On Feb. 27 this year, the Dow Jones Industrial Average slid 416 points, the biggest drop since the market reopened after the 9/11 attacks. By early May, the market had more than made up those losses and stood at record highs.
How did you react? Did you turn off the news? Did you call your broker in a panic? Or did you call your financial planner to see if your plan was solid?
It’s easy to succumb to the urge to sell if the market takes a header or buy if it’s headed upward. But sudden action is usually a mistake. In the late 1980s, Harvard psychologist Paul Andreassen made news with a research project that found that people who listened to market news actually made lower returns. Why? Because those who sold – or bought – during a market swing probably found a day later that the market was really running on hype, not fundamentals.
You pay a financial planner to devise a financial strategy that matches your risk tolerance and long-term financial goals. No, there is absolutely no way to guarantee that you’ll never lose money. But if a plan truly matches you, the noise level on TV shouldn’t make a difference. So the next time the Dow spikes or slides, ask yourself:
What’s my plan? If you’ve worked with a good financial planner, you should be able to articulate those goals all by yourself or refer to an investment policy statement you made together. Much of the riskiest investing, overbuying and panic selling during the late 1990s and early 2000s could have been avoided if individual investors had sought advice for achieving long-term specific goals such as retirement or a college education.
What’s my risk tolerance? At your first meeting with a planner, you should have discussed – and later filled out – a form asking you a number of questions about how you handle risk and what your expectations were about investment returns. You might have had to do this more than once if your risk tolerance was low but your investment expectations were high – low-risk investors can’t expect the highest returns. That’s part of the education process when you visit a planner.
Am I prepared to stay invested – no matter what? We all remember the “Tech Wreck” of 2000. At the worst of that downturn, investors bailed out of the stock market or drastically cut back, only to get back in after they were “convinced” that the market was rebounding. In reality, they missed out on stock market gains during the early stages of recovery, and that’s costly in the long run. Of course, some investors looking for that late 20th century investment high also got into the real estate market, and they perhaps learned a similar lesson when that market started heading south two years ago.
In 2004, SEI Investments studied 12 bear markets since World War II. Investors who either stayed in the market through its bottom, or were fortunate to enter at the bottom, saw the S&P 500 gain an average of 32.5 percent (not counting dividends) during the first year of recovery. Investors who missed even just the first week of recovery saw their gains that first year slide to 24.3 percent. Those who waited three months before getting back in gained only 14.8 percent.
Am I diversified? The NASDAQ lost 39 percent of its value just in 2001, and another 21 percent in 2002. Meanwhile, real estate investment trusts, which performed poorly in 1998 and 1999 when stocks were booming, had banner years in 2000 and 2001, performed so-so in 2002, and had an excellent 2003. Bonds also returned well during the bear market. Your planner, based on your risk profile, should have you in diversified investments that fit your goals.
Do I still feel the same way I used to about returns? Having a long-term investment plan doesn’t mean make the plan and leave it to gather dust. You and your planner should decide when it’s time for a review of your investment goals and your feelings about them. An annual conversation makes sense if nothing’s going on, but life events like death, divorce, kids moving out and illness are good reasons to do a head-to-toe review of a financial plan.
May 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA
Tuesday, May 22, 2007
Tuesday, May 15, 2007
Making Your Employer a Partner In Your Financial Planning
People who look to their employers for nothing more than a weekly paycheck and basic health care insurance are missing the boat.
It makes the most sense to ask a future employer about benefits before you agree to come to work. But even if you have been working for the same company for years, it’s never too late to go to human resources to make sure you’re getting the most mileage out of your current benefits and maybe pick up a new perk or two. See if you have the following options available, and check with your tax professional or a financial adviser before you make a selection:
Look at health savings accounts: If your employer has converted to a high-deductible healthcare plan, you may have the option of starting a health savings account (HSA). These accounts help workers to save and spend money tax-free for medical expenses not covered by the plan or your deductible. Why are they a good idea? Because you can sock away money tax-free that will cover the amount of the deductible (at least $1,050 for individuals, $2,100 for families) if you need it, and it will grow tax-free over time if you don’t.
See if a Roth 401(k) works for you: In 2006, the government gave employers clearance to offer Roth 401(k)s, employer-sponsored retirement plans that allow workers to put all or part of their 401(k)s into a Roth, which allow after-tax money to grow tax-free. Roth 401(k)s allow higher contribution limits -- $15,500 in 2007 plus an additional $5,000 if you’re over 50 – compared to traditional Roth IRAs that limit annual contributions to $4,000 with an extra $1,000 for those over 50.
Look for a finders’ fee: Companies rarely like to give away money unless they know they’re saving some in the process. Many companies are now offering finders’ fees to employees who successfully bring new workers in the door. Why? Because it costs considerable money and time to hire people, and employers are happy to see their best employees bring friends and former co-workers in the door. Also, some companies give away special bonuses for bringing in new clients, so don’t miss a chance to earn them. However, keep in mind that substantial bonuses may change your tax liability, so keep an eye on that issue.
Check your target bonus amounts: This is usually not a problem for most people who receive annual bonuses, but it makes sense to doublecheck the minimum bonus you should earn annually and what it will take to exceed that limit.
Get flexible: If your company has a flexible spending account for medical, commuting or child-care costs, estimate carefully what you’ll need to spend and get on board. While workers can get a chance to spend out their accounts into the next tax year, it’s very important to project exact numbers so you won’t lose funds at the end of the eligibility period.
Get smart: More than three-fourths of U.S. companies offer education benefits, so if you have the time and inclination, finish that degree or complete a particular course of study to prepare you for your next job or for your enjoyment. Most companies will ask you to stay a certain length of time after receiving such benefits, which is only fair. But education is worth far more than the dollar cost of tuition, so don’t pass it up.
Get fit: Some companies negotiate membership discounts to gyms and other fitness facilities, and that’s a worthwhile benefit. But these days, with company health care premiums going through the roof, some employers are actually paying employees to lose weight, quit smoking or take other steps to improve their health and lower their boss’s costs.
Have some fun: Companies get discounts to a variety of entertainments – the local amusement park, sports events, theaters, restaurants, auto shows and other local events. If they interest you – and particularly if they interest your kids – you’d be foolish to pass up such discounts.
Be proactive: If you hear friends or clients boasting about particular benefits or incentives at their companies, quiz them to find out as much as you can about how their companies afford those benefits. If the story checks out, then go to your own company and ask them if they might consider it.
May 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA
It makes the most sense to ask a future employer about benefits before you agree to come to work. But even if you have been working for the same company for years, it’s never too late to go to human resources to make sure you’re getting the most mileage out of your current benefits and maybe pick up a new perk or two. See if you have the following options available, and check with your tax professional or a financial adviser before you make a selection:
Look at health savings accounts: If your employer has converted to a high-deductible healthcare plan, you may have the option of starting a health savings account (HSA). These accounts help workers to save and spend money tax-free for medical expenses not covered by the plan or your deductible. Why are they a good idea? Because you can sock away money tax-free that will cover the amount of the deductible (at least $1,050 for individuals, $2,100 for families) if you need it, and it will grow tax-free over time if you don’t.
See if a Roth 401(k) works for you: In 2006, the government gave employers clearance to offer Roth 401(k)s, employer-sponsored retirement plans that allow workers to put all or part of their 401(k)s into a Roth, which allow after-tax money to grow tax-free. Roth 401(k)s allow higher contribution limits -- $15,500 in 2007 plus an additional $5,000 if you’re over 50 – compared to traditional Roth IRAs that limit annual contributions to $4,000 with an extra $1,000 for those over 50.
Look for a finders’ fee: Companies rarely like to give away money unless they know they’re saving some in the process. Many companies are now offering finders’ fees to employees who successfully bring new workers in the door. Why? Because it costs considerable money and time to hire people, and employers are happy to see their best employees bring friends and former co-workers in the door. Also, some companies give away special bonuses for bringing in new clients, so don’t miss a chance to earn them. However, keep in mind that substantial bonuses may change your tax liability, so keep an eye on that issue.
Check your target bonus amounts: This is usually not a problem for most people who receive annual bonuses, but it makes sense to doublecheck the minimum bonus you should earn annually and what it will take to exceed that limit.
Get flexible: If your company has a flexible spending account for medical, commuting or child-care costs, estimate carefully what you’ll need to spend and get on board. While workers can get a chance to spend out their accounts into the next tax year, it’s very important to project exact numbers so you won’t lose funds at the end of the eligibility period.
Get smart: More than three-fourths of U.S. companies offer education benefits, so if you have the time and inclination, finish that degree or complete a particular course of study to prepare you for your next job or for your enjoyment. Most companies will ask you to stay a certain length of time after receiving such benefits, which is only fair. But education is worth far more than the dollar cost of tuition, so don’t pass it up.
Get fit: Some companies negotiate membership discounts to gyms and other fitness facilities, and that’s a worthwhile benefit. But these days, with company health care premiums going through the roof, some employers are actually paying employees to lose weight, quit smoking or take other steps to improve their health and lower their boss’s costs.
Have some fun: Companies get discounts to a variety of entertainments – the local amusement park, sports events, theaters, restaurants, auto shows and other local events. If they interest you – and particularly if they interest your kids – you’d be foolish to pass up such discounts.
Be proactive: If you hear friends or clients boasting about particular benefits or incentives at their companies, quiz them to find out as much as you can about how their companies afford those benefits. If the story checks out, then go to your own company and ask them if they might consider it.
May 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA
Tuesday, May 8, 2007
Adopting a Child Requires a Specific Financial Plan
Adopting a child is a massive decision, probably bigger than education, marriage or career. Few individuals or couples anticipate how expensive it is to have a biological child, and depending on your choice of adoption scenario you’re going to need a financial plan.
It’s not overstating to say that in some situations, you may be paying the price of a current four-year public college degree just to complete the adoption process.
Here’s a very general review of those figures. The least expensive form of adoption comes from your local foster care system. Your cost could conceivably be zero since states often subsidize these programs to place these children. Meanwhile, agency and private domestic adoptions can range from $5,000 to $40,000 depending on agency and attorney fees, travel expenses, birth mother health and living expenses, state requirements and many other factors unique to the situation. International adoptions are somewhere in the middle of that cost range even with travel, adoption agency and other fees and expenses that need to be paid on the ground in the country of adoption.
All parenthood comes at a price. But with the help of a financial planner, you can not only afford the adoption but continue your planning for your child’s upbringing and your retirement. Here are some financial stepping stones to a successful adoption:
Create a financial plan or re-evaluate your existing one: As you already know, a financial plan is a written set of goals, strategies and a timeline for accomplishing those goals. It starts with the basics – determining how much you really have in savings, debt, insurance and investments. Your planner can also help you understand how much the additional costs of adopting and raising a child will affect all those numbers.
Get rid of your high-interest debt: A major decision like having a child is a good reason to take a “clean slate” approach to debt. Before you can build a reserve fund, it’s wisest to pay off your credit cards and any other high-rate debt first.
Make sure you have a solid estate plan in place: Today, adoptive parents are typically older and closer to retirement. That means you have to create an estate plan and a safety net of insurance and savings that will secure your child’s future if the worst happens. Also, if you are a single parent or part of an unmarried couple hoping to adopt, the whole issue of estate planning becomes much more critical. You may also want to consider separate guardianship for the child and the child’s finances.
Check your insurance options: In today’s health, life and home insurance environment, the addition of a child to a policy can bring additional cost – sometimes without the guarantee of the best coverage. Before you start the adoption process, check with your employer or your independent insurance agent to make sure you have the best coverage for what you can afford. If you’re self-employed, family coverage becomes an extremely expensive bargain, so you really need to evaluate your options since you’re footing the entire bill. Also, keep in mind that you can put an adopted child on your health plan within 30 days of the adoption date, but if you delay, you might have to wait until the next open enrollment session to put your child on your insurance.
Know your tax advantages: Families adopting overseas can get some tax relief. Parents are entitled to a one-time tax credit of $11,390 in 2007 for adoption expenses. Though the credit can’t be reduced by the alternative minimum tax, qualifying expenses include paperwork costs, court costs, attorney fees and all travel expenses including meals and lodging. This amount is phased out if an individual’s modified adjusted gross income (MAGI) is between $170,820 and $210,820. Over the $210,820 level, taxpayers can’t claim the credit or exclusion.
Build your reserve fund: When a baby, toddler or older child comes into the house, money flies out the door at a velocity most childless people have never seen. Children always cost money and sometimes unpredictably so, but it pays to build your savings before they arrive so you won’t overuse your credit cards. Also, in the case of surrogacy, it’s possible that a birth mother’s health may take a turn during the pregnancy, so that’s an expense that needs to be anticipated.
May 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA
It’s not overstating to say that in some situations, you may be paying the price of a current four-year public college degree just to complete the adoption process.
Here’s a very general review of those figures. The least expensive form of adoption comes from your local foster care system. Your cost could conceivably be zero since states often subsidize these programs to place these children. Meanwhile, agency and private domestic adoptions can range from $5,000 to $40,000 depending on agency and attorney fees, travel expenses, birth mother health and living expenses, state requirements and many other factors unique to the situation. International adoptions are somewhere in the middle of that cost range even with travel, adoption agency and other fees and expenses that need to be paid on the ground in the country of adoption.
All parenthood comes at a price. But with the help of a financial planner, you can not only afford the adoption but continue your planning for your child’s upbringing and your retirement. Here are some financial stepping stones to a successful adoption:
Create a financial plan or re-evaluate your existing one: As you already know, a financial plan is a written set of goals, strategies and a timeline for accomplishing those goals. It starts with the basics – determining how much you really have in savings, debt, insurance and investments. Your planner can also help you understand how much the additional costs of adopting and raising a child will affect all those numbers.
Get rid of your high-interest debt: A major decision like having a child is a good reason to take a “clean slate” approach to debt. Before you can build a reserve fund, it’s wisest to pay off your credit cards and any other high-rate debt first.
Make sure you have a solid estate plan in place: Today, adoptive parents are typically older and closer to retirement. That means you have to create an estate plan and a safety net of insurance and savings that will secure your child’s future if the worst happens. Also, if you are a single parent or part of an unmarried couple hoping to adopt, the whole issue of estate planning becomes much more critical. You may also want to consider separate guardianship for the child and the child’s finances.
Check your insurance options: In today’s health, life and home insurance environment, the addition of a child to a policy can bring additional cost – sometimes without the guarantee of the best coverage. Before you start the adoption process, check with your employer or your independent insurance agent to make sure you have the best coverage for what you can afford. If you’re self-employed, family coverage becomes an extremely expensive bargain, so you really need to evaluate your options since you’re footing the entire bill. Also, keep in mind that you can put an adopted child on your health plan within 30 days of the adoption date, but if you delay, you might have to wait until the next open enrollment session to put your child on your insurance.
Know your tax advantages: Families adopting overseas can get some tax relief. Parents are entitled to a one-time tax credit of $11,390 in 2007 for adoption expenses. Though the credit can’t be reduced by the alternative minimum tax, qualifying expenses include paperwork costs, court costs, attorney fees and all travel expenses including meals and lodging. This amount is phased out if an individual’s modified adjusted gross income (MAGI) is between $170,820 and $210,820. Over the $210,820 level, taxpayers can’t claim the credit or exclusion.
Build your reserve fund: When a baby, toddler or older child comes into the house, money flies out the door at a velocity most childless people have never seen. Children always cost money and sometimes unpredictably so, but it pays to build your savings before they arrive so you won’t overuse your credit cards. Also, in the case of surrogacy, it’s possible that a birth mother’s health may take a turn during the pregnancy, so that’s an expense that needs to be anticipated.
May 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA
Thursday, May 3, 2007
Getting the Kids Involved in Saving for College
The World War II generation got a taste of higher education through the G.I. Bill and made it a point to supplement or pay their kids’ tuition. It was a struggle, but a far more manageable one than it is in this day and age. Figures from the University of Texas in 2005 showed that since the 1960s, the price of a public higher education has risen from about five percent of median family income to more than 17 percent today.
Based on the current pace, that number could rise to 30 percent of median family income by 2020. Private universities could approach 50 percent.
Scary numbers indeed. That’s why it makes sense for families to make college affordability a family effort - with both parents and kids pitching in. That’s a big change in 40 years, where parents considered it a badge of honor to put their kids through school with no debt.
But there’s a bright side to involving your child in the process of saving for college. They’ll get an early education in money decisions that will have a direct impact on their future. Here are ways to make sure you’re well informed about the college savings process and how to involve your child:
Based on the current pace, that number could rise to 30 percent of median family income by 2020. Private universities could approach 50 percent.
Scary numbers indeed. That’s why it makes sense for families to make college affordability a family effort - with both parents and kids pitching in. That’s a big change in 40 years, where parents considered it a badge of honor to put their kids through school with no debt.
But there’s a bright side to involving your child in the process of saving for college. They’ll get an early education in money decisions that will have a direct impact on their future. Here are ways to make sure you’re well informed about the college savings process and how to involve your child:
Get advice as early as possible. Even if your child has only a short time until high school graduation, get advice tailored to your own situation from a trained expert such as a financial planner. Parents often forget that their first financial goal is retirement planning, not college saving, so they need to start with the following points:
- What parents will need to support their retirement;
- What they can contribute to their child’s college fund based on time to retirement and to freshman year;
- The best savings strategies for parent and child based on the tax situation for both;
- A primer on college financial aid in all its forms. Depending on the child’s need for financial aid, parents need to know what kind of assets they should hold in their child’s name and in what types of accounts for the best chance of securing financial aid if it’s needed.
Involve your child in the discussion. Armed with knowledge from the financial planning process or your own research, start talking with your child about their financial contribution through money from part-time jobs, savings or, as a last resort, debt after college. Parents might decide to schedule two advisory meetings with a planner – one for themselves, and a second one with the child.
Lack of money isn’t the only reason kids may be asked to contribute or shoulder debt. Blended families with ex-spouses who either don’t want to make a contribution or haven’t agreed to pay tuition as part of a divorce settlement can be a sticking point. Whatever the reason may be it needs to be presented honestly to the child.
Tackle the FAFSA first. The dreaded Free Application for Federal Student Aid (FAFSA) is a necessity for all parents who believe there will be some shortfall in paying for college after savings, grants and scholarships. It’s a good idea to fill it out even if your needs aren’t immediate; family finances can change for the worse. Your child won’t qualify for federal student loans until you fill out this form. To speed the process, get your taxes done as early as possible in the year your child will need the funds. Colleges typically dole out money on a first-come, first-served basis, so you’ll need your income documentation in order.
Once the FAFSA is processed, the Department of Education determines financial need and the parent’s EFC, or the expected financial contribution. If parents can’t cover the EFC, the student has to come up with a way to close the gap. There’s a way to rough out what your EFC might be – go to http://finaid.org/calculators/quickefc.phtml.
Start looking for free money. On the community level, you might find corporations, associations and other groups that offer scholarships and grants for local students, particularly those going off to state or local schools. Students can generally find out about local opportunities through their high school guidance counselor. If the student works for a company on a part-time basis, there might be college support there. Also, the College Board (http://www.collegeboard.com/) Web site features a good online clearinghouse for scholarships, grants, internships and loans, as well as http://www.fastweb.com/.
April 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA
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