Strategic Wealth Advisors

Keeping Market Volatility in Perspective

Debt Payoff Strategies

Making Financial Resolutions? Look Back at Last Year

Simplified Employee Pension Plans (SEPs)

Ask the Experts: Will my broker calculate my cost basis for DRP stocks?

Gift Tax Strategies

How Much Do You Know about Social Security?

Qualified Charitable Distributions Qualify for RMDs

Why Does Europe Affect Your Portfolio?

Ask the Experts: Does the federal financial aid formula count all parental assets?

Can You Get to a Million Dollars?

Long-Term Care Planning Is Important for Women

Five Year-End Tax Planning Considerations

The Debt Ceiling and the Road Ahead

Ask the Experts: I'm retiring to a state with no income tax. Can my former state tax my retirement benefits?

Factoring Health-Care Costs into Retirement Planning

Making Benefit Decisions during Open Enrollment

Year-End Investment Planning: The Clock Is Ticking

Could You Handle a Financial Windfall?

Ask the Experts: What happens to my online accounts when I die?

Do You Need Flood or Earthquake Insurance?

Life without Life Insurance

Panic Selling: Are the market conditions today as bad as they were in 2008?

All about Indices

Talking to Your Child about College Expectations

Medicare and Medicaid: Do You Know the Difference?

Tax Advantages of Homeownership

Crisis Investing: Keeping Your Head

The New Face of Socially Responsible Investing

Ask the Experts: Can the IRS waive the 60-day IRA rollover deadline?

Ask the Experts: What is a funeral trust?

Deciphering Health Savings Vehicles

Life Insurance Policy Loans: Tax and Other Implications

Mid-Year Tax Considerations

Ask the Experts: Can I make charitable contributions from my IRA?

Estate Tax Exemption Is Portable (for Now)

Don't Be Nickeled-and-Dimed by Account Fees

Inflation or Deflation: Watching for Warning Signs

Ask the Experts: What health-care changes become effective in 2011?

A/B and A/B/C Trusts

Rising Interest Rates: The Downside of Economic Recovery

401(k) In-Plan Roth Conversions

Year-End Investment Planning Is More Challenging in 2010

Ways to Trim College Costs

Trusteed IRA's can "Stretch” Beneficiary Benefits

Social Security: File-and-Suspend for Higher Benefits

Will You See Higher Tax Rates in 2011?

What You Should Know about Inherited IRAs

Mid-Year Finanical Review Provides Clarity and Time to Adjust

Does the return on your portfolio milrror it's Risk?

Bob Farrell's 10 Rules for Investing

Your most valauble asset is?

Roth IRA Conversions 2010

Rich In Confidence Workshop

Love and Compassion for Tiger Woods and Family

Rich In Confidence

Maybe there is a financing method available for Commercial Real Estate.

Recession Changing Affluent Behavior

Ten Lessons From The Financial Crisis; Soon to be forgotten?

Active vs. Passive Portfolio Management, What’s the Difference?

CREW presentation Rebranding 09/10/09

8 Word Leading To Success

August 2009 issue of the NSCPA Silver Streak

Golf Analogy to explain Investment Risk and Reward

David Booth speaks of Retirment Risk and Return

Broker vs. Investment Advisor

Market Volatility Stocks for the Long Run?

Buy and Hold, does it still work? Of Course

Life is about Finishing Strong

Quote of the Day

Quote of the Day

Quote of the day

Wisdom

Haste Makes Waste

Risk Tolerance

Christmas Card

The Big 3 Automakers

THE HUMAN SPIRIT

Ten Reasons to Be Cheerful

Bears versus bulls

Points of reference

Stocks versus bonds

Minimum payments

Make additional payments

Pay off highest interest rate debts first

Get a debt consolidation loan

Automate your retirement savings

Plan ahead for a cash crunch

Review your investments

Check your insurance coverage

Update your estate plan

What are some advantages of a SEP?

What are some disadvantages?

What are my options?

Federal gift tax basics

Basic planning

Gift considerations

How is Social Security funded?

How are earnings reported to the SSA?

What benefits are available?

How do you qualify for benefits?

Do most people apply for early retirement benefits?

How much more will you receive if you delay applying for benefits?

Can you receive benefits based on an ex-spouse's record?

Do workers with lower earnings receive more from Social Security?

Do you have to stop working to receive Social Security retirement benefits?

Background

Who might consider this strategy?

Certain limitations apply

What are the income tax implications?

Bank exposure

Potential for tighter credit creating recession

Greece could be the tip of the iceberg

All politics is local

Current balance--your starting point

Time (accumulation period)

Rate of return (earnings)

Amount of contributions

Contributions needed

Women as caregivers

Women as long-term care recipients

Paying for long-term care

1. Tax rates unchanged

2. AMT "fix" expires at end of year

3. Retirement plan contributions

4. Retirement plan distributions

5. Expiring provisions

The debt ceiling will rise in stages

Discretionary spending will be cut

"Supercommittee" will seek additional $1.5 trillion deficit reduction

More spending cuts, 2012 debt ceiling tied to deficit reduction

Balanced budget amendment would give authority to increase debt ceiling

Grad student subsidized loans eliminated

How much will you need?

What can you do?

Are you happy with your health plan?

Should you contribute to a flexible spending account?

What other benefits or incentives are available?

Do you need more information?

Harvest tax losses if appropriate

Don't procrastinate on tax break for small business stock

Consider the potential impact of higher interest rates

Don't let payroll tax increase derail long-term plans

2012-01-24T10:50:00.000-08:00

When markets are volatile, sticking to a long-term investing strategy can be a challenge. Though past performance is no guarantee of future results, it might help you keep the ups and downs in perspective to see how recent market action compares to previous market cycles.

Corrections of 10% or more and bear markets of at least 20% are a regular occurrence. Since 1929, there have been 18 previous 20%-plus bear markets (not including 2011 market action). Losses on the S&P 500 in those markets ranged from almost 21% in 1948-49 to 83% during 1930-1932; the average loss for all 18 bears was 37%.*

However, since 1929, the average bull market has tended to last almost twice as long as the average bear, and has produced average gains of about 79%.* Individual bull market gains have ranged from 21.4% at the end of 2001 to the nearly 302% increase registered during the 1990s.* The worst annual loss--47%--occurred in 1931, but the all-time best annual return--a capital appreciation gain of just under 47%--happened just two years later in 1933.**

Last year's volatility rattled even seasoned investors. For example, during a single week in August, 2 of the Dow's 11 best days in history alternated with 2 of its 11 worst daily point losses ever.***
While by no means normal, the highs and lows are hardly unprecedented. Even though the 634-point drop on August 8 felt historic, it didn't begin to match the real record-holders. The single biggest daily decline occurred in September 2008, when the Dow fell 778 points. The biggest percentage drop was October 1987's "Black Monday," when the Dow fell almost 23%; that makes the Dow's 5.5% loss on August 8, 2011, seem relatively tame by comparison. And August 8 was followed by the Dow's 10th best day ever, with a gain of 430 points. While that upward movement may seem exceptional, the Dow's best day ever came during the dark days of October 2008, when a 936-point move up on October 13 represented a gain of more than 11% in a single day.***

The last decade has been a challenging one for stocks. Between 2001 and 2010, the S&P 500 had an average annual total return of just 1.4%, while the equivalent figure for Treasury bonds was 6.6%.**** For much of that time, interest rates were falling, helping bonds to outperform stocks. However, interest rates are now at record lows, and rising rates could change the relative performance of stocks and bonds.

While there may be ongoing volatility in the markets that needs to be monitored, it's important to keep things in perspective. Your ability to meet your goals could be affected if you change your overall long-term game plan with every new headline.

Past performance is no guarantee of future results. Market indices listed are unmanaged and are not available for direct investment. All investing involves risk, including the risk of loss of principal, and there can be no guarantee that any investment strategy will be successful. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The Standard & Poor's 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.

DATA SOURCES: *Bull and bear market time frames, gains/losses: all calculations based on data from the Stock Trader's Almanac 2011 for the Standard & Poor's 500.
**1931 and 1933 annual stock returns: based on Ibbotson SBBI data for capital appreciation of S&P 500.
***Based on data from the Stock Trader's Almanac 2011.
**** 10-year rolling stock returns: based on Ibbotson SBBI data for annual total returns between 2001 and 2010 of S&P 500 and an index of U.S. Treasury bonds with an approximate 20-year maturity.

2012-01-03T13:12:00.000-08:00

In these uncertain economic times, you may be thinking of reducing your debt load. There are a number of strategies for paying off debt that you might consider. However, before starting any debt payoff strategy (or combination of strategies), be sure you understand the terms of your debts, including any penalties for prepayment.

You are generally required to make minimum payments on your debts, based on factors set by the lender. Failure to make the minimum payments can result in penalties, increased interest rates, and default. If you make only the minimum payments, it may take a long time to pay off the debt, and you may have to pay large amounts of interest over the life of the loan. This is especially true of credit card debt.

Your credit card statement will indicate the amount of your current monthly minimum payment. To find the minimum payment factors, you will need to review terms in your credit card contract. These terms can change over time.

For credit cards, the minimum payment is usually equal to the greater of a minimum percentage multiplied by the card's balance (plus interest on the balance, in some cases) or some minimal amount (such as $15). For example, assume you have a credit card with a current balance of $2,000, an interest rate of 18%, a minimum percentage of 2% plus interest, and a minimum amount of $15. The initial minimum payment required would be $70 [greater of ($2,000 x 2%) + ($2,000 x (18% / 12)) or $15]. If you made only the minimum payment each month, it would take you 114 months to pay off the debt, and you would pay total interest of $1,314.

For other types of loans, the minimum payment is generally the same as the regular monthly payment.

Making payments in addition to your regular payments or the minimum payments can reduce the time payments must be made and the total interest paid. The additional payments could be made periodically, such as monthly, quarterly, or annually.

For example, if you made monthly payments of $100 on the credit card debt above (the initial minimum payment was $70), it would take you only 24 months to pay off the debt, and you would pay total interest of just $396.

As another example, let's assume you have a current debt on which you owe $100,000, the interest rate is 7.125%, the monthly payment is $898, and you have a remaining term of 15 years and 3 months. If you make regular payments, you will pay total interest of $62,247. However, if you pay an additional $200 each month, it will take you only 11 years to pay off the debt, and you will pay total interest of just $44,364.

Another strategy is to pay one-half of your regular monthly mortgage payment every two weeks. By the end of the year, you will have made 26 payments of one-half the monthly amount, or essentially 13 monthly payments. In other words, you will have made an extra monthly payment for the year. Furthermore, payments are made earlier than required, thus reducing the total interest you will have to pay.

One way to potentially optimize payment of your debt is to first make the minimum payments required for each debt, and then allocate any remaining dollars to the debts with the highest interest rates.

For example, let's assume you have two debts, you owe $10,000 on each, and each has a monthly payment of $200. The interest rate for one debt is 8%; the interest rate for the other is 18%. If you make regular payments, it will take you 94 months until both debts are paid off, and you will pay total interest of $10,827. However, if you make monthly payments of $600, with the extra $200 paying off the debt with an 18% interest rate first, it will take you only 41 months to pay off the debts, and you will pay total interest of just $4,457.

If you have multiple debts with high interest rates, it may be possible to pay off those debts by getting a debt consolidation loan. This type of loan will typically be a home equity loan. Therefore, the interest rate on it will often be much lower than the interest rates on the debts being consolidated. Furthermore, if you itemize deductions, interest paid on home equity debt of up to $100,000 is generally deductible for income tax purposes, thus reducing the effective interest rate on the debt consolidation loan even further. However, a home equity loan potentially puts your home at risk because it serves as collateral, and the lender could foreclose if you fail to repay. There also may be closing costs and other charges associated with the loan.

All examples are hypothetical and for illustrative purposes only.

2011-12-27T21:38:00.000-08:00

Each new year brings the chance for a fresh start, and the opportunity to improve your financial picture. As you make financial resolutions for 2012, looking back at what happened last year can help you make some positive changes this year.

In 2011: The economic slowdown took its toll on retirement savings.

In 2012: While the economy--and its impact on financial markets--may be out of your hands, you can still look for ways to increase your retirement savings. First, determine whether you're leaving any money on the table. If you participate in an employer-sponsored retirement plan such as a 401(k) or a 403(b), contribute the maximum amount you can--particularly if your employer matches some or all of your contributions.

Contributing to an employer-sponsored retirement plan can help you save more consistently. Because your contributions are deducted automatically from your salary each pay period, you won't be tempted to skip one now and then. And this year, why not resolve to steadily increase your retirement contributions? Your employer may allow you to sign up for automatic contribution increases based on a certain schedule or triggering event (e.g., annually or whenever your pay increases).

If you're self-employed or contributing to a traditional or Roth IRA on your own, you can still automate your contributions by having money sent directly from a savings or checking account to your retirement account.

In 2011: According to the Federal Reserve, use of consumer credit rose in 2011 after falling for two straight years.

In 2012: If you've reigned in your spending but are still burdened by debt (especially credit card debt), your lack of emergency savings may be partly to blame. For example, even if you pay much more than your monthly minimum credit card payment, you'll be caught in an endless cycle of debt unless you can avoid using your credit card for new expenses. Resolve to have at least three to six months of your living expenses set aside in a liquid account such as a savings or money market account so that you have cash on hand to pay for unexpected expenses (e.g., costly car or home repairs, large medical bills) instead of racking up new credit card debt and interest charges.

In 2011: Market volatility was the norm.

In 2012: You can't control the market, but you can control your response to market volatility. Is your asset allocation still in line with your investment goals, time horizon, and risk tolerance? Is it time to rebalance your allocation in light of changing market conditions and/or your changing needs? Are you taking appropriate advantage of available investment products or offerings? Reviewing your portfolio periodically can help you stay on track.

In 2011: Floods, hurricanes, tornadoes, earthquakes, and wildfires were widespread.

In 2012: The federal government issued more disaster declarations in 2011 than in any other year on record, serving as a reminder that it's important to review your property and casualty coverage to make sure you're adequately protected. Is there coverage you really should have (e.g., personal umbrella liability, renters insurance, or flood protection), but don't?

In 2011: New estate and gift tax laws took effect.

In 2012: Your estate plan should be reviewed in light of the changes made last year to estate and gift tax laws. Certain life events, such as changes in employment, family circumstances (marriages, divorces, births, illness or incapacity, and deaths), or even the valuation of your estate, may also affect your estate plan.

2011-12-20T09:05:00.000-08:00

If you're a small business owner thinking about adopting a retirement plan, you should consider a SEP (simplified employee pension plan). A SEP allows you to make retirement contributions to traditional IRAs (SEP-IRAs) set up for yourself and each eligible employee. (If you don't have employees, you can adopt a SEP for yourself alone.) Your contributions are deductible from your business's income, and excluded from your employees' income. Virtually any business owner can establish a SEP.

Fairly high contribution limits. For 2012, you can contribute and deduct up to 25% of each employee's W-2 compensation (up to $250,000, $245,000 in 2011). If you're self-employed, the contribution to your IRA can't exceed 20% of your net earnings from self-employment. Contributions can't exceed $50,000 per participant ($49,000 in 2011).
You don't have to make contributions to the SEP every year. However, if you do make a contribution, you must generally contribute a uniform percent of pay for yourself and each eligible employee.
You have until the due date of your business's federal income tax return (including extensions) to set up a SEP and make contributions.
SEPs are fairly easy to set up and inexpensive to operate. You can establish a SEP by using a simple two-page IRS document (Form 5305-SEP), or by adopting a prepackaged prototype SEP from a bank, insurance company, or financial institution.
Reporting requirements are minimal.
A SEP doesn't preclude you or your employees from establishing or contributing to a separate IRA. (However, participation in the SEP may impact whether or not annual traditional IRA contributions are deductible.)
Employer contributions can be made after age 70½.
Generally, you won't have fiduciary responsibility for your employees' investment decisions.

All employees must be included in the SEP except employees who have not attained age 21, haven't worked for you in at least three of the last five years, or earn less than $550.
Your contributions vest immediately. This can be costly if you have high employee turnover.
Unlike a 401(k) plan, employees can't make pretax contributions or Roth contributions to a SEP (but a SEP can accept annual and rollover IRA contributions, like any other traditional IRA).
Plan loans are not allowed.
A SEP-IRA may provide less protection from creditors outside of bankruptcy than some other alternatives.

A number of other types of retirement plans are available to small business owners, including 401(k) plans, profit-sharing plans, defined benefit plans, and SIMPLE IRAs.

If you have no employees (other than your spouse) and don't anticipate having any in the near future, a solo 401(k) plan may be a better choice, as it may allow a higher deductible contribution than a SEP. For example, if you're incorporated, you can receive an employer contribution of up to 25% of your W-2 income (to $250,000 in 2012, $245,000 in 2011) (like a SEP) but in addition, you can make up to $17,000 ($16,500 in 2011) of pretax employee contributions (plus an additional $5,500 of catch-up contributions if you're age 50 or older). Total contributions (employer and employee) are limited to $50,000 in 2012 ($49,000 in 2011), plus any catch-up contributions (or, if less, 100% of your compensation).

Unlike a SEP, a solo 401(k) can allow plan loans and Roth contributions. And because a solo 401(k) doesn't cover any common law employees, it's simpler to administer than a regular 401(k) plan (because the Employee Retirement Income Security Act of 1974 (ERISA) does not apply).

2011-12-13T13:15:00.000-08:00

If you think you don't need to track cost basis on your own because brokers must now report to both you and the IRS the cost basis for any stock sold, there are some potential pitfalls to be aware of.
First, new cost basis reporting requirements are being phased in. New regulations requiring brokers to report cost basis generally apply only to stocks bought after January 1, 2011. (Mutual funds will become subject to the same provisions in 2012; bonds and options will follow in 2013.) However, for a stock bought as part of a dividend reinvestment plan, or DRP, the new provisions will apply only to purchases made on or after January 1, 2012. As a result, for most DRP stock purchased before that date, in most cases you or your tax preparer will still be responsible for calculating accurate cost basis information.*

Because DRPs typically involve many purchases over a long time, calculating the cost basis for a DRP stock could be challenging. Fortunately, there's also a provision that makes the calculation easier. For stocks held in DRPs, the cost basis of all purchases in the plan can be averaged to determine the cost basis for individual shares sold.

The ability to average sales from a DRP applies only to plans whose documents specify that at least 10% of every dividend paid must be reinvested in identical stock. To be considered identical, the stock must have the same CUSIP number, which would not apply to purchases of the same stock made outside the DRP.

Even after adjusted cost basis reporting is available for DRP stocks, you can still specify which shares are considered the ones sold for tax purposes. However, you must do so before the trade settles--typically, three days after the transaction.

You can include any transaction costs paid as part of your adjusted cost basis. And even though your adjusted cost basis may be calculated by someone else, it may still be a good idea to keep documentation of any purchases or sales to make sure it matches the information being supplied to the IRS.

The reporting regulations already apply for DRPs that do not require reinvestment of at least 10% of every dividend paid.

2011-12-06T10:33:00.001-08:00

The current large gift tax applicable exclusion amount, low gift tax rates, depressed property values, and low interest rates create a favorable environment for making certain gifts.

Annual exclusion. Each year, you can give a certain amount ($13,000 in 2011 and 2012) to as many individuals as you like gift tax free.

Qualified transfers exclusion. You can give an unlimited amount on behalf of any individuals for tuition or medical expenses gift tax free. You must pay the amount directly to the educational or medical care provider.

Applicable exclusion amount. Gifts can also be sheltered by the applicable exclusion amount, which can protect gifts of up to $5,120,000 (in 2012; $5,000,000 in 2011). The dollar limit applies to all taxable gifts you make during life and to your estate at your death for federal estate tax purposes.

The first gifts you consider should generally be annual exclusion and qualified transfer gifts. You can make annual exclusion gifts to anyone for any purpose. The annual exclusion is lost in any year in which you do not use it. You can make unlimited gifts using the exclusion for qualified transfers, but gifts are limited to educational and medical purposes.

You and your spouse can split gifts that either of you make. Doing so allows you and your spouse to effectively use each other's annual exclusions and applicable exclusion amounts. For example, if you have 2 children, you and your spouse could make annual exclusion gifts totaling $52,000 to your children (2 spouses x 2 children x $13,000). If you make gifts of $52,000 for 10 years, you will have transferred $520,000 to your children gift tax free.

Next, consider gifts that are sheltered by the applicable exclusion amount. But remember that use of the applicable exclusion amount during life reduces the amount available for estate tax purposes at your death.

If you are likely to have a very large taxable estate at your death that could not be sheltered by the applicable exclusion amount, it might even make sense to make gifts that cause you to pay gift tax. For example, let's assume any additional transfer you make would be subject to the current top gift or estate tax rate of 35% and you make a taxable gift of $1 million to your child on which you pay $350,000 of gift tax. If instead you retained the $1,350,000 until death, $472,500 of estate tax would be due ($1,350,000 x 35%) and only $877,500 of the $1,350,000 would remain for your child. By making the taxable gift and paying gift taxes that reduced your taxable estate, you reduced taxes by $122,500 while increasing the amount transferred to your child by the same $122,500.

If you have property whose value is depressed, now may be a good time to make a gift of it. The gift tax value of a gift is its fair market value, and a lower value means a smaller gift for gift tax purposes. However, you generally should not make gifts of property that would produce an income tax loss if sold (basis in excess of sales price). The person receiving the property would have a carryover basis and would not be able to claim the loss. In these cases, instead consider selling the property, claiming the loss, and making a gift of the sales proceeds.

Future appreciation on gifted property is removed from your gross estate for federal estate tax purposes. However, while property included in your estate generally receives a basis stepped up (or stepped down) to fair market value when you die, lifetime gifts do not. Therefore, you may wish to balance the gift tax advantage of a gift with carryover basis and income tax on gain if the property is sold against the income tax advantage of a stepped-up basis and estate tax (if any) if you retain the property until your death.

In the current low interest rate environment, you may wish to consider a grantor retained annuity trust (GRAT). In a GRAT, you transfer property to a trust, but retain a right to annuity payments for a term of years. After the trust term ends, the remaining trust property passes to your beneficiaries, such as family members. The value of the gift of a remainder interest is discounted for gift tax purposes to reflect that it will be received in the future. Also, if you survive the trust term, the trust property is not included in your gross estate for estate tax purposes. Any appreciation in the trust property that is greater than the IRS interest rate used to value the gift escapes gift and estate taxation. The lower the IRS interest rate, the more effective this technique generally is.

In the current low interest rate environment, you may also wish to consider a low-interest loan to family members. You are generally required to provide for adequate interest on the loan, or interest will be deemed for gift tax purposes. However, with the current low interest rates, you can provide loans at a very low rate and family members can effectively keep any earnings in excess of the interest they are required to pay you.

2011-11-29T12:04:00.001-08:00

Social Security is in the news more and more, as the first wave of baby boomers retire and economic pressures on the program increase. More than 90% of Americans are covered by Social Security,* but how much do you know about this important program?

Unlike many government programs, Social Security is funded primarily through the collection of payroll taxes. In 2010, 81.9% of funding came from this source, with the rest derived from interest earned on government bonds held by Social Security trust funds and income taxes paid on benefits.* That's why Social Security is known as a "pay-as-you-go" system. However, someone working and paying Social Security taxes today is not funding his or her own benefits, but is funding the benefits of someone who is receiving them now or in the near future--one of the reasons why Social Security is facing a potential funding shortfall. According to the Social Security Administration (SSA), the number of retired workers will double in less than 30 years, but there will be fewer workers paying into the system. And with life expectancies increasing, benefits will be paid for a longer period.*

If you work for an employer, your employer will send a copy of your W-2 form annually to the SSA. If you're self-employed, the IRS will report your earnings to the SSA annually after your federal income tax return has been processed.

Although Social Security is known as a retirement program, benefits are paid to people of all ages, including surviving family members and disabled individuals. In 2010, 5.7 million people were awarded Social Security benefits. Of those, 46% were retired workers, 36% were survivors or spouses/children of retired or disabled workers, and 18% were disabled workers.*

As you work and pay payroll taxes, you earn Social Security credits. Generally, you need to work 10 years to earn enough credits to qualify for retirement benefits--other benefits have different requirements. Contact the SSA if you have any questions about your benefit entitlement.

Yes. According to a report by the Government Accounting Office (GAO), 43% of people take early retirement benefits at age 62, while almost 73% of people apply for benefits before they reach full retirement age.**

For each year past your full retirement age you delay receiving benefits, your Social Security benefit will increase by a certain percentage (8% for anyone who was born in 1943 or later). For example, if your full retirement age is 66 and you delay receiving benefits until age 70, your annual benefit will be 32% higher.

You may qualify for divorced spousal benefits if you were married for at least 10 years, you haven't remarried, you are age 62 or older, and you don't qualify for a higher benefit based on your own work record.

A worker who has lower earnings will receive a lower monthly benefit than someone with higher earnings because benefits are based on average lifetime earnings (the highest 35 years of earnings are used in the calculation). However, the Social Security benefit formula is designed to ensure that workers with lower earnings receive a greater percentage of their preretirement earnings. For example, a worker with relatively low earnings may receive a benefit that is approximately 55% of his or her preretirement earnings, while a worker with relatively high earnings may receive a benefit that is approximately 25% of his or her earnings.***

No. As long as you've reached early retirement age and meet eligibility requirements, you can apply for Social Security benefits even if you decide to continue working. However, if you're younger than full retirement age and earn more than a certain amount, your benefits will be temporarily reduced (once you reach full retirement age, your benefits will be increased to account for the money that was withheld).
Fast Facts & Figures About Social Security, 2011
GAO-11-400, Retirement Income, June 2011, based on data compiled by the SSA Office of the Chief Actuary
SSA Publication No. 05-10045, 2011

2011-11-22T10:01:00.001-08:00

If you're an IRA owner who must take a required minimum distribution (RMD) in 2011, you can avoid some or all of the resulting income tax liability by donating a portion of it to charity. A qualified charitable distribution (QCD), also known as an IRA charitable rollover, can not only save you income taxes, it can help minimize your taxable estate and fulfill your philanthropic desires. Through December 31, you can make tax-free transfers of up to $100,000 directly from your IRA to qualified charities. Here are the details.

The QCD provision was enacted in 2006, and was scheduled to end in 2009, but last-minute legislation extended it into 2010 and 2011.

Prior to 2006, if a donor withdrew funds from a traditional IRA in order to contribute to charity, the withdrawal had to be reported as ordinary income and was taxed at regular income tax rates. Once the contribution was made, the donor was generally entitled to an income tax deduction for the value of the charitable contribution, calculated and reported on Schedule A of Form 1040 (subject to certain limitations), which could potentially offset some or all of the taxable income generated by the withdrawal.

With a QCD, you can exclude from taxable income any IRA funds directly transferred to a charity as an outright contribution.

There is currently legislation being considered in Congress that would make this provision permanent. It would also get rid of the $100,000 cap, reduce the minimum age at which taxpayers are able to take advantage of certain giving vehicles (e.g., charitable remainder trusts) from 70½ to 59½, and make it easier for donors to give through supporting organizations, private foundations, and donor-advised funds.

You would benefit most from implementing this strategy if you:

Do not need all of the income from your RMDs
Make charitable gifts, but don't itemize deductions (generally, only taxpayers who itemize get federal income tax-saving benefits from charitable donations)
Make large charitable gifts, but are unable to deduct all of them in a given year because of adjusted gross income limitations
Want to avoid being taxed on your RMDs

Certain limitations apply to these nontaxable charitable distributions from an IRA:

You must be at least 70½ years of age when the gift is transferred
Total gifts cannot exceed $100,000 per year, per IRA owner or beneficiary (married taxpayers with separate IRAs can give up to $200,000 total per year, but no more than $100,000 may be distributed from each spouse's IRA)
Gifts must be made directly from your IRA to a public charity (i.e., they cannot be made to a private foundation, a supporting organization, or a donor-advised fund)
The gifts must be outright (i.e., they cannot be used to establish a charitable gift annuity or fund a charitable remainder trust)

Transfers must come from the IRAs directly to the charity. If you have retirement assets in a 401(k) or 403(b), for example, you must first roll those assets into an IRA, and then make the transfer from the IRA directly to the charity.

You cannot do a QCD from a SEP-IRA or SIMPLE IRA.

Federal--You do not recognize the transfer as income, as long as it goes directly from the IRA to the charity. However, you are not eligible for an income tax charitable deduction.
State--State laws vary, so check with your financial professional.

2011-11-15T10:28:00.001-08:00

When a possible default on Greek sovereign debt becomes headline news, a lot of people find themselves wondering, "How can the problems of a country so small and so far away create such turmoil in the world's financial markets?" What's happening in Europe is probably affecting your portfolio right now, regardless of the quality of your holdings or how well diversified you are.

One of the chief concerns about the possibility of default on sovereign debt has to do with the financial stability of banks that hold it. For example, some of the largest French banks have already seen their credit ratings downgraded because of their extensive holdings of debt from troubled European countries. If a Greek default made banks reluctant to lend to one another, that could affect credit markets worldwide.

American banks hold very little Greek debt compared to European banks; however, they could face a different challenge. Derivatives known as credit default swaps can create a ripple effect, multiplying a default's impact beyond the bondholders to other financial institutions and institutional investors. U.S. financial institutions are major issuers of credit default swaps, and the potential impact that a Greek default would have is unclear. However, since the 2008 financial crisis, banks have been forced to hold greater capital reserves to deal with contingencies.

Lending worldwide hasn't fully recovered from the last financial crisis, and has helped keep global economic recovery sluggish. If banks' lending ability were impaired further by a financial crisis brought on by a default on sovereign debt, pessimists argue that a slowing global economy could be thrown into recession. Europe represents a major market for many U.S. companies, and a recession there would be felt around the globe.

Even though Greece is the immediate concern, Europe's larger economies could pose a bigger threat. Italy and Spain both face debt and deficit problems. Italy's economy is more than five times that of Greece; Spain's is more than four times bigger (CIA World Factbook 2011). If a Greek default would have a ripple effect, default by Spain or Italy could create waves.

To compound the problem, borrowing costs for troubled countries have risen. At recent auctions, nervous investors have demanded higher interest rates to compensate them for their higher perceived risk. As any credit card holder knows, having to pay a higher interest rate makes paying off debt and balancing the budget more difficult.

Recently there have been signs that voters in stronger European countries, such as Germany, may be questioning why they should continue to support others when their own economies are slowing. Also, investors worry that the financial support available from the European Financial Stability Fund (EFSF) may not be sufficient or available quickly enough to avert problems. Though there's no shortage of suggestions for how to deal with the situation--issuance of euro bonds backed by all eurozone members, leveraging the EFSF's existing assets, greater fiscal integration among countries, Greece abandoning the euro--questions about the ability and willingness of other eurozone countries to support weaker members have contributed to investor anxiety.

Financial markets hate uncertainty, and the situation has contributed to the recent volatility across a variety of asset classes. However, eurozone leaders have the benefit of having watched the United States during the 2008 crisis. Also, they have generally reaffirmed their determination to defend the euro.

Uncertainty about Europe could persist for months, so while it's important to monitor the situation, don't let every twist and turn derail a carefully constructed investment game plan. To determine how market events might affect your own portfolio, don't hesitate to ask questions and get expert help.

2011-11-09T12:39:00.000-08:00

The federal methodology for financial aid examines your family's income, assets, and household information to calculate your expected family contribution, or EFC. Your EFC represents the amount of money the government deems you can afford to put toward college costs each year before any financial aid is forthcoming.

The federal methodology counts some parental assets and excludes others in arriving at your EFC (these assets are referred to as assessable and non-assessable assets). The more assessable assets your family has, the higher your EFC. The following assets are excluded from the federal methodology:

Retirement accounts (e.g., 401(k)s, all IRAs)
Annuities
Cash value life insurance
Home equity in primary residence
Personal items (e.g., cars, furniture)
A family farm

Keep in mind that your assets for financial aid purposes are those you own at the time you sign the FAFSA.

Assessable assets are all other assets of the parent. These include items such as checking and savings accounts, money market accounts, certificates of deposit, stocks, bonds, mutual funds, U.S. savings bonds, certain 529 plans, trusts, limited partnerships, vacation homes, investment properties, and business assets.

When a family's total assessable assets are counted, the federal methodology grants parents an asset protection allowance that lets them exclude a certain portion of their assets from the final tally. The amount of the allowance varies, depending on the age of the older parent at the time the student applies for aid--the older the parent, the greater the allowance. For example, for the 2011/2012 school year, the asset protection allowance for a two-parent family where the older parent is 48 years old is $46,200; the figure jumps to $54,300 if the older parent is 54 years old.

2011-11-01T10:30:00.000-07:00

Often in life, you have investment goals that you hope to reach. Say, for example, you have determined that you would like to have $1 million in your investment portfolio by the time you retire. But will you be able to get to a million dollars?
In trying to accumulate $1 million (or any other amount), you should generally consider the current balance of your investment portfolio available to meet your anticipated future need, any additional contributions that you anticipate you can make to your investment portfolio, any amounts that you can earn on your portfolio, and the time that you have to do so.

Of course, the more that you have today, the less you may need to contribute to your investment portfolio or earn on your investments over your time horizon.

In general, the longer your time horizon, the greater the opportunity you have to accumulate $1 million. If you have a sufficiently long time horizon and a sufficiently large current balance, with earnings you may be able to reach your goal without making any additional contributions. With a longer time horizon, you'll also have more time to recover if the value of your investments drops. If additional contributions are required in order to reach your goal, the more time you'll have to target your goal, and the less you may have to contribute.
The sooner you start making contributions, the better. If you wait too long and the time remaining to accumulate funds becomes too short, you may be unable to make the large contributions required. In such a case, you may need to consider whether you can extend the accumulation period--for example, by delaying retirement.

In general, the greater the rate of return (ROR) that you can earn on your investments, the more likely that you'll reach your investment goal of $1 million. The greater the proportion of the investment portfolio that comes from earnings, the less you may need to contribute to the portfolio. Earnings can benefit from long time horizons and compound rates of return, as returns are earned on any earlier earnings.
However, higher rates of return are generally associated with greater investment risk and the possibility of investment losses. It's important to choose investments that meet your time horizon and tolerance for risk. And be realistic in your assumptions. What rate of return is realistic given your current asset allocation and investment selection?

Of course, the more you can regularly contribute to your investment portfolio (e.g., monthly or yearly), the better your chances are of reaching your investment goal of $1 million, especially if you start contributing early and have a long time horizon.

Now that we've reviewed the primary factors that affect your chances of getting to a million dollars, let's consider this question: At a given rate of return, how much do you need to save each year to reach the $1 million target? For example, let's assume that you anticipate that you can earn an annual rate of 5% (to be compounded monthly) on your investments. If your current balance is $500,000 and you have 20 more years to reach $1 million, you actually do not need to make any additional contributions (see scenario 1 in the table below), but if you only have 10 more years, you'll need to make annual contributions of $13,956 (see scenario 2). If your current balance is $0 and you have 30 more years to reach $1 million, you'll need to contribute $14,754 annually (see scenario 3), but if you only have 20 more years, you'll need to contribute $29,873 annually (see scenario 4).

Scenario	1	2
Target	$1,000,000	$1,000,000
Current Balance	$500,000	$500,000
Years	20	10
ROR	5%	5%
Annual Contribution	$0	$13,956

Scenario	3	4
Target	$1,000,000	$1,000,000
Current Balance	$0	$0
Years	30	20
ROR	5%	5%
Annual Contribution	$14,754	$29,873

This is a hypothetical example and is not intended to reflect the actual performance of any investment. Actual results may vary. Taxes and inflation are not considered.

2011-10-25T11:32:00.000-07:00

The prospect of needing long-term care is an important, yet sometimes overlooked, part of financial and retirement planning. Yet it may be especially vital for women to consider as they often face the need for long-term care as both a caregiver and recipient.

While you may think most long-term care is received in a nursing home setting, the National Clearinghouse for Long-Term Care Information (National Clearinghouse) estimates that about 80% of care is provided at home by informal (unpaid) family caregivers. Of those caregivers, about 60% are women (www.longtermcare.gov).

In many instances, the care provided for chronically disabled older adults is quite intensive and time-consuming. Women who act as family caregivers of older people with high levels of personal-care needs may face considerable financial, emotional, and physical strain. For instance, caregivers may face financial challenges due to lost wages from reduced work hours, time out of the workforce, extended family leave, or early retirement. Reduced work hours or extended time out of work may also affect the ability to contribute toward retirement savings, potentially resulting in a loss of retirement income.

Caregivers also may face emotional strains and poor health related to their caregiving responsibilities. This may be especially true for older women caregivers and younger women who may be caring for an older family member in addition to managing their own household.

According to the Centers for Disease Control and Prevention (CDC), women outlive men by an average of 6 years (www.cdc.gov). Because they tend to live longer, women are at a higher risk than men of needing long-term care (source: National Clearinghouse). And the National Clearinghouse reports that women, on average, need care over a longer time than men (3.7 years vs. 2.2 years). With a longer life expectancy and a greater likelihood of needing long-term care, women often must confront their long-term care needs without the help of their spouse or other family members.

Long-term care can be expensive. An important part of planning is deciding how to pay for these services.

Buying long-term care (LTC) insurance is an option. Many LTC insurance policies pay for the cost of care provided in a nursing home, assisted-living facility, or at home, but the premium paid generally depends on the age of the insured and the policy benefits and options purchased. And premiums can increase if the insurer raises its overall rates. Even with LTC insurance, you still may have some out-of-pocket contributions in addition to premium payments. For example:

Not all policies provide coverage for care in your home, even though that's where most care is provided. While the cost of in-home care may be less than the cost of care provided in a nursing home, it can still be quite expensive.
Most policies allow for the selection of an elimination period of between 10 days and 1 year, during which time the insured is responsible for payment of care.
The LTC insurance benefit is often paid based on a daily or monthly maximum amount, which may not be enough to cover all of the costs of care.
While lifetime coverage may be selected, it can increase the premium cost significantly, and some policies may not offer that option. Most common LTC insurance benefit periods last from 1 year to 5 years, after which time the insurance coverage generally ends regardless of whether care is still being provided.

Government benefits provided primarily through a state's Medicaid program may be used to pay for long-term care. To qualify for Medicaid, however, assets and income must fall below certain limits, which vary from state to state. Often, this requires spending down assets, which may mean using savings to pay for care before qualifying for Medicaid.

Women may have to confront particular challenges when planning for long-term care. A financial professional can help with some of the complex issues you may face when preparing for the possibility of long-term care, both as a caregiver and a receiver of care.

2011-10-18T09:30:00.000-07:00

Legislation passed in December of 2010 extended lower tax rates, deductions, and other expiring provisions for an additional one to two years. As a result, you can consider 2011 year-end tax planning moves with a relative degree of certainty. Here are five things to keep in mind.

The same six federal income tax rates that apply this year will apply next year (these are the same rates that applied in 2010). So, depending on your taxable income, you'll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket. The rates that apply to long-term capital gains and dividends also remain unchanged; long-term capital gains and qualifying dividends continue to be taxed at a maximum rate of 15% in 2011 and 2012. If you're in the 10% or 15% income tax bracket, a special 0% rate will generally apply.

While 2010 regular income tax rates as well as the rates that apply to long-term capital gains and qualifying dividends were extended through 2012, the latest in a long line of alternative minimum tax "fixes" (in the form of increased AMT exemption amounts) is effective only through the end of this year. So, if AMT is a factor in your year-end planning, potential year-end moves are somewhat complicated by the uncertainty of the AMT for 2012. Of course, many expect another AMT "fix" for 2012, but as things stand today, AMT exemption amounts will drop significantly for 2012, increasing the reach and impact of the AMT in 2012.

Traditional IRAs (assuming that you qualify to make deductible contributions) and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds pretax, reducing your 2011 taxable income. Contributions that you make to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) plan are made with after-tax dollars, but qualified Roth distributions are completely free from federal income tax, making these retirement savings vehicles very appealing. For 2011, you can contribute up to $16,500 to a 401(k) plan ($22,000 if you're age 50 or older), and up to $5,000 to a traditional or Roth IRA ($6,000 if you're age 50 or older). The window to make 2011 contributions to an employer plan closes at the end of the year, while you generally have until the due date of your federal income tax return to make 2011 IRA contributions.

Once you reach age 70½, you're generally required to start taking required minimum distributions (RMDs) from any traditional IRAs or employer-sponsored retirement plans you own. Take any distributions by the date required--the end of the year for most individuals. The penalty is steep for failing to do so: 50% of the amount that should have been distributed.

The year 2011 may be the last opportunity for individuals age 70½ or older to make qualified charitable distributions of up to $100,000 from an IRA directly to a qualified charity. These charitable distributions can be excluded from your income, and count toward satisfying any RMDs that you would otherwise have to take from your IRA for 2011.

Barring additional legislation, 2011 will be the last opportunity to take advantage of some expiring provisions:

"Bonus" depreciation and IRC Section 179 expensing limits drop significantly in 2012.
The increased (100%) exclusion of capital gain from the sale or exchange of qualified small business stock (certain requirements, including a five-year holding period, apply) will not apply to qualified small business stock issued and acquired in 2012.
The credit for energy-efficient improvements made to your home expires at the end of 2011. The credit is limited, however, and you may not be able to claim a credit for 2011 if you've claimed it in past years.

2011-10-11T10:38:00.000-07:00

The Budget Control Act of 2011 left all sides with plenty to argue about for the rest of the year. In addition to gradually increasing the debt ceiling, it's intended to bring down the federal budget deficit by an estimated $2.1 trillion over the next 10 years, focusing on spending cuts rather than increased revenues. The Act also sets the stage for more debate over how to achieve that $2.1 trillion reduction. Here are some of the key provisions of the debt ceiling legislation.

The legislation increased the $14.3 trillion debt ceiling by $400 billion immediately, and by another $500 billion after September. The increases enable the Treasury to pay bills without interruption while additional discussion of deficit reduction measures takes place.

An additional $1.2 trillion to $1.5 trillion in borrowing authority, which is believed will take care of the Treasury's needs until 2013, will be available in 2012; the amount will depend on whether certain requirements are met. Though Congress could vote to disapprove the additional borrowing authority, that action could be vetoed by President Obama, which would prevent a rerun of last July's uncertainty.

Caps on domestic and defense spending will cut an estimated $917 billion--roughly the same amount as the initial increase in the debt ceiling--from federal budgets over the next decade.

A special 12-member joint select committee of Democrats and Republicans from both the House and Senate is charged with finding ways to reduce the deficit by an additional $1.5 trillion. The committee is directed to report its proposals by November 23, 2011; by December 2, it must submit legislation to implement those proposals. Both houses of Congress must vote on that legislation, which cannot be amended on the floor, by December 23.

The joint committee's deficit reduction proposals will determine the amount of an additional increase in the debt ceiling. If the committee's proposals are approved by Congress, the debt ceiling will be increased in 2012 by the amount saved by the deficit reduction measures (up to $1.5 trillion). If the committee cannot agree on how to cut the deficit by at least $1.2 trillion, or if Congress doesn't approve the committee's proposals, the new debt ceiling increase would be limited to $1.2 trillion.

To try to prevent gridlock on the committee, failure to agree on at least $1.2 trillion in deficit reduction would automatically trigger an additional $1.2 trillion in spending cuts beginning in January 2013. The cuts would apply to both defense spending, such as the Departments of Defense and Homeland Security, and to nondefense spending, such as payments to Medicare providers. However, Medicare cuts would be limited to 2% of the program's cost, and Social Security, veterans benefits, food stamps, and Supplemental Security Income (SSI) would be exempt.

President Obama also would be granted immediate authority to increase the debt ceiling by $1.5 trillion if Congress were to pass by year's end a constitutional amendment requiring a balanced budget. Such an amendment would not become effective unless ratified by three-quarters of the states.

Subsidized-interest Stafford Loans for graduate and professional students (other than those in state-required teaching or certification programs) will end after July 1, 2012, though unsubsidized loans will still be available. To compensate for the cuts, the Act also adds $17 billion in mandatory funds over two years for Pell Grants.

2011-10-04T10:41:00.001-07:00

The short answer is "no."

In the past, several states enacted "source tax" laws that attempted to tax retirement benefits if they were earned in that state, regardless of where a taxpayer resided when the benefits were ultimately paid. For example, if you earned a $50,000 annual pension while working in California, and then retired to Florida, California would attempt to tax those benefits, even though you were no longer a California resident.

But, in 1996, a federal law was enacted (P.L. 104-95) that prohibited states from taxing certain retirement benefits paid to nonresidents. As a result, if your retirement benefits are covered by the law (most are, see below), only the state in which you reside (or are domiciled) can tax those benefits.

Whether you're a resident of, or domiciled in, a state is determined by the laws of that particular state. In general, your residence is the place you actually live. Your domicile is your permanent legal residence; even if you don't currently live there, you have an intent to return and remain there.
The law applies to all qualified plans (this includes 401(k)s, profit-sharing plans, and defined benefit plans), IRAs, SEP-IRAs, Internal Revenue Section 403(a) annuities, Section 403(b) plans, Section 457(b) plans, and governmental plans.

The law provides only limited protection for nonqualified deferred compensation plan benefits. Benefits paid from nonqualified plans that are designed solely to pay benefits in excess of certain Internal Revenue Code limits (for example, Section 415 excess benefit plans) are covered by the law. Also covered are nonqualified plan (for example, top-hat plan) benefits that are paid over the employee's lifetime, or over a period of at least 10 years.

Examples of benefits that are not covered by the law include stock options, stock appreciation rights (SARs), and restricted stock.

2011-09-28T10:28:00.000-07:00

There are many factors to consider in determining how much you'll need to save in order to enjoy a comfortable and financially secure retirement. One often overlooked retirement expense is the cost of health care. You may presume that when you reach age 65, Medicare will cover most health-care costs. However, Medicare currently only pays for a portion of the cost for most health-care services, leaving a potentially large amount of uninsured medical expenses. Without proper planning, health-care costs can sap retirement income in a hurry, leaving you financially strapped.

How much you'll spend generally may depend on when you retire, how long you live, your health status, and the cost of medical care in your area. But the costs can add up. You won't have to pay for Medicare Part A hospital insurance (unless you don't qualify and have to buy into the program), but you will likely pay either $96.40 or $110.50 each month in 2011 for Medicare Part B physician's coverage (although you may pay higher premiums based on income and other factors), and an average of $30 per month for Medicare Part D prescription coverage. In addition, there are co-pays and deductibles to consider (e.g., after paying the first $162 in Part B expenses per year, you pay 20% of the Medicare-approved amount for services thereafter).

The cost of health care is rising. The Centers for Medicare & Medicaid Services (CMS) reports that national health expenditures grew by 4% in 2009. And the CMS Office of the Actuary estimates that out-of-pocket spending is projected to grow at an average rate of 5% from 2015 through 2020.

It's clear that health care is an important factor in retirement planning. And while you may be able to buy a cheaper car, live in a smaller home, or take fewer vacations in order to stay within your retirement income budget, you can't do without necessary medical care. So what can you do? You can better prepare for these expenses by taking the following steps:

Acknowledge that paying for health care in retirement is an issue to consider. Don't presume Medicare and Medigap insurance will cover all your expenses--they probably won't. Include potential health-care costs in your retirement plan.
Evaluate your present health and project your future medical needs. That might be easier said than done, but taking stock of your overall health now and factoring in your family's health history may help you determine the type of care you might need in retirement. Are you currently being treated for high blood pressure or diabetes? Do you live a healthy lifestyle? Does heart disease run in your family?
Understand what Medicare covers and what it costs. For instance, Medicare (Part A, Part B, and Part D) generally provides benefits for inpatient hospital care, medically necessary doctor's visits, and prescriptions. But Medicare doesn't cover everything. Examples of services generally not covered by Medicare include most chiropractic care, dental or vision care, and long-term care. You'll also have to account for deductibles, co-insurance costs for some services, and a monthly premium for Medicare Parts B and D.
Consider the cost of supplemental insurance. Medigap plans are standardized policies sold by private insurance companies that pay for some or all of the costs not covered by Medicare. In addition to Medigap policies, other types of supplemental insurance include long-term care insurance, dental insurance, and vision insurance. The type and amount of coverage that's best for you depends on a number of factors, including how much premium you can afford, what benefits you need, your financial resources, your health, and your anticipated medical needs.
Don't forget to factor in the cost of long-term care. The National Clearinghouse for Long-Term Care Information estimates that at least 70% of people over age 65 will require some long-term care services. Medicare does not pay for custodial (nonskilled) long-term care services, and Medicaid pays only if you and your spouse meet income and asset criteria.
Save, save, save. You may have already begun saving for your retirement, but if you fail to include the cost of health care in your plan, you're likely leaving out a big expense. Your financial professional can help you figure out how much you may need to save and adjust your retirement planning strategies to account for potential health-care costs in retirement.

2011-09-20T11:29:00.000-07:00

The end of the year is traditionally open enrollment season, your annual opportunity to review your employer-provided benefit options and make elections for the upcoming plan year. Even if you're busy, take a look at the enrollment packets or information you receive from your employer. You generally only have a few weeks (or less) to make important decisions about your benefits, and with health-care costs rising, it's more important than ever to choose your benefits wisely.

During open enrollment season, many employers roll out new health plan options. Even if you're satisfied with your current health plan, it's a good idea to check out the plans your employer is offering for next year and compare these to your existing health coverage. If you decide to stick with the same health plan you have now, look for differences between this year's plan and next year's. Premiums, out-of-pocket costs, and coverage offered often change from one year to the next.

Some tips for reviewing your health plan:

Start by reading any plan materials you've received in your open enrollment packet and find out as much as you can about your options. Look for a "What's New" section that spells out plan changes.
List your expenses. These will vary from year to year, but what you've spent over the course of the last 12 months may be a good predictor of what you'll spend next year. Don't forget to include co-payments and deductibles, as well as dental, vision, and prescription drug expenses.
Reevaluate your coverage to account for life changes. For example, getting married, having a baby, or retiring are events that should trigger a thorough review of your health coverage.
Consider all out-of-pocket costs, not just the premium you'll pay. For example, if you frequently fill prescriptions, you may save money with a plan that offers the broadest prescription drug coverage with the lowest co-payments, even if it charges a higher premium than other plans.
Compare your coverage to your spouse's if he or she is eligible for employer-sponsored health insurance. Will you come out ahead if you switch to your spouse's plan? If you have children, which plan best suits their needs?
Take advantage of technology. Some employers offer calculators or tables that allow you to do a side-by-side comparison of health plans to help select the best option.

You can help offset your health-care costs by contributing pretax dollars to a health flexible spending account (FSA) or reduce your child-care expenses by contributing to a dependent care FSA. The money you contribute is not subject to federal income and Social Security taxes (nor generally to state and local income taxes) and you can use these tax-free dollars to pay for health-care costs not covered by insurance or for dependent care expenses.

If your employer offers you the chance to participate in one or both types of FSAs, you'll need to estimate your expenses for the upcoming year in order to decide how much to contribute (subject to limits). Your contributions will be deducted, pretax, from your paycheck. If you're currently participating in an FSA, it's also an ideal time to find out how much money you have in this year's account. Unused contributions are lost if you don't spend them by the end of your benefit period. And remember, you must enroll each year--you won't automatically be reenrolled in a health or dependent care FSA.

Health insurance coverage is a valuable benefit, especially if your employer pays a large percentage of the cost, but many employers offer other voluntary benefits such as dental care, vision coverage, disability insurance, life insurance, and long-term care insurance. Even if your employer doesn't contribute toward the premium cost, you may be able to conveniently pay premiums via payroll deduction.

Many employers sweeten benefit packages by offering discounts on various health-related products and services, such as gym memberships, wellness programs, and eyeglasses. Find out what your employer offers--otherwise you may miss out on some saving opportunities. Your employer may also offer incentives for employees who take steps to maintain a healthy lifestyle. For example, you may be eligible for a monetary reward for completing a health assessment, or you may be reimbursed for the cost of fitness classes.

Ask your benefits administrator for help if you have any questions about your health plan, the options available to you, or enrollment instructions or deadlines.

2011-09-14T10:16:00.000-07:00

Investment planning at the end of 2010 was complicated by uncertainty over whether existing tax rates would be extended. This year, it's the congressional "supercommittee" charged with tackling the country's deficit financing problem that's the source of uncertainty. Even though you may not be sure how the committee's work might ultimately affect you, here are some factors to keep in mind as you plot your year-end strategy.

If you plan to harvest losses to offset capital gains, you may want to think about the cost basis of those shares. To maximize your losses for tax purposes, you would sell shares that have lost the most, which would enable you to offset more gains. Unless you specify which shares of stock are to be sold, your broker will typically treat them as sold based on the FIFO (first in, first out) method, meaning that the first shares bought are considered to be the first shares sold. However, you can designate specific shares as the ones sold or direct the broker to use a different method, such as LIFO (last in, first out) or highest in, first out. You can also use a standing order or instruction to specify that a particular method is to be used.

As of this year, brokers must report to the Internal Revenue Service your cost basis for the sale of any shares of stock bought after January 1, 2011. That will make it even more important to make sure when preparing your tax returns that your cost basis records for such sales are accurate and agree with those of your broker. If you decide to specify stock shares in order to determine your cost basis, you must do so by the settlement date (typically, three days after execution of the trade) in order for your broker's records for the stock sale to be accurate.

Mutual funds, dividend reinvestment plans, bonds, and other securities eventually also will be subject to the same mandatory cost basis reporting requirement.

If you plan to invest in a qualifying small business, you may want to do so by December 31. That's because 100% of any capital gains on the sale of qualified small business stock issued after September 27, 2010, and before January 1, 2012, can be excluded from your taxable income. (The exclusion is scheduled to revert to 50% next year.)

To claim the 100% exclusion, you must have acquired the stock at original issue (with some exceptions for stock acquired as an inheritance or gift). Also, the business must satisfy certain requirements, and you must hold the stock for at least five years. There are limits on the total amount of gain that is eligible for the exclusion. There also may be special considerations if you roll over the gain from the sale of your stock to another qualified small business stock, or if you receive qualified stock as part of your deferred compensation plan. Don't hesitate to get expert help with your specific situation.

Interest rates have been at historic lows in recent years, but as the economy continues to heal, that won't always be the case. The Federal Reserve Board has said that raising interest rates won't be its first step in reducing the support it has given the monetary system. However, at some point, interest rates are likely to begin moving up again. When that happens--and there's no way to know for sure when that might be--bond prices will begin to feel the impact. As bond yields begin to rise, bond prices will begin to tumble, since prices move in the opposite direction from bond yields.

If you've benefitted from the 2% reduction in workers' Social Security taxes in 2011, congratulations! However, be aware that the provision is scheduled to expire at the end of this year. If you've been saving or investing that money, your long-term plans will benefit if you can figure out how to replace that source of funding for your investment efforts.

2011-09-06T09:12:00.000-07:00

Receiving a financial windfall is often a life-changing event. It's a relatively common one, too. You might never win the lottery, but the odds are that at some point you'll receive a significant amount of money, perhaps from an inheritance, bonus, insurance settlement, or the sale of a home or business. If so, would you be prepared for the financial decisions you might suddenly face?

Proceed with caution
The first thing you'll want to do after receiving a large sum of money is to take a deep breath. You may feel the urge to spend, invest, move, quit your job, or give to others. But if you want your windfall to last, don't do anything until you've had a chance to come to terms with the personal and financial consequences. Regrettably, some people who suddenly come into money lose it all within a few years because they fail to plan. Taking the time to make well-thought-out financial decisions will help ensure that your money will last.

Put your money somewhere temporarily
Until you've had time to explore your options, there's nothing wrong with putting a lump sum into a relatively liquid account, such as a savings or money market account. You don't have to leave it there forever--just set it aside until you've had time to formulate a plan.

Assemble a support team
Because your finances are likely going to be a lot more complex now, one of the first things you should do is to get unbiased advice from a financial professional who can help you put together a financial plan. You may also need to work with an accountant, an attorney, or an insurance professional who can help address any tax, estate planning, or insurance planning concerns. Although receiving a windfall should be a happy event, it's sometimes very stressful, and you may need help from trusted professionals to help you handle the pressure.

Avoid spending and giving impulsively
Spend or give your money away too quickly and you risk depleting your nest egg. Although it's tempting to go out and buy something you've always wanted but couldn't afford before, watch your spending. A financial windfall can turn even a financially conservative person into an impulsive shopper. If your ultimate goal is to create lasting wealth, take time to consider your future needs, not just what you need (and want) today.What about giving or loaning money to family and friends, or making a charitable donation? Again, it's best to wait until you've set priorities and developed a financial plan. Otherwise, your personal relationships could suffer (will your sister be hurt if you give $10,000 to your brother?), and your generosity might have unintended consequences (will you be approached by dozens of charities once you donate to one?).

Watch out for too-good-to-be-true opportunities
Unfortunately, more than one person has become the target of unscrupulous individuals looking to profit from the good fortune of others. And even if you're approached by a well-meaning friend, family member, or business associate, you should thoroughly investigate any investment or business opportunities presented, instead of relying on someone else's judgment. If you have trouble saying no, consider referring any requests you receive to a third party, such as an attorney or financial professional you're working with.

Look at your financial needs and goals
An important part of handling a financial windfall is to evaluate your short- and long-term needs and goals. This will serve as a foundation for your financial plan.
Do you have enough money set aside in an emergency account?
Do you have outstanding debt that you'd like to pay off?
Do you plan to pay for your children's education?
Do you need to bolster your retirement savings?
Are you planning to buy a first or second home?
Would you like to quit your job or go into business for yourself?
Are you considering giving or loaning money to loved ones or donating to a favorite charity?
What would you like to accomplish with your wealth over time?

Have a little fun
Once you've made some initial decisions and set aside money needed to pay taxes, consider spending a small portion of your windfall on something you'd like. There's no reason to deprive yourself, as long as you've taken care of business first. If you plan well and control the urge to spend lavishly, your windfall may provide you with financial security and comfort for many years to come.

2011-08-31T09:21:00.001-07:00

These days, using a personal computer is just a normal part of life. You may have e-mail or online accounts that require a password, or you may have pictures, videos, or documents stored online or on your hard drive. You may even maintain a blog or website. Like your physical assets, these "digital" or "cyber" assets can have both sentimental and economic value. Chances are, nobody else knows your cyber assets even exist, and if they do, they may not know where those assets are stored or how to access them. It's important that you make plans for the disposition of your cyber assets in the event of your incapacity or death. If you don't, your survivors may have to deal with time-consuming and costly searches, or worse, the assets may be overlooked and lost altogether.

What happens to your cyber assets at your death depends on what type of asset it is, and while the laws regarding cyber assets are not well settled, there are some broad guidelines. Domain names, once registered, become your personal property under property law, and your websites and blog content are yours under federal copyright law. These types of cyber assets are clearly defined by law and are transferable to your heirs (e.g., through your will). On the other hand, certain online accounts, such as e-mail accounts, Facebook, Twitter, eBay, or PayPal, may not be classified as property in the legal sense; you are merely given a license by the website when you agree to its terms of service. Under these terms of service, transferability of your accounts may be limited or even prohibited altogether. Terms of service vary widely from site to site. Some sites, such as YouTube, will allow persons with legal power of attorney to access your accounts, and they post instructions on how to do so. Other sites, such as Facebook, will put your accounts into a "memorial state." Many sites, however, will terminate and permanently delete your accounts upon notification of your death. You should read and understand all terms of service and make any necessary legal arrangements so your heirs will have access to your accounts.

Note: On the flip side, you may have certain private accounts to which you want to ensure that no one is given access and which will be terminated immediately upon your death.

2011-08-23T11:56:00.000-07:00

We'd like to believe that disasters caused by floods or earthquakes are rare. But as we have seen with the recent natural disasters in the United States and abroad, the impact can be financially devastating. If you were to fall victim to a natural disaster, could you pay for the damages out-of-pocket? Will your homeowners insurance provide adequate coverage? Could any of us depend on the government for assistance?

Standard homeowners insurance generally does not cover damage directly caused by either floods or earthquakes. Federal disaster assistance is usually in the form of loans or grants and is only available if the damage is widespread and very serious, and the affected area is declared a disaster area by the Federal Emergency Management Agency (FEMA). So what should you do? First, review your current insurance with your insurance professional to determine what is, and especially what isn't, covered. Assuming you aren't covered for damage caused by flood or earthquake, consider buying flood or earthquake insurance, especially if you live in an area prone to recurrent disasters of this type.

Flood insurance
You might consider purchasing flood insurance even if you don't live in a high-risk area for floods. Storms, inadequate drainage, melting snow, and hurricanes can all cause serious flooding. According to the National Flood Insurance Program (NFIP), approximately 20% of all flood insurance claims come from areas that are at low to moderate risk for floods (www.floodsmart.gov). And if you're buying a home in a designated flood zone, your mortgage lender will require you to carry flood insurance before granting you a mortgage.

However, you can't simply buy flood insurance as an endorsement to your current homeowners policy. Instead, if you are eligible, you can purchase a separate flood insurance policy through an insurance company that participates in the NFIP. A few insurance companies also offer excess flood insurance policies that can supplement NFIP coverage.

A flood insurance policy provides flood protection for both your home and its contents. You can purchase up to $250,000 of coverage for the building itself, and up to $100,000 of coverage for the contents. If you own a home whose value exceeds the amount available through the federal program, you may be able to buy excess flood insurance through a private insurer. Excess flood insurance covers amounts above the $250,000 federal limit, and unlike NFIP coverage, may cover your home for its full replacement cost. You may be able to purchase these policies even in high-risk flood zones. Flood insurance offers some degree of protection for flood-related basement damage, but it doesn't cover all types of damage. It also doesn't cover events such as seepage or failure of a sump pump, and damages caused by sewer backups aren't covered unless they are directly related to a flood.

Earthquake insurance
Most homeowners policies generally have very limited coverage for earthquake damage--excluding direct loss from earth movement but covering loss by a subsequent fire, explosion, breakage of glass, or theft. As a result, if you live in an area prone to earthquakes, you may want to purchase earthquake insurance.

Typically, earthquake insurance covers damage to your home and your possessions. Most policies also cover costs incurred to minimize further damage after the earthquake, and costs for additional living expenses. The cost of earthquake insurance varies, depending on the scope of coverage, type of structure, and your location (e.g., in an earthquake zone). Coverage can be purchased as an endorsement to your existing homeowners insurance, or as a separate policy.

Whether you should buy earthquake insurance may depend on a number of factors that include:

The frequency and severity of earthquakes in your area
The likelihood an earthquake would cause considerable damage to your home
Whether your home is constructed to withstand an earthquake of moderate strength
Whether you could absorb the cost of replacing your residential and personal property

If you do buy earthquake insurance, you'll probably want to buy enough to cover the costs of rebuilding your home and replacing damaged personal property. That means that the amount of insurance you buy generally should be based on replacement or reconstruction costs and not the current market value of your home and possessions. Also, you may not notice some damages to your home or possessions immediately after an earthquake, so be sure the policy you buy gives you adequate time to discover damages and file a claim.

2011-08-18T10:26:00.000-07:00

What if you were no longer here to provide for your family and loved ones? What if you couldn't watch your children grow, graduate from college, and begin their own families? What if your spouse couldn't afford the home, car, college tuition, or unanticipated medical expenses, all because you hadn't planned for the unexpected? Life is full of "what ifs," and we don't always have the answers to every question. That's why it's important to put a plan in place that will protect your family if you're not here. Life insurance can be an essential part of that plan.

How much do you need?
Life insurance can provide financial resources at your death for your family or business, or for charities and other interests. The amount of life insurance you need depends on a number of factors, including the size of your family, the nature of your financial obligations, your career stage, and your goals. The answers to these questions may help you determine how much life insurance you should consider:

What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death?
How much of your salary is devoted to current expenses and future needs?
How long would your dependents need support if you were to die tomorrow?
How much money would you want to leave for special situations, such as funding your children's education or gifts to charities?
What other assets, including existing life insurance, do you have?

What if your spouse dies first?
If you're the primary breadwinner in your marriage, it's easy to overlook the financial and emotional strain your family will face if your spouse should die before you. Your income might be diminished if you have to work less in order to spend more time with your children. Or, you may have to work longer hours to cover unanticipated expenses for daycare, house cleaning, meals, etc. To your young children, losing one parent may seem like losing both. If your spouse should die before you, insurance on his or her life can offer financial security for your family, allowing you to spend more time providing emotional support for your children.

Even if you're single
Just because you're single doesn't mean you don't need life insurance. If you died tomorrow, what financial obligations would remain? Do your parents or other relatives depend on you for support? Do you want to leave something to people close to you such as siblings, other relatives, or close friends? How will you provide for your favorite charities? Do you have pets that will need care in your absence? Life insurance is an important part of any financial plan, even if you're not married.

Don't let hard times be an excuse to cancel your insurance
During tough economic times, you might be tempted to stop paying your life insurance premium. However, a recent study reveals that 4 in 10 households with children under age 18 would have trouble meeting their everyday living expenses if the primary breadwinner died. Yet 30% of U.S. households have no life insurance, and of those that do, over half (58 million) say they need more life insurance (Life Insurance and Market Research Association 2010 Trends in Life Insurance Ownership). Cancelling your life insurance to save a few dollars when money is tight may jeopardize your family's financial future.

Review your plan
Whether you have life insurance through your employer or purchased privately, have you reviewed your coverage recently, especially in relation to your current circumstances? Do you have enough coverage to meet your changing needs and goals? If you change jobs, can you take your insurance with you? Lives change over time and your financial needs may change as well. Review your present coverage with your insurance professional to ensure it's keeping up with your changing financial needs and goals.

2011-08-09T17:07:00.000-07:00

2011-08-02T20:01:00.000-07:00

No doubt you've seen headlines reporting that a particular index is up or down. But do you know how an index works, and why understanding the nuts and bolts of a specific index can make a difference to your portfolio?

An index is simply a way to measure and report the fluctuations of a securities market or a particular segment of a market. An index is developed by a company that sets specific criteria to determine which securities are included in the index--factors such as a company's size or location, or the liquidity of its stock. For example, the S&P 500 is a collection of large-cap U.S.-based companies that Standard and Poor's considers to be leading representatives of a cross section of industries.

The company that develops the index tracks the performance of its components and aggregates the data to produce a single figure that represents the index as a whole. Virtually every asset class has at least one index that tracks it, but because of the size and variety of the stock market, there are more stock indexes than any other type.

How indices are used
In addition to providing valuable information needed to monitor how a particular market is faring, an index can serve as the basis for mutual funds or exchange-traded funds that attempt to replicate its performance; that process is known as indexing. An index also can be used as a benchmark for funds that invest in the same asset class, regardless of whether a fund includes the same specific securities. Finally, some investment products do not attempt to replicate an index's performance but represent a bet on the index's general movements, though such investments can be challenging and are not appropriate for every investor.

You can't invest in an index
You cannot invest directly in an index. You could always purchase each and every security in the index and do the necessary trading to ensure that the portfolio continues to mirror the index, but the financial services industry has saved you the trouble. As noted above, investment products such as index mutual funds and exchange-traded funds are used by investors to try to capture a particular market's performance.

However, an index-based investment may not match the return of an index exactly. One reason is what's known as "tracking error." Costs such as taxes, operating expenses (even minimal ones), and transaction costs can differ among mutual funds. As a result, your return may be slightly different from that of the index or even other funds based on the same index, even though most index funds try to keep tracking error to a minimum.

Indices don't stay static
Though an index adheres to a set of guidelines for selection of the securities it includes, the company that oversees the index generally reviews the security selection periodically. For example, some indices are rebalanced if an individual security grows so large that it dominates the index. Others have a limit on how much of the index can be devoted to a particular sector or industry, and rebalance if the proportion gets skewed. And in some cases, an index is altered because of serious problems with one of its components (for example, Flowserve Corp. replaced Washington Mutual Inc. in the S&P 500 after WaMu was closed by the Office of Thrift Supervision in 2008).

Weight watching
Even indices that include the same securities may not operate in precisely the same way. Why? Because different indices may weight the relative importance of the same securities in different ways. The way an index is weighted determines how much of each individual security is included in it--for example, how many shares of stock. That weighting in turn can affect the overall index's performance.

Some indices are weighted based on market capitalization; the companies with the highest market cap (total value of stock outstanding) make up a larger share of the index than companies with a smaller market cap. As a result, those companies can have a disproportionate impact on the performance of an index weighted by market cap. For example, a 10% decline in the price of the largest company in the S&P 500 index would affect the index's overall return more dramatically than a 10% drop in the price of a much smaller company, because the S&P 500 is weighted by market cap.

Other indices are weighted by price; the most expensive stocks receive greater weight than lower-priced stocks. The Dow Jones Industrial Average, which includes 30 large, blue-chip industrial stocks and is commonly referred to as the Dow even though there are several Dow indices, is price-weighted. A relatively new approach to weighting an index is to use certain fundamental attributes, such as dividends or cash flow, as the basis for weighting the stocks that comprise the index.

2011-07-26T11:34:00.000-07:00

If you're the parent of a high school student who's looking ahead to college, it's important to have a grown-up conversation with your child about college expectations. A frank discussion can help everyone get on the same page. Here are some talking points.

Costs
For many families, the cost of college is the elephant in the room. You may want to start off by saying something like "we will have saved x by the time you start college, and after that, we should be able to contribute y each year." Financial professionals typically recommend that parents avoid promising to pay 100% of college costs, in case they experience an unforeseeable financial setback.

If your child is interested in schools that have significant price differences, you may say something like "we can come up with x each year from savings and income that should cover most of State U, but if you want to attend Private U, then you'll have to borrow the difference, which is z." Then use an online calculator to show your child exactly what "z" will cost each month over a standard 10-year repayment term. You're borrowing $27,000 at 6.8%? That will cost you $311 each month. The loan is $45,000 at 8.5%? That will cost you $558 each month. And so on. The idea is to take a big, abstract loan amount and translate it into a month-to-month reality.

Next, print out an amortization table showing the breakdown of principal and interest payments that will be due each year. Review the basic deferment and forbearance rules that govern under what circumstances borrowers can temporarily postpone their federal student loan payments. Finally, make sure to put that student loan payment into a larger financial context--there will be other items competing for your child's financial resources after college, like rent, food, utility bills, a car payment, etc. The goal is to help your child understand the long-term financial impact of choosing the more expensive college. Even then, many 16, 17, or 18 year olds may be unable to fully grasp the seriousness of such an endeavor.

Ultimately, it's up to parents to help their child avoid going into too much debt. According to the New York Times, for the first time ever last year, student loan debt outpaced credit card debt in the United States, and this year it's expected to surpass a trillion dollars. Unlike most other types of debt, student loan debt generally cannot be discharged in bankruptcy, and in the case of default, the federal government can garnish your child's wages or intercept tax refunds to recover the money.

If there's any silver lining here, it's that many parents believe that kids get more out of college when they are at least partly responsible for its costs, as compared to having a "blank check" mentality. Being on a financial hook, even a small one, may encourage your child to live more frugally, choose courses carefully, and hit the books sufficiently. Later, if you have the resources, you can always help your child repay his or her student loans.

Grades
Many parents consider going to college their child's first real job. But some students don't take academics as seriously as they should. You might say something like "we expect you to maintain a GPA of x, and if you don't, we may have to reconsider paying the tuition bill for the following year." Though you'll probably want to build in some wiggle room for the adjustment period that freshmen typically require, after a certain period of time your child needs to be serious enough about academics to make the college cost burden worthwhile.

Course of study
Even if your child has no idea what career path to choose (and most high schoolers don't), ask about your child's likes and dislikes, strengths and interests. At a minimum, this information will help start the wheels spinning, and when coupled with new revelations and experiences later on, it can lead to potential career pathways.

2011-07-19T11:17:00.000-07:00

Medicare and Medicaid were signed into law 36 years ago to protect older and poorer Americans against the high cost of health care. Ironically, it's the high cost of providing health care through these programs that now threatens federal and state budgets, leading to calls for Medicare and Medicaid reform. Although these programs are often lumped together, they function quite differently. Here's a look at the coverage each provide.

What is Medicare?
Medicare is a health insurance program funded and run by the federal government that guarantees health coverage to older Americans. Medicare is not income-based. People who have paid Medicare taxes on their earnings are automatically eligible at age 65, but some people with disabilities qualify for Medicare coverage earlier than age 65, and people with end-stage renal disease qualify at any age.

Medicare offers three main types of coverage. Part A covers inpatient hospital care, as well as short-term skilled nursing care, hospice care, and home health care under certain conditions. Part B covers medical services such as doctor's visits, outpatient care, and laboratory tests. Part D covers prescription drugs. If you or your spouse has paid Medicare taxes while working, you generally won't pay a premium for Medicare Part A coverage, but you'll pay a premium if you want to enroll in Part B or in some (but not all) Part D plans. You'll also need to pay certain out-of-pocket costs such as deductibles, co-payments, or coinsurance costs, depending on the types of coverage you have.

What is Medicaid?
Medicaid is a health insurance program funded by both the federal government and state governments to provide coverage to Americans of all ages who have low incomes and no health insurance. States administer their own Medicaid programs under federal guidelines. They must cover individuals on public assistance, but they may also opt to cover other groups and establish eligibility requirements. Children, families, people with disabilities, and older individuals may all receive Medicaid.

If you're eligible for Medicaid, you may have to pay a small co-payment when receiving medical services, but most of your health-care costs will be covered.

Can you be eligible for both Medicare and Medicaid?
Yes--if you're eligible for both programs, you're known as a "dual eligible" beneficiary. Generally, individuals who are eligible for both programs are older or disabled (or both) and need help paying their Medicare costs because they have very low incomes. Medicaid covers premiums, deductibles, co-payments, coinsurance, and other Medicare costs and provides some health benefits that Medicare does not. Individuals in nursing homes are often dual eligible beneficiaries, and that's partly behind the misconception that Medicare pays for nursing home or other long-term care (it does not--see sidebar); instead, Medicaid is the primary payer of nursing home bills. Because many older individuals cannot afford the high cost of nursing home care and exhaust their savings, they eventually become eligible for Medicaid.

Medicaid, not Medicare, is the primary payer of nursing home care in the United States. Although Medicare pays for short-term skilled nursing or rehabilitative care in a skilled nursing facility, it does not pay for extended care in a nursing home or for other custodial long-term care. Custodial care is help with daily activities such as eating, bathing, dressing, and using the bathroom. Some individuals need both short-term and long-term care; for example, someone who has suffered a stroke may receive rehabilitation services in a skilled nursing facility, but may later be admitted to a nursing home in order to receive custodial long-term care services.

For more information, visit the Centers for Medicare & Medicaid Services website at www.cms.gov.

2011-07-12T22:21:00.000-07:00

Although tax considerations probably aren't the motivating force behind most home purchases, the tax advantages associated with homeownership are significant enough that they may factor into the decision process. Here's a quick review of federal tax benefits available.

The mortgage interest deduction
If you itemize deductions on Schedule A of Form 1040, you're generally able to deduct the interest you pay on debt resulting from a loan used to buy, build, or improve your principal residence, provided that the loan is secured by your home (the ability to deduct mortgage interest also generally applies to second homes, though special rules apply if you rent the home out for part of the year). Interest you pay on up to $1 million in mortgage debt ($500,000 if you're married and file a separate federal income tax return) can qualify for the deduction (different rules may apply if you incurred the debt prior to October 14, 1987).

Interest on qualifying home equity debt (basically, debt on a loan secured by equity in your main or second home that is not used to buy, build, or improve your home) of up to $100,000 ($50,000 for married individuals filing separately) is generally deductible regardless of how the loan proceeds are used. Note, however, that if you're subject to the alternative minimum tax (AMT), the AMT calculation doesn't allow a deduction for interest on debt that's not used to buy, build, or improve your home.

Qualified mortgage insurance premium payments made prior to 2012 can be deducted in the same manner as qualified mortgage interest, provided the mortgage insurance contract is issued after 2006. The deduction is, however, phased out for those with adjusted gross incomes exceeding $100,000 ($50,000 for married couples filing separate federal income tax returns).

Deduction for real estate property taxes
If you itemize deductions, you can also generally deduct the real estate taxes that you pay on your property in the year that you pay them to the taxing authority. If you pay your real estate taxes through an escrow account, you can only deduct the real estate taxes actually paid by your lender from the escrow account during the year. For purposes of calculating the AMT, however, no deduction for state and local taxes, including any real estate tax, is allowed.

Energy tax credit
Though not as generous as it has been the last two years, a credit is available to individuals who make energy-efficient improvements to their homes. You may be entitled to a 10% credit for the purchase of qualified energy-efficient improvements, including a roof, windows, skylights, exterior doors, and insulation materials. Specific credit amounts may also be available for the purchase of specified energy-efficient property: $50 for an advanced main air circulating fan; $150 for a qualified furnace or hot water boiler; and $300 for other items, including qualified electric heat pump water heaters and central air conditioning units.

There's a lifetime credit cap of $500 ($200 for windows), however. So, if you've claimed the credit in the past--in one or more tax years after 2005--you're only entitled to the difference between the current cap and the total amount that you've claimed in the past. That includes any credit that you claimed in 2009 and 2010, when the aggregate limit on the credit was $1,500.

Capital gain exclusion
If you sell your principal residence at a gain, you may be able to exclude some or all of the gain from federal income tax. Generally speaking, capital gain (or loss) on the sale of your principal residence equals the sale price of the home less your adjusted basis in the property. Your adjusted basis is the cost of the property (i.e., what you paid for it), plus amounts paid for capital improvements, less any depreciation and casualty losses claimed for tax purposes.

If you meet all requirements, you can exclude from federal income tax up to $250,000 ($500,000 if you're married and file a joint federal income tax return) of any capital gain that results from the sale of your principal residence. In general, this exclusion can be used only once every two years. To qualify for the exclusion, you must have owned and used the home as your principal residence for a total of two out of the five years before the sale. If you fail the two-out-of-five-year test, you might still be able to exclude part of your gain if your home sale is due to a change in place of employment, health reasons, or certain other unforeseen circumstances.

It's important to note that special rules apply in a number of circumstances, including situations in which you maintained a home office for tax purposes or otherwise used your home for business purposes. Special rules may also apply if you are a member of the uniformed services.

Mortgage interest deduction threatened?
Recent discussions relating to reducing the budget deficit have cast a spotlight on itemized deductions, including the mortgage interest deduction. Could the mortgage interest deduction ultimately be eliminated? That seems unlikely, but elimination or reduction of the deduction has remained part of the ongoing debate, and was included among the recommendations contained in the National Commission on Fiscal Responsibility and Reform's December 2010 report.

According to the U.S. Census Bureau, the estimated homeownership rate in the United States at the end of 2010 was 66.5% (Source: U.S. Census Bureau, Housing and Household Economic Statistics Division).

2011-07-05T10:51:00.000-07:00

When a crisis creates uncertainty, markets often become volatile, especially when the scope of the disaster isn't clear. A crisis is like Janus, the Roman god with faces that looked forward and back. For some investors, it may represent a threat; for others, it may spell opportunity. Not every crisis requires a reaction; sticking to a long-term plan is still the best strategy for most people.

Here are some examples of factors that investors sometimes overlook when considering which face of Janus to focus on during a crisis.

Watch the global supply chain
Companies and economies increasingly operate in a global context. The more heavily an industry or company relies on global partners, the more it might be affected by crisis conditions. Think not only about companies that are affected directly by turmoil, but about other companies that rely on them.

For example, China has become in many ways the world's factory floor, and many information technology services are now outsourced to India. How would a crisis in either country affect global supply chains or communications infrastructure? Might competitors not affected by the crisis pick up at least some of the slack? How might a particular industry be hit by shortages of parts or raw materials? Is a large multinational so geographically spread out that a crisis in one part of the world may have little impact on its overall operations? Oil is perhaps the most obvious example of how a crisis can affect global supply chains. A perceived threat to supplies can affect prices of other assets.

Consider currency fluctuations
Currency fluctuations are another factor to consider. Crises in one part of the world can affect that region's currency. That in turn can affect companies located elsewhere. The 2010 panic over potential default by several eurozone countries strengthened the dollar, and though that may sound like good news, a stronger dollar can hurt U.S. exports.

Currency issues are also important because of what's called the "carry trade." This happens when investors use money from a country where interest rates are relatively low--the Japanese yen and the U.S. dollar have been prime examples in recent years--to invest elsewhere at a better rate of return. However, if the cheaper currency suddenly increases in value, the carry trade can reverse as investors put their capital back into the so-called funding currency. That can affect assets denominated in other currencies. For example, the yen soared as investors anticipated that money would be repatriated to deal with Japan's earthquake/tsunami/nuclear disaster. Some investments denominated in other currencies suffered when investors sold them to invest in yen.

Think both long term and short term
Nothing lasts forever. A crisis could create opportunities that eventually peter out, or challenges that later seem trivial. Or it could have little short-term impact but mean profound change over a period of years. When considering whether a crisis represents a challenge or an opportunity, think both short term and long term.

A crisis with potentially long-term opportunities or harmful consequences may mean you may be able to take more time with a decision. If the window of opportunity is smaller or the potential devastation more short term, remember that there are alternatives to an all-or-nothing approach. For example, you could take a small position and see how your investment thesis plays out before committing more. Even if the window of opportunity slams shut, new opportunities often emerge during even the worst of times; missing one now doesn't mean you won't find others later. If you're worried about a potential downturn, you could use other investments to hedge your exposure while retaining a long-term stake, or take profits to protect part of your holdings but leave some money invested in case the crisis is short-lived.

Note: Any investment approach involves some type of risk, including the possible loss of principal, and there's no guarantee any strategy or technique will be successful.

2011-06-28T09:31:00.000-07:00

Feeling strongly about the societal benefit or harm your money might be supporting doesn't mean you have to forgo pursuing a return on your investments. Socially responsible investing allows you to further both your own economic interests and a greater good.

The concept of putting your money where your mouth is first gained widespread attention during the 1970s, when such highly charged political issues as the Vietnam War and apartheid in South Africa led some investors to try to make sure their money didn't support policies that were counter to their beliefs. Since then, a wide variety of investment products, such as socially conscious mutual funds, have been developed to help people invest in ways consistent with a personal philosophy. However, individuals aren't the only ones to adopt responsible investing principles; many colleges and universities, government pension and retirement funds, and religious groups do so as well.

There are many approaches to what may also be known as mission investing, double- or triple-bottom-line investing, ethical investing, socially conscious investing, green investing, sustainable investing, or impact investing.

Screening potential investments
This is perhaps the best known aspect of socially responsible investing: evaluating investments based not only on their finances but on their social, environmental, and even corporate governance practices. The process may be negative, eliminating companies whose products or actions are deemed contrary to the public good. Examples of companies that are frequently excluded from socially responsible funds are those involved with alcohol, tobacco, gambling, defense, and those that contribute to environmental pollution or that have significant interests in countries considered to have repressive or racist governments.

However, as socially responsible investing has evolved, the screening process has become increasingly positive, using screens to identify companies whose practices actively further a particular social good, such as protecting the environment. For example, green technology that can help address environmental problems has attracted the interest of many investors who see not only a social good but an opportunity for profit.

Shareholder activism
Both individual and institutional shareholders have become increasingly willing to pressure corporations to adopt socially responsible practices. In many cases, having a good social record can enhance business, making a company more attractive to investors. Shareholder advocacy can involve filing shareholder resolutions on such topics as corporate governance, climate change, political contributions, environmental impact, and labor practices. Such activism got a boost from the SEC when it adopted the so-called "say on pay" rule as part of the Dodd-Frank financial reforms. As of April 2011, companies over a certain size must allow shareholders a vote on executive pay at least once every three years. Though the vote is nonbinding, it could give institutional investors a stronger hand in advocating for other interests.

Community investing
Still another approach involves directing investment capital to communities and projects that may have difficulty getting traditional financing. Investors provide money that is then used to make or guarantee loans to organizations that help traditionally underserved populations with challenges such as gaining access to affordable housing, finding jobs, and receiving health care.

Impact investing
A recent development focuses not only on investment returns and social benefit, but on measuring and managing performance in both of those arenas. So-called "impact investing" aims not only to minimize negative impact and enhance social good, but to do so in a way that maximizes efficient use of the resources involved, using business-world methods such as benchmarking to compare returns and gauge how effectively an investment fulfills its goals. In fact, some have made a case for considering impact investing an emerging alternative asset class, since such investments may not be highly correlated with traditional assets such as stocks or bonds.

Know your goals
When investing for the greater good, make sure your expectations are clear and realistic. "The public good" may be defined differently by every investor. Also, many socially responsible funds achieve solid financial returns; others may not.

Note: Before investing in a mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund; read it carefully before investing.

2011-06-20T11:01:00.000-07:00

If you take a distribution from your IRA intending to make a 60-day rollover, but for some reason the funds don't get to the new IRA trustee in time, the tax impact can be devastating. In general, the rollover is invalid, the distribution becomes a taxable event, and you're treated as having made a regular, instead of a rollover, contribution to the new IRA. But all may not be lost. The 60-day requirement can be automatically waived in some cases, and the IRS has the discretion to waive the rule in others. The 60-day requirement is automatically waived if all of the following apply:

~The financial institution receives the funds on your behalf before the end of the 60-day rollover period

~You followed all the procedures set by the financial institution for depositing funds into an IRA within the 60-day period (including giving instructions to deposit the funds into an IRA)

~The funds are not deposited into an IRA within the 60-day rollover period solely because of an error on the part of the financial institution

~The funds are deposited within 1 year from the beginning of the 60-day rollover period

~It would have been a valid rollover if the financial institution had deposited the funds as instructed

If you don't qualify for an automatic waiver, you can apply to the IRS for a discretionary waiver. The IRS may waive the 60-day requirement where failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. The IRS will consider all relevant facts and circumstances, including:

~Whether errors were made by the financial institution (in addition to those described under automatic waiver, above)

~Whether you were unable to complete the rollover on a timely basis due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, or postal error

~Whether you used the amount distributed

~How much time has passed since the date of distribution

2011-06-14T09:08:00.000-07:00

A funeral trust is a contract you enter into with a provider of funeral or burial services. Often, the trust is entered into directly with the funeral home, which may agree to "lock in" costs for future funeral or burial services at an agreed upon price. The funeral home sometimes serves as trustee (manager of trust assets), and you usually fund the trust with cash, bonds, or life insurance. A revocable funeral trust can be changed and revoked by you at any time. An irrevocable trust can't be changed or revoked, and you generally can't get your money out except to pay for funeral services.

Irrevocable funeral trusts may also help you qualify for long-term care benefits through Medicaid. These trusts may be funded with assets that would otherwise be countable resources for Medicaid. They are also often sold through insurance companies, in which case they are typically funded with single-premium whole life insurance. Trust assets, including life insurance death benefits, are not countable resources when trying to qualify for long-term care benefits through Medicaid. And you can fund the funeral trust right before entering the nursing home--there's no "look-back" period for these transfers.

Another advantage of funding your trust with life insurance is that the trust will have no taxable income to report, since life insurance cash values grow tax deferred. Otherwise, income from trust assets may be taxed to you as the trustor (creator of the trust) unless the trustee elects to treat the trust as a qualified funeral trust by filing form 1041-QFT with the IRS, in which case trust income is taxed to the trust.

But what if you want to change funeral homes, or the facility you selected goes out of business? Does your irrevocable trust allow you to change beneficiaries (e.g., funeral homes)? Are trust funds protected from creditors of the funeral home? States have laws regulating prepaid funeral trusts that often require funeral homes to keep trust assets separate from their own business assets--keeping them safe from funeral home creditors. And most irrevocable trusts are transferable to another funeral home should the initial business fail or you change funeral homes.

2011-06-07T10:54:00.000-07:00

Health savings accounts (HSAs), Archer medical savings accounts (MSAs), health reimbursement arrangements (HRAs), and flexible spending arrangements (FSAs) are all personal health accounts that may help you control your health-care costs. But trying to figure out what's what can be confusing. Here's a brief description of each type of account, including some of their major features and benefits.

MSAs/HSAs
As of January 1, 2008, the MSA program expired and no new MSAs can be established, although if you already participate in an MSA, you can continue to receive contributions. HSAs have generally taken the place of MSAs because of their greater flexibility and options. In fact, in most instances you can roll over an existing MSA into an HSA. MSAs and HSAs are set up in a trust account with a financial entity. Contributions made through your employer are pretax dollars (or you can contribute to the account directly and deduct the contribution), no tax is due on funds in the account, or on any earnings until withdrawn, and if funds are used for qualified medical expenses, the withdrawals are not taxed. However, account withdrawals that aren't used for qualified medical expenses are subject to a tax penalty of 20%, in addition to regular income tax. Your account is portable, meaning if you change employers or leave the workforce, you can keep the account. To be eligible, you must be insured by a high deductible health plan (HDHP) that you maintain (if self-employed) or that's provided through your employer.

However, there are also differences between MSAs and HSAs. Generally, anyone with an HDHP can participate in an HSA. But to qualify for an MSA, you must have been either an employee of a company that employs 50 or fewer people, or be self-employed (or the spouse of such an employee or self-employed person). With an HSA, contributions can be made by you, your employer, or anyone else on your behalf within the same plan year. But MSA contributions can only be made by either your employer or yourself, but not both, in the same plan year. Contribution amounts also differ. In 2011, maximum HSA contributions are limited to $3,050 for single HDHP coverage and $6,150 for family HDHP coverage. MSA contributions can be up to 75% (65% if you participate in a self-only plan) of the annual deductible of your HDHP, but no more than your annual earnings from employment.

FSAs
If you don't participate in an HDHP, you still can set money aside for uninsured medical expenses through an employer-established FSA. Unlike an HSA, you must be an employee of the employer providing the FSA in order to participate (self-employed persons are not eligible and certain limitations may apply if you are a highly compensated participant or key employee). Pretax contributions can be made by either you, your employer, or both of you (except employer contributions used to pay long-term care premiums must be included in income). You determine how much money you want deposited each year up to the plan's maximum dollar amount or percentage of compensation; funds in the account are not subject to tax; and distributions are tax free if used to pay for qualified, unreimbursed medical expenses you've incurred (no advance payments for anticipated expenses). Unlike HSAs, if you leave your employer, you can't keep the money in the account or take it with you to another employer (it's not portable). Also, what you don't spend on medical expenses by the end of the plan year is forfeited and not available the following year (i.e., you must use it or lose it).

HRAs
Like FSAs, HRAs are only available to employees, not to self-employed individuals. And HRAs must be funded solely by an employer; you can't contribute directly to the account. The terms of the HRA are generally determined by the employer. For example, your employer's plan may or may not require you to have health insurance in order to participate. The plan sets the maximum amount of contributions, and determines whether a credit balance in the account can be rolled over from year to year, and if so, how much of the account can be rolled over. But contributions and reimbursements for qualified medical expenses are tax free. Reimbursements can be made to current and former employees, including spouses and dependents of employees and deceased employees. However, if the plan allows for any distribution to you or anyone else (e.g., spouse, dependent, estate at your death) for other than reimbursement for qualified medical expenses, then any distribution, whether for qualified medical expenses or not, is included in gross income.

Beginning January 1, 2011, for HSA, MSA, FSA, and HRA programs, a drug or medicine is considered a qualified medical expense only if it is obtained with a prescription, or is insulin.

Effective January 1, 2013, contributions to a flexible spending account will be limited to $2,500 per year, increased annually by cost-of-living adjustments.

2011-05-31T09:31:00.000-07:00

As the owner of a life insurance policy, you can generally borrow the policy's cash surrender value and use the proceeds for any purpose. Before you take a policy loan, be sure you understand the implications of the loan on the policy itself as well as any tax implications, now and in the future.

Effect of policy loan on policy
You can generally borrow an amount up to the policy's cash surrender value (less an adjustment for interest) from the insurer. The insurer will charge you interest on the loan. Generally, interest is not actually paid, but is added to the amount of the loan. Interest charged on a policy loan is not generally deductible for income tax purposes. There could be other adjustments as well under the contract; for example, a participating policy may restrict the payment of dividends to you while a loan is outstanding.

You are not required to repay a life insurance policy loan. But you can generally repay a life insurance policy loan at any time while the insured is alive. If you do not repay the loan, the cash surrender value paid to you or the policy proceeds at death will be reduced by the amount of the loan (plus interest). Thus, a loan generally reduces life insurance protection.

If the amount borrowed plus interest ever equals or exceeds the cash surrender value, the policy can terminate if additional amounts are not paid into the life insurance policy. Life insurance protection could be lost.

If you have any incidents of ownership in a life insurance policy on your life, proceeds paid at death are includable in your gross estate for federal estate tax purposes. The right to obtain a policy loan is an incident of ownership. Generally, life insurance proceeds received at death by your beneficiary are received income tax free.

Taxation of policy loan
You can borrow against your life insurance policy, and the loan proceeds are generally not taxable to you (unless the policy is a modified endowment contract (MEC), see below).

A loan from a MEC is treated as a distribution from the MEC. A distribution from a MEC is subject to the income-out-first rule. As amounts are distributed, they are treated as consisting of taxable income to the extent that they do not exceed the excess of the cash surrender value of the policy over the investment in the contract (generally, premiums paid less tax-free distributions). The taxable income will also be subject to a 10% penalty tax unless the distribution is made after age 59½, on account of disability, or as part of a series of substantially equal periodic payments.

Example: You have a MEC with a cash surrender value of $100,000. You have paid premiums of $50,000. You take a policy loan for $60,000. The first $50,000 ($100,000 cash surrender value - $50,000 investment in the contract) of the loan is taxable income to you.

Lapse or surrender of policy
An outstanding loan is generally treated as an amount received if a policy lapses or is surrendered and may result in taxable income. A policy can lapse if premiums are not paid and the policy terminates when any policy benefits are exhausted as a result. Also, as noted above, if the amount borrowed plus interest ever equals or exceeds the cash surrender value, the policy can terminate if additional amounts are not paid into the life insurance policy. You can cash in a policy by surrendering the policy to the insurer in return for the policy's cash surrender value (as reduced by the amount of the loan plus interest).

If you surrender your policy to the life insurance company or the policy lapses, any gain realized is taxable at ordinary income tax rates. The gain is the excess of the amount you receive over the net premium cost. The net premium cost is the total premiums you paid less any tax-free distributions received. An outstanding loan is generally treated as an amount received if a policy is surrendered or lapsed and may result in taxable income.

Example: You have a life insurance policy with a cash surrender value of $200,000. You have paid premiums of $75,000. You also have an outstanding policy loan of $175,000. There have been no distributions from the policy. You surrender the policy to the insurer for $25,000 cash. You have taxable ordinary income of $125,000 ($25,000 cash + $175,000 loan - $75,000 premiums). If you have not prepared for it, it may come as quite a shock.

Example: You have a life insurance policy with a cash surrender value of $200,000. You have paid premiums of $75,000. You also have an outstanding policy loan of $200,000. There have been no distributions from the policy. The policy lapses. You have taxable ordinary income of $125,000 ($200,000 loan - $75,000 premiums). Once again, if you have not prepared for it, it may come as quite a shock.

*What is a MEC?
A life insurance policy purchased after June 20, 1988, is a modified endowment contract if the accumulated premiums paid at any time during the first seven years exceed the sum of the net level premiums for a policy that would be paid up after seven years. A single premium policy is one example of a modified endowment contract. (Your life insurance company or life insurance agent can tell you if a policy is a modified endowment contract.)

2011-05-24T13:30:00.000-07:00

Though it may seem as if the ink has barely dried on your 2010 federal income tax return, the end of 2011 is now visible on the horizon. Here are some things to consider as you take stock of your current tax situation.

The 2% difference
If you're an employee, 6.2% of your wages (up to the taxable wage base--$106,800 in 2011) would normally be withheld for your portion of the Social Security retirement component of FICA employment tax. But legislation passed in December 2010 included a temporary one-year 2% reduction in this tax. That means for 2011, you're paying the tax at a rate of 4.2%. If you're self-employed, the 12.4% you would normally pay for the Social Security portion of your self-employment tax is reduced to 10.4%.

Have you earmarked the resulting extra dollars in your paycheck efficiently by, for example, paying down high-interest debt or saving for retirement? If you haven't, consider making up for it by contributing an extra 4% of your income to your 401(k) or an IRA for the remainder of the year. By applying the extra money toward a long-term goal, the potential benefit of the temporary tax reduction can extend beyond 2011.

Tax rates
The same federal income tax rates that applied in 2010 continue to apply in 2011 and 2012 (depending on your taxable income, you'll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket). And, as in 2010, long-term capital gains and qualifying dividends in 2011 and 2012 continue to be taxed at a maximum rate of 15%; if you're in the 10% or 15% marginal income tax brackets, a special 0% rate will generally apply. So, unlike this time last year, you don't have to contend with the uncertainty of not knowing what next year's tax rates will be.

That consistency, however, does not apply to the alternative minimum tax (AMT)--essentially a parallel federal income tax system, with its own rates and rules. While the December legislation extended regular income tax rates through 2012, it only extended AMT relief (in the form of increased AMT exemption amounts) through 2011. You can probably expect another AMT fix in legislation later this year, since without it there would be a dramatic increase in the number of individuals subject to AMT in 2012. But that leaves a fair degree of uncertainty today, however, as you consider your overall tax situation.

Also worth noting
Small business stock: Generally, individuals may exclude 50% of any capital gain from the sale or exchange of qualified small business stock provided they meet certain requirements, including a five-year holding period. For qualified small business stock issued and acquired after September 27, 2010, and before January 1, 2012, however, 100% of any capital gain may be excluded from income if the stock is held for at least five years and all other requirements are met.

IRA qualified charitable distributions: Absent additional legislation, 2011 will be the last year that you'll be able to make qualified charitable distributions (QCDs) of up to $100,000 from an IRA directly to a qualified charity if you're age 70½ or older. Such distributions may be excluded from income and count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to receive from your IRA in 2011.

Depreciation and IRC Section 179 expensing: If you're a business owner or self-employed individual, you're allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011 (the "bonus" first-year additional depreciation deduction will drop to 50% for property acquired and placed in service during 2012). For 2011, the maximum amount that can be expensed under IRC Section 179 is $500,000, but in 2012 the limit will drop to $125,000.

2011-05-17T12:26:00.000-07:00

Yes, if you qualify. The law authorizing "qualified charitable distributions," or QCDs, has recently been extended through 2011.

You simply direct your IRA trustee to make a distribution directly from your IRA (other than a SEP or SIMPLE) to a qualified charity. You must be 70½ or older, and the distribution must be one that would otherwise be taxable to you. You can exclude up to $100,000 of QCDs from your gross income in 2011. If you file a joint return, your spouse (if 70½ or older) can exclude an additional $100,000 of QCDs in 2011. But you can't also deduct QCDs as a charitable contribution on your federal income tax return--that would be double dipping.

QCDs count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to take from your IRA in 2011, just as if you had received an actual distribution from the plan. However, distributions that you actually receive from your IRA (including RMDs) that you subsequently transfer to a charity cannot qualify as QCDs.

For example, assume that your RMD for 2011 is $25,000. In June 2011, you make a $15,000 QCD to Qualified Charity A. You exclude the $15,000 of QCDs from your 2011 gross income. Your $15,000 QCD satisfies $15,000 of your $25,000 RMD. You'll need to withdraw another $10,000 (or make an additional QCD) by December 31, 2011, to avoid a penalty.

You could instead take a distribution from your IRA and then donate the proceeds to a charity yourself, but this would be a bit more cumbersome, and possibly more expensive. You'd include the distribution in gross income and then take a corresponding income tax deduction for the charitable contribution. But the additional tax from the distribution may be more than the charitable deduction, due to IRS limits. QCDs avoid all this by providing an exclusion from income for the amount paid directly from your IRA to the charity--you don't report the IRS distribution in your gross income, and you don't take a deduction for the QCD. The exclusion from gross income for QCDs also provides a tax-effective way for taxpayers who don't itemize deductions to make charitable contributions.

2011-05-10T09:33:00.000-07:00

Recent legislation introduced a new, but perhaps temporary, estate planning concept--exemption "portability." In short, the estate of a deceased spouse can transfer to the surviving spouse any portion of the federal estate tax exemption that it does not use. The surviving spouse's estate can then add that amount to the exemption it is entitled to, increasing the total amount that can be passed on to heirs tax free. This new feature makes it easier for married couples to minimize the potential impact of estate taxes.

The federal estate tax exemption defined
The federal government imposes a tax on the value of your property when you pass it along to your descendants at your death. Any amount that is passed to a surviving spouse is generally fully deductible. The estate is also allowed to exclude a certain amount that passes on to nonspouse beneficiaries. That amount is called the "basic exclusion amount," which is $5 million in 2011.

How the exemption works for married couples
Prior to the new tax law, if a spouse died without having planned for his or her exemption, the deceased spouse's estate would have passed tax free to the surviving spouse under the unlimited marital deduction (assuming all assets passed to the surviving spouse), and the deceased spouse's exemption was lost or "wasted." The surviving spouse's estate could then only transfer an amount equal to his or her own exemption free from federal estate tax. To solve this dilemma, married couples typically set up what is commonly referred to as a credit shelter trust (aka "bypass" or family trust) that sheltered or preserved the exemption of the first spouse to die.

The following examples illustrate how portability can achieve a similar result without the use of a credit shelter trust.

Example: result without portability
Assume Henry and Wilma are married, have all of their assets jointly titled, and have a net worth of $10 million. Henry dies first, when the federal estate tax exemption is $5 million and there is no portability. Henry's estate passes to Wilma free from federal estate tax under the unlimited marital deduction and does not use any of his $5 million exemption. Assume that at the time of Wilma's death, the exemption is still $5 million, the federal estate tax rate is 35%, and Wilma's estate is still worth $10 million. With Henry's exemption completely wasted, Wilma can pass on only $5 million free from federal estate tax. Assuming no other variables, Wilma's estate will owe about $1,750,000 in federal estate tax: $10 million estate - $5 million exemption = $5 million taxable estate x 35% estate tax rate = $1,750,000.

Example: result with portability
Assume Henry and Wilma are married, have all of their assets jointly titled, and have a net worth of $10 million. Henry dies first, when the federal estate tax exemption is $5 million and there is portability. As above, Henry's estate passes to Wilma free from federal estate tax under the unlimited marital deduction and does not use any of his $5 million exemption. Even though Henry's estate owes no tax, Henry's executor files a timely return on which he elects to transfer Henry's unused exemption to Wilma. Assume that at the time of Wilma's subsequent death, the exemption is still $5 million, the federal estate tax rate is 35%, and Wilma's estate is still worth $10 million. Since Wilma has "inherited" Henry's unused exemption, she can pass on the entire $10 million estate free from federal estate tax. Portability of the estate tax exemption saves Henry and Wilma's heirs $1,750,000 in estate tax.

Portability does not eliminate the benefits of credit shelter trusts
Even with portability, there are still tax and nontax considerations that may lead you to use a credit shelter trust, such as:

~The portability feature is in effect for only two years and will expire after 2012, unless Congress enacts further legislation.

~The trust can help protect assets against creditors of the surviving spouse or future beneficiaries (typically children and grandchildren).

~The trust allows the first spouse to die to control the ultimate distribution of his or her assets. For example, in a second marriage situation, one spouse may wish to ensure that any assets remaining after his or her spouse's death pass to his or her children from a previous marriage.

~Appreciation of assets placed in the trust will escape estate taxation in the survivor's estate.

~The portability feature applies only to estate tax; it does not apply to the generation-skipping transfer (GST) tax. Without a trust, any unused

~GST tax exemption of the first spouse to die is lost.

2011-05-03T13:44:00.000-07:00

Interest rates on deposit accounts, such as savings accounts, interest-bearing checking accounts, and money market accounts have been persistently low, and rates aren't likely to improve any time soon. To make matters worse, financial institutions are under pressure to raise account fees, as they look to recapture some of the revenue lost in the wake of stricter financial regulations. The result is that some account holders now earn less interest on their money than they pay in account fees.

Though it's hard to find attractive interest rates, it's relatively easy to save on account fees if you're willing to do your homework. Start by reviewing your account statements to determine your spending and saving habits. What average account balance do you generally maintain? Do you pay monthly account maintenance or service fees? How many ATM transactions do you have in a month? Are you overdrawing your account? Once you know your financial habits, you'll be ready to take steps to reduce account fees.

If you pay account maintenance fees
An account maintenance or service fee is a common monthly service charge that applies to some accounts. Financial institutions offer a variety of products, each with their own fee structure. Often, higher maintenance or service fees may apply to accounts that pay higher interest rates. To help avoid these fees:

~ Shop around, and compare your options--not all banks and credit unions charge maintenance fees.
~ Make sure you understand and follow account requirements. For example, monthly maintenance fees may be reduced or waived if you sign up for direct deposit or online bill pay, maintain another account, or tie your account to a loan or mortgage.
~ Read your account statements and notices you get from your financial institution. Otherwise, months may go by before you notice that fees have gone up or account requirements have changed.
~ Reevaluate your needs regularly. They change over time, and you may want to switch your money to another type of account, or even find another bank or credit union that better suits your needs.

If you frequently use ATMs
Withdrawing money from an ATM is so quick, it's easy to overlook how much it's costing you. Fees for ATM transactions generally range from $2 to $5, and may be higher. One way to minimize these fees is to choose a financial institution that owns many local ATMs, but that isn't your only option. To help reduce ATM costs:

~ Ask for a list of surcharge-free ATMs. Many financial institutions participate in networks that enable account holders to withdraw cash from designated ATMs without paying a surcharge. You can also download an application to your mobile device to help you find surcharge-free ATMs anywhere in the country.
~ Plan your spending. Withdrawing larger amounts when possible (at least enough to last for a week) will substantially reduce the number of ATM transactions you have.
~ Look for a bank or credit union that rebates ATM fees imposed by ATMs owned by other financial institutions (limits may apply).
~ Opt for cash back when you use your debit card (a minimum or maximum amount may apply). This is often a free or low-cost alternative to going to the ATM.

If you tend to overdraw your account
Overdrafts are common--a 2009 study by the nonprofit Center for Responsible Lending found that over 50 million Americans overdrew their checking account over a 12-month period. To help reduce or eliminate overdrafts:

~ Look into online banking. Being able to track your account history whenever you want can help you avoid overdraft fees. You'll also be able to quickly transfer funds among accounts, should the need arise.
~ Sign up to receive transaction or low balance alerts via your mobile device or computer.
~ Link your savings account to your checking account so that money will be automatically taken out of your savings account should you overdraw your checking account (typically, little or no fee is charged).

The bottom line
Often, people choose a bank or credit union based on convenience--the location of branches, easy access to ATMs, and hours of service. Convenience is important, but so is cost. And you don't have to settle--there are plenty of banks and credit unions across the country that offer great products and excellent service, without hitting you too hard in the pocketbook.

2011-04-26T09:16:00.000-07:00

There's been much debate in investing circles over the last year about whether inflation or deflation represents a more likely threat to the future of the U.S. economy. With a recovery that's still tentative compared to previous recessions, measures designed to stimulate the economy or cut spending to rein in the budget deficit provoke warnings about their potential to create one or the other.

The case for inflation
As the economy has begun to recover, worries about the potential for future inflation have become widespread. The Fed has undertaken extraordinary measures to make sure there is plenty of money in circulation, but some experts worry that the increased money supply will eventually cut the dollar's purchasing power, especially if interest rates are kept at historically low levels for too long. They cite the easy availability of money as contributing to the late-1990s tech bubble and the mid-2000s housing bubble, and fear that another could be on the way.

The Federal Reserve Board's monetary policy committee maintains that inflation currently is too weak to support normal economic growth, let alone launch an inflationary spiral. However, those who see inflation in our future watch for warning signs such as increased Treasury yields, particularly on longer-term bonds. Higher yields when bonds are auctioned suggest that investors are increasingly wary of tying up their money for long periods at a fixed interest rate if they feel that inflation is going to erode the buying power of those fixed payments over time. Wholesale prices also are watched closely; higher prices at the wholesale level can be a precursor of higher prices at retail (that is, if retailers are able to pass those costs along to buyers, which is not always the case).

The case for deflation
At first blush, the falling prices that characterize deflation don't sound like such a bad thing. Who wouldn't like to be able to buy things for less than they cost now, especially when times are tough? The problem is that those falling prices can harm the economy in several ways, as Americans were reminded during the recent recession. When prices are dropping, people tend to postpone purchases, hoping to pay less in the future (consider what's happened with real estate since 2007). Delayed spending puts pressure on corporate profit margins and companies tend to cut spending themselves, creating financial difficulties for companies that rely on business spending. Cutbacks begin to ripple through the economy.

Deflation typically affects not only prices but wages; scarce jobs can lead to pay cuts even for those who stay employed. And lower incomes can start a new round of cost-cutting by both consumers and business. If this process sounds familiar, it's because for much of 2009, the U.S. experienced negative annual inflation rates for the first time since 1955.

Though consumers have loosened their purse strings in recent months, deflationistas argue that if another financial crisis were to reduce credit availability, or if high ongoing unemployment once again begins to weigh on consumers' willingness and ability to spend, the threat of deflation could return. Those concerned about the possibility of a new round of deflation at some point keep an eye on consumer spending, the state of the credit and housing markets, and the stability of banks and other financial institutions.

Seeing shades of gray
Inflation and deflation aren't necessarily an either-or proposition. It's possible to have inflation in some areas and deflation in others; anyone who has watched food prices or health-care costs increase while their paycheck stayed the same and the value of their house declined can vouch for that.

From an investing standpoint, inflation isn't black-and-white, either. Some industries and asset classes benefit from inflationary forces, while companies that are highly dependent on both commodity prices and cheap labor can be more challenged by rising prices.

2011-04-19T14:09:00.000-07:00

The Patient Protection and Affordable Care Act (PPACA), signed into law in 2010, makes significant changes to our health-care delivery system. Here are some of the most important changes scheduled to take effect in 2011.

The cost of over-the-counter drugs not prescribed by a doctor can no longer be reimbursed through a health reimbursement account or a health flexible spending account, nor can these costs be reimbursed on a tax-free basis through a health savings account (HSA) or Archer medical savings account. Also, the tax on distributions from HSAs and Archer MSAs that are not used for qualified medical expenses increases to 20% (up from 10% and 15% for HSAs and Archer MSAs respectively).

Medicare Part D participants will receive a 50% discount on brand-name prescriptions filled in the coverage gap (i.e., the "donut hole") from pharmaceutical manufacturers, and federal subsidies for generic prescriptions filled in the coverage gap will start to be phased in.

Also, certain preventive services covered by Medicare are no longer subject to cost-sharing (co-payments), the deductible is waived for Medicare-covered colorectal cancer screening tests, and Medicare now covers personalized prevention plans including a comprehensive health risk assessment.

Medicare Advantage (MA) plans can no longer impose higher cost-sharing for some Medicare-covered benefits than would be imposed by traditional Medicare insurance. Also, MA plans cannot exceed a mandatory maximum out-of-pocket amount for most Medicare services. The maximum amount in 2011 is $6,700, but MA plans can voluntarily offer lower out-of-pocket amounts. Also, the annual enrollment period for MA plans is changed to October 15 through December 7.

The requirement that employers report the total value of employer-sponsored health benefits on employees' W-2s was to begin in 2011. However, the IRS has deferred this requirement until 2012.

2011-04-13T09:40:00.000-07:00

If you're married, a combination of trusts, often referred to as A/B, A/B/C, or A/B/Q trusts, may be useful for estate planning purposes. The combination of trusts can sometimes be used to minimize total estate tax for two spouses, and can provide nontax benefits as well.

A federal estate tax overview
An unlimited marital deduction is generally available for transfers of wealth between you and your spouse.

Currently, an estate of $5 million can be sheltered by a $5 million basic exclusion amount and a tax rate of 35% applies to any excess. Any unused portion of the basic exclusion of a deceased spouse is portable and can be transferred to a surviving spouse. The $5 million amount will be indexed for inflation in 2012.

Absent further legislation, in 2013, the amount that can be sheltered is reduced to $1 million, the top estate tax rate increases to 55%, and the basic exclusion amount is no longer portable.

The A, or power of appointment marital, trust
The A trust is structured to qualify for the marital deduction. You give your surviving spouse a right to all of the trust's income for life and the power to appoint who receives the trust property at your spouse's death. You would typically fund the A trust (together with a Q trust, if desired) with the amount of your estate in excess of the applicable exclusion amount.

The B, or bypass credit shelter, trust
You would typically fund the B trust with an amount equal to the applicable exclusion amount, or credit shelter amount. You can give your spouse interests in the B trust, but generally none that would cause the trust to be includable in your spouse's estate for estate tax purposes (thus, the B trust bypasses your spouse's estate). You can name the persons who will receive trust income or other distributions from the trust. You can also provide that, at your spouse's death, the trust will continue for the benefit of, or be distributed to, your children or other beneficiaries. Or, you could give your spouse a limited power to appoint property among a limited class of beneficiaries, such as your children from your current marriage.

The C, Q, or QTIP marital, trust
The C or Q trust, typically a QTIP trust, is also structured to qualify for the marital deduction. You give your surviving spouse a right to all of the trust's income for your spouse's life. However, you retain for yourself the right to designate who receives the property at your spouse's death. This can be useful when you have children from a prior marriage who you would like to benefit after your spouse's death. You would typically fund the C trust (together with an A trust, if desired) with the amount of your estate in excess of the applicable exclusion amount.

Everything to spouse versus A/B trusts
Because the exclusion amount is higher and portable in 2011 and 2012, some couples may think they do not need A/B or A/B/C trusts. Everything could be left to the surviving spouse who uses both spouses' exclusions. However, there are still tax advantages to using this basic planning strategy as shown in the following example.

Example: John is married to Mary and has an estate of $10 million. Assume a $5 million basic exclusion amount that is indexed and portable and a top estate tax rate of 35%. John leaves $10 million to Mary at his death. The transfer qualifies for the marital deduction, no estate tax is due, and John's unused $5 million exclusion is transferred to Mary. Everything (except the unused exclusion) doubles in value. Mary's estate of $20 million is partially sheltered by Mary's applicable exclusion amount of $15 million ($10 million basic exclusion plus John's unused $5 million exclusion). After estate taxes of $1,750,000 are paid, $18,250,000 remains for John and Mary's children.

Assume instead that John leaves $5 million to Mary in an A trust and $5 million in a B trust for Mary and their children. No estate tax is due. Everything doubles in value. Mary's estate of $10 million is sheltered by Mary's basic exclusion amount of $10 million. No estate tax is due. The entire $20 million (the $10 million B trust plus Mary's $10 million estate) remains for John and Mary's children. By using the A/B trusts, estate tax has been reduced by $1,750,000, and the tax savings go to John and Mary's children.

Other trust benefits
The use of trusts can also provide other benefits, such as control over who receives your property and when, investment management of trust property for trust beneficiaries, avoidance of probate, and asset protection. To learn more, consult an estate planning professional.

2011-04-05T09:52:00.000-07:00

Over the last several years, investors have grown accustomed to historically low interest rates. Ever since the Federal Reserve Board's target fed funds rate--the rate at which banks lend to one another--hit a high above 19% in mid-1981, the long-term direction of rates has been downward. In the last decade, the Fed's data* shows the target rate has never been much higher than 6%. And since December 2008, the Fed has kept it at a previously unheard-of level between 0.25% and zero to try to ensure that credit would be available to promote economic recovery.

Because bond prices typically rise when interest rates fall, that decline in yields has produced a bull market in bonds over the last decade. But what happens when the trend reverses? Even if they continue to remain relatively stable for a while, ultra-low interest rates have nowhere to go but up. When the economic recovery begins to show signs of strength, at some point the Federal Reserve Board will begin to raise the target rate again. When that happens, bond prices also will begin to reverse their long-term direction.

Here are some factors to consider in anticipation of a future with rising interest rates.

Bond maturities: when short is sweet
When interest rates rise, longer-term bonds typically feel the impact the most. In an extended period of rising interest rates, bond buyers become reluctant to tie up their money for longer periods because they foresee higher yields in the future; the later the bond's maturity date, the greater the risk that its yield will eventually be superseded by that of newer bonds. As demand drops and yields increase to attract purchasers, prices fall.

There are various ways to manage that impact. If you own individual bonds, you always have the option of holding them to maturity; in that case, you would suffer no loss of principal unless the borrower defaults. Bond investments also can be laddered. This involves buying a portfolio of bonds with varying maturities; for example, a five-bond portfolio might be structured so that one of the five matures each year for the next five years. As each bond matures, it can be reinvested in an instrument that carries a higher yield. Laddering also can be used with certificates of deposit (CDs).

If you own a bond fund, you can check the average maturity of the fund's holdings, or the fund's average duration, which takes into account the value of interest payments and will generally be shorter than the average maturity. The longer a fund's duration, the more sensitive it may be to interest rate changes.

Rising rates and other assets
Higher interest rates often are an attempt to prevent rising prices. When prices go up, purchasing power goes down, including the purchasing power of a bond's fixed interest payments. That can make bonds less attractive to buyers. However, not all investments are hurt by higher prices. For example, commodities such as oil and wheat typically do well in inflationary periods; in fact, increases in commodity prices are often what trigger a bout of inflation. If you're primarily interested in the overall value of your portfolio rather than a regular income stream, your financial professional can help you explore whether you should consider diversifying into asset classes that tend to benefit from inflation and that might help counteract the potential impact of falling bond prices.

Though bonds are affected most directly, equities aren't necessarily immune to rate increases. Though many companies borrowed money in recent years to take advantage of low rates and postpone the need to issue bonds for some time, those that haven't may see their borrowing costs increase, which could affect their bottom lines. Even those that squirreled away cash could be hit when they return to the bond markets eventually. Also, if interest rates rise to a level that's competitive with the return on stocks, that could reduce investor demand for equities.

Higher rates aren't all bad news
For those who've been diligent about saving, or who have kept a substantial portion of their investments in cash, higher rates could be a boon. Savings accounts, CDs, and money market funds are all likely to do better at providing income than they have in recent years. The downside, of course, is that if higher rates are accompanied by inflation, such cash alternatives might not keep pace with rising prices. And bear in mind that a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money investing in a money market fund.

*Source: Federal Reserve Statistical Release Historical Data for Fed funds rate weekly since 1954.

2011-03-22T09:58:00.000-07:00

You may have heard the buzz … 401(k) plans can now permit in-plan Roth conversions. But is this an option for you?
What is it?
A 401(k) in-plan Roth conversion (also called an "in-plan Roth rollover") allows you to transfer the non-Roth portion of your 401(k) account into a designated Roth account within the same plan. The amount you convert is subject to federal income tax in the year of the conversion (except for any nontaxable basis you have in the amount transferred), but qualified distributions from the Roth account in the future are entirely income tax free. The 10% early distribution penalty doesn't apply to amounts you convert (but that tax may be reclaimed by the IRS if you take a nonqualified distribution from your Roth account within five years of the conversion).
What part of my account can I convert?
Here's where it gets a bit tricky. Assuming your 401(k) allows in-plan conversions (plans aren't required to), you have to be entitled to a distribution from the plan in order to make a conversion. For example, you're generally entitled to a distribution from your 401(k) plan after you terminate employment. If your account balance is greater than $5,000, you also have the right to keep your money in the plan until you reach normal retirement age (typically 65). So in this case, your plan may allow you to transfer all or part of your account into a Roth account (except for any required distributions and certain periodic payments).
But what if you're still employed? If you want to transfer your pretax contributions and earnings into a Roth account, you'll generally only be able to do so if you're age 59½ or disabled, or you've received a qualified reservist distribution, because those are the only events that can trigger an eligible distribution (hardship withdrawals aren't eligible for rollover or conversion). In some cases, your vested employer contributions (and earnings) may also be available for distribution while you're still employed--for example, after the contribution has been in the plan for two years, or after you have 60 months of participation (the terms of your plan, and federal law, control). If your plan allows these distributions, it can also allow them to be converted.
Keep in mind that if you're entitled to an eligible rollover distribution, you can always roll those dollars into a Roth IRA instead of using an in-plan conversion.
Some employers aren't comfortable letting employees withdraw their retirement funds while they're still employed. The IRS has addressed this concern by letting 401(k) plans provide for the in-service distributions described above only if the employee intends to convert those funds. For example, a plan that currently doesn't let employees withdraw pretax dollars at age 59½ can be amended to allow those withdrawals, but only if an employee intends to roll those dollars into a Roth account--the employee would not be allowed to actually take a distribution of the funds, or roll the dollars over into an IRA.
What else do I need to know?
If you have the choice of an in-plan conversion or a rollover to a Roth IRA, which should you choose? There are a number of factors to consider:
• You can recharacterize (undo) a Roth IRA conversion if the conversion turns sour (for example, the value of the converted assets declines significantly), but you can't recharacterize in-plan conversions.
• In general, the investments available in an employer 401(k) plan are fairly limited, while virtually any type of investment is available in an IRA (on the other hand, your 401(k) plan may offer investments that you can't replicate in an IRA, or that aren't available at similar cost).
• Finally, 401(k) plans typically enjoy more protection from creditors under federal law than do IRAs (consult a professional if creditor protection is important to you).

2010-10-24T19:11:00.000-07:00

Year-End Investment Planning Is More Challenging in 2010
If you don't normally review your investments at the end of each year, 2010 might be a good time to start. And if year-end investment planning is already part of your routine, you might want to pay special attention this year. Why? Because significant changes in the tax code that are scheduled to go into effect in 2011 could substantially alter the taxation of your portfolio next year. That could in turn affect your investment strategy. And since many expect additional changes that will affect next year's tax landscape, it's even more important than usual to think about whether your portfolio needs fine-tuning.
Begin planning before December 31
If you plan to sell a profitable investment at some point, you'll want to assess whether you should sell before the end of the year. That's especially true if you're in a low tax bracket or you have investments that have appreciated substantially. Investors in the 10% and 15% tax brackets currently owe no capital gains taxes on long-term capital gains. That is scheduled to change in 2011, when the long-term capital gains rate at this level is scheduled to increase from 0 to 10%. If you're in the 25% bracket or higher this year, you'll also need to think about this issue, though the scheduled increase from the current 15% to 20% isn't quite as dramatic as the leap from 0 to 10% that those in the lower income brackets will face. (Special, slightly lower rates for investments held for more than five years will apply beginning in 2011.)
Also, the tax brackets themselves are scheduled to change next year (see sidebar). If you plan to harvest a tax loss and think you may be in a higher tax bracket next year, it might make sense to first determine whether the loss would be more valuable later. Though tax considerations shouldn't be the sole factor in a decision to buy or sell, they shouldn't be ignored, either--especially this year.
Complicating your decisions, of course, is the uncertainty about whether the scheduled changes will undergo further revision before the end of the year. One possibility is to have a game plan based on the current scenario, and adjust it as warranted. It may seem like a burden, but for those in higher tax brackets, the extra effort could pay off come tax time.
Think about your overall tax burden
If you converted an IRA to a Roth IRA this year or are thinking about doing so before the end of the year, you may need to take that into account when deciding whether to book capital gains in 2010. That's because you're able to report the taxable ordinary income from the conversion on either your 2010 return or in the 2011 and 2012 tax years (half of the income in each year). Your decision about when you will account for the taxable income that results from a Roth conversion may affect your decision about the timing of investment sales, or vice versa. If you choose to report the income resulting from your Roth conversion on your 2010 return, consider whether it makes sense to realize sizable capital gains this year. If you feel it's to your advantage to sell assets and pay the capital gains tax in 2010, you may want to consider opting to postpone payment of the taxes owed on the Roth conversion until 2011 and 2012. That would mean the total taxes owed would be spread over three years rather than one (though as noted above, your future tax bracket also should be factored into the calculation).
Consider the tax status of dividends
Qualifying dividends are scheduled once again to be taxed next year as ordinary income, as they were before 2003, rather than at long-term capital gains rates, which are typically lower. If you'll be in the 15% tax bracket, that represents an increase of 15%. And if you'll be in the 28% tax bracket or higher next year, the change in the tax status of dividend payments could also have an impact; the higher your tax bracket in 2011, the greater the impact.
Don't forget the usual suspects
In addition to staying on top of the tax issues that complicate this year's investment planning efforts, there are some tasks that are useful every year. A portfolio review can tell you whether it's time to adjust your holdings to maintain an appropriate asset allocation. Also, if you have losses, you may be able to harvest those losing positions to offset some or all of any capital gains. Be sure to consider how long you've owned the asset; assets held a year or less generate short-term capital gains and are taxed as ordinary income.
If you're selling an investment but intend to repurchase it later, be careful not to buy within 30 days before or after a sale of the same security. Doing so would constitute a violation of the "wash sale" rule, and the tax loss would be disallowed. Finally, if you're considering the purchase of a mutual fund outside of a tax-advantaged account, find out when the fund will distribute dividends or capital gains, and consider postponing action until after that date to avoid owing tax on that distribution.
Federal tax brackets for ordinary income are scheduled to change in 2011 as follows:
10% becomes 15%
15% remains 15%
25% becomes 28%
28% becomes 31%
33% becomes 36%
35% becomes 39.6%

2010-08-10T15:19:00.000-07:00

Here's a new twist on an old saying. There are three things in life that are certain: death, taxes, and college costs that go up every year, even during a recession. How can students and parents avoid the "extreme borrowing" phenomenon that can lead to years of burdensome loan payments? They can start by looking for ways to trim college costs so they won't have to borrow and/or pay as much in the first place. Here are some ideas.
Pick a college with a lower sticker price
Pricey private colleges often like to point out that the majority of their students don't pay the full "sticker price." The problem is, you never quite know how much, exactly, their students are paying. Every student's aid package is different, and the presence of merit aid awards makes the picture even murkier. Private colleges with the biggest endowments can afford to be the most generous (replacing loans with grants in aid packages, for example, or guaranteeing merit aid for all four years), but not every private college can do this. Even if a college takes $15,000 or $20,000 off its sticker price, that may still leave $30,000 or more to pay each year.
In the past few years, enrollment at public colleges has soared due to their lower sticker prices--public colleges are typically half the cost of private colleges and, for in-state residents, the savings can be even greater. Education experts often debate the benefits of spending more money to attend a well-known, more prestigious private college vs. a public college. But it's generally agreed that motivated, bright students can succeed anywhere, and that after a certain period of time, job experience matters more than where you went to college.
Consider taking a year off
The number of students taking time off between high school and college is growing in a measurable way. This period, commonly referred to as a "gap year," is typically spent volunteering, traveling, working, and/or interning. One of the main benefits of a gap year is the increased maturity and focus that comes from engaging in new experiences. These traits can help students get their money's worth in college by sharpening study habits and career goals. Another benefit is the potential to earn money to pay for college. For example, working full-time for 42 weeks (10 months) at the federal minimum wage of $7.25 per hour equals about $12,180 before taxes. Or, for the volunteer-minded, the AmeriCorps program currently provides a modest living allowance and a stipend in 2010 of $5,350 in exchange for service work (future stipends will be tied to the maximum federal Pell Grant). And more than 80 colleges now offer matching grants to students who earn an AmeriCorps stipend (see www.americorps.gov for more information).
Tweak the typical four-year experience
If your child doesn't mind forgoing the typical four-year college experience, here are some ways to trim costs:
• Attend a community college for one or two years, then transfer to a four-year institution
• Take AP high school courses to earn college credit and reduce the time in college
• Look at colleges that offer three-year accelerated degree programs
• Consider living at home and commuting to school to save on room-and-board costs
• Research online education options (check out www.distance-education.org)
Research scholarships
After your child fills out the federal government's financial aid application (the FAFSA) and the college's financial aid application (the standard PROFILE application or the college's own form), he or she should set aside as much time as possible to research and apply for scholarships. With online searches, students can easily input their talents and background and get a filtered list of relevant scholarships (try www.fastweb.com or www.collegeboard.com). Also, don't forget to check with your employer and the local chamber of commerce for scholarships.
Budget well during college
Encourage your child to look for deals on mandatory items like books, supplies, and other personal dorm room items. For discretionary items, establish guidelines for a reasonable amount of monthly spending money, but build in flexibility. If you do co-sign a credit card application with your child (a co-signer is now required in most cases for applicants under 21), make sure your child doesn't succumb to the temptation of easy money. According to a study last year by Sallie Mae, the average college student has $3,200 in credit card debt. Discuss your expectations of credit card usage and make sure your child understands how interest accumulates on unpaid monthly balances.
Are you ready to plan your students college experience? We can help. No charge, no obligation. Contact us at Support@wealthadvising.com .

2010-08-03T10:36:00.001-07:00

What You Should Know about Trusteed IRAs

The tax code allows IRAs to be created as trust accounts, custodial accounts, and annuity contracts. Regardless of the form, the federal tax rules are generally the same for all IRAs. But the structure of the IRA agreement can have a significant impact on how your IRA is administered. This article will focus on one type of trust account commonly called a "trusteed IRA," or "individual retirement trust."
Why might you need a trusteed IRA?
In a typical IRA, your beneficiary takes control of the IRA assets upon your death. There's nothing to stop your beneficiary from withdrawing all or part of the IRA funds at any time. This ability of your beneficiary to withdraw assets at will may be troublesome to you for several reasons. For example, you may simply be concerned that your beneficiary will squander the IRA funds.
Or it may be your wish that your IRA "stretch" after your death--that is, continue to accumulate on a tax-deferred (or in the case of Roth IRAs, potentially tax-free) basis--for as long as possible. Your intent to stretch out the IRA payments may be defeated if your beneficiary has total control over the IRA assets upon your death.
Even if your beneficiary doesn't deplete the IRA assets, in a typical IRA you normally have no say about where the funds go when your beneficiary dies. Your beneficiary, or the IRA agreement, usually specifies who gets the funds at that point. So, in a typical IRA, if you name your spouse as your primary beneficiary, your spouse could name children from a previous marriage, or a new spouse if he or she remarries, as the ultimate beneficiary of your IRA assets. A trusteed IRA allows you to control the ultimate beneficiaries of your IRA, by letting you specify contingent beneficiaries that cannot be changed by your primary beneficiary.
With a trusteed IRA, you can't stop the payment of required minimum distributions (RMDs) to your beneficiary but you can restrict any additional payments. You can direct the trustee to pay only RMDs to your beneficiary. Or you can provide the trustee with discretionary authority to make payments to your beneficiary in addition to RMDs, e.g., for your beneficiary's health, welfare, or education. Or you can impose restrictions on distributions that last only until your beneficiary reaches a specified age. Trusteed IRAs can also be set up to qualify as marital, QTIP, and credit shelter (bypass) trusts, potentially simplifying your estate planning.
A trusteed IRA can also be a valuable tool during your lifetime. It can be structured so that if you become incapacitated, the trustee will step in and take over the investment of assets and distribution of benefits on your behalf, ensuring that your IRA won't be in limbo until a guardian is appointed.
Is a trusteed IRA right for you?
While trusteed IRAs can be as flexible as a particular trustee will allow (not all provide the same level of IRA planning services), they aren't right for everyone. The minimum balance required to establish a trusteed IRA, and the fees charged, are usually significantly higher than for other IRAs, making trusteed IRAs most appropriate for large IRA accounts. You may also incur attorney's fees and other costs.
And in some cases, another approach might be more appropriate. For example, you may be able to assure that your IRA "stretches" after your death by instead naming a trust as the beneficiary of your IRA. If specific IRS rules are followed, RMDs can be calculated using your trust beneficiary's life expectancy (this is commonly called a "see-through" trust).
See-through trusts are generally more expensive, and more complicated, than trusteed IRAs. It's important that you consult an estate planning professional who can explain your options and make sure you choose the right vehicle for your particular situation.

2010-07-28T10:23:00.000-07:00

Social Security: File-and-Suspend for Higher Benefits

If you're married and looking for opportunities to increase retirement income, you may want to look closely at your Social Security benefits. One opportunity for maximizing Social Security income, called "file-and-suspend," may enable a married couple to boost both their retirement and survivor's benefits.

What is file-and-suspend?

Generally, a husband or wife is entitled to receive a Social Security retirement benefit based either on his or her own earnings record (a worker's benefit), or on his or her spouse's earnings record (a spousal benefit), whichever is higher. But under Social Security rules, a husband or wife who is eligible to file for retirement benefits based on his or her spouse's record cannot do so until his or her spouse begins receiving benefits. However, there is one exception--someone who has reached full retirement age may choose to file for retirement benefits, then immediately request to have those benefits suspended, so that his or her eligible spouse can file for spousal benefits.

File-and-suspend is a strategy that may be used in a variety of situations, but is commonly used when one spouse has much lower lifetime earnings, and thus will receive a higher retirement benefit based on his or her spouse's earnings record. (A husband or wife's spousal benefit may be as much as 50% of what his or her spouse is entitled to receive at full retirement age.) Using this strategy not only allows the eligible spouse with lower earnings to immediately claim a higher (spousal) retirement benefit, but can also increase the amount of available survivor protection. The spouse with higher earnings who has suspended his or her benefits can accrue delayed retirement credits at a rate of 8% per year (the rate for anyone born in 1943 or later) up until age 70. Because a surviving spouse will generally receive a benefit equal to 100% of the retirement benefit the other spouse was receiving (or was entitled to receive) at the time of his or her death, suspending a benefit to accrue delayed retirement credits may substantially increase the survivor's benefit.

Example

Let's look at one hypothetical example of how filing for, then suspending, Social Security benefits might help a married couple increase their retirement income and survivor's benefits.

Henry is about to reach his full retirement age of 66, but he wants to postpone filing for Social Security benefits. At full retirement age his monthly benefit will be $2,000, but if he waits until age 70 to file, his benefit will be $2,640

(32% more) due to delayed retirement credits. However, his wife Julia, who has had substantially lower lifetime earnings than Henry, wants to retire in a few months at her full retirement age (also 66). Based on her own earnings record, Julia will be eligible for a monthly benefit of $700, but based on Henry's earnings record she will be eligible for a monthly spousal benefit of $1,000 (50% of Henry's entitlement).
So that Julia can receive the higher spousal benefit as soon as she retires, Henry files an application for benefits, but immediately suspends it. That way, he can also continue to earn delayed retirement credits, which will result in a higher monthly retirement benefit for him later.

Using the file-and-suspend strategy not only increases Julia and Henry's retirement income, but it also offers increased survivor protection. Upon Henry's death, Julia will be entitled to receive 100% of what Henry was receiving

(or was entitled to receive) at the time of his death. So by suspending his own retirement benefit in order to increase it through delayed retirement credits, Henry has ensured that Julia will receive a survivor's benefit that is up to 32% higher for the rest of her life should he die first. (Note, though, that this hypothetical example is for illustrative purposes only and does not account for cost-of-living adjustments or taxes.)
Points to consider

Deciding when to begin receiving Social Security benefits is a complicated decision. You'll need to consider a number of scenarios, and take into account factors such as both spouses' ages, estimated benefit entitlements, and life expectancies. A Social Security representative can help explain your options.
Ask a tax professional to help you weigh the tax consequences of delaying Social Security income.
Using the file-and-suspend strategy may not be advantageous when one spouse is in poor health or when Social Security income is needed as soon as possible.
The spousal benefit will be reduced if the spouse claiming it is under full retirement age.

Questions? Contact Richard Hanseen at Richard@wealthadvising.com
Or the Social Security Administration at 800-772-1213 or visit www.socialsecurity.gov.

2010-07-11T19:23:00.000-07:00

The year was 2001. The top marginal federal income tax bracket was 39.6%, and the tax rate that applied to most long-term capital gains was 20%. Then came the Economic Growth and Tax Relief Reconciliation Act of 2001, followed two years later by the Jobs and Growth Tax Relief Reconciliation Act of 2003. By mid-2003, the top marginal tax rate was 35%, and the 20% capital gains rate had dropped to 15%. But this tax relief was designed to be temporary--the provisions that established lower rates were crafted to self-expire after a period of time. And now, in 2010, we're only months away from seeing those provisions expire.
Federal income tax brackets
Right now, there are six marginal income tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. For 2010, these brackets apply to married couples filing joint federal income tax returns in the following manner:

As it stands now, these marginal tax brackets will expire at the end of 2010. There would be no 10% bracket for 2011, and the remaining bracket rates would return to their original 2001 levels: 15%, 28%, 31%, 36%, and 39.6%.

Long-term capital gain tax rates
For 2010, if you sell shares of stock that you've held for more than a year, any gain is long-term capital gain, generally taxed at a maximum rate of 15%. If you're in the 10% or the 15% marginal income tax bracket, however, you'll pay no federal tax on the long-term gain (a 0% tax rate applies). That means if you're a married couple filing a joint federal income tax return, and your taxable income is $68,000 or less, you'd pay no federal tax on the gain.

However, these rates are also scheduled to expire at the end of 2010. Absent new legislation, in 2011, a 20% rate will generally apply to long-term capital gains. Individuals in the 15% tax bracket (remember, there won't be a 10% bracket in 2011) will pay the tax at a rate of 10%. Special rules (and slightly lower rates) will apply for qualifying property held for five years or more.

Finally, while qualifying dividends are taxed in 2010 using the same capital gain tax rates described above (i.e., 15% and 0%), in 2011 they'll be taxed as ordinary income.

Will Congress take action?
In the proposed 2011 budget submitted to Congress in February, President Obama asked for a permanent extension of the current 10%, 15%, and 25% marginal income tax brackets, and an expansion of the current 28% tax bracket. The current 33% and 35% brackets would be allowed to expire, resulting in the top two marginal rates for 2011 returning to 36% and 39.6%. The expanded 28% bracket would be calculated in a way that would allow individuals earning less than $200,000 (less the standard deduction amount and one exemption) and married couples filing jointly earning less than $250,000 (less the standard deduction and two personal exemptions) to escape taxation at the top rates.

The President also proposed making the current tax rates that apply to long-term capital gain (i.e., the 0% and 15% rates) permanent, but adding a new 20% rate for those in the newly reestablished 36% and 39.6% brackets.

Will Congress act, or will it simply let current rates expire? There's plenty of time before 2011, so stay tuned …

2010-07-04T11:58:00.000-07:00

Using Yield to Evaluate Stocks and Bonds
A core consideration for income investors is an investment's yield, which indicates the value of the payments you'll receive. Yield can be a useful tool in considering whether you'd rather try to generate future income from bonds or stocks, and whether its price is appropriate.

Dividend yield

Dividend yield reflects how much of a company's value gets passed on to shareholders. To calculate it, divide the annual dividend by the price for a share of the company's common stock. For example, if a stock offers a $1.75 annual dividend and its share price is $50, its dividend yield would be 3.5%.

A stock's yield also can help you determine whether a stock is undervalued or overvalued relative to its projected income. The dividend discount model uses dividend yield to calculate what the current value of a stock should be based on its anticipated dividends in the future. If dividends are expected to grow rapidly, the present value of a stock should be higher than if dividends are expected to remain relatively static.
Dividend yield only goes so far as a valuation tool. Obviously, a company isn't necessarily worthless just because it may not pay dividends, and the calculation is only as good as the assumptions it's based on. A company can always cut its dividend (just ask shareholders of the nation's banks), in which case the present value of that income stream--and presumably the stock's price--would also drop. A company's growth rate may vary over its life cycle; trying to guess when dividends might change and by how much makes the dividend discount calculation even more challenging.

Bond yields

There are many different measures of yield on a bond. Current yield can tell you what your periodic interest payments represent as a percentage of your initial investment. However, for purposes of comparison with other investments, you may also want to consider the value of those interest payments over the life of the bond, including what you could earn by reinvesting those payments at the yield available when you bought it. That's measured by a bond's yield to maturity.

Comparing stock and bond yields

In addition to being a tool for evaluating individual stocks and bonds, yield can be used to assess the relative value of the stock and bond markets as a whole. A method informally known as the Fed model can help you estimate whether stocks are overvalued or undervalued relative to bonds. (However, the so-called Fed model is not officially endorsed by the Federal Reserve.)

Though there are variations on the method, the original model compares the yield on the 10-year Treasury note to the forward-earnings yield per share of the S&P 500. Earnings yield is calculated in much the same way as dividend yield is: by dividing the per-share earnings forecast (rather than the anticipated dividend) for the next 12 months by the current share price. If the result is lower than the yield to maturity on a 10-year Treasury note, stocks might be overpriced. Why? Because the Treasury note offers a higher yield that involves less risk. On the other hand, if the forward-earnings yield on stocks is higher, then you're at least being compensated for the higher risk involved with stocks.

However, for the average investor, the model also has flaws. If earnings prove weaker than predicted, actual stock yield might not be as high, which would throw off the comparison. Also, using trailing earnings over the previous 12 months rather than forward earnings as your yardstick would give you a different result. Dramatic swings in Treasury prices can make stocks seem less expensive than they might be when compared to their historical performance. And even if equities or bonds appear cheap, there's no guarantee either one won't be an even better bargain in the future.

Yield shouldn't be the only factor in your decision, but it can help you compare apples and oranges.

If you would like to discuss this informatin further please call Richard @702-592-5715. There is no Obligation.

2010-05-24T15:33:00.000-07:00

The rules governing inherited IRAs can be complicated. Here are the major issues.

Transferring inherited IRA assets
If you inherit an IRA from someone who isn't your spouse, your options are fairly limited. You can't roll the proceeds over to your own IRA, treat the IRA as your own, or make any additional contributions to the IRA. What you can do is transfer the assets to a different IRA provider, as long as the registration of the account continues to reflect that the IRA is an inherited IRA and not your own.

If you inherit an IRA from your spouse, you have many more options. You can roll all or part of the IRA proceeds over to your own IRA. You become the owner of the IRA assets, and the rules that apply to IRA owners, not beneficiaries, apply from that point on. If you're the sole beneficiary of the IRA, you can also generally treat the inherited IRA as your own by retitling the IRA in your name. But you aren't required to assume ownership of an inherited IRA. You can instead continue to maintain the inherited IRA as a beneficiary. You might want to do this if you inherit a traditional IRA and you'll need to use the funds before you turn 59½ (distributions from inherited IRAs aren't subject to the 10% penalty that typically applies to early distributions from IRAs you own).

Required minimum distributions (RMDs)
Nonspouse beneficiary: Federal law requires that you begin taking distributions (called required minimum distributions, or RMDs) from the inherited IRA after the IRA owner dies. If the IRA owner died after turning 70½ and didn't take a required distribution for the year of death, you'll need to make sure to take that distribution by December 31 of the year of death in order to avoid a 50% penalty.

Spouse beneficiary: If you roll the inherited IRA over to your own IRA, or treat it as your own, then the RMD rules apply to you the same way they apply to any IRA owner--you'll generally need to begin taking RMDs from a traditional IRA after you turn 70½; no lifetime RMDs are required at all from a Roth IRA. If you don't roll the IRA assets over or treat the IRA as your own, then the same rules described above for nonspouse beneficiaries generally apply to you, except that you can defer receiving distributions until your spouse would have turned 70½.

Special rules--inherited Roth IRAs
Qualified distributions to a beneficiary from an inherited Roth IRA are free from federal income taxes. To be qualified, the distribution must be made after a five-year holding period. The five-year period begins on January 1 of the year the deceased IRA owner first established any Roth IRA, and ends after five full calendar years. If you take a distribution from an inherited Roth IRA before this five-year period ends, any earnings you receive will be subject to federal income taxes (earnings generally come out last). If you're a spouse beneficiary, and you roll the inherited Roth IRA over to your own Roth IRA or treat the inherited IRA as your own, then you'll be eligible to take tax-free distributions only after you reach age 59½, become disabled, or have qualifying first-time homebuyer expenses. You'll also need to satisfy the five-year holding period, but a special rule applies--the five-year period for all of your Roth IRAs will be deemed to have started on January 1 of the year you or your spouse first established any Roth IRA, whichever is earlier.

And speak to a financial professional if...
•You're sharing the inherited IRA with other beneficiaries. This can impact when and how you must begin receiving RMDs from the IRA.
•You don't want or need the IRA funds. You may be able to disclaim the IRA and have it pass to another beneficiary. This must be done in accordance with strict IRA rules.
•Any estate taxes were paid that are attributable to the inherited IRA. You may be entitled to an income tax deduction equal to the estate taxes paid.

2010-05-18T20:52:00.000-07:00

Mid-year is an ideal time to take a look at your finances, because the demands on your time may be fewer, and the planning opportunities greater, than if you wait until the end of the year. Here are a few tips to get you started.

Identifying your needs
Financial plans often need to be modified when personal circumstances change. Answering these questions can help you identify the financial issues you want to address within the next few months.

•Are any life-changing events coming up soon, such as marriage, the birth of a child, retirement, or a career change?
•Will your income or expenses substantially increase or decrease this year?
•Are you concerned about the performance of your investment portfolio?
•Do you have any needs or concerns that you would like to address?
Tax planning
Completing a mid-year estimate of your income tax liability can reveal tax-planning opportunities. You can use last year's tax return as a basis, then make any anticipated adjustments to your income and deductions for this year. Check your withholding, especially if you owed taxes when you filed your most recent income tax return or if you received a large refund. Doing that now, rather than waiting until the end of the year, will help you avoid a big tax bill or having too much of your money tied up with Uncle Sam. If necessary, adjust the amount of federal or state income tax withheld from your paycheck by filing a new Form W-4 with your employer.

One of the easiest things you can do right now to help avoid missed tax-saving opportunities for the year is to set up a system for saving receipts and other tax-related documents. This can be as simple as dedicating a folder in your file cabinet to this year's tax return so that you can keep track of important paperwork.

Retirement planning
If you're working and you received a pay increase for this year, don't overlook the opportunity to increase your retirement plan contributions by asking your employer to apply a higher percentage of your salary. This year, you may be able to contribute up to $16,500 to your retirement plan at work ($22,000 if you're age 50 or older). If you have a traditional IRA, you may also want to weigh the benefits of converting it to a Roth IRA this year, when you may be able to take advantage of a special deferral rule that applies only to 2010 conversions. This deferral rule gives you the option of reporting half of any resulting taxable income that results on your 2011 tax return and half of the income on your 2012 return.

If you're already retired, take a new look at your retirement income needs and whether your current investments and distribution strategy will continue to provide enough income.

Investment planning
Have you recently reviewed your portfolio to make sure that your asset allocation is still in line with your financial goals, time horizon, and tolerance for risk? Though it's common to rebalance a portfolio at the end of the year, if the market is volatile, you may need to rebalance more frequently.

Insurance planning
Do you know exactly how much life and disability insurance coverage you have? Are you familiar with the terms of your homeowners, renters, or auto insurance policies? If not, it's time to add your insurance policies to your summer reading list. Insurance needs frequently change, and it's possible that your coverage hasn't kept pace with your income or family circumstances

2010-05-16T07:50:00.000-07:00

Evaluating Risk in Your Portfolio
If you're like most people, you probably evaluate your portfolio in terms of the return it earns. However, as we were all reminded in 2008, returns aren't the only factor you should consider when determining whether your portfolio is allocated appropriately. Also important is the level of risk you take in pursuing those returns.

There are a number of ways to estimate the level of risk in a portfolio. The term "risk" is often used interchangeably with "volatility" (the tendency of a portfolio's value to rise or fall sharply, especially within a relatively short period of time). However, for most people, a portfolio is simply a means to an end--paying for retirement or a child's college tuition, for example. In that context, "risk" also means the risk of not meeting your financial needs.

Volatility measures
One of the most common measures of volatility is standard deviation, which gauges the degree of an investment's up-and-down moves. It shows how much the investment's returns have deviated from time to time from its own average. The higher the standard deviation of an investment or portfolio, the bumpier the road to those returns has been.

Another way to assess a portfolio's volatility is to determine its beta. This statistic compares a portfolio's ups and downs to those of a benchmark index, such as the S&P 500, and indicates how sensitive the portfolio might be to overall market movements. An investment or portfolio with a beta of 1 would have exactly as much market risk as its benchmark.

The higher the beta, the more volatile the portfolio. A beta of 1.05 means the portfolio involves 5% more market risk than the benchmark to which it's compared. If the benchmark rises 10%, a portfolio with a beta of 1.05 should theoretically rise 10.5%; a fall of 10% in the benchmark should mean a corresponding 10.5% decline in the portfolio.

A 0.95 beta means a portfolio has 5% less market risk than that index; in theory, the portfolio would rise and fall 5% less than the benchmark. (However, remember that investments also have unique risks that are not related to market behavior. Those risks can create volatility patterns that are different from the underlying benchmark.)

The risk of not achieving your goals
Another way to evaluate risk is to estimate the chances of your portfolio achieving a desired financial goal. In this case, "risk" means not volatility but the odds that your portfolio will succeed in meeting a specific financial liability. A technique known as Monte Carlo simulation uses computer modeling based on multiple scenarios for how various types of investments might perform based on their past returns. Though past performance is no guarantee of future results, such a projection can estimate how close your plan might come to meeting a future target amount.

Let's look at a hypothetical example. Let's say Bob wants to retire in 15 years. A Monte Carlo simulation might suggest that, given his current level of saving and his portfolio's asset allocation, Bob has a 90% chance of achieving his retirement target. If he chose to save more, he might increase his odds of success to 95%. Or Bob might decide that he's comfortable with having an 85% chance of success in reaching his target amount if that also means his portfolio might be less volatile. (However, be aware that though a projection might show a high probability that you'll reach your financial goals, it can't guarantee that outcome.)

Are you getting paid enough to take risk?
Another approach to thinking about portfolio risk involves the reward side of the risk-reward tradeoff. You can compare a portfolio's return to that of a relatively risk-free investment, such as the inflation-adjusted return on a short-term (3 months or less) U.S. Treasury bill. Modern portfolio theory is based on the assumption that you should receive greater compensation for taking more risk (though there's no guarantee it will work out that way, of course). A stock should offer a potentially higher return than a Treasury bond; the difference between the two returns is the equity's risk premium. A small-cap stock that's relatively new should offer a higher risk premium than a well established, dividend-paying stock. While understanding risk premium doesn't necessarily minimize risk, it can help you evaluate whether the return you're getting is worth the risk you're taking.

Whatever your approach to portfolio risk, understanding the nature and level of the risks you face can be critical in sticking to a long-term investing strategy.

2010-04-27T13:21:00.001-07:00

Bob Farrell’s 10 rules for investing
Wall Street “gurus” come and go, but in the case of Bob Farrell legendary status was achieved. He spent several decades as chief stock market analyst at Merrill Lynch & Co. and had a front-row seat at the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987 crash.
Farrell retired in 1992, but his famous “10 Market Rules to Remember” have lived on and are summarized below, courtesy of The Big Picture [1] and MarketWatch [2] (June 2008). The words of wisdom are timeless and are especially appropriate as investors grapple with the difficult juncture at which stock markets find themselves at this stage.
1. Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.
2. Excesses in one direction will lead to an excess in the opposite direction
Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.
3. There are no new eras – excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past six years, only to get cut in half.
As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it – human nature – is never different.
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction eventually.
5. The public buys the most at the top and the least at the bottom
That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing. Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors Survey.
6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism”, says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
This is why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks.
8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend
I would suggest that as of August 2008, we are on our third reflexive rebound – the January rate cuts, the Bear Stearns low in March, and now the Fannie/Freddie rescue lows of July.
We have yet to see the long-drawn-out fundamental portion of the bear market.
9. When all the experts and forecasts agree – something else is going to happen
As Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”
Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.
10. Bull markets are more fun than bear markets
Especially if you are long only or mandated to be fully invested. Those with more flexible charters might squeak out a smile or two here and there.

2010-03-14T20:56:00.000-07:00

I attended a lecture/workshop featuring Cynthia Kersey a motivational speaker. I really enjoyed listening to her presentation. It lasted 2 hours that felt like 30 minutes.

One of her statements that make a lot of sense to me is,

“The greatest natural resources in the world is not in the earth’s waters or minerals, nor in the forests or grasslands. It is the spirit that resides in every unstoppable person. And the spirit of the individual benefits us all

2010-03-09T11:30:00.000-08:00

Is a Roth conversion right for you?

The answer to this question depends on many factors, including your current and projected future income tax rates, the length of time you can leave the funds in the Roth IRA without taking withdrawals, your state's tax laws, and how you'll pay the income taxes due at the time of the conversion.
Follow the link and hear the summarry of the opportunity.https://www.forefieldkt.com/KT/HtmlNL.aspx?type=fs&id=191761&iplf=ff&mId=73158
We can help you decide whether a Roth conversion is right for you, and whether you should take advantage of the special deferral rule for 2010 conversions.
Contact us at support@wealthadvising.com

2010-01-16T15:00:00.000-08:00

Join us for the Rich In Confidence workshop being held on the 24th day of February 2010.
What is confidence? It has been defined as the ability to transform fear and trepidation into focused relaxed thinking, communication, and action.

How much better off would you be if you had your personal "keys to confidence?" Would you be in a better position to maximize your opportunities, achieve your goals and stay focused on your future?

This workshop was developed to help you find your "keys to confidence." All of us have those "keys to confidence;" they are unique to the individual.

Join us and find your "keys to confidence."

Rich In Confidence, February 24th 2009, 4:30 pm, the 2nd floor conference room,
Acuity Financial Center, 7881 West Charleston Blvd. Las Vegas NV.

Late enough not to interfere with your workday.
Afternoon snacks provided
To Register: provide your Name and phone number at support@wealthadvising.com

2009-12-13T21:26:00.000-08:00

I wonder how many windows have been broken in those glass houses because of the stone throwing.
I have been a fan of Tiger since before the day he showed up at the Las Vegas Invitational to win his first tournament. I was one of the starters working the first tee during that tournament. He was young and focused. He single handedly raised the bar on what golf was all about. In order to compete the players had to find a new competitive spirit. His “Tiger Jam” has and will continue to benefit hundreds of children.

Tiger’s recent activities have not been at the level he played golf. Because of his transgressions many have decided to judge him and rather harshly. One news caster said he wasn’t going to cover the story but “current new facts” changed his mind.

Well so be it.

When my daughter got in trouble in high school I didn’t judge nor abandon her. She has a master’s degree in Public Administration today. When my son had some issues in high school I didn’t abandon him either. Today he has his own business involving political campaigns.

I am not going to abandon being a fan of Tiger either. I am going to carry love and compassion in my heart for him and his family. I am going to pray that something positive comes out of this problem.

How about you? Are you going to judge or prey for a solution that is of benefit to all involved?

If we focus on the similarities in each other we can build a community. That includes our short comings. None of us are prefect.

With love and compassion.

2009-12-09T06:17:00.000-08:00

Join us for the Rich In Confidence workshop being held on the 15th day of December 2009.
What is confidence? It has been defined as the ability to transform fear and trepidation into focused relaxed thinking, communication, and action.

How much better off would you be if you had your personal "keys to confidence?" Would you be in a better position to maximize your opportunities, achieve your goals and stay focused on your future?

This workshop was developed to help you find your "keys to confidence." All of us have those "keys to confidence;" they are unique to the individual.

Join us and find your "keys to confidence."

Rich In Confidence, December 15th 2009, 7:30 am, the 2nd floor conference room, in the Acuity Financial Center located at 7881 West Charleston Blvd. Las Vegas NV.
For reservations please respond to support@wealthadvisng.com

2009-11-24T11:47:00.000-08:00

I found this article very interesting because it suggest there is an avenue available for refinancing commercial real estate.
MALL INVESTORS SET FOR BONANZA AS FINANCE RECOVERS By Henny Sender in New YorkPublished: November 23 2009 23:32 Last updated: November 23 2009 23:32 Hedge funds and other investors now stand to make billions of dollars from their holdings in bankrupt US mall owner General Growth Properties, underscoring the extent of the recent rebound in financial markets, people familiar with the matter say.
Among the biggest potential winners is William Ackman’s Pershing Square Capital Management, which is sitting on a paper profit of more than $800m on investments in the debt and equity of GGP, according to people familiar with Mr Ackman’s fund. Other investors that stand to make big profits on holdings in the high-profile retail property owner include Centerbridge Partners, Elliott Associates, Goldman Sachs, John Paulson’s Paulson & Co and York Capital, the people said.
This article can be found at:
http://www.ft.com/cms/s/0/8ac70c30-d87c-11de-b63a-00144feabdc0,_i_email=y.html
"FT" and "Financial Times" are trademarks of The Financial Times.
Copyright The Financial Times Ltd 2009

2009-11-13T11:10:00.000-08:00

This article is from the Finanical Advisor magazine. I found it interesting and thought I would share the article.

Recession Changing Affluent Behavior
By Dorothy Hinchcliff
U.S. economic woes and stock market volatility have prompted changes in the investment and social behaviors of high-net-worth Americans, says a new survey of CPA financial advisors.

Clients say they're dining out less frequently and ordering less expensive wines and premium liquor brands, according to the survey of personal financial specialists (PFS) conducted by the American Institute of Certified Public Accountants. Many are having items repaired, rather than purchasing new ones and they're taking fewer or less expensive vacations.

CPA personal financial specialists are advising clients to rebalance their portfolios, reassess their tax planning and control their expenses and cash flow. Eighty percent of CPA financial advisors surveyed are strongly recommending their clients move toward a mix of growth and income securities. Sixty-five percent are also recommending more fixed-income securities. Forty percent are strongly recommending that their clients hold larger cash positions. Thirty percent are recommending commodities such as gold and precious metals.

In anticipation of future tax increases, 67% of CPA advisors said their clients are accelerating capital gains. Half of clients are increasing contributions to qualified retirement plans, such as 401(k)s and IRAs. In terms of wealth transfer, nearly 60% of CPA financial planners are recommending paying medical and/or education bills directly for family members and 50% are recommending gifting devalued assets.

The survey was conducted April 22 to June 4 via an online questionnaire e-mailed to members of the AICPA Financial Planning Membership Section. Of the 529 respondents, 57% work with individual clients with a net worth of $1 million to $5 million; 34% work with individual clients with a net worth of less than $1 million; 3% have individual clients with a net worth of over $15 million; 5% have individual clients with an average net worth of $6 million to $10 million; and 1% manage individual clients with a net worth of $11 million to $ 15 million. The average age range of clients is between 56 and 64. The margin of error was plus or minus four percentage points.

2009-11-12T20:45:00.000-08:00

This is a great presentation about the financial crisis and the 10 things we shouldn't, but probably will forget. Take a look and enjoy, remember, we just lived through an historical event of major proposrtions. The issue was and is "leverage," too much. We learned that in 1920-36. We talk about it all the time but we didn't learn the lesson. Will we learn the lesson this time? You tell me.
http://www.scribd.com/doc/22412231/Chanos-Presentation-Ten-Lessons-From-The-Financial-Crisis-That-Investors-Will-Soon-Forget-If-They-Haven-t-Already

2009-10-06T19:37:00.000-07:00

One of the longest-standing debates in investing is over the relative merits of active portfolio management versus passive management. With an actively managed portfolio, a manager tries to beat the performance of a given benchmark index by using his or her judgment in selecting individual securities and deciding when to buy and sell them. A passively managed portfolio attempts to match that benchmark performance, and in the process, minimize expenses that can reduce an investor's net return.

Each camp has strong advocates who argue that the advantages of its approach outweigh those for the opposite side.

Active investing: attempting to add value

Proponents of active management believe that by picking the right investments, taking advantage of market trends, and attempting to manage risk, a skilled investment manager can generate returns that outperform a benchmark index. For example, an active manager whose benchmark is the Standard & Poor's 500 Index (S&P 500) might attempt to earn better-than-market returns by overweighting certain industries or individual securities, allocating more to those sectors than the index does.

Passive investing: focusing on costs

Advocates, passive investing--sometimes referred to as indexing--have long argued that the best way to capture overall market returns is to use low-cost market-tracking index investments. This approach is based on the concept of the efficient market, which states that because all investors have access to all the available information about a company and its securities, it's difficult if not impossible to gain an advantage over any other investor. As new information becomes available, market prices adjust in response to reflect a security's true value. That market efficiency, proponents say, means that reducing investment costs is the key to improving net returns.

Indexing does create certain cost efficiencies because the investment reflects an index. Also, because trading is relatively infrequent--passively managed portfolios typically buy or sell securities only when the index itself changes--trading costs often are lower. Also, infrequent trading typically generates fewer capital gains distributions, which means relative tax efficiency.

Topic	Active Management	Passive Management
Objective	Attempts to beat benchmark performance	Attempts to match benchmark performance
	Contends pricing inefficiencies in the market create investing opportunities	Contends that it is difficult or impossible to "beat the market"
Approach	Securities selected by portfolio manager	Securities selected based on an index
Analytical Techniques	Picking specific securities and timing of trades	Overall allocation of assets across asset classes and diversification
Costs	Trading and the degree of liquidity for individual securities increases portfolio costs	Infrequent trading tends to minimize portfolio expenses
Proponents	Virtually all Brokerage Firms, Mutual Fund Companies, Market Timing Services	The Univ. of Chicago, Nobel Prize Recipients, Vanguard Group (John Bogle founder) Dimensional Fund Advisors, Barclays Global Investors, Warren Buffet, and Charles Schwab & Company

How has it all turned out? The index continues to match the index.

What about the active managers? In a study done for a 10 year period ended 2004 only 2.4% of the active managers beat the S&P 500 index. Statistically speaking 2.4% is LUCK. (Source Index Funds pg 52)

Why pay someone to pick stocks when only 2.4% get lucky and beat the market?
From our standpoint, investments are just one of many tools used to accomplish your goals and ambitions as expressed in your financial plan. Your plan is unique to you and the tools used to accomplish your plan should be unique to you and your plan.

Our planning process:

CLARITY: The process of "thinking clearly about the problem," transforming an opaque thought into a crystal clear vision.

CONFIDENCE: The process of "thinking clearly about the solution." Identifying the strategies to be applied to the planning gaps that bring forth the crystal clear vision.

COMFORT: A crystal clear vision coupled with success strategies brings a sense of comfort that we are on the path of achievement.

Result; Peace of Mind and Financial Freedom

2009-09-10T16:13:00.000-07:00

We Just completed a panel presentation to CREW (Commercial Real Estate Women) concerning Rebranding.
The other panelists were:
Lani Dorlack, Director of Sales, Greenspun Media Group
Reggie Burton, President, RB Communications
Dan Green, VP/General Manager, On Target Media
Michelle Stewart, Review Journal

It was a great experience discussing the options for professionals in the commercial real estate market on whether to and how to rebrand, maintain confidence, and move to the next level.

Thank you CREW for the opportunity to share with you.

2009-08-08T20:15:00.000-07:00

A friend and Associate of mine sent me an email which said;
"Just in case you want to start your morning with a checklist to remind yourself of all the actions you are taking that are leading you in the right direction!" she included the link to the YouTube presentation. it is at the bottom.

I listened to the piece on YouTube and thought is was worth the time and effort to write it down, and make the information available to you.

I also included the link to the presentation and Brenda's contact information. Brenda has been very help full to me! If you need help in organizing your life, or business, including your thought process, contact her, she can help.

8 words that lead to success

The words are listed below but the presentation, which takes 4 minutes, explains the value and implementation of the words. take the time, its worth it.

1. PASSION
2. WORK
3. GET GOOD AT IT
4. FOCUS ON IT
5. PUSH
6. SERVE OTHERS WITH VALUE
7. IDEAS
8. PERSIST

YouTube link
http://www.youtube.com/watch?v=Y6bbMQXQ180

Thanks to:
Brenda Prinzavalli
Principal, Balanced Organizing Solutions, LLC
http://www.balorg.com/

2009-07-29T12:31:00.000-07:00

I am pleased to have the opportunity to again be the Chairman of the Personal Financial Planning Task Force for 2009-2010. One of the key objectives of our Committee this year is to focus on ways to advance the Personal Financial Specialist (PFS) designation in our state as the premier financial planning designation.
I have been a PFS since 2000. I have given up my CPA practice and practice solely as a financial planner and investment advisor. I really like the work.
Some years ago the law concerning fee structure was changed and we were allowed to accept payment for services in a form outside our normal hourly billing rate method. There was a lot of fear among the membership that the profession would go the way of the “salesman” because of the fees and commission structure of some products and services we were allowed to provide our clients. That has not happened. The profession is as strong as it has ever been because, as CPA’s in public practice, our focus has always been on the client. That is the culture of the accounting profession and it is and it is how we grow up in this business. That is why we are the most trusted advisor, and is one of the reasons we should advance our standing in the financial planning arena, so that the client always comes first.
There are a few myths that should be dispelled.
Myth 1 If you work with another CPA, you could lose your tax preparation work to him/her or even worse you might lose your audit client.

Many CPAs involved in the financial planning are looking to shed their tax practice. Just as CPAs have a passion for audit, tax, CITP, ABV there are many CPAs who have a passion for PFS work. We can’t be all things to all people. It’s just too complex in this world to do it all. I refer out tax and accounting work. I need to focus on what I do best and so do all of us.

Myth 2 If I work with a CPA, my referral base will dry up.

By working with a CPA, and delivering superior quality financial services, it is likely that a whole new referral base will open up.
Every client referral that I get from a client that a CPA referred my way, I am always looking to add clients to the CPA who originally referred me in.

Actually CPA/PFS enhance the traditional accounting practice by:
· Enhancing Credibility
· Adherence to long standing ethics
· We speak the same language
· The client is our focus
· Duty to uphold the profession
· Increased referral opportunities
·
I would sincerely like your support and input on helping of initiative to move the CPA profession to the forefront of the financial planning arena. Please contact me at Richard@wealthadvising.com, or at (702) 362-3123 if you have interest in this endeavor. Together we can build a stronger, more resilient profession.

Richard Hanseen
PFP Task Force Chairman

2009-07-05T17:31:00.000-07:00

Seems like experiencing risk on the upside (gain) is ok, but risk on the downside (loss) is not ok. In financial terms, we talk about two types of risk, systemic (market risk) and business risk. Using golf as an analogy, business risk is the risk you experience with every round of 18 holes you play on the same course. Some rounds are very good. Some are not so good. They vary around your average score. (USGA handicap) Systemic risk (market risk) could be analogous to the difficulty of the golf course you are playing. (Its slope or difficulty)

Business risk has to do with the possibility that a business may fail. Diversification by holding a large number of the same type of companies eliminates business risk. If you own 100 companies that provide the same product or service the risk of one failing does not affect the whole. Likewise, the more golf you play the less an abnormally bad score will impact your over all game. Systemic (market risk) has to do with the risk we pay for providing capital to the capital markets. So, the bigger the risk the greater our return should be. Systemic risk cannot be diversified away. Nor , as in golf, can you change the difficulty of the course you are playing on.

Risk is measured by accumulating data on the “universe” being studied and converting that data into a statistical explanation. (All of your golf scores) The key words are mean and standard deviation. Mean is the average occurrence. (Your USGA handicap or average score) The average occurrence becomes the expected occurrence. The risk of attaining the mean is called the standard deviation or the variation around the mean. (Scores above and below your handicap or your average) The measurement of how the results vary around the mean and by how much. (How often do you play exactly to your handicap?) Let’s add a couple of numbers. Let’s say you are a 15 handicap. A 15 handicap equates to an average score if par plus fifteen (72 +15 = 87). How often do you shoot exactly 87? Typically the scores will seldom be exactly 87. Instead they will vary widely. Scores from 82 on the low side to 95 on the high side would be common. In this analogy, this range of scores will include 95% of the occurrences (2 standard deviations). Occasionally you will shoot 80 and 100. Statistically speaking we have included 98% of your expected golf scores (3 standard deviations). Occasionally you will shoot lower maybe 79 or higher maybe 115 (4 standard deviations). These scores don’t happen often but they do happen.

If the mean return on a portfolio is 5% and the standard deviation is 9%, this portfolio is expected to have a rate of return between 32% gain and 22% LOSS.

Statistically plus or minus two standard deviations includes 95% of the occurrences (as shown in the table above). Three standard deviations is said to include 98% of the occurrences. A portfolio with a standard deviation of three is expected to produce a range of returns between a 32% gain and a 22% LOSS (as shown in the table above).

In the current economic environment, we are experiencing returns outside the 98% range. These experiences do not happen often, but when they do they are very impactful. They are also not outside the realm of expectation. to continue our golf analogy; For instance, the US OPEN, played the weekend of June 21, ,had to be finished on Tuesday due to rain. The first time since 1985. Not often, but it does happen.

In the financial planning and investment world we are trying to establish a plan of accumulating wealth to be used in later years. (A par) Therefore, the main focus is limiting downside risk by utilizing a mix of institutional class investments that lowers risk and maintains return. At the same time, we have to accept the fluctuations (risk) in the market if we are to avail ourselves of market returns.

2009-06-29T16:13:00.000-07:00

In this presentation Mr. Booth discusses the importance of balancing volatility risk and purchasing power risk when investing for retirement. He explains that T-bills have not produced the real returns necessary to preserve living standards over the long haul, and illustrates how investors can manage both types of risk through an appropriate commitment to stocks.

An entrepreneur and visionary marketer who built his successful investment firm on finance principles he learned at the University of Chicago Graduate School of Business has returned the favor by making the largest donation in the University's history and the largest gift to any business school in the world, the school announced Thursday, Nov. 6.

The donor is David G. Booth, founder and chief executive of the investment firm Dimensional Fund Advisors, his wife Suzanne and their family. Booth received his M.B.A. from the school in 1971. The combination of an up-front payment, the income stream and the equity interest provided by the Booth gift is valued at $300 million.

http://www.dfaus.com/library/videos/retireme/

2009-06-09T10:14:00.000-07:00

Investments styles and methods can be confusing.
In the next few sections I am going to provide you with some information concerning investment issues so you can make use of these concepts when you invest. Each one is designed to provide you with clarity; one of the three keys I hand to you for unlocking the investment doors. There are many questions and a smart investor should be aware of the answers.
For instance:
What is the difference between a Stock Broker (solicitor) and a Registered Investment Advisor (advisor)?
Do you need one or can you do investing by yourself?
What do the terms allocation and diversification have to do with investments?
What is passive investment and what is active investment?
Can you time the markets behavior?
Can you pick stocks that will be winners and avoid the losers?
Is there a money manager that outperforms the market on a steady basis?
What are the assumptions underlying each and which is best for you?
Do you know what a Risk Quotient is? Do you know what yours is?
If these questions make you feel overwhelmed, take a breath and keep reading. Providing you with clarity on these questions will help develop the confidence you need to make your next step. We are going to take them one at a time and this week

I would like to discuss the difference between a Stock Broker and a Registered Investment Advisor.
A Stock Broker has a license to “solicit” persons to purchase securities aka stocks and bonds. They are “an agent that charges a fee or commission for executing buy and sell orders submitted by an investor.” http://www.investopedia.com/terms/s/stockbroker.asp The most obvious example would be a person who works for Merrill Lynch or Morgan Stanley. They are agents and employees of that firm. A Stock Broker’s loyalty and responsibility is generally to the firm he/she works for.
A Registered Investment Advisor is a person who provides investment advice and is registered with the SEC or State of Residence depending on the amount of assets managed. http://www.investopedia.com/terms/i/investmentadvisor.asp Mutual fund companies, such as the Vanguard group, are generally included in the definition of Investment Advisors because they receive fees from asset-based compensation.

Most Investment Advisors charge either a flat fee for their services or a percentage of the assets being managed. With this form of compensation, there are very limited conflicts of interest between Investment Advisors and their clients because the advisor will only earn more if the clients' asset base grows.

Strategic Wealth Advisors is a Registered Investment Advisor. The founder is a CPA and holds the designation of Personal Financial Specialist (PFS). The designation is granted by the American Institute of Certified Public Accountants to those who have completed educational and testing requirements required by the Institute.
Next Friday I am going to discuss risk. What is it? Did you know it is what you get paid for when you invest? What is your tolerance for risk?

2009-05-31T07:58:00.000-07:00

2009-05-31T05:42:00.000-07:00

In an effort to provide educational material to our clients I have Attached an interview between knowledge@wharton, (The Wharton School of Finance) Professor Jeremy J. Siegel and Robert Stambaugh.

In the interview both professors discuss volatility in the markets and whether they believe they are a logical place to invest for the long term.
The following link will take youdirectly to the source and you may listen to the audio interview. .
Why Stock-price Volatility Should Never Be a Surprise, Even in the Long Run: Knowledge@Wharton Published : April 29, 2009

Stock market investors have suffered deep losses in the past 18 months, challenging the belief that stocks are the best long-term investments. Indeed, Wharton finance and economics professor Robert Stambaugh recently coauthored a paper titled, Are Stocks Really Less Volatile in the Long Run?," which suggests that equities are subject to bigger price swings than previously understood. The research adds a new perspective to the work of Wharton finance professor Jeremy J. Siegel, author of the book, Stocks for the Long Run, which says stock returns more than offset risks if you stay with the market through its ups and downs. In a recent interview with Knowledge@Wharton, the professors described their views about the market's long-term behavior.

An edited transcript follows.

Knowledge@Wharton: Professor Stambaugh, your work finds that volatility in stocks -- the ranges of ups and downs -- can be considerably more severe than most people believe. And your paper focuses on uncertainties that cloud the future. Can you put this in laymen terms for us?

Robert Stambaugh: Generally when we think about volatility in the stock market, we think about the value of the market fluctuating, typically around some sort of trend or long-term expected rate of return. Our work makes the point that uncertainty about that trend itself adds to the uncertainty that investors face and should be perceived by them much like volatility -- much like the fluctuations around the trend. That uncertainty about the trend itself becomes more important the further into the future you project investment outcomes. So our paper basically makes the point that to an investor with a long horizon, stocks actually are riskier per period. That is, the rate at which risk grows over the horizon such that it makes the investment riskier over the long run. This is basically in contrast to what we think of as more conventional wisdom that says over the long run, fluctuations in the stock market will to some degree cancel each other out and, therefore, make risk to an investor in the long run look [smaller] per period than [it would] to a short-run investor.

Knowledge@Wharton: There are a number of factors that you say contribute to this uncertainty about the future. What are the most important of those?
Stambaugh: Probably the most important is just uncertainty about the overall long run trend. The other feature of the stock market that contributes to uncertainty is the fact that at some points in time we think the expected rate of return is higher than at other points in time. In other words, over time the rate of return that you can expect to earn over the short- and intermediate-terms fluctuates. The fact that the expected return fluctuates also adds to uncertainty because we do not know -- for example -- if expected returns are currently high, which many of us would guess they are. We don't really know how long they're going to stay high. That may in part depend on how quickly the economy recovers. That additional uncertainty also contributes to higher uncertainty in the long run.
Knowledge@Wharton: What would be an example of a kind of event that could occur that people simply can't take into account ahead of time? I saw in one story a mention of global warming, for example. Stambaugh: Global warming is interesting. It provides an interesting analogy to this concept because ... we might be very uncertain about how quickly the Earth is warming, but that uncertainty
Knowledge@Wharton doesn't much impact our uncertainty about crop output and economic output next year. But if we look 50 years down the road ... uncertainty about the rate [at which the Earth is warming] has a much bigger impact on our overall uncertainty.
Knowledge@Wharton: Professor Siegel, your work in Stocks for the Long Run, and in the years since then, talks a lot about the long-term trends -- a couple of hundred years of stock market data, and bond and cash returns -- [showing] that volatility does tend to even out over time. Is that right?
Jeremy Siegel: Yes. My empirical work -- which tracks stock returns since the beginning of the 19th century, so now we have a little bit more than 200 years of data -- showed that stock returns display what economists call "mean reversion," or reversion to the mean. In the short run, there seems to be a lot of volatility, uncertainty. But if you draw a trend line... it tends to fluctuate around that. And if I understand Rob's work, he still agrees there is mean reversion.
Stambaugh: Yes, exactly.
Siegel: He's not denying it and most researchers -- actually even before me -- had suggested [mean reversion]. When I did it, it got stronger. And almost everyone has confirmed it. So the mean reversion story, I think, it is still there. What Rob is bringing up is, as he calls it, trend uncertainty. That analogy to global warming is a good one in the sense that ... crop yields fluctuate a lot year-to-year . But we know that over 5- or 10-year periods they tend to get back to a mean. But if there's going to be some big change in the future -- and what Rob seemed to say is even with 200 years of data -- you can't really be that certain of the long-term trend. In my first chapter in Stocks for the Long Run ... I say that we could be seeing that the last 200 years are the golden age of capitalism. When we look through the centuries, there have been an awful lot of huge changes. That golden age may be over. So, even 200 years doesn't give you confidence. We have empires that have ruled 1,000 years and more and then they fail. That sort of big picture uncertainty really could be a dominant feature looking far into the future.
Knowledge@Wharton: We're all familiar with the warnings we get from our brokers when we invest in something, that past performance is not a guarantee of future results. So most people recognize that there are uncertainties about the future, but when we talk about volatility and uncertainty, a lot of people automatically translate that into risk . They look at the downside. But we also have surprises on the upside, don't we? Such as technological breakthroughs that nobody could imagine earlier, things that improve productivity... .So, professor Stambaugh, according to your work, it's possible not just that results could be worse than they have been in the past, but that they could be better?
Stambaugh: Exactly. We’re not making any sort of bullish or bearish statement. We’re just saying that whatever projection one makes about the trend or what's likely to happen, you can have big surprises on the upside or downside. And part of what contributes to the overall uncertainty in the long run is just uncertainty about things like the trend. Indeed, we were somewhat unsure when we began this whether 200 years of data that Jeremy has very carefully assembled -- and we're very grateful to have available -- would indeed leave one with a lot of uncertainty about this trend, or whether it would resolve a lot of that uncertainty. This is where we bring statistics to bear on the problem, which allows us to quantify how much uncertainty will be left over... . And, indeed, we found out that even... two centuries of data leaves one with enough uncertainty that as you look at the implied variance of stock returns over the longer horizons, the risk actually does rise significantly with [the time] horizon.
Knowledge@Wharton: Professor Siegel, as I recall from your book, you don't just say this is what the numbers average out to over time -- when you talk, for example, about the greater returns of stocks vs. bonds and cash. But you have some reasons why you think that has been the case, right? What are they?
Siegel: Our general models take individuals as what we call risk averse. People have to be paid to take on risks. Since stocks are the residual after bonds and other claimants have their first say, it's natural that stocks would have a higher return. What has tended to surprise economists -- there are a ton of papers that have been written -- is that extra return seems to be very generous over long
Knowledge@Wharton There has been a lot of literature about what's called the equity premium puzzle, written in the mid 1980s by a few economists. Given the macro fluctuations, it seems that equity holders actually get a very rich premium. There have been some modifications and there's been a lot of reworking on that. The premium I find over the long run on stocks over bonds is about 3% a year. And that's a compound annual premium. That premium -- although in the short run it can certainly be up and down over periods of decades and generations and even centuries -- has been relatively constant and, therefore, for someone planning 30, 40 years into the future for their retirement, that difference could obviously accumulate to a very large sum in favor of stocks.
Knowledge@Wharton: Professor Stambaugh, when you look at your findings, regardless of whether volatility may be higher in the future than people expect, what about the relative returns of stocks vs. bonds vs. cash. Do you draw any conclusions that an investor could put to some practical use?
Stambaugh: We've not yet looked at this same issue with regard to nominal bonds where you have things like inflation risk present. So I'm afraid I can't yet tell you what our conclusions would be there. But certainly the issue with regard to asset choice -- if you [want to] make a simple stock versus cash kind of choice or stocks versus a TIPS [Treasury Inflation Protected Securities] or index bond -- our ... best estimate of what the spread would be is what it's been historically.
Knowledge@Wharton: Between stocks and bonds?
Stambaugh: Between stocks and bonds or stocks and cash. All we're saying is that there is uncertainty about whether that average spread will in fact be realized by investors over time. And the uncertainty -- when you take into account all its components -- is indeed higher for longer-term investors.
Siegel: What Robert is saying is very important. These trend uncertainties apply to other assets, too. Stambaugh: Absolutely.
Siegel: One could say that ... nominal bonds were an inflation trend. We've had inflation --we went up to 13% -- but we know countries that have gone into hyperinflation. The risk of that may be considered a trend uncertainty -- suddenly that breaks down . Rob mentioned TIPS, which are generally more protective because the government promises to pay according to the consumer price index if it isn't manipulated, if there are not price controls -- and if the government can get enough revenue to pay it. There are certainly uncertainties there in the long run. So in some sense, the trend uncertainties that Rob's work shows apply to all other assets. I don't know whether that would lead you -- and I would want to ask Rob about that -- to recommend to people that they reduce their stock allocations as a result of this uncertainty, given that it can, in fact, affect other asset classes, too.
Stambaugh: As I said, we haven't looked at a wide variety of asset classes here. But if one were making an allocation between stocks and cash, and you had a desired allocation ... and then you became aware of this additional uncertainty, you would reduce your stock allocation. Again, we're not making a prescription about what that stock allocation should be. Our point is simply that for a long-run investor this consideration has a bigger effect.
Siegel: But, Rob, have you found the same trend uncertainties affect bonds? Let's say the nominal bonds. Could you make a claim that you would reduce stocks versus bonds under those conditions?
Stambaugh: No. It’s quite possible that if we were to look at nominal bonds -- and that would be an extension because there you do have substantial trend uncertainty, particularly with regard to inflation. It’s quite possible that this same kind of uncertainty in nominal bonds could well make them less attractive. So that's an extension to our work that we hope to pursue but I just can't give you an answer right now.
Knowledge@Wharton: And I can hear a lot of listeners out there gnashing their teeth and saying --well, look, I live in the real world here and I'm worried about my retirement. Are you telling me that if my asset allocation model used up to this point said I'm a 30-year-old and I should have 70% in stocks, that I should have 40% in stocks? What decisions should people make? Stambaugh: Sorry, I can't help you there.
Knowledge@Wharton: Jeremy, what do you think?
Siegel: It is easy to jump to the conclusion that: "Oh my goodness, stocks are riskier. Let me get into these other asset classes." Global warming really happens. These are big trend-changing events that really could affect all assets.
Knowledge@Wharton: And just to go back for a second, Rob did say that these uncertainties could be uncertainties on the good side. Good things can happen as well.
Stambaugh: Yes, except that uncertainty is never viewed as a good thing for an investor. In general, we think of -- as Jeremy said earlier -- investors being risk averse. So as you crank up uncertainty, you need to provide some reward. The fact that you can be surprised on the good side, generally, to a risk averse investor, doesn't offset totally the fact that you could be surprised on the downside.
Siegel: In my book, Future for Investors, I speculate a bit about trends of technology and the fact that the communications revolution suddenly opening up -- connecting people and research centers in a way that hasn't been done before -- could ... increase growth. There are potentials for very favorable surprises in terms of inventions, discoveries, innovation, etc. .. . so, in a way, Rob is right. You don't generally like uncertainty because the downside is more hurtful than the upside is helpful. But there can very well be that upside, too.
Knowledge@Wharton: But an investor would not be irrational to sit there and say, "Well I realize there are uncertainties of global warming and these other kinds of things we've mentioned, but at the same time maybe somebody will invent a breakthrough battery for electric cars, or nuclear fusion will suddenly become practical," or something like that.
Siegel: It's not too late for that. Some people say there's already too much carbon dioxide in the atmosphere, but I understand what you're saying.
Knowledge@Wharton: I just want to turn finally for a minute or two to the market of the past couple of years, which has been just terrible for people. The S&P 500 is still down about 45% from its peak. Are these events that we have seen in the last couple of years anomalies or are they things that people should expect to happen every once in a while? Where do they fit into your view of the trends over the years?
Siegel: We had a 20-year period of very low volatility of real economic variables. We had two very mild recessions. If you look at quarterly changes in real GDP or any of the real economic factors, their variability went down. That lulled a lot of people into thinking, "Hey, we're in a more stable world."That led to a lot more leverage and, therefore, a ripple -- which I interpreted as not being something disastrous -- turned into a tidal wave because of the leverage firms took. It pushed us back into a recession which I now look at as about as severe as I remember in the 1970s and 1980s... . Obviously there are people out there talking about the 1930s.We are miles away from that at the present time. But it looks like we have moved back at least on this recession to the severity of the '70s and '80s.And that period of low volatility -- which economists called "the great moderation" -- seems to be over and could have been an anomaly.
Knowledge@Wharton: And your view?
Stambaugh: I guess I should take the opportunity at this point, since you raised the issue of the current economic environment, to point out that I would not want to claim as we sit here currently that stock volatility in the long run is going to be higher than current short-run volatility. We were at very historic highs in terms of short-run volatility. The VIX, Volatility Index, has hit all-time highs recently. So certainly we expect that sort of short-run volatility to moderate. I wouldn't want readers and listeners to misinterpret our work as claiming that we're making a statement about the current environment where we think long-run volatility is going to be even higher than it is today. Our paper is more about what a more typical environment -- or more average environment --
Knowledge@Wharton for volatility would offer an investor in terms of short-run versus long-run. That is, in a more typical environment we would argue that stocks look riskier in the long run, but certainly today stock's volatilities are at all-time highs -- at least over relatively short horizons such as those measured by things like the VIX.
Knowledge@Wharton: So you would not expect this kind of volatility to continue for long periods? Stambaugh: I would certainly hope not. I don't expect it -- I don't think anyone does -- and we'd all be very surprised if it were to continue.
Knowledge@Wharton: That gets us to the last question. It is customary to ask professor Siegel for his thoughts about what the markets and the economy are likely to do over the next year or two.
Stambaugh: I will defer to Jeremy on that question.
Siegel: I put my head on the chopping block each time I'm here. I was giving a talk this morning and I said, "I can finally take off my bullet-proof vest."I talk about stocks and there are a few people who say, "Maybe that is better."What the rally reflects is that people are now saying, "You know what? The world isn't coming to an end."Obviously I'm saying that people were really discounting [the market] because we had a financial shock almost as bad as the 1930s, but certainly not an economic shock with the same tremendous response. So, again, it's going to be a recession just like we had in the '70s and '80s, and those periods have always been very good buying opportunities for stock investors. So you missed a part of this rally, but it is still a very reasonably priced market and you will be very amply rewarded in the long run.
Knowledge@Wharton: So you still believe in stocks for the long run?
Siegel: Oh, yes, I definitely do. Let me just say that ... once you're down 50% from the high -- and we're actually down a little bit more but we've come back -- the returns from those levels are even greater than the long-run mean. We can't be certain of that, but you face historically even better prospects.
Knowledge@Wharton: Thank you, and professor Stambaugh, thank you very much for your paper as well. It reminds us that we can't always count on the past being prologue.

All materials copyright of the Wharton School of the University of Pennsylvania

2009-05-23T11:40:00.000-07:00

Clarity: Replacing fear and doubt with information and understanding.
I have attached an article written by Eugene Famma

2009-05-04T12:10:00.000-07:00

I received an email from a friend reminding me that life is about the finish line. The Human Spirit wants to make an impact and it needs to finish strong to do that. Regardless of the amount of material goods we leave our true legacy is how we lived our life to the very end. This book is about Golf and Life….they are pretty much the same.
Enjoy the read!
Dying to Make A Difference
(Excerpt from Finish Strong)
By Dan Green

"I have tried my best to show what it is to persevere, and what it means to be strong."
--Miles Levin
After a two year battle with cancer, teenager Miles Levin, unfortunately lost his fight.However, during his final years, he achieved a level of self-awareness, courage and wisdom that most of us will never reach.

Miles chose to post his observations on carepages.com blog and through his writings
he inspired thousands of people. He wrote with amazing grace and eloquence. Some
of his posts were short:

"Dying is not what scares me. It's dying and having no impact."

Some were long and philosophical. But each post served a significant purpose in that
it challenged the reader to think more deeply about life, death and making a difference.Through his expressions Miles left the world a better place than he came into it. I canonly hope I do the same with my life.

Here's what Miles said just one month after being diagnosed with terminal cancer:

"I went to the driving range the other day and I was thinking...I was thinking about how you start out with a big bucket full of golf balls, and you just start hitting away carelessly. You have dozens of them, each individual ball means nothing to you so just hit, hit, hit.

One ball is practically inconsequential when subtracted from your bottomless bucket.
There are no practice swings or technique re-evaluations after a bad shot, because so many more tries remain.

Yet eventually you start to have to reach down towards the bottom of the bucket to
scavenge for another shot and you realize that tries are running out. Now with just a
handful left, each swing becomes more crucial, so between each shot you take a couple practice swings and a few deep breaths.

There is a very strong need to end on a good note, even if the preceding shot was terrible, getting it right at the end means a lot. You know as you tee up your last ball, 'This is my final shot, I want to crush this with perfection; I must make this count.'

Limited quantities or limited time brings a new, precious value and significance to
anything you do. Live every day shooting as if it's your last shot, I know I have to."
--Miles Alpern Levin, July 7, 2005

Like Miles suggested, we should treat each day as a precious ball of life. Take your time, take a breath and make a practice swing. Make each shot count and most of all finish strong!

2009-03-21T19:26:00.000-07:00

2009-03-19T17:56:00.000-07:00

"Leave it to the Americans. They'll do the right thing after they've exhausted all other possibilities."
Winston Churchill
From an interview: Berry Ritholtz interview with Steve Forbes
And I think that we're on the path towards that.

2009-03-18T14:09:00.000-07:00

"The American Republic will endure until the day Congress discovers that it can bribe the public withe the public"s Money."--Alexis de Tocqueville

2009-03-10T10:32:00.000-07:00

What a profound short little paragraph that says it all!!

"You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it."
~~~~ Dr. Adrian Rogers, 1931

2009-02-16T20:05:00.000-08:00

My grandmother used to tell me “haste makes waste.” You know what, she was never wrong. She also used to tell me, “never make emotional decisions because they almost always turn out to be the wrong decision.”
Some time ago I was involved in a small, by today’s standards, underwriting. If memory serves me correctly we raised about $250 million dollars. It was underwritten by Merrill Lynch. There were a number of experts involved; they included our legal counsel, Merrill’s legal counsel, our auditors locally, and their main underwriting group in Los Angeles. We spent about 9 months doing the appropriate strategizing and due diligence process to make sure everyone was on the same page. That every t was crossed and i dotted. We worked very hard during that period. Because of the nature of the underwriting we also had an independent auditing firm reviewing some unique calculations that then had to go to our auditors. Remember these are all national concerns trying to insure the strategy would succeed and the investors would be protected. So it took 9 months and all this effort to raise $250 million.
But in less than three weeks a group of naïve senators and representatives came up with over 1000 pages of stuff that no one was allowed to read and spent $787 billion.
Doesn’t that make you a little nervous? It does me.
Let me say that again $250 million = 9 months of experts focused on one project.
Versus less than 3 weeks, with no experts, instead 306 congressmen spent $787 billion of your dollars without reading the document they voted on. There were no hearings; there was no review of other possible solutions, none, or very little, discussion.
My point is, regardless of your politics, this is a travesty. It is a mockery of what our forefathers intended. It does represent exactly what they were afraid of; if too much power were to end up with too few people. That’s why all the checks and balances are in place. Had the checks and balances been followed these expenditures would be much diferent.
They say this package will create 200 to 400 million jobs. Do you know about how much each job costs? It is roughly $200,000 to $400,000 per job. Do you know how much these jobs will pay on average? My guess is $50,000. Do you know how much in taxes the government will receive from these new jobs? Social Security and Medicare tax of $3,825 plus income tax of $4,199. So how long will it take the government to get back the $200,000 to $400,000 it spent to create these jobs? Well, if the jobs created are 200 million it will take 49.85 years to get the money back. If the number of jobs created is 400 million it will only take 24.92 years.
A typical business deal requires a payback in 5 to 10 years.
Haste does make waste.
What's your take?

2009-01-17T12:57:00.001-08:00

I have a tax client who uses a large broker dealer for her investments. She is 67 years old and this money is the only money she has for her retirement. Her parents lived into their 90’s. In other words she needs to her investment to last for another 25 to 35 years. She was not asked to complete a Risk Tolerance Questionnaire. The broker invested her money in a portfolio of international stocks. Her portfolio is down 50%. Had she invested in a 60/40 portfolio her portfolio would be down but by 21% instead. Another way of saying that is she would have 79% of her portfolio in tact instead of 50%.
Do you know what your capacity for risk is? If you did do you think your investments might look different? If you would like to know what your appetite for risk is complete the questionnaire at http://strategicwealthadvisers.com/question.html . We will provide you with a report showing what your risk tolerance is given your answers.

2008-12-21T06:50:00.000-08:00

I received a Christmas card from one of our very prominent families in Las Vegas. Here is what it said

“What after all has maintained the human race on this old globe, despite all the calamities of nature and all the tragic failing of mankind, if not the faith in new possibilities and the courage to advocate them.”

Jane Addams
First female recipient of the Nobel Peace Prize

Wishing you new possibilities.

2008-12-12T11:15:00.000-08:00

I have been torn about writing concerning the UAW and the big three automakers, but I must say there are truths that cannot be avoided.

It makes no sense to provide capital to a failing business model. The markets will not participate because the model of the big 3 is broken. An example, I have a friend who works for the auditing firm that audits one of the major participants. His comment, 3 years ago, was they are not in the business of making automobiles but rather paying employee benefits.

I don’t think we should provide money to a broken system that will inevitably require more capital to cover existing excesses. I prefer a structured bankruptcy. Debt needs to be converted to equity. Costs associated with some contracts need to be eliminated and that can only be done through a bankruptcy process. Remember, the airlines have been through this process many times and you still get a seat on the plane when you travel.

I do not like the idea that people will lose their jobs!! But at the same time we cannot continue to provide capital to a failing business model that includes excessive wages.

There are very productive plants that exist around the world producing automobiles. Those plants need to be brought to the U.S. The problem is they are automated and have a smaller need for labor. I guess it is time to come to grips with the idea that capital goes where is most efficiently used and labor also. The Auto Industry is economically speaking, out of balance, and trying to find that elusive economic term, equilibrium. Let’s restructure, become more efficient, and keep our production capacity at home. That is the way to save jobs that will continue to be of value.

I look forward to your comments.

2008-11-21T15:57:00.000-08:00

I had the opportunity to represent the AICPA on local television yesterday. The subject matter was saving and investing for the future. It was directed at the 25-34 age group.

It seems that 25-34 year olds are heavily in debt as compared to other age groups. Statistics reveal they have 70 cents of debt for every $1 of assets. That is quite high. They are not saving but rather using debt to acquire homes etc.
During my preparation a client came to mind. She is 91 now and has about $4 million invested. Mrs. B is her name.

Mrs. B tells the following story; we lived in a small farming town in Kansas. My mother took in laundry to make ends meet. We were dirt poor. I remember sitting at the kitchen table one evening with my brothers and my mother. We were talking about the times. They were very bleak. I slammed my fist on the table and screamed I will never be poor again! I left for California soon after that. I worked for the Studios. Since I didn’t have an education I worked very hard to make up for it. As time went on I was rewarded but I never spent all the money I made. I always saved and invested a good portion of it because I never wanted to be poor again.
It seems this story is appropriate for current times. That story was set in 1929, a period of significant market decline.

Many news casters are comparing today to 1929. There are some similarities but many differences. I don’t believe we are going into a depression! One thing is for sure, THE HUMAN SPIRIT WILL PREVAIL! And Mrs. B is the proof in the pudding; she is the embodiment of the human spirit.

The human spirit has overcome every major challenge ever handed it. It overcame the depression of the 30’s and every financial crisis to date. It has overcome war and natural disaster. It just doesn’t’ give up, no matter what.

The fact of the matter is, even given today’s economic turmoil, we are still in the best position we have ever been in the history of the world.

I believe in the human spirit and that it will triumph over all.

Range of Returns

Range of Returns

2 Standard deviations (5%+ or - 2x9%)

3 standard deviations (5%+ or - 3 * 9%)

2008-10-24T16:32:00.000-07:00

I know it all looks bleak but here are
Ten Reasons to Be Cheerful

Ladies and gentlemen, please raise your half-empty glasses and view them as half-full, because here are ten reasons to be cheerful about the global economy and the state of investment markets:
1. An awful lot of bad news is in the price. It is the nature of markets to assimilate new information quickly, which means that as we all sit around feeling gloomy, markets have usually moved on.
2. In bad times, demand for risky assets falls. So the compensation for taking this risk needs to adjust higher to attract investors. Lower share prices relative to fundamentals just means expected returns are higher.
3. Governments in the US, Europe, the UK and Australasia are pulling out all the stops to recapitalize their banking systems and get credit flowing again. The extraordinary response of risk assets to recent moves on this front shows how important confidence is in supporting markets.
4. Central banks have mounted a globally coordinated reduction in benchmark interest rates. Markets are priced for further moves. Insofar as banks pass on these lower borrowing costs, this will support business and consumer activity, buttressing the real economy.
5. Some governments are providing fiscal stimulus to bolster economic activity. Australia, for instance, recently unveiled a $A10.4 billion package. In the US, there is talk of a post-election stimulus plan.1
6. Oil prices, which until recently were seen as a major threat to global growth, have retraced significantly. From late July until early October, crude oil futures fell by 45 per cent from a record $US147.27 a barrel.2
7. According to Dimensional research, the average duration of bear markets in the US from the end of 1965 until the middle of this year was about 14 months.3 This one has now lasted just on a year. This is not to claim it is near an end, but the longer it goes on, the closer is the next bull market.
8. Someone is buying. It's important to remember that on the other side of the trade from all those people liquidating their portfolios and mutual funds are other investors who are happy to buy. While some are market timers, others see this as a long-term buying opportunity.
9. Unless you have sold your holdings, your losses so far are only on paper. Market recoveries after prolonged downturns tend to come in quick sudden bursts. All you need to do to capture those recoveries is to stay in your seat.
10. The sun will come up tomorrow. Anxiety over the market downturn is understandable. But there have been crises before. The world moves on and risk appetites have a tendency to reassert themselves.