Financial Ducks in a Row

Happy December

2008-12-15T15:41:00.000-06:00

I know I've mentioned on these pages before about how I enjoy all of the different seasons for different reasons - and December is no exception. During this month, aside from the obvious holiday celebration, my traditions include going to the Nutcracker with my wife and daughter at UIS, getting into the swing of high school basketball (just watched three more games last night!), getting together with family and friends, and of course, finishing out the business year and prepping for the coming tax season.

This month’s article has several ideas that you might incorporate into your financial world, using the internet. The internet has brought us many conveniences that we never could have dreamed of just a few short years ago, and I recommend taking advantage of them. Oh yeah, also, I've begun using Twitter for several things, including automatic schedule entry, todo lists, and posting the minutiae of life. You can follow me at twitter.com/BlankenshipFP if you like! If you don't know what Twitter is, you should check it out - it's a really neat technology that promises to be a big part of our lives in years to come.

Lastly, I wanted to clarify something about my last newsletter: You need to know that the recommendations I made about fiscal responsibility and the like are long-term recommendations for resolving economic troubles. I realize that in the short term, we're all tightening our belts and such, but I think we need to make long-term commitments to live on less than what we make, work hard, and just be more responsible in a fiscal sense. Without making these sorts of moves, we're doomed to continue this cycle of boom/bust and continue to experience this pain we've had over the past few months. I know we can do it - we're all capable of applying our own brand of ingenuity and "elbow grease" to the broad economy. Let's do this ourselves, and not expect the government to do it for us.

Going Online to Improve Your Finances

2008-12-15T15:35:00.000-06:00

Web-based services are transforming almost every industry in the world, and certainly financial services is being transformed as well. Listed below are several ideas that you can use to improve your financial security and convenience by using commonly-available online tools and services.

Automatic Investment If you are receiving a direct deposit of a paycheck and/or Social Security check, you should also consider making monthly, fixed-amount investments automatically into your various funds. Done correctly, you could get a really nice habit going: taking advantage of dollar-cost-averaging with consistent gains, as well as having your distributions automatically re-invested.

Save For Retirement Many low-cost brokerages offer no-fee IRAs with no annual, set-up, or termination fees. Some of these include Fidelity, Schwab, TD Ameritrade, Scottrade, Vanguard, and T. Rowe Price. If you operate a small business, there are multiple opportunities to establish significant retirement savings accounts, such as the Solo 401(k). All of these accounts can be set up online.

Automatic Bill Pay Although this has been around for a while, many folks were slow to adopt automatic bill-pay, myself included. It is getting easier to use, and harder to ignore the benefits. Both Microsoft Money and Intuit's Quicken provide online bill-paying services, as do most banks these days, and the number is increasing. Other bill-paying services include AOL, Bill Pay, Paytrust, Status Factory, Yahoo, and Yodlee.

Credit Reports With just a few keystrokes, you can get your annual credit report. AnnualCreditReport.com allows you to request a free credit file disclosure once every 12 months from each of the three consumer credit reporting agencies, Equifax, Experian, and TransUnion.

Electronic Wallet An electronic wallet is a term for services that allow you to make payments to virtually anyone or any company, as well as accept payments from the same, without providing that individual with your secured account information. Paypal is an example of an electronic wallet service, as are BillMeLater.com, Checkout.com, Google, and Neteller.com. Once your account is established, funds can be withdrawn automatically from your account (credit card, checking, money market, etc.) to use to pay for anything from flowers for your honey to a subscription to a magazine. Using a credit card to fund these purchases is the safest way (as opposed to a checking account),as you have more security in the transaction and recourse if the transaction doesn't work out for you.

Personal Finance Information A great starting point is SmartMoney.com's "Personal Finance" section. Its "Deal of the Day" will point you to savings on everything from seasonal shrubbery to private charter jet travel. Other services include Fool.com, Kiplinger.com, Money.CNN.com, and NAPFA.org.

Account Aggregation There are several services available to help coordinate your online accounts - banking, credit card, loans, 401(k), IRA, and other investments. These accounts also help you to automate your budget, schedule online bill payments, identify tax-deductible purchases, and store important documents (bank statements, checks, receipts) for easy reference online. Quicken.com offers such a service, as does Yodlee.com.

Research One of the greatest benefits of the internet is the plethora of information on all subjects, mostly for free. Financial information is another area that you can use the internet to help you find. For example, if you're looking for a good rate on CDs, you can find that information at BankRate.com. If you're planning to buy a new car, go to KBB.com (Kelly Blue Book) to find out about what rebates and other offers may be available on the models that you're interested in.

This is, of course, just the tip of the iceberg, but you should have a few new ideas on how you can use the internet to your advantage, making your financial life more organized, automated, and hopefully profitiable. That's all for now - until next time...

What You Can Do About The Economy

2008-11-15T16:41:00.002-06:00

You’re a smart bunch of people. I’ve known that ever since I first met you. You’re also energetic and resourceful – not accustomed to just sitting still and letting the world have its way with you. I realize that there is some frustration on your part (probably a lot of frustration) about this current economic crisis that’s going on. And to top it off, so far all I’ve told you to do is to wait it out – don’t panic – stay the course.

What I failed to mention in my previous letters to you, my friends, is that there are several common sense things that you can do right now. I’m telling you this because I recognize and appreciate your energy, your resourcefulness, and your willingness to take the hard truths of life, and apply them in a fashion that has no choice but to succeed.

Throughout this past couple of months I’ve had many folks talk to me about how worried they are – worried that we’re on the verge of another depression like we had in the 1930’s. Folks, I understand your concerns, but really – how many of you are considering pulling up stakes and walking away from your homes, to take to the road in the hopes of finding work, any work – like people did during the depression? And this went on for years… We’ve not felt any real pain like that – why, we’re just now trading in our Hummers and Navigators for something a little more economical! No, this is nothing like that at all. But the resolution is very similar, although it’s one of the hard truths that I mentioned before.

The hard truth is this: nothing is going to fix the American and world economies until we (you, me, your families, friends, and neighbors) learn to tighten our belts in a crisis, work a little harder, maybe work a little longer, and most importantly get back in that old habit of spending less than we earn (maybe a LOT less), possibly by settling for homes and autos that more realistically reflect what our finances will support. Because in the end what you save has a much greater impact on your future way of life than the returns you get in the market – good, bad, or horrendous.

This saving I’m recommending will help you to recover your losses. And here’s another hard truth that you may not want to hear: because of the market losses we’ve seen this year, you may have to work an extra year or two before retirement, or perhaps work part-time, or tighten your belt a little more than you expected to. Most likely it will be a combination of the three… but doing all of these things will put you in a much better position when the market does finally come back – even better than before!

All that we need to do (and by “we” I mean all Americans), is save a little more, work a little harder, and work a little longer. Eventually our government will also ask us to pay more taxes, especially to resolve the enormous debt we’ve built up. If our government doesn’t do this, we’re only continuing the transference of this debt forward to the future generations – and somebody is going to have to deal with it. Let’s you and I start doing something about it now.

While we’re at it, we need to put a lot of consideration into our present social programs. For example, does it really make sense for everyone to be covered by Social Security and Medicare? I think we’ve made a lot of promises that we can’t in any way afford to keep, and if we don’t face the hard truth soon, it’s all going to blow up in our faces.

The way you impact this (beyond your savings habits) is to take part in the process and get involved in making sure our government makes the hard choices. Write your congressmen and women. Call your state representatives. Take action – we have to act and act soon!

Another action you can take right now in the light of these difficult financial times is to rebalance your holdings – especially if they’re taxable accounts. If you’ve experienced losses in your taxable accounts (and let’s face it, who hasn’t?), the next six weeks are critical in terms of tax loss harvesting. For those of you whose accounts I’m managing that can benefit from this strategy, I will be in touch with you shortly to work out a plan for taking part in this strategy.

What we’ll do is sell your heavy loss positions before the end of the year and place those funds into something very safe, like municipal bonds, for the IRS-required 30 days (to avoid wash sale rules). Then, along in January we’ll take a look at your overall allocation in all of your accounts and reallocate the funds from the bond holdings into a more balanced portfolio.

You will then have a capital loss on your record that you can use to offset capital gains you may have earned this year, plus up to $3,000 of ordinary income. Any unused losses are carried over and used to offset capital gains and income (in $3,000 per year increments) indefinitely until it’s all used up. It’s a one-time activity that we must take advantage of now, before the market does pick back up. It’s a small amount of silver lining in all the dark clouds we’ve been seeing lately.

For those of you that have taxable accounts that I’m not managing, please let me know if I can help you with the process. It’s fairly straightforward, but you don’t want to make mistakes as you do this – the IRS doesn’t forgive (and they certainly don’t forget, either).

So there you have it, that’s my message. You probably already knew it, but as I said, I felt like I was doing you a disservice by not giving you more direction than to just stay the course. Feel free to pass this message along – in fact, that’s yet another thing you can do: if you agree with even a small part of this message, make an effort to relay the message to others. If, by some wild circumstance, we could get this message and the sentiment out to enough other people like you and me, think about the positive impact we’d have… and we’re just the ones to do it. It’s in our heritage.

SOSEPP - Fixed Annuitization method

2008-11-06T10:04:00.002-06:00

When calculating your Series of Substantially Equal Periodic Payments (SOSEPP), provided for under §72(t)(2)(A)(iv) of the Internal Revenue Code, one of your choices is the Fixed Annuitization method.

Calculating your annual payment under this method requires you to have the balance of your IRA account and an annuity factor, which is found in Appendix B of Rev. Ruling 2002-62 using the age you have reached (or will reach) for that year, coupled with a rate of interest of your choice that is not more than 120% of the federal mid-term rate published by regularly the IRS in an Internal Revenue Bulletin (IRB).

Once you've calculated your annual payment under the Fixed Annuitization method, your future payments will be exactly the same until the SOSEPP is no longer in effect. There is a one-time opportunity to change to the Required Minimum Distribution method, described here.

SOSEPP - Fixed Amortization Method

2008-11-06T09:49:00.002-06:00

When calculating your Series of Substantially Equal Periodic Payments (SOSEPP), provided for under §72(t)(2)(A)(iv) of the Internal Revenue Code, one of your choices is the Fixed Amorization method.

Calculating your annual payment under this method requires you to have the balance of your IRA account, from which you then create an amortization schedule over a specified number of years equal to your life expectancy factor from either the Single Life Expectancy table, the Uniform Lifetime table, or the Joint Life and Last Survivor Expectancy table, using the age(s) you have reached (or will reach) for that year, coupled with a rate of interest of your choice that is not more than 120% of the federal mid-term rate published by regularly the IRS in an Internal Revenue Bulletin (IRB).

Once you've calculated your annual payment under the Fixed Amortization method, your future payments will be exactly the same until the SOSEPP is no longer in effect. There is a one-time opportunity to change to the Required Minimum Distribution method, described here.

SOSEPP - RMD Method

2008-11-06T09:36:00.003-06:00

The Required Minimum Distribution method for calculating your Series of Substantially Equal Periodic Payments (under §72(t)(2)(A)(iv)) calculates the specific amount that you must withdraw from your IRA (or other retirement plan) each year, based upon your account balance at the end of the previous year, divided by the life expectency factor from either the Single Life Expectancy table, the Uniform Lifetime table, or the Joint Life and Last Survivor Expectancy table, using the age(s) you have reached (or will reach) for that year. This annual amount will be different each year.

Changing Your SOSEPP - Once, just once

2008-11-06T09:19:00.003-06:00

The IRS allows you to change your Series of Substantially Equal Periodic Payments (SOSEPP) allowed under §72(t)(2)(A)(iv) - one time, and only one time. And then, you're only allowed to change your method from either the fixed annuitization method or the fixed amortization method to the Required Minimum Distribution method.

This is the only exception allowed for making a change to your SOSEPP during its enforcement period, which is the later of five years after you started the SOSEPP or when you turn age 59 1/2. The exception is documented in Rev. Ruling 2002-62, 2.03(b).

Early Withdrawal of an IRA - Series of Substantially Equal Periodic Payments

2008-11-06T07:56:00.005-06:00

This particular section of the Internal Revenue Code - specifically §72(t)(2)(A)(iv) - is the most famous of the 72(t) provisions. This is mostly due to the fact that it seems to be the ultimate answer to the age-old question "How can I take money out of my IRA without penalty?"

While it's true that this particular code section provides a method for getting at your retirement funds without penalty (and without special circumstances like first-time home purchase or medical issues), this code section is very complicated. With this complication comes a huge potential for costly mistakes - and the IRS is notorious for NOT forgiving and forgetting!

In order to set up your Series of Substantially Equal Periodic Payments (SOSEPP), you must use one of the three methods prescribed by the IRS: Required Minimum Distribution method, Fixed Amortization method, and Fixed Annuitization method. (follow the links for more information on each method)

Once chosen, your method can not be changed under most circumstances. There is one situation that provides for a one-time change to your payments, but in general the SOSEPP can't be changed. This means that every year the SOSEPP is in effect, you must take exactly the amount in your schedule from your IRA, no more and no less. Making a change to your withdrawal schedule will result in your owing the 10% penalty retroactively on all payments received to that point, plus interest. (this is the place where the IRS does not forgive)

In addition, once you've begun your SOSEPP, you must continue that payment schedule until the later of five years or you reach age 59 1/2. Again, this is an area where the IRS doesn't forgive or give any leeway: if you take additional distributions one day before your five years or 59 1/2th birthday, the action will "bust" the SOSEPP, and you'll be liable for 10% penalty on all distributions from your IRA plus penalties. Obviously this sort of an arrangement should not be taken lightly, and you must keep excellent, flawless records on your withdrawals.

Other facts about §72(t)(2)(A)(iv):

You can split your IRA into more than one account, and apply your SOSEPP against only one account, thereby reducing the balance against which your payout method is calculated.
You can have more than one SOSEPP going at a time, using separate IRA accounts and different payout methods for each.
Your periodic payment could change under the minimum distribution method, as it recalculates annually based on the account balance at the end of the prior year.

Withdrawals from an IRA - death, disability, and 59 1/2

2008-11-05T16:34:00.003-06:00

Three of the most common ways that you can withdraw funds from your IRA without penalty are - reaching age 59 1/2, death, and disability.

When you reach age 59 1/2, you can withdraw any amount of your IRA (or other deferred account) without penalty, for any reason. The only thing you have to remember is that you must pay ordinary income tax on the amount that you withdraw. This means that, at any time during the year that exactly 6 months has passed since your 59th birthday, you are free to make withdrawals from your IRA without penalty. If you reach age 59 prior to June 30 of any given year, you can take withdrawals for the entire year. However, if you reach age 59 on July 1 or after, you will have to wait until the following year to begin taking penalty-free withdrawals from your IRA.

Upon your death at any age, your beneficiaries of your account, or your estate if you have not named a beneficiary, can take distributions from your IRA in any amount for any reason without penalty.

In addition, if you are deemed "totally and permanently disabled" you are also eligible to withdraw IRA assets for any purpose without penalty. Total and permanent disability means that you have been examined by a physician and the disability is such that you can not work, and the condition is expected to last for at least one year or result in your death.

Early Withdrawal of an IRA - 72(t) Exceptions

2008-11-03T20:50:00.009-06:00

In our first post about early withdrawal from an IRA, we mentioned that there were several exceptions in the Internal Revenue Code that allow an early withdrawal from your IRA or 401(k) without the 10% penalty being imposed. The section of the IRC that deals with quite a few of these exceptions is called Section 72(t) (referred to as §72(t) for short), and there are several subsections in this piece of the Code. Each subsection, listed below, has specific circumstances that must be met in order to provide exception to the 10% penalty. Clicking on the link for each subsection will provide you with additional details about that exception.

§72(t)(2)(A)(i) - age 59 1/2.

§72(t)(2)(A)(ii) - death at any age.

§72(t)(2)(A)(iii) - disability at any age.

§72(t)(2)(A)(iv) - series of substantially equal periodic payments (SOSEPP).

§72(t)(2)(A)(v) - separation from service on or after age 55 (401(k) only).

§72(t)(2)(A)(vi) - 404(k) dividends.

§72(t)(2)(A)(vii) - levy on a qualified plan

§72(t)(2)(B) - medical expenses.

§72(t)(2)(C) - qualified domestic relations order (QDRO) - upon a divorce settlement

§72(t)(2)(D) - health insurance premiums.

§72(t)(2)(E) - higher education expenses.

§72(t)(2)(F) - first time home purchase

In another post we'll go into the details of §72(t)(4), which describes the penalties and circumstances surrounding making changes to the SOSEPP (described in §72(t)(2)(A)(iv)), which can be quite severe, and which can take up quite a bit of time to discuss. For now, the sections above should suffice to keep us busy for a while.

Early Withdrawal of an IRA - Medical

2008-11-03T17:52:00.002-06:00

As we covered in a previous post, there are several ways to get at your IRA funds before age 59 1/2 without having to pay the 10% penalty. In this second post in our series about Early Withdrawals, we'll cover the Medical purposes which allow this penalty-free distribution.

There are three different Medical reasons that can be used for an early withdrawal: high unreimbursed medical expenses, paying the cost of medical insurance, and disability. We'll cover each of these topics separately below.

High Unreimbursed Medical Expenses
If you are faced with high medical expenses for yourself, your spouse, or a qualified dependent, you may be eligible to withdraw some funds from your IRA penalty-free to pay for those expenses. The amount that you can withdraw is limited to the actual amount of the medical expenses you paid during the calendar year, minus 7.5% of your Adjusted Gross Income (AGI - the amount on your Form 1040, line 38, or Form 1040A line 22).

You can only count medical expenses that would otherwise have been deductible as medical expenses on Schedule A of Form 1040 - but, you don't have to itemize your deductions in order to take advantage of this exception to the 10% penalty.

Medical Insurance Premiums
You may be able to take a penalty-free distribution of some IRA funds to help pay for medical insurance premiums for yourself, your spouse, and your dependents, as long as the amount you withdraw does not exceed the amount you actually paid for medical insurance premiums, and all of the following apply:

You lost your job.

You received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job.

You receive the distributions during either the year you received the unemployment compensation or the following year.

You receive the distributions no later than 60 days after you have been reemployed.

There is no income limitation on this provision.

Disability
If you become disabled prior to age 59 1/2, distributions in any amount from your IRA are not subject to the 10% penalty. Your disability must be considered of a long duration (greater than one year) or expected to result in death. The disability (physical or mental) must be determined by a physician.

Keep in mind, as we mentioned previously, these avenues provide a way to withdraw funds from your IRA penalty-free, but not tax-free. You will still be liable for ordinary income tax on any distributions that you take from your deductible IRA.

Early Withdrawal of an IRA - First Time Homebuyer

2008-11-02T15:10:00.009-06:00

Normally, when you've put money into an IRA (or 401(k), or other deferred compensation arrangement), you are allowed to begin taking withdrawals once you've reached age 59 1/2. But sometimes you'd like to take your money out earlier... and you've probably already discovered that there is a 10% penalty for taking funds out of your IRA early, right? So - is there a way to avoid that penalty?

Yes - there are several ways, as a matter of fact. There are several sections of the Internal Revenue Code that deal with these early distributions - including 72(t) (which we'll cover in depth in another post), first time home purchase, high medical expenses (including medical insurance), disability, and others. We'll explain the first time home purchase in this post, and cover the remainder of the exceptions in other posts.

First Time Home Purchase
If you are buying, building, or re-building your first home (defined later), you are allowed to take a distribution of up to $10,000 (or $20,000 for a married couple) from your IRA to fund a portion of your costs, without paying the 10% penalty. There are a few restrictions, though - here is the official wording from the IRS:

It must be used to pay qualified acquisition costs (defined later) before the close of the 120th day after the day you received it.

It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer (defined later) who is any of the following.

Yourself.

Your spouse.

Your or your spouse's child.

Your or your spouse's grandchild.

Your or your spouse's parent or other ancestor.

When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000.
If both you and your spouse are first-time homebuyers (defined later), each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.

Qualified acquisition costs. Qualified acquisition costs include the following items.

Costs of buying, building, or rebuilding a home.

Any usual or reasonable settlement, financing, or other closing costs.

First-time homebuyer. Generally, you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement.

Date of acquisition. The date of acquisition is the date that:

You enter into a binding contract to buy the main home for which the distribution is being used, or

The building or rebuilding of the main home for which the distribution is being used begins.

The keys here are to make sure that you qualify as a first-time homebuyer (by the IRS' definition above), that you use the funds in time (before 120 days has passed), and that you haven't taken this option previously. For many folks this can be very helpful in funding the purchase of a home.

Another important point here is that you need to understand that although you do not have to pay the 10% penalty on the distribution, you WILL be required to pay ordinary income tax on any money taken from your IRA. This can be a surprise to some folks who weren't expecting it.

If you'd like to learn more about this and other options with your IRA, you can check out IRS Publication 590.

Net Unrealized Appreciation

2008-11-02T14:38:00.003-06:00

This often-misunderstood section of the IRS code can be quite a benefit - if it happens to fit your situation. Net Unrealized Appreciation (NUA) refers to the increase in value of your company's stock held within your 401(k), either due to a company match or your own investment in the company stock within the 401(k). Other company-sponsored deferred accounts can apply here as well, but the primary type of account is the 401(k), so we'll refer to all company-sponsored tax-deferred accounts as 401(k)'s for the purpose of this discussion.

In order to take advantage of the NUA provision, first of all you must hold your company's stock in your 401(k), and you must be in a position to roll over the account. That is, you must have separated from service, by leaving employment (voluntarily or involuntarily), or the 401(k) plan is being terminated.

As you consider the rollover of your funds, if the company stock has increased in value, you have unrealized appreciation, that is, value that has not yet been realized due to a sale of the stock. The IRS allows for this appreciation to be treated as a capital gain, which can result in much lower tax rates on the gain.

In order to take advantage of this treatment, the 401(k) account must be rolled over in a one-time transaction, but there are a few things that you must do differently from other rollovers: The company stock will be rolled over into a taxable (non-IRA) account, while everything else will be rolled over into a traditional IRA.

When you roll over the company stock, this will be considered a distribution, so you must be in a position to either exclude the penalty on an early distribution (more on this in subsequent posts) or be prepared to pay a penalty plus the tax on the basis (or cost) of the stock. Your employer will have maintained records on your original cost of the stock.

As an example, let's say you have participated in your company's 401(k) plan for several years and are ready to retire. Part of the 401(k) funds have been invested over the years in your company's stock, which has cost you a total of $10,000 through the years. Your company has done well, and now that stock is worth $150,000 in the market. If you rolled over this stock into an IRA, you would pay ordinary income tax on that growth of $140,000 - at whatever is your current marginal income tax rate (for example, let's use 25%). Instead of going that route, you decide to use the NUA provision in the tax law to your advantage.

So, you set up a new IRA and a taxable account at the brokerage of your choice, and direct the 401(k) administrator to roll over your company stock to the taxable account, and all other funds to the IRA. When you roll over the company stock into the taxable account, you will be taxed (at ordinary income tax rates) on the basis of the stock - which, from our example, was $10,000. Now, not only will the growth of the stock ($140,000) have a tax rate of 15% (or less) for capital gains, you also do not have to take required minimum distributions (RMD) from those funds. You can leave the company stock in that taxable account forever if you wish, and hand it over to your heirs (who will receive a step-up in value to the current value of the stock at your passing).

Here's the math: you pay tax at our example rate of 25% on the $10,000 basis of the stock, or $2,500. Then, as you sell some of the stock, the total amount of capital gains tax would be 15% (at today's rates) of $140,000 (just the growth!) or $21,000. Compare that to the non-NUA treatment, where you might be taxed with ordinary income tax rates on the entire $150,000 stock value over time, for a total of $37,500! In this example, we've saved a total of $14,000 in taxes! Wow...

Now, NUA treatment doesn't work for all situations. For example, if your company stock has only grown minimally in value, or has gone down in value, there is little or no benefit to utilizing the NUA option. Also, if the basis of the stock is fairly high relative to the growth, it might make sense to only apply NUA treatment to a portion of your company stock.

The View From Here

2008-10-15T06:32:00.000-05:00

Happy October to you all! I know the past several weeks have been somewhat harrowing in the financial world, but goodness, hasn't the Fall weather been fantastic so far? As unusual as our weather has been (here in Central Illinois) all year, the Autumn has just been beautiful, with sun-drenched "coolish" days, crisp evenings, and very little rain - which our local farmers have really been taking advantage of.

I've been hearing about some very good soybean and corn crop numbers, so the view from here is that it has been a pretty good year in the agricultural community. Add to that the fact that gasoline is now selling for less than $3 a gallon again, plus the stock market is back to showing signs of an upward push (we'll get to that later), things are looking pretty good, I'd say.

My point is, even as dire as things seemed from the news reports lately, there are plenty of things to be thankful for. In this month's newsletter, I'll be detailing some of the very good reasons we have to be optimistic about the financial outlooks as well. Bear in mind, you don't see the screaming headlines when things start to look good - those kinds of stories are reserved for doom and gloom - so to balance out what you hear and read, have a look at what my point of view is on the matter.

An Update On The Financial World

2008-10-15T06:31:00.000-05:00

What a month it's been so far! I've heard from several of you, and I'm surprised I haven't received more calls. It is certainly understandable that the recent news and financial activities have you quite concerned.

This is the ugly side of our system of capitalism - where we have loosely regulated components (investment banks aren't as tightly regulated as commercial banks, obviously). Over the past few years, many companies have taken advantage of relaxed standards to make a lot, make that a boatload, of money. For example, ten years ago, no one would have thought you could have no money down, no assets, no job, and still buy a house. And, there is little doubt that many consumers were willing participants in this ruse - the blame goes to both sides. But the financial institutions should have been held to a higher standard - after all, the leaders of those organizations have been walking away with millions in salaries and bonuses, leaving the homeowners and shareholders (and uninvolved taxpayers!) to clean up the mess. While that may sound like I'm calling for additional governmental intervention, it seems that some preventative intervention would have been preferable to the "after the fact" $700+ billion intervention we've been forced to employ.

So, how we arrived at this point, and how, perhaps we might prevent it in the future is frankly, an extremely complicated issue that will be debated for decades, I'm sure. What's most important in my opinion at this stage, is for we citizen-investors to review the landscape and make good choices about what to do next, given the environment that has presented itself.

Let's start by reviewing the facts about our current situation, and what those facts mean going forward...

The Credit Markets Are In A Crisis In order for our large companies to operate effectively, nearly all of them operate within the Credit Market, borrowing cash on very limited terms (usually less than 9 months). These loans are called Commercial Paper, and Commercial Paper has traditionally been the investment of choice for money market funds, since these loans are very liquid and quite secure - meaning they can be turned into cash quite quickly. When the overall marketplace became concerned over the validity of corporate balance sheets and therefore the corporations' ability to meet these obligations, people began pulling their money out of the money market funds. When money leaves money market funds in large amounts, the fund must redeem their Commercial Paper - and when they're not buying new Commercial Paper, the corporations who depend on those loans are caught in a bind without operating cash. So when you hear talk about the "rescue" or "bailout", this is part of the reason why - corporate America is having a hard time paying its day-to-day bills without having to make dramatic moves (like selling parts of the business to raise cash, as insurer AIG is doing). The good news is that, although this is a very real problem, it is temporary, as the markets in our capitalism system have a tendency to work out kinks like this. How long will it take? Probably less than a year, but it may take longer. What are the impacts for you? Likely slightly better rates for money market funds, but also likely stiffer requirements from banks for longer-term loans like mortgages.

Investment Banks Are Broken Some of the largest investment banks (Lehman, Bear Stearns, Merrill, etc.) were heavily involved in the process of handling the Collateralized Mortgage Obligations (CMOs) that became the central derivative of the subprime mortgage crisis. These CMOs are packages of hundreds of mortgages, used as investments by all kinds of funds, investors, and companies. The problem is that 1) the underlying loans were being made on very risky terms, such as zero-down on inflated valuations of homes; and 2) the ratings agencies (Standard and Poors and Moody's among others) were not being realistic about the quality of the underlying investments. So, in other words, these CMOs were being touted as "safe" investments, when in fact they were extremely risky. Add to that set of circumstances the fact that many of these investment banks were leveraging (borrowing more money) to own the CMOs, and you've got a recipe for a real crisis when the real estate market took a dive and homeowners began to default on their mortgages, since they now held a mortgage for more than their home was worth. The good news here is that, with the "meltdown" that occurred in the debt market, new regulation and much tighter restrictions will keep this from happening again, at least as long as memory serves us. Plus, the "rescue" provides a way for some of the folks directly impacted by this (those with overblown mortgages) to gain some traction on their financial situation without losing their homes. In the meantime, even though the rescue package was characterized as a "bailout" - we taxpayers will not foot the complete bill. The remaining banks (those not up to their ears in the problem to begin with) will be purchasing the mortgage packages under much more stringent terms, effectively paying back a portion (but probably not all) of the "bailout" money, which is good for the Treasury (and we taxpayers) in the long run.

Diversification Doesn't Remove ALL Risk In a situation like we've seen over the past several weeks, where emotion and greed are ruling the day and we witness a worldwide financial meltdown, there is no safe harbor. In other words, if all investments are falling as we saw recently, just face it, unless you're only invested in CDs, your account is going to reduce in value. The good news is that this is only a temporary situation. Historically, this kind of activity has lasted from three to six months. After that, those asset classes that have become the most mis-priced through the crisis typically come back much more strongly than others - but all asset classes bounce back. At these market low positions, it might make good sense to re-balance your portfolio - that is, buy low now that you can. Of course, if you have money that has been on the sidelines in cash that you were intending to have in the market, now is an excellent time to buy in. (Hint: Warren Buffett is doing just that!)

The Short Term Market Is Driven By Fear and Greed After we saw the monumental drop off in market values last week - what happened? Only the largest single-day point gain ever for both the S&P 500 and the DJIA. But did you see the screaming headlines about how great this was? Of course not! Good news doesn't sell newspapers or TV advertising. Unfortunately, our markets will always be driven by emotion, but the good news here is that you have me to rely on - and in those times when things are sounding awful on CNBC or whatever is your medium of choice, relax, and switch it off, knowing that I'm here to do the worrying for you... That's part of my job, so switch over the baseball playoffs or tune in the debates. Don't let the fear and greed mongers dissuade you from your appropriate long-term view of things.

The Market Outlook - Historic Perspective So, with the above context, let's have a look at our current market outlook with some perspective on what happened in the stock market in past, seemingly similar situations. For context, let's use the bear market environments of 1973-1974 and 2000-2002. These two, for those that haven't read up on them, were a couple of dillies, as bear markets go. In the 1973-1974 downturn, the S&P 500 lost 43%, and in 2000-2002, it dropped 47% (this includes dividends, the actual price drops were larger). In addition to the precipitous drops in valuation, these two bear markets lingered far longer than the average - 12 months after the 1973-1974 market had crossed the 20% drop point (making it an official bear market), the market had dropped another 27%. For the 2000-2002 market, a year after its official bear declaration, stocks had lost an additional 1.2%.

These were the only two markets over the past fifty years in which the S&P 500 was lower 12 months after reaching a 20% decline. The very good news here is that neither of these markets bears much resemblance to our present marketplace. Presently we have a rumor of inflation picking up - but nothing like what we saw in the 70's with the double-digit inflation and wheezing economy that we suffered through in that decade following the bear in 1973-1974.

The more important factor is stock valuation - when the 1973-1974 bear market began, the S&P 500 was selling for 40 times the earnings of the underlying companies, and 35 times trailing earnings when the 2000-2002 bear market began. This kind of sky-high valuation was evident for the 1929 and 1987 precipitous crashes as well. But when this present bear market began, the S&P 500 was only selling for 19 times trailing earnings - not a low level, but certainly not comparable to those of the classic "crashes".

The bear market that our present situation most closely resembles is the one that occurred in 1990, which culminated in another financial crisis - that of the collapse of thousands of savings and loans. So what happened following that crisis? From 12/31/1990 to 12/31/1991, the S&P 500 increased 26%. Sounds like a pretty good outlook, don't you think? I'm not for a second suggesting that we'll see such a runup over the next 12 months, but history has shown that just such a thing is quite possible. But also remember that history should only be used as a guide - not as the answer.

The Bottom Line So, boiled down, my recommendations are as follows:

Hold tight to your position. There is no good reason to sell your investments at this point, no matter how shaky you are. You definitely do not want to be on the sidelines in a cash position when the market begins to pick back up. Considering only the past 28 years (1980 to present), if you were fully invested in the market the entire time, your return would have been 3018% overall - but if you'd missed the best 50 days during that time period, your aggregate return would have only been 430%. On a $10,000 beginning investment, that's a difference of over a quarter-million dollars.
Rebalance if your account needs it. Evaluate your future plans, and if they call for a restructuring of your portfolio and/or a rebalance, now is the best time to do it. Give me a call and I'll work with you to accomplish this.
Ignore all the "noise". Shut off CNN, give yourself a break from it all. Take a walk, or watch a baseball game or a movie. (remember, I'll do the worrying for you!)
Pass this newsletter along to your friends, families and colleagues, if you think it might help them to cope.

That's all for this month - next month we'll get back to some more uplifting topics, like IRAs and stuff like that! Until then... take care.

Special Bulletin 9/30/2008

2008-09-30T06:30:00.001-05:00

Greetings once again. I thought it was important to drop you a note this morning to help you work through this situation in the markets, as it can look pretty dire. I want you to know that, as I stated in this newsletter earlier this month - this situation is a fleeting thing. We will soon have the "bailout" in place, and the markets will recover. It's important to keep all of this in perspective... while the headlines shout about the largest drop ever in the stock market, bear in mind that in terms of percentage, this doesn't even come close to the largest drop. I realize it can be painful to watch - but if you're invested for the long term (which you all should be) then this short-term "noise" will have little impact on your overall plan. As we've noted before, with pessimism at its height, it won't be long before things turn around. It's always darkest just before dawn.

Take a hint from this quote:

"I have not looked at any of my holdings and don't intend to. I don't want to be tempted to jump because I think I'd be more likely to jump in the wrong direction than the right one. My advice has always been to choose a sensible diversified portfolio and stop reading the financial pages. I recommend the sports section."

That was from Richard Thaler, professor of behavioral science and economics, University of Chicago Graduate School of Business.

And as always, if you want to talk it over, please give me a call.

Special Bulletin

2008-09-15T11:21:00.002-05:00

In light of the economic tremors that are going on in the financial sector today, I felt compelled to provide a comment: The failure of certain firms who took part (on the institutional side) in the personal real estate frenzy was not unexpected. The problems produced by the greed of that event were bound to "come home to roost". It is unfortunate that this part of the inevitable cycle has to come at this point, though. Just last week, we saw very favorable signs of resolution to the overall financial marketplace's woes: mortgage rates plunged, consumer confidence surged (partly in response to the strengthening dollar), commodity prices declined, and other systemic gauges improved. These signs all point to an overall improvement in the outlook for the home price issue (and the overall economy) at the root of the market's problems of late.

As with the demise of Bear Stearns earlier this year, our marketplace will absorb this action regarding Lehman. The improving underlying forces of the market mentioned above will continue to move forward, and we'll see an end to this current turmoil soon. Using history as our guide, we know that "this too shall pass".

Going forward, I expect for confidence levels to continue to increase, in spite of today's news, and for the market issues to eventually work themselves out - most likely by the Spring. All of these factors' improvement are building the basis for home prices to stabilize, and the overall marketplace is getting back on track.

In short - as many of you have heard me say before: When the markets are down is not the time to make brash moves. We can be our own worst enemy if we think we can resolve this problem on our own. Don't just do something, stay put.

And as always, if you want to talk it over, please give me a call.

It Has Fell

2008-09-15T11:20:00.001-05:00

So - Fall has fell. As far as I can tell, it looks like we're in for Autumn weather from here on out. That's not such a bad thing, really, except for the fact that we had so little Summer-like weather this year here in the Midwest. I suppose there's not much we can do about it, besides, as I've mentioned on these pages before, Fall is one of my favorite seasons anyhow. This year isn't bringing the promise of post-season baseball for the Cardinals, but I know that the Cubs fans are really looking forward to October. Good for you - make the most of it!

I have an article for you this month which explains (briefly) the concept of the Stretch IRA, and how you may use this as an estate planning tool for your family. As always, feel free to call me if you have any questions about the articles, or if you'd like to discuss your specific situation more completely.

Stretching Your IRA - A Legacy in the Making

2008-09-15T11:19:00.000-05:00

The term "stretch IRA" has become a popular way to refer to an IRA (either traditional or Roth) that has provisions that make it easier to "stretch out" the time that funds can stay in the IRA after the death of the owner. A stretch IRA is not a special type of IRA under the Internal Revenue Code, rather, it's a traditional or Roth IRA that has language in the custodial or trust document that gives a beneficiary or contingent beneficiary the option to take distributions from an inherited IRA over the beneficiary's life expectancy. This language also generally allows for successor beneficiaries to be named, facilitating the further tax-deferred growth of the IRA over (possibly) more than one generation. There's nothing really dramatic about this "stretch" language; any IRA provider can include it. The fact is, though, many don't. Absent the "stretch" language, IRA funds might have to be distributed on a much more aggressive basis upon the death of the IRA owner or original beneficiary.

Why Is Stretching an IRA So Important?

Earnings in an IRA grow tax deferred. Over time, this tax-deferred growth can help an individual to accumulate significant funds in her IRA. For someone fortunate enough to have the funds to support himself in retirement without the need to tap into his IRA, continuing this tax-deferred growth for as long as possible may be a priority. These folks may want for their heirs to benefit from this tax-deferral as well.

As an example, let's say Phred, age 62, has a $400,000 IRA. In addition, having recently retired, Phred has a pension from his former company that pays $40,000 per year, and he has other funds (outside the IRA) that provide an additional $15,000 per year in income. Phred's annual living expenses are (conveniently enough for our example) exactly $55,000 per year. With those circumstances, there is no need to withdraw funds from his IRA until he is required to do so (at age 70 1/2). Phred has named his wife Ethyl, age 60, as the beneficiary (Phred didn't name her Ethyl, her parents named her Ethyl - he only named her the beneficiary!). They have agreed that, should Phred pass away, Ethyl also would not take distributions from the IRA until required (or necessary), with the intention of leaving the balance of the IRA to their grandchildren. Phred dies at age 70, before reaching age 70 1/2. At this point, the IRA has grown to $687,000 (7% per year). Ethyl rolls over the IRA into a new IRA in her name, and does not take a distribution until her age 70 1/2, at which point the IRA has grown to more than $813,000.

Clarifying Two Important Points

Now, a couple of things need to be clear at this point, as the Internal Revenue Code has made this matter quite complicated. The first is that, had Ethyl been under age 59 1/2 and needed the income from the IRA, she could have begun taking distributions of income from Phred's IRA immediately - using his attained age rather than her own. Given that she did not need the funds, though, it was beneficial for Ethyl to roll over the IRA to her own IRA, which allowed for the deferral of the Required Minimum Distribution (RMD) beginning date. It's also important to note that, if Phred were the younger of the two, Ethyl could have deferred that RMD beginning date until the date that Phred would have attained age 70 1/2.

The second point that needs to be clear is that, when Ethyl sets up her rollover IRA, it is critical that the beneficiaries are specifically named on the beneficiary form. The reason for this is that, upon her death, if the beneficiaries are not specifically named, or if the beneficiaries have pre-deceased the IRA owner and subsequent or contingent beneficiaries are not named on the beneficiary form for the IRA, an entirely new set of rules applies (see Non-Designated Beneficiaries below for this explanation).

By naming the beneficiaries specifically, the intentions of the account owner are clear, and will be carried out as she wished. However - if there is more than one beneficiary, it is important to make sure that each beneficiary has had a receiver (rollover) IRA set up and the funds rolled over into the account by the end of the year following the year of death. If these separate accounts have not been established in this timely fashion, the funds must be distributed using the age of the oldest beneficiary as the lifetime. If the accounts are set up as directed though, each beneficiary uses his own age as the lifetime for the distributions.

Meanwhile, Back at the Example...

Continuing our example, let's assume that Ethyl passes away at age 72, having taken two minimum distributions from her account, and the account is now worth over $868,000. She and Phred had three grandchildren as beneficiaries: Chip, age 30, Robbie, age 20, and Ernie, age 10. (I know I'm off on a tangent here, but they had chosen to disinherit their oldest grandson Mike, since he wasn't around any more after the first season.) Since Ethyl had wisely specifically designated the three boys as beneficiaries, each one could draw out the Required Minimum Distributions using their own ages. For Chip, this means that his first distribution would have to be at least $5,431, for Robbie, $4,595, and for Ernie, $3,976. Of course the three boys had had their own separate accounts set up to roll over their inheritances as the law requires. Had they not set up these accounts, all three would have to take distribution of the amount of the oldest beneficiary, Chip. This would mean that Robbie and Ernie would be unnecessarily taking additional (taxable) distributions from the inheritance.

Another way to deal with this would be to set up a trust as the beneficiary of Ethyl's IRA, naming the grandsons as specific beneficiaries of separate trust shares. In this fashion, each would still be able to take distributions over their own lifetimes.

Bear in mind, these beneficiaries are REQUIRED to begin taking distributions upon their inheritance of the IRA proceeds. The only way to defer taking distributions from an inherited IRA is if the beneficiary is the spouse, which we discussed earlier above. Any other person or trust (who is not a spouse) must begin taking distributions upon inheriting the IRA, per their own life, using the Single Life table from the IRS.

Non-Designated Beneficiaries

As mentioned above, if the beneficiary of an IRA is not properly designated on the IRA beneficiary form, a completely different set of rules comes into affect. This situation comes into play when your primary beneficiary pre-deceases you, or if for some reason the original documentation of your beneficiary can not be found (happens more often than you want to know!). This is why it is critical to make copies of your beneficiary designation form, as well as to check up with your IRA custodian to ensure that the proper information is applied to the account. Update these records if your primary or contingent beneficiaries should happen to die before you.

So, if a properly designated beneficiary is not named on the account information, your will (or the state's probate law) will determine the non-designated beneficiary. At that point, if the RMD beginning date for the owner of the IRA has already passed, the beneficiary may take distributions over the remaining life span of the original owner using the Uniform Life table from the IRS. If the RMD beginning date has not passed (that is, the owner of the IRA is less than age 70 1/2), then the non-designated beneficiary must take distribution of the entire account's proceeds within five years of the end of the year in which the account owner died. Obviously, this is not a preferred method, as all of these distributions are taxable as ordinary income, and this five-year method results in very large distributions.

Back to our example - had Ethyl NOT properly designated her grandsons as beneficiaries and had passed away prior to age 70 1/2, each grandson would be required to take distribution of nearly $290,000 within five years of Ethyl's death. Conversely, if Ethyl had attained age 70 1/2 by her death, the boys could stretch out their payments over the Uniform Table's span, amounting to required distributions of just a little over $10,000 to each boy, increasing each year until the account is exhausted.

In a nutshell, that's the stretch IRA. It can be pretty complicated, depending upon your wishes, but in most cases it's not too difficult to work out a proper plan. Hopefully my examples have shown the benefit of properly setting up your IRA beneficiaries, as well as making sure that your wishes and directions are well understood by your heirs and executor. If I can be of any help to you as you set up your IRA to stretch for your heirs, please let me know.

Don't Want To Think About It

2008-08-15T12:58:00.001-05:00

Even though we're only halfway through August, the weather 'round here has been surprisingly mild, bringing to mind thoughts of the coming Autumn. For those in the audience that are big fans of the Summertime, I'm sure you can understand what my headline means - good grief, we have hardly had any Summer weather this year at all here in Central Illinois! It's been so mild and rainy ever since the Spring - why, we've only this week begun to harvest any tomatoes from our garden! I can't imagine that the past week or two of very mild weather (low 80's) will maintain without raising temperatures back up to our normal 90's, but it does make you wonder, doesn't it? I sure hope we've got a little more Summer in store for us - I've barely gotten to put a fishing line in the water!

In this month's edition, we'll work through an example of a pension question that comes up quite often: when should I start taking payments? As you'll see, it gets pretty complicated, but hopefully the examples I provide will give you a foundation to begin thinking about as you address this question in your own life.

Ready, Set, Go! When To Start A Pension Payout?

2008-08-15T12:57:00.000-05:00

The question comes up often: I’m ready to retire at age 55, and I can begin collecting my pension right away. Should I? The amount of the pension increases to almost double if I wait to start collecting at age 62, and two-and-a-half times if I wait until age 65. What’s the best way to do this?

Obviously, there are a lot of factors that will go into the answer to such a question, so right off, it’s hard to say for sure, but here are the basics of making this decision:

These types of pensions are based on the employer’s assumption about your life expectancy. If you live to exactly the expected age, the cost to the employer will be roughly the same no matter which option you choose. You just need to do the math – bigger payments later are made for (expected) fewer years.

It goes without saying that if you were sure you’d die at age 60, you would be much better off starting your pension payout as early as possible. On the other hand, if you live longer than expected, starting your payout as late as possible will likely make up for the late start. But at what projected life span does this make sense?

An Example To Consider

Let’s start with an example: Say at age 55 you could begin a pension paying $700 per month, or at age 62, $1,303 per month, or you could begin receiving $1,737 per month if you wait to age 65 to begin collecting. For the purpose of simplicity, the example will not factor in taxes or any cost-of-living adjustments.

At age 70, your first option is still ahead of the other two. So, if you were to die before age 71, the first option, collecting at age 55, works the best, because you would have collected a total of $126,000 by that point, versus $125,095 for the age 62 option and only $104,225 with the age 65 option.

However (and isn’t there always a however in life?) – if you lived beyond that age, the other options begin to take the lead. If you lived to at least 72 but not to age 75, the age 62 option would work out the best. Anything from age 75 on up, you’re best off to wait until age 65 to get started.

Throw in a Wrench Or Two

This has been a very simplistic look at the arithmetic behind this question – but there is more. Remember when I mentioned above that if you live to the expected age, the cost to your employer is roughly the same no matter which option you choose? How can this be, you might ask…? Well, during the time that you’re not taking your pension payments, your employer has control over the money in the pension fund, and they’ve got it invested, so it’s growing over that 7 or 10 years (between age 55 and either 62 or 65). The returns that your employer achieves over that time helps to balance out whichever choice you make.

Why is this important? Consider it this way: Instead of spending the money when you receive each pension payment, what would your results be if you invested them? If you took your pension of $700 at age 55 and invested each payment for a conservative return of 6%, by age 62 you would have amassed $72,852 in savings, a gain of more than $14,000 over the total of your payments. Using this strategy, you remain in the driver’s seat until age 78 with the age 55 option, when the age 62 option takes over until age 80, at which point the age 65 option is the clear winner.

Okay, Maybe a Third Wrench in the Works

Now – the problem with that last calculation is that it assumes you have the wherewithal to get by without spending your pension money… which isn’t out of the question for the earlier years, you’d still be plenty young and spry enough to earn a part-time living that could make up the difference and allow you to continue your lifestyle, but at some point you’d probably like to stop working altogether.

Back to our example, if we make the assumption that at age 65 you begin spending your pension and savings, at the rate of $1,737 per month (the amount of your pension if you started drawing at age 65). Oddly enough, using this strategy, you start running out of money in your surplus fund at approximately the same crossover point as in the earlier strategy: if you used the age 55 option you’d have used up your surplus by age 78; while with the age 62 option, your surplus would be gone by age 80. At those ages, you would have to get by on the $700 or $1,303 of your original pension, plus any social security and other retirement savings.

And The Point of This Is...?

The point of all this, well actually there are two points: First – the answer to the question of when to take the pension depends on what you’ll do with it, and whether or not you need those funds right away. Couple those factors with how long you’ll live. If you’ll need a larger amount to live on, such as if you don't have any other retirement savings, the longer you can wait before starting your pension payouts, the better, especially if you’re in good health and expect to live beyond age 80.

The second point is that, even if you have a pension available to you, it is definitely in your best interest to develop a savings strategy in addition to the pension. And this is doubly important if your pension is fixed (no cost-of-living adjustments) as in our example.

The best way to answer this question is to gather all of these factors, along with considerations regarding investment risk tolerance, tax implications, family longevity and your own health, as well as your lifestyle costs, healthcare costs, and propensity to continue working after your official “retirement” – at whatever age that might be – and then run the calculations.

As you might have guessed, this is just the sort of thing that I do, and I’d be happy to help you get an understanding of the numbers as they relate to your situation. Just give me a call.

That’s all for now – until next month…

Vacation Time

2008-07-15T14:48:00.001-05:00

As many of you know, we often travel to Pensacola Beach for vacation, and soon (in fact, in a few days) we'll be making our annual trip. Of course, this year, we'll be spending considerably more on fuel to get there, but still it's a reasonable alternative to flying - and we wouldn't consider NOT making the trip, it's just too much a part of our lives. I think that traditions like this trip make our lives more complete, as we have the familiar friends to connect with, and the beautiful surroundings to help us "decompress" from the stress of day-to-day life. Hopefully you also are able to do your traditional "vacating" this Summer - it's too important to miss. Make sure to take this time for yourself and your family!

In light of the economy's present doldrums, and since everyone who is eligible to receive a Stimulus Check should have received it by now, I thought it would be interesting to talk about ways to use this check within your own economy to stimulate things. That is, how you can use the Stimulus Check to improve your financial outlook, regardless of what they're saying on the evening news. I hope the article this month gives you some ideas!

Stimulating YOUR Economy

2008-07-15T14:47:00.000-05:00

So anyhow, if you qualified to receive one (and have filed your 2007 taxes in a timely fashion) you should have received your Economic Stimulus Check from the IRS. It's possible that some of you might not have received it yet, since they're being delivered through July, so if you don't have it yet you should have it soon. So - what should you do with the check? How can you impact YOUR economy in a positive fashion? Obviously, retailers would like for you to rush right out and spend the money on something - preferably just a down payment on something really big - and they are coming up with some very enticing offers to get you to do just that. Below are some alternative that you might consider, that will have a positive impact on your overall financial picture:

Cash the check and use the money when and where you want. By doing so, you won't be locked into spending all the money in one place, and there are never any fees involved with using cash. This is suggested as an alternative to taking on some of the offers that retailers are promoting, with extra fees and time payment plans (that are never a good idea in the first place). Use the money to just augment your overall cash flow.
Pay (or Pre-Pay) a bill. The lump sum provided by the stimulus check may be just what you need to pay your real estate taxes or car insurance. Or, you might start prepayment plans with you home heating contractor to lock in fixed fuel prices for the coming winter (if this is available to you). Another option might be to pre-pay a tuition bill or student loan.
Start or add to your emergency fund. For those of you that have worked with me, you know that I advocate this as a way to ensure that you're not caught "off guard" when those inevitable surprises come up, like needing roof repairs or new tires on your car. By having an emergency fund available, you won't have to use costly personal credit (credit cards) or negatively impact your month-to-month cash flow in these emergencies. Put these funds in a savings account or money-market account, so that you'll earn some interest (even though it's paltry) on the balance.
Pay off some or all of a high-interest rate debt. If you have outstanding credit card balances, you might want to give some thought to paying off some or all of those balances, starting with the balance that carries the highest rate of interest. $1200 applied toward a credit card balance with an annual percentage rate of 14.9% could same roughly $180 in interest charges in the course of one year!
Invest in the future. Start (or add to) a Roth IRA, deductible IRA, Coverdell Education Savings Account, or a 529 College Savings plan. A single contribution of $600 to an education account can grow to over $1,700 (at a rate of 6%) in the eighteen years between now and your newborn's first day of college. Likewise, a similar contribution to an IRA, left alone for 30 years at a rate of 6%, would grow to nearly $3,500!
Make a tax payment and adjust your withholding. Stay with me on this one - you could actually come out ahead if the circumstances fit for you. If you aren't taking full advantage of your employer-matching funds in your 401(k) plan, making a payment on your income tax obligation for the year and then adjusting your withholding to match will free up $100 a month in your take-home pay (using the $600 check as an example). If you then started or increased your contributions to your 401(k) plan and your employer matches fifty cents on the dollar, you'll actually come out ahead! You would have contributions in your 401(k) plan of $900, plus your take home pay would still be slightly more than before you started this plan, due to the pre-tax 401(k) contribution. Just remember to adjust your withholding back again in January, 2009, or make other adjustments to ensure that you don't come up short next year!
Invest in yourself. Use the stimulus check for those books you wanted to buy about gardening, self-improvement, or investing education. Or, take a class at your local community college in a subject that stimulates YOU! You might also use the funds to buy a gadget or gizmo you'd been wanting that will make your life easier or more enjoyable.
Invest in your community. Consider making a donation with your stimulus money. There are many deserving charities (I'm sure you can come up with a list of several without much difficulty) that would LOVE to have a donation of $600 or $1,200. And you can take a deduction on your tax return for the donation (assuming that you itemize your deductions).

The Bottom Line

The point of these suggestions are to give you some food for thought. Congress started this program to help stimulate the economy (whether it will have an impact is debatable, I think the economy will stimulate itself) so why not figure out how you can use these funds to stimulate YOUR economy? Too often when "found money" makes its way into our checking accounts, it just flows through and nothing meaningful happens with that specific sum. With these ideas, I challenge you to come up with a use for the funds that has a lasting, meaningful impact - on your life, on your financial condition, or on the life of someone else. As I've often said, putting this kind of thought into the use of these funds has little chance to be something you'll regret. "Gee, I wish I hadn't paid down that debt. Now I'm all debt free. I don't know what do do with myself." Yeah, that's not a likely conversation you'll have with yourself!

All's Fair

2008-06-15T07:18:00.003-05:00

June brings us the traditional beginning of the summer season, and with the weather we've been having, this year is no exception. For those of you that know me well, you know that this includes a healthy portion of Fair time - that is, the Sangamon County Fair. I am heavily involved in the Fair, and I'd like to take this opportunity to invite all of you to join us at the Fair, beginning on Wednesday, June 18, and running through Sunday, June 22. As always, we have some great entertainment lined up, with Little Big Town on Thursday evening, Kelly Pickler (of American Idol fame!) on Friday, and Randy Owen, formerly of the legendary group Alabama, on Saturday evening. If you're not familiar with the way the Sangamon County Fair works, once you've paid the admission price, you have access to the grandstand shows and all other entertainment, rides, and shows throughout the fair, for no additional cost. You can find out more by going to www.SangCoFair.com.

Given the volatility we've been experiencing of late in the financial world, I thought it would be timely to revisit some of the ways that we can help ourselves to maintain confidence throughout these uncertain periods. This month's article addresses these concerns and I hope will help your confidence in your financial matters. As always, I am available to talk about your concerns if you'd like, just give me a call!

Maintaining Confidence in an Uncertain World

2008-06-15T07:16:00.001-05:00

All around us, every day, we see signs of an unstable financial world. The price of gasoline is out of sight, and instability continues in the Middle East; while at home we're confronted by a presidential election that offers little choice other than to hold your nose and vote for the one that you believe is likely to do the least damage. Add to this the stock market's volatility, the rising cost of "getting by", and the subprime mortgage crisis, and there's little wonder many folks are very concerned about the future.

What Can You Do?

I don't suggest hiding under your bed - this has never worked for me, and sometimes you find things there that you would rather not! On the other hand, there are few things that you can do to help get through this uncertainty, and maybe you'll decide that it's not so scary after all.

For starters, all of the headlines we see, especially the financial ones, must be taken with a grain of salt. For example, back in early 2001, CNN reported that seven cows, born and raised in Germany, had been diagnosed with mad cow disease. Within six weeks, beef consumption in Germany dropped in half. Yet, throughout the 20+ years since mad cow disease was discovered, a total of 150 deaths have been attributed to this disease. On the other hand, we are told that salmonella poisoning kills more than 600 people in the US every year, along with making an additional 1.4 million of us sick. But the popularity of chicken, the primary food source that hosts salmonella poisoning, continues to increase.

This odd behavior comes about because of how we perceive and interpret information. Obviously, our personal experiences have the greatest weight, followed by experiences related to us by friends and family. The next most believable source of information is mass media, including the largely undocumented internet, while last in line is documented, statistical evidence. So, while most folks have had enough experience with food poisoning to put the salmonella statistics in their proper context, Mad Cow disease, with its sensational name and (at the time) largely unknown characteristics, made us sit up and take notice. And, more importantly from the perspective of the media provider, the sensational SELLS!

So What Does This Mean For My Finances?

Consider how this phenomena impacts your financial decisions. For several years, the watch-word has been to stay out of medium- and long-term bonds as investments, because the long-term rates are going up. This talk began in 2001 - and long-term rates have gone up since then, a little, but not enough to make an appreciable difference in using medium- and long-term bonds in your portfolio.

This is not to say that you should ignore the news - but rather, you should keep your trusty grain of salt handy as you do follow the news. And ask your trusted advisor to help you interpret the news that you find particularly troubling. In addition, it doesn't add value to check your portfolio's value every day and wring your hands over every headline in the various financial news outlets. Generally speaking, these headlines provide no value to the average investor, and more often than not they serve to distract you from the aim of your long-term plans.

Understand Why You Choose Investments

One of the more difficult things for most folks to understand is that it is near impossible to always choose a "big winner" mutual fund. Consider this: if, over the past five years, a mutual fund manager has had a better-than-average result from his mutual fund (meaning, he's beating the indexes over that period), he's one of approximately 3% of all mutual fund managers. When you consider that new funds are introduced every year, replacing old "losers", you begin to realize that this 3% is actually a smaller number, since the losing funds have disappeared from the list.

Add to this mix the fact that "past performance doesn't guarantee future results". In other words, just because a particular fund manager has beaten the average in the past doesn't mean that he will do so in the future. What I'm driving at is this: There is no point in chasing the "best" managed mutual fund, especially when the index is likely to beat or equal any given manager 97% of the time, at a cost of far less than half (in terms of internal expense ratios). You're much better off spending time making sure that your portfolio is well diversified and matches your risk tolerance, and then maintaining solid discipline to not run for the exits when a headline looks scary to you.

Have a Trusted Adviser to Lean On

This goes for all facets of your life, obviously - and of course it's a bit self-serving when coming from me. The point is, while we all would like to believe we can "do it on our own", we eventually come to realize that we need some additional expertise to help us plan. And once we've made those plans, having someone to help us review and consider options is a must - because simply having a plan isn't enough, we must execute and review results. Once we've seen those results, we can then determine how to make minor adjustments for the future, and then again, execute the plans. Especially when the environment has been volatile, it's important to review our results and make sure we're still on track.

You might think that the work a financial planner does is based primarily in the future, but the past is at least as important - especially when things haven't gone the way we'd hoped. In other words, while we're aiming for a particular goal in the future, it is where we are "today" that gives us our starting point. Confucius said "A journey of a thousand miles begins with a single step". But if you never stopped during that thousand miles to consider where your destination is relative to where you are right now, you'd likely end up somewhere else.

The Point of All This (FINALLY!)

I know I've rambled a bit, but I think you get the gist of my message - Lay out careful plans, don't allow the "pundits" and headlines to distract you, use the market averages to your advantage, diversify to match your risk tolerance, and check your progress regularly. The author Michael Pollan presented a seven-word mantra in his best-selling book "In Defense of Food" that provides clarity when making choices there:

"Eat food. Not too much. Mostly plants."

From this idea, I've built the following mantra for investing and planning:

"Plan regularly. Don't be distracted. Save lots."

I hope this will help you as you go forward in your financial life. In these uncertain times, having a sound foundation to guide you is your most important tool. Take care, and best wishes for this month.

May Flowers?

2008-05-15T06:58:00.001-05:00

Throughout the month so far, we've had much more rain than normal - I thought the saying was "April showers bring May flowers"!! Instead, the April showers seem to just be bringing more May showers, at least around here. The flowers have been coming up, though, and right now the iris outside my office door is just about to bust with blooms.

Even with the weather being as it has been, we still have made it out to find a few mushrooms, and even got to take in a Cubs/Cards game. I won't go into detail on the outcome - let's just leave it that we had a nice time at the game and at least one of us (not me, the Cubs fan in the house) came home happy.

One of the big issues that many people face when planning for retirement is getting a handle on their income needs. This month's article should help to shed some light on that calculation. By gaining an understanding of the retirement income requirement, we can look forward to our golden years without the fears associated with not knowing if we've done enough saving, or if we're retiring too soon.

Retirement Income Requirement

2008-05-15T06:57:00.000-05:00

You know how important it is to plan for your retirement, but how do you get started? One of the first steps should be to come up with an estimate of how much income you'll need in order to fund your retirement. Easy to say, not so easy to do! Retirement planning is not an exact science. Your specific needs will depend on your goals, lifestyle, age, and many other factors. However, by doing a little homework, you'll be well on your way to a comfortable retirement.

Start With Your Current Income

A rule of thumb suggests that you'll need about 70 percent of your current annual income in retirement. This can be a good starting point, but will that figure work for you? It really all depends on how close you are to retiring. If you're young and retirement is light years away, that figure probably won't be a reliable estimate of your income needs (and let's face it, over a long period of time it's not much more than a wild guess!). That's because many things will change dramatically between now and the time you retire. As you near retirement, the gap between your present needs and your future needs will likely narrow. But remember, you're only going to use your current income only as a general guideline, even if retirement is well within sight. In order to accurately estimate your retirement income requirement, you'll have to do some more cipherin'.

Project Your Retirement Expenses

As with any budgeting exercise, annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That's why estimating expenses is a big piece of the retirement planning puzzle. It's bound to be difficult identifying all of your expenses and projecting how much you'll be spending in each area, especially if retirement is still a ways off. To help you get started, here are some common retirement expenses:

Food and clothing
Housing: Rent or mortgage payments, property taxes, homeowners insurance, property upkeep and repairs
Utilities: Gas, electric, water, telephone, cable TV
Transportation: Car payments, auto insurance, gas, maintenance and repairs
Insurance: Medical, dental, life, disability, long-term care
Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs
Taxes: Federal and state income tax, capital gains tax
Debts: Personal loans, business loans, credit card payments
Education: Children's or grandchildren's college expenses
Gifts: Charitable and personal
Recreation: Travel, dining out, hobbies, leisure activities
Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living
Miscellaneous: Personal grooming, pets, club memberships

Don't forget that the cost of living will go up over time. The average annual rate of inflation over the past 20 years has been approximately 3 percent. And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children's education early in retirement. Other expenses, such as health care and insurance, are bound to increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it's always best to be conservative). Finally, have a financial professional review your estimates to make sure they're as accurate and realistic as possible. Don't forget to factor in insurance benefits (especially medical) as your out-of-pocket costs are likely to be much different in retirement than when you're working.

Decide When You'll Retire

To determine your total retirement needs, you can't just estimate how much annual income you need. You also need to figure out how long you'll be retired. Why? The longer your retirement, the more years of income you'll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it's great to have the flexibility to choose when you'll retire, it's important to remember that retiring at 50 will end up costing you a lot more than retiring at 65.

Estimate Your Life Expectancy

The age at which you retire isn't the only factor that determines how long you'll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you'll have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. To guard against that risk, you'll need to estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you'll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There's no way to predict how long you'll actually live. With life expectancies on the rise, it's probably best to assume you'll live longer than you expect. To be conservative, you might project out to age 100 (or longer, if longevity is in your genes!).

Don't Forget to Inflate!

But you can't just come up with an expense figure and simply multiply it by the number of years you're planning on living... remember that little factor we talked about earlier - inflation? Not considering the impact of inflation can cause your plan to run off the rails - and soon you'd run out of money altogether. As we sometimes morbidly joke in this business, you may want to increase your bacon intake to match up with your portfolio's longevity!

It's a fairly simple matter to project out the future value of your retirement income requirement, using the average inflation rate of 3% (or higher to be more conservative), to give you a pretty good picture of the amount of money you'll need when you retire. There are many calculators available on the internet to help you with this process - just go to your favorite search site (MSN, Yahoo!, Google, etc.) and search for "retirement calculator". As an alternative, I'll be happy to work with you to come up with a reasonable figure for your own circumstances.

Identify Your Sources of Income

Once you have an idea of your retirement income requirement, your next step is to determine just how prepared you are to meet those needs. In other words, what sources of income will be available to you in retirement? Your employer may offer a traditional pension that will pay you monthly benefits (although this is becoming increasingly rare, especially in the private sector). In addition, you can likely count on Social Security to provide a portion of your retirement income, although many younger folks are making their plans without factoring in Social Security, just in case it's not there in the long run. You should be receiving an annual update of your estimated Social Security benefits. If not, to get an estimate of your Social Security benefits, visit the Social Security Administration website (www.ssa.gov) and order a copy of your statement.

Other sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and additional investments. The amount of income you receive from those sources is dependent upon the amount you invest, the rate of return on your investments, the internal costs of the investments, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.

Make Up Any Shortfall

If you've been diligent about saving, or are fortunate enough to have a funded traditional pension plan, your expected income sources may well be more than enough to fund even a lengthy retirement. But what if it looks like you're going to come up short? Don't run screaming down a hallway -- there are always steps that you can take to bridge the gap. A financial professional can help you figure out the best ways to do that, but here are a few suggestions:

Try to cut current expenses (in your working years) so you'll have more money to save for retirement. This will have the added benefit of teaching you to get by on a little less both now and in the future, as well.
Shift your asset allocation to increase the potential returns on your portfolio (always keeping in mind that a portfolio that offers higher potential returns most likely involves greater risk of loss)
Lower your expectations for retirement so you won't need as much money (no beach house on the Riviera, instead maybe you'll plan to buy a Buick Riviera to drive to the rental beach house once a year!)
Work part-time during retirement for extra income. Many folks are doing this nowadays, as the "kick back and relax" style of retirement is not their cup of tea. Staying active tends to maintain your health as you age, both physically and mentally.
Consider delaying your retirement for a few years. Instead of a big fat "I QUIT" at your planned age, consider shifting gears and pursuing a different career, something that you're passionate about that you always dreamed of doing.

I hope the above discussion helps you to be better prepared as you plan toward your retirement. Too often, I talk to folks about their goals for retirement, and they've never considered the income side - the primary aim they have in mind is a particular age. By focusing on the retirement income requirement, you can be much better prepared for a long, happy, restful vacation from "work".

April Greetings

2008-04-15T17:42:00.001-05:00

Well, it seems that I was a little premature in my call for Spring in last month's letter. As I write these lines, we had a bit of snow earlier in the day, so I'm thinking that the groundhog's call was better than mine altogether, and he really pushed it this year! This makes more than 10 weeks of Winter after he saw his shadow back in February...

Enough about the weather though - it's April, so what should we be focusing on? I mean, besides the fact that the Cardinals and the Cubs are both playing very well... With the cold weather, we haven't had much thought of mushroom hunting or turkey hunting, so - I thought now was a good time to bring up some issues surrounding inter-family loans, which I've addressed in my second article. Many times this issue comes up and you may find some interesting tidbits in that article.

The first article this month covers the question "what can I do to prepare more for retirement goals beyond my 401(k) and IRA?" While most folks are, understandably, at their limits by making the maximum annual contributions to the "regular" kinds of accounts, some folks would like additional avenues to use. This article should help you to think through some of the possibilities, and as always, I'm available to talk it over if you'd like.

Beyond 401(k) and IRA

2008-04-15T17:41:00.001-05:00

You're contributing as much as you're allowed to a 401(k) or other employer-sponsored retirement plan. You're also contributing the maximum annual amount to your Roth or traditional IRA. But you want to set aside still more money to make sure your retirement is everything you hoped for. What options do you have? Here are some things to consider...

Before moving beyond - are you really maxing our your 401(k) and IRA?

IRAs and employer-sponsored retirement plans like 401(k)s have some real advantages when it comes to saving for your retirement. So, before you go any further, make sure you're really contributing all you can.

In 2008, most individuals can contribute up to $15,500 to a 401(k) plan, and up to $5,000 to a traditional or Roth IRA. If you're age 50 or better, though, you can make up to an additional $5,000 in "catch-up" contributions to your 401(k) in 2008, and an additional $1,000 to your traditional or Roth IRA. What's more, if you file a joint tax return with your spouse, your spouse may be able to make a full IRA contribution, even if he or she has little or no taxable compensation. (Call my office if you need help with the details on this one.)

Looking at deferred annuities

If you are looking beyond 401(k)s and IRAs, one option you may be aware of is a deferred annuity. Deferred annuities are generally funded with after-tax dollars, but earnings are tax-deferred; you don't pay tax until you take a distribution from the annuity, and then you only pay tax on the portion of each distribution that represents earnings. There is also no annual limit on contributions to an annuity.

The tax deferral offered by a deferred annuity is a nice feature, but it comes with some tradeoffs that you'll need to weigh carefully:

There are associated fees and costs, including annual fees, investment management fees, and insurance expenses
A surrender charge may be imposed if you withdraw funds within a certain period of time (generally 7 years!)
A 10% federal penalty tax (in addition to any regular income tax) may apply if you withdraw funds from an annuity before age 59 1/2
Investment gains are taxed at ordinary income tax rates, not at the lower capital gains tax rates

Annuities do have some unique benefits beyond tax deferral. With annuities, you can elect an annual payment amount that is guaranteed for the rest of your life (the guarantee is subject to the payment ability of the issuing institution) - this relative degree of certainty can be psychologically and financially comforting. In addition, annuities may offer some creditor protection under state law.

Taxable investment accounts

Your other basic option is to invest through a taxable investment account. The lower federal income tax rates that apply to long-term capital gains and qualifying dividends go a long way toward taking the bite out of holding investments outside of a tax-advantaged retirement account like a 401(k) or IRA. And, a taxable investment account offers one enormous advantage: You gain a tremendous amount of flexibility. You can choose from a virtually unlimited selection of specific investments, and there's no federal penalty for withdrawing funds before age 59 1/2.

Investment options worth mentioning:

Mutual funds or separately managed accounts (SMAs) managed for tax efficiency intentionally minimize current taxable distributions
Indexed mutual funds and exchange-traded funds (ETFs) trade infrequently and therefore tend to have low annual taxable distributions
Tax-free municipal bonds and municipal bond funds generate income that is free from federal and/or state income tax

Always keep the big picture in mind

Your investment decisions should be based on your individual goals, time frame, risk tolerance, and investment knowledge. You should evaluate every investment decision with an eye toward how the investment will fit into your overall investment portfolio, and whether it will meet your general asset allocation needs. A financial professional can be invaluable in helping you evaluate your options.

Inter-Family Loan Topics

2008-04-15T17:40:00.000-05:00

Often, the topic of Inter-Family Loans comes up in my discussions with clients. Many times a parent wishes to help out a child with the purchase of a home, or some other financial goal - but they don't want to just hand over the money with no responsibility attached. Inter-family loans can be a good way to approach this topic - the child continues to have fiscal responsibility, and the parent is able to earn a bit on the loan, while still feeling as if they're in a "helping" position with the child. Below are a few items to think about, along with the additional topic of co-signing loans with family members.

Should I lend money to a family member?

Lending money to a family member may seem like the right thing to do. After all, what could go wrong? Your son, sister, father, or cousin really needs your help, and there's no question that he or she will pay you back.

Or is there? Lending money to anyone, even someone you trust, is risky. No matter how well-intentioned the borrower is, there's always the chance that he or she won't be able to pay you back, or will prioritize other debts above yours.

When deciding, consider these tips:

Don't lend money you can't afford to lose. If you make the loan, will you still be able to meet your savings goals? If the loan isn't paid back, will the financial effect be negligible or substantial?
Avoid becoming an ATM. Relatives (especially your children) may ask you for a loan because it's convenient, but they may be able to obtain the money easily elsewhere. Explore other options with them first.
Think through the emotional consequences. Will you be able to forgive and forget if loan payments are sporadic or if the loan isn't paid in full? How hurt will you be if your relative freely spends money (on a vacation, for example) before paying you back?

If you decide to go through with the loan, make sure expectations on both sides are clear. Discuss all terms and conditions and consider putting them in writing. You may even want to draft a formal loan agreement. At the very least, settle on the amount of each loan payment and the date by which the loan must be paid in full. Open-ended obligations inevitably lead to misunderstandings.

On the other hand, don't feel guilty if you decide to turn down your family member's loan request. It's hard to say no, but it's still easier than repairing a damaged relationship if things don't work out.

Is it a good idea to cosign a loan?

At some point, you may be asked to cosign a loan for a friend or relative who is unable to qualify for one independently. While it's noble to want to help someone you care about, think carefully about the consequences. Some people readily agree to cosign a loan because they believe it won't affect their own finances, but unfortunately, that's not the case.

When you cosign a loan, you're guaranteeing the debt. Legally speaking, this means that you're equally responsible for paying back the loan. If the primary borrower misses a payment, the lender can ask you to make the payment instead. If the borrower defaults on the loan, you may have to pay off the outstanding loan balance as well as cover late fees and collection costs, if any. In many states, creditors can even try to collect the debt from you before trying to collect from the borrower.

You should also keep in mind that when you cosign a loan, it becomes part of your credit history and may negatively affect your ability to get credit if the borrower makes late payments or defaults on the loan. And when you apply for credit, lenders will generally include the monthly payment for the cosigned loan when calculating your debt-to-income ratio, even though you're not the primary borrower. This ratio is one of the most important factors lenders use when making credit decisions, so the outstanding loan debt could make it harder for you to obtain a mortgage, buy a car, or secure a line of credit.

Cosigning a loan is risky enough that the federal government requires creditors to issue a notice to all cosigners that explains their obligations. If, after careful consideration, you decide to cosign a loan, make sure you also get copies of the loan contract and the Truth-In-Lending Disclosure and thoroughly read them. Monitor the loan as closely as possible (you may want to ask the loan officer to contact you in writing if the borrower misses a payment), and occasionally review your credit report so that there are no unfortunate surprises down the road.

March Forth

2008-03-15T13:25:00.001-05:00

Greetings – I think Spring has sprung (or it’s about to!).

I don’t think I can recall a Winter that has seemed as long as this one has… it seems like we’ve had bad weather, bitter cold, and dreary skies for six months! It’s awful nice to begin to see the warmer weather returning to Central Illinois .

In this month's newsletter, I talk about a couple of issues I've uncovered recently in the area of income taxes. Then I've included an article about identity theft that I think we can all learn from - and put to use. Let me know if you have any questions!

Income Tax Items of Interest

2008-03-15T13:24:00.000-05:00

I received something in the mail that was a bit disturbing to me, so I thought I’d mention it for your information. There is a tax preparation outfit in the Springfield area (I won’t mention it by name, but if you have been on Wabash Boulevard recently you’ve seen their pitchman dressed in green waving at cars), who has sent a notice out to, presumably, the entire area, advertising that they will do your taxes for free.

I’m as big of a bargain hunter as the next guy, so when I see something for free it piques my interest. When I read the fine print on the ad, it points out that the free tax preparation doesn’t apply to refund anticipation loans (RALs). Now we’ve arrived at the crux of the matter. As it turns out, this outfit (and most other “tax prep in a box” stores) have very little vested interest in preparing your return accurately – except for the fact that they want to saddle you with the fees associated with a refund anticipation loan.

According to the Center for Responsible Lending, RALs are nothing short of the Pay-Day check cashing stores in sheep’s clothing – offering short-term cash advances at amazing rates: starting at around 40%, and ranging as high as 700% in some cases. Obviously this is a lucrative game, as the big name tax preparation firms are into it in a big way, and many other, smaller firms (like the one I received the advert from) are also looking for a piece of the pie.

The long and the short of it is this – as enticing as it may sound to get your refund immediately when you sign your tax return, don’t do it! With e-Filing and direct deposit, most of the time you’ll have your refund back in just a few weeks. And if you’re getting so much back that this becomes a life-changing event for you, you should probably review your W4 and have a little less withheld – thereby giving yourself a raise with every paycheck.

Another point that I wanted to mention, regarding tax refunds: Does everyone realize that the Economic Stimulus payments (the one that Congress has decided all of us Americans need to fix the economy) are simply a refund of your own money? And that at some point we’re going to have to give it back, with interest?

Identity Theft Protection

2008-03-15T13:23:00.000-05:00

Whether they’re snatching your purse, diving into your dumpster, stealing your mail, or hacking into your computer, they’re out to get you. Who are they? Identity thieves.

Identity thieves can empty your bank account, max out your credit cards, open new accounts in your name, and purchase furniture, cars, and even homes on the basis of your credit history. If they give your personal information to the police during an arrest and then don’t show up for a court date, you may be subsequently arrested and jailed.

And what will you get for their efforts? You’ll get the headache and expense of cleaning up the mess they leave behind..

You may never be able to completely prevent your identity from being stolen, but here are some steps you can take to help protect yourself from becoming a victim.

Check Yourself Out

It’s important to review your credit report periodically. Check to make sure that all the information contained in it is correct, and be on the lookout for any fraudulent activity.

You may get your credit report for free once a year, from each of the three national credit reporting agencies. To do so, contact the Annual Credit Report Request Service online at www.annualcreditreport.com or call (877) 322-8228.

If you need to correct any information or dispute any entries, contact the three national credit reporting agencies:

Equifax – www.equifax.com – phone 800-685-1111
Experian – www.experian.com – phone 888-397-3742
TransUnion – www.transunion.com – phone 800-916-8800

Secure Your Number

Your most important personal identifier is your Social Security number (SSN). Guard it carefully. Never carry your Social Security card with you unless you need it for a specific purpose (such as applying for a passport or driver’s license). The same goes for other forms of identification (such as health insurance cards) that include your SSN. If your state uses your SSN as your driver’s license number, request an alternate number. Don’t have your SSN pre-printed on your checks, and don’t let merchants write it on your checks. Don’t give it out over the phone unless you initiate the call to an organization that you trust. Ask the three major credit reporting agencies to truncate it on your credit reports. Try to avoid listing it (where possible) on employment applications; offer instead to provide it during your interview.

Don’t Leave Home With It

Most of us carry our checkbooks and all of our credit cards, debit cards, and telephone cards with us all the time. That’s a bad idea – if your wallet or purse is stolen, the thief will have a treasure chest of new toys to play with.

Carry only the cards and/or checks you’ll need for any one trip. And keep a written record of all your account numbers, credit card expiration dates, and the telephone numbers of the customer service and fraud departments in a secure place – at home. It may be useful to make a photocopy (or as I do, a computer-scanned image) of all of your credit cards, driver’s license, insurance cards, etc., and keep those images in a safe place where you can get to them quickly in the event that your cards are stolen.

Keep Your Receipts

When you make a purchase with a credit or debit card, you’re given a receipt. Don’t throw it away or leave it behind – it may contain your credit card number, plus it is your sole defense in the event of fraud within the store. And don’t leave it in the shopping bag inside your car while you continue shopping either; if your car is broken into and the item you bought is stolen, your identity could be stolen as well.

Save your receipts until you can check them against your monthly statements, and watch your statements for purchases you didn’t make, or for amounts that don’t match. When you’re finished matching them, shred them!

When You Toss It, Shred It

Before you throw out any financial records such as credit or debit card receipts and statements, canceled checks, or even offers for credit cards you receive in the mail – shred the documents, preferably in a cross-cut shredder. If you don’t, you may find that the panhandler going through your dumpster was looking for more than just discarded leftovers. These cross-cut shredders are very affordable (around $20) and available at most discount stores and office supply outlets.

Keep A Low Profile

The more your personal information is available to others, the more likely you are to be victimized by identity theft. While you don’t need to become a hermit in a cave, there are steps you can take to help minimize your exposure:

to stop telephone calls from national telemarketers, list your telephone number with the FTC’s National Do Not Call Registry by calling 888-382-1222 or registering online at www.donotcall.gov
to remove your name from most national mailing and e-mailing lists, as well as most telemarketing lists, write the Direct Marketing Association at 1120 Avenue of the Americas, New York, NY 10036-6700, or register online at www.optoutprescreen.com
when given the opportunity to do so by your bank, investment firm, insurance company, and credit card companies, opt out of allowing them to share your financial information with other organizations.
You may even want to consider having your name and address removed from the telephone book and reverse directories.

Take a Bite Out Of Crime

Whatever else you may want your computer to do, you don’t want it to inadvertently reveal your personal information to others. Take steps to help assure that this won’t happen.

Install a firewall to prevent hackers from obtaining information from your hard drive or hijacking your computer to use it for committing other crimes. This is especially important if you use a high-speed connection that leaves you continuously connected to the internet, such as cable or DSL. Moreover, install virus protection software and update it on a regular basis as well.

Try to avoid storing personal and financial information on a laptop; if it’s stolen, the thief may obtain much more than the value of your computer. If you must store such information on your laptop, make things as difficult as possible for a thief by protecting these files with a strong password – one that’s at least eight characters long, and that contains uppercase and lowercase letters, as well as numbers and symbols.

“If a stranger calls, don’t answer.” Opening emails from people you don’t know, especially if you download attached files or click on hyperlinks in the message, can expose you to viruses, infect your computer with “spyware” or “malware” – software that captures information by recording your keystrokes – or lead you to “spoof” websites (websites that impersonate legitimate business sites) designed to trick you into revealing personal information that can be used to steal your identity.

If you wish to visit a business’s legitimate website, use your stored bookmark or type the URL address directly into your browser. If you provide personal or financial information about yourself over the internet, do so only at secure websites – to determine if a website is secure, look for a URL that begins with “https” instead of “http” or a padlock icon in the bottom of the browser’s status bar.

And when it comes time to upgrade to a new computer, remove all your personal information from the old one before you dispose of it. Using the “delete” function isn’t sufficient to do the job; overwrite the hard drive using a “wipe” utility program (several are available on the market). The minimal cost of investing in this software may save you from being wiped out later by an identity thief.

Lastly, Be Diligent

As the grizzled old duty sergeant used to say on the television show “Hill Street Blues” – Be careful out there. The identity you save may be your own!

Happy February!

2008-02-15T12:30:00.001-06:00

Seems like the groundhog was right... we have been continuing to have winter weather and it doesn't seem like it's going to end any time soon. Guess that's what we get for living in the midwest, but as I was telling someone (who lives elsewhere) the other day: All my stuff is here!

I ran across a good one the other day, or at least I got a kick out of it, and I thought I'd share it with you. You can click on the following link for a Dilbert cartoon that I got a kick out of. Keep in mind that I don't necessarily advise using Dogbert's recommendations, but he may have a good idea there!

Well, they've done it to us again - with the signing of the Economic Stimulous Package, Congress has given us another reason to file tax returns when we didn't otherwise need to. If a person doesn't normally earn enough income to require filing a return, they are still required to file a return for 2007 in order to be eligible for the rebate checks. If you or a friend or relative needs to file a return in this fashion, I will, just like last year, prepare this return for you for free. All you have to do is ask.

In this month's newsletter, I have outlined a couple of things that are new in the financial planning world. This is certainly not an exhaustive listing of new laws and the like, but rather just a couple of things that I thought you might find interesting. Let me know if you have any questions about them!

New Laws in Effect for 2008

2008-02-15T12:29:00.001-06:00

Every year in early January, a new spate of laws on the books goes into effect, and 2008 is no exception. I've listed a couple of financial-planning-related items below that have just come into effect that may have an impact on your life.

Direct conversion from 401(k) to Roth IRA. Beginning in 2008, if you hold a 401(k), 403(b), 457, or other CODA plan, and you're hoping to convert some of those funds to your Roth IRA, you can move these funds directly from one plan to the other.

The reason this is different for 2008 is that, in the past, you would need to take care of this activity in two steps: 1) rollover the funds from the 401(k) to a traditional IRA; and then 2) convert from the traditional IRA into your Roth IRA account. This removal of a step helps out with the paperwork in the process, most certainly, but it also opens up a new avenue that was previously not available. If your 401(k) or other plan has a provision for in-service withdrawals (some do, most do not), you can effectively convert some of your account to a Roth IRA while you're still working. You'll need to check with your HR representative to find out if this option is available to you. If so, it might make sense to do a partial conversion - you should check it out!

Why would you want to do this? As I've mentioned before, the Roth IRA is a very valuable asset to own. If you wait until age 59 1/2 or later, all of the funds in your Roth IRA are tax-free when withdrawn, and *under current law* they will never be taxed. In addition, the Roth IRA account is flexible, in that you can withdraw your contributions at any time for any purpose, without tax or penalty - the exception being that you must wait five years after establishing the account (in the case of a conversion) before the funds are available for use tax-free. With careful planning, this should not be a problem for most folks.

This conversion option is still subject to the $100,000 income limit as in the past. This will change in 2010, when any person, regardless of income, will be eligible to convert from either a traditional IRA or a 401(k) or other plan directly to a Roth IRA. Many of you are taking advantage of non-deductible IRAs now in order to utilize this rollover option when you are eligible in 2010. Again, there are some careful planning steps that need to be taken when working out such a plan, but it's a good way to provide yourself with tax-free income in the future.

Another benefit of the Roth IRA is that you are never required to take minimum distributions (RMD's) from the account at age 70 1/2 as you are with the traditional IRA plans. This way, if you don't need the funds, you can let the account continue to grow until you need it, or pass it on to your heirs... which brings me to a second law that recently came into effect:

Non-spouse heirs of 401(k) accounts. This rule actually came into effect previously, but has recently gotten some clarification by the IRS. In the past, spousal heirs of qualified plans were treated differently from non-spousal heirs. The spouse as an heir could rollover the plan to an IRA and "stretch" distributions out over a lifetime, whereas a non-spouse was required to take all of the funds from the account either immediately or over a five-year timeframe at most.

This new arrangement allows the non-spouse beneficiary to use the same rules as a spouse, thereby making the inherited plan much more flexible and allowing for continued tax-free growth over their lifetime. The new clarity that has been brought forth is that, previously, unless a special provision were in place, then the plan rules (not IRA rules) would still be in effect. An employer would need to specifically allow the application of the IRA rules in order for this special treatment to apply.

Exclusion of Gain on Sale of Principal Residence by Surviving Spouse. Beginning in 2008, a surviving spouse can exclude up to $500,000 in gain on the sale of a principal residence, as long as the sale occurs within two years of the other spouse's death. In the past, this was only allowed within the year of death of the spouse, which required an expedient sale in some cases, otherwise the surviving spouse was only allowed an exclusion of $250,000 in gain.

January

2008-01-15T06:19:00.001-06:00

Greetings to you all from beautiful downtown New Berlin!

Quite often in this newsletter I've mentioned that a particular time of year is my favorite - autumn being the most favorite. However, this time of year, in the midst of the high school and college basketball seasons, with a promising new year ahead of us, comes a close second for me. If you know me very well at all, you'll know that I make an extra effort to attend as many high school basketball games as I can (I recently spent nearly fourteen hours in one day watching games at the Waverly Holiday Tournament).

In addition to all of the sports happenings around us, we're getting geared up for the coming tax season - with some good news for those of you who have me prepare your income tax returns... lower cost! I've recently changed software providers, which has resulted in reduced software expenditures over the previous software, and I am passing that savings on to you. If your return hasn't changed materially from the return prepared last year, you can expect that the cost will be approximately $10 less than in the past. It's not much, I agree, but every little bit helps.

In this month's newsletter, I found an article provided by the Financial Planning Association on actions that homeowners who find themselves in trouble (as a result of adjusting mortgage rates) should take in order to ease the impact of the problems. Hopefully this doesn't directly apply to any of you reading this newsletter, but if it does impact you or someone you come in contact with, the suggestions are very helpful and useful. By all means, if you have problems with such a situation and need help exploring your options, don't hesitate to call me.

Homeowners in Trouble Need to be Proactive

2008-01-15T06:18:00.001-06:00

According to a November report by Standard & Poor’s, about half a trillion dollars' worth of adjustable-rate mortgages are due to reset to higher rates in 2008 when their two-year teaser rate periods come to an end.

Even though general interest rates have been headed down recently, you should know that it may not affect the mortgage market all that much. And if you suspect the lapse of your teaser rate will make your future monthly payments unaffordable, you need to take action now, not when higher payments take hold.

Mortgage trouble can be a sign of other concerns in a person or family’s financial life, and it makes sense to review your entire financial picture. One way to do this is to seek out the advice of a trained financial expert such as a Certified Financial Planner™ professional. A CFP can examine what you’re doing right and wrong with credit as a whole and make suggestions on how to circumvent immediate problems. In general, their advice might be the following:

Act first: If you believe that you are going to be late with a payment of any kind – not just your mortgage lender’s – contact the lender first. A recent Freddie Mac survey reported that of 2,000 homeowners reporting they were behind in their payments, 31 percent said they had not contacted their lenders despite repeated warnings of penalties and foreclosure in the mail.

Use every contact you have: If you have a person-to-person relationship with your lender, start by talking to a branch manager or an actual human you can use as a stepping stone to getting the right answers. If you have worked with a mortgage broker for years, perhaps they can help you get closer to a lending official who can consider your case more quickly and effectively.

Know the best time to act: There’s a key window to exploit. At 15 days past due, a file is typically referred to a lender’s collection department, and at 30 days, the delinquency is reported to the credit bureau. Once the 15-day notice arrives, immediately respond to the letter, and try to reach a department manager during the day to explain your situation and formulate a plan of action. If you are late, it won’t prevent a ding in your credit rating, but it may save your loan and your home.

Know your mortgage rights: Check your loan agreement and learn what your lender can or cannot do if you fail to make payment. Check the State government housing division and get information on the applicable law.

Go back to the basics: Review your spending plan and make appropriate changes. Now is the time to prioritize.

Ask for a change in your loan agreement: Under certain circumstances, such as loss of a job, medical problems or evidence of other financial burdens beyond your control, a lender might either renegotiate the terms of your loan or temporarily grant a forbearance agreement that would suspend payments or allow you a lower payment over a period of time. Ask under what conditions you might be eligible for either option.

Refinance if you can: The best option to rescue yourself from a huge jump in your monthly mortgage payment is to refinance, preferably into a fixed-rate mortgage. Keep in mind your lender won’t be all that excited about it if your credit picture isn’t that healthy and if your home value has dropped, refinancing will be even less likely. Have a conversation with a tax advisor or a financial planner to see if there are options.

If foreclosure is looming: Use your advisors to see if they know legal or other resources to help you negotiate with your lender to prevent the loss of your home. Obviously, the time to act was before the foreclosure notice was issued, but as a situation worsens, it’s obviously no time to go it alone. Keep in mind that a lender doesn’t want you to go into foreclosure any more than you do – lenders almost always lose money in foreclosure. Do consult with tax and legal advisors during this process, and stay away from foreclosure prevention companies since their fees are high. Always keep in mind that foreclosure victims are easy targets for scams.

December 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Jim Blankenship, a local member of FPA.

It's December

2007-12-15T06:59:00.001-06:00

Merry Christmas to all, and Happy Holidays!

Here in New Berlin, we were quite fortunate in that we side-stepped the worst of the ice storms of the past week. My friends, clients and colleagues just a little further west from here haven't faired as well, although I believe everyone came through without too much inconvenience or damage. Our hearts go out to you, as we have experienced the power outages and feelings of utter helplessness that a major ice storm can bring about. We are reminded to be truly thankful that we have our families, our homes, and our livelihoods.

As we round out this year, I wanted to take a moment to thank each and every one of you for your business over the past year. 2007 was a very good year for Blankenship Financial Planning - our best yet. Also, thanks to all of you who have passed my name along to your family and friends. As I've always said, the people who I have helped to be successful are the only "advertisement" I need. I sincerely thank you all for the privilege of knowing you and for the opportunity to work with you.

In this month's newsletter, I thought it might be useful to review the reasoning behind diversification. It's always helpful to me (and hopefully to you!) to go back and reconsider the very foundations of what we believe. Since diversification is one of the most important pillars of sound investment philosophy, we'll review it this month.

Diversification: I Know I Should, But Why?

2007-12-15T06:01:00.001-06:00

Any discussion of the tenets of long-term investing that covers the disciplines that we should follow as we invest for the long term includes the recommendation to diversify. This concept is delivered almost without thought - after all, as children we are taught "Don't put all your eggs in one basket!". But have you ever stopped to consider just why we should diversify?

Of course, in the example of the saying about the eggs, it's simple spreading of risk: if you have all your eggs in one basket and you drop that basket... all your eggs have broken! By spreading your eggs into a second basket, if one basket is dropped, only those eggs in that basket will break, and you've still got one basket of good, unbroken eggs.

What if we add a third basket? A fourth? As you might imagine, it soon becomes too costly to own so many baskets (potentially one for each egg), as well as too unwieldy. One person couldn't possibly carry twelve baskets effectively just to harvest that dozen eggs. So, while diversification makes sense to a degree, you always must keep in mind that before long, you lose the efficiency of the basket, and your costs increase.

Enough about eggs for now though. Why do we preach diversification in investing? The roots of this concept (at least in the modern age) run toward a theory called "Modern Portfolio Theory", which was developed by a fellow named Harry Markowitz. The overall theory is pretty weighty so we won't cover it completely here (although I'd be happy to discuss it with you if you wish). The gist of the benefit of diversification follows.

Decisions about investments are always made in an environment of uncertainty. This is because, even though we have a belief that our investments will hold their value and hopefully increase in value over time, there is no certainty that this will be the case. We can study the past performance, the present activity, and many pieces of information about the particular security - but we have no surety that the increase we hope for will occur.

This uncertainty is due to the continuous up and down volatility in investment prices. As an example, if a stock is worth $20 now and was worth $15 last week, we have no idea if it will be worth $30 tomorrow or possibly even $10. This shouldn't be a surprise: how many times have you seen something in the news that seems like a good thing for the economy, like an interest rate cut - only to see the market drop like a stone at the release of the news. The opposite happens just as often.

So - what's a guy to do? Enter diversification.

Diversification - Your Key to Reduce Volatility
It's not hard to understand that every dollar you save in taxes and overall costs of investments equates to increases in your bottom line total return. What may be difficult to follow though, is the concept that diversification of risk can reduce volatility, and therefore reduce loss. An example may be the best way to get this point across.

Let's say you have $1,000 in your overall portfolio, and through the year you have achieved a 20% gain. Shortly thereafter, your investment experiences a correction, amounting to a 20% loss. Most folks would think that you've just held ground and broke even in your account - but most folks would be wrong to think so. What happened is that your account gained 20% to a value of $1,200, and then the account lost 20% or $240 (.20 times $1,200), so in the end you have actually lost a net amount of $40. Just for grins, the result is the same if you work things in the reverse as well: a 20% loss gives you a balance of $800, and then a 20% gain ($160) gives you a final balance of $960, for a loss of the same $40.

For purposes of comparison, let's look at another situation: a 10% gain followed by a 10% loss. From our previous example, we know that this isn't just "holding ground" - we have lost a total of $10 in the process. We started with $1,000 and gained 10% to a value of $1,100, and then experienced a 10% loss ($110), for a final balance of $990.

What's truly important to note about these two examples is the relationship of the volatility (the percentage size of the gains and losses) to the actual dollar loss realized. In the first case, the volatility was double that of the second (20% versus 10%), but the resulting loss was quadrupled!

If we took the first example and changed the volatility to a 40% swing in either direction, the resulting loss is even greater - a gain of 40% gives us $1,400, and the following loss of 40% ($560) brings us to a final balance of $840, for a loss of $160, which is sixteen times the loss we suffered in the 10% example. If you're a mathemetician, you'll notice the relationship here: the level of volatility that we experience results in an exponential loss in the account. If we had a 50% gain followed by a 50% loss, our overall loss would be twenty-five times the loss in the 10% example, and so on.

It doesn't take long to understand why it is important to keep volatility in your portfolio low: the smaller the "swings" of volatility, the lower your potential loss. When you increase the "swings" of volatility by a factor of one, your potential losses increase exponentially.

So - if I've done my job and explained this properly, the question on your mind at this point should be: "How do I get myself some of this low volatility?" And if you've been reading carefully up to this point, the answer should be obvious: diversify.

And how do we do that? Much the same as the eggsample from earlier, you want to find a place (or group of places) to invest your money that will result in less volatility. All investments are affected by various things around them - oil and gas companies are impacted by the cost of crude oil, banks are impacted by interest rates and the credit crunch, department stores are impacted by inflation, employment, and the seasons. What we look for are investment vehicles that are diverse enough to not all be impacted by the same kinds of things at the same time - hence, we diversify into different capitalization-weightings, different countries, and different sectors, all in an effort to reduce the overall risk of loss (volatility) in our portfolio.

For example - by investing in the S&P 500 index, we are diversifying across many different companies, sectors, and industries in the US marketplace. In addition to this investment, we might add a holding in the EAFE index (Europe, Asia and Far East), further diversifying across different countries, companies, sectors and industries. By doing so, if something happens that makes the company United States Steel lose 20% in value, the impact on our portfolio is minimized, since US Steel is only a very small portion of our portfolio. By the same token, if an event should occur that caused the stock market in Singapore to suddenly crash, and this event was limited in its exposure to just Singapore, then as before, since we're diversified among many countries, our exposure to volatility is minimized.

I hope this explanation helps you to understand one of the very basic pillars of investing discipline. I would be remiss, though, if I didn't point out that diversification will also have a negative impact on your gains. When you reduce the volatility in your investments, you're not only reducing the downside swing, but the upside swing as well. What we give up is the "once in a lifetime" homerun-type of investments.

For example, if you happened to put all of your money in Google at it's initial offering in August of 2004, by the end of that year you could have doubled your money. In the diversification example using the S&P 500, you would have had a small percentage of your portfolio in Google, and your overall return from August to December in 2004 would have been 10.8%. For an example on the other side of the coin, if you had placed your nest egg in Enron stock in late 2000, by mid 2001, you could have virtually nothing left, while the S&P 500 had fallen by a mere 17% during the same period. Reducing volatility, while it causes you to give up the spectacular gains, will also save you from the spectacular crashes. And we all know which one happens more often.

That's all for now. Talk to you again next month!

November Greetings

2007-11-15T14:36:00.001-06:00

As I write this month's newsletter, the weather outside is turning decidedly Novemberish. Cool, wet, and windy, it makes you think that maybe something more harsh is just around the corner.

It's a similar feeling that I get as I see the market headlines - housing starts are way down, oil prices way up, market going sideways to down a little - it just makes you think something more harsh is in the offing. Much the same as we know that there is a Spring around the corner and we know that there will be some chilly winds to endure in the short term, I think that our present market outlook is not nearly as bleak as all of the signals seem to indicate. Granted, we're going to have to endure the "chill" of higher fuel prices and the "ill winds" as the housing market rights itself, but all in all, before you know it, this "winter of discontent" will be past us and we'll soon see the sprouts of new growth in our investments. If you're sufficiently diversified throughout the market, now is a good time to begin to snuggle in for a winter's sleep - relax, and get out a good book to enjoy by the fireplace.

In this month's newsletter, I'll cover the benefits of having a will in place. I think you'll learn something here - and maybe it will get you motivated to take some action.

Do You Have The Will?

2007-11-15T14:30:00.001-06:00

Statistics show us that approximately 70% of all Americans don't have a valid will. Are you one of them? Chances are, you are. If you do have one, chances are that in a circle of four people, three don't have a will.

This situation begs an obvious question: Do I need a will? You only need a will if you can't truthfully answer "No" to both of the following questions:

Do you care who gets your money and property when you die?
Do you care who is appointed guardian of your minor children if you die?

If you answered "Yes" to either or both of those questions, you need a will! Otherwise, state laws will determine the outcome of those situations - and it's not likely that you would have made the same decisions that the state would.

Why should you have a will?

A will is appropriate for anyone, not just the rich, no matter how much money or property you have. A will is your instructions for how you'd like your belongings and assets distributed at your passing. Without a will, the courts will decide to whom these things go, without regard to your wishes. The courts, according to state law, have a specific succession path that they will follow in distributing your assets - not understanding that you loaned some money to your first child when they purchased their home, and as such you had intended to "equal things out" with the other two kids at your passing, for example.

In addition, anyone with children, especially minor children, must have a will. Only you (and presumably your spouse) should be making the decisions about who will care for the children as their guardian in the event of your untimely passing. No one wants to think about death as a near-term event - but it happens every day. If it should happen to you and you don't have a will in effect, your family and loved ones will be thrown into a confusing world of decisions that they aren't prepared to make, on top of the very difficult situation that they already have in dealing with your death.

A third benefit of a will is tax benefits. By utilizing your will to pass along your assets that have grown in value through the years (as opposed to making gifts during your lifetime), your heirs will receive the property at a "stepped up" value as of the date of your death (in most cases). For example, let's say you own a piece of farmland that you purchased for $10,000 many years ago. Today, the land is actually worth something like $150,000 due to appreciation in land values. If you were to give this land to your son as a gift during your lifetime, and the son sold the land, he would owe capital gains tax on $140,000 (the growth of the value of the land), which would amount to something like $21,000 at a 15% rate. On the other hand, if you bequeathed the property to your son via your will (assuming that your overall estate was worth something south of $2 million), then there would be no tax owed, either on the transfer of the property or when your son sells it. This is because the act of inheriting property causes a "step up" in the value of the property, and so the tax basis of the property is $150,000, leaving no capital gain to tax (assuming again that the son sells the property for $150,000).

So - how do you get started? As mentioned above, there are a few things you need to consider when setting up a will. The most difficult decisions generally surround the idea of guardianship for the children. Think through this decision carefully, along with your spouse (if you have one), and then talk to the person or persons you've chosen. I generally recommend that you choose a guardian and a trustee to manage funds that have been set aside for the children's care - this way you have a separation of powers, and two heads working together for the benefit of the kids. In addition, many times if there is only a guardian who has the additional duty of administering funds, the guardian may tend to over- or under-utilize the funds on the children's behalf, and having a separate trustee to help with this process can make sure that the funds are used as you directed.

The second person that you need to name in your will is an executor. This individual will be responsible for administering your will and your estate when you pass. Depending upon the circumstances, this person may need to be very skilled in working with others (your beneficiaries) to ensure that your instructions are properly enacted.

The specific instructions that you wish to have carried out completes the picture. In some cases, especially those including children, you'll want the will to establish one or more trusts, requiring the naming of a trustee. This will help to ensure that your funds are used as you direct. You'll also need to think about how the rest of your assets, money, and property might be distributed.

Start by gathering the names, addressses and dates of birth for you, your spouse, your children, other beneficiaries, your proposed guardian(s), and your proposed executor(s). I used plurals for guardian(s) and executor(s) because it can be very helpful to have "backup" people named for the event of your original choice's predeceasing you.

Next, gather together your debt information - mortgages, car loans, credit cards, student loans, and any other loans you might have. Then list your assets - property, stocks, bonds, accounts, homes, personal property, etc.. Take pains to specifically identify each item of debt and assets, so that it is very clear which item you are referring to.

Lastly, gather copies of other existing legal documents, including divorce decrees, prior wills, trusts, prenuptual agreements, and any other document that might affect the legal distribution of your assets.

When you talk to your attorney, he or she will likely have other items that you need to gather, but this should head you in the right direction. And I do advocate using a lawyer - this is much too important for a "do-it-yourself" job. When you think about the consequences of doing it incorrectly, the cost for the attorney is a pretty small sum by comparison.

So - if you happen to be "one of the other three" in the circle of four, don't delay. There's no sense in putting your family and beneficiaries through the court system if you can help it - and you can. If you have the will.

October issue

2007-10-15T14:25:00.004-05:00

I believe Autumn has finally fell upon Central Illinois... this morning we have a light rain, with high temperatures only in the 60's. It was only a week ago when we were still having highs near the 90's - so it's been a late-starting Autumn for us. Hopefully it will stick around for a while before the cold blasts of Winter begin!

In mid-August, investors as a group took a look around at the credit crunch (associated with the sub-prime mortgage debacle unfolding) and very quickly hit the markets with a 10% correction. As anticipated, this was extremely short-lived, and September saw the markets return to their recent bullish trends. As your advisor, I take very seriously my job of helping you to interpret these situations, understand that we've developed portfolios that account for short-term anomalies, and maintain the course. I believe that the greatest value that I bring to our relationship is the discipline to view such events without emotion, and to help you weather these minor storms without losing our cool. I heard from a few of you during this event, and I think I did my job - and I hope you benefited from my advice.

In this month's newsletter, I thought we'd talk briefly about the pros and cons of using regular tax-efficient mutual funds for college savings instead of 529 plans. The second article is a brief overview of IRA Accounts and the Required Minimum Distribution (RMD) rules. I believe that just about anyone can get a benefit from an overview of these two topics.

Mutual Funds vs. 529 Plans

2007-10-15T14:23:00.004-05:00

Saving for college is a tough job - on par with saving for retirement, and often in direct conflict with that goal as well. Adding to the difficulty of the task is the fact that there are so many different options out there (in terms of investment vehicles) that really muddy the waters for the individual college saver.

One question that comes up very often is whether it is just as effective to utilize tax-effficient mutual funds instead of 529 plans as we save for college. The idea is that the mutual fund can generate a higher overall return than the 529 plan due to the additional costs associated with the administration of the 529 plan.

It is a fact that most 529 plans charge management fees that have a direct impact on the overall return of the account, and it is also a fact that many tax-efficient mutual funds (such as index funds) can produce higher returns at a lower cost than most other investments. But here are a few reasons why a 529 plan is nearly always the superior choice when it comes to college savings activities:

A. Taxing Matters - with a 529 plan, you pay no tax at all (when the funds are used for Qualified Higher Education Expenses, QHEE), while with any other type of account, you'll pay some tax. In my book, no tax is always better than some tax, no matter how little.

In addition, while today's tax rates on capital gains (the tax you'd pay on an indexed mutual fund) are at the lowest they've historically ever been, at either 5% or 15%, depending upon your tax bracket - these rates are scheduled to sunset at the end of 2010, increasing the rates to 10% or 20%. So, the question becomes: will your student be finished with college before the rise in rates?

The third taxing matter has to do with the Kiddie Tax. Recently there have been some changes made to this portion of the tax code, with detrimental effects for parents who have counted on a strategy of repositioning funds to the child's name in order to benefit from a lower tax rate. Beginning next year, the child's investment income above a minimum of $1,700 can be taxed at the parent's highest rate all the way up to age 23!

B. Financial Aid Impact - any income that is reported on your form 1040 (which includes capital gains) is considered as a part of the calculation for financial aid for the following year. As you begin drawing monies from the mutual funds, it is possible that you will be increasing your income to the detriment of available need-based financial aid. If, on the other hand, these funds were in a 529 plan and withdrawn for use in paying QHEE, there will be no taxable income reported on your 1040, thereby having no impact on the financial aid calculation.

C. Inherent Costs - with the 529 plans, there are administrative and manager fees, but, as shown with the recent changes to the BrightStart plan in Illinois, these fees are beginning to come down. Plus, most 529 plans (BrightStart and Bright Directions included) have very low-cost investment options available, reducing the expense ratio of the funds themselves. Analysis of 529 plans versus mutual funds has consistently shown that, when considering the tax benefits and the costs of the two options, there are very few instances where a low-cost mutual fund performs better than a 529 plan, and then only when the 529 plan in question is one where the administrative expenses are relatively high and the taxpayer is in the lowest possible tax bracket.

In addition to the internal costs of the various options, mutual funds quite often make certain investment decisions that have tax consequences, such as distributing capital gains and dividends. 529 plans do not have to make this sort of decision, and therefore decisions can be based entirely on investment considerations.

All in all, while non-529 investments may provide additional investment options over those available in the 529 plans, unless for some reason you do not have the option of choosing a 529 plan for specific college savings, the 529 plan is the better choice across the board.

RMDs From IRAs

2007-10-15T14:22:00.001-05:00

I've made the observation before - IRAs are like belly-buttons: just about everyone has one these days, and quite often they have more than one. Wait a second, maybe they're not quite like belly-buttons after all. Oh well, you get the point - just about everyone has at least one IRA in their various investment holdings, and these accounts will eventually be subjected to Required Minimum Distributions (RMD) when the owner of the account reaches age 70 1/2.

So what are RMDs, you might ask? When the IRA was developed, it was determined that there would be a requirement for the account owner to withdraw the funds that had been hidden from taxes over the lifetime of the account, in order for the IRS to begin benefitting from the taxes that would be levied against the account withdrawals. A schedule was prepared, which approximates the life span of the account owner, and prescribes a minimum withdrawal amount for each year that the account owner is alive, until the account is exhausted.

A participant in a traditional IRA (Roth IRAs are not subject to RMD rules) must begin receiving distributions from the IRA by April 1 of the year following the year that the participant turns age 70 1/2. In other words, assuming that the participant reaches age 70 during the months of January through June of 2007, means that the participant reaches age 70 1/2 during the 2007 calendar year, so RMDs must begin by April 1, 2008. An individual who reaches age 70 during the latter half (July through December) of 2007 does not reach age 70 1/2 until the 2008 calendar year, and as such, RMDs must begin by April 1, 2009.

After that first year's RMD is taken, the second year's must be taken by December 31 of the same year. In our examples above, the first participant must take an RMD by April 1 2008, and another by December 31, 2008. The second participant must take an RMD by April 1, 2009 and another by December 31, 2009. For all subsequent years, the RMD must simply be taken by December 31 in order to be credited for that year.

Calculation of the RMD is fairly straightforward, although there is some math involved. For the first year of RMD, the participant will be age 70, and according to the Uniform Lifetime Table (See IRS Publication 590 for more detail on other tables), the distribution period is 27.4 for 2007. So if an individual participant has IRAs worth $100,000 at the end of the previous year, dividing that balance of $100,000 by 27.4 produces the result of $3,649.64 - the RMD for that first year. Each subsequent year, you would take the balance of the accounts on December 31 of the previous year and divide them by the distibution period from the Uniform Lifetime Table, and make sure that you take a distribution of at least that amount during the calendar year.

Now, I made a point of indicating that you calculate your RMD based on the balance of all of your IRAs. This is because the IRS considers all of your traditional IRAs as one single account, and you are required to take RMD withdrawals based on the overall total of all accounts. This withdrawal can be from one account or evenly from all accounts, or in whatever combination you wish, as long as you meet the minimum.

Another point that is extremely important to note: taking these distributions is a requirement. Failing to take the appropriate amount of distribution will result in a penalty of 50% (yes, half!) of the RMD that was not taken. So, as you can see, it really pays to know how to take the proper RMD withdrawals - the IRS has very little sense of humor about it.

Understand that the examples I've given are for simple situations, involving the original owner of the account and no other complications. In the case of an inherited IRA or other complicating factors, or if the account is an employer's qualified plan rather than an IRA, many other factors come into play that will change the circumstances considerably. If you need help on one of these more complicated situations, let me know and I'll be happy to work with you on it.

September Greetings

2007-09-15T07:05:00.000-05:00

After my list of good things about August last month, I received a couple of suggestions that I had left off my list, and I'm ashamed that I did: Fresh tomatoes and fresh peaches! Thanks, JM, (one of my favorite award-winning gardeners) for catching my error!

Now that we're almost to Fall, with the crisp air and the bright sunshine, I'd like to begin collecting a list of the best things we love about fall. Another reader has already started the list (Thanks, CM!):

- It's warm during the day and you can smell the fireplaces burning at night in the crisp air
- You can open the windows (not run the air)
- The beautiful Sunday drives to see the colorful leaves on the trees
- You can wear more clothes to cover up those not so flattering areas
- The holidays are right around the corner
- You can put the down comforter on the bed and snuggle under the covers
- Warm up with a hot bubble bath
- Caramel apples, pumpkin pie, candy corn and all those foods you only get in the fall.

Okay, we've gotten a list started - how about your favorite things, memories, smells, and such, about Fall? I'll share any additional ideas that I get from you in future editions.

In this month's newsletter, I have an article that I found at the Financial Planning Association which addresses your financial decision-making, and how your own unique point of view can impact these decisions. Hopefully you're find this information helpful.

How Your Personality Affects Your Financial Decision-Making

2007-09-15T07:04:00.001-05:00

The recent volatility in the stock market has everyone a little jumpy – even folks who have worked with a trusted financial planner for years. But if you’ve never worked with a planner before, one of the first things he or she will do is make you fill out a risk analysis questionnaire.

Why is risk analysis important before you make decisions with your money? Risk tolerance is an important part of investing – everyone knows that. But the real value of answering a lot of questions about your risk tolerance is to tell you what you don’t know – how the sources of your money, the way you made it, how outside forces have shaped your view of it and how you’re handling it now will inform every decision you make about it in the future.

The most important thing a risk questionnaire can tell is what’s important about money to you. Trained financial advisers can determine your money personality through a process of questioning discovery. Planners can then guide investors within their money personality. Do you want certainty, are you willing to take a little risk or let it roll because “you can always make more of it?”

A financial planner tries to see through the static to find out what you really need to create a solid financial life. But it might make sense to ask yourself a few questions before you and your planner sit down:

What’s important about money?
What do I do with my money?
If money was absolutely not an issue, what would I do with my life?
Has the way I’ve made my money – through work, marriage or inheritance – affected the way I think about it in a particular way?
How much debt do I have and how do I feel about it?
Am I more concerned about maintaining the value of my initial investment or making a profit from it?
Am I willing to give up that stability for the chance at long-term growth?
What am I most likely to enjoy spending money on?
How would I feel if the value of my investment dropped for several months?
How would I feel if the value of my investment dropped for several years?
If I had to list three things I really wanted to do with my money, what would they be?
What does retirement mean to me? Does it mean quitting work entirely and doing whatever I want to do or working in a new career full- or part-time?
Do I want kids? Do I understand the financial commitment?
If I have kids, do I expect them to pay their own way through college or will I pay all or part of it? What kind of shape am I in to afford their college education?
How’s my health and my health insurance coverage?
What kind of physical and financial shape are my parents in?

One of the toughest aspects of getting a financial plan going is recognizing how your personal style, mindset, and life situation might affect your investment decisions. A financial professional will understand this challenge and can help you think through your choices. Your resulting portfolio should feel like a perfect fit for you!

-30-

September 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community.

Good Things About August

2007-08-15T14:33:00.000-05:00

Here we are in August. I won't mention the heat (other than that!). Since August is an oft-maligned month, I thought I'd share this list that I came across on the internet, to which I've added a few things:

Good Things About August
* Lighter clothing = less laundry to do!
* Grass doesn't grow as quickly = less lawn mowing
* Lots of sunlight (this can never be a bad thing)
* The refreshing (if brief) cooldown which follows an afternoon thunderstorm
* Melons are in season!
* School starts (likely only a good thing if you're a parent and NOT a school teacher)
* Baseball is getting to the really good part - the final run to the division races
* High School football gets started, and the promise of Fall is just around the corner
* You get a chance to really, REALLY appreciate air conditioning...

Let me know if you have other reasons to love the month of August, or if another month is your most favorite. I'll share any additional ideas that I get from you in future editions.

In this month's newsletter, I have an update on the BrightStart 529 plan, as well as an article on when it makes sense to leave a 401(k), 403(b), 457 or other retirement plan where it is instead of rolling it over when leaving a job. I think there are a few pearls of wisdom that you may not have considered there, and hopefully you're find this information helpful.

BrightStart - The Results Are In!

2007-08-15T14:21:00.000-05:00

For those of us with kids nearing their college years (if they're in diapers, they're nearer than you think!), the goings-on at the Illinois State Treasurer's office has had more than just a passing interest for us.

If you haven't been following the story, just prior to leaving office, Judy Baar-Topinka negotiated a new management deal with Oppenheimer Funds, to manage the Bright Start 529 plan. As one of his first acts in office, Alexi Giannoulias (rightly so) asked for the negotiations to be reviewed, as due diligence. What resulted was a dramatic improvement in the terms of this plan, making BrightStart, in my opinion, superior to the other savings-type plan sponsored in Illinois - the Bright Directions 529 plan.

The primary reason that I consider the BrightStart plan superior to Bright Directions at this point, is that the cost structure of the BrightStart plan is now within the range of the most efficient investing vehicles that Americans have available to them. The new cost structure for the BrightStart plan ranges from 0.20% to 0.63% - you'd be hard-pressed to find ANY investment vehicle with expense ratios that low!

By contrast, the Bright Directions plan's expense ratios range between 0.12% and 1.24%, with a program management fee of 0.45% tacked on to each account. In addition, unless you've chosen to use a Fee-Only financial advisor (like, for example, Blankenship Financial Planning!) to assist you with acquisition of your Bright Directions account, you will have to pay a commission of anywhere from 3.5% up front to a 0.50% annual trailing commission. Effectively, you're paying around 4% up front (or more) for this plan, plus annual fees of an extra 0.50% for the underlying funds.

Now - if you happen to own the Bright Directions plan, there's probably a very good reason for it. Up until this recent announcement, the BrightStart plan had fees very comparable to the Bright Directions plan, with fewer choices for your investments, making it far inferior to Bright Directions. Just because at present the BrightStart plan has the edge over Bright Directions doesn't mean that you should switch plans or make dramatic changes to your strategy. I suspect that there may be improvements in the wings for the Bright Directions plan as well - and even if things don't change, the Bright Directions plan still offers a very good choice of investments. If you pay attention to how you manage the account, your costs can still be very low compared to the industry. If you'd like to discuss your options, give me a call.

The good news is that the BrightStart plan has "stepped up" and is now providing Illinois residents with a very cost effective 529 plan. If you're trying to decide what the best savings plan is for your Education Savings Strategy, the choice just got a little easier.

Everything But The Retirement Plan!

2007-08-15T14:18:00.000-05:00

Conventional wisdom says that when you leave a job, whether you've been "downsized" or you've just decided to take the leap, you should always move your retirement plan to a self-directed IRA. (Note: when referring to "retirement plans" in this article, this could be a 401(k) plan, a 403(b), a 457, or any other qualified savings deferral-type plan).

But there are a few instances when it makes sense to leave the money in the former employer's plan.

You have several options of what to do with the money in your former employer's plan, such as leaving it, rolling it over into a new employer's plan, rolling it over to an IRA, or just taking the cash.

The last option is the worst. You'll automatically lose 10% via penalty from the IRS (unless you meet one of the exceptions, including first home purchase, healthcare costs, and a few others) if you're under age 59 1/2, plus you're taxed on the funds as if it were income. For the highest bracket, this can amount to losing as much as 45% of the account.

In addition, if you think about it, by cashing out you're derailing the retirement fund that you've put so much effort into setting aside. If you cash it out, you've got to start over, and you've got less time to build the account back up. A 2005 change in the tax law requires your old employer to automatically roll over your account into an IRA if it is between $1,000 and $5,000 (if you don't choose another option), to keep folks from cashing out. If your account balance is more than $5,000, the old employer is required to maintain your account in the old plan until you choose what you're going to do with it.

With recent tax law changes, another option has become available for your old account: you can now roll these funds over into a new employer's retirement plan, as long as the plan allows it. In many cases this may make good sense, especially if the new plan has good investment choices and is cost-effective.

If the new plan doesn't suit you, you can always roll the funds from your old employer's plan into an IRA. You'll then be able to decide just how you want to allocate the investmtents, choosing from the entire universe of available investment options, rather than the limited list that many plans have available. Caution is necessary when doing this type of rollover, as a misstep could cause the IRS to treat your attempted rollover as a complete distribution, having the same tax effect as cashing out. Seek the help of a professional if you are unsure about how to deal with this situation.

But when would you leave the funds at the old employer? If the old employer's plan is a well-managed, low-cost plan, and you're happy with how your investments have done, then you might just want to leave it where it is. In addition, if you happen to be over age 55, you may have options available to access the funds immediately, rather than waiting until age 59 1/2 - but only if you leave the funds in the original employer's plan. Plus, if your plan is a 457 plan (generally only available to governmental employees, such as the State), you may be able to tap the plan upon your ending employment without penalty as well.

Another good reason to leave the fund at the old employer is if you believe that there is a high probability that you may return to employment with this employer. Especially in the case of working for the State, it probably makes sense to leave those funds in the SERS plan when you think there is a better than average possibility that you may return to work with the State (even another agency), as there are benefits available in the plan that you would be giving up if you moved your account to an IRA, and you're not likely to be able to move those funds back when you return.

So - hopefully this quick conversation has helped to clear up some questions, and perhaps it has brought up some new questions for you. Don't hesitate to contact me if you're unclear about the choices that you have available. I'll be happy to discuss it with you.

Reverse Mortgages Require a Close Look

2007-07-16T14:14:00.001-05:00

For many folks in their retirement years, home equity is roughly 30-40 percent of their net worth. If you and your spouse are both at least 62 years of age and have significant equity in your home, a reverse mortgage can turn that equity into tax-free cash without forcing you to move or make a monthly payment.

If it’s right for you, it’s a worthwhile financial tool. If not, you could make some serious mistakes with your financial future.

A reverse mortgage gets its name because of the way it works. Instead of the borrower making payments to the lender, the lender releases equity to the borrower in a number of forms:

A lump sum cash payment;
A monthly cash payment;
A line of credit (which tends to be the most popular option);
Some combination of the above.

When the owner dies or moves away, the house can be sold, the loan paid off and any leftover equity value can go to the living owner or the designated heirs. Heirs don’t have to sell the house. They can either pay off the reverse mortgage with their own funds or refinance the outstanding loan balance within six months with the option of two 90-day extensions that must be applied for.

There are three basic types of reverse mortgages:>

· Single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations;

· Home Equity Conversion Mortgages (HECMs) are federally insured reversed mortgages backed by the U. S. Department of Housing and Urban Development (HUD);

· Proprietary reverse mortgages are private loans that cover home values usually over $600,000.

The size of a reverse mortgage is determined by the borrower's age, the interest rate and the home's value. The older a borrower, the more they can borrow, but the amounts are capped by the maximum FHA loan limit for each city and county. The amounts vary from $200,160 in rural areas to $362,790 in many major metropolitan areas. In Alaska, Guam, Hawaii and the U.S. Virgin Islands, the FHA mortgage limits can be adjusted up to 150 percent of the ceiling based on the area.

Reverse mortgages have traditionally been chosen by older Americans who can’t cover everyday living expenses or who otherwise need cash for such things as long-term care premiums, home health care services, home improvements or to pay off their current mortgage or credit cards greater than their income can support. More recently, though, they’ve become popular with individuals who see them as a better alternative to home equity lines. Some use the proceeds to supplement monthly income, buy a car, fund travel and second homes. Evaluate with the help of a financial adviser if reverse mortgage funds can be used to restructure estate taxes.

You will have to consult with a financial planner before you’re granted this loan – that’s one of the requirements. You should consider a CERTIFIED FINANCIAL PLANNER™ professional to do this because reverse mortgages can be complex and risky. This step can be completed within the first few days of the process. The basic loan closing now takes place in about 30-40 days from the date of application. Generally the only out-of-pocket cost is an appraisal fee ranging from $300- $500.

Here are other things to consider:

Cost: Reverse mortgages are generally more expensive than traditional mortgages in terms of origination fees, closing costs and other charges. The basic FHA-backed HECM loan finances these fees into the initial loan balance, and they can run between $12,000 and $18,000. The loans are based on anticipated home value appreciation of four percent a year, so if the housing market is healthy, those costs are generally recovered in a short period of time. But if the housing market sours, it will definitely take longer to recoup those fees.

You’ll need to make sure you’re not endangering your federal retirement benefits: The basic FHA HECM is designed as tax-free income to the senior receiving their Social Security income. However, if your total liquid assets exceed allowable limits under federal guidelines, you might endanger your benefits. This is another critical reason to work with a financial planner on this decision.

Rates: Reverse mortgages have rates that are typically higher than those charged on conventional mortgages. Interest is charged on the outstanding balance and added to the amount you owe each month. Again, check the total annual loan cost.

Your mortgage can be called: The homeowner or estate always retains title to the home, but if you fail to pay your property taxes, adequately maintain your home, pay your insurance premiums, or change your primary residence, the lender can declare the mortgage due or reduce the amount of monthly cash advances to pay those overdue amounts.

Talk to your kids. If your house is your major asset, getting involved in a reverse mortgage may not leave much to the next generation – if it appreciates, there may be some difference that the kids can have. That’s why that in addition to discussing a reverse mortgage with a financial adviser, persons considering a reverse mortgage need to talk with their family.

July 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community

401(k) Mistakes (also applies to other Retirement Plans!)

2007-06-22T14:13:00.000-05:00

As we've discussed on these pages in the past, in these days you're pretty much on your own when it comes to planning for your retirement. Granted, the State of Illinois still has its pension plan, but beyond that, few employers provide anything in terms of retirement benefits beyond the 401(k) or other deferred retirement plan, which means it's up to you! For the purpose of brevity, I'll refer to 401(k) plans throughout this article, but know that most of the information applies to 403(b) plans, 401(a) plans, and 457 plans as well as Keogh, SIMPLE, and SEP IRA plans.

For most of us, the 401(k) is the default to take on the role that the pension plan did for previous generations. Paying attention to and avoiding the following Mistakes can help you to ensure that you have a financially-secure future.

#1 - Choosing Not to Participate
It's amazing how many folks, young or old, don't participate in their company's 401(k) plan. If your employer matches your contributions, you're effectively giving money away. You wouldn't do that with a raise or a tax cut, would you? And even if your employer doesn't match your contributions, the tax savings should be enough to spark your interest... If you're not presently participating in your company-offered 401(k) plan, bear in mind that time is your greatest ally when it comes to building up your savings. Starting early and making regular contributions to your account will have an enormous impact on the results when you're ready to begin using these funds in retirement.

For example, if you put $1000 into your account at age 25, with a compound rate of return of 10%, by age 65 your account would be worth over $45,000. By the same token, if you'd waited until age 30 to make that $1000 deposit, by age 65 it would only have grown to $27,000. That's roughly a 40% difference affected only by waiting for 5 years!

#2 Not Having a Plan
Blindly allocating your investments can have dire consequences, whether you know it or not... I have met folks who believed that they were doing the right thing by "diversifying" across every fund choice in their plan. This results in diversification all right, but doesn't take into account the time horizon for the investment, your own risk tolerance, and other factors.

Another acquaintance, age 26, had a conservative portfolio of investments in his account - amounting to more than 80% in bonds and fixed instruments. At that age, even the most conservative of investment plans should have you above a 50% ratio in equities, in order to take advantage of long-term stock market returns. Granted, stocks are more volatile than bonds and fixed income investments, but with a longer time horizon, bonds and fixed income investments can hardly keep up with inflation, let alone provide any measure of growth. In addition, the longer time horizon provides the time to ride out any "bumps" in the market that may take place.

It makes good sense to analyze your potential investment choices, consider your time horizon, your risk tolerance, and ultimately your investment "mix", in order to create a plan for your investments that will carry you toward that "holy grail" of investment success - a fruitful retirement.

#3 Set It and Forget It
While we shouldn't obsess over every single market move every single day, we also shouldn't make our investment and contribution decisions once and then leave them for 20, 30 or 40 years. Over time, your various investments are going to grow at different rates, eventually causing one or more of your holdings to become overweighted (with regard to your planned "mix").

I generally recommend reviewing your quarterly statements just to see how things are going in your account, and choose one of the quarters to make any rebalancing moves annually. These rebalancing moves don't need to be done until one or another of your investments gets to a 5% or more variance from your plan.

#4 Taking Out a Loan
This falls into the category of things you *can* do but shouldn't. Kinda like jumping off a cliff. What happens here is that your contribution program goes on hold as you pay back the loan, and if you don't pay it back, you'll owe tax and penalties. In addtion to that, you're paying back your tax-deferred fund with after-tax dollars, which will eventually be taxed again when you withdraw the funds at retirement. In only the most extreme of circumstances should you consider this kind of loan - honestly, you'll regret it if you do it.

TidBits - May 2007

2007-05-15T14:10:00.001-05:00

Talk To Your Parents

Many of us are fortunate enough to still have our parents with us. If you haven’t ever talked to your parents about their estate plan, it’s never too late to start. Even though talk of money is considered taboo in many families, you might be surprised at how an open conversation about financial situations can bring you closer to your parents – and ease their minds about some sticky decisions that they need help with.

Credit Reports

If you don’t already do this, it’s a good idea to get a copy of your credit report from each of the three credit-reporting agencies once a year. It’s moderately easy to do, by going to www.annualcreditreport.com. Doing so will allow you to ensure that you don’t have any “extra” accounts on your record, or any mistakes with regard to your payment history. Staying current with your credit information will make applying for that mortgage or home equity loan a lot less stressful with no surprises. Be careful that you don’t sign up for any of the “credit watch” or “credit monitoring” services – these are almost always very costly services for the minimal benefits that they provide.

My Investment Philosophy

2007-05-15T14:01:00.001-05:00

One of the most important parts of your overall financial plan is the investment plan. The investment plan is made up of three distinct parts: present value, projection of future inflows and outflows, and allocation. It is allocation that we’re most interested in today.

Allocation is the process of determining the “mix” of your investment assets: stocks, bonds, real estate, etc. Allocation is determined by the philosophy that you choose to follow with regard to investment management. My philosophy is summed up as follows:

- Diversify

- Reduce Costs

- Pay Attention to Economic Signals

- Maintain Discipline – Stick To Your Plan

Now, there are three primary schools of thought that are often relied upon to develop an Investment Philosophy: technical analysis, fundamental analysis, efficient markets hypothesis.

Technical Analysis is the review of charts of stocks and funds, with the belief that patterns within the action of the stock can provide insight into the future actions that the stock will experience. The theory is that investor behavior can be predicted based upon volume and stock price fluctuations, and given the prediction of this behavior, Technical Analysts purportedly take advantage of “knowing” what the future will bring. I’ve always likened Technical Analysis to palm reading…

Fundamental Analysis is where the data about a stock – the price-earnings ratio, expected growth rates, earnings projections, etc. – is studied in order to determine the “correct” price intrinsic within the stock. This intrinsic value is then compared to the trading value (present price) of the stock, and if the intrinsic value is higher than the trading value, this represents a buying situation; or a selling situation if the intrinsic value is lower than the current price.

The third school of thought, Efficient Markets Hypothesis (EMH), explains away the benefits supposed by the Fundamental Analysis theory. With EMH, as the name implies, it is assumed that the market itself is very efficient with regard to the dissemination of information. In other words, when a piece of new information is made available about a stock, that information is quickly and efficiently spread to all interested parties, allowing for little, if any, opportunity for arbitrage.

For example, let’s say that Ford Motor Company is coming out with a new model of car, widely expected to be the savior for this company. As a result, Ford stock is highly valued, compared to recent history, in anticipation of this new model. During the testing of this new model, it has been determined that there are serious flaws in the design – turns out using aluminum foil for the engine block wasn’t such a good idea – and now the new model will not only be drastically delayed, it may be canceled altogether. If this new information were known only to a select few (outside the company), then those folks could take advantage of the situation (arbitrage), and short-sell the stock in anticipation of it’s expected fall in value. The Efficient Markets Hypothesis takes the stance that this kind of information is spread SO quickly that the opportunity for arbitrage is effectively wiped out.

So that explains how EMH addresses Fundamental Analysis – how does this help build our philosophy? How does the investor take advantage of the marketplace to their benefit? To answer these questions, we first need to take a walk – a Random Walk, specifically. “A Random Walk Down Wall Street”, by Burton Malkiel, first published in 1973 and now in its Ninth Edition, describes the activity of the stock market as a “Random Walk”. This is due to the observation that short-run changes in stock prices can not be predicted, but rather are quite random.

Let me say that again: Short-run changes in stock prices can not be predicted, but rather are quite random. It is for this reason that I often don’t pay much attention to the day-to-day fluctuations in the Dow or the S&P 500 – what I’m more interested in is the long-run direction of the market, which is illustrated by some very sound statistics. Specifically, I pay close attention to the broad views of the domestic and world economies, including manufacturing, GDP, and jobs information; interest rates and inflation; as well as money supply and market valuations (for example, the forward view of price-earnings ratios of the broad indexes), among other things.

Against this backdrop of factors, the present momentum of the markets is also considered, since it is more likely that the market will continue in the direction that it has maintained over the previous 18 to 24 months than not.

So, how does all of this fit together? Let’s look at the four points of my investment philosophy again:

- Diversify – by utilizing broad market indexes, covering all points of the marketplace both domestic and international, we are automatically diversifying across market capitalization, company, industry, and country. It just doesn’t make sense to choose a narrow band of investments when you can take part in the success of the overall economy.

- Reduce Costs – index mutual funds are the most cost-efficient investment vehicle in the industry. Expense ratios are well below .5% for most of these investments. In addition, Exchange Traded Funds (ETFs) are also the most tax-efficient investment options available that invest in the unrestricted equity and bond markets.

- Pay Attention to Economic Signals – when viewing forward-looking economic conditions, it is necessary to context the various signals together, considering the impact on your present investment elections. As indicated previously, short-run trends are difficult if not impossible to predict, but longer-run trends tend to have certain signals that indicate they’re on the horizon. Paying close attention to these signals can help with long-term decision making with regard to your investments.

- Maintain Discipline – Stick to Your Plan – this goes hand-in-hand with the view that short-run trends can not be predicted. In addition, short-run trends typically have little impact on the overall investment plan, provided that you maintain discipline and do not stray from the plan. The worst thing you could do is panic in a short-run market action and abandon your plan. The whole point of having a plan is to help you to get through those panicky times with confidence.

We’ve covered a lot of ground in a short time period – but I don’t want to bore you too much with all of this. Hopefully this has given you some insights into how I manage investments, and perhaps it will help you as you consider your own investment decisions.

Considering an Offer to Retire Early: Should You Take It?

2007-04-17T05:57:00.000-05:00

In today's corporate environment, where restructuring, and downsizing are the norm, many employers are offering their employees early retirement packages. As you near retirement age, you may find yourself confronted with an offer from your employer for early retirement. While many early retirement offers seem attractive at first, it is important for you to review an offer carefully before accepting it to ensure that it is indeed a "golden" opportunity.

Typical elements of an early retirement offer
An early retirement offer usually consists of severance payments and post-retirement medical coverage coupled with already existing retirement benefits.

Severance payments
Severance payments are usually based on your salary and the number of years you have worked for the company. Severance payments can be distributed in either a lump sum or over a number of years.

Example: John has 30 years of service with the utility company and grosses $675 per week, before taxes. When John reaches age 57, his employer offers him an early retirement package. The package includes a severance payment based on two weeks' salary for each year that John worked for the company ($1,350 x 30 = $40,500).

Post-retirement medical coverage
Because of the high cost of medical care, you might find it hard to turn down an early retirement package that includes post-retirement medical coverage. These packages usually guarantee medical coverage until you reach age 65 and you become eligible to receive Medicare. However, some packages continue to provide full or reduced medical coverage well past the age of 65.

Bridging
Another type of early retirement offer is bridging, sometimes referred to as the golden bridge. Your employer provides you with temporary benefits to bridge the period between early retirement and the time when your Social Security benefits are scheduled to begin. The temporary benefits are usually equivalent to the amount you will receive from Social Security at age 62.

Example: John, age 57, works for a local utility company. The company offers John a golden bridge retirement package that provides him with five years of temporary benefits. The benefits are equivalent to the amount that John will receive from Social Security at age 62. The benefits serve as a bridge between the period of John's early retirement, age 57, and the period when he becomes eligible for early Social Security benefits at age 62.

Evaluating an early retirement offer
The decision of whether to accept an early retirement offer is not an easy one to make. Your company's personnel department should provide either individual or group counseling to guide you during this important decision-making process. If individual or group counseling is not available, feel free to speak to the person in charge of employee benefits at your company. You should find out what amount you can expect to receive each year after you retire. You should then figure out the difference between what you would collect if you retire early and the amount you would earn if you continue working. Make sure that your company has your correct date of birth and starting date of employment, since they are often the numbers used by your employer to calculate how much money you are going to receive.

Tip: If you choose to accept an offer for early retirement, some companies will pay (in the form of a bonus) all or part of the difference between what you would collect if you retire early and the amount you would earn if you continue working.

Caution: Keep in mind that some company-paid consultants may make the early retirement package seem more attractive than it really is. Instead, you should consult legal counsel or another professional advisor.

Tax/retirement plan implications
If you accept an early retirement offer, you should be aware of any possible tax implications. Pension plans often contain provisions that reduce your monthly benefit when you begin distributions before a certain age. As a result, early retirement can result in lower monthly retirement benefits. Employer-sponsored retirement plans (such as 401(k)s) and traditional IRAs are generally subject to the 10 percent premature distribution tax for distributions made before age 59½. However, there are a number of exceptions to this rule, such as distributions made from 401(k)s and other qualified plans after separating from service at age 55 or older.

Provided that you're over age 59½ or meet one of the exceptions, you can make penalty-free withdrawals from your account. However, you may still have to pay income tax on all or part of the withdrawal. Distributions from employer-sponsored plans are usually taxable, since contributions to most of these plans are made on a pretax basis. IRA distributions may or may not be taxable, depending on whether or not the contributions you made to the account were tax-deductible. Roth IRAs are subject to special rules of their own, but are generally not taxed when used for retirement.

In effect, while withdrawals from an IRA or retirement plan can be a valuable source of retirement income, the need for the current income should be weighed against such issues as: (1) the desire to defer income tax for as long as possible, (2) the desire to preserve the assets for your beneficiaries, and (3) the possibility that, with life expectancies on the rise, you may live into your 80s or 90s and may therefore need to draw on those retirement assets for longer than you might think. Another issue that comes into play with IRAs and retirement plans if you retire early is how to best invest the assets. Many financial planners these days advise that you continue to invest for long-term growth after you've retired, especially if you retire early. However, certain modifications to your investment choices and percentages may be appropriate, based on your risk tolerance, your retirement income needs, and other factors.

Consequences of saying no to an offer
If you are considering turning down your employer's offer to retire early, be aware of the consequences of saying no to the offer. If you are holding out for a better offer, keep in mind that the first offer is oftentimes the most generous. If you do not accept the offer, you may find yourself without a job later on down the road. You may want to accept a sure thing right away rather than face further uncertainty on fitting in with your company's future plans.

Consequences of saying yes to an offer
After careful consideration, you may find that early retirement is the way to go. However, before you jump right into retirement, you'll want to be aware of the consequences of saying yes.

Some of the most important consequences include:
1) Less time to save for retirement, since you may have been planning on playing “catch-up” in your last few years of working;
2) Retirement savings will have to last longer – you may have planned to retire at 65, but now at age 55 you’ll have to provide retirement income for an additional ten years. This could derail your plan and force you to seek other employment.
3) Your pension may be smaller – starting earlier typically makes the overall payments smaller than you had likely planned. This will also impact your available funds for retirement.
4) Psychological impact – many folks just aren’t mentally prepared for retirement. If you thrive on the work environment, with the competition and drive that goes along with it, making the change to a more sedate lifestyle may not work for you at this stage.

There are many other issues to consider, but hopefully this article has started you thinking about the important factors. As always, if you need help working out the issues, don’t hesitate to call.

Illinois' BrightStart Plan

2007-03-16T06:45:00.000-05:00

You may have heard recently that there have been some changes made to the BrightStart 529 College Savings plan in Illinois. Our state Treasurer took a look at the state of things, and decided that it was time for a change.

What has happened is that the Treasurer has made a change to the administrator of the accounts, which is a very positive change for college savers. While the details are yet to come, we are being told that the new administrator, Oppenheimer, will provide the account at one of the lowest costs in the industry!

This plan was, a couple of years ago, the better of the two alternatives (at that time), but it wasn’t stellar by any means. The introduction of the newer Bright Directions plan has been a very positive influence, probably at least part of the reason why this change was made to the BrightStart plan.

I’ll keep an eye on things and let you know if these new developments warrant any changes to our current directions with regard to this type of account – but for now, if you’re already in either the BrightStart or Bright Directions plan, just stay put.

Recent Market Activity

2007-03-16T06:40:00.000-05:00

Dear Friends and Clients,

A couple of weeks ago, the stock market fell 400 points. Then again earlier this week, it fell some 200+ points. While I could speculate on the causes, that is not necessarily a productive use of time. The bottom line is that my colleagues and I do not see anything fundamentally wrong with the stock market at this time.

As we have discussed in the past, stock market investors should maintain a diversified portfolio that meets their long-term goals and personal risk tolerance thresholds. They should be prepared for daily volatility in the markets, cyclical ups and downs, and periodic corrections.

In up-markets, you will hear me saying that “trees to do not forever grow to the sky”, meaning that the stock market can’t go up and up forever without some sort of correction.

When a correction or “blip” in the market performance occurs, as has recently been the case, my message to you is this: The Chicago River may be green this Saturday for St. Patrick’s Day, but it is highly unlikely that the river will be anything but its normal brownish color come Sunday. In other words, this too shall pass.

While I am not prone to making market predictions, I do believe that the recent market downturn is very short-lived. Cycles are normal. Historically we have had a 10% correction every two years and a 20% correction every five years. This could be one of those normal corrections, but I doubt it. I also disagree with Greenspan regarding a possible recession by year-end 2007. If it in fact does happen, it will not a big deal for long-term investors - only for those who happen to lose a job.

The current market conditions may remind you a bit of 1987 and 1998. The 500 point drop that we saw in 1987 was a real biggie and scary (The Dow was at 2,000 then, not 12,000). Most experts could not explain the dramatic one day crash, yet many value money managers, while concerned, were buying because of the unbelievable values. I recall the market was in the 20+ P/E (price/earnings) range. Today the market is less than 15 P/E and the recent drops have amounted to a 3 1/2% decline, NOT 25%! Yes corporate earnings are slowing (I thought they would last year). The market recovered quickly in 1987-1988. Remember 9/11/2000? We experienced a huge and quick recovery from that precipitous drop.

So here’s what to do … or perhaps what not to do, now:
If you are in your accumulation years, now would be a good time to be buying properly-researched investments (stocks and equity mutual funds). Remember the old adage “Buy low. Sell high.”? Hint: When the market has recently fallen, it’s LOW. It’s time to Buy! If you have a tax refund that you’re looking to invest, or you have a planned IRA contribution coming up, now is the ideal time to get into the equity market.

On the other hand, if you are reaching the end of your accumulation years and/or entering the distribution phase of your life, you will not want to make any rash decisions based on the market’s short-term volatility. Give yourself a 30-day moratorium after any big market event – whether up or down – and give me a call before you make any buy or sell decisions. Don’t fall prey and “sell low” because you are panicked or making irrational (fear-based) decisions.
Since 1980, our economic growth cycles have averaged 5+years and the average market downturn has averaged less than 12 months!

The fundamental message I am trying to communicate to you is this: if your financial plan and investment strategy was sound a week ago, it is still sound today. Unless something has changed in your life, it is unlikely that you should take radical action. Of course, there is always the possibility that you do not feel your current plan is “sound.” If you feel it is time for a financial check up, or if you would like to discuss the market conditions as they relate to your personal financial strategy, I am happy to sit down and consult with you.

Please call my office to schedule a review and consulting time if you are worried about the markets and/or your personal finances. Or perhaps it’s just time to talk. I am here for you, whenever you feel the need for professional investment and financial planning advice.

New Regulations on Preferred Lenders and Inducements

2007-02-16T06:39:00.000-06:00

The U.S. Department of Education has drafted a package of proposed regulatory changes that, among other things, would keep colleges from recommending fewer than 3 lenders to students who are seeking federal loans.

Along with requiring colleges to include at least 3 lenders in their "preferred lender" lists, the proposed changes would require colleges to show the "method and criteria" they used to pick the lenders, and to give borrowers interest rate information and benefits offered by those lenders.

It would also clarify what lenders can and can't offer colleges and prospective borrowers to secure loan applications or loan volume. Listed among the "prohibited inducements": other financial aid; prizes; payment of conference or training registration, transportation, and lodging costs; hospitality suites; tickets to shows or sporting events; and meals and alcoholic beverages.

The proposed changes show the Education Department's growing concern that some colleges are violating federal law by making students borrow from lenders with which the institutions have exclusive arrangements.

Pell Grant Increase Would Be First In 5 Years

2007-02-16T06:37:00.000-06:00

Student aid was the hot topic in a recent battle between the Democratic leadership in Congress and President Bush.

First, the House of Representatives approved a spending bill for the rest of the 2007 fiscal year that provided a 6%, or $260, increase in the maximum Pell Grant award.

The next day, Secretary of Education Margaret Spellings announced that Bush planned to unveil a budget for 2008 that calls for the biggest increase in the grant program for low-income students in a generation; The maximum award would increase by nearly 14%, or $550, next year, and by 33%, or $1,350, over the next five years.

Tax Deductions You Might Have Forgotten

2007-02-16T06:33:00.000-06:00

With the advent of online tax filing, many folks have taken on the burden of preparing and filing their own taxes. As you do this, you’ll want to make sure that you cover all of the bases with respect to the deductions that you’re allowed. Perhaps there will be one listed that you’ve overlooked, or didn’t even realize you could take!

Educator Expenses. If you’re a professional educator, you can deduct up to $250 worth of expenses you’ve incurred on books and classroom supplies. Don’t be daunted by the fact that there isn’t a place on the return for this deduction – Congress waited until it was too late last year before they extended this deduction, and the IRS forms were already finalized. The trick is to use line 23 on Form 1040, the one for Archer Medical Savings Account deductions, and write an “E” on the dots to the left of the “amount” column. If you’re also claiming the Archer MSA deduction, write a “B” (for both) on the dots, enter both amounts (totaled), and attach an explanatory breakdown of the two deductions to your return.

College Tuition. This one isn’t on the tax forms either. It’s allowable to deduct up to $4,000 that you paid in college tuition in 2006 for yourself, your spouse, or a dependent. This is helpful if you have a high enough income that you cannot take advantage of the Hope or Lifetime

Learning Credit. The trick to taking this deduction is to use line 35 of Form 1040, which is the line for domestic production deduction. Write the letter “T” on the dots to the left. If you’re also claiming the domestic production deduction, as before with the educator credit, write the letter “B” on the line and attach a breakdown of the expenses to your return.

Estate Tax Paid on Income in Respect of a Decedent (IRD). If you inherited an IRA from someone whose estate was large enough to be subject to the federal estate tax, you can use this deduction to keep from being double-taxed. What happens is, you get an income-tax deduction for the amount of estate tax paid on the balance. For example, if you inherited an IRA worth $200,000 that was subject to estate tax at the rate of 45%, so the tax amounted to $90,000 – paid from elsewhere in the estate. As you withdraw funds from the account, each withdrawal carries an IRD deduction of 45% - so if you took out $50,000, you’d get to deduct $22,500 from your tax return, so that you wouldn’t pay tax on that portion again. This deduction is taken on Schedule A as a miscellaneous deduction, not subject to the 2% floor.

Refinancing Points. When you refinance your home, quite often there are points paid on the loan. While you can deduct these all at once on the original purchase of a home, the rule is to deduct points on refinancing over the life of the loan. So, if you paid two points on a $200,000 15-year home refinancing, for a total of $4,000, you’re eligible to take a deduction of $267 each year of the loan. If you refinance again or sell the home, ending the loan early, in that year you’re allowed to deduct the remaining value of the points that you paid on that loan.

State Sales Taxes. This is yet another of the “last minute” extensions that made its way into the tax law for 2006 returns. As in recent years, you’re eligible to evaluate between state sales tax and state income tax for your deduction. Where this really pays off is if you’ve purchased a car (or two), or an RV, boat, or other big-ticket item. There is a formula based on your income to come up with the base amount of tax you’re allowed to consider, and you’d add to this the amounts you paid for the big-ticket item(s). For this deduction, use line 5 of Schedule A and write “ST” on the dotted line to the left.

What’s New for 2007

2007-01-20T09:35:00.001-06:00

Every year offers some surprises in the financial world, and 2007 is no exception. Here is a look at some of the changes – large and small – that may have an effect on your finances in the year to come.

Charitable Deductions Need More Documentation

I mentioned this one in last month’s newsletter – if you give cash to your favorite charity in 2007 and beyond, ask for a receipt. The IRS now requires that you have a receipt or other written documentation for all cash contributions for which you are claiming a deduction, not just for those exceeding $250 as in years past. Your canceled check and credit card statements can be used for this purpose, as well. The supporting documentation must show the name of the charity, as well as the date and amount of your contribution in order to be accepted as documentation of the contribution.

Refunds Due For Telephone Excise Tax Paid

After more than a century of existence, originally introduced as a luxury tax on wealthy individuals, the federal excise tax on long-distance phone service has been abolished. Actually it was abolished in 2003, but for some reason, Ma Bell and her counterparts continued to charge it up until August of last year. As a result, we all deserve a refund!

This refund won’t make you rich, in fact the range of the refund is between $30 and $60, depending upon how many exemptions you claim on your 2006 tax return. But it’s your money, so don’t forget to fill out the necessary forms to claim it!

For folks who normally would not file a tax return, specifically seniors on a lower fixed income, it may make sense to make sure that they file their return for the year, simply to get this refund.
Note: if you know of someone who needs assistance with filing their taxes and this refund is the only reason that they are filing a return, I would gladly prepare their returns for them free of charge. Just give me a call.

Charitable Contributions From IRAs Allowed

If you’re over 70½ and need to take required distributions from your IRA, you may benefit from a new rule that allows you to contribute as much as $100,000 to a qualified charity directly from your IRA. These distributions are tax-free and can be used to satisfy minimum distribution requirements. If you would like to exercise this option though, don’t wait: it’s only available during the 2007 tax year.

Medicare Part B Premiums Tied to Income

Beginning in 2007, Medicare Part B premiums will be higher for beneficiaries with higher incomes. You’ll pay an income-related premium if your modified adjusted gross income exceeds $80,000 if you’re a single taxpayer, or $160,000 if you’re married and you file your taxes jointly. The Social Security Administration should have already contacted you of this change if you’re already receiving Medicare.

Splitting Tax Refunds

If you are expecting a refund of federal income taxes this year, you can now split up the direct deposit of your refund to as many as three accounts. This can be an IRA, a savings or checking account, a Health Savings Account, or a Coverdell Education Savings Account.

Strategies of Successful Investors

2007-01-16T09:20:00.000-06:00

For a golfer looking to improve his game, it can be useful to study Tiger Woods’ strategies and methods. Investors can, in much the same way, learn from the “money masters”. You might not have their resources or years of experience, but understanding their philosophies can help you in your own approach to investing.

Think Like an Owner, Not Like a Trader

This philosophy is as commonsense as the investor who is famous for following it: Warren Buffett. Any list of successful investors includes the chairman of Berkshire Hathaway, and he’s typically at the top of the list. The Oracle of Omaha is well-known for his down-to-earth approach to sizing up investment opportunities.

Buffett invests in businesses, not stocks, and prefers those with consistent earning power and little or no debt. He also looks at whether a company has an outstanding management team. Buffett attaches little importance to the market’s day-to-day fluctuations; he has been quoted as saying that he wouldn’t care if the market shut down completely for several years. However, he does pay attention to what he pays for a stock; as a value investor, he may watch a company for years before deciding to buy. And when he buys, he plans to hang on to his investment for a long time.

Don’t Forget That Markets Can Be Irrational

George Soros feels that markets can be irrational. However, rather than dismissing the ups and downs, the founder of the legendary Quantum Fund made his reputation by exploiting macroeconomic movements. He once made more than $1 billion overnight when his hedge fund speculated on the devaluation of the British pound.

Soros believes in capitalizing on investing bubbles that occur when investors feed off one another’s emotions. He is known for making big bets on global investments, attempting to profit from both upward and downward market movements. Such a strategy can be tricky for an individual investor to follow. However, even a buy-and-hold investor should remember that market events may have as much to do with investor psychology as with fundamentals. Whether or not you apply Soros’s philosophy in the same way he does, that can be a valuable lesson to remember.

Use What You know; Know What You Buy

During his 13-year tenure at Fidelity Investments’ Magellan Fund, Peter Lynch was one of the most successful mutual fund portfolio managers in history. He subsequently wrote two best-selling books for individual investors.

If you want to follow Lynch’s approach, stay on the alert for investing ideas drawn from your own experiences. His books contend that because of your job, your acquaintances, your shopping habits, your hobbies, or your geographic location, you may be able to spot up-and-coming companies before they attract attention from Wall Street. However, simply identifying a company you feel has great potential is only the first step. Lynch did thorough research into a company’s fundamentals and market to decide whether it was just a good idea or a good investment.

Lynch is a believer in finding unknown companies with the potential to become what he called “ten baggers” (companies that grow to 10 times their original price), preferably businesses that are fairly easy to understand.

Make Sure the Reward is Worth the Risk

Perhaps the best-known bond fund manager in the country, PIMCO’s Bill Gross makes sure that if he takes greater risk – for example, by buying longer-term or emerging-market bounds – the return he expects is high enough to justify that additional risk. If it isn’t, he says, stick with lower returns from a more reliable investment. Because bonds have historically returned less than stocks and therefore suffer more from high inflation, he also focuses on maximizing real return (an investment’s return after inflation is taken into account).

Choose a Sound Strategy and Stick To It

Even though all these investors seem to have different approaches, in practice they’re more similar than they might appear. Each of their investing decisions has specific, well-thought-out reasons behind it. They rely on their own strategic thinking rather than blindly following market trends. And they understand their chosen investing disciplines well enough to apply them through good times and bad.

Work with your financial planner to determine a strategy that matches your financial goals, time horizon, and investing style.

IRAs: Roth or Traditional?

2006-12-20T06:55:00.000-06:00

The question comes up pretty often, and I’ve dealt with it in general with my recommended “Order of Contributions”, that we discussed briefly during last month’s newsletter. The order is as follows:

1. Contribute enough to your employer-provided retirement plan to get the company matching funds.
2. Maximize your contribution to a Roth IRA.
3. Continue increasing your contribution to your employer-provided plan up to the annual maximum.

Beyond those three items, you may want to consider college savings accounts, tax-efficient mutual funds in a taxable account, or a low-cost annuity, among other choices.

But the question I was referring to is this: Which is better, a Roth IRA or a Traditional IRA?

The answer, as usual, is a fully-qualified “It depends”. I’ll try to explain the most important factors.

If you were to consider the two types of accounts side-by-side, at first glance you’d think that it doesn’t make any difference which one I contribute to – especially if I assume that the tax rate will be the same in retirement (or distribution phase) as it was before retirement (or accumulation phase). This is because you’re paying the same tax on the distribution of the Traditional IRA after the investment period, simply delayed, that you would pay on the Roth contribution, only this part is paid up-front.

Clear as mud, right? Let’s look at the following table to illustrate. I have purposely not included any increases in value, as we’ll get to that a bit later. In the example, we’re using a 20% ordinary income tax rate.

Each year we had $1,250 available to contribute to either a Traditional or a Roth. We had to pay tax on the Roth contribution each year, but we were able to make the whole contribution, tax-deducted, on our Traditional account.

What happens when we throw in growth in the account? The following table reflects the next step in our analysis, with each account growing at 10% per year, and the values are as of the end of the year:

If you subtract the tax from the Traditional balance, you come up with the same number as the Roth account, since there is no tax on the Roth account at distribution. So, although you pay more in taxes, you had more contributions to your account, so it all comes out in the wash.

So far, I’m not yet convinced that I should use a Roth instead of a Traditional IRA. Let’s make another change to our table, by assuming that the tax rate in distribution is 25%, and that we remain at a 20% rate during accumulation. The following results come from that change:

As you can see, this results in a nearly $1,100 increase in taxes at distribution, making the Roth IRA the preferred option. Conversely, if the ordinary income tax rate is lower in distribution, the Traditional IRA is a better option.

There are some other factors that we could consider and run calculations on, but for the most part we’ve covered the important bases. If you’d like to see some more research and discuss the pros and cons of the types of IRAs, please give me a call. I have many wonderful spreadsheets to share, if you’d like to see them.

By strictly running the numbers, the Roth IRA is preferred when the income tax rate is higher in retirement, and it’s at least as good as the Traditional IRA if the rates remain the same. If the numbers were the only differences between the two accounts, this is not a strong argument for the Roth, because you’re just making a gamble as to what will happen with tax rates in the future.

Thankfully, there are more factors to bear on the decision. In the September edition of this newsletter, I pointed out three very good reasons to choose a Roth IRA over a Traditional (deductible) IRA (see below).

With those factors in mind, and given that I have a generally pessimistic view of tax rate futures in the US, the Roth IRA is the better choice in nearly all situations.

Three Very Good Reasons to Choose
The Roth IRA Over the Trad IRA
1. Roth IRA proceeds (when you are eligible to withdraw them, post age 59 ½) are tax free. That’s right, there is no tax on the contributions you put into the account and no tax on the earnings of the account. You paid tax on the contributions when you earned them, so in actuality there is no additional tax on these monies.
2. There is no Required Minimum Distribution (RMD) rule for the Roth IRA. With the Trad IRA, at age 70 ½, you must begin withdrawing funds from the account, whether you need them or not. For some folks, this is probably the biggest benefit of all with the Roth IRA.
3. Funds contributed to your Roth IRA may be withdrawn at any time, for any reason, with no tax or penalty. Note that this only applies to annual contributions, not converted funds, and not the earnings on the funds. But the point is that you have access to your contributions as a sort of “emergency fund of last resort”. While this benefit could work against your long-term goals, it may come in handy at some point in the future.
4. (a bonus!) As illustrated, if you believe that ordinary income tax rates will remain the same or increase in the future, the calculations work in favor of the Roth IRA.

New Requirement for Charitable Gifts

2006-11-20T15:19:00.000-06:00

A recent addition to the tax law is that, beginning January 1, 2007, any cash contributions to charities that you intend to itemize and deduct on your Schedule A must be substantiated with a receipt.

In other words, you can no longer simply estimate how much you put in the collection plate at church each week, or how much you plugged into the Salvation Army kettle. You need to make these contributions by way of a check, or many institutions will send an annual report of your contributions, assuming that you used an envelope or other instrument to identify yourself and your gifts throughout the year.

I have a feeling that this may have an impact specifically on groups like the Salvation Army, since they depend upon their kettle contributions for a large amount of their annual budget. But since this likely will represent a small amount of each individual’s tax savings, hopefully something will work out and this won’t impact them too much.

Variable Annuities: Are They Worth A Look?

2006-11-20T15:08:00.000-06:00

For the most part, annuities of any sort have long been on the list of areas to avoid for most folks. These accounts are typically way over-priced for the situation that they are sold to serve, and quite often annuities are only sold to benefit the agent who sold them.

Some recent new activity in the insurance industry has developed an interesting new category of annuities, specifically Variable Annuities (VAs), that gives us reason to re-consider the use of annuities as a possible portion of our retirement portfolios.

So what’s different? Some insurance companies have been listening to the issues that folks have with VAs – the biggest problem being the exorbitant cost of the insurance component – and have introduced new “flat fee” VA, which addresses some of the problems there.

But first, let’s examine the problem.

The Problem With VAs
VAs represent approximately $1.2 trillion worth of Americans’ portfolios. Typically, the average insurance fee is approximately 1.35% on these accounts, which stacks up to approximately $15 billion each year in insurance fees alone. When you add in asset-based fees for the complicated riders, the costs in these accounts quickly escalate.

Many consumer advocates, including the likes of Suze Orman, Jonathan Clements, and Jane Bryant Quinn, have come out against VAs due to the extreme cost issues. To quote Orman “Actually, I don’t dislike VAs, I hate them. Here’s why: they are really expensive… You are pushing 3% a year in various fees. That’s ridiculous.” Leave it to Suze to not mince words.
Mr. Clements, in the Wall Street Journal a couple of years ago, wrote “Variable annuities are a favorite with unscrupulous investment advisers, who can collect ridiculously high commissions by foisting these turkeys onto unsuspecting investors.” As a result, according to the NASD in July of this year, annuity cases are consistently the third most common type of securities arbitration, behind stock and mutual funds.

Flat-Fee VAs
The Flat-Fee VA is a new product that seeks to address these problems by eliminating the percentage rate of insurance costs. These products also eliminate the commissions and surrender charges that were the primary cause of their popularity among the insurance agents that pushed them so hard.

As with all VAs, the new Flat-Fee VA still has some internal costs for the underlying funds, but the insurance component is a simple flat fee – which can be as low as $20 per month, or $240 per year.

If you had a $100,000 account, under the old type of VA with an average insurance cost of 1.35%, you would pay approximately $1,350 for the insurance. In a $1 million VA, the cost for insurance is $13,500. This is reduced dramatically with the flat fee product, which keeps the cost down, sometimes as low as $20 per month. In addition to the flat fee, these new VAs don’t have all of the complicated (expensive!) riders that the old product had. Instead, the products typically have a much more broad array of investment options, helping you to maximize your portfolio performance with alternatives like commodities, real estate, and hedge funds.

So, when might a VA make sense? When you are looking for a guaranteed (more or less*) stream of income, and you’ve maxed out all of your other tax-deferral options. With the elimination of many of our pension plans, and the future of Social Security in doubt, you may want to place a portion of your portfolio in a VA to help ensure that you have an additional tax-deferred component to utilize.

If you’ve been following my advice so far, this will make a great deal of sense to you. I’ll recap briefly how your tax-deferrals should go:

Let’s say you’re over age 50, and you have enough investible income to max out all of your options. The first money should go to your employer’s 401(k) (or other deferred instrument such as a 457, 403(b), or deferred comp) plan, investing up to the employer’s match. Secondly, you should max out your (and your spouse’s) Roth IRA – at $5,000 including the catch-up provision. The next money goes back to your deferred plan at your employer, maxing this out at $20,000 (with the catch-ups included).

For a married couple, this can amount to $50,000 in deferred money, not including the company match (if there is one). If the math eludes you, it’s like this: $15,000 each in standard 401(k) contributions, $5,000 each in 401(k) catch-up contributions, and $5,000 in Roth IRA contributions each, for a total of $50,000.

If you still have money that you’d like to defer for the year, this is when you should consider a flat-fee VA. The money that goes into the VA is taxed at your ordinary income rate, but then you can defer taxation on growth until you begin withdrawing the funds later. And when you begin withdrawing funds, you are only taxed on the gains in the account, making this a fairly tax efficient alternative that you should consider at this stage.

*I mentioned that VAs are somewhat guaranteed. Depending upon the structure of the policy, there is quite often some down-side protection, meaning that you are (for these policies) protected against losing the money that you have contributed to the account. Depending upon the investment options you choose, there could be a high degree of risk involved, so you’ll want to be very careful with these investments and consider the impact to your overall risk profile.

Pension Protection Act of 2006

2006-11-01T15:15:00.000-06:00

With the passage of the 2006 Pension Protection Act in August and the President’s signing of the Act, the tax treatment of 529 Plans, originally set to expire in 2010, has been made permanent.

We discussed this briefly in last month’s letter, so I thought this month we could cover some more ground within the college funding world that this Act’s passage makes possible. This will be familiar ground for most, but I think we parents of future college students need to be reminded of these things sometimes.

It will always be cheaper to save for college than to pay for loans. If you’re in the position of most folks – with enough assets that you figure your child won’t be considered for financial aid – then it pays in spades to save now. If you saved $150 a month for 8 years at 8% interest, you’d have just over $20,000 in your account. If, on the other hand, you didn’t save that money and had to borrow $20,000, paying it back over the same 8 year period at 7% interest would require monthly payments of $273 - $123 dollars a month more. If the rate on the loan was 9%, the payments would be $293 a month, almost double the amount if you would have saved.

The best time to start is yesterday. Actually, the best thing to do is don’t delay. If you started saving for college when your child was first born, accumulating $20,000 when the child is 18 only requires $42 per month, assuming 8% interest. Waiting just five years, that payment increases to $74 per month. Wait until your child is 13, when you have only five years left in order to accumulate $20,000, you’d need to make savings payments of nearly $273 each month.

Choose the right plan. The differences between your choices for 529 plans alone are mind-boggling, but you need to consider other options for savings as well. Some will provide tax benefits, others may not, but this is a critical choice to make as you make your savings plan work for you.

Retirement: What Does It Mean To You?

2006-10-16T15:13:00.000-05:00

Retirement.
(Did you just hear angels singing the Hallelujah Chorus, or was that just me?)

Many of us are nearing that magical date, that of “retirement”. If you’re with the state or federal government, you’re nearing that time when you’ve got your thirty years in, or you’ve hit the “number”. Others are nearing a particular age, such as 62 or 65 – a time when you can begin drawing on various sources of retirement funds.

But what does “retirement” (there go those angels again!) really mean? Sometimes, it makes sense to “take” the retirement and lock in a pension, but that’s quite often not enough money to get by. Other times, money isn’t the issue, but rather you realize that you’ve worked every day of your adult life, and you need to have some sort of activity to keep you fresh – maybe something more fulfilling, though, something that really makes you happy to be a part of it. So what kinds of questions do you need to consider as you think about this magical event?

Most of us know of one person or another who has retired (in the classic sense) and they have, after a year or two, discovered that it’s not all it’s cracked up to be. The retiree, without the driving requirements of their old work-a-day lives, find themselves bored, feeling out of the loop, and unfulfilled.

Taking on work in retirement may be the exact thing that you need to consider. The following questions may help you with your consideration of working during your retirement years:

Why are you considering work? Is it because of the need for extra funds for your retirement accounts? Or is it primarily for fulfillment, intellectual stimulation, keeping “in the loop”? Or just to get out of the house?

What kinds of lifestyle considerations should be included in your job search? Are you thinking that you’d like to work year ‘round, or seasonally? What about your ideas of traveling – can part-time work fit in with this? In more and more cases, the answer can be “Yes”. Some companies, such as Home Depot and CVS, have lead the way to “split” work options. For example, if you wanted to work for the same company in Wisconsin in the summer and Phoenix in the winter, some companies can make arrangements like this.

Think about your dream job – try to imagine the best possible scenario. It may be a job that provides health insurance and retirement benefits, but that also allows you flexibility of schedule so that you can make it to your grandchildren’s school activities. With a visualized “perfect” job, it will be easier to think of the possibilities for your retirement job.

No matter what type of job you choose, there are a couple of things that you’ll want to make sure that you do to prepare yourself. Keep your technology skills up to date. If you don’t know how to use a computer, take a course at your local community college. This is especially important if you’ve been out of the job market for a little while – nearly every job requires some computer skills these days.

Read up on your intended job. Learn about current issues in the trade or industry, and stay current on what’s happening. This will make you a more viable candidate for the new job, plus you’ll be much more prepared to hit the ground running.

Manage your expectations. Nothing happens as quickly as we envision. Don’t get discouraged if your first forays don’t immediately pan out. Depending upon your goal in terms of a job, you may need to take courses to learn more or become certified, and this could take a couple of years. Remember, it’s been a little while since you took a course, right?

Learn to “network” with others. This is a learned skill which can be difficult for some folks. But it is the single best, tried and true, method for finding job opportunities. There are many ways to learn about networking, but the best way to learn is to just get out there and do it.
Hopefully this list of considerations will help you as you think about working in retirement. The main thing to keep in mind is that you’ve completed a career in one field, and a job doesn’t necessarily define the person. Have fun, be fulfilled, and use this opportunity to make yourself happy. You’ve earned the right to be happy with your work.

529 Tax Treatment Made Permanent

2006-09-20T15:12:00.000-05:00

With the passage of the 2006 Pension Protection Act in August and the President’s signing of the Act, the tax treatment of 529 Plans, originally set to expire in 2010, has been made permanent.

The long-sought-after 529 tax permanency provision removes the uncertainty surrounding the tax treatment of 529 plans after the year 2010 and provides college savers using 529 plans with unique tax benefits going forward. The Pension Protection Act does not help Coverdell Education Savings Accounts (ESAs), which are still facing a 2010 sunset of tax benefits contained in the 2001 EGTRRA.

In addition to the above change, this act also provides the IRS with the authority to develop regulations to prevent taxpayer abuse of 529 plans. This is to address concerns raised by the Treasury Department that 529 plans might be used for non-education funding purposes.

IRAs: Making the Most of Your IRA

2006-09-20T06:35:00.000-05:00

With all of the new changes that have recently gone into effect for IRAs, I thought it would make good sense to go over some of the most important aspects of these accounts. Most all of us have at least one IRA account, and often we have a couple of accounts, including a Roth IRA and the traditional IRA (or “trad” IRA).

The rules for these accounts can become quite complex, especially as we begin drawing funds out of the accounts or considering what will happen with the account at our demise, but we shouldn’t let the complexities keep us from using these accounts. The benefits from using IRAs can be huge – and you should use the rules of the IRAs to your advantage in order to wring every bit of value from the accounts. In this issue, I bring out three of these important factors for your consideration.

I. START EARLY. As with every other facet of financial planning, time is a huge factor in the favor of building up your net worth. I often recommend that parents begin encouraging their children to contribute to an IRA as soon as they begin earning money. Keep in mind the limits to the accounts, though: your contributions are limited to the lesser of $4,000 ($5,000 if you’re over age 50), or your Adjusted Gross Income for the year. In other words, if your teenager had a part-time job that paid her $2,231 over the year, her contribution to her Roth IRA for the year would be limited to $2,231.

II. CHOOSE BETWEEN A ROTH IRA AND A TRADITIONAL IRA FOR ANNUAL CONTRIBUTIONS. This topic alone could cover many pages, but the gist of it is this: if you are able to deduct the IRA from your income and your marginal tax rate is above the minimum, you should first consider contributing to a Trad IRA. This is because of the tax-deductible nature of these accounts. In nearly every other case, it makes more sense to make your annual contributions to a Roth IRA.

There are three very good reasons for choosing the Roth IRA over the non-deductible IRA (or a deductible IRA with a low income):

1. Roth IRA proceeds (when you are eligible to withdraw them, post age 59 ½) are tax free. That’s right, there is no tax on the contributions you put into the account and no tax on the earnings of the account. You paid tax on the contributions when you earned them, so in actuality there is no additional tax on these monies.

2. There is no Required Minimum Distribution (RMD) rule for the Roth IRA. With the Trad IRA, at age 70 ½, you must begin withdrawing funds from the account, whether you need them or not. For some folks, this is probably the biggest benefit of all with the Roth IRA.

3. Funds contributed to your Roth IRA may be withdrawn at any time, for any reason, with no tax or penalty. Note that this only applies to annual contributions, not converted funds, and not the earnings on the funds. But the point is that you have access to your contributions as a sort of “emergency fund of last resort”. While this benefit could work against your long-term goals, it may come in handy at some point in the future.

III. CHOOSE THE RIGHT BENEFICIARY OPTION. By utilizing the beneficiary option as a part of your overall estate plan, you and your heirs can effectively stretch out the benefits of your IRA for significant periods of time. Since taxes are not due on the account’s holdings until they are withdrawn, delaying that even for the longest period of time makes a great deal of sense. There are many complicated nuances to assigning beneficiaries to your IRAs, but in general it makes sense first to consider your spouse as the primary beneficiary.

Your spouse will be able to treat your IRA as their own and use their own life as the determining factor in RMD calculations. In the case where the surviving spouse is significantly younger, this can have a dramatic positive affect.

If you choose instead to direct your IRA proceeds to your children, it often makes the most sense to ensure that each child is designated as the primary, sole beneficiary on a separate IRA. Otherwise, all of the children will be forced to begin RMD during the year in which your oldest heir turns age 70 ½. In addition, make sure that your heirs understand the impact of inheriting an IRA. Without proper knowledge, an unwitting heir might trigger a huge tax and penalty to utilize an IRA on today’s wants, rather than tomorrow’s needs.

IV. PLAN WHICH INVESTMENTS TO HOLD IN YOUR IRA. Given the tax deferred nature of Trad IRAs and the tax-free nature of Roth IRAs, it makes good sense to place specific components of your overall portfolio into these accounts. This is mostly true when you have non-tax-deferred holdings in addition to your IRAs and qualified retirement plans, such as a 401(k) or deferred compensation plan.

Income-generating assets such as bonds or dividend-paying mutual funds should be placed in these deferred accounts, deferring (or avoiding) taxation to a later date. Appreciating assets, like most growth stock funds, should be placed in taxable accounts, since the capital gains taxes are lower than the income tax rates at this time.

Get Your Financial Ducks in a Row

2006-08-21T06:34:00.000-05:00

Do you or someone you know struggle with money issues, be it due to credit problems, budgeting concerns, or just trying to understand it all?

One of the problems that many folks face is that no one ever taught them how to handle money. There are so many facets to finances these days, from saving and retirement accounts to credit card debt, mortgages, insurance and legal documents. It can be a confusing, frightening place to be if you don’t have a good handle on the basics of your money matters.

Quite often, when dealing with difficult financial situations, we become frozen in place, unable (or unwilling) to make a move because we don’t understand the impact of waiting, or the benefits of making that first step toward our dreams. Does making one move cancel our options for another move? What is the most important area to focus on first, or should we try to focus a little bit on everything at once?

In order to deal with this fear, it takes a bit of organization – getting all of your information into one place – and then developing a plan. The first plans should just deal with making sure that you’ve got your basics covered: rent, groceries, insurance, etc.. Then, begin considering your goals. As these goals come into focus, you’ll start to see ways that you can, baby step by baby step, find your way out of the situation you’ve discovered yourself in. Discipline and focus are the primary tools that you’ll need in order to be successful.

Blankenship Financial Planning provides counseling in order to empower folks to better understand the impacts of their decisions about money matters. Since we operate in an hourly, fee-only fashion, this kind of counseling is accessible to folks from all walks of life, and the advice is provided by someone that is focused on the “big picture” of your overall money situation.

When Should You Plan to Take Social Security Retirement Benefits?

2006-08-21T06:31:00.000-05:00

For a lot of folks, the title question is a no-brainer: take the money and run. Why, you’ve been paying into this system all your life, so you should begin taking it back out as soon as you can, right?

Well, maybe.

The real answer is that it depends on your situation (you knew that was coming, right?). There are several factors that should go into this decision. Your year of birth, for example, determines when “full retirement” can begin for Social Security (SSA) reasons – but it also determines the rate of increase in benefits for each year of delay in retirement. For folks who were born in 1943 or later, the rate of increase for each year of delay before taking benefits is 8%. In other words, if you delayed retirement to age 63, you can expect your benefits to be 108% of the amount you would have received at age 62. At age 64, the amount would be 116.64% more than the amount at age 62, and so forth. This doesn’t take into account the annual cost of living increases.

As you can see, longevity then begins to become a larger factor, since the longer you live, the more benefits you’ll ultimately receive from the system. Under the current arrangement, delaying benefits to age 66 has a break-even point (the point at which the benefits you receive at the later retirement age are more than the cumulative amount received at the earlier age) at around age 78, while delaying to age 70 breaks even at approximately age 80. So, assuming you’re in good health and your family longevity is such that you expect to live beyond those ages, it makes sense to consider delaying benefits.

Your current need for the funds impacts the decision, in a way you might not expect. The above break-even example assumes that you’re spending the SSA money each month. If you’re in a position with adequate retirement income from other sources, such as a pension or other retirement plan, investing the SSA proceeds in a nominal 6% interest-bearing account will increase the break-even points to ages 90 and 95, respectively.

Do you plan to continue working while receiving benefits? If so, assuming you begin receiving benefits at age 62, bear in mind that for every two dollars of employment income above the annual limit (for 2006) of $12,480, your current SSA benefits will be reduced by one dollar. During the year in which you reach your normal retirement age, the reduction is less – one dollar for every three dollars earned above $33,240 for 2006, and the reduction is eliminated for years following your normal retirement age.

Income level, from all sources, impacts taxation of SSA benefits, as well. In some cases it may make sense to plan taking a larger distribution from an IRA in the earlier years to offset not taking the SSA at the earliest age, and then reducing the distribution (subject to RMD rules), to a level that allows you to take your SSA benefit tax-free.

A significant factor is marital status, as well as your accrued benefits versus your spouse’s benefits. In the case of a married couple which sees the husband’s benefits significantly larger than the wife’s, it usually makes sense to delay receiving benefits in order to increase the survivor’s benefit. This holds true for couples who are the same age or when the wife is younger than the husband. If the situation is reversed (husband earned less than the wife and is younger), actuarial rules should be applied to consider longevity and a decision made on that basis.

Generally speaking, when the wife has significant earnings, it makes great sense to begin taking benefits at the earlier age. If the wife has virtually no earnings, she should wait until her husband retires before taking SSA benefits.

As you can see, it’s not always as easy as just choosing the earliest age to begin receiving SSA benefits. After analyzing all of the factors, it could be very advantageous to delay. Understanding all of these factors and how they impact your benefits will help in the decision-making process. Don’t forget to consider these factors – and let me know if you’d like some guidance in the process.

The 529 "Loophole"

2006-07-18T14:53:00.000-05:00

Parents of college-bound students: If you haven’t heard about the 529 loophole, listen up: Congress passed a law earlier this year, making changes to the way 529 plans and Coverdell ESAs are treated for financial aid purposes.

In the past, these college savings accounts and tuition plans were considered either assets of the account owner (in the case of a savings 529), or an income source (in the case of a pre-paid tuition plan). What this meant was that, if the dependent student was the owner of the 529 plan, the value would be assessed at a rate of 35% (savings), or 100% income source (prepaid tuition). The new law removes these accounts from financial aid consideration altogether.

It’s important to note, the only place that this “loophole” makes a huge difference is if the student owns assets, such as within an UTMA or UGMA, or an existing 529 plan (with the student as the owner). This is probably a small group of families that face this situation, but the impact is significant

If you happen to be in this position, keep this loophole in mind as you file (or re-file) your FAFSA form. In some cases it may make sense to re-file a corrected form to eliminate the account(s).

Retirement Saving: Have You Done Enough?

2006-07-18T14:50:00.000-05:00

One of the reasons that retirement funding is a mystery to most folks is the uncertainty that comes with trying to determine how much is enough – enough savings set aside so that we don’t run out of money during retirement.

The answer to this question begins with an understanding of your day-to-day living expenses, and how those expenses may change in retirement. This is a simple enough process, although it does take some effort.

The difficult part of the process is to determine what the funding requirement is in order to provide the income you’ll need to cover your living expenses – for as much as forty years or more!

There is a rule of thumb (more on this later) that you can use to come up with a rough guess – but without using sophisticated computer modeling and Monte Carlo analysis, your level of assuredness is limited.

According to a recent survey by the Employee Benefits Research Institute, 84% of all people believe that they will have plenty of savings to cover their needs in retirement. At the same time, less than one-third of those surveyed had gone through the effort to calculate how much they will need.

When looking at the actual savings numbers, only around 20% of the survey respondents had in excess of $100,000 set aside for retirement, and more than 10% indicated that they had nothing at all saved for retirement.

The rule of thumb that I mentioned before indicates that you should plan to withdraw no more than 3% to 5% each year from your retirement savings in order to not run out of money. This is what we refer to as a “sustainable rate of withdrawal”. What this equates to is a requirement of $1 million in retirement funds in order to be able to withdraw $30,000 to $50,000 each year.

Don’t despair over these estimates, though. The rule of thumb is based upon 100 percent certainty, and if you happen to have that luxury, that’s fantastic. There are ways to increase your sustainable rate of withdrawal, while still maintaining a high degree of certainty.

The first and possibly most important factor is to have a plan, and to monitor your plan closely. You can do this on your own, or in conjunction with a financial pro. Paying close attention to your plan and staying with it will provide you with the information in order to make certain that your plan stays on track.

Making adjustments to your portfolio holdings can have a positive impact on the level of sustainable withdrawal. It may seem to run counter to your intuition, but more risk in your holdings is good for your long-term holdings. It is important to maintain significant positions in the stock market in order to achieve a higher level of withdrawals over time.

The third factor that can have an impact on your savings’ sustainability is the pattern of income that you’ll need in retirement. As you probably realize, over the span of your forty-plus year retirement, your income needs will likely change. During your first several years, you’re likely to spend considerably more than the “average”, as you travel more, take on new hobbies, and the like. Or, on the other hand you may continue to save during this time of your life.

Later on in your retirement, many folks take on lower expenses as they become more sedentary, not traveling as much. Declining health and lower energy level makes staying closer to home more attractive. In later years, health care costs can cause the expense levels to soar.
It is also important to maintain a realistic view of your own life span. It’s not at all unreasonable to project your retirement plan out to your late 90’s.

There are more factors that can have a positive impact on your sustainable withdrawal rate, but these are the primary ones. I want to reiterate that the most important factor is to make a plan, monitor it closely, and make the appropriate adjustments throughout your life.

What you’ll find is that, by putting some effort into developing a plan, you’ll have much more confidence in your ability to make your savings last. At the same time, if you find that you haven’t yet done enough, you have time to make adjustments in your efforts that will increase your odds.

Having made a plan, it’s also important to review and update it, on average once a year or so. This kind of review will leave you with the peace of mind that, in fact, you’re on track. And don’t forget to factor in your guaranteed income sources – such as pensions, annuities, and Social Security.

Isn't It About Time?

2006-06-13T10:05:00.000-05:00

If your life is anything like mine, I’m sure you can relate: it seems like every available moment is filled with multiple activities that you need and want to take part in, plus, it seems that the to-do list grows longer daily. If you’re not dashing off to a baseball game or soccer match, then there’s club meetings or church commitments, yard work, family obligations, volunteer activities… the list goes on and on.

Add to this the stress that goes along with having to make all of the financial decisions in your life, not knowing for sure where to turn for advice, and ultimately making a choice that just “seems right” – but there’s always that question nagging in the back of your mind: “Am I doing the right thing?”.

Wouldn’t it help to have an expert review your entire financial picture – your credit cards, insurance, real estate, employer plans, mortgages, IRAs, 401(k)s, etc. – and provide a clear-cut approach to moving toward your life’s goals, answering that nagging question?

I can’t say that this kind of guidance will give you more time, but perhaps you’ll be able to enjoy your life’s activities a little more with one less thing on your mind.

Isn’t it about time? Let’s get started.

Student Loans

2006-06-13T10:04:00.000-05:00

Anyone who has student loans that are in need of consolidation should act now and get this done before the end of June. On July 1, the guaranteed rates for consolidated student loans will increase dramatically, from 4.7% to 6.54%.In addition, beginning on July 1, a recent change in the law restricts borrowers to one consolidation – regardless if you’ve gone back to school and incurred additional loans above the original consolidation.

College Preparation

2006-06-13T10:03:00.000-05:00

If your student will be a sophomore or junior in high school this fall, it’s time to get serious (very serious, if they’re going to be a senior!) about preparing for college. This includes school choices, scholarship research, funding arrangements, and other financial issues.

Don’t know where to start? Give me a call. As a Certified College Planning Specialist, I am in a unique position to help you navigate this important preparation phase as you and your child prepare for this next chapter of their lives.

New Retirement Risk Index

2006-06-13T10:00:00.000-05:00

Earlier this month, the Center for Retirement Research (CRR) at Boston College published a briefing on their new Retirement Risk Index.

As you might expect, most of the report is pretty dull, without much of any interest to anyone other than a statistics geek like me. There are a couple of notes in the text though, that I thought I’d point out to you, as they indicate some trends that you may be able to identify with, or they might just spur you into taking some actions for yourself and your family.

Social Security Replacement Ratio. The first interesting fact that the CRR found is that, for the foreseeable future, the rate at which Social Security is expected to replace your salary upon retirement will continue to erode. This isn’t a shocking revelation, we’ve expected it and quite often incorporate this fact into retirement plans, but this report is the first I’ve seen where actual projections are being made as to the rate of the erosion.

The report indicates that the replacement ratio for 1992-2002 was 40%, when Medicare Part B deduction is taken into account. The projection is that, by 2030, when the first of Generation X will be ready to retire, the replacement ratio will be approximately 33%. This represents a reduction in the real purchasing power of the payments of approximately 17.5% - meaning that you’ll either have to make up that much more with your retirement account, or you’ll need to tighten your belt that much more.

The Risk Index. What the index itself indicates is that there is a certain segment of our population that is “at risk” of having inadequate income for retirement. Overall, the CRR says that 43% of all households are “at risk”. When you take that figure and apply it to those around you, it quickly becomes apparent that we’re going to have a major problem as folks begin to retire – especially the very large “Boomer” generation. Nearly one out of every two households are considered “at risk”.

For the earlier Boomers, born 1946-1954, the figure is a little better, at approximately one out of three at risk. Perhaps this means that as folks get nearer to retirement, they “see the light” and are making up the difference where possible. I hope so.

Exchange-Traded Funds

2006-06-13T09:58:00.000-05:00

For those of you who have worked with me, you likely already know that I am a fan of Exchange-Traded Funds, or ETFs for developing appropriately diversified portfolios.
Why ETFs? There are several reasons, but the ones I find most compelling are:

Low cost
Ease of Use
Simplicity

Taking these factors one-by-one, first I’ll address the Low Cost factor. Since most ETFs require no management since they’re simply tied to an index, the expense ratio is incredibly small. For example, the average S&P 500 index mutual fund carries an expense ratio of 0.577%, while the average S&P 500 ETF has an expense ratio of roughly one-sixth the size, at 0.092%. Over the long term (which all of our equity investments should be) this differential can make a substantial difference in the results of your investments.

I work very hard to make sure that your investment portfolio is as cost-effective as possible – and using ETFs is, at this point in time, the best option I can find that strikes the balance between low cost and effective diversification.

Secondly, I choose ETFs due to their Ease of Use. What I mean by this is that ETFs, specifically index ETFs, provide the investor with immediate access to broad portions of the stock market with ease. When developing a portfolio of appropriate diversification, there is no doubt that you are covering the various facets of the market when you choose an indexed ETF for that market segment.

Lastly, the Simplicity of ETFs is readily apparent – when you realize that you can purchase an ETF from any brokerage account, with only the (usually small) transaction fee, you notice that there’s a small delay as your transaction settles in the account, unlike traditional mutual funds, which make take a day or two to complete the transaction.

Combining the simplicity, ease of use, and low cost of ETFs makes this choice a “triple threat” when constructing an investment portfolio.

Use the A-B-C Test to Compare Insurance Proposals

2006-05-16T09:55:00.000-05:00

When confronted with multiple insurance proposals, I suggest you try the A-B-C Technique. This method will help you learn the details of different proposals that agents will offer from different companies.

Here’s how it works: After Agent A submits a proposal, ask him/her to take a look at Agent B’s submission. In turn, ask Agent B to examine Agent C’s proposal and evaluate it. Lastly, show Agent C the original recommendation from Agent A.

In this A-B-C triangle, you are not trying to embarrass anyone, but you are taking advantage of a person’s expertise in the very competitive marketplace of insurance coverage.

This strategy works especially well in evaluating disability insurance plans or long-term care plans, because the “fine print” in either type of plan is crucial in determining which proposal best meets your particular needs.

Keep in mind that with many types of insurance, expensive may be better. Shop by benefits offered, not premium price. And if you need a third-party opinion, give me a call. I will evaluate each of the options from a non-involved perspective.

529 Plan Bankruptcy Protection

2006-05-16T09:54:00.000-05:00

Last year, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 into law. Some of the very helpful provisions in this law affect college education savings plans such as 529 plans.

The specific provisions that protect college savings from creditors are as follows:
· Full exemption is provided only for funds contributed to college savings plans more than two years prior to filing bankruptcy.
· The protection is limited to $5,000 for funds held for one to two years.
· If the account or contributions have been in place less than one year, there is no shielding from creditors.
· The education savings vehicle beneficiary must be the debtor’s child, grandchild, stepchild or step-grandchild. You cannot establish a 529 plan in your own name and take advantage of the new protections.

Silly Deferred Account Tricks

2006-05-16T09:47:00.000-05:00

(or, teaching your money to roll over)

You’ve heard it millions of times – on the radio or tv – “when you leave your job, you should roll over your retirement account”. You may know that it makes sense (or at least you assume it makes sense, otherwise why would these folks admonish you to do so?), but do you know why it’s important? And do you have the first clue as to “how” to accomplish a rollover?

Why roll over? Among the reasons that it is important to roll over your retirement account when you leave employment is that you want to be able to control your money. If you leave the account with the former employer, you are effectively handing over a portion of the control of your money to the administrator.

This administrator’s primary job is to ensure that the plan remains as effective and efficient as possible, for your former employer. Your interests are not taken into account at all, and in fact, many activities that the administrator undertakes (and subsequently charges to the plan accounts) are of no benefit to you whatsoever, as a former employee. By rolling your funds over to a self-directed IRA, you can make sure that the costs associated with your account’s maintenance are directly benefiting your own account.

In addition, by rolling over your retirement funds into an IRA, you will now have more flexibility in the investment choices you can utilize. Remember how your employer’s qualified plan only had five or six mutual funds to choose from? Now, you can invest in just about any fund, stock, bond, or ETF that you can think of.

How to roll over? We’ve covered (albeit briefly) the “why”, so now we’ll cover the “how”. It’s actually pretty simple, as long as you follow a couple of important rules. Both of these are related to maintaining the tax-deferred nature of your investment.

The first rule is that you should always have an account set up to receive the monies before requesting the withdrawal from your current plan. If you don’t have a place to put the money, the plan administrator will assume that you’re taking a “cash out” distribution, and they’ll withhold 20% tax on the withdrawal. The way to resolve this is to ensure that your withdrawal paperwork (with your old account) indicates a “direct rollover” is occurring. At the same time, your deposit paperwork with your new account will indicate the same. The old plan administrator may still send a check to your home address, but it will be made out to the new account custodian.

The second rule is related to the first, but this is one that you can foul up even if you’ve gotten the paperwork filled out correctly: your rollover must occur within the span of 60 days, or you’ll be penalized as if you withdrew the money to cash out the plan – 10%, plus ordinary income tax on the withdrawal.

As I indicated earlier, the current (old) plan administrator may send you a check for your rollover, made out to the new custodian – but it’s up to you to make sure that you get the check sent to the new plan custodian as soon as possible, so that there’s no danger of taking more than 60 days to complete the roll over.

The entire process is simple enough, following the steps below:

1. establish your new account
2. request a “direct rollover” withdrawal from your old plan
3. receive the rollover check
4. submit the check with the appropriate “direct rollover” deposit slip at your new account.

As you can see, the process is straightforward, but if you don’t pay close attention to what’s going on, or if one of your plan administrators (either the new one or your old one) has a special “twist” to the process, it can become a mess.

If you’re in doubt about this process, feel free to give me a call – this is one of the areas that I specialize in and I’ve helped quite a few folks successfully navigate this process.

Scholarship Applications

2006-04-25T08:13:00.000-05:00

For those of you that have already dealt with these, I’m sure you’ll agree with me that filling out a scholarship application ranks right up there with tax returns, mortgage documents, and FAFSA forms. Plus, there’s a lot riding on it. Making the right statements could have a significant impact on your student’s educational future. Submit an application that has typos and grammatical errors, and you may as well have just skipped it altogether.

Listed below are some tips to help your student navigate through the process of completing the application and essays.

Scholarship Application Tips

Pay attention to deadlines. Applications submitted past the deadline are not considered.
Prepare a resume. Not only is this good practice for the student as they venture closer to the world of a career, but also gives the student an opportunity to “showcase” their activities and achievements.
Send more than asked for. It may help to provide additional materials, such as evidence of awards, additional activities, or writing examples. This will give the decision-makers a more complete picture of the student. If, however, there are explicit instructions to limit your submission to specific items, follow the instructions. Any additional information will be considered “clutter”.
Prepare letters of recommendation. The student should cultivate the sources of these letters fairly early on in their career – so that when the scholarship deadline is looming, the letter-writer isn’t put under pressure to produce a letter on short notice. These letters are an important source of information for the display of character, personality, and specific talents.
Essay writing. The student should make certain that the essay allows their personality to show. In addition to scholastic and academic achievements, it is important to showcase the well-rounded student, highlighting sports, club memberships, honors, achievements, volunteer and community work. It is also important to include personal vignettes, lessons learned, and information on financial need where applicable.
Proofread. Nothing will come across with a greater negativity than a sloppy, poorly written, grammar and punctuation nightmare. Have at lease two other people review your application and especially your essay in order to find all the errors and correct them before submitting.
Copies. Always keep a copy of everything that you submit. Things have a way of getting lost in the mail. Plus, if you’ve got a copy of what was sent, if there are questions on a portion of your submission, you can easily answer them from your copy. (By the way, this is a good practice for anything that you send anywhere. In today’s world of computers with scanners, there is simply no reason to ever be caught without a copy of a form you’ve sent somewhere.
Thank You. It’s a good practice to get into: regardless of the outcome by the scholarship committee, the student should send a brief letter or card, thanking them for their consideration. In the event that the student receives the scholarship, a more formal letter of thanks would be quite appropriate.

Why Plan?

2006-04-25T08:11:00.000-05:00

I am always advocating creating a plan for your financial life – but why plan? Maybe we can identify some factors which may motivate you to develop plans for your life, incorporating financial factors with the rest of your life.

Following are some of the more important factors that you may want to think about:

1. It is a way to prepare for the future. This fits in with one definition of planning, which is "intelligent cooperation with the inevitable."
2. Planning identifies problems and points the way to solutions. Taking a systematic, thorough look at the situation and thinking about the future possibilities can bring these things to light.
3. It helps us to do first things first. In other words, it provides a rationale for assigning priorities. Should we save more for retirement, or for college? Should we pay off our home mortgage?
4. Planning helps to coordinate your various goals with one another. For example, you need to make sure that adequate funds are being set aside for family vacations, while still putting aside funds for college and retirement.
5. Planning can educate, involve and inform you and your family about the various goals and situations that you have to account for within your financial world. Planning can be a real eye-opener.

Now, just so that you won’t think that this concept of planning is a new idea, I recently came across the following endorsement of the concept of planning:

“Suppose one of you wants to build a tower. Will he not first sit down and estimate the cost to see if he has enough money to complete it? For if he lays the foundation and is not able to finish it, everyone who sees it will ridicule him, saying ‘this fellow began to build and was not able to finish.’

Or suppose a king is about to go to war against another king. Will he not first sit down and consider whether he is able with ten thousand men to oppose the one coming against him with twenty thousand? If he is not able, he will send a delegation while the other is still a long way off and will ask for terms of peace.”

In case you don’t recognize the quote, it is from the New Testament of the Bible (NIV), the book of Luke, chapter 14, verses 28-32. Obviously the concept of planning is important – considered by Jesus Christ to be what we call today a “no brainer”. That’s a pretty powerful endorsement, no matter how you look at it.

Hopefully these factors have helped you to understand the importance of planning – and that you are inspired to begin developing your own plan. Because your life will go according to “a” plan, you might as well make it “your” plan!

I Bet You're in This Group

2006-04-02T11:38:00.000-05:00

This sort of puts things in perspective! If the population of the Earth was reduced to that of a small town with 100 people, it would look something like this:

There would be:
52 women
48 men

57 Asians
21 Europeans
14 Americans (northern and southern)
8 Africans

70 people of color
30 Caucasians

Six people would own 59% of the whole world wealth and all of them will be from the United States of America.

80 would have bad living conditions
70 would be uneducated
50 underfed
1 would have a computer
1 (only one) will have higher education, (probably the one with the computer).

Also think about the following:

If there is a food in your fridge, you have shoes and clothes, you have bed and a roof, you are richer then 75% of the people in the world.

If you have a bank account, money in your wallet and some coins in the money- box, you belong to the 8% of the people on the world who are “well-to-do”.

Savings Rates By Generation

2006-03-19T13:12:00.000-06:00

According to a recent article in USA Today, there are stark differences in the way the three current “at work” generations view savings habits. The three generations are Baby Boomers (born 1947-64), Generation X (born 1965-80), and Generation Y (born 1981-95).

The rate of participation in retirement savings plans for the Boomers is the highest, as you might imagine – at 72%, with an average account balance of approximately $93,000. The Gen X group is next at a participation rate of 63%, account balances around $31,000. Gen Y brings up the rear in participation rate at 31%, and account balances around $3,200.
While these numbers aren’t necessarily unexpected, they highlight two issues:

1) Gen Y members need to get “with it”, since they are far more likely to have jobs without traditional pensions; and
2) Baby Boomers need to increase that average account balance. Less than $100,000 in a retirement account and nearing retirement is not a promising place to be. Without some other form of sustenance, this amount will be woefully inadequate as you begin drawing on the balance to live on in retirement.

So, if you’re one of those folks whose retirement account is in good shape – keep it up! If you’re “average” or below, you want to start concentrating on your savings. And help your children understand that they need to start saving, as well.

Tax Deductions

2006-03-19T13:11:00.000-06:00

Many Americans unknowingly overpay on their income taxes each year – because they don’t know all of the deductions that they have available to them. Listed below are several new and commonly-missed deductions that you may not be aware of:

$$$ - for 2006, you could be eligible for up to $3,400 in tax credits if you purchase a hybrid automobile – but don’t wait until the end of the year! This credit is limited to the first 60,000 units of these cars (allocated to the several given hybrid manufacturers by volume), and once they’re gone, it’s gone.

$$$ - according to the GAO, over 2 million taxpayers overpaid on their taxes in 2002 simply because they didn’t take advantage of the tax laws enacted late in the year. The same held true for the 2004 provision to deduct state sales tax instead of income tax – since it was enacted late in the year, an estimated 1 million taxpayers didn’t take advantage of it.

$$$ - with the skyrocketing cost of medical expenses, it may make sense to track these costs and deduct them. For retired folks on limited income, with high medical expenses, the 7.5% floor is often easily met. This is a deduction that often gets overlooked because the taxpayer hasn’t tracked the expenses throughout the year.

$$$ - speaking of the elderly, if you’re providing support for elderly parents or grandparents, and their income (above Social Security) isn’t more than $3,200, you can claim them as dependents on your tax return – even if they live by themselves or in a nursing facility. You must provide more than half of their support in order to claim this exemption.

$$$ - when making charitable contributions, it pays to note the actual date when you’ve made the contribution. For 2005, for example, cash donations made after August 28th (Hurricane Katrina) could be deducted in full, rather than being limited by your income as contributions would be otherwise.

$$$ - the same goes for business deductions: for 2005, any mileage driven in your personal car for business purposes could be deducted at a rate of 48¢ per mile for miles driven between September 1 and December 31 – an 8¢ increase of the rate from earlier in the year.

Asset Allocation

2006-03-19T13:08:00.000-06:00

On these very pages not too long ago, I pointed out the most important factor to achieving your investing goals, and that is consistent accumulation. The second most important factor?

Asset allocation is the process of dividing your investment “pile” into various different types of investments in an effort to maximize your exposure to the benefits of each type of appropriate asset class – while at the same time utilizing the risk as efficiently as possible.

There are two primary factors which help to determine how you might allocate your investment assets: risk tolerance and time horizon.

Risk tolerance deals with whether or not you can sleep at night knowing that your investment could fall (or rise!) by 15%, for example. If you’re a person who has to watch your investments every day and can’t stand it when you see a loss, you have a low tolerance for risk. If, however you recognize that it is important to take measured risks in order to achieve a better return, you may have a moderate tolerance for risk. On the other hand, if you consider the lottery, Texas Hold ‘Em, and day-trading penny stocks to be reasonable components of a portfolio, you’ve got an inappropriately large appetite for risk.

Risk is tempered by time horizon. In other words, even if you’re fairly risk-averse, if your time horizon is long enough, you can (and should) take on a fairly risky allocation model. Conversely, when your time horizon is shorter, you need to back off on the risk – even if you have a high appetite for risk – the short time horizon reduces your ability to recover from significant losses should they occur.

What’s important to remember is that investing too conservatively early on in your savings career can have a drastic affect on the results. Since you have a significant amount of time for compounding to work in your favor, it makes sense to take additional risk to increase the overall return for your portfolio. With time on your side, you can afford to take a little more risk when the reward is appropriate.

At the same time, when your investing horizon is shorter, say less than five years, you can’t afford to put your funds at much risk. But this doesn’t mean that you should put your money under the mattress – inflation will eat away the buying power of your money in a short time. It’s important to maintain a degree of risk in your portfolio throughout your investing life in order to combat the impact of inflation and provide for a minimal amount of growth.

Having determined an appropriate allocation model to follow, it makes sense to review and re-balance your portfolio about once a year – in order to make sure your allocation model is still in effect. Rebalancing more often doesn’t produce benefits to match the amount of effort and transaction costs that you would incur.

Happy allocating! As always, if you need some help with this, I would be happy to help out – just give me a call.

The DRA's "Dirty Little Secrets"

2006-02-19T13:04:00.000-06:00

Congress passed the “Deficit Reduction Act”, or DRA, recently. I think the title of the Act is inappropriate, in that it provides for a reduction in the rate of deficit increase, rather than an actual reduction of the deficit itself.

Imagine if you or I decided we’d put into place a plan to reduce the rate at which we increase our credit card balance each month, while never actually paying down the principal! Whatever happened to fiscal responsibility??

At the end of the day, this DRA promises to reduce the budget deficits by about $40 billion over the next several years, or about 2.5% of the $1.6 trillion of projected deficits during that time period.

Here Are The Dirty Little Secrets
I’ve Found (So Far)

A few Dirty Little Secrets were hidden within the DRA, two of which will have an impact on you if you are, or will be, paying for college costs by way of loans – and let’s face it just about everyone has at least some loans in their college payment plan.

The first Secret is that it will now be illegal to consolidate student loans while the student is still in school, which was a favorable option allowing students to lock in lower fixed rates. This may not seem like such a big deal until you hear about the second secret.

The second Secret in DRA 2006 is that, no matter what, you only have one opportunity, as a user of student loans, to consolidate them. In the past, there was a small loophole which allowed to you re-consolidate loans if you took out another student loan after the initial consolidation. Not any more.

So, who is the benefactor of these Dirty Little Secrets? Sallie Mae, the privatized holder of most student loans – because if favorable consolidations were openly available, Sallie Mae would have to compete with every financial institution out there for your loans. And we all know what happens when competition is allowed in the marketplace! Why, inefficiencies are wrung out, and the fittest survive! And Sallie Mae is not among the fittest.

Another change that we knew was coming is that the new rate for subsidized (Stafford) loans will be increasing from 4.7% to 6.8%, and PLUS loans will hop up to 8.5% from 6.1%.

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

* Medicaid Provisions
One last item that caught my interest in the DRA is the changes to the Medicaid program. Primarily, this provision makes some of the “qualifying” or Medicaid planning options a little more difficult. The other item allows for an exclusion of some Long-Term Care policy proceeds when qualifying for Medicaid benefits.

Annuities - Good, Bad, or Otherwise?

2006-02-19T13:00:00.000-06:00

For many folks, questions about annuities are a large part of your financial concerns. So, I thought I’d take the opportunity this month to address some of the basics of annuities, as well as the ways annuities are used and abused.

First the basics: Annuities are generally a product of insurance companies. There are two components to the contract – a rate of return, either fixed or variable; and a payout, which may be deferred to the future or immediate.

To define these terms a little better:
· Fixed rate: this kind of annuity invests in very conservative assets. The rate of return is guaranteed, and usually slightly higher than current CD or money market rates.
· Variable rate: this type of annuity has multiple “sub-accounts” (like mutual funds) to choose from, allowing for fluctuating returns. The point is that with these investments, presumably you will have a greater likelihood of positive results. Oftentimes, the opposite may occur.
· Deferred: In a deferred annuity, the payout begins at some point in the future, usually retirement.
· Immediate: With this type of annuity, a lump-sum of money is deposited, and the payout begins immediately. The payout then continues for a certain period of time, or for the life of the annuitant.

All annuities share certain common characteristics, including tax deferral on the funds until withdrawal, surrender charges if the contract isn’t held for a certain period of time, penalties from the IRS if the money is withdrawn prior to age 59 ½, and a death benefit if the annuitant dies prior to the payout. Oh, yes, and one other common item: expenses and charges – of as much as 4% or more – are charged to the account annually.

It is due to the high expenses associated with annuities that they are a favorite of insurance salesmen. After all, high expense equals high commission!

One place that an annuity might make sense is for the individual who has maxed out all of their other tax-deferral options, such as 401(k) and deferred compensation plans, as well as a Roth IRA. Even so, you need to look closely at the expenses and examine the true return you can expect, as well as your need for an insurance component in your portfolio, before diving into an annuity.

Another good circumstance for a fixed annuity is to provide a steady conservative component of your portfolio. These should be compared to bond funds for yield to see if there is a benefit, of course.

The good news is that there have recently been some alternatives developed in the annuity arena by low-cost providers like T. Rowe Price and Vanguard. These companies’ offerings should be considered if you’re thinking about an annuity.

Assets

2006-01-19T12:57:00.000-06:00

Most financial advice is about financial assets. The truth is, there are really five different kinds of assets that we should consider:

Personal Assets. Clothing, furnishings, and jewelry fit into this category. Most of this “stuff” decreases in value to less than half what we paid for it before we even get it home.
Household Assets. This includes real estate, cars, and appliances. Most of these items either appreciate in value over time or provide a fair value over their life (in relation to renting the service).

Employment Assets. Some employers still provide for a pension for their employees’ retirement. This pension has a value, and should be considered an asset. Since most companies have under-funded their pension plans, you might discount the value of this asset by half, but you should still consider it if it’s one you have available to you.

Social Security Assets. Since most of us have been force-fed the koolaid of having our 401(k) rather than considering what Social Security benefits may be available to us, we don’t even think about this benefit as an asset. Unless it is eliminated entirely, though, we should still consider the value of this future income stream as an asset, although we should also discount it somewhat, due to the fact that the system is vastly underfunded and will become overburdened over the next several years as the “Boomers” begin retiring and drawing benefits.

Financial Assets. This is the 401(k) plan, IRA, or taxable stock, bond, mutual fund or savings accounts that you’ve established. This one usually gets the most attention, because it tends to trump all the other types of assets. When you have plenty in this category, you don’t tend to worry about the other categories, because you can always use the money from here to buy the goods and services to cover those other categories.

Now for the good news – even though most of us don’t have anywhere near enough set aside in the financial assets category, it’s not impossible to build things up in order to make your future a little brighter.

According to a recent article by Scott Burns, there are a couple of “seductive illusions” that we need to avoid in order to get there:

The first of these illusions is that our personal assets will somehow contribute to our future security. Take a stroll through the Goodwill store and you’ll see the illusion of what those things are worth, should you ever need to sell them.

Secondly, and possibly the most harmful of these illusions, is that our household assets can be quickly turned into financial assets. This illusion is harder to break, because past generations have done this successfully: most residents of Florida and Arizona had very little in financial assets before they sold their household assets in New York or Chicago or California. It doesn’t work as well for those of us in the great Midwest, where property doesn’t “bloom” in value every year.

So – how can you tell if you’re doing the right thing with your assets? Here are some basic benchmarks to consider:
* If your Personal Assets are growing faster than your Financial Assets, your focus is in the wrong place and trouble is on the horizon.
* If your Household Assets are growing faster than your Financial Assets, you’re fortunate to live where you do. But you may be heading for a problem in the future, having to sell your home in order to provide funds to live on, because that’s where your money is.
* And a sign that you’re headed in the right direction – if your financial decisions revolve around reducing your mortgage or increasing your financial assets rather than purchasing or paying for Personal Assets, then you’re doing the right things. Keep up the good work!

What is College Really Worth?

2006-01-19T12:55:00.000-06:00

About this time of year, many families of high school seniors will begin to have some very serious discussions about money, education, and the realities of what is affordable versus what is not. In many cases, this discussion will have a dramatic impact on the student’s future.

For many parents, this brings up a dilemma: perhaps you’ve saved some money, but not enough to pay for the incredible cost of tuition at some of the higher-end colleges. It seems that the saving that you’ve done is actually working against you, because you’re finding that having some assets to your name takes you out of the running for many grant options.

At the same time, your child has, well, good grades, but they’re not the valedictorian by any stretch. What’s the next alternative?

Of course, there are plenty of loan options to choose from, including home equity loans, “PLUS” loans, and loans from retirement savings plans.

Each of these options (and there are many others to choose from) has shortcomings. Home equity has a tendency toward a floating rate, which could become very expensive in the long run. PLUS loans are non-deductible and often carry floating rates, plus the repayment period begins immediately. Borrowing from a retirement plan is never a good idea – it’s hard enough to put money aside in the first place, let alone continue putting money aside and paying yourself back at that same time!

So the issue comes back to the original question: what is college really worth? Obviously a college education is worth the expense in the long run, but is an education at a prestigious institution really worth the additional cost?

There are really two answers to that question. First of all, most of the “prestigious” schools operate on a false pretense when it comes to the cost of attendance. It is extremely rare that a student would pay the “sticker price” to attend. There are so many endowments and scholarships available at these schools, most students don’t come anywhere near paying the whole amount.

The second answer is a resounding “No!” – meaning, the quality of the education and the cachet that goes along with it are likely not worth the additional cost, even if you were to be required to pay it. When making comparisons between various different schools you need to keep in mind that the name of the institution makes far less difference in terms of career success for your student than does the simple fact that the student has taken part in and passed this milestone in their life.

So if the question comes down to cost – and let’s face it, you know it will – focus more on making sure that your student can get an education at a quality school, rather than believing that the prestigious name institution is going to make a big difference in the long run. The education is the important part; we just need to remember that.

Equity Indexed Annuities

2005-12-19T12:53:00.000-06:00

While technically classified as a fixed annuity, an equity-indexed annuity (EIA) can be described as a hybrid of a fixed annuity and a variable annuity, having some characteristics of both, and falling in between with regard to potential for return and level of risk.

With a traditional fixed annuity, the annuity issuer guarantees both the rate of return and the payout. Investors in fixed annuities elect safety of principal and guaranteed returns over market risks and the potential for higher returns.

With a variable annuity, on the other hand, the rate of return varies according to the performance of the investments you choose from those offered by the issuer (these investments are often called subaccounts). With the exception of a guaranteed subaccount, variable annuities don’t offer any guarantees on the performance of the subaccounts. You assume all the risk related to those investments including the risk that you may lose principal. In return for assuming a greater amount of risk, investors in variable annuities have a greater potential for growth in earnings.

EIAs take the middle ground, offering limited downside risk balanced by limited upside potential for returns. They offer safety of principal, and generally a minimum rate of return (provided the EIA is held for the full term). EIAs also offer the potential for higher returns by tying interest paid to the performance of a stock index.

Cutting College Costs

2005-12-19T12:52:00.000-06:00

Parents, when planning to pay for your child’s college expenses, you’ll receive an estimate from each school of the cost for tuition, fees, and other expenses. Most often, the “other expense” factor may seem very high, and a little hard to understand.

A recent survey by Student Monitor, tracking the spending habits of college students, shows that students tend to spend an average of nearly $7,000 on discretionary items. The following is a list of some of the discretionary spending that they uncovered:
· Transportation and Travel – frequency of visits, distance, and mode of travel will impact this the most.
· Personal Expenses – phone, laundry, toiletries, clothing, and entertainment
· Additional Fees and Dues – lab fees for science classes, honorary and social fraternities, and other fees
· Health Insurance – quite often this is an included charge on the tuition bill. If the child is already covered on the family policy, be sure to waive the institution-provided insurance.
· Books and Supplies – again, each class will have required books, and some will have required supplies. Used books can help lower the costs, but are often scarce or outdated.
· Room and Board – there are a lot of variables in the cost of room and board, depending upon the residence hall chosen, whether the room is a single, double, triple or quad room. Off-campus living may reduce the “rent” cost, but there will be additional costs for utilities, groceries, etc.
· Computer – many times, a computer is required, and if so the admissions requirements will explain the expectations. This will impact whether the student needs a basic PC or a more expensive laptop.
· Property Insurance – Most homeowner’s policies will cover the student’s personal property in a dorm room, but check your policy’s limitations against the value of the possessions. There may be a limit in the coverage. And if the student lives off-campus in an apartment, a renter’s policy is a must.

The Most Important Factor in Retirement Savings

2005-12-19T12:48:00.000-06:00

We’ve all been there: making decisions on the old retirement savings account. It doesn’t matter if it is a Roth IRA, a 401(k), or a deferred comp plan, there are many different decisions that we have to make.

It can be overwhelming, until you step back and realize that there are actually only three primary decisions to make:

1. How much to contribute
2. How to allocate between stocks and bonds
3. Which funds/investments to choose

Once you realize this, it becomes much easier to start the decision-making process. But here’s something about that process that I’ll wager you didn’t realize – one of those three decisions is by far more important to the overall success in your plans, and there is another factor* that you may not have considered.

The most important decision you can make with regard to your saving activity is the first one in the list – How much to contribute.

According to a recent study by Putnam, this one factor makes a much greater difference in the outcome of a savings plan than the other two can, even in the best of circumstances. By choosing to save as much as possible, we are laying the groundwork for the other items, allocation and fund choice, to optimize upon the greatest possible starting amounts.
Putnam’s study indicates that fund choice makes the largest difference in the later years of a plan, and that aggressive allocation makes a smaller difference in the earlier years.

The rule of thumb generally is that you should invest at least enough to get the maximum from your employer’s match, assuming that a match is available to you. Above and beyond that, it is important to ensure that you’re salting away as much as you can, so that compounding can begin on as large an amount as possible.

This doesn’t mean that you should not pay careful attention to allocation and fund choices – what the study indicates is that you can make a mistake here and there with allocation or fund choice, and it won’t sink the boat.

*The other factor that I alluded to earlier is having a plan, and the discipline to stick to it. That means developing goals, mapping out how (incrementally) you will achieve those goals, and then putting the plan into action – sticking to it, through thick and thin, and monitoring your progress. I know, I know, you’re saying to yourself, “what a shock, the planner-guy is advocating that we have a plan”. Touché. Okay – so I believe in what I do. I recommend that you develop a financial plan regardless of whether you hire me to do it. I sincerely believe it is the most important factor in determining success in reaching your lifelong goals.

Women as Retirees

2005-11-19T12:47:00.000-06:00

A recent survey by the WISER institute shows that retirement is a myth for the majority of women across the country. Here are a few of the key findings:
· 38% of women aged 30-55 are worried they will live at or near the poverty level because they cannot adequately save for retirement. The figure for men in the same age group is 33%.
· 52% of women expect to continue working once they reach retirement age
· 54% of women have little to no money left to save for retirement once they pay their bills. This figure rises to over 62% for African-American and Hispanic women.
· More than four in ten women sampled said their retirement would be less comfortable than that of their parents.

College Planning

2005-11-19T12:45:00.000-06:00

* ATTENTION parents of students of the Class of 2007, 2008, and 2009! Has your student begun the process of choosing a college? Do you or your student even know where to start?
I can help with complete college planning. This includes step-by-step guidance along the way as your student prepares for college, choosing a college, and helping you develop plans to pay for tuition, books, fees, room and board, and the like.
* I also provide assistance for students in their senior year (Class of 2006) as you prepare for filing for financial aid, in order to avoid costly delays.
If you’d like some help with either situation, give me a call. It may be too late and I won’t be able to help you out, but it won’t cost anything to talk it over and see if there is anything I can do to help.
* SPEAKING of college planning, one of the biggest mistakes I see parents making these days is to put saving for college ahead of all of their other financial goals. Understandably, they want to give their children everything, and that includes an education without cost to the student.

Keep this thought in mind: you can always take out a loan for college. You can’t take out a loan to retire.

With the cost of college spiraling upward, many parents come realize that not only do they need to save for education, but out of the same paycheck they need to put money aside for retirement as well.

College preparation, including savings, should be thought of as a family project, so include the children in the activity. It’s not bad parenting to share the cost of college with your children – in fact, many would argue that teaching this kind of fiscal responsibility is very important to a child’s (or young adult’s) financial education. Encourage your kids to:
· get a part time job to help save up for school costs
· discuss the concept of student loans with them, so they will be mentally prepared when the time comes
· Do their best in high school – this will boost their chances for scholarships and grants

"Incidental" Financial Advice

2005-11-19T12:44:00.000-06:00

In April of this year, the Securities and Exchange Commission voted on an obscure ruling called the “Merrill Lynch rule”, which allows broker representatives to offer fee-based accounts without having to register as investment advisors. Broker representatives accept commissions as their compensation, so they must sell a product in order to receive compensation.

This ruling is something that consumers of financial products (investors) need to understand.

The Investment Advisor Act of 1940 provides certain protections to the consumer – such as ensuring that the advice provided is in the best interest of the consumer, for example. This ruling allows the broker representative to bypass this registration, so long as their advice is “solely incidental” to traditional brokerage services.

The obvious question here is, why would anyone hire a professional to provide them with “incidental advice”? If you were to ask folks why they do business with these brokerage firms, the answer would likely be because they feel comfortable that they’ll get good advice from a brand name company. In reality, you’re getting advice from people, not from a company. It’s a person you must trust.

In truth, there’s no such thing as incidental financial advice. Just as there is no such thing as incidental dentistry or an incidental brake job. Incidental financial advice is, by definition, incomplete financial advice, and does more harm than good. Either advice is provided properly and completely, in the interests of the consumer, by a professional acting as a fiduciary, or it’s simply a part of an overall sales job for insurance or investment products.

Two Types Of Professional
This ruling by the SEC effectively separates a class of financial professionals from being held to a fiduciary standard. The irony is that the SEC is pointing out with this ruling that the advice provided by the broker reps is incidental to their primary function of selling securities products. Doesn’t it make you wonder then, why the brokerage firms advertise themselves as financial advisors, financial consultants, and other titles that imply something other than what their primary job function is?

The Financial Planning Association, the largest organization of professionals who are dedicated to financial planning, stated in a written response to the SEC decision: “We believe that, at an absolute minimum, a consumer warning label is warranted given the confusion in the marketplace over who is a broker agent and who is a fiduciary investment advisor.”
With the adoption of this ruling, the SEC has effectively created two classes of financial professionals – those that work strictly in the best interest of their clients, and those that hide behind an exemption.

I just thought you’d like to know about this.

Medicare Part D

2005-10-19T12:43:00.000-05:00

If you’re a Medicare participant, get ready to be bombarded with offers from health insurance providers within the coming weeks. The first date that you can sign up for Part D is November 15, and you have until May 15, 2006 in order to choose a plan without penalty.

So far, there has not been a lot of solid information on your options, other than the “gobble-de-gook” of the governmental description of the plan. Expect for the insurers to have much better descriptions and comparable policies that you can review in order to make a good decision.

If you’re confused about all of the options, there are a few good resources on the internet that can help. One in particular that I’ve found quite helpful in researching Part D is Terry Savage’s columns from the Chicago Sun-Times, found at www.suntimes.com.

As always, if you have questions, don’t hesitate to call – I’m certain that I can help you make the right decision when it comes to this complicated plan.

Credit Card Changes

2005-10-19T12:41:00.000-05:00

New Minimum Payment
Beginning with your November bill, you’ll notice that the minimum payment required by your credit card company has doubled. For some people, this may cause a problem – but hopefully you’re among the folks that have taken my advice and eliminated your credit card debt, keeping your account paid up each month.If you’re in the process of eliminating credit card debt, this might come as a nasty surprise for you!

Financial Aid Process

2005-10-19T12:40:00.000-05:00

ATTENTION parents of students of the Class of 2006! The process has already begun for some families – that is, the Financial Aid process…

What does this mean? If you’re waiting, you’re losing ground. September 15 was the kickoff date for applying for the CSS-Profile information, and January 2 will be the first date to begin submitting your forms for consideration.

Remember, financial aid is given on a first-come, first-served basis!

Statistics show that approximately 90% of all financial aid applications have errors of some sort, and as a result you’re required to resubmit them, effectively “going to the end of the line” for aid. If you’d like some help with this process, give me a call.

Portfolio Discipline vs. Active "Timing"

2005-10-19T12:36:00.000-05:00

This is an age-old debate, often fueled by the financial press. You see headlines about this stock or that stock or sector returning wildly huge returns. “Why can’t I do that?”, you ask yourself.
In reality, chasing the “wild” return most often leaves you with a depleted account, as many of you can attest, I’m sure.

Another problem is when you see a downturn in the market, like we saw between 2000 and 2002, and you decide you just can’t stomach it any more, so you pull out until its’ “safer” to invest. The problem is that by the time you’ve made your decision to go to the sidelines, you’ve already lost a bunch, and the reversal is right around the corner.

If you got out of the market by September 30, 2002, you missed out on a 20% return over the 12 months to come, using Vanguard’s Total Stock Market Index fund (VTSMX) as an example. But if you had simply stayed in the market, the fund that you purchased in October of 1995 would have, to date, returned a total of 103%, or about 10% a year. The total return for the investor that sold in 2002 would have been 29%, or about 4% for those seven years.

There are three items that make up the discipline I’m talking about here: Asset Allocation, Diversification, and Rebalancing.

Asset Allocation is probably the most important decision you can make with regard to investing, and should be based upon three factors: your risk tolerance; the number of years before you begin taking distributions from the portfolio; and the rate of return required for you to meet your goals. Asset allocation should only be changed when there is a significant change to one of these three factors.

Diversification among the asset classes (stocks, bonds, and money markets) can help reduce many kinds of risks that investors face. Diversification within asset classes can help to further reduce your exposure to risk. Recommending the mix is the job of your financial advisor.

Rebalancing is when you review your accounts once a year to make sure that the “mix” you developed is still on target. If any one asset class or single fund is housing less or more than you originally planned, you need to rebalance.