Understanding Social Security Survivors Benefits is Worth the Effort

April 21st, 2014
office pictures may 2012 002 150x150 Understanding Social Security Survivors Benefits is Worth the Effort

Jane Young, CFP, EA

There are a myriad of different Social Security options available to widows and widowers.  If you have lost a spouse, it is worthwhile to take the time required to fully understand your Social Security benefits. As a widow or widower, you have the choice of taking Social Security based on your own work record, or Social Security based on the work record of your spouse (survivor benefits).  You are eligible for 100% of your deceased spouse’s basic benefit, at full retirement age.  Reduced benefits are available as early as age 60, and if you are disabled, benefits can begin at 50.  The full retirement age is 66 if you were born between 1945 and 1956, and gradually increases up to 67 if you were born between 1957 and 1960.  The normal retirement age for everyone born after 1960 is 67.

If you started taking Social Security on your own record, before the loss of your spouse, call Social Security to see if you can receive more in the form of survivor benefits.  One nice feature of Social Security survivor’s benefits is the option to begin taking benefits based on your own earnings record, and later switch to survivors benefits.  Conversely, you can begin taking survivor’s benefits and later switch to benefits based on your own work record.   Unlike standard spousal benefits, you can switch even if you started taking benefits prior to reaching full retirement age.

Generally, you cannot get survivor’s benefits if you remarry before age 60.  After age 60, remarriage does not impact your benefits.  Additionally, at age 62 you are eligible to get benefits based on your new spouses benefits.  You may have the choice between benefits based on your own work record, benefits based on the work record of your deceased spouse, or benefits based on the work record of your current spouse.  Unfortunately, you have to choose from one of these options.  If other family members are entitled to survivor’s benefits, there is a limit to the total amount that can be paid to a family.

 If you receive a pension from a federal, state, or local government job where you did not pay Social Security, your survivor’s benefits may be reduced.    Your Social Security benefits will be reduced by two thirds of your government pension.  Additionally, if you collect Social Security based on your own work record, and you receive a pension from a job where you did not pay Social Security, your benefit may be reduced due to the Windfall Elimination Provision. Be sure to discuss this with your Social Security representative before you file for benefits.

Social Security survivor’s benefit can be very complex; please take the time to fully understand your options.  Before filing for Social Security, research the options available to you at www.socialsecurity.gov and meet with a Social Security representative to fully understand your choices.

Are Bond Funds Safe as Interest Rate Rise?

April 8th, 2014

 

office pictures may 2012 002 150x150 Are Bond Funds Safe as Interest Rate Rise?

Jane Young, CFP, EA

A key tenant in properly managing your investments is to maintain a well diversified portfolio.  A well diversified portfolio usually contains a mix of stock or stock mutual funds and fixed income investments.  Stock mutual funds are long term investments that can provide you with growth over a long period of time. Fixed income investments can provide you with short term liquidity, income, and a buffer against stock market volatility.  Bond funds have long been a staple in most fixed income portfolios.  However, with the threat of rising interest rates, many bond funds may no longer provide the stability you are seeking in the fixed income sleeve of your portfolio.

Interest rates, after dropping close to all time lows, have begun to increase.  The bond market had experienced what is commonly referred to as a 30 year bull market. Until recently, interest rates had been steadily dropping since the 1981.  As interest rates fell, bond owners experienced a corresponding increase in the value of their bonds.  Generally, when you buy a bond and interest rates decrease, the market value of the bond will rise. On the other hand, if interest rates increase, the market value of the bond will drop.  If you hold an individual bond to maturity, assuming the issuer does not default, your entire principal will be returned, regardless of the prevailing interest rate. 

Many investors prefer bond mutual funds over individual bonds because they provide greater diversification, liquidity and professional management.  However, recently bond funds have experienced decreasing yields.  As bonds within mutual funds mature, they are replaced with lower earning bonds.  In an environment of increasing interest rates, another major concern is the potential loss of principal.  If many investors decide to sell their bond funds, the fund managers may be forced to sell individual bonds at an inopportune time.  The manager may be forced to sell bonds before maturity, at less than the face value.

The duration of a bond fund is a measure of it’s sensitivity to changes in interest rates or interest rate risk.  For example, if the duration of a bond fund is 5 years, and interest rates decrease by 1%, the value of the bond fund should rise by about 5%.  If interest rates increases by 1%, the value of the bond fund should drop by 5%.  Short term bonds have a lower duration and long term bonds have a higher duration.  You can find the duration of most bond funds at Morningstar.com.

With the threat of higher U.S. interest rates, consider moving your longer term bond funds into short term bond funds or international bond funds.   For greater security of principal, move your bond funds into an FDIC insured CD ladder or equity indexed CD.   Bond funds usually represent the safe portion of your portfolio,  and some of your principal may be at risk as interest rates rise.

Are You Ready for the Unexpected?

April 1st, 2014

 

office pictures may 2012 002 150x150 Are You Ready for the Unexpected?

Jane Young, CFP, EA

The recent fires remind us how crucial it is to plan for unexpected financial misfortunes.  An important part of financial planning is ensuring you are adequately protected from life’s calamities.  You can’t control what life throws at you, but you can ease the blow by being prepared and keeping your financial life in order.

This may seem obvious, but we have a tendency to procrastinate when it comes to insurance and other precautionary measures.   You should always maintain an emergency fund of three to six months of expenses.  Even with good insurance, it may take time for the insurance company to reimburse you for a loss.   You should review your insurance coverage on a regular basis.  While most of us have home and auto insurance, things change and you may need some adjustments.  I encourage you to meet with your insurance agent at least once every three years or when there is a major change in your life.  Even if you are adequately insured, it is advisable to periodically get quotes from several reputable insurance companies. This can lead to considerable savings as your life circumstances change.

Make sure that you have adequate insurance to cover the current replacement value of your home and your personal property.  This is especially important if you’ve made significant home improvements.  You also need adequate insurance to pay for a place to live until you can buy or build a new home.   You may need a rider or additional coverage if you do business out of your home or you have collectibles, jewelry, art, or firearms.  It is prudent for most to have an umbrella liability policy equal to one to two times your net worth.  A good insurance agent can help you assess the risks that are unique to your situation and ensure you are adequately covered.

In addition to insurance you need an emergency plan to help you react quickly, should a disaster strike.  I recommend keeping all of your important documents in a safe deposit box.  Be sure to back-up important computer files at an off-site location.  Document all of your personal belongings and special features of your home with a video or pictures; this should also be kept in safe deposit box.

You also need to be prepared should something happen to you.  If others are dependent on your income, consider term life insurance to help them get by without your assistance.  If you are a primary wage earner, consider long term disability insurance to provide income if you are unable to work.  You should have a current will and health power of attorney.   When reviewing your will, be sure to review beneficiary designations for your retirement plans, annuities, and life insurance policies.

Generally, if you live within your means, stay out of debt and save 10–15% of your income, you will be better prepared to handle financial disasters that may arise.

Save Money by Focusing on Problem Areas

March 26th, 2014

office pictures may 2012 0021 150x150 Save Money by Focusing on Problem AreasProbably the most important step toward saving money is making the decision to focus on your spending habits.  We frequently over spend when we are in a hurry and don’t have time to plan.  If you are serious about saving money slow down, get organized and devote some time to making a plan.   You can save a tremendous amount of money if you think about what you really need, make a list, compare prices and avoid impulse purchases. 

Start by reviewing your spending habits over the last year.  Calculate what you have been spending in relation to your income.  You may discover a gap in what you thought you were spending and the amount of money left at the end of the month.  It may be helpful to keep a spending diary for about a month to see where all that money is going.  Review your spending over the past year for obvious problem areas.  It is common for many people over spend on eating out, clothing, electronic toys and tools.

You may be very good at setting a budget and tracking your expenses. However, if this approach is too time consuming for your busy lifestyle, consider what we call creative budgeting.  Focus on one or two problem areas and develop creative ways to reduce spending in these areas.  For example, if you have a tendency to over spend on eating out, think of some creative ways to reduce spending in this area.   Some creative ideas may include preparing breakfast and lunch at home the night before and taking it to work with you.  When you are preparing a meal, make extra to freeze or eat for lunch the next day.  If you enjoy going out with friends, consider eating something before you leave and then eat something small like a side salad or cup of soup when you meet your friends.  Instead of going to expensive restaurants, organize a potluck dinner or start a gourmet club and rotate going to one another’s home.   Restaurants generally provide very large portions.  Consider taking half of your meal home, to be eaten later, or share a meal with a friend.  You can also save money by meeting at someone’s home for appetizers, desert or drinks before or after dinner.  There are many ways to reduce money on eating out that may result in more enjoyment, better food and less calories.

 Continue working on fun and creative ways to reduce spending in your initial target area.  The key is to substitute what you are giving up with something equally or more satisfying and less expensive.  Once you feel comfortable with your level of spending in this area, identify another place where your spending could be reduced.  After going through this process a few times you should become more focused on where you are spending money and your spending should be better aligned with your goal

First Financial Steps for Widows

March 20th, 2014

 

office pictures may 2012 002 150x150 First Financial Steps for Widows

Jane Young, CFP, EA

If you have recently lost a spouse you may not have the energy or the interest to address the financial issues that need to be dealt with.  Experiencing such a tragic loss is emotionally exhausting.   It’s hard to focus on financial issues, but you have a nagging fear that important issues aren’t being addressed.  This can cause tremendous stress.  Find ways to simplify, organize, and prioritize activities that must be addressed immediately and postpone those that can wait.  Be easy on yourself, it is normal to feel like you are in a fog.  This will begin to clear in about a year, but you may still be fuzzy for about three years.  Take things one day at a time and move at your own pace.  Don’t let anyone pressure you into making decisions before your head is clear and you are ready to move forward.

Your first step should be to get organized.   You may not be quite ready to tackle the urgent paperwork, but you want to be sure that nothing is lost.  Create three in-boxes to separate all incoming correspondence by bills and urgent paperwork, personal correspondence, and non-urgent paperwork.  You should also start pulling together important documents including  wills and trusts, investment and bank statements, insurance policies, deeds and titles, tax returns, loan documents, your marriage certificate, and  20 copies of the death certificate. 

Your next step is to be sure you have the funds to cover immediate cash flow needs.  Review your current bills, credit card statements, and checking account to determine what your monthly expenses have been.  Compare this to your current cash position and income sources to be sure you have enough money to cover expenses over the next six months.  At this time your focus should be on short term spending requirements.   Be sure to pay current bills, but use caution with bills that seem suspicious or that may have been paid already.

Once your short term cash flow needs are covered, do a full inventory of assets, liabilities and benefits available to you.  This will be needed to settle the estate and to provide you with information on your long term financial situation.   Apply for life insurance, Social Security, and pension benefits that you may be entitled to.  You should also contact insurance providers to be sure you are adequately covered.

Hire an attorney to help you settle the estate.  An attorney can help you with your appointment as the personal representative and walk you through the activities required to settle the estate. 

Avoid making any major decisions for at least two years, and do not let anyone pressure you into making decisions before you are ready.  Most opportunities will still be there when you are ready to make a decision.   Beware!  There are a lot of wolves in sheep’s clothing out there preying on recent widows.

The Importance of Planning for Widowhood

March 10th, 2014

 

office pictures may 2012 002 150x150 The Importance of Planning for Widowhood

Jane Young, CFP, EA

According to the Administration on Aging, in 2010 there were four times as many widows as widowers. Over half of all women over 75 live alone, and one third of all women who become widows are under the age of 65.   About one third of all women who reach 65 are likely to live to 90.  Twenty seven percent of unmarried women, between ages 65 and 69, are poor compared to only 7% for all married women.  Women frequently have erratic work experience, due to family obligations, resulting in lower pensions than men.   Only about one third of all women will receive a pension in comparison to about two thirds of all men.  

These are just a few statistics indicating why it is crucial for women to plan ahead for the uncomfortable, but very real possibility of becoming a widow.  Many couples spend years planning for retirement together, but avoid planning for the possibility of living alone.  Couples need to develop a plan that addresses issues that must be dealt with upon the death of a spouse, as well as a plan for long term financial security for the surviving spouse. 

Start by working with an Estate Planning Attorney, whom you both feel comfortable with, to draft your wills and powers of attorney.  Part of this process should include reviewing the beneficiary designations on all of your retirement accounts and insurance policies to be sure they are consistent with your estate planning goals.  This is also a good time to discuss end of life preferences with one another.

The next step is to organize your finances and ensure that you both know what you have, where you have it, and how it can be accessed.  Take an active role in managing your finances.  If you are uncomfortable or don’t understand your finances, do some reading, take some classes or ask your planner to help you better understand your financial situation.   If you decide to work with a financial planner, take the time to select someone with whom you have complete trust and confidence – someone you can rely on as a trusted resource, should you become a widow.

Ensure that you have adequate emergency reserves to cover funeral expenses and living expenses for several months while the estate is settled.   The loss of a spouse is extremely difficult and you don’t need money worries on top of the tremendous emotional hardship you will be experiencing.

Incorporate the possibility of losing a spouse in your long term financial planning.  Run retirement scenarios and develop a plan that meets your goals together and on your own.  Review and understand survivor benefits associated with Social Security and Employer Pension Plans.  If your projected cash flow falls below your expenses, consider purchasing term life insurance or developing contingency plans to reduce your expenses. 

Sure Fire Ways to Ruin Your Retirement Plan

March 7th, 2014

 

 

office pictures may 2012 002 150x150  Sure Fire Ways to Ruin Your Retirement Plan

Jane Young, CFP, EA

Managing your finances is a balancing act between spending for today and saving for the future.   It’s important to plan and save for retirement but the demands of everyday life frequently get in the way.  Here are some common pitfalls to avoid when planning for your retirement.

 

Living Beyond Your Means – Spending more than you earn, failing to save and going into debt can be huge threats to your financial security and retirement plans.  Develop a spending plan that allows for an emergency fund and annual savings of 10-15% of your gross income.  Make a conscious decision to spend less money, buy a less expensive house and buy less expensive cars to keep your expenses below your income.  This can help you save for the future with a buffer for financial emergencies.

 

Failure to Participate – Participate in tax advantaged retirement plans for which you may be eligible.  Contribute to your employers 401k or 403b to take advantage of any employer match and deduct the contributions from your current income.  Additionally, if you are eligible, consider contributing to a Roth IRA.  Generally, an after tax Roth IRA contribution can grow tax free, with no tax due upon distribution.

 

Failure to Diversify – Maximize the potential for growing your retirement nest egg by maintaining a well-diversified portfolio designed to meet your unique risk tolerance and investment timeframe.  A common pitfall is the failure to monitor and rebalance your portfolio on an annual basis.   A portfolio that is too conservative can be as detrimental to your retirement plan as an overly aggressive portfolio.  Upon retirement, investors frequently make the mistake of changing their portfolio allocation to be extremely conservative, when they may live for another 30 to 40 years.

 

Market Timing and Trading on Emotion – Moving in and out of the stock market based on short term market fluctuations generally results in lower long term returns.   There is a natural inclination to buy when the economy is booming and sell when the economy is in the doldrums.   This usually results in buying high and selling low, which can be very detrimental to your portfolio.  To maximize your retirement portfolio avoid the emotional temptation to react to short term events and fluctuations in the market.

 

Funding College and Living Expenses for Grown Children at the Expense of Retirement – Avoid the pitfall of sacrificing your retirement to fund college education for your children or to make significant contributions toward an adult child’s living expenses.  Students have many options to finance or minimize college expenses but you can’t take out a loan to finance your retirement.

Cashing Out or Taking an Early Withdrawal – When you change jobs, transfer the money from your employer’s plan to another tax deferred plan such as a Rollover IRA.  This allows you to avoid paying significant income tax and a 10% early distribution penalty, if you are under 59 ½.

How ETFs Differ from Mutual Funds

March 3rd, 2014

 

office pictures may 2012 002 150x150 How ETFs Differ from Mutual Funds

Jane Young, CFP, EA

ETFs (Exchange-Traded Funds) and mutual funds are investment vehicles that enable investors to pool their money to buy a collection of stocks or bonds.   This makes it practical for the average investor to diversify their holdings across a large number of companies or entities.   Mutual funds can be actively or passively managed.   Generally, ETFs are passively managed and are designed to represent a specific index or category of securities, similar to an index mutual fund.   ETFs are especially useful in focusing on narrow sectors of the market that frequently aren’t offered by mutual funds.   ETFs can be especially useful to invest in a specific country or industry sector.

Mutual funds and ETFs differ in how they are traded.  Mutual funds are bought and sold through a mutual fund company.   ETFs are bought and sold on the market, between investors. Shares in a mutual fund are traded based on the price at the close of the day.   ETFs can be traded throughout the day, anytime the market is open.  This is similar to the manner in which individual stocks are traded.  

Generally, ETFs have lower fees than mutual funds because of lower overhead costs.  This is especially true when comparing ETFs to actively managed mutual funds.  However, when you purchase an ETF you must pay a brokerage fee every time a transaction is made.  Mutual funds may be more efficient if you are planning to dollar cost average, or buy shares over a period of time.

Due to structural differences, ETFs can provide greater tax efficiencies than mutual funds.  ETFs are traded on the market between investors, much like individual stocks.   When investors buy and sell shares of ETFs, shares are exchanged between one another; there is no taxable sale of stocks or bonds within the ETF.  On the other hand, mutual funds are traded within a mutual fund company.  If several investors decide to sell, the manager may be forced to sell stock or bonds within the fund to cover the redemption.  This is a taxable event that may result in capital gains that must be passed on to the shareholders.

Additionally, the structure of an ETF allows for the creation and redemption of shares with in-kind transactions.   Capital gains taxes are avoided because there is no taxable sale of stocks or bonds within the ETF when an in-kind redemption is done.

Finally, ETFs are generally tax efficient because they are passively managed, similar to an index fund.  Passively managed investments track to an index and don’t do a lot of trading.  With less trading, the investor should incur less capital gains while holding the ETF.   Mutual fund investors can also minimize their exposure to capital gains by purchasing index funds and tax efficient funds that do minimal trading.  Both Mutual Funds and ETFs that invest in bonds or dividend paying stocks must pass interest and dividend income on to shareholders.

Embracing the Future on Your Own

February 27th, 2014

 

office pictures may 2012 002 150x150 Embracing the Future on Your Own

Jane Young, CFP, EA

Losing a spouse completely changes your life, and it’s important to take the time you need to grieve and heal.  The sadness may never go away and you’ll always miss your husband, but after two or three years you may be ready to look toward the future.  Before the loss of your husband, the two of you made plans; these plans may no longer be the best course of action for you.  It is common to feel an obligation to follow the plans you developed together, that you would somehow betray your husband’s memory to follow a different course.   Nothing could be further from the truth.  Your situation has completely changed and you may have a whole new perspective on things.   Plans that worked for the two of you, together, may no longer be practical for you.  Without even realizing it, you may have been striving to fulfill your husband’s dream rather than your own.   It’s time to follow your own path and build a future that supports your new hopes and dreams.  This article makes reference to widows but it can also be helpful to widowers.

Start by reflecting on your personal values; think about what and who is important to you and what you enjoy doing.  What type of lifestyle do you want to lead and where do you want to live.   Take out a piece of paper and fill it with goals and ideas on things you would like to accomplish.  Let your mind wander, don’t evaluate, just brainstorm ideas.  Now go back and contemplate this list and formulate about five to ten realistic goals to be achieved in the next year or so.  Prioritize these goals and identify some action steps to be taken.

Now it’s time to review your financial situation with respect to your goals.  Many of your goals may be financially oriented.  Start reviewing your current cash flow, identify and tabulate your expenses, and compare them to your income.  Are your expenses in line with your goals, or do you need to change the way you spend money.   At the very least, make sure your expenses don’t exceed your income and put aside an emergency fund equal to at least three months of expenses.  I also encourage you to save at least 10% of your annual gross income.

Once your current financial situation is secure, develop a financial plan for the future.  Are there any major changes needed to achieve your long term goals?  Do you want to live in a different city or do you want to sell your home and buy something with less maintenance?  Do you need to rearrange your spending habits or make some changes in your career?  As you plan for the future, make sure you are saving and investing enough to cover retirement expenses.  Be sure to incorporate some fun and adventure into your plans!

The Pitfalls of Market Timing

February 24th, 2014
office pictures may 2012 002 150x150 The Pitfalls of Market Timing

Jane Young, CFP, EA

Market timing is one of the most detrimental ways an investor can negatively impact his stock market returns. History shows that investors do not effectively time the market. For the last nine years, DALBAR, Inc., a market research firm, has conducted an annual study on market returns called the Quantitative Analysis of Investor Behavior (QAIB). This study has consistently found that returns earned by the individual investor are significantly below that of the stock market indices. The 2013 QAIB report found that during the 20 year period between 1998 and 2012, the average mutual fund investor lagged the stock market indices by 3.96%. This is a significant improvement over the period between 1991 and 2010, in which the average investor lagged the mutual fund indices by 5.1%. According to Dalbar, “No matter what the state of the mutual fund industry, boom or bust: Investment results are more dependent on investor behavior than on fund performance. Mutual fund investors who hold on to their investments are more successful than those who time the market.”
The stock market is counterintuitive in that the best time to sell is usually when the market seems to be doing well, and the best time to buy is usually when the market is doing poorly. As investors, our decisions are frequently driven by emotion rather than cognitive reasoning. We frequently overreact to emotions of fear and greed which throws numberswiki.com

us onto an investment roller coaster. When the stock market goes up we start to feel more and more optimistic, and as the market rises higher we get caught up in a state of euphoria. Our sense of greed kicks in and we don’t want to miss the opportunity to make money, so we buy when the market is high. The market may stay up for a while but eventually the economic cycle changes and stock prices start to drop. Initially we rationalize that this is temporary, or just a minor correction. As the market continues to drop we become more and more concerned. Soon our sense of fear kicks in, we start to panic and we sell at the wrong time. If we don’t recognize the dangers of this emotion driven cycle we are deemed to repeat it.
In addition to our intrinsic emotional response, we are bombarded by sensationalized news and advertising campaigns to influence us to change the course of our investment strategy. Don’t get caught up in the hype about the next big investment craze. Your best course of action is to develop and follow an investment strategy that supports your tolerance for risk and investment timeframe. The stock market is volatile and is best suited for long term investing. Time is needed to absorb fluctuations in the market. Keep short term money in fixed income investments. You will be less tempted to time the market in a well-diversified portfolio specifically designed for your investment time horizon.

European Travel Can Be Affordable, With Some Planning

November 4th, 2013
office pictures may 2012 002 150x150 European Travel Can Be Affordable, With Some Planning

Jane Young, CFP, EA

The cost of a European vacation may seem daunting. However, with some careful planning you can travel to Europe for little more than the cost of a domestic vacation. Two major factors in saving money on European travel are when and where to go. Several countries, such as Romania, Slovakia, Hungary, Portugal, Greece, Spain and Poland can be considerably less expensive than others. If you are trying to save money, avoid Norway, Sweden, Switzerland, Finland, Denmark and Luxemburg. Consider avoiding the big touristy cities such as London, Paris, Amsterdam, Geneva, Rome and Venice until you have more money to spend.
You can reap tremendous savings by avoiding travel during the peak summer season. Airfares and lodging prices are generally very expensive between mid-May and mid-September. You can find great deals on airfare and lodging between October and April. You can also save money by flying on a Tuesday or Wednesday.
Additionally, you can save money by flying across the Atlantic into less popular European cities. Once you arrive in Europe, you can take a train or a discount European airline to your target destination. It is also easier to use frequent flyer miles for flights to less popular destinations. Frequent flyer miles can be a great way to save money on air travel.
Once in Europe, it is inexpensive to get around using trains, buses, subways and discount airlines. If you have a long distance to travel, consider a sleeping train or a discount airline such as easyJet or RyanAir. You will be pleasantly surprised by how inexpensive airfare within Europe can be. A sleeper car enables you to cover large distances while you sleep and save the cost of a hotel for the night. There are places that you just can’t reach by train or bus. In this instance, rent a car for a day or two to visit these special out of the way places.
Save money on lodging by staying at an apartment, Bed and Breakfast or locally owned hotel. You can get better deals by staying in small towns or just outside the city center; this works well in cities with a good subway system. There are numerous resources on the internet to research and read reviews on lodging options. Some of my favorite on-line resources include TripAdvisor, VRBO (Vacation Rental by Owner), Fodor’s and Rick Steve’s.
Finally, don’t pay unnecessary fees to convert money or to pay for travel expenses. Many credit cards charge between 1-3% on European purchases. Use a credit card, such as Capital One, that doesn’t charge extra fees for European purchases. Generally, you can get the best exchange rate on local currency by using your ATM card at a major European bank. With ATMs, you are charged a fee every time you pull out money, so minimize your transactions. Avoid Change Bureaus; they usually have unfavorable exchange rates.

Variable Annuities May Not Be Your Best Option

October 23rd, 2013

office pictures may 2012 002 150x150 Variable Annuities May Not Be Your Best Option

Jane Young, CFP, EA


A variable annuity is an investment contract with an insurance company where you invest money into your choice of a variety of sub-accounts. Sub-accounts are similar to mutual funds, where money from a large number of investors is pooled and invested in accordance with specific investment objectives. Like mutual funds, sub-accounts may invest in different categories of stock or interest earning investments.
One characteristic of a variable annuity is the tax deferral of gains until the funds are withdrawn. However, upon distribution the gains are taxable at regular income tax rates, as opposed to capital gains rates that may be available for mutual funds. Additionally, there is no step-up in basis upon death for assets held in variable annuities.
Variable annuities are generally more appropriate for non-retirement accounts because gains within a retirement account are already tax deferred. Traditional retirement accounts and Roth IRAs meet the tax deferral needs for most investors. However, in some cases a variable annuity may be attractive to a high income investor who has maximized his traditional retirement options and needs additional opportunities for tax deferral. This is especially true for an investor who is currently in a high tax bracket and expects to be in a lower tax bracket in retirement.
When investing in variable annuities, with non-retirement money, there is no requirement to take a Required Minimum Distribution at 70 ½. However, there is generally a 10% penalty on withdrawals made before 59 1/2. Trades can be made within a variable annuity account without immediate tax consequences. The entire gain will be taxable upon withdrawal. There is no annual contribution limit for variable annuities, and you can make non-taxable transfers between annuity companies using a 1035 exchange. However, you may have to pay a surrender charge if you have held the annuity for less than seven to ten years, and you purchased it from a commissioned adviser. Before buying an annuity, read the fine print to fully understand all of the fees and penalties associated with the product. Most variable annuities have early withdrawal penalties and a higher expense structure than mutual funds.
A variable annuity may be an option for someone who wants to purchase an insurance policy to buffer the risk of losing money in the market. For many investors, due to the long term growth in the stock market, this guarantee may be come at too high a price. Some investors are willing to pay additional fees in exchange for the peace of mind that a guaranteed withdrawal benefit can provide. Guaranteed minimum withdrawal benefits (GMWB) can be very complex and have some significant restrictions. Additionally, some products offer a guaranteed death benefit for an extra fee. Read the contract carefully and make sure you understand the product before you buy.
Due to the high costs, lack of flexibility, complexity and unfavorable tax treatment variable annuities are not beneficial for many investors.

Tips to Acheive Financial Fitness

October 23rd, 2013

office pictures may 2012 002 150x150 Tips to Acheive Financial Fitness

Jane Young, CFP, EA


The first step toward financial fitness is to understand your current situation and live within your means. Review your actual expenses on an annual basis and categorize your expenses as necessary or discretionary. Compare your expenses to your income and develop a budget to ensure you are living within your means and saving for the future. The next step is to pay off high interest credit cards and personal debts. Once you have paid off your credit cards, create and maintain an emergency fund equal to about four months of expenses, including expenses for the current month. Your emergency funds should be readily accessible in a checking, savings or money market account.
Now it’s time to look toward the future. Get in the habit of always saving at least 10% to 15% of your gross income. Think about your goals and what you want to accomplish. If you don’t own a home, you may want to save for a down payment. When you purchase a home make sure you can easily make the payments while contributing toward retirement. Generally, your mortgage expense should be at or below 25% of your take home pay.
Contribute money into retirement plans, for which you qualify. Make contributions to your 401k plan, at least up to the employer match and maximize your Roth IRA. If you are self-employed, consider a SEP or a Simple plan. If you have children and want to contribute to their college expenses, consider a 529 college savings plan. Do not contribute so much toward your children’s college fund that you sacrifice your own retirement.
As you save for retirement, be an investor not a trader. Investing in the stock market is a long term endeavor, forecasting the short-term movement of the stock market is fruitless. Avoid emotional reactions to headlines and short term events. Don’t overreact to sensationalistic stories or chase the latest investment trends. Establish a defensive position by maintaining a well-diversified portfolio, custom designed for your unique situation. Slow and steady wins the race!
Don’t invest in anything that you don’t understand or that sounds too good to be true. If you really want to invest in complicated products, read the fine print. Be especially aware of high commissions, fees, and surrender charges. There is no free lunch; if you are being offered above market returns, there is probably a catch. Keep in mind that contracts are written to protect the insurance or investment company, not the investor.
It is impossible to predict fluctuations in the market or to select the next great stock. However, you can hedge your bets with a well-diversified portfolio. Establish an asset allocation that is aligned with your goals, investment timeframe, and risk tolerance. Your portfolio should contain a mix of fixed income and stock based investments across a wide variety of companies and industries. Rebalance your portfolio on an annual basis to stay diversified.

The Difference Between an Roth IRA and a Traditional IRA

October 16th, 2013

office pictures may 2012 002 150x150 The Difference Between an Roth IRA and a Traditional IRA

Jane Young, CFP, EA


One of the biggest decisions associated with saving for retirement is choosing between a Roth IRA and a Traditional IRA. The primary difference between the two IRAs is when you pay income tax. A traditional IRA is usually funded with pre-tax dollars providing you with a current tax deduction. Your money grows tax deferred, but you have to pay regular income tax upon distribution. A Roth IRA is funded with after tax dollars, and does not provide a current tax deduction. Generally, a Roth IRA grows tax free and you don’t have to pay taxes on distributions. In 2013 you can contribute up to a total of $5,500 per year plus a $1,000 catch-up contribution if you are over 50. You can make a contribution into a combination of a Roth and a Traditional IRA as long as you don’t exceed the limit. You also have until your filing date, usually April 15th, to make a contribution for the previous year. New contributions must come from earned income.
There are some income restrictions on IRA contributions. In 2013, your eligibility to contribute to a Roth IRA begins to phase-out at a modified adjusted gross income of $112,000 if you file single and $178,000 if you file married filing jointly. With a traditional IRA, there are no limits on contributions based on income. However, if you are eligible for a retirement plan through your employer, there are restrictions on the amount you can earn and still be eligible for a tax deductible IRA. In 2013 your eligibility for a deductible IRA begins to phase out at $59,000 if you are single and at $95,000 if you file married filing jointly.
Generally, you cannot take distributions from a traditional IRA before age 59 ½ without a 10% penalty. Contributions to a Roth IRA can be withdrawn anytime, tax free. Earnings may be withdrawn tax free after you reach age 59 ½ and your money has been invested for at least five years. There are some exceptions to the early withdrawal penalties. You must start taking required minimum distributions on Traditional IRAs upon reaching 70 ½. Roth IRAs are not subject to required minimum distributions.
The decision on the type of IRA is based largely on your current tax rate, your anticipated tax rate in retirement, your investment timeframe, and your investment goals. A Roth IRA may be your best choice if you are currently in a low income tax bracket and anticipate being in a higher bracket in retirement. A Roth IRA may also be a good option if you already have a lot of money in a traditional IRA or 401k, and you are looking for some tax diversification. A Roth IRA can be a good option if you are not eligible for a deductible IRA but your income is low enough to qualify for a Roth IRA.

There is More to Retirement Than the Money

October 16th, 2013
office pictures may 2012 002 150x150 There is More to Retirement Than the Money

Jane Young, CFP, EA

Are you concerned that you don’t have the financial means to fully retire anytime soon? That may not be such a bad thing. There is much more to retirement than reaching some magic number where you will be able to cover your living expenses. Your personal identity may be closely aligned with your career. Personal identity plays a huge role in your self-esteem and happiness. Your sense of accomplishment and purpose can also be tied to your work. The structure, responsibility and expectations from your job give you a sense of purpose and help you feel appreciated. Retirement may have a dramatic impact on your personal identity and sense of relevance. Make a plan to transition into your retirement adventure with a new sense of direction and purpose.
Many of your relationships are connected to your career. Relationships with colleagues, clients, co-workers and suppliers account for a lot of your social interactions. These are people with whom you have a common understanding and intertwined social connections. Think about the impact retirement may have on these connections. How will you replace this sense of community and nurture these relationships after retirement?
Another consideration in retirement is keeping your mind stimulated. At work our minds are fully engaged as we juggle several different tasks at once. This may be exhausting, but it keeps our minds stimulated and energized. A study conducted by the Rand Center for the Study of Aging and the University of Michigan found that early retirement can have a significant negative impact on the cognitive ability of people in their early 60’s. The study concluded that people need to stay active to preserve their memories and reasoning abilities. As you transition into retirement, be sure stay mentally active and engaged.
You may be looking forward to retirement in anticipation of doing all the fun things you currently have no time for. Retirees frequently enter retirement with tremendous enthusiasm and fill their first few years with exciting trips and activities. However, after a while you tire of these activities, the activities lack the substance to make you feel truly fulfilled. You start missing the sense of affirmation, self- identity and purpose you found in your job. You have time to engage in fun activities every day, but it’s just not enough, you aren’t fully satisfied.
It doesn’t have to be this way. Before you jump into retirement, give some serious thought about what you will do in retirement. How will you stay socially and emotionally engaged in a way that is truly meaningful and rewarding? Engage in activities that will feed your self-esteem. Consider a new, part-time career, set some fitness goals, engage in volunteer activities, or take up a meaningful hobby. Decide how you will develop new social networks. Once you are retired, what will you say and how will you feel when someone asks – What do you do?

July 16th, 2013

May 23rd, 2013
 How to Pick an IRA That’s Right for You (via Credit.com)

One of the most common questions I hear from clients is whether they should invest in a traditional IRA or a Roth IRA. Let’s start with an understanding of the difference between the two. The biggest difference between a traditional IRA and a Roth IRA is when you pay taxes. I like to think of it…


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Saving for College with a 529 Plan

May 23rd, 2013

office pictures may 2012 002 150x150 Saving for College with a 529 Plan

Jane M. Young CFP,EA

A 529 Savings Plan is a tax advantaged college savings plan sponsored by a state or educational institution. The plan is named after section 529 of the Internal Revenue Code, created in 1996. Every state offers at least one 529 plan. Investment in a 529 plan enables the owner to save money, tax free, for future college expenses on behalf of a student or “beneficiary”. Although 529 plans are generally sponsored by specific states, they may be used at any eligible college, university, or trade school throughout the country.
Funds invested in 529 plans grow tax free if they are used for qualified education expenses. Qualified education expenses include tuition, required fees, room and board, required books, and required supplies. Although contributions are made with after tax dollars, residents of Colorado can deduct contributions made to the Colorado plan from their state income taxes.
The owner of a 529 plan has full control over the account. The owner has the freedom to select or change the beneficiary and select from the investment choices. Many find 529 plans preferable over custodial accounts for minors where the assets are held in the child’s name, and are irrevocable. Once funds are transferred to a custodial account, the funds must be used for the benefit of the minor. This can have unintended consequences. Here is an example, your daughter reaches the age of majority and decides she would rather have a corvette than a college education. Unfortunately, the money is hers to spend however she pleases.
Additionally, gains on custodial accounts are fully taxable. Custodial accounts can also be detrimental to financial aid because they are viewed as assets of the student. In comparison to a custodial account, a 529 plan has less impact on a student’s eligibility for need-based financial aid. A 529 plan is viewed as an asset of the parent rather than an asset of the student.
A common concern with 529 savings plans is your child may not need the funds for college expenses. Fortunately, if your designated beneficiary gets a scholarship or decides against a college education, you can change the beneficiary to another family member or to yourself. If you don’t need the money for college expenses, you can withdraw the money from the 529 plan. However, if the funds are not used for qualified education expenses you will have to pay a 10% penalty and taxes on the gains. This in not entirely bad, you have a lump sum of money that may have been spent years ago, if you weren’t saving for college.
Investing in most 529 plans is simplified by using age weighted portfolios. These portfolios gradually transition into less risky investments as the beneficiary reaches college age.
When purchasing a 529 plan, be aware of high fees and commissions. Most states offer direct programs that don’t charge sales commissions. Colorado offers the choice of an inexpensive program directly through Vanguard, without a sales load.

The Widow’s Guide to Social Security Benefits

May 1st, 2013
 The Widows Guide to Social Security BenefitsThe Widow’s Guide to Social Security Benefits (via Credit.com)

As a Certified Financial Planner™, I work with a lot of widows trying to navigate the tricky world of Social Security benefits after their spouse passes away. Social Security provides you, as a widow, with a choice between your own Social Security benefit based on your work history, and a survivor…

Understanding Mutual Fund Fees

April 30th, 2013

office pictures may 2012 002 150x150 Understanding Mutual Fund Fees

 

 

 

 

 

 

 

Jane M. Young, CFP, EA

When investing in mutual funds it is important to be aware of the associated fees.  High fees can significantly impact your total investment return.   All mutual funds have operating expenses and some have sales fees, commonly known as a load. When you invest in mutual funds you have a choice between load and no-load funds.   A mutual fund load is basically a commission charged to the investor to compensate the broker or sales person.   As the name implies, no-load funds do not charge a sales fee.

The first type of load fund is an A share fund, where you pay a front end sales charge plus a small annual 12b-1 fee.   A 12b-1 fee is a distribution fee that covers marketing, advertising and distribution costs.  The typical front-end load is around 5%, but can go as high as 8.5%.  Class A shares offer breakpoints that provide you with a discount on the sales load when you purchase larger quantities or commit to making regular purchases.  The 12b-1 fee associated with most A shares is generally about .25% annually.

The second type of load fund is a B share, where you pay an annual fee of around 1% plus a contingent deferred sales charge (CDSC), if you sell before a specified date. The CDSC usually begins with a fee of 5% that gradually decreases over five years.  After five years or so the fund converts to an A share fund.  The actual percentages and timeframes may vary between fund families.  Most mutual fund companies have stopped offering B share funds because they are usually the most expensive option for the investor and the least profitable option for the mutual fund company.

The third type of load fund is a C share that charges a level annual load, usually around 1%.  This is on-going fee that is deducted from the mutual fund assets on an annual basis.

Generally, any given mutual fund can offer more than one share class to investors.  There is no difference in the underlying fund.  The only difference is in the fees and expenses that the investor pays.

All load and no-load mutual funds charge fees associated with the operation of the fund.  The most significant of these expenses is usually the management fee which pays for the actual management of the portfolio.  Other operations related fees may include administrative expenses, transaction fees, custody expenses, legal expenses, transfer agent fees, and 12b-1 fees.

These annual fees are combined and calculated as a percentage of fund assets to arrive at the fund’s expense ratio.  The expense ratio is an annualized fee charged to all shareholders.  The expense ratio includes the fund’s operating expenses, management fees, on-going asset based loads(C shares) and 12b-1 fees.  The expense ratio does not include front-end loads and CDSCs.   According to Morningstar the average mutual fund expense ratio is .75%.