Consumer Borrowing in 2009 Will Mean Making a Plan

If you’re planning to buy a home or a car in 2009, the process is going to be a lot tougher without an excellent credit score and a significant down payment. So that means you’re going to have to work harder—and possibly wait a little longer—to make those key purchases.

What’s a good credit score? According to credit scoring giant Fair Isaac Corp., the best FICO score range as of late 2008 stood at 760-850, according to reports; that minimum is roughly 20 points higher than it would have been a year ago.

Barring any major federal action to loosen up these markets on the consumer level, these factors make it particularly important to make sure there are no skeletons in your credit closet.

The Federal Reserve Board’s statistics show that outstanding consumer credit has increased from a bit more than $2 trillion in 2003 to $2.5 trillion by the end of the second quarter of 2008, representing a 25 percent increase over five years. These high levels of debt, combined with a global credit crunch, have tightened up lending to all but the best customers–and they’re having trouble too.

If you have extraordinarily high debt levels, a record of late payments or very little money to put down on that home or car, you need to do some advance planning before you contact any lenders. Here are issues you need to incorporate into your planning:

Get some advice: You might be focused on paying down debt or saving up your down payment, but credit is only one part of your lifetime financial picture. It might be a good idea to talk with a tax professional or a financial planner to learn how to best use credit. It’s always good to determine what your limits should be.

Pay down the balances you have: Next year, Fair Isaac Corp., the company that created the FICO score, will be adjusting the way it computes its credit scores. One of the top changes will be a greater negative weight on credit utilization–how close you get to the borrowing limit of each of your accounts. The company says that for optimal scoring, each account’s outstanding credit should be no more than 50 percent of the credit line and hopefully less. As you’re paying down your balances, it’s wise to focus on the highest-rate credit cards or loans first.

Set a credit report review schedule: You have the right to get all three of your credit reports—from Experian, TransUnion and Equifax—once a year for free. You can do so by ordering them at www.annualcreditreport.com. Don't order all three of them at the same time, though. By spreading out the dates you receive each of your credit reports, you'll get a continuous view of how your credit picture looks because the three bureaus feed each other the latest information. It's a good way to clean up errors and keep a steady watch for identity theft. By the way, all those ads that advertise free credit reports? Most of them will demand a credit card number from you, which means at some point those reports won’t be free. The aforementioned Web site is the best place to get reports that are truly free of charge.
Pay on time and pay more than the minimum. If you’ve been late with payments or have stuck only to paying the minimums, it’s time to give that up now. Here’s what you do. To avoid late payments, note the due dates when the bills arrive and then set a date for payment five to seven days ahead so you’ll definitely be able to mail your payment on time. To put more toward the balance, finally do a budget–this will help you identify the non-essential spending you’ve been doing so you can pay your outstanding credit balances faster.

Cut up cards, but don't close the account: Closing accounts—even those that have had zero balances for years—is a bad idea. Lenders want to see a long record of responsible credit management, and longtime accounts that you haven't touched in years may actually help your score because it shows you have some restraint.

No-doc or low-doc loans? Find another way: If you are self-employed or otherwise don’t have a lot of verifiable income, you may have the most trouble getting a loan. While banks and other lenders two years ago might have bent over backwards to lend to people with unverifiable income, that gravy train is mostly over now. If you do get a loan, you’ll pay far more for it than you would have before the credit markets blew up.


January 2009 — 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.

As Worker Shortage Increases, So Will Incentives to Keep Boomers on the Job

For several years now, various agencies and academics have predicted a systemic labor shortage that will create a labor shortage over the next 25-30 years as the gap between Baby Boomers and entrants of college-educated workers widens due to the Boomers’ mass retirements.

There are plenty of arguments over this theory, but employers are acting now to keep older workers in their jobs just a little longer. Some Boomers are finding out their bosses don’t want them to retire or are willing to make interesting compromises to give them an incentive to stay on full- or part-time. In a survey of older workers in the July 2008 EBRI Issue Brief, published by the nonpartisan Employee Benefit Research Institute (EBRI), 29 percent of workers said that feeling truly needed for an assignment was one of the top three most effective draws for staying on the job. Other incentives that ranked highly include:

• Receiving a full pension while working part time;
• A pay increase;
• Continuing company-subsidized health insurance at the same level as full-time workers, and
• Receiving a partial pension while working part time.
  

So what would convince you to stay on the job or un-retire if your employer comes calling again? It makes sense to talk over such issues with a tax professional and a financial planner. No matter what the incentives put in front of you, there are key issues to consider:

Make working retirement a variable in your planning: If you’re 5-10 years away from retirement and reviewing your retirement thinking so far, it makes sense to ask yourself under what conditions you’d return to the workplace. You obviously need to know based on current projections how much money you’re likely to gather from savings and other retirement resources. Then you need to consider how much money you’d be satisfied making in your post-retirement working life.

Consider how a return to the workplace will affect you personally and socially: If you’re 40, 50 or 60, working right now probably feels like breathing – when have you not worked? But it may not be the best option after a year or two out of the workplace.

How will it affect your taxes? Tax issues shouldn’t determine your ambitions and goals, but it’s important to consider the impact work-related income will have on your retirement. Many retirees find that it doesn’t take much post-retirement, work-related income to tip them into a higher bracket. Look for ways to control the taxes you’ll ultimately pay, including continued participation in qualified plans, IRAs, and other tax-favored accumulation vehicles and using annuity income to fill the gap between the beginning of the “post-retirement” period and the age when full Social Security benefits can be drawn without an offset for employment income.


Consider what earnings will do to all your retirement payments: If you are planning to work, consider not only the tax impact, but also how that might change the way you plan to draw on your retirement savings and investments as well as Social Security. If you are planning to work, it’s important you consider delaying receipt of those benefits for as long as you can.

Look at all the incentives: The top incentives luring experienced workers back to the workplace may be very attractive to you, or not attractive at all. Do some thinking about this. If you get the call, be prepared with a counterproposal of what would really convince you to come back.

Consider insurance issues: If a retiree returning to the workforce is already receiving Medicare or covered by a “Medigap” policy, they may be able to lower their costs or improve their coverage by accepting group coverage as primary underwriter of their medical expenses. Since people over age 55 are generally the greatest users of the healthcare system, coverage issues are particularly important to run by a financial expert.

Keep saving: If you return to the workplace, see what you can do to take advantage of your new employer’s 401(k) plan or any other tax-advantaged retirement savings benefit, particularly if an employer matches your contribution. Don’t miss a chance to enhance your retirement savings.

November 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.

As Medical Expenses Rise, Don’t Miss Key Deductions

There are plenty of horror stories about uncovered medical expenses these days, and the truly horrifying part is that many of them belong to people who actually have health insurance. But anytime you or a family member is facing a health crisis or an unusual medical-related expense, it’s best to check to see if you might get a break from Uncle Sam.

A tax professional and a financial planner should be consulted to determine whether there are any tax issues or any ways to defer cost or save money at any part of the process. The Internal Revenue Service lets you deduct medical costs as long as they are more than 7.5 percent of your adjusted gross income (AGI). That means if your AGI is $50,000, you can deduct only those unreimbursed expenses that exceed $3,750.

Getting there requires some planning, which is why it’s so important to gather up every dime of unreimbursed medical, dental and vision care expenses and review it carefully.

Here are things people often miss:

Medically related travel: The IRS evaluates the standard cents-per-mile allowance each year for travel to and from medical treatments. Between Jan. 1-June 30, that rate was 19 cents a mile. Between July 1 and Dec. 31, the rate will rocket to 27 cents a mile.

Insurance payments from already taxed income: This includes the cost of long-term care insurance, up to certain limits based on your age.

Uninsured medical treatments: This includes what you spend for an extra pair of eyeglasses or set of contact lenses, false teeth, hearing aids or artificial limbs.

Rehab treatment: What you pay for alcohol or drug-abuse treatments can be noted on Schedule A.

Weight-loss to smoking cessation: If a doctor prescribes it, you’ll be able to deduct it.

Laser vision correction surgery: May be an allowable expense to deduct on your current taxes.

Doctor-recommended equipment and related expenses: If your doctor tells you that you need a humidifier installed on your heating and air conditioning system to help your breathing problems, you might be able to deduct all or part of the cost for the device as well as the additional energy costs to run it.

Some medical education costs: If you, your spouse or child have a chronic medical condition and you attend a conference to learn more about it, you can count admission and transportation expenses as a deduction, but not meals and lodging.

If you’re self-employed: You may deduct, as an adjustment to gross income, the full cost paid for medical insurance for you, your spouse and your dependents.

Lodging for out-of-town treatment: When accompanying a minor dependent to out-of-town medical treatment, hotel bills may be partially deductible.
Here are some less common expenses to watch:

Medically necessary home improvements or equipment: If you do a home improvement or bring in special equipment that’s considered medically necessary for you, your spouse or your dependents, you’ll be able to deduct the cost. These may include special entrance/exit ramps to your house, widening doorways, modifying kitchens or bathrooms, or adding a chairlift for the physically disabled. Because these improvements are not expected to add to the market value of the home, they are considered fully deductible. If the improvement increases the value of your home, only the amount of the expense that exceeds the increase in the property value of your home is deductible.

Nursing services: If you are paying out-of-pocket for a home-based nurse, these expenses may be deductible.

Lead paint removal: Lead paint is dangerous, and the money needed to remove the paint from a home is deductible.


November 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.

Before the Holidays, Get Those Charitable Donations Lined Up

There’s a special sinking feeling as you approach Dec. 31 and realize you’ve done no tax planning whatsoever. That includes big issues like end-of-the-year investment decisions, and the smaller ones – like that stuff you no longer use piling up in the basement.

Charitable giving is an important part of tax planning at year end, so let’s look at the cash and noncash aspects of giving. It makes sense to contact a tax expert or financial planner to talk about what giving makes sense for you:

You have to itemize: Only individual taxpayers who itemize their deductions on Schedule A can claim a deduction for charitable contributions. This deduction is not available to people who choose the standard deduction, including anyone who files a short form (1040A or 1040EZ).

Get out the checkbook: Uncle Sam likes a record. To deduct any charitable donation of money, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution – and it definitely helps to have both. Bank records mean canceled checks, bank or credit union statements and credit card statements. Bank or credit union statements should show the name of the charity and the date and amount paid. Credit card statements should show the name of the charity and the transaction posting date. For payroll deductions, the taxpayer should retain a pay stub, Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity. If you remember the IRS being satisfied with personal bank registers or scribbled notes to document the donation, they’re not anymore.

There are charities, and then there are charities: You need to make sure that organizations are qualified to make tax-deductible contributions to. IRS Publication 78, available online and at many public libraries, lists most organizations that are qualified to receive deductible contributions, but there’s an online version too. Just go to IRS.gov and type in “Search for Charities.” One key exception -- it’s important to note that churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even though they often are not listed in Publication 78.

Giving away property: If you give away property, including clothing and household items, get a receipt that includes a description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes a description of the property and its condition. For any kind of vehicle, boat or airplane, the deduction is now limited to the gross proceeds from its sale. This rule applies if the claimed value of the vehicle is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.

You can’t deduct junk: Under a provision of the 2006 Pension Protection Act, contributions of physical items must be in 
good used condition or better to qualify for a deduction. That means that you can’t deduct ripped or discolored clothing or appliances that don’t work. If you donate noncash property that is valued at more than $500, you need to report to the IRS how and when you acquired the property and your cost basis. You must file Form 8283, Noncash Charitable Contributions, for all donations of property valued at more than $500.

Use that digital camera: If you’re ever audited, it helps to have photographs or video of these items, and obviously, demand a detailed receipt.

Learn rules about giving away appreciated securities: This is where a financial planner or tax expert would come in handy. When you donate stocks or mutual fund shares you have held for more than one year, generally you may deduct the stocks’ current fair market value. Additionally, you avoid paying capital gains taxes on the appreciated value.

November 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.

Short-term Long-term Care Insurance? Make Sure it’s a Good Idea for You

As the long-term care (LTC) insurance market has matured over the past 20 years, features have been added to the costly policies to make them more attractive. Even the IRS has even come on board, making a portion of the premiums tax-deductible. Yet with the tougher economy, insurers are looking for ways to get more consumers in the door – so they’re adjusting features to give people a break on cost.

Enter the “shorter-term” long-term care policy for individuals who are willing to play the odds. The main change in such policies is that they eliminate the “lifetime” feature in favor of a shorter time limit on benefits, usually between two and three years, currently the length of an average nursing home stay. These shorter-term plans can potentially cut the cost of average annual premiums in half, and if couples buy a combined policy, they potentially may cut the premium cost further.

The idea of lower-cost LTC insurance is certainly attractive, but it makes sense to get some advice and ask some very important questions before committing. A financial planning professional can help you assess how well prepared your finances are to sustain a serious long-term illness with a current national average of $70,000 in annual nursing home bills that would not otherwise be covered by insurance. In addition, ask:

What’s your health like? People in good health purchasing long-term care insurance in their 50s or younger usually get the most affordable deal in LTC insurance. But to some degree, your current health status is no guarantee that you’ll only be looking at 2-3 years of expenses in total. Keep in mind that 40 percent of long-term care is provided to individuals between the ages of 19 and 65, so the need for care can strike at any time and may do so more than once.

Are you female? Again, personal and family resources come into play here, but since women typically live longer than men – and they still earn less on average than men – women should take a heightened interest in providing for their long-term care safety net. Long-term care insurance might be a good solution given their other investments and their health history.

What types of services are covered? Over the course of time, LTC policies have evolved to place more emphasis on home-based care or assisted living, since most people would choose to be cared for in a familiar environment. However, it is important to review what all home-based as well as nursing home/assisted care center services may be covered. A basic LTC insurance policy pays for assistance with activities of daily living including eating, dressing, bathing, toileting, incontinence and transferring (bed to chair, etc.). Each policy lists the types of services that are covered under nursing home care and under home health care. Homemaker services may be covered. Also, if you are considering a policy with a fixed dollar benefit, compare all of these features with a lifetime policy.

What triggers coverage? Most LTC policies won’t go into effect until the covered individual can’t perform two tasks of daily living for a specific period of time or when that person needs substantial supervision related to cognitive impairment, such as Alzheimer’s disease.
What if I never want to go to a nursing home? The idea is to cover every eventuality. The best-designed LTC policies will pay the same amount of benefit whether care is received in a long-term care facility, an assisted living facility, an adult day care center or in the home. Some policies do offer reduced percentages for home health care versus nursing home care, but it’s a better idea to keep full percentages on home health care benefits since most people would rather stay in their homes. Discuss these options with a financial planner if you can, because the amount of your personal assets will be a factor here.

What’s the record of particular companies in this business? Over the past generation, more companies have gotten involved in the LTC insurance business, and it makes sense to see not only who the leaders are at the time you’re buying and what they’re offering, but how financially healthy these companies are and have been over the course of time. You’ve probably heard of insurance companies that have gone out of business and stranded customers. There’s no restriction on that happening with LTC providers, so check their ratings and financial history very carefully.


October 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.

Make Estate and Financial Planning a First Step After Divorce

After a marriage breaks up, about the last thing most people want to do is sit down with one more attorney. But no matter how old you are or whether you have kids, it’s important to consult both financial and legal experts to make sure you have an updated estate and financial plan for your new life once the divorce decree is final.

It’s also best to blend estate planning with financial planning post-divorce. If you weren’t working with a financial or estate planner during the divorce process, it’s time to do so now. The immediate months after a divorce can be disorienting – even if you don’t move, you are literally starting a new household that you will have to direct yourself, and that means new money issues to face.

This is why that the weeks immediately after a divorce are a good time to revisit short- and long-term spending and planning goals. Here’s a general road map to that process:

Start with a financial planner: Whether you plan to stay single, remarry or move in with a new partner, it’s good to get a baseline look at your finances as early as possible after the divorce is final. Expenses for the newly single can pile up quickly and unexpectedly, and a financial planning professional can help you review your new current spending and savings needs, compare strategies to achieve long-term goals like college and retirement and give you critical tools to protect your assets and loved ones if you die suddenly. Even if you have a good relationship with an ex-spouse and you addressed key issues for your children as part of the divorce proceedings, you need to revisit all these issues as a single individual before you move on to the next stage.

Talk with a trained estate planning attorney about wills and other critical documents: True, there are software programs and other kit solutions available to write basic wills, powers of attorney and certain simple trust agreements. But it makes sense to coordinate the activities of a financial planner with an estate planning attorney who can tailor an overall estate plan specific to your needs no matter how basic they might be right now. Even if you are very young with few assets, it makes sense to get some solid advice in this area so you’ll be able to manage such planning as you age and your finances get more complex. Particularly if you have kids, such planning is important if you plan to remarry and if you want to guarantee that specific assets are guaranteed for them when you die. In some cases where a spouse dies unmarried with minor children, an ex-spouse might automatically gain control of assets that were supposed to be earmarked for the kids. If you don’t want that to happen, you need to plan for that legally.

Make a guardianship game plan for your kids: It’s not enough to plan how money and assets will go to your children if you or your ex-spouse die suddenly or are incapacitated. If your children are minors, it’s particularly important to make sure you and your ex-spouse have a guardianship plan for their upbringing as well as any assets they may inherit. You might completely trust your ex-spouse’s new husband, wife or partner to raise your kids if your ex-spouse dies before you, but there may be others better-equipped to do so – spell that out now. Also, if there are any trust or wealth issues that will become effective for your children once they reach adulthood, it’s also important to establish an efficient legal structure for distributing those assets as well as appointing a trustee in a will to train and guide your kids through that financial transition.

Plan for special needs kids: If one of your children is disabled and is expected to need lifetime assistance of some type, then you should consult a qualified attorney to help you create a special needs trust. It will help protect your child from having to give up any public or social financial assistance as well as access to special doctors, medical help, special prescriptions or treatments that could be taken away if they were to personally inherit assets that would disqualify them for these programs. When such assets are held in trust, they are not counted as the child’s assets. The advantage is that those inherited assets may still be used to support their housing or other personal living needs.

Get solid protection in place: Most people focus on what may happen to their health insurance if they get divorced, but insurance issues like life, property/casualty and disability insurance are sometimes put on the back burner. If you’re newly single, you definitely need the best health coverage you can afford for yourself and your kids, but life, property, liability and disability insurance becomes doubly important, particularly if you failed to address those needs during the divorce. Even if your ex-spouse is cooperative with financial support, it’s wise to insure yourself as if they weren’t. A financial planner should be able to go through those options in detail.

Review all your investments for primary ownership and beneficiary information: Even if you were advised correctly to change the names on assets you and your spouse were dividing between yourselves, it still makes sense post-divorce to review that the names are indeed correct on those assets, and most important, to make sure all beneficiary information is correct.

October 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.

Giving the Gift of a Financial Planner

The holiday season should be about giving, but at the end of the season, most people can’t help but think it’s all about spending and money out the door. What would happen if you and other family members considered a different gift this holiday season – the chance to build your financial awareness with a trained expert?

Financial planning is an investment. It costs money. But its potential returns are manifold – a chance to get a handle on current problems with spending, debt and investing and a long-term opportunity to diffuse fear of financial issues by learning everything possible about them. It doesn’t matter if you are a single working individual or a family with kids still at home – the right financial planner can be a long-term partner in re-educating everyone in a household about money and the right ways to handle it.

For many people financial planning is a reaction to an emergency, such as a divorce, the death of a spouse or a sudden windfall. But in making the decision to do financial planning as an ongoing part of your life, you have the chance to fully review all your spending and investing decisions and maybe allow each of your family members to do individualized planning that will set them on a good course for life.

Here are some questions you should ask a prospective financial planner:

What training do you have? Find out how long the planner has been in practice and what kind of certifications they hold. A CERTIFIED FINANCIAL PLANNER™ professional is someone with a minimum of three years who has completed a comprehensive course of study at a college or university offering a financial planning curriculum approved by CFP Board. CFP® practitioners must pass a comprehensive two-day, 10-hour CFP® Certification Examination that tests their ability to apply financial planning knowledge in an integrated format. Based on regular research of what planners do, the exam covers the financial planning process, tax planning, employee benefits and retirement planning, estate planning, investment management and insurance.

What services do you offer? What a financial planner offers is based on credentials, licenses and areas of expertise. Generally, financial planners cannot sell insurance or securities products such as mutual funds or stocks without the proper licenses, or give investment advice unless registered with state or federal authorities. Some planners offer financial planning advice on a range of topics but do not sell financial products. Others may provide advice only in specific areas such as estate planning or on tax matters.


How do you charge for your services? Professional planners will provide you with a financial planning agreement that spells out the services they provide and how they’ll be compensated. Payment can happen in one of several ways:

• Salaried planners are actually employees of a firm, and you help pay their salaries through fees or commissions you agree to pay.
• Direct fees to the planner through an hourly rate, a flat rate, or on a percentage of your assets and/or income.
• Commissions paid by a third party from the products sold to you based on the planner’s recommendations. Commissions are typically a percentage of the amount you invest based on those recommendations.
• A hybrid of fees and commissions based on services. A planner may charge a fee for designing a comprehensive financial plan and occasional visits and calls to review it, while commissions might come from products they sell that you invest in. (Planners may offset some fees in exchange for commissions.)

Do you have any potential conflicts of interest? It may seem like a rude question, but the best planners expect this one and are prepared to make disclosure. Obviously, if a planner profits from the sale of investment products to you, she must spell that out.

How do you feel about teaching and training? One of the primary benefits of having a financial planner is education about the moves you are making or may potentially make. Don’t view a planning relationship as tossing someone your finances so you won’t have to deal with them anymore. As long as you’re paying for their services, make sure you get a long-term education out of it.


November 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.

Be Careful About Picking Beneficiaries for Your IRAs and 401(k)s

Inheriting IRA or 401(k) proceeds from a friend or relative can be a potentially huge windfall, but it can also be a sizable tax headache. For both the giver and the recipient, it’s worth getting some advice.

Bank accounts, stocks, real estate and life insurance proceeds generally pass to heirs free of income tax. However, inherited retirement benefits can be a different story. Beneficiaries have to pay ordinary income tax on distributions from 401(k) plans and traditional IRAs after they are inherited. (You don’t see the same problem with Roth IRAs – their benefits can be free of income tax to your heirs if all tax requirements are met.)

A financial planning professional or an experienced tax advisor can work with you based on your personal tax and estate circumstances to determine an inheritance strategy that is best for you. Some general guidelines:

Spouses are the first stop: Federal law dictates that your surviving spouse must be the primary beneficiary of your 401(k) plan benefit unless your spouse signs a waiver to redirect those funds. Even with a traditional IRA, naming the spouse as the primary beneficiary may be an appropriate option. Should the surviving spouse have his or her own IRA, this approach would allow them to simply roll over the assets from the decedent’s IRA into their own. Furthermore, if the surviving spouse is significantly younger than the deceased, the surviving spouse would receive the added benefit of stretching out distributions from the IRA until he or she turns 70 1/2. The stretch-out allows the assets to continue to grow on a tax- deferred basis, thereby maximizing asset value and delaying any income tax due.

When might you want to rethink a spousal beneficiary? When the surviving spouse’s estate is expected to be large enough to exceed the applicable exclusion amount for federal and state estate taxes. The applicable exclusion amount after allowable expenses is $2 million in 2008 and above $3.5 million in 2009. It should also be noted that in addition to federal estate tax, many states impose a state tax on estates with considerably lower asset levels (often anything over $1,000,000). Proper estate planning may alleviate this issue.

What about non-spousal beneficiaries? Today, non-spouse beneficiaries may be able to roll over all or a part of inherited 401(k) benefits to an inherited IRA. A recent change in IRS regulations still requires non-spousal heirs to withdraw a minimum amount from Inherited IRA assets every year, but it’s based on the age of the recipient rather than the age of the decedent.

Establishing a Stretch IRA: Due to recent changes in the minimum distribution law, taxpayers may now establish IRAs designed to stretch out the time period over which a non-spouse beneficiary (i.e. child) is required to take minimum distributions from an inherited IRA. Proper use of this vehicle may potentially allow for continued growth of tax-deferred earnings over multiple generations and can have a substantial impact on the future value of the family portfolio.

Naming trusts or charities as beneficiaries. Placing IRA assets in trust can have substantial advantages but can be complex. It should only be considered after receiving tax advice from a competent professional. It is particularly important to get tax advice related to this issue. Trusts can be complex instruments with which to bequeath assets, and even though naming a charity as one’s primary beneficiary will not affect distributions in your lifetime, it could affect the tax consequences for non-charitable beneficiaries who are sharing the same asset upon your death.


October 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.

Blended Families Should Plan Early for Their Kids’ College Financial Aid

Finances for blended families – one of the fastest-growing demographics in the United States – can be complicated. The needs of stepchildren may fall into direct conflict with one’s own, and aside from the many financial entanglements that result from previous marriages or partnerships, college planning is a particular area where couples should seek help.

Why? Because more than 60 percent of all college students now apply for some form of financial aid, and those numbers will go higher as college costs rise. Add that to the sometimes conflicted financial goals within families with children from previous marriages and relationships, and a couple’s financial picture may become a source of considerable strain based on negotiations with former spouses over the welfare of children from previous relationships.

That’s why both tax experts and financial planners should be consulted before couples remarry – to address the host of financial issues blended families face. In particular, individuals with children from a previous marriage should think through how college will be funded for their own children as well as any children born after the remarriage.

Here are several key issues that soon-to-be remarried individuals should consider with regard to planning for college:

Divorce agreements should spell out college support: By the time individuals are planning to remarry, a divorce may be long past. But in cases where a divorce may be pending before remarriage, couples may have the opportunity to secure adequate college support if state laws allow that as part of a settlement. Even if the children are very young, support agreements should always look ahead to the years when the child heads to college, not only to make sure that the education is properly funded, but to spell out those financial responsibilities for each divorcing spouse.

Prenuptial agreements should too: Even if a remarrying couple has very small children, it makes particular sense to look to the future when the children of this blended family are heading for school. In many situations, it’s common for remarrying spouses to shoulder the full burden of the blended family’s college expense. But a prenuptial agreement – a financial agreement made by two individuals planning to marry -- can do two things. It can look into the past and document existing agreements with ex-spouses to pay for college expenses and other financial support and it can look into the future to do contingency planning for the kids in case this marriage ends up in divorce as well.

Get advice about the FAFSA: On January 1 each year, students become eligible to file their Free Application for Federal Student Aid (FAFSA) online for the coming school year. This process can get very confusing in blended families because parent-child relationships determine the level of financial responsibility and the potential for aid. In some cases, it might be wiser for a couple not to marry while children are still receiving financial aid in college, so it is critical for divorced spouses to get advice on this issue. Colleges will determine financial aid packages on the custodial and financial profile of parents based on any of the following parental scenarios:

• The parent who had provided the majority financial support to the child during the past 12 months.
• The parent who supplied more than half of the child’s support and pledges to continue to do so.
• The parent who has legal custody of the child.
• The parent who claimed the child as a dependent on their taxes.
• The parent who provided the most financial support to the child during the most recent calendar year.
• The parent with the greater documented income.

College financial aid is tough enough for traditional families to navigate. A financial planner with specific expertise in navigating financial aid issues as well as your overall financial picture can help you make the best choices in preparing your application for college aid.

Remember that if the parent who provided financial support was single, divorced or widowed but has since remarried, the student will have to submit the stepparent’s financial information. While this information will be evaluated, it doesn’t legally obligate the stepparent to provide financial assistance.


September 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.

Always Have a Plan for Leftover 529 Plan Money

With the high cost of education, it’s hard to envision that there might be money left over, but it does happen. Kids get scholarships; they might finish early; sometimes they quit school never to return.

In the case of 529 college savings plans, it’s particularly important to have a backup plan for the possibility of leftover funds, not only to support another family member’s educational goals, but as a potential addition to your estate planning.

As a refresher, a 529 college savings plans – named for the federal law that created them in 1996 – allow a parent to open a tax-deferred college savings plan with as little as $25 to start in some states. You should know that a 529 college savings plan is NOT the same thing as a 529 prepaid college tuition plan. Prepaid tuition plans are just that – tax-deferred savings plans that allow you to save for tuition for in-state schools [though some plans allow you to transfer out a portion of those assets to out-of-state schools]. Also, it’s important to note that prepaid tuition plans are not an automatic guarantee a student will get into that college.

As part of sweeping pension reform signed into law by President Bush in 2006, withdrawals from 529 plans are now permanently tax-free. In some states, contributions may also be deductible on state tax returns. All 50 states now have 529 plans college savings plans, and a majority of them provides additional incentives, such as a state-tax deduction to in-state residents who invest in their respective plan.

It’s a good idea to have your financial adviser help you sort through the details of various state plans. There are various services – including Morningstar Inc. – that now rank the offerings of each state’s plan. SavingforCollege.com and finaid.org are leading sites to help educate you in how these plans work.

So, if you’ve made all these moves, how should you handle surplus 529 funds? There are a few options:

Change the beneficiary: If Student #1 doesn’t spend out the funds, you can replace the beneficiary with another blood relation – that means brother, sister, first cousin, even you or your spouse – to continue spending down those funds for educational expenses. Also, if you have a grandchild headed for college, you can arrange for your 529 plan to make the withdrawal payable to your grandchild as the beneficiary.

Take a penalty and spend the money on whatever you want: This isn’t the most sensible financial option, but you do have the option to take leftover funds as a nonqualified distribution for your own non-educational use. However, you’ll owe ordinary federal tax with an additional 10 percent on the earnings portion of the distribution. Don’t forget state tax, either.

Let your successor owner make the decisions. When you apply for the account, you are asked to name a successor owner. When you die, you can simply trust the successor owner or the beneficiary of the funds to do what they want with the money.


September 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.

How to Takeover an Aging Parent’s Finances

Like many difficult situations with people we love, planning to take over an older relative’s finances is best done in happier times, when both sides are healthy and various options can be considered. Unfortunately, events can sometimes intervene – death, illness or natural disasters can make an elder’s need for assistance a critical matter.

Once stricken, older relatives may be unable to understand questions or express their wishes in proper detail. If there is no plan, family members grasp at responsibilities – or shirk them – without any idea of what the older relative would really want.

What’s critical to understand is that such talks should go far beyond money. They need to be discussions about independence and basic preferences for the way an individual wants to live or die. Demographers believe that with the rising number of single Americans – those divorced or never married – these conversations will become increasingly complicated as they fall to nieces and nephews, younger friends or designated representatives.

Want to avoid a worst-case scenario? Start the conversation now. Here are some ideas:

Decide what’s important to talk about first: Maybe this conversation isn’t just about where the will or health care power of attorney is. Maybe this conversation is about you noticing that a parent or loved one is moving slower, is more forgetful, is clearly looking like their health has taken a turn for the worse – and maybe that’s why you want to know where the will is. Jumping into money issues first is usually a mistake. Deal with immediate health and lifestyle issues first.

Explain why you want to talk about finances: In some families, having a successful financial discussion means several attempts and some frustration. Don’t let yourself become angry or frustrated – just keep starting the conversation until it catches on. It might make sense to say something like, “You’ve always been so independent, Mom. I just want you to give us the right instructions so we do exactly what you want.”

Prepare your questions in advance: When a parent or relative is unconscious or unresponsive, the younger relative is immediately in the drivers’ seat. That’s why it’s critical to make a list of questions for the elderly relative to answer in detail. The basics: Where important papers are, how household expenses are paid, who doctors and specialists are, what medicines are being taken and whether there’s a will, an advanced directive and a funeral plan (and money or insurance proceeds to pay for it). There may be dozens more questions beyond these based on your family’s personal circumstances. But in creating this list, ask yourself: “What do I need to know if this person suddenly becomes sick or dies?”

Offer to get some qualified advice: If you don’t fully understand your relative’s financial affairs, it might make sense for you both to talk to an attorney or a tax or financial adviser. A qualified adviser can offer specific suggestions on critical legal documents that should be in place and ways to make sure accounts to pay medical and household bills are accessible to the older person and the designated friend or relative who will hold power of attorney.

Plan a caregiving strategy together: You should discuss the relative’s preferences and trigger points for various stages of heath care. An individual always wants to stay in his or her home, but you should have an honest discussion about how much you can do at home as a caregiver and whether various services (home health aide, geriatric care manager, assisted living) should be introduced at various stages. Talking through what a parent will be able to live with at various health stages – and putting that information in writing – will save plenty of doubt and bitterness later.

Discuss what should happen with the home: If an elderly relative becomes sick and irreversibly incapacitated, the equity in his or her home may come under consideration as a resource to pay uncovered medical or household maintenance. Since the home is both a major asset and an emotional focal point, it’s best to get good advice and spell out specifically what the elderly relative wants done with his property and under what conditions.

Make sure everyone knows the plan: Once you settle on a strategy, make sure all family and friends understand the plan and their assignments.


August 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.

How to Buy Life Insurance

Reminder: Wechter Financial has a new website coming soon to www.wechterfinancial.com!!!

Life insurance is primarily a product for families. If you have a spouse and children who depend on your income and you don’t have extensive resources, then life insurance is a useful tool to help them pay expenses. Single people without dependents typically don’t need the same amount of life insurance because they don’t have as many responsibilities that will outlive them.

Most financial planners would tell you that insurance is not a replacement for a long-term savings or investing strategy but an additional cushion. Depending on your financial situation, life insurance and its ancillary products can have some very attractive tax characteristics as well.

Who needs life insurance: Those with dependents, either children or friends or family members with special needs; with a nonworking spouse or one with an income substantially lower than yours or those with a big mortgage that will be too overwhelming for one income to pay off.

How much is necessary: Optimally, the right amount of life insurance allows your survivors to invest the insurance payout and then draw down the account over time in a way that matches the income you would provide if you were still around. You need to figure far more than a family’s basic living expenses adjusted for inflation. Also consider:

• Education funds needed for each child from grade school to college.
• Money to cover special health expenses for a family member already diagnosed at the time of the insured’s death.
• Funds for child care if the surviving spouse needs to keep working.
• Emergency funds that your survivors can keep in reserve.
  

Types of life insurance: There are six basic types of life insurance.

• Term: Term life insurance is the simplest kind of life insurance because it pays if death occurs during the term of the policy, which is usually from one to 30 years. There are two kinds of term life insurance: Level term means that the death benefit stays throughout the duration of the policy, and decreasing term means that the death benefit drops in one-year increments over the duration of the policy.
• Whole life/permanent: Whole life or permanent insurance has a level premium and pays a static benefit whenever you die. For this guaranteed benefit, whole life is usually the more expensive choice because it front-loads its costs into the early premium years of the policy so it can invest the money to pay for death benefits at the end of several years or decades. At a certain point, the policy owner will pay in enough where he or she will start accruing cash value on that money which can be withdrawn if the policy owner decides to cancel the coverage. There are four types of permanent insurance:
• Whole or ordinary life: This is the most common type of permanent insurance policy, offering a death benefit with a savings account. You agree to pay a certain amount in premiums on a regular basis for a specific death benefit. The savings element would grow based on dividends the company pays to you.
• Universal or adjustable life: This variation offers a little more flexibility, such as the possibility of increasing the death benefit if you pass a medical exam. The savings product attached to this kind of account generally earns a money market rate of interest, and after you start accumulating money in this account you’ll generally have the option of altering your premium payments. This helps if you lose your job or have some other financial misfortune.
• Variable life: This policy lets you invest your cash value in stocks, bonds and money market mutual funds which is good if those investments go up. If they go down, your cash value and death benefit will shrink, but you need to make sure there’s a guarantee that your death benefit won’t fall below a certain level. This type of policy can be fairly risky for ordinary consumers.
• Variable-universal life: This choice allows you the flexibility of premium payments with a more aggressive investment scenario for the cash value of the policy.
  

Life insurance proceeds don’t generally go into Uncle Sam’s collection plate, which makes life insurance an attractive purchase for many individuals hoping to maximize the amount to give to heirs. Yet life insurance can also be purchased in a way to give the living policyholder tax-free income during retirement. Since we’re talking about estate issues here, getting proper advice is critically important. The federal government’s current estate tax ceilings were set to expire in 2010, and this fact alone could affect the attractiveness of this strategy for your situation.


August 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.

Considering an Annuity?

Managed Payout Funds Are One More Entry in the Retirement Spend-Down Picture

Insurers have long been part of the effort to help retirees spend down their nest eggs through annuity products. Now, the mutual fund industry is jumping in with a competing offering for individuals who may or may not be so keen on annuities.

Called “target distribution” or “managed payout” funds, individuals who are retired or about to retire can invest in these fund products that contain stocks, bonds or other asset classes. They are structured so investors can designate regular withdrawals and the account balance can be transferred easily at the time of the account holder’s death to any spousal or non-spousal beneficiary.

Managed payout funds have been compared to fixed immediate annuities and are also known as retirement income funds. Any distribution taken by the account holder is expected to keep pace with inflation and come from dividends, fund appreciation and a portion of principal. The rest of the assets stay invested.

For retirees who want to continue building their nest egg while generating a steady stream of monthly income, they’re worth examining. It’s estimated that some $16 trillion in retirement assets are up for grabs and looking for disciplined distribution.

These funds issue checks regularly based on the account holder’s preferences, but the amounts are tied overall to fund performance. Vanguard, Fidelity Investments and Charles Schwab have all recently entered this business. Most of these funds encourage account holders to pull out between 3-7 percent of their total portfolio annually.

As the number of retiring Americans continues to increase, there will continue to be new wrinkles in the spend-out game. It makes good sense to get some personalized advice on how to best spend down your assets in a way that fits your needs. One way would be to consult a financial planning professional a few years before you’re ready to retire to check the following:

• See how your current assets are working so you know if you have enough to retire – know what you have before you question how to spend it.
• Consider various scenarios that describe the way you’ll want to live after retirement and whether your invested assets support that plan.
• Are your long-term care needs covered? Before you start talking about locking up assets in specialized fund products, make sure you have money in reserve or long-term care insurance in place should you need to pay for temporary disability or end-of-life care.
• What are the fees on the various managed payout funds you’re looking at? Most specialized funds have some fee structure that you should compare against other alternatives. Compare the expense ratio of your chosen fund against other possibilities.
• How will your assets in these funds be invested? Do those choices match your risk tolerance and your investment goals post-retirement? You’ll still need to be making smart investing choices with what hasn’t been spent down.
  
  August 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.

What’s the Correct Amount to Withdraw from Your Retirement Funds Each Year?

Rules of thumb and guidelines abound in every investment arena – you’ll always hear about specific percentages you should save, spend or invest based on where you are in life. They’re made to draw attention to specific investment needs everyone has, and for that reason, it’s good to have them.

A popular one is that no one should spend more than 4 percent annually of the value of their nest egg in any given year. Another is that retirees only need 70-80 percent of their last working year’s income to maintain their standard of living.

The reality is that everyone’s retirement goals are different and should be planned based on specific needs, not general rules of thumb. This is why retirement plans should be made with the aid of experts in tax, estate and investment issues. A good starting point would be a meeting with a CERTIFIED FINANCIAL PLANNER™ professional who could go over your personal situation and define particular percentages that can be withdrawn from your overall retirement nest egg while you continue to work or relax.

What’s the downside of not planning? Wachovia’s recent fourth annual Retirement Survey showed that many retirees enter their post-working years with no idea – or limitations – on how much of their nest egg they’ll spend on an annual basis. The financial firm reported that 28 percent of surveyed retirees with average total savings of $375,000 withdraw 10 percent or more of their retirement savings annually to pay for expenses. Further, only one-third (38 percent) pegged their withdrawal rate at 5 percent or less. Only about half (47 percent) said they had a written withdrawal strategy, and only 28 percent said they have a written budget for spending their savings.

Here are the major ways to determine an appropriate withdrawal amount withdraw each year in retirement:

Define a vision of retirement and revisit it every year: Anyone who has worked with a good investment manager or financial planner has addressed the kind of retirement they envision. Incorporating part-time work into the retirement picture might make other financial goals more affordable. A person who manages his or her finances or works with an expert needs to revisit those goals annually to assess the feasibility of affording a particular lifestyle in retirement.

Track working-life expenses for 3-6 months: This is where that vision of retirement becomes real. Understanding what an individual spends on lattes and late-night carryout may motivate an investor to shift his behavior from spending to saving.

Create a worst-case health scenario: For many retirees, increasing healthcare expenses and the cost of end-of-life-care account for significant spending. As a result, many retirees may pay for expensive experimental treatments to fight disease or long-term assisted living or nursing home care. According to AARP, annual nursing home costs will be at more than $100,000 a year in the next two decades compared to their current annual range of $45,000-$60,000. While public aid picks up medical expenses for those who exhaust their assets in most states, most of us desire more than minimal standards of care.

Shift into a retirement investment strategy in stages: With a clear majority of investors having inadequate retirement funds in place near or at retirement age, it may seem silly to talk about investing post-retirement. But the younger an investor is, the more valuable the conversation. Good advisers can help build more balanced portfolios that fit the exact needs of the investor as retirement nears.

See how long you can put off taking Social Security: The Wachovia study also reported that the majority of respondents planned to start taking Social Security benefits at age 62, the earliest point possible. Another 17 percent reported taking Social Security benefits at age 65. Only 9 percent reported delaying Social Security benefits past age 65. Even though no one will get rich off of Social Security, delaying taking those payments will result in larger payments later, but get advice to see if that decision is right for you.

July 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.

Financial Planning For Newly Single Parents

After a divorce or the sudden death of a spouse, single parents have the twin challenges of adjusting to a new life and getting their child adjusted to it as well. The third challenge – getting money issues in order – can be a threat to both.

For a newly divorced or newly widowed parent, the right tax, estate and financial planning advice are crucial. A CERTIFIED FINANCIAL PLANNER™ professional can advise any newly single man or woman on the right steps to take in setting up a new financial future that fits them. But there are some general steps the newly single should take:

Revise or make an estate plan: Single parents have to revisit the estate plans they made when they were married or set an estate plan for the first time. A will is essential, but it’s also important to make immediate plans for who will raise the children if something happens to the parent. In case of divorce, plans might have been set for the ex-spouse to take full-time custody in case of the other’s death, but if a parent has never been married, it’s particularly important to select the right custodian for the child and perhaps a separate person who can become custodian of the child’s finances to invest properly for their support and their future.

Make sure all beneficiaries are correct: If you’ve separated assets in a divorce or you’ve just had or adopted a child, it’s particularly important to go over all your holdings to make sure your beneficiary designations are correct to make sure your child or a trust or other investment structure set up in the child’s name receives those assets. Don’t forget all your insurance policies, your work and individual retirement accounts and any investments you might have recently acquired.

Make sure ex-spouses are removed from any joint accounts you’ve been awarded: You also need to notify each of the three credit bureaus of your divorce so future reports will be based only on your credit reports.

Adjust your investment focus if necessary: Becoming a single parent changes your investment picture. For retirement as well as investing you will do for your child’s future, get specific advice on what they’ll need for college and what you’ll need for retirement as a single person.

Revisit your career plan: Unless you are wealthy to begin with, you are probably going to have to either return to the workforce or possibly change jobs to increase your earnings or improve your benefits if you’re not receiving any other source of income. If additional career training is necessary to improve your prospects, you may consider going back to school – always tough with a kid at home – and you’ll need to strategize how to pay for it. You might also choose to work for an employer with great educational benefits.

Make sure you get the pension assets you’re entitled to: A Qualified Domestic Relations Order (QDRO) is a settlement statement where a spouse receives pension assets from another in case of a divorce. You need to present a QDRO approved by the court at the time a divorce is finalized to your ex-spouse’s plan administrator to make sure agreed-upon assets get transferred to the account you’ve designated. Get some advice on how to best invest those assets.

Make sure health insurance is in place: If you’re divorced, it’s likely you won’t be able to stay on your spouse’s plan, so you’ll have to locate your own insurance option. But if your ex-spouse’s plan is a good one, try and make sure that he or she can keep your child covered until a better option comes along. Again, the need for health insurance may also drive your career decision, so consider it.

Make sure your life and other insurance is in place: As a single parent, you’ll need to adjust the amount of your life insurance relative to any insurance coverage your ex-spouse has with your children as the beneficiaries. You’ll also need to make sure on a regular basis that your ex-spouse has not cancelled that coverage.

Check in with Social Security: See if your ex-spouse’s work record may entitle you to receive certain benefits.

An emergency fund becomes even more important: If you have the option of acquiring six months’ of income in a divorce settlement or if you can set aside that amount somehow, it’s particularly necessary because you won’t have another partner’s income to fall back on anymore.


July 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.

How New College Grads Can Get a Jump on Financial Planning For a Lifetime

The average college graduate with a four-year degree now takes about five years to put on a cap and gown, and her average debt is growing too. According to 2006 figures from the Project on Student Debt, the average college I.O.U. was approaching $21,000.

With all that student loan debt, it’s genuinely tough to focus on saving and planning for retirement. But there’s really no better time for a young person to be better positioned for good money habits that will last for a lifetime. Here are some of the best moves to make coming out of school, even if you haven’t gotten a job yet:

Talk to a financial planner: Ask your parents for the graduation present of financial advice. A meeting with a financial planner can set a spending plan that will accommodate what your future income needs will be to extinguish that debt and how you’ll be able to save in the future.

Sign up for the company 401(k) the minute you’re eligible: A 401(k) plan accomplishes more than retirement savings. It teaches a new worker the value of “out of sight, out of mind” savings – when money goes to savings before you have a chance to spend it. In addition, having deductions taken to go directly into your 401(k) will mean less federal and state taxes from your paycheck. That’s why new grads should sign up for their 401(k) retirement savings the moment they become eligible. But it’s important to stress that even if it takes a year before you can join the company plan, start putting money away in a traditional or Roth IRA. You’ll be capturing funds from the start, which experts say is the absolute best way to build a financial future.

Always aim for the maximum: It’s a tremendous challenge to put away the most you can save in any retirement plan once you get out of school – you have a household to set up, school loans to pay off and you need to have a little fun, too. But even if you can’t set aside the maximum in your various retirement options at the start, make it a goal to get there as soon as your income rises and your debt falls. Have the payroll department calculate a sample of what your net pay will be with and without money deducted for your 401(k) savings. You’ll be surprised how similar your net pay could be.

Check your investment balance each year: Studies show that many people will pick a handful of mutual funds for their 401(k) s at the very start and not change them. That’s one of the great reasons to have access to a financial planner because you can examine whether your investment choices and style fit your age and goals.

Hold off on buying a new car: Mass transit is best, but if you need a car, think about buying a quality used car that you can pay off quickly. A new car with a low down payment means you’ll be doubling your debt if you owe the maximum in school loans. Do you really want to owe $40,000 or more? That’s a tremendous burden for a new professional.

Don’t forget about insurance: If you’re single, it’s not time for life insurance, but you must have auto, rental apartment and yes, disability insurance. Even if your employer does not offer you health insurance right away, you must find another insurance resource since you probably won’t be able to piggyback on your parents’ health plan for awhile. If you’re driving a used car, you may not need to keep as much collision on your car. Don’t forget to insure the contents of your apartment – one break-in can cost you thousands of dollars you don’t have. And if you think about “old folks” being the only folks who can become disabled and cut off from a paycheck until they can work again, guess again. Think of how losing a paycheck for six months would hurt your finances.

Start laying away an emergency fund: Even if all you have is the proceeds from two missed lattes a week, start putting money in a special account you will not touch unless you are out of work and need to find some way to pay the rent. Make the trigger something as serious as that, or you’ll never have a serious reserve for emergencies.

Figure out taxes: New workers tend to do one of two things when it comes to taxes – they either withhold too much or too little. It makes sense to sit down with a planner or a tax professional to make sure your annual tax set-aside is correct, because withholding too much means Uncle Sam gets to hold the money that could go to your retirement or your emergency fund.

Don’t forget about health insurance: Health insurance gets more expensive by the day, and finding a good employer that provides good options for this benefit is particularly important. Given that younger people are generally healthier, get some advice on whether you should investigate a high-deductible plan that’s paired with something called a health savings account (HSA). Such accounts allow you to stash money that can cover that big deductible – for individuals, the minimum deductible in 2008 is $1,100 – but the accounts can be invested just like IRAs. Over the course of time, you can develop a nice little nest egg that can alleviate a lot of future worries about how you’ll pay for health care.


July 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.

Q&A: Foreclosure Investing May be On the Upswing, But it isn’t for the Squeamish

In May, RealtyTrac, a leading online market for foreclosure properties, reported that foreclosure rates were up 4 percent in April from March levels, but up a whopping 65 percent from April 2007.

There’s that old saying that one person’s misfortune is another person’s happiness. But in these troubled times for the mortgage industry, those who consider investing in foreclosure properties should not only understand foreclosure and the importance of cash in the process, but the emotional element unique to this kind of investment. After all, each foreclosure represents someone who has lost a home.

With the rise in foreclosures, you’ll definitely hear more about how “easy” it is to invest and make a killing. But in reality, those who deal regularly in foreclosures know that making a profit can be tough, and that’s true even for individuals with close ties to lenders and public officials and lots of experience. Here’s a look at the foreclosure process and how it works.

What is foreclosure? A foreclosure happens when a buyer defaults on their payments and the lender takes formal legal action to seize the property. Foreclosures have accelerated not only due to a downturn in the economy that’s affected home sales, but because many homeowners were tripped up by adjustable-rate mortgages that moved to higher payment levels that they could afford. State rules govern this process, but generally, when a lender decides to foreclose on a property it files a notice of default or a lis pendens (Latin for "lawsuit pending"). This document is a public record, and for buyers – including other lenders -- it's the first step in locating a property in foreclosure. A buyer looking for foreclosures can look online for lists of properties in default, but it’s particularly important to double-check these listings.

Do all troubled properties have to be in foreclosure to be sold? Actually, no. You will hear about “pre-foreclosure” or “short sale” properties put up for sale by lenders who have entered into agreements with troubled homeowners who elect to give up the property to avoid a foreclosure on their credit report. You will also hear about such sales being done by intermediary companies who claim to deal in these transactions. Some are legitimate, some are not. Check them out.

How do people invest in foreclosure properties? There are three primary ways this happens. First, you will see buyers coming in at the “pre-foreclosure” stage. Second, you will see buyers going after “REO” (real estate owned) properties – literally foreclosed real estate still on the books of a lender. Third, you’ll see foreclosures auctioned off at the public courthouse or in private auctions, depending on how the lender wants to market such properties to get them off their hands. Each process has its own conventions for inspecting the properties – sometimes prospective buyers get time to inspect what they might buy, other times little or none.

Can I borrow to buy foreclosures? If you have to borrow money to buy foreclosed or other troubled properties, you might not want to get involved at all. While the typical purchase of a home involves mortgage financing that takes weeks to secure due to credit checks and other factors, the sale of foreclosure properties is typically a fast-moving process that requires no-strings financing. Bottom line, lenders like cash. There’s another good reason to enter this process with cash instead of debt. Even sophisticated foreclosure investors often discover ugly surprises when buying – property with greater damage than they anticipated, for example – and they may not have the flexibility to borrow to fix those unexpected problems after they borrowed to buy in the first place.

So, how do I educate myself? Start with some solid advice about your personal finances and your tax situation. A Certified Financial Planner™ professional can help review your circumstances and how prepared you might be for this risky form of investment. Beyond that, it’s a process of learning how various lenders in your community deal with pre-foreclosure and foreclosure property and how public officials and private auction houses in your area handle the auction process for such property. Generally, this is knowledge that will take time to obtain since all the parties involved in this process are busy and besieged by many like you who want to learn. Be patient, take the proper time to study the process and don’t spend a dime until you do.



June 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.

To Retire or Un-retire? Ways to Consider the Question

Add retirement to the long list of things Baby Boomers are changing their minds about.

An April, 2006 study by Zogby International and the MetLife Mature Market Institute found that a significant number of older Americans are revising their ideas about their post-career years. The study found that 78 percent of respondents aged 55-59 are working or looking for work, as are 60 percent of 60-65 year-olds and 37 percent of 66-70 year-olds. Across all three age groups, roughly 15 percent of workers have actually accepted retirement benefits from a previous employer, and then chose to return to work (or are seeking work). Called the “working retired,” these workers represent 11 percent of 55-59 year-olds, 16 percent of 60-65 year-olds and 19 percent of 66-70 year-olds.

A decision to return to work isn’t necessarily a negative. It’s not always a sign that older Americans are having trouble making ends meet. Some work simply because they want to change careers for a new challenge.

Yet delaying retirement or returning to the workforce from retirement is a decision that should be made after a thorough financial review.

According to MetLife, most older employees expect to stop working for pay at the age of 70. The best time to talk about working in retirement is at least five years before you retire. If you’re working with a good advisor, they’ll force you to answer key questions about the retirement you want to have. You might discover that working in retirement is something you want to avoid at all costs, and you’ll have to accelerate your savings and investments to avoid it. Here are some critical points to consider in a working retirement:

Making working retirement a variable in your planning: If you’re in your early 50s and reviewing your retirement planning so far, it makes sense to ask yourself under what conditions you’d return to the workplace. Maybe you want to take a year off after you retire from your current job and then you’ll go back into another career. You obviously need to know based on current projections how much money you’re likely to gather from savings and other retirement resources. Then you need to consider how much money you’d be satisfied making in your post-retirement working life and for how many years you’ll earn that income.

Check what returning to work will do to your pension: Early retirement transitions can have some adverse effects particularly where pensions are involved. Get some advice here.

Back to school? You need to plan: Seniors may get early-bird specials at restaurants, but colleges aren’t giving away free tuition. And if you haven’t had to put your own kid through school, you’ll be shocked at how much college costs have risen in the past 30-plus years. If you’re investigating post-retirement employers, see if you can qualify for educational benefits to back up any out-of-pocket costs. Also, some colleges do offer discounted tuition or free classes for seniors.

Talk to a tax professional before you make a move: Tax issues shouldn’t determine your ambitions and goals, but it’s important to consider the impact work-related income will have on your retirement. Many retirees find that it doesn’t take much post-retirement income to tip them into a higher bracket. Look for ways to control the taxes you’ll ultimately pay, including continued participation in qualified plans, and IRAs, and other tax-favored accumulation vehicles. And don’t forget to discuss your Social Security options.

Consider insurance issues: If a retiree returning to the workforce is already receiving Medicare or covered by a “Medigap” policy, they may be able to lower their costs or improve their coverage by accepting group coverage as primary underwriter of their medical expenses. Since people over age 55 are generally the greatest users of the healthcare system, coverage issues are particularly important to run by a financial expert.

Keep saving: If you return to the workplace, see what you can do to take advantage of your new employer’s 401(k) plan or any other tax-advantaged retirement savings benefit, particularly if an employer matches your contribution. Don’t miss a chance to enhance your retirement savings.


June 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.

Traveling Smart During the Hot, Pricey Summer of ‘08

Summer is when we hope to get time off to relax. But with regular gasoline prices nearing $4 and energy prices pushing tourism expenses higher on everything from plane fare to meals out, paying for this year’s summer vacation might be a significant source of financial stress.

A recent GfK Roper Reports survey indicated that 55 percent of respondents said they are limiting “discretionary expenses like eating out and vacations.”

If that sounds like your agenda, here are some ways to save on travel this summer:

Stay closer to home: Is it that boring around home? Rather than flying across the country, check out the tourism website for your state or the nearest adjoining state to yours and just see what looks interesting. Those websites offer coupons, too. Also, sign up for e-mail from your local transit agencies and check their websites – you might hear about special deals at local museums or parks and free parking sites where you can leave your car before you pick up the train or bus.

Get smart about your travel points: If there’s a particular hotel chain you’re going to stay in, see whether they’re part of a larger network where you can earn points or other incentives toward future stays. Also, rather than multiple credit cards, try and narrow your usage to plastic that carries the best points plans toward hotels, airlines and car rental agencies you use all the time for fun or business.

Go off-season: Admittedly, it’s tougher with kids since they can only travel when school’s out, but if you don’t have a family, start traveling out-of-season all the time. Vegas and Aruba might be hotter than blazes in July, but as long as you have sun block and access to good air conditioning, then you can take solace counting what you’ll save on hotels, meals and other expenses that dip in price when the crowds are low.

Let travel opportunities find you online: If you have a favorite airline, resort or hotel chain, get on their mailing lists online and be ready to react if they offer a great deal.

Look for value weeks on the calendar: For family friendly venues, you might want to check prices on the edges of summer when schools are still letting out or going back into session. It’s not a bad time for grownups to travel either – you’ll beat the crowds.

Check out your motor club: Major organizations like AAA negotiate good prices on popular tourism locations around the country, even places like Disney World. Again, even if you don’t have kids, check your motor club’s offerings on hotel, destination, rental car and even train discounts.

Merge errands into your trip: This is not just vacation advice, but good everyday advice – if you can pack regular errands into your vacation time in the car, do it. For example, when returning from a trip, consider incorporating your regular errands on the drive home (consider stopping in states or counties with cheaper sales taxes that might save money on similarly priced items).

Leave or return on a Monday or Tuesday: Play around with the days of the week that you can schedule your trip just to see if you can find significant savings on hotel and airfares. Fighting to get home on a Saturday or Sunday can cost you money.

Pinch those gasoline pennies: If you’re driving your own car on trips, focus on maintenance and when and where you’re buying your gas. Keep your tires inflated and make sure your engine is in good shape for maximum fuel economy. Also, don’t carry tons of stuff – heavier cars burn more gas. Consider joining a wholesale club that sells their own gas onsite – you might save a considerable sum not only at home, but in out-of-town locations where you’re staying (hit the Internet and check before you go). Also, buy gasoline mid-week when prices generally stabilize from spikes entering the weekend and starting the workweek. Last but not least, buy gas when daytime temperatures are lowest. Why? Because during cool hours, gasoline is densest and packs more fuel power.


June 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.

Heading Back to School? Make a Plan First

It was the physicist Rosalyn S. Yalow who said, “The excitement of learning separates youth from old age. As long as you're learning you're not old.”

A July/August 2006 story in AARP Magazine by noted workplace and career expert Rosabeth Moss Kanter pointed out that retirement-phobic mid- or late-career types might retreat to college campuses instead of the golf course to prepare for the next phase of their life. Why? They want to train for completely new careers in all-new professional fields or public service. According to the piece, “Traditional volunteering is not what leading-edge boomers have in mind. They want to be leaders and to help improve the world.” Education will be a part of that movement.

The back-to-school movement for older Americans is an interesting one, but it goes beyond purely financial considerations. It makes sense to discuss your ideas with a tax professional and a financial expert such as a Certified Financial Planner™ professional before you make a move:

Do you really need the degree? Depending on the field, many employers will look at an experienced worker and take their particular work and life accomplishments into consideration when hiring. An MBA or other advanced degree may be personally fulfilling, but you have to consider whether your future plans really require it and whether the degree will pay for itself in the end in salary, opportunity or both.

Are you planning to attend school while working or will you take time off? Going for an aggressive degree program while working full-time can be financially, mentally and physically draining. Obviously, if you plan to take a sabbatical and go to school full-time, that’s a more complex set of financial issues you need to consider well in advance, and you should get help planning for it. Beyond finance, you need to be prepared for the demands of school on your time with family, friends and your personal relaxation. Time is an opportunity cost you can’t get back.

Check your qualifications for federal and state tax credits: Both the federal Hope Credit and the Lifetime Learning Credit are among options you may consider to help cushion the tuition blow if you qualify – discuss these credits and other ways to afford college with your tax expert as well as your planner.

How prepared are you to take on debt? It would be wonderful to pay cash for a college degree, and with time and planning you might be able to do it. But if you need to take out debt to pay for your coursework, make sure your credit cards and other debt are paid off first. You’ll put yourself in the best position to afford any student debt you take on.

Will your company pay? Take advantage of every educational break you can take before you leave your company. If they require you to stay a certain amount of time after attaining your degree, work that into your plan.

Check scholarships and grants: See if there are sources of grants and scholarships not only in your community, but also within your industry. Go online and do a general search for such aid.

How’s your retirement and health plan? It might seem like a good idea to raid the retirement plan or milk the home equity to go back to school, you need to research whether that makes sense for you. Despite your current energy and determination, no one has a guarantee of perfect health through the last half or third of their lives. You can’t forego retirement or healthcare planning simply because you need the money for school.

Consider a functional degree. All sorts of colleges – even the nation’s most prestigious schools – are considering abbreviated graduate and post-graduate programs that give students exactly the amount of education to upgrade their skills and head back into the workforce. If one year of college will do, why pay for three or four?

Are your school choices friendly to older students? It’s your money. Make sure you’re attending an institution that considers its older students a valuable addition to its campus and makes you welcome.


June 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.