It’s getting to be the case that virtually any standalone investment product sold to individuals can be repackaged into a mutual fund. It makes a lot of sense – everyone already knows what a mutual fund is, and all that’s left to explain is the objective, availability of capital, specific risks and fees.
Such is the case with income replacement funds that aim to replace annuities as a way for retirees to manage their spendable assets during the years they expect to be in retirement.
Aimed at the Baby Boomer Market, mutual fund leaders Fidelity and Vanguard are among others getting into this product, which are a bit like target-date retirement funds in that they start with a pile of stocks, bonds and cash that grows more conservative based on the dates you’ll need to draw those assets. Essentially, that means if you’re retiring in 2020 and you want money available through 2040, you pick a fund that’s labeled for that withdrawal window, and you accept that such funds are invested properly for that timeframe.
Generally, after taking an expense fee, the fund pays the investor a rising percentage of their account value each year until the balance runs out in the termination year. The idea is that you’ll get a relatively stable income stream that may keep up with inflation.
Unlike many annuities, however, you can cash out whenever you want.
It all sounds good, right? Beware of the following, and seek some advice from a financial expert like a Certified Financial Planner™ professional:
There’s no exact guarantee on how big the payments will be, unlike most guaranteed annuities that set fixed payments. That means that if the market slides, so will your payments;
It is possible to outlive your money, so be very careful in planning how and for how long these payments will be made.
There’s nothing wrong with investigating these mutual funds, and depending how much retirement savings you have and what your needs will be, they may be one of a series of options you use as interlocking parts of your overall portfolio to arrange a flow of income in your non-working (or partially working) years. But like all mutual fund choices, they are not one-size-fits all solutions, and it’s good to get some advice that fits your situation.
Keep in mind that a qualified financial planner should go beyond telling you whether to put your money in an income replacement fund, an annuity or other investment choice. One of the big benefits of seeking qualified financial help is assessing how much income may be required in view of your various goals in retirement – whether you plan to work part-time, whether health issues might affect your income needs, or any one of a host of issues unique to an individual’s retirement.
Back to income replacement funds. Keep in mind that investment products are a lot like new car models – sometimes it makes sense to wait a year or two to see that the kinks are out. Products attempting to address various financial concerns are being designed daily. By all means study the advantages of such products, but keep in mind that these products might be reconfigured to make later versions more attractive and always note that there are product costs to having “concerns or risks” addressed in product design which should be weighed against costs, and perhaps flexibility, of “active” oversight.
January 2008 — 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, January 31, 2008
Thursday, January 24, 2008
It’s Time to Start Thinking About the Estate Tax Again
Back in 2001, the Economic Growth and Tax Relief Reconciliation Act triggered a gradual increase in the dollar threshold of estates subject to the estate tax. In tax years 2007 and 2008, estates valued at more than $2 million may be taxed as much as 45 percent, while in tax year 2009, the threshold will increase to $3.5 million. The year after that, the tax will be repealed for a year.
However, in 2011, unless Congress acts, the party’s over. The estate tax will be reset at up to 55 percent on estates at a significantly lower threshold – $1 million.
While bills continue to swirl around Congress and many expect a Band-Aid of some sort before 2011, no one seems to believe that the so-called “death tax” is likely to be eliminated altogether. That makes it tough for individuals to set a clear course for their own estate planning. If you suspect your estate or the estate of relatives you might inherit from may fall prey to the estate tax, it makes sense right now to enlist the help of experts. Assets may be expected to grow over time, and your estate may turn out to be larger than you may think. You should be talking to estate and tax specialists as well as financial advisors such as Certified Financial Planner™ professionals.
Here are some things to keep in mind as you plan those conversations:
Think about a life insurance trust: Whether you need it for estate liquidity or for other purposes, an irrevocable life insurance trust can be created to keep the proceeds of the insurance out of your taxable estate. An added benefit is that such trusts may permit spousal access to the cash value of the policy. Yet note the word “irrevocable” – it means a decision that cannot be changed.
If your assets are expected to increase: A grantor-retained annuity trust, or GRAT, is an irrevocable trust that is popular among families with assets that are expected to increase, because such appreciation can be passed on to heirs with minimal tax consequences.
Prepare a gifting strategy: Under current law, unlimited amounts can be left to a spouse or to charity free of federal estate tax. Other heirs can receive a total of $2 million, tax-free, when deaths occur in 2007 or 2008. If your assets are over the estate tax limit, it might make sense to devise a gifting strategy that spends down your total taxable estate while still allowing you a comfortable lifestyle. You might, for instance, consider making direct payments for someone else’s medical bills or education tuition. No gift tax applies for these items, so payments can be unlimited.
January 2008 — 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.
However, in 2011, unless Congress acts, the party’s over. The estate tax will be reset at up to 55 percent on estates at a significantly lower threshold – $1 million.
While bills continue to swirl around Congress and many expect a Band-Aid of some sort before 2011, no one seems to believe that the so-called “death tax” is likely to be eliminated altogether. That makes it tough for individuals to set a clear course for their own estate planning. If you suspect your estate or the estate of relatives you might inherit from may fall prey to the estate tax, it makes sense right now to enlist the help of experts. Assets may be expected to grow over time, and your estate may turn out to be larger than you may think. You should be talking to estate and tax specialists as well as financial advisors such as Certified Financial Planner™ professionals.
Here are some things to keep in mind as you plan those conversations:
Think about a life insurance trust: Whether you need it for estate liquidity or for other purposes, an irrevocable life insurance trust can be created to keep the proceeds of the insurance out of your taxable estate. An added benefit is that such trusts may permit spousal access to the cash value of the policy. Yet note the word “irrevocable” – it means a decision that cannot be changed.
If your assets are expected to increase: A grantor-retained annuity trust, or GRAT, is an irrevocable trust that is popular among families with assets that are expected to increase, because such appreciation can be passed on to heirs with minimal tax consequences.
Prepare a gifting strategy: Under current law, unlimited amounts can be left to a spouse or to charity free of federal estate tax. Other heirs can receive a total of $2 million, tax-free, when deaths occur in 2007 or 2008. If your assets are over the estate tax limit, it might make sense to devise a gifting strategy that spends down your total taxable estate while still allowing you a comfortable lifestyle. You might, for instance, consider making direct payments for someone else’s medical bills or education tuition. No gift tax applies for these items, so payments can be unlimited.
January 2008 — 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.
Friday, January 18, 2008
Pay Close Attention to So-Called “Default” Investments
One of the provisions of the Pension Protection Act of 2006 was to allow companies to automatically enroll their employees in their companies’ 401(k) plans, but it wasn’t until last October that companies got guidance on the categories of investments they had to choose for their workers’ contributions.
The decision contained a controversial provision. The Labor Department decided to prohibit stable-value funds or guaranteed investment contracts (GICs) from the choices, because many experts find them too conservative for younger investors.
Instead, companies can now offer balanced mutual funds among their QDIAs (Qualified Default Investment Alternatives) as well as target and lifecycle funds. Balanced funds create an assortment of investments that fit the group of employees as a whole, while target or lifecycle funds contain specific mixtures of investments targeted to an investor’s age or retirement date.
What’s also important to know is that employers won’t be liable for employees’ money lost while invested in a QDIA, but they’ll be responsible for doing the due diligence to select the investments, for monitoring the investments’ performance and for deciding whether to keep or jettison those investments.
So does that mean that you can comfortably rely on default investments for your entire retirement strategy? No.
Target investments specifically have become very popular. Money has been gushing into these funds, according to the Investment Company Institute. By yearend 2006, this particular category of funds held $114.3 billion in assets, up from only $12.3 billion in 2001. Why the demand? In part such funds have been positioned as “no-brainer” investments for individuals without the time, inclination or knowledge to choose investments for themselves. 401(k) plan architect Ted Benna was quoted earlier this year as saying that within 5-10 years, more than 75 percent of 401(k) plan assets could be invested in target funds.
A trained financial expert such as a Certified Financial Planner™ professional can help individuals meet specific goals in retirement that aren’t addressed by these one-size-fits-all plans. For instance, some critics say life-expectancy issues are not adequately addressed in target-date plans, and they definitely don’t address scenarios in which you plan to work in retirement or spend your assets in unconventional ways. Also, some critics offer that many people may underfund such plans without realizing the correct amounts they should invest to meet their goal. A planner’s job is to help advise individuals on an ongoing basis about meeting such goals.
That said, how should you evaluate a target-date fund? Here are some questions you should ask:
Do you know how much money you’ll need to retire? This is one of the questions you should start with based on your age and the vision of retirement you have. It is one thing to invest in a fund that promises consistent growth until your retirement date, but what if you need more growth? What if there are specific tax and spending issues that might interfere with putting the right amount of money into such funds each year? This is why individual advice makes sense. A mutual fund can’t ask you what your goals are, nor can it make sure you’re investing enough.
How did your employer select the funds it’s offering? Obviously, most employers want to make the right fund choices for employees, but just because they’re offering target funds doesn’t mean they’re offering the right target funds for you and your needs. Keep in mind that most fund choices offered to companies are heavily marketed and might not be the cheapest or most efficient investment choices out there. Always check the Morningstar rating of any fund your 401(k) invests in.
What if you leave your job and take your 401(k) with you? What happens to your targeted investment plan then? Obviously you’ll roll over these assets into another tax-advantaged retirement plan, but what will happen to your annual retirement savings strategy at that point? Always ask.
What are you paying for a targeted fund? Granted, the investment choices are being made for you, but what are you paying for those choices? Often, these funds are constructed based on a fund-of-funds structure that layers a fee on top of the fees incurred by the individual funds. Always understand the fee structure of any fund you invest in.
January 2008 — 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.
The decision contained a controversial provision. The Labor Department decided to prohibit stable-value funds or guaranteed investment contracts (GICs) from the choices, because many experts find them too conservative for younger investors.
Instead, companies can now offer balanced mutual funds among their QDIAs (Qualified Default Investment Alternatives) as well as target and lifecycle funds. Balanced funds create an assortment of investments that fit the group of employees as a whole, while target or lifecycle funds contain specific mixtures of investments targeted to an investor’s age or retirement date.
What’s also important to know is that employers won’t be liable for employees’ money lost while invested in a QDIA, but they’ll be responsible for doing the due diligence to select the investments, for monitoring the investments’ performance and for deciding whether to keep or jettison those investments.
So does that mean that you can comfortably rely on default investments for your entire retirement strategy? No.
Target investments specifically have become very popular. Money has been gushing into these funds, according to the Investment Company Institute. By yearend 2006, this particular category of funds held $114.3 billion in assets, up from only $12.3 billion in 2001. Why the demand? In part such funds have been positioned as “no-brainer” investments for individuals without the time, inclination or knowledge to choose investments for themselves. 401(k) plan architect Ted Benna was quoted earlier this year as saying that within 5-10 years, more than 75 percent of 401(k) plan assets could be invested in target funds.
A trained financial expert such as a Certified Financial Planner™ professional can help individuals meet specific goals in retirement that aren’t addressed by these one-size-fits-all plans. For instance, some critics say life-expectancy issues are not adequately addressed in target-date plans, and they definitely don’t address scenarios in which you plan to work in retirement or spend your assets in unconventional ways. Also, some critics offer that many people may underfund such plans without realizing the correct amounts they should invest to meet their goal. A planner’s job is to help advise individuals on an ongoing basis about meeting such goals.
That said, how should you evaluate a target-date fund? Here are some questions you should ask:
Do you know how much money you’ll need to retire? This is one of the questions you should start with based on your age and the vision of retirement you have. It is one thing to invest in a fund that promises consistent growth until your retirement date, but what if you need more growth? What if there are specific tax and spending issues that might interfere with putting the right amount of money into such funds each year? This is why individual advice makes sense. A mutual fund can’t ask you what your goals are, nor can it make sure you’re investing enough.
How did your employer select the funds it’s offering? Obviously, most employers want to make the right fund choices for employees, but just because they’re offering target funds doesn’t mean they’re offering the right target funds for you and your needs. Keep in mind that most fund choices offered to companies are heavily marketed and might not be the cheapest or most efficient investment choices out there. Always check the Morningstar rating of any fund your 401(k) invests in.
What if you leave your job and take your 401(k) with you? What happens to your targeted investment plan then? Obviously you’ll roll over these assets into another tax-advantaged retirement plan, but what will happen to your annual retirement savings strategy at that point? Always ask.
What are you paying for a targeted fund? Granted, the investment choices are being made for you, but what are you paying for those choices? Often, these funds are constructed based on a fund-of-funds structure that layers a fee on top of the fees incurred by the individual funds. Always understand the fee structure of any fund you invest in.
January 2008 — 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, January 10, 2008
Homeowners in Trouble Need to be Proactive
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, a local member of FPA.
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, a local member of FPA.
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