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Thinking About Munis? Make Sure You’re Making Wise Picks

Municipal bonds have long been a safe haven for higher-income investors looking for safety and greater tax efficiency. The credit squeeze put the municipal bond market through its paces like other competing markets this year, but it may be time to take a second look at both municipal bonds and muni bond funds.

Let’s start with a definition of what a municipal bond is. A municipal bond, or muni, is a bond issued by a local government or their agencies to raise funds for a host of reasons tied to keeping the government going. The potential issuers may include cities, counties, redevelopment agencies, water and sewer projects, school districts, publicly owned airports, seaports and other transportation entities. They pay for everything from immediate government expenses to new roads and various public projects. Municipal bonds come in two flavors—general obligation bonds and revenue bonds. General obligation bonds are intended to raise immediate capital to cover government expenses; revenue bonds are the ones that fund infrastructure projects.

As an incentive for investors to buy these bonds, interest income is often exempt from federal income tax as well as the income tax of the state in which they are issued. Mutual funds that invest in municipal bonds also offer the same tax treatment.

This year has held lots of excitement for muni investors and those who were hoping to be. The credit crunch sucker-punched funding sources for public projects as well as private investments–many municipalities ended up dropping certain projects because investors weren’t there to buy the paper and other sources of financing had dried up as well.

Who’s fled the muni market? Hedge funds, issuers of structured notes and municipal bond mutual funds trying to keep up with redemptions from tapped-out investors. Right now, the best source of demand for munis is individuals, who can account for only so much business. But in the absence of other buyers, that’s potentially good news for you.

Keep in mind that even during the Great Depression, no state defaulted on its general-obligation bonds, and while some munis have defaulted, overall, such defaults are very, very rare.

So where’s the opportunity for you? Look at some of the highly rated outstanding bonds. You’ll find some amazing yields that you certainly won’t find in CDs and other investments. Even though their prices have plunged, some municipals late last year were offering long-term, tax-free yields of five percent and above, which translate into the equivalent of nearly seven percent for taxpayers in the 28 percent bracket and nearly eight percent for someone in the top 35 percent bracket when the tax exemption is considered.

That’s a very nice return relative to U.S. Treasuries, considered the safest investments of all.

But before you buy, here are some things to know and steps to follow.

Are munis right for you? The first call you make shouldn’t be to a broker. It should be to your tax professional and your financial adviser. A CERTIFIED FINANCIAL PLANNER™ professional can take a look at your entire taxable investment portfolio (there’s no point in putting tax-exempt munis into tax-exempt accounts like IRAs or 401(k)s) and determine whether they’re the right approach to take for your investments.

What munis are in trouble? There are some governments who issued a hybrid muni known as a variable-rate demand note. These were sold mainly to institutions with maturities of up to 30 years that were paying at rates reset as frequently as once a day. During the crisis, the rates on these notes have shot up to double-digit territory, putting the municipalities that issued them under particular strain due to short-term interest rates that can be reset as frequently as once a day.

Keep an eye peeled for the AMT: While most munis pay interest that’s free from federal income taxes, some may pay rates that are subject to the alternative minimum tax, known as the AMT. It’s a little more complicated than we have space for here, but this is absolutely why you need to talk to your tax professional or financial planner before making a move into munis.

Don’t forget to ladder: “Laddering” is a portfolio structuring term. To ladder bonds means that you are buying them with maturities occurring at regular intervals, so when they mature, you’ll have money to reinvest at those same regular intervals.

Watch those ratings: Yes, the main private investment ratings firms–Moody’s and Standard & Poor’s among them–have been in the doghouse for rating many battered investments highly, not just munis. But most municipals rated AA or AAA are generally safe to consider. It’s also important to check the issuer’s long-term ratings history. If they’ve been consistently highly ranked over decades and the municipality has no financial scandal (something that can be checked through news archives on the Internet), that’s another good way to research a bond issuer before making a purchase.

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.

Whether You Call It a Budget or a Spending Plan, It’s a Good Way to Start 2009

Granted, the New Year is a time for best intentions. People vow to stick to a diet, knuckle down at work, spend more quality time with people they care about, start scratching off that long list of key chores around the house, and of course, keep a closer watch on their pocketbook.

If you find you can do only one of these things, focus on that last item–making and sticking to a budget. It might help you handle the rest of those resolutions:

• Being in control of one’s finances reduces stress. Stress can make people eat more and spend more.
• Having a spending plan in place means you’ll have already prioritized the key activities, expenditures and projects you’ll need to make for the year and the money you’ll need to afford them.
• Spending less time worrying about money means you’ll have more time to think about the people in your life.

Here are some ideas you may want to incorporate into that process.

Don’t be afraid to ask for help: Do you know where you need to be? A financial planner can ask the right questions and develop a customized plan to figure out your starting point and where you’ll finish based on your age, earnings potential and the new habits you’ll develop.

Start tracking every dime you spend: Whether you do it with a pen and a notebook or a computer program, make a concerted effort to track your everyday spending. Physicians say overweight people should track every morsel of food they eat; with money, it’s the same thing. Knowing where every penny goes gives a quick picture where certain pennies can be saved or invested.

Prioritize… When it comes to spending, there are needs and wants. Try this exercise. You can do this on a big 2009 desk calendar (or an electronic calendar that allows space for lots of notes to yourself). Mark down at the appropriate dates and times of the year items for which you need to spend and those for which you want to spend. What are needs? In part, food (not carryout or restaurant meals), monthly mortgage, tuition, auto or rent payments; monthly utilities; home, auto, life or disability insurance; retirement savings; property taxes and credit card payments. What are wants? Non-essential items like vacations, non-essential home improvement projects, restaurant meals (you can cook at home) or treats like clothing splurges or electronics. Compare these total expenditures to your total income. What will this crowded calendar tell you? That by attacking debt, making certain sacrifices and spending and saving smarter, you can eventually un-crowd that calendar and your financial life.

…then zero in each month: There has to be a living, breathing side to budgeting that accommodates change. Do this: Near the end of each month, make a list of the specific “needs” and “wants” you’ll face next month, and figure out how much money you’ll have for wants after needs are addressed. For example, if your car needs a necessary repair, that’s certainly going to boost the “needs” side of the page. If you find due to a one-time event (paying off a particular credit card, for example) that you have more to spend in the “wants” column, then it’s time to decide whether it’s time for a treat or to throw more into savings, investments or attacking any other debt.

Identify and plan for long-term goals: You need to think about the things you really want to do with your life and what those things will cost. Putting goals in writing gives them a formality and a starting point for the planning you must do. If these goals require saving, make sure you put those savings dates on the financial calendar you made.

Build failure and recovery into the plan: How many diets have evaporated with the words, “I blew it!” The fact is, with food or money; everyone goes off course at times. The important thing is to have a plan for corrective action – if you’re about to make an impulse purchase; implement a three-day spending rule. That means you should give yourself three days to check your budget and think through the purchase before you make it. If you can minimize the damage and get back on course, your progress will continue.

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.

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.

What if Your Employer Wants You to Retire Slowly or Come Back From Retirement? Be Ready with a Plan

Roughly 25 percent of the U.S. workforce is nearing retirement age, according to a recent survey by Hewitt Associates. This has important ramifications for the retirement many Americans will have in the future.

The consulting firm reported that out of 140 mid-size and large employers, 55 percent already had evaluated the impact that potential retirements could have on their organization, and 61 percent have developed or will develop special programs to retain targeted, near-retirement employees. Only one in five said that phased retirement is critical to their company's human resources strategy today, that number more than triples to 61 percent when employers look ahead 5 years.

What’s phased retirement? Conventionally, it’s the process of allowing employees who have reached 59 ½ to cut their hours while voluntarily receiving a pro-rata portion of their pension annuities. The company gets to keep its intellectual capital in place a little longer while the worker gets to segue into retirement gradually while accessing some of their retirement assets along the way. Provisions in the Pension Protection Act of 2006 made it easier for companies to create phased retirement strategies.

Hewitt said that in addition to retaining current employees, employers are reconsidering their policies toward rehiring retirees. While 45 percent indicated they currently have policies in place that limit the ability to rehire retirees, 46 percent said they were likely to review their rehiring policies in the future.

What kind of consideration process should you undertake if your employer offers this option? A good first step is to consult a financial planner such as a CERTIFIED FINANCIAL PLANNER™ professional to talk through the possibilities:

Envision how a phased retirement or return to your workplace would affect your life: If you’re reviewing your retirement planning at any age, it makes sense to ask yourself under what conditions you’d leave the workplace or return to it. If you were offered phased retirement, how would you deal with the cutback in responsibility and hours? Some people thrive on work relationships and might not know what to do with significant time outside the office. 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 total retirement income: 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. Early retirement transitions can have some adverse effects particularly where pensions are involved. But, if the place where you spent your career comes calling, you might get some attractive pension incentives to get people to come back. Talk these options over with both financial and tax experts.

Can you negotiate for benefits? If you’re investigating post-retirement employers, including your own, see what benefits you’ll qualify for, and take a close look at educational benefits that may allow you to upgrade your skills for free. If your company will pay you to go to school and give you the time to actually work on a degree, that might be a very nice incentive indeed.

Consider insurance issues: If you are a retiree returning to the workforce and you’re already receiving Medicare or covered by a “Medigap” policy, you may be able to lower your costs or improve your 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 any new wrinkles in your employer’s 401(k) plan or any other tax-advantaged retirement savings benefits, particularly if they match your contribution. Don’t miss a chance to enhance your retirement savings, even if you’ve already retired once.

December 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.

After a Turbulent 2008, Make Some New Year’s Resolutions for a Financially Healthy 2009

Money worries are the most common cause of holiday stress, according to Mental Health America. The 2006 study showed that parents are more stressed than all other demographic groups by finances and females are more likely than men to feel stressed by finances.

Money isn’t everyone’s No. 1 worry, but if it’s yours, why not consider the following New Year’s resolutions to improve your financial life?

Resolve:

1. To write down your goals: Have you ever written down the big things you want in life? Granted, all great dreams don’t cost money, but many of them do. Money buys freedom – to travel, to retire early, to start a business, to change careers. Putting goals in writing gives them a formality and a starting point for the planning you must do.

2. To evaluate your risk tolerance: One of the most beneficial things financial planners do is help you articulate your financial goals and establish (or re-establish) your tolerance for risk. With the market turbulence that’s marked 2008, many individuals would benefit from an analysis of how much risk they want – or need – to take given what they want to achieve with their money.

3. To track your spending: If you haven’t purchased financial accounting software or set up a reliable accounting method of your own, this is the year to do it. Diligent expense tracking is the first critical step to getting personal finances in order.

4. To consider advice on taxes and planning: Maybe you’ve always winged it with your taxes and considered your company 401(k) the ticket to your financial future. Chances are your planning is inadequate. Start getting references on good tax professionals and consider sitting down with a CERTIFIED FINANCIAL PLANNER™ professional to discuss your current retirement savings picture and what you can do to improve it.

5. To cut your credit card debt: If you can’t ever seem to get yourself completely out of credit card debt, make this the year to do it. Take inventory of your balances, figure out if you can consolidate them under your lowest-rate card, and resolve to pay off an amount that exceeds the minimum – on time, every month. Oh, and pay cash from now on.

6. To save: If you haven’t signed up for your employer’s 401(k) plan or begun a savings plan tailored for the self-employed, this is the year. And resolve to save at least 5-10 percent of your take-home pay based on your cash flow, and place the maximum in whatever retirement savings plans you qualify for.


7. Get ahead on your mortgage: This advice isn’t for everybody, but if you’ve paid off your credit cards by paying more than the minimum, you can apply the same principle to your mortgage payment. Every dollar you prepay will potentially save thousands in interest over the life of the loan if you plan to stay in your home long-term. In fact, if you make one extra payment a year, either at once or in equal monthly shares over the course of a year, you can cut at least five years of payments on a 30-year loan. Just don’t short your retirement investment plans to accomplish this.

8. Invest in yourself: If going back to college or taking specific coursework will help you advance in your career, plan to do it. If investing in a health club membership that you actually makes sense for your health as well as your insurance costs, do it.

9. To redefine the way you shop: If you’re an impulse shopper, break the habit in ’09. As a suggestion, get a legal pad and make that your centralized shopping list – use a single page for groceries, stock-up goods (it’s wise to start buying essentials in bulk if you can measure the savings), essential clothing or big expenditures you’ll need to make at specific times. Taking that pad with you wherever you spend money is a good way to keep a grip on your wallet as long as you don’t stray from the list.

10. To attack that miscellaneous column: Do you really need deluxe cable? How much are you paying for your Internet service? Can you wear a sweater around the house and lower the thermostat? In every budget, there are items that can be cut – or at least trimmed. Take a hard look at all your “essentials” to see how essential they really are. Aim for a target of at least 10 percent and start setting that money aside on a regular basis.


December 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.

Helping Your Kids Recover after a Major Money Mistake

The average college graduate is $20,000 in debt, and today’s young adults are clearly exposed to more opportunities for self-directed financial disaster than any group in history.

Despite the current credit crunch, credit cards are still a common way most young people afford their new adult lifestyle, and rising costs on everything from rent to gasoline presents deeper challenges.

So it happens. Your kid gets in trouble with those credit cards, loses a job, or can’t find a job to pay the sum total of the rising debt he or she has. What can you do?

Make sure you can afford to help: It’s tough to say no to a financial bailout for your kid, but depending on the level of trouble he or she is in and your own financial responsibilities, you may need to. Here are some ideas:

Both sides should come clean: Remember that this situation is as much about the relationship as about money. The decision to help a family member with money problems requires understanding – lecturing tends to work not so well. But it’s right to encourage your kid to take a frank look at their financial situation and if they are in debt trouble of any kind, they should get help. It’s also important that you show confidence that they will make it through this.

Consider a joint talk with a financial planner: A financial planner, such as a CERTIFIED FINANCIAL PLANNER™ professional, can look at their financial situation and your own and give you both a road map on how to work through your child’s money problems and set up better money management techniques for after the crisis.

Should help be considered a gift? Actually, this is a good first question in any scenario where you offer help to a friend or family member. What happens if you don’t get the money back? For the sake of the relationship involved, it might make sense to think through that possibility. Would the potential loss of money injure you, and worse, will it injure the relationship? This is why it might be a very good idea to present this solution as a one-time gift – and then stick to it.

But if it’s a loan: You need to structure it professionally with clear consequences if it goes unpaid. Handled correctly, such a solution can offer benefits for the borrower and lender alike. Terms should be at arm’s length to meet IRS rules but it can still be more attractive than the child could obtain in the current marketplace. But there’s the potential for incredible downside. Unclear agreements can lead to missed payments or default. If the borrower dies suddenly, the lender’s investment may be lost if the agreement isn’t structured correctly. A properly executed promissory note is still an obligation of the estate, and may continue to be paid to an heir or other person or entity based on the terms as agreed. It is advisable that the loan agreement be in writing and properly executed to meet IRS rules.

Work with them on budgeting: It’s not going to be enough to solve the immediate problem. Even if you don’t use a financial planner to help you both work through the situation, it’s important to set a clear financial course for your child going forward. They obviously have to have a stake in the planning, but you’re going to have to provide guidance.

Encourage them to start an emergency fund: Even if your child only has a few cents in their pocket after settling their troubles, encourage them to start an emergency fund. Optimally, they’ll need to stash away three to six months’ worth of living expenses, and even if it’s just a small start, it’s part of the recovery effort.


December 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.

Taking Steps to Safer Investment Decisions in 2009

It’s tough to tell how much one investor can do alone to preserve their assets in 2009, particularly with unprecedented government intervention in world markets. But there are some general ideas to employ as markets and economies hopefully stabilize in the New Year:

Start with a plan – or review an old one: If you’ve worked with a good financial planner, you should be able to articulate your long-term investment goals by yourself. If you can’t discuss such goals in detail, it might be time to meet with a financial advisor including a CERTIFIED FINANCIAL PLANNER™ professional. Much of the riskiest investing, overbuying and panic selling during the late 1990s and early 2000s could have been avoided if individual investors had sought advice for achieving long-term specific goals such as retirement or a college education.

Check all your assets in banks: As a result of federal economic bailout legislation, the Federal Deposit Insurance Corporation (FDIC) temporarily raised the per-deposit account, per bank coverage level from $100,000 to $250,000 through Dec. 31, 2009. Certain retirement-related accounts carry $250,000 of FDIC coverage, but again, check in with your bank to make sure you’re covered, and if not, get the right advice for moving funds so you don’t incur an unexpected tax liability or fees.

Review your risk tolerance: Having a plan doesn’t mean make the plan and leave it to sit for years. You and your planner should decide when it’s time for a review of your investment goals and your feelings about them. An annual conversation makes sense if nothing’s going on, but when unusual circumstances in life or the markets take place, a phone call might be a good idea.

Check your credit: No one knows how long it might take to unravel the nation’s current credit situation. That’s why creditworthy individuals might want to delay looking for new lines of credit until things loosen, and it’s definitely a good time to schedule review of each of your latest credit reports at staggered intervals throughout the next year. Why? Because in tough economies and times of tight credit, identity theft might be on the rise, and you’ll need to make sure the information on your credit data is truly your own.

Pay attention to your cash: You should have an emergency fund of three to six months’ worth of living expenses in case your job situation goes south, but the market turbulence we’ve experienced also highlights the need to be somewhat liquid in your investment positions so you can take advantage of certain opportunities. Not every investment that’s lost value is necessarily a bad investment, and with careful study, you should be able to have cash on reserve so you can capitalize on legitimate opportunities.


Re-budget: It’s a good time to make a budget or re-assess the one you have. Though the federal government would love for consumers to start spending again to lift the economy, that doesn’t mean you have to jump in with both feet. Keep your spending smart, your debt low so it’s easier to set savings and investment priorities that will do you the most good when the economy and the market come back.

Check your retirement: How will the activity in the market affect your retirement timetable? You might want to continue working full-time or plan a phased-in approach as you continue to build assets. There is a great danger now that people may become either too risk-adverse or assume too much risk in planning for their retirement, and that’s why it’s wise to get advice.


December 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 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.

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.

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.

Financial Crisis Update: Monday, October 6, 2008

by Advisor Products Inc. 10/6/2008 6:00:00 PM

Global equity markets retreated again today as investors indulged fears that not even the world’s top government bankers will be able to shore up the credit markets and stave off recession. The blue-chip Dow industrials fell 369 points, cracking the 10,000-point barrier for the first time since 2004, and other major indices fell 3% to 4%. The market did show some resolve, however, gaining over 400 points from the session's low in the final hour and 15 minutes of trading. Once again, bond markets served their traditional role as a relatively safe haven from stock market volatility. Treasury yields sank even further as demand for government debt pushed prices upward yet again. For more, please read:http://money.cnn.com/2008/10/06/markets/markets_newyork/index.htm

World Holds Breath For Bank Bailout Now that Congress has ratified the $700 billion emergency bank rescue package and President Bush has signed it into law, Treasury officials are already hard at work to put the controversial plan into practice before global credit markets freeze over. Few of the central figures involved in the bailout expect that the next few weeks will be completely free from setbacks, but in the meantime investors around the world can at least hope that the plan works.

Investing In The Post-Bailout Future Noted finance professor Jeremy Siegel says few people are happy that the Treasury has had to resort to such extreme lengths to stimulate lending, but he also notes that the $700 billion rescue plan “can be a plus” for taxpayers and investors if executed properly. But what exactly is the government buying with that $700 billion and how will the plan work? In clear language, Prof. Siegel lays out the parameters and what’s at stake.

Digging Into The Job Numbers After the initial shockwaves from Friday’s labor report, economists are putting together a more balanced picture of what the numbers imply. American businesses may be trimming their payrolls, but wages are still edging higher, which indicates that skilled workers are still in demand. And due to the impact of Hurricane Ike and other events, the final revision to the numbers may end up telling a very different story – the revised July numbers were less gloomy than economists had expected, for example.

Financial Crisis Update: Friday, October 3, 2008

by Advisor Products Inc. 10/3/2008 11:35:00 AM

Wall Street closed its worst week since 2001 with fresh losses as fear of a full-fledged credit crisis and ongoing economic concerns conspired to drive share prices sharply lower. Major U.S. indices fell another 1.3% to 1.5% despite the eagerly awaited passage of a $700 billion package of aid for the banking system. Bond yields continued to sink as Treasury debt beckoned investors as a relatively safe haven from the stock market carnage. For more, please read:http://www.msnbc.msn.com/id/3683270/

$700 Billion Bailout PassesAfter two weeks of sometimes heated debate, the Treasury’s far-reaching and historic plan to bail out the nation's financial system—now with added tax breaks and other incentives to tempt recalcitrant members of Congress—was signed into law by President Bush on Friday afternoon. Whether it will provide what it takes to keep the credit markets moving and keep the economy out of the grip of recession remains to be seen.

Job Market Takes Another HitOutside the credit markets, investors pondered news that U.S. payrolls plunged in September, leaving some speculating that bailout or no bailout, a recession could be waiting in the wings. Although the unemployment rate remained unchanged at 6.1%, a net 159,000 jobs still disappeared in September.

Candidates Tighten Focus On EconomyNow that the debate between Sarah Palin and Joe Biden is over (and the bailout has been passed), presidential candidates Barack Obama and John McCain have increased the intensity of their economic rhetoric in an attempt to calm the fears of investors and consumers alike. Social Security and taxes are now headline issues, as is the welfare of the middle class.

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.

Top 10 Money Moves for Today’s College Freshman

With average college tuition up 6.3 percent at private schools and up 6.6 percent at public schools this past school year, money management is a bigger issue than ever on college campuses. That’s why it’s good to send your freshman off to school with a 10-point plan on how to best manage their money:

1. Take baby steps with credit: It’s one thing for a teenager to use their parents’ credit card while they’re still living at home. It’s quite another when they get their first taste of freedom hundreds of miles away. Parents may co-sign the student’s credit card but keep it in the student’s name. That way, parents will know when financial missteps occur, which will be a strong incentive for the student to keep his credit rating clean for the next four years. Most important: Parents should do whatever it takes to make sure the child doesn’t sign up for any credit cards on campus.

2. Bank smart: Students need to get some familiarity with the banking system before they head to college. Kids generally should set up a checking account on campus, but talk to them about debit options and how banking fees (particularly for overdrafts) can eat away at their money. Also ask your child to ask the bank about direct-deposit options if you’re planning to deposit money for their tuition or agreed-to spending needs. You want your child to be independent, but if necessary, make it a joint account and check those balances online.

3. Work with them to set up their first emergency fund: A young person should get used to the idea of savings and reserves for unforeseen events such as emergency trips home or related expenses. Make it clear that late-night pizza and mochas are not an emergency.

4. Put the student in charge of maintaining her financial aid: Each year, the FAFSA (Free Application for Federal Financial Aid) is due in June. State applications are due earlier. While parents need to run the financial aid process, students need to be equally aware of how their education is paid. Everyone should file the form whether or not you think your child may be eligible, and your child should be searching for scholarships at all times. It might also make sense to take your child to your tax preparer to make sure you’re taking advantage of the child’s “tax capacity” and other income tax opportunities. It will be a good learning experience.

5. Make them budget: If they’re leaving for college with a new computer, consider giving them personal finance software to track their everyday expenses and make sure the computer has a security password. Work together to determine necessary realities about everyday expenses, tuition and financial aid. Then tell your kid that when he or she comes home at Thanksgiving, you will sit down again to review those figures and make reasonable adjustments. You obviously need to trust your kids, but you might want to do this for as long as it takes them to develop solid and consistent money habits.

6. Schedule a holiday budget and credit check: When the triumphant freshman returns home for the holidays, schedule some R&R, home cooking and the first reading ever of their fall budget figures and their first credit reports. Since credit reports can be ordered online, parents and student should sit down with each of the child’s three credit reports from Experian, TransUnion and Equifax and review them for activity and errors. Since everyone is entitled to one free report from each of the agencies each year, go to www.annualcreditreport.com for theirs.

7. Help them open their first IRA: Get some advice on this from a trusted financial planner but if your 18-year-old child is earning wages by working part-time at school, at home during breaks or for your own company, have them open a Roth IRA in a growth fund. Make sure they understand this is essential to their future savings so they don’t cash it in.

8. Discuss identity theft: Personal financial data left on laptop computers, cell phones and other electronic devices can be readily stolen on campus or in a dorm or roommate environment. Tell your kid to keep all paper records in a safe place and introduce passwords to keep all their digital information safe.

9. Get them networking: Internships and jobs in their chosen field during summer breaks can give your student a head start on their career path. Encourage them to research these opportunities freshman year so they’ll be in the front of the line when it’s time to apply.

10. Handle mistakes the right way: Most kids will make money mistakes in college. If they overdraw a checking account or overdo it with their credit card, make the criticism constructive but firm and always come up with a corrective plan you’ll work on together.


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.