Curs Secure Retirement

Planning for a Secure Retirement
Without a solid plan in place, the reality of retirement may turn out quite different from your dreams. You can, however, set up a plan to significantly improve your retirement situation. In this six-lesson course you'll learn the basics of building a blueprint that will help you achieve a secure retirement. You'll examine some common planning mistakes, determine your current financial profile, look at some investment basics, learn debt management strategies, and find out how to catch up if you started late.
Lessons
1. Your Retirement Dreams In Lesson 1, we'll start by examining some common planning mistakes, then jump right into the nitty-gritty of figuring out your current financial profile -including assets, liabilities, and your overall net worth. 2. Your Investment Profile Now that you're clear on your income, expenses, and net worth, we'll learn about some necessary considerations before you take the plunge and start building a financial plan that works for you. 3. Investing Basics, Plus Social Security and Inflation In this lesson, we'll be focusing on some of the basic tools available to create a solid foundation, including Social Security, stocks, bonds, and mutual funds. We'll also take a look at how inflation affects your plan. 4. Your Retirement Toolkit: 401(k)s, IRAs, and More This lesson takes a look at a few commonly used retirement planning options, such as 401(k)s and IRAs. We'll also look at how Employee Stock Ownership Plans (ESOPs), pensions, and annuities fit into your overall plan. 5. Debt Management Basics When it comes to retirement, investing is only part of the puzzle. Managing your debt load is another important consideration. This lesson helps you get a handle on your debt, now and into the future. 6. Starting Late, Keeping It Safe In our final lesson, we'll examine strategies for late planners, as well as some important insurance basics and the pros and cons of working with financial planners.
Your Retirement Dreams In Lesson 1, we'll start by examining some common planning mistakes, then jump right into the nitty-gritty of figuring out your current financial profile -- including assets, liabilities, and your overall net worth.
Course Introduction
Most experts agree that you will generally need less income after you retire. Perhaps your house will be paid off, so you won't have mortgage payments. Or perhaps you will move into a smaller dwelling after your children leave home, which may reduce your overall housing cost. However, it's important to remember that the sooner you can start saving, the better. If you put off saving as $2,000 per year starting at age 25, it could cost you as much as $520,000 by age 65! However, you are the only one who knows your individual situation. Indeed, the word "retirement" conjures up different pictures for different people. Some think of it as a leisurely time to enjoy sun-drenched beaches and work on their golf games. Others think Related Information From Our Sponsor Keep the Change
of it as a time to travel and enjoy the fruits of many years of hard work. Still others see an opportunity to start a new career. But without a solid plan in place to provide for their expectations, the reality of retirement may end up being disappointingly different for many. If you want to, however, you can set up a plan to significantly improve their retirement situation. That's the point of this course: Over the next six lessons, you'll learn the basics of building a plan that will help you achieve a secure retirement.
How the Course Is Structured

In Lesson 1, we'll start by examining some common planning mistakes, then we'll jump right into the nitty-gritty of figuring out your current financial profile including assets, liabilities, and your overall net worth. In the next few lessons, we'll look at some investment basics, including risk, your goals, basic investment vehicles, and a few specialized retirement savings vehicles. Finally, we'll get back to hands-on planning, focusing on practical debt management strategies and a few no-nonsense tips for planners who started late. The following list defines several key terms you will need to understand as your financial health and plan for your retirement: Assets: A financial asset is something that is worth real money -- something that you can convert to money should you need it now or in the future. Liabilities: Your liabilities are the things you owe. Net Worth: Your financial net worth is the difference between your financial assets and your financial liabilities. This course is not intended to replace the advice of your tax advisor. Additional or different benefits or rules may apply in your state. In addition, this course is not intended to endorse any specific investment or type of investment. Various investments come with various levels of risk. Research your investments carefully before purchasing.
With Keep the Change you can save while you spend. Each time you buy something with your Bank of America VISA Check Card, well round your purchase to the nearest dollar amount and transfer the difference from your checking account to your savings account. What could be easier?
When Will You Retire and What Will Be There When You Do
When do you want to retire? If you're like most people, probably in your mid-60s. Yet, if you're like most people, you really haven't begun to do anything about it. In fact, more than half of Americans between the ages of 18 and 34, and more than a quarter of those ages 35 to 54, have not begun to save for retirement -- which is a problem. Why? Because in order to maintain your standard of living -- never mind all that travel you'd like to do and golf you want to play -- you'll need between 70 and 80 percent of current income. Americans spend an average of 18 years in retirement. And guess what? People are living longer and longer; chances are, by the time you retire you'll have a lot more years than this. This means you'll need a lot of money to live on. If you've saved. . . More than Between 5 and 15% of your 15% of annual income your annual income Have significant savings Will still have some mortgage payments when you retire Less than 5% of your annual income With Keep the Change you can save while you spend. Each time you buy something with your Bank of America VISA Check Card, well round your purchase to the nearest dollar amount and transfer the difference from Related Information From Our Sponsor Keep the Change
And you... Have a high income
Will still have significant mortgage payments when you retire
Won't Want to retire with a standard Want to retire with a standard of of living comparable to what have a mortgage living comparable to what you you have now when you have now retire
Plan to scale down your lifestyle during retirement Maintaining your standard of living will require... 65% of your current annual income 75% of your current annual income 85% of your current annual income
your checking account to your savings account. What could be easier?
Some simple guidelines for determining how much you'll need for a comfortable retirement. But, some may counter, that's where Social Security comes in. Well, kinda, sorta . . . but not really. Social Security was designed to provide only basic necessities, such as food, shelter, and clothing. It was not intended as a sole source of income. And it was created at a time when life expectancies were much shorter. Moreover, Social Security is under political attack and serious financial strain right now. So while it may be around for the foreseeable future, you shouldn't count on it to finance your dreams -- at best, it's only a safety net. What does that mean? Basically, that you need to take some responsibility and start planning now. So get ready for your first step: Understanding your current financial profile.
Next Up
Getting a grip on your financial profile.
What Comes In and What Goes Out

In order to plan for the future, you need a solid grasp of the present. Do you know how much money you have in savings, off the top of your head? How about the amount that you owe to creditors? Many people don't. Many avoid "doing the math" because they are living beyond their means or because the topic of money makes them uncomfortable. Don't let yourself get caught in the same trap that nearly one-third of Americans do, causing them to delay their retirement. However, you can't begin a solid plan for financial security until you take a look at your present situation. So, grab a pencil and a few sheets of paper or pull up your accounting software. (Note that this exercise is for you and will not be shared with the group, so be honest.) Related Information From Our Sponsor Keep the Change
What's Coming In
First, we're going to take a look at how much money flows through your household each month. The first step is to evaluate your monthly income using this calculator. Hopefully, you can lay your hands on that number without too much trouble. Once you do, enter the amount you receive annually in each of the fields provided, then hit the "calculate" button. Write this number down and continue with the lesson. The number generated by the calculator is your true monthly income.
With Keep the Change you can save while you spend. Each time you buy something with your Bank of America VISA Check Card, well round your purchase to the nearest dollar amount and transfer the difference from
Now, take a moment to think about this number. Is it more or less than what you thought? By how much? If the difference is surprising, note by how much you overestimated or underestimated your income.
How Much Is Going Out?

Understanding the money that flows out of your household is a bit more time-consuming. However, it is critical that you move forward with this exercise before you continue with the lessons in this course. Be as honest and thorough as you can be. First, create a list of your monthly expense categories and how much you currently spend on each. The categories may include: Rent/Mortgage Utilities Telephone Gas Commuting Expenses Groceries Clothing Credit Card Payments Automobile Loans Insurance Entertainment/Dining Out Once you have listed all of your monthly expenses, list your annual expenses at the bottom of the list. These may include vacations or other once- or twice-a-year expenses. Now, gather together any evidence of your spending over the last two years -- canceled checks, ATM receipts, bank statements, credit card bills, computerized records, etc. By going back two years instead of just a few months, you will get a much more accurate picture of your living expenses. You may have had an unusual expenditure or two over the past year -- buying a new car or paying for a child's wedding. In addition, looking at just a few months may not show you all of your once-a-year expenses -- vacations, medical visits, etc. -- these need to be counted. So, while this will take some time, it is most important that you get as close as possible to two years of total expenses. t's also important to note that if you find that documentation is missing -- bank statements are gone or you can't find your credit card bills -- it will be important to pay closer attention to keeping your financial records in order in the future. As a general rule of thumb, keep all income and tax-related expense records for three years -- this is the length of time the IRS has to ask for records, so you are killing two birds with one stone! If you can't pull together this documentation, go through your planner and whatever records you can find and try to put together as close a financial picture as possible. However, it is likely that some expenses will be missing, so this exercise should be revisited once you have more financial documents at your disposal. Follow these steps to calculate your average monthly expenses: 1. Plug numbers into the list of spending categories you created. As you come across new expenses, create as many categories at you need. Don't forget cash expenditures such as baby-sitting and gasoline, once-a-year expenditures such as vacations, and necessary but irregular expenses such as gifts and entertainment. 2. Add together all of the categories and divide that number by 24 (the number of months in two years). That is your average monthly expenditure for each category. 3. Total the averages of each category and that's your average monthly expenditure. Again, take a look at the number that you guessed at the beginning of these exercises. How close were you to that total?
your checking account to your savings account. What could be easier?
What If My Outgoing Total Was Higher Than My Incoming Total?

First, take a deep breath and congratulate yourself for having the courage to address this fact. Many people don't until they are too far in debt to do much about it. In the upcoming lessons, we're going to show you how to set up a budget and put you in touch with some debt-reductions resources and options that may help you be able to save significantly more money each month.
Next Up
Calculate your net worth.
Figuring Out Your Net Worth

Net worth is an important indicator of your financial well-being. The formula for figuring out your financial net worth is simple: Assets - Liabilities = Net Worth There's nothing like peer support in a learning environment. If you ever belonged to a study group in school, you'll remember the value of putting heads together to discuss the subject and work through solutions. The Message Board is your online studygroup lounge, where you can meet your classmates, share your reasons for signing up for this class, and talk about your goals and dilemmas as you work through this course. You never know who has the answers you seek. Related Information From Our Sponsor Keep the Change
Why Are You Here?
Your Assets
A financial asset is something that is worth real money -- something that you can convert to money should you need it now or in the future. This might include: Cash in the bank, stocks, bonds or mutual funds Money in retirement accounts Any businesses you own Real estate you own other than your own home (Note: Include your primary residence only if you plan to sell it to contribute to your retirement) Future Social Security or pension benefits (If this figure is a monthly amount, multiply it by the number of months you intend to be retired, e.g., 240 for 20 years of retirement) Other items of value that you intend to -- and are sure you can -- sell to contribute to your retirement Make a list of all of your assets and add them. This is your asset total.
Your Liabilities
Your liabilities are the things you owe. They may include: Auto loans Credit cards Personal loans Mortgages on properties other than your primary residence (unless you included that residence in your asset list), money you owe other people, etc. Make a list of all of your liabilities and add them. This is your liability total.
Your Net Worth

Use the Net Worth Calculator to find your net worth. Your net worth tells you where you are. Ideally, your net worth should be at least half of your annual income. Is it a bigger or smaller number than you expected? Again, don't use this exercise to beat yourself up. We're taking the first steps to create positive change and that's a good thing. Now that you have some key figures in place, congratulate yourself. You've begun to take control of your retirement situation! With Keep the Change you can save while you spend. Each time you buy something with your Bank of America VISA Check Card, well round your purchase to the nearest dollar amount and transfer the difference from your checking account to your savings account. What could be easier?
Moving Forward
As you plan your retirement, the financial self-portrait you've just established will come in handy. For instance, if you are starting retirement planning late and have a low net worth, it may be wise to invest fairly vigorously to establish a baseline. However, if you have a low tolerance for risk and a long timeline to work with, you might choose to invest more conservatively. We'll discuss these issues and more next lesson. See you there! In the meantime, don't forget to check out the quiz and assignment, and visit the Message Board to meet your instructor and classmates.
Assignment #1
Spend some time reviewing your income and expenses and complete the net worth exercises discussed in this lesson. Getting a clear picture of your current situation is critical to taking positive action. This is your first step toward developing a successful retirement strategy.
Solution
Spend some time reviewing your income and expenses and complete the net worth exercises discussed in this lesson. Getting a clear picture of your current situation is critical to taking positive action. This is your first step toward developing a successful retirement strategy.
Quiz: #1
Question 1: Most Americans do which of the following? A) B) C) D) Question 2: Which of the following is not a form of income? A) B) C) Credit card Alimony Job wages Save more than they need for retirement Do not save enough for retirement Get enough income from Social Security to comfortably retire Have pensions that will take care of them
D)
Interest from savings
Question 3: You may be in trouble if your debt danger ratio is __________. A) B) C) D) Question 4: What is net worth? A) B) C) D) Your Investment Profile Now that you're clear on your income, expenses, and net worth, we'll learn about some necessary considerations before you take the plunge and start building a financial plan that works for you. Your value as a person Your assets minus your liabilities Your liabilities minus your assets Your total liabilities less than 5 more than 10 more than 25 none of the above
Risky Business
In Lesson 1, you evaluated your current financial picture. In this lesson, we'll review factors you should bear in mind as you start planning. Related Information From Our Sponsor Keep the Change
Understanding Risk
"True richness begins when the money you earn begins to earn money itself," writes Suze Orman says in The Courage to Be Rich. And that means one thing: You won't get very rich by stashing all your money in your mattress. In fact, over time, even the safest, most conservative investment will begin making exponentially great payoffs, increasing your wealth dramatically faster than a simple, linear savings strategy. Remember the discussion in our last lesson about the impact of saving just $2,000? So, if you want a well-padded retirement, you're probably going to need to take a deep breath and get ready to invest.
Understanding Investment Variables

One fact of investing is that nearly every form of growing your money comes with some risk: Generally, the higher the return -- or the potential return -- the greater that factor of risk. That said, risk is only one of several investment factors you need to consider before you begin an aggressive investing plan for the long term. Following is a list of variables that will, help you prioritize your investment plan. Your age: If you're approaching retirement and you have a lot of savings, it may be unwise to make riskier investments. After all, if you lose money at this stage of the game it's likely that you'll have a more difficult time earning back that cash than you would have 15 or 20 years ago. By the same token, if you're very young and have lots of time for investments to multiply, you may want to play it conservative. However, if
you're starting your savings plan late in life, you may decide that riskier investments with the potential for higher rewards make sense. We'll discuss this more in the next section when we when go over asset allocation. Time frame: Whether you're investing for your retirement, for your child's education, to buy a house, or for some other purpose, you need to determine a time frame for your investments. By having this deadline to achieve your investment goals, you'll be better able to decide which investment vehicles are likely to get you to your desired outcome most effectively. Risk level: Again, in most investments, the rule of thumb is the higher the return, the greater the risk. So, although they may sound great, get-rich-quick investments and "sure-thing" tips are some of the surest ways to lose your hard-earned cash. In general you will likely lean toward having more risk at a younger age and less risk as you get older. Your personality: Regardless of the other factors, if you're going to lose sleep at night because your money is in a high-risk investment, the solution is simple: Don't put it there! Your investments shouldn't cause you undue stress. All of these factors interact with one another as you put together a retirement plan. We'll examine how over the next several lessons. The following shows common short term investment vehicles: Money Market Funds Savings Accounts Treasury Bills Federal Agency Securities Certificates of Deposit Commercial Paper Bankers' Acceptances Repurchase Agreements The following shows common long term investment vehicles: Certificates of Deposit Treasury Notes and Bonds Corporate Bonds Municipal Bonds Equities (or Stocks) Mutual Funds Medium-Term Notes Defined Asset Funds
Next Up
In our next section, finding your investing style.
Creating a Saving Style That Suits Your Personality

To reach your goals, it's important to know your investing or saving style -- and be very clear about what you want. Related Information From Our Sponsor Keep the Change
Determine What You Want for Your Future

As with most things in life, you need to decide what you want from your future before you can make a plan to get there. So take a few moments and map out your dream retirement. How will you spend your time? How will you spend your money? Where do you want to live? To vacation? Will you be working part-time or will you be career-free? Write a paragraph or two about what you want out of your retirement.
With Keep the Change you can save while you spend. Each time you buy something
Allocating Your Money

We'll talk more in the next section about diversifying your investments. But how much of your money should you put into these different kinds of investments? In other words, how will you allocate your investments? Asset allocation is based on many of the principles we discussed earlier: your age, timeline, tolerance for risk, and the like. If you love the thought of risky investments that could yield big returns, you'll want to consider putting more of your money into those vehicles. However, if you like to know that your money is relatively safe, yet still returning on your investment, you may wish to choose more moderate vehicles.
Allocation Formula
Investment advisors suggest a simple calculation to assist you in allocating money between various long- and short-term investments. Subtract your age from 100 percent (or 120 percent if you want to be more aggressive). Invest that amount in stocks and the remaining amount in bonds or other lower-risk investments. If you're a conservative investor of 30, subtract 30 from 100. Seventy percent of your portfolio goes to stocks, and 30 percent to low-risk investments. According to many advisors, even conservative investors would do well to play the stock market. Figure 2-1 illustrates two different strategies a 30-year-old investor might use.
with your Bank of America VISA Check Card, well round your purchase to the nearest dollar amount and transfer the difference from your checking account to your savings account. What could be easier?
Figure 2-1: Two different strategies a 30-year-old investor might use.
Make It Automatic
If you're like most people, when the monthly bills come around, your money seems to magically vanish. If you don't make it a habit to pay yourself first, it will be very difficult to reach your savings goals. To ensure that they put money away each week or month, many people find it easier by having automatic withdrawals made from their savings accounts or paychecks. In addition to the convenience of automatic withdrawal, you take advantage of the principle of dollar cost averaging as well. Check with your employer,
your bank, or your investment house to make arrangements if you think this would be a good option for you. Contrary to popular belief, you don't need a lot of money to use an investment broker; sometimes no up-front money is needed at all if you have automatic deductions from your paycheck.
Next Up
Mitigating risk.
Mitigating Risk
Financial risk is a fact of life -- but following these tips will give you more peace of mind.
Do Your Homework
The best way to control the risk of your investments is to educate yourself. If you're buying a stock, look into the company's track record, profits, and projections. If you're looking into a mutual fund, don't just consider last year's returns -- take a look at the 5year, 10-year, and since-inception returns.
Happy Returns
A slight difference in returns can significantly change your investment. For instance, if you put 10,000 dollars in an investment with a 4 percent rate of return, it will grow to 26,658 dollars in 25 years and 48,010 dollars in 40 years. At 10 percent that same investment will earn 108,347 dollars in 25 years and 452,592 dollars in 40 years. Related Information From Our Sponsor Keep the Change
Diversification
Another way to reduce the risk factor of your assets is to spread them across a variety of investments. This helps you to weather market fluctuations and other economic factors more effectively. In other words, while some of your investments may be on a temporary downturn, your other investments may be holding steady or doing well. In order to properly diversify, however, you need to put your money into various types of investments. We'll explain more about the specific vehicles later. However, a properly diverse portfolio doesn't mean that you just invest in various types of stocks. Rather, you should put some money in stocks, perhaps some in bonds, etc. Mutual funds practice this strategy to reduce risk on behalf of their investors.
Dollar Cost Averaging

Another important risk-management concept is called dollar cost averaging. This means that if you intend to invest a specific amount per year, you may very well receive a better overall rate of return if you invest bit by bit rather than investing it all at once. If you invest your money in a lump sum, you risk investing when the cost of the investment is high. However, if you invest in smaller sums over a period of time, you're likely to take advantage of market fluctuations that will make your overall cost of acquisition lower. Figure 2-2 gives you an idea of how dollar cost averaging can benefit you. The first graph illustrates a lump sum investment of $1,200. After the investment is made at $35, the market wavers and falls. Almost a year later, the value of the stock has dropped to about $20, slashing the value of the original investment by more than a third, and resulting in significant losses. The second graph illustrates the effect of dollar cost averaging. The same $1,200 is invested in twelve installments of $100. The price at which the investments are made ranges from about $47 to $10. The average price the investor paid is approximately $28, significantly lower than the $35 paid by the lump-sum investor. The second investor still suffers losses, but they are mitigated by dollar cost averaging.
With Keep the Change you can save while you spend. Each time you buy something with your Bank of America VISA Check Card, well round your purchase to the nearest dollar amount and transfer the
difference from your checking account to your savings account. What could be easier?
Figure 2-2: Dollar cost averaging can help you manage your risk.
Don't Fix It If It Isn't Broken

Finally, it's important to remember that the best way to reduce risk is to save for the long haul. Don't be tempted to dump a solid investment because it's suffering a temporary downturn. In many cases, the investment will rebound and you will earn your money back. Buying "hot stocks" and selling them for a quick profit is risky business. Although some folks make money this way, far more end up losing their shirts. While it's not always exciting, investing with long-term strategy is the most effective way to go. Remember, too, buying and selling isn't free -- if you haphazardly buy and sell you may end up paying significant fees to an investment broker, which can deteriorate your rate of return. Again the key is to think and act long-term; be prudent in monitoring your investments, but don't change strategies at every turn of the market.
Moving Forward
In our next lessons, we'll be discussing different investment vehicles. It's important to know your own situation before you can make decisions about the investments that make the most sense for you. Now that we've covered the risks involved and how to determine what's right for you, let's find out about the actual investing! In the mean time, be sure to visit the Message Board to ask questions and share ideas with your fellow students. You'll also want to complete the assignment and quiz for this lesson to get the most out of this class.
Assignment #1
Write down some of your personal goals and the timeline that you have to reach them, and determine what level of risk you are able to withstand to achieve those goals.
Solution
Write down some of your personal goals and the timeline that you have to reach them, and determine what level of risk you are able to withstand to achieve those goals.
Quiz: #1
Question 1: Which of the following should be considered when calculating your tolerance for risk? (Check all that apply.) A) B) C) Question 2: What does diversification, for the purpose of reducing risk, mean? A) B) C) Question 3: What is dollar cost averaging? A) Purchasing investments at different prices over time with the goal of achieving a lower overall cost per share B) Purchasing investments at different prices over time with the goal of achieving a higher overall cost per share C) D) Question 4: What is the most effective, risk-managed approach to investing? A) B) C) D) Investing Basics, Plus Social Security and Inflation In this lesson, we'll be focusing on some of the basic tools available to create a solid foundation, including Social Security, stocks, bonds, and mutual funds. We'll also take a look at how inflation affects your plan. A long-term strategy A short-term strategy A stocks-only strategy Day trading Figuring out how many dollars each investment is worth Another phrase for diversification Dividing your money among many stocks Dividing your money among different investments Putting your money in different bank accounts Your age Your timeframe Previous performance of the investment
Your Investment Options: Stocks and Bonds

Last lesson we looked at some basic investment concepts. In Lessons 3, we'll explain more investment basics, take a deeper look at Social Security, and examine the effects of inflation. Related Information From Our Sponsor Keep the Change
Understanding Stocks
When you buy a stock, you are actually buying a piece of a company. A company in which you can purchase stock is generally considered "public," and has gone through an Initial Public Offering, during which it sells shares of itself. A few years ago, stocks could only be purchased through a broker at a hefty commission of $50 or more per "trade" or transaction. Now, Internet brokerage firms allow investors to buy and sell stock for relatively low fees. However, be sure to deduct the cost of the trades when calculating your overall return. You can make money on stocks in two ways:
With Keep the Change you can save while you spend. Each time you buy something with your Bank of America VISA Check Card, well
First, through the dividends -- distribution of the company's profits -- a stock may pay. However, if the company does not make a profit, shareholders do not receive dividends. Dividends are paid on each share owned, so the more shares you own, the greater the dividends you will receive. The second way is when the stock itself appreciates in value. So, if you bought a hundred shares of stock at $5 each and two years later the stock was trading (selling) for $10 each, you would have "made" $500. However, if the stock's value declined after that to $5 each again, your profits would be zero, unless you had been paid dividends. Be sure to do your homework before you invest, reading the company's prospectus and brushing up on its competitors. When deciding what stock or stocks to buy, there are literally thousands to choose from. So how do you go know the difference between them? To start with, there are a number of ways you can categorize stocks, but the most common are by size, style, and sector. Size: When we talk about size, this refers to what is called a company's market capitalization. This means the number of shares the company has sold times the cost of each share. You'll often hear stocks referred to as "large cap" or "small cap" which simply means their size relative to other stocks. There are no official rules that distinguish what is large cap or small cap, but there are some general guidelines. Large cap companies tend to more stable and less risky because they are established. Typically you can expect higher dividends with these stocks, but lower prospects of the stock appreciating very quickly. Small cap on the other hand usually grows at a much faster pace, though may pay little or no dividends. Style: Stocks are most commonly divided into two different styles, value and growth. Growth stocks are those that are expanding at an above average rate. In contrast, value stocks are viewed as having a lower price with the higher potential for "upside." Maybe a company made a big mistake that sent its stock price very low, but they fixed the problem and are now ready to rebound this is your typical value stock. Sector: Various financial companies have different definitions of sectors when describing a stock, but the most common is from Standard & Poors, which breaks stocks into one of ten "buckets." Each of these buckets, or sectors, contains stocks that have similar attributes, such as communications companies, utilities providers, and technology companies, to name a few.
round your purchase to the nearest dollar amount and transfer the difference from your checking account to your savings account. What could be easier?
Understanding Bonds
Bonds are, in effect, a loan that you make to a corporation or government. You give them your money for a pre-determined amount of time for a pre-determined rate of return on a regular basis. Bonds have a maturity date by which the bond issuer must pay back the value to the bondholder. You should look at the bond's rating, which denotes the creditworthiness of the issuer -- the lower the rating, the higher the return and the risk. Keep in mind that the longer the term of the bond, the higher the risk, as rates of return can fluctuate. The US government issues bonds that are referred to as "risk free," as they are backed by the US government. All other bonds issued by private companies are said to have some level of risk and as such must pay a higher rate of return than government bonds.
Next Up
Mutual funds and tax-advantaged investing.
Your Investment Options: Mutual Funds and Tax-Advantaged Investing

Mutual funds can be an attractive option for people who do not want to actively manage their investments, and you should always consider the tax implications of any investments you make. Related Information From Our Sponsor Keep the Change
Understanding Mutual Funds

A mutual fund is composed of the money contributed by a group of investors and overseen by a manager. That money is then used to buy various stocks, bonds, or other investments. Some funds are organized by level of risk, by industry, or even by religious beliefs. Each fund has a prospectus, a document required by the Federal government that tells you about the fund's objectives, investments, risk, costs, performance history, and staff. Always read the prospectus. You'll also need to know whether the fund is a load or no-load fund. "Load" is the commission paid to those who sell you the mutual fund, usually brokers. This amount is usually deducted from your investment and ranges from 4 to 8.5 percent. Some funds are partial-load funds that refund the commission to you if you keep your money with them for five years. However, this type of fund still reduces your overall return. It's important to research any funds you want to invest in -- some higher load funds have higher returns, but increasingly no-load or "lower" load funds are showing they can offer similar levels of returns. There are some advisors who counsel that investors are more likely to withdraw their money from no-load accounts, potentially making them more volatile. There is no evidence to support this claim and, since no-load funds cost you less, they're likely the best way to go and often have lower management costs, yielding higher returns.
Tax-Advantaged Investing
The bad news about all of those returns is that they are considered income by the federal government and are therefore taxable. First, the gains get counted on your tax return as additional income and may bump you up into a higher tax bracket. Secondly, you might owe a separate capital gains tax to the state and federal governments on the money you earned. There are some investments, however, that offer tax advantages. Tax-free investing: If you're in a high tax bracket, 31 percent or more, you may wish to invest in a tax-free mutual fund or a tax-free money market fund. Be sure to familiarize yourself with the restrictions on the investment in the eyes of both your state government and the IRS. Other tax-advantaged investing options include tax-free bonds and bond funds. Many of these are exempt from both state and federal taxes and are appropriate for those in high tax brackets. Be sure to familiarize yourself with your state's tax code. Tax-deferred investing: Your earnings are not taxable until the time that you remove them from the investment. A good example of this is a traditional IRA or a 401(k) plan from your employer. The most common investment made by Americans, other than a home, is investing in an IRA account or their company's standard 401(k) plan. More people are now investing in what are called Roth IRAs or Roth 401(k)s. We'll examine these in more detail in the next lesson, but it is important to point out that as opposed to investing in a tax-deferred manner, with a Roth you pay taxes when you invest in the fund -- but then are generally able to take money out of the fund when you retire tax-free. The general rule of thumb is that if you are young and have a longer period of time to realize gains in a stock, or fund, it may be a good time to consider a Roth option. If you are older, you likely will be better off with a standard tax-deferred solution.
Other Options
Treasury bills, bonds, or notes are loans to the federal government that mature within a given time frame. There are other investments available, such as stock options.
Next Up
More about Social Security.
Social Security: A Deeper Look

Social Security is a very misunderstood institution. It was started during the 1930s in order to provide people with their basic needs -- food, shelter, and clothing -- upon retirement. However, people live much longer today than they did in the 1930s, so the system is under serious strain, paying out more benefits to individuals than were anticipated when the system was started. In addition to retirement benefits, Social Security provides disability insurance for you and income for your spouse and children if you are disabled. There are a number of proposals being considered to extend the life of Social Security. However, regardless of the ultimate approach taken to preserve these benefits for future generations, it is likely that the younger you are now, the longer you will have to wait until you receive your Social Security benefits. For instance, if you were born before 1938, you can collect full benefits at age 65. If you were born between 1938 and 1959, you can receive full benefits at age 66, plus or minus several months, based upon the year you were born. If you were born after 1960, your full benefits kick in when you turn 67. As Americans live longer we can expect the benefits age to be increased, if Social Security continues to exist. As we mentioned in our previous lesson, it's best to view Social Security as potential safety net, but not count on it for your retirement needs. Related Information From Our Sponsor Keep the Change
How It's Calculated

Social Security takes a few factors into consideration. First, the number of quarters (three-month periods you have worked) needs to total 40 if you reach age 62 after 1990, basically 10 years of work during which you paid Social Security taxes. This requirement is a little misleading, because if you earn $2,960 per year, you get credited for the full four quarters, regardless of when you worked, so seasonal employees or part-time employees usually retain eligibility. To calculate your Social Security retirement potential, visit the Social Security Administration Web site's benefit calculator. Social Security also takes into account the age at which you begin receiving benefits. You may elect to start your benefits earlier than the required date for full benefits. However, that will usually result in a reduced benefit, so you may lose a considerable amount of money over time. In addition, Social Security takes into consideration the amount of money you earned at the time you retired. Your benefit is based on that amount.
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Planning around inflation.
The Impact of Inflation
The Rule of 72
Inflation is a factor that retirement planners often fail to apply to future goals because it occurs slowly. We often wrongly recall past costs as constants and underestimate the impact of price increases on our future projections. The Rule of 72 can help you estimate the impact of inflation. It says simply that if you divide the rate of inflation into the number 72, the result will be the number of years it takes to double prices. For example, if you divide 72 by a 3 percent expected rate of inflation, prices are expected to double every 24 years. At 4 percent, prices are expected to double every 18 years. Related Information From Our Sponsor Keep the Change
Looking Back
Inflation, however, is very real, very insidious, and a very serious threat to the accomplishment of your objectives. The accepted measure of inflation in the United States is the CPI, or Consumer Price Index, compiled and published monthly by the Department of Labor. From 1900 to about 1960, the CPI averaged about 2.5 percent. Since 1960, it has averaged 4.3 percent, ranging from less than 1 percent in 1961 to more than 13 percent in 1980. That may not sound like much, but the impact is devastating on a long-term basis. Most goods and services that you could buy for$1.00 in 1960 cost $6.00 in 1999! If you question that fact, consider that stamps rose more than 600 percent in cost in 35 years, from five cents in 1965 to 37 cents now. The price of a typical midsize family car rose 650 percent over the same time period -- from about $4,000 to an average of $26,000.
Looking Forward
In the last few years the rate has returned to about 2.5 percent. However, we saw 2005 increase to 3.4 percent, and we can only guess its future direction. Even at 2.5 percent per year, today's mid-priced car will cost 75 percent more in 40 more years, or about $70,000. At 4.5 percent, it will cost $151,000! Many investors -- including many financial professionals -- fail to apply the full impact of inflation to retirement calculations. For example, let's say you're a 50-year-old who wants to retire in 15 years at age 65 with the ability to buy goods and services that cost $48,000 per year now. Let's also say that inflation will average 3.5 percent annually, which is the combined average of pre-1960 rates and post-1960 rates. Let's assume also that you expect to live until age 90, or 25 years in retirement. A pricing model will tell us that $48,000 of goods and services will cost $80,417 when you retire in 15 years. That's a lot more money you must plan on spending, but the real problem is that inflation never stops, so you must plan to spend more and more each year to buy the same goods and services.
Next Up
Lesson 4 takes a look at some commonly used retirement vehicles: 401(k)s, IRAs, and more.
Assignment #1
Pick a few stocks and mutual funds, and start charting their performance. When choosing funds to monitor, be sure to pick several with different risk ratings. An easy place to look up stocks or funds and chart their performance is your daily paper's business section, or online at CNN Money. As you watch, visit the Message Board to discuss your observations.
Solution
Pick a few stocks and mutual funds, and start charting their performance. When choosing funds to monitor, be sure to pick several with different risk ratings. An easy place to look up stocks or funds and chart their performance is your daily paper's business section, or online at CNN Money. As you watch, visit the Message Board to discuss your observations.
Quiz: #1
Question 1: Which of the following is used to calculate the amount of Social Security you will receive? A) B) C) D) Question 2: When you own a piece of stock, you own ______________. A) B) C) D) Question 3: What is a "load" on a mutual fund? A) B) C) D) Question 4: What does is mean to have tax-free investments? A) B) C) D) Your Retirement Toolkit: 401(k)s, IRAs, and More You never pay any tax on returns Investments are made in government programs Investments are usually exempt from federal taxes but may incur state taxes Investing is done before taxes The amount of debt the fund has How much the fund will return on investment A refund A commission on your purchase of the fund The right to dividends A piece of a company A piece of paper, no more A piece of several companies Your age, your income at time of retirement, and the number of quarters you have worked Your income level, where you live, and the level of your job Your income level and other investments that you have None of the above
This lesson takes a look at a few commonly used retirement planning options, such as 401(k)s and IRAs. We'll also look at how Employee Stock Ownership Plans (ESOPs), pensions, and annuities fit into your overall plan.
401(k) and 403(b) Plans; and ESOPs and Pensions

Last lesson, we focused on some of the basic tools available to retirement planners, including Social Security, stocks, bonds, and mutual funds, and examined the importance of planning around inflation. In Lesson 4, we'll examine a few commonly used retirements planning options.
Vested?
When you're considering switching jobs, find out how long you need to work for the company before you are considered "vested" -- in other words, how long before you are entitled to keep employer contributions or other benefits even if you leave the company. Companies often use a vesting period over three to five years as an enticement to keep you as an employee. Related Information From Our Sponsor Keep the Change
Company-Provided Plans
Many employers offer access to retirement plans for their employees. Some employers even contribute money on your behalf. This is an important benefit and you should look at such contributions when considering a career change, as they can add up to significant amounts of money over the course of your employment. In this section we'll discuss some common employer-sponsored plans: 401(k) and 403(b) plans, Roth 401(k) plans, Employee Stock Ownership Plans (ESOPs), and pensions.
401(k) and 403(b) Plans

These plans allow you to contribute a portion of your pre-tax income up to a set percentage or dollar limitation, depending upon your employer's plan. Because you are contributing pre-tax dollars, the money you contribute is not included in calculating your federal and state income taxes. In addition, your employer may make a contribution on your behalf outright or may match part of your contributions. If you work for a not-for-profit corporation, your organization may offer a 403(b) plan, which may also be called a tax-sheltered annuity. This is very similar to a 401(k) plan, and you're able to contribute as much as 20 percent of your salary (up to a specific amount, specified annually) pre-tax. Be aware that there is usually a substantial penalty for withdrawing these funds before retirement, although exceptions do apply. In addition, you may be able to borrow against the value of your retirement account.
Roth 401(k) Plans

As we started to examine in our last lesson, another option becoming more and more popular is called a Roth 401(k) plan. A Roth 401(k) plan is virtually identical to a standard 401(k) plan, except it allows you to withdraw amounts tax-free after you reach the age of retirement, and you are limited to $15,000 a year in contributions. As opposed to a standard 401(k) plan, in which you make contributions from your pre-tax income, Roth contributions are taxable when they occur. With this, the two most important items to consider when deciding whether to invest in a Roth 401(k) are age and employer contributions. With a Roth plan, you are likely to see a greater benefit than with a standard 401(k) if you are younger and have the opportunity to recognize gains over a long period of time. Remember -- you paid taxes on your contributions, so you have to make up for these payments. In addition, many employers do not having employeematching programs with their Roth plans. It is important to weigh these two factors when considering which plan is best for your retirement planning needs. If you have the opportunity to participate in one of these plans, participate to the highest level you can. If your employer has any level of matching contribution policy, the reason grows exponentially. While it may seem like a large pay reduction to put 20 percent of your income in a retirement account that cannot be touched, you may find that the amount by which the deduction reduces your taxes actually makes the difference quite a With Keep the Change you can save while you spend. Each time you buy something with your Bank of America VISA Check Card, well round your purchase to the nearest dollar amount and transfer the difference from your checking account to your savings account. What could be easier?
bit less. Consult the plan administrator to calculate how different contributions will change your take-home pay. He or she should be able to provide you with examples of how various contributions will affect your individual situation.
ESOPs and Pensions

Your employer may offer other types of plans, such as Employee Stock Ownership Plans (ESOPs) or pensions. With these types of retirement programs, qualifications, risk, and ultimate benefit may vary greatly. Therefore, you need to discuss the specifics of the plan with your company's plan administrator. Find out how your money will be guaranteed and how much risk is involved. Pensions are employer-sponsored retirement plans that pay you based on the number of years that you worked for a company. An employer puts a percentage of your salary, generally out of the employer's funds, into a fund. This money is not taxed until you take it out of the fund. Federal law dictates that you are entitled to receive benefits after five years of service. So as long as you stay at your job for five years before you quit, you're likely to receive some payment at retirement -- even if you left before your pension reached its full potential.
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IRAs and annuities.
Individual Options: IRAs and Annuities

If your employer does not offer a retirement plan, you still have options. Related Information From Our Sponsor Keep the Change
Individual Retirement Accounts (IRAs)

IRAs are available to anyone with employment income. They come in two forms: Traditional or Roth. Traditional IRAs allow you to contribute up to $3,000 ($3,500 if you are 50 or older) per year as long as you earn at least that much income from employment or alimony. Traditional IRA contributions are fully deductible if you are: Single and your adjusted gross income is between $40,000 and $50,000, or Married, earning an adjusted gross income between $60,000 and $70,000 The deductibility thresholds are for tax year 2002. They increase annually for singles until 2005 and for married filing jointly until 2007. Consult IRS Publication 590 Individual Retirement Arrangements for the current year deductibility guidelines.
If you earn more, you can take the IRA deduction as long as you are not an active participant in your employer's plan. If you are not sure, you should check with your employer to find out if you are considered an active participant, as the definition is complicated. In a traditional IRA, your money grows tax-deferred and you pay taxes on your contributions and their earnings as you withdraw the funds. If you choose to make a withdrawal before age 591/2, you will not only pay tax on that amount, but you will also be penalized 10 percent for early withdrawal, unless an exception applies.
Roth IRA contributions, on the other hand, are not tax-deductible. They have a $3,000 to $3,500 contribution limit reduced by any contributions you may have made to a traditional IRA. However, your money's earnings grow tax-free and you do not pay taxes on the distributions of principal and earnings when you take them at the time of retirement (at least age 591/2), at which time you must have had the account for at least five years. In order to qualify for a Roth IRA, you must have an AGI of less than $110,000 as a single or $160,000 as a married couple filing jointly.
Annuities
Annuities can be described as a combination of life insurance policy and retirement account. Such accounts are secured by an insurance company, and your beneficiaries are guaranteed to receive the benefits of your contribution should you die before you become eligible to receive the account's benefits. Annuities are similar to IRAs in that your money grows tax-deferred until withdrawal, for which you are eligible at age 591/2. Unlike IRAs, however, your contributions are not tax deductible, so you need to take that loss of money (the tax you pay) into consideration when you consider an annuity.
Next Up
Retirement strategies for the self-employed.
Alternatives for the Self-Employed

If you work for yourself, you have even more options available to you. However, you need to take it upon yourself to ensure your own retirement security. In addition, if you have employees, you must provide them with a retirement plan similar to your own. Ignore this provision and you risk big bucks in penalties. You should consider the cost of providing such a plan as part of a total compensation package. These types of retirement options may also help you attract a better caliber of employee. Related Information From Our Sponsor Keep the Change
SEP-IRAs
The easiest option for the self-employed is to set up a simplified employee pension individual retirement account (SEP-IRA). Requiring little paperwork, a SEP-IRA is much like a traditional IRA, except that employers may make contributions. As a self-employed individual, you may contribute up to 13.04 percent of your net business income, up to a set maximum. Again, as with a traditional IRA, you pay taxes on the money when it is withdrawn and eligibility for that begins at age 591/2. With Keep the Change you can save while you spend. Each time you buy something with your Bank of America VISA Check Card, well round your purchase to the nearest dollar amount and transfer the difference from your checking account to your savings account. What could be easier?
Simple IRAs
A SIMPLE IRA is very similar to a SEP-IRA, but it allows for employers contributions and elective deferrals (similar to a 401(k) plan). The plan is very basic in the elective deferrals are limited annually, and employer contributions are limited to a maximum of 3 percent of an individual's compensation. It also allows the employer to match these deferrals, dollar for dollar, up to 3 percent of the individual's compensation. As an employee, a selfemployed individual can make deferrals under the plan and receive employer-matching contributions. While the contribution limits are less than those of the SEP-IRA, this plan allows for employee participation via deferrals and might be viable option for a selfemployed person just starting a plan.
Defined Contribution Plan

Defined Contribution Plans come in a variety of options but allow you, as a self-employed individual, to put 20 percent of your income away, up to set maximum, tax-deferred. When setting up a Defined Contribution Plan, you have several options: Profit-sharing plan, which allows for limited flexibility in annual contributions Money-purchase pension plan, which requires a fixed contribution each year Paired plan, which is a combination of a profit-sharing and money-purchase plan Defined Contribution Plans require more intensive paperwork than SEP-IRAs, but offer a variety of options (such as loans and protection from creditors) that may suit your business and your employees more effectively.
Defined Benefit Plans

A Defined Benefit Plan has unlimited contributions, but limits distributions based on IRSimposed limitations. You are required to retain the services of an actuary. For this, as well as for other recordkeeping reasons, defined benefit plans are more complicated and costly than SEP-IRAs or defined contribution plans. However, they may be a good option for someone nearing retirement and in need of an aggressive savings strategy. They may be a good option for someone nearing retirement and in need of an aggressive savings strategy.
Moving Forward
In this lesson, we reviewed quite a bit of information on investment vehicles available to you for retirement. However, if you're stuck with an unhealthy level of debt, you may find the prospect of investing in these vehicles overwhelming. In our next section, we'll be discussing how to make the best investment of all -- eliminating personal debt! Be sure to complete the assignment and quiz for this lesson, and drop by the Message Board to check in with your instructor and fellow students to get the most out of this course.
Assignment #1
Continue monitoring the stocks and mutual funds you decided to watch. How are they performing? Would you stake your future on them? How would you handle any that have declined in value? Also, visit MSN Money and use the calculator to compare the results of investing in a Roth plan versus a standard retirement plan. As you assess, visit the message board to discuss your findings.
Solution
Continue monitoring the stocks and mutual funds you decided to watch. How are they performing? Would you stake your future on them? How would you handle any that have declined in value? Also, visit MSN Money and use the calculator to compare the results of investing in a Roth plan versus a standard retirement plan. As you assess, visit the message board to discuss your findings.
Quiz: #1
Question 1: Which of the following are investment options for a self-employed person? (Check all that apply.) A) B) C) Question 2: Which if the follow are features of a Defined Benefit Plan? (Check all that apply.) A) B) C) Question 3: True or False: A Sep-IRA is identical to a SIMPLE IRA. A) B) Debt Management Basics When it comes to retirement, investing is only part of the puzzle. Managing your debt load is another important consideration. This lesson helps you get a handle on your debt, now and into the future. True False Allows unlimited contributions Requires the services of an actuary Limits distributions based on IRS-imposed limitations A SEP-IRA A Money Purchase Plan A Profit Sharing Plan
Getting Out from Under

In Lesson 4, we looked at some investment vehicles designed for retirement savings. However, investing is only part of the puzzle. Managing your debt load is another. Lesson 5 helps you get a handle on your debt. Once again, this lesson will involve hands-on calculations, so that you can see directly how your debt affects your ability to sock away for a rainy day. Let's begin! Related Information From Our Sponsor Keep the Change
Debt 101
Debt comes in two flavors: good and bad. Good debt is debt that's in line with your overall goals: school loans, mortgages, and car loans, for example. These can and often do qualify as good debts, since they are debts that help you move toward your goals and enrich your life. Bad debt tends to come from frivolous spending. Predictably, bad debt often pools in your credit card balances. A credit card balance that spirals out of control is your worst savings nightmare. It's something you need to control. (We'll talk more about managing bad debt momentarily.) However, whether you have good debt or bad debt the ultimate goal should be no --or at least minimal -- debt. Conventional wisdom says that everyone should have some debt, especially a mortgage, because of the tax advantages. However, even when you achieve a tax deduction because of a mortgage, you may still be spending more money than you are saving. To create a no- (or low-) debt plan, you first need to take a hard look at the debt you presently have. We'll help you figure out your debt ratio later on in the
lesson. Next, you need to create a budget to address your household expenses and find out how much money you can devote toward paying off your debt.
Budgeting
The word "budgeting," like the word "dieting," can make most of us groan. After all, what could be less fun than watching every penny that goes out of our pockets? However, many people who go through the budgeting process are amazed to find out how much they're spending -- and how much they're wasting -- on simple weekly or monthly expenditures. Learning where your money goes is critical to getting your finances back on track. Review your assignment from Lesson 1 when you created a list of your monthly expense categories detailing how much you spend on each. These likely included: Rent/Mortgage Utilities Telephone Gas Commuting expenses Groceries Clothing Credit card payments Automobile loans Insurance Entertainment/dining out You should have listed all of your monthly expenses, and then your other annual expenses at the bottom of the list, such as vacations or other once- or twice-ayear expenses.
Slash Your Expenses

Now you need to be merciless. Go through each category and realistically decide what can be cut -- and how. If you are a young person renting an apartment, moving to a less expensive apartment may be an option. If you own a home, it may be possible for you to sell it and move to a less expensive home, but it may not be feasible or even the best option. Some common ways to cut expenses: Switch telephone companies. Compare rates by calling telephone companies and learning about the options. When those pesky phone service telemarketers call you may be able to negotiate excellent rates -- and even a rebate -- by chatting with them instead of hanging up. Think about whether you need a home phone and a cell phone. With your cell phone, make your long distance calls in off-peak hours. Cancel unnecessary subscriptions. Do you really need (or even like) that extra magazine on the coffee table? Cut back on dining out or eat at less expensive establishments. Clip coupons, buy (wisely) in bulk and watch for sales, freezing perishables bought at a low cost. Buy clothing on sale or at outlet stores. Buy a less expensive (but good-quality) used car for cash instead of buying a new car on credit. Transfer credit card balances to cards with lower interest. Then cancel the high-interest cards! Regularly review the fees you are paying for automobile and homeowners insurance. Many companies will give you a discount if you purchase both through the same company. Think of other ways to cut your expenses and go to it. Once you have
determined the amount of money you can save in other areas, it is important to commit that amount to paying off your debt. Begin with those debts that are incurring the highest interest rate -- credit cards, gas cards, department store cards, and the like. Just say "No" when cashiers try to push store credit cards by offering you an additional discount on your purchase. While it may seem tempting, remember that store cards generally have a higher rate of interest than other cards and often don't have a grace period on new purchases. Over the long term, these cards will cost you far more than the 10 or 15 percent you will save that day.
Next Up
Notes on credit ratings.
Understanding Your Credit Rating

Much as we all want to get out from under debt, sometimes we need a loan. Given that reality of life, it's a good idea to check your credit report once a year or before applying for any type of additional credit or loan. Often, there are mistakes on these reports that can damage your ability to obtain credit. It is your right to request to have such mistakes corrected. Borrowing money against your assets is generally easier than borrowing money in other ways. Why? Because the loan is secured by collateral, something of value to the lender should you fail to pay your loan. So, be prepared: If you don't pay the loan back, the asset you worked so hard to build may go to the lender. However, you may still need a good credit rating to secure the loan. Related Information From Our Sponsor Keep the Change
The Big Three

Your credit rating is generally reported by one of three large agencies: Experian, TransUnion, or Equifax. The rating they assign is commonly called a "FICO score," named after the Fair Issac company that developed the scoring system, and can range between 300 and 850. Most lenders now base their decisions on the score given by one of these reporting companies. However, different types of lenders look at these scores differently. For example, a mortgage company may give you an "excellent" rating if your score is over 680 and offer you their lowest rate, but a credit card company may require a much higher score to put you in the same preferential category. The general rule of thumb is that if you keep your rating over 720 you will almost always receive the best credit possible. These companies are in contact with major credit card companies, as well as other financing and collection organizations. They track how much debt you've incurred as well as your payment patterns. These scores are a function of how much debt you have, how timely you make your payments, and what type of credit you have. Late payments and other negative information can stay on your report for as many as seven years. Bankruptcy remains on your credit report for 10 years. Before you apply for a car loan, mortgage, or credit card, it's a good idea to get a copy of your report and review it for accuracy. You'll need to get your score from three different agencies, each of which lenders rely on. Reports typically cost about $8 a piece. To order a copy of your report, call the agencies or contact them online at: Equifax: www.equifax.com or (800) 685-1111
TransUnion: www.tuc.com or (800) 888-4213 Experian: www.experian.com or (888) 397-3742 The Fair Credit Reporting Act (FCRA) requires each of these reporting agencies to provide you with a free copy of your credit report, at your request, once every 12 months.
To dispute inaccuracies on your credit report, contact the credit agency. It is important to monitor your credit reports, because many contain misinformation that can affect your score, and therefore lending decisions. There are estimates that say as many as 80 percent of all credit reports contain at least some incorrect information. You can obtain a free copy of your credit report each year by contacting these groups in writing. However, you should beware of companies offering quick fixes for your credit rating. These are often scams.
Next Up
Debt reduction.
Debt Reduction
We sometimes overlook powerful tools in reducing our debt. For instance, you may have savings accumulated or may have some non-retirement investments in mutual funds or stocks. If so, it might be wise to use these assets to pay off high-interest debt. For instance, you might be reluctant to use a mutual fund account that is earning 12 percent to pay off debt. However, if your credit card charges you 15 to 20 percent interest, you are actually losing money by keeping the savings in your account. Of course, you should never convert all of your savings; you do need to keep a cushion in case of an emergency.
When It's More Than a Bad Habit

Sometimes, overspending is more than a bad habit. If you feel that spending has become a compulsive behavior or if you are having difficulty cutting back, you may wish to seek guidance from a counselor or a 12step group such as Debtors Anonymous. Find a group near you by visiting www.debtorsanonymous.org . Related Information From Our Sponsor Keep the Change
Asking for Help

If you find that sticking to a tighter budget and paying more toward your debt is still not making a dent, it may be time to consult someone for help. Here you have several options.
Your Credit Card Company

Sometimes by just calling your credit card company and asking, you can get a reduction in interest that could mean hundreds of dollars per year. In addition, if you are truly having trouble meeting your obligations, you may be able to negotiate a new payment schedule. And, while you're on the phone, have them lower your credit limit so that you're not tempted to overspend again. Remember, they would rather earn a little less from you than have you default on your load and not pay at all.
Consumer Credit Counseling Service
With Keep the Change you can save while you spend. Each time you buy something with your Bank of
These non-profit agencies exist in every state. Find the one nearest you at the Consumer Credit Counseling Service Web site. CCCS helps you develop a budget and acts as an intermediary between you and the credit card companies. Be aware that CCCS agencies get most of their funding from credit card companies based upon the payment schedules they negotiate, and sometimes they do not negotiate medical bills, car loans, or other payments for which they do not receive commission. In addition, working through such an agency can tarnish your credit rating. However, they can be a powerful intermediary and relieve much of your credit card interest. And, if you've been late on several payments, the damage to your credit report may already be done.
America VISA Check Card, well round your purchase to the nearest dollar amount and transfer the difference from your checking account to your savings account. What could be easier?
Bankruptcy
This is a legal declaration that can relieve you of certain debts. Bankruptcy, however, does have a number of serious consequences. Although most states allow you to keep your possessions -- your house, car, and other belongings -your eligibility may be determined by how much equity you have in your home. In addition, bankruptcy remains on your credit report for 10 years and can, especially in the years soon after your bankruptcy, seriously affect your ability to secure a mortgage or other credit. Because some employers check credit records to make employment decisions, you may wish to consider that as well. There are two forms of bankruptcy. Chapter 7 essentially cancels certain debts. Chapter 13 requires a repayment schedule and doesn't cancel debts, but gives you protection from creditors until a repayment schedule can be worked out. Research your options carefully before making such a serious decision.
Negotiating With Creditors

If you find yourself with more debt than you can handle, the worst thing to do is to ignore it. Doing so can damage the options that you have, as well as your ability to obtain credit, such as a mortgage or business loan, in the future.
Next Up
Your debt profile.
Your Debt Profile

Before you can begin to manage your debt, you need to understand it. Before we move on to the next lesson, we'll help you do that using this online debt calculator. In the left-hand column, list all of the credit cards you have; loans, lines of credit, or other payments you make on money borrowed from institutions or others; and also list any other outstanding debts you have, such as taxes or medical bills. In the second column, list the monthly payment you make on each obligation and total the amounts. This is the amount you pay each month toward debt. Finally, in the third column, list the entire amount owed and total it. This is your total debt. (If you cannot fit your debts into the spaces provide, you can do the same calculations using a pencil and a piece of paper.)
Your Debt Danger Ratio

Some financial advisors suggest a simple calculation for determining your debt danger ratio. First, add up your monthly debt and divide it by your annual income. The result equals your debt danger ratio. If it equals more than 25, you may be in trouble.
Your Debt Ratio

Remember when you figured out your monthly income? Go back and get that figure. Now, using that figure and the amount of your monthly debt, you can figure out your debt ratio. Plug both figures into this calculator to calculate it. Now you know your debt ratio, a key indicator of your overall financial wellbeing. The following list helps you understand what it says about your financial health: 10%: Excellent. 15%: Fair, but you should probably pay off some debt before you attempt to acquire additional credit. 20%: Disaster waiting to happen. You're in the land of bad debt. Stop using your credit cards, and start paying them off. 25%: Stop! Get help! You're in serious trouble, and you are living daily in the land of bad debt. With Keep the Change you can save while you spend. Each time you buy something with your Bank of America VISA Check Card, well round your purchase to the nearest dollar amount and transfer the difference from your checking account to your savings account. What could be easier? Related Information From Our Sponsor Keep the Change
Moving Forward
We've discussed some debt-reduction strategies that should help you get your spending under control so you can give your retirement plans a serious shot at success. In our final lesson, we'll discuss strategies for those who started saving late in life and who need to make up for lost time. You'll also find out what a financial planner can -- and can't -- do for you. In the meantime, be sure to visit the Message Board and do the assignment and quiz. See you there!
Assignment #1
Figure out your debt ratio using the calculator provided. Are you comfortable with it? Can you improve it? Using the budgeting suggestions provided, establish a plan of action for budgeting yourself, spending less, and reducing your debt.
Solution
Figure out your debt ratio using the calculator provided. Are you comfortable with it? Can you improve it? Using the budgeting suggestions provided, establish a plan of action for budgeting yourself, spending less, and reducing your debt.
Quiz: #1
Question 1: How do you figure out your total debt? A) Adding up your minimum monthly payments on obligations B) Adding up the amount you owe on short- and long-term debt, such as credit cards, auto loans, personal loans, and the like C) D) Question 2: Subtracting answer A from answer B None of the above
You can often get help negotiating with your creditors from which of the following? (Check all that apply.) A) B) C) Question 3: How is your debt danger ratio calculated? A) B) C) D) Question 4: What does Chapter 13 bankruptcy do? A) B) C) D) Starting Late, Keeping It Safe In our final lesson, we'll examine strategies for late planners, as well as some important insurance basics and the pros and cons of working with financial planners. Restructures your debt payments Relieves you of certain debts Relieves you of all debts Incurs more debt Adding all of your debt Dividing the total amount of bad debt by your annual income The amount of good debt you have in comparison to bad debt Your monthly expenses Family and friends Consumer Credit Counseling Services The creditors themselves
Ideas for Late-in-Life Planners

In the last lesson, we looked at debt management. In our final lesson, we'll examine strategies for late planners, as well as some important insurance basics. Once you have begun to manage your debt and are maximizing your retirement savings options, you may realize that you started saving a bit later than you needed to or that your retirement needs are going to be greater than you first anticipated. Don't panic the important thing is to address the situation, not ignore it. In some cases, traditional retirement savings vehicles are just not enough. Here are some suggestions for making up for lost time. Consider real estate equity. If you purchased a home during your working years, it's likely that you've built considerable equity, which is a possible source of retirement funding. First, you could sell your home and use the proceeds to purchase a smaller home. This may eliminate mortgage debt or provide important retirement income. If you own your home outright and want to stay, you may wish to consider a reverse mortgage. These programs allow you to receive a monthly check based on the value of your home; in other words, you're building a loan balance that is paid off when your home is sold. Cut back on spending. It's never fun, but remember in our last lesson how cutting back on spending can be an important way to sock more money away for retirement. Consider your expenses and see where you can make some modifications. Get more aggressive with your investments. If you're in your mid-30s and you earn a 6 percent vs. 4 percent return over the rate of inflation, the amount of money that you need to save for retirement could be as much as 40 percent less. Therefore, take a look at how you can wisely move into more aggressive investments, based upon your financial needs and your age. Turn your hobby into a moneymaker. Whether you're a great cook or you love to write, it's possible that your hobby could earn you a few extra bucks toward your retirement. In the best-case scenario, you could turn your hobby into your own business, which could earn money and build equity. Consider a job with a retirement plan. If your current job does not offer a plan for retirement, consider switching to a job that does. It's critical that you maximize taxRelated Information From Our Sponsor Keep the Change
advantaged savings vehicles for retirement to realistically meet your needs. If the thought of leaving your job leaves you cold, approach your employer about offering a retirement plan.
Next Up
Some important insurance considerations.
Insuring for Safety, Not Savings

You're working hard to build a comfortable retirement for yourself and your spouse or partner. But if you don't have proper insurance, you're putting the financial well-being of yourself and your family at risk.
What if You Can't Afford It?

If you cannot afford health insurance, you should check with your state's insurance commissioner to find out what options you may have. Many states offer affordable plans for families, especially children. You can find the commissioner for your state at the NAIC Web site . Related Information From Our Sponsor Keep the Change
Health Insurance
The most important type of policy to secure is a major medical policy. This covers large expenses like physician bills, hospital expenses, and many medical tests and diagnostic tools, such as X-rays. Another issue for you to consider is benefits. If you are a woman of childbearing years, you may want to make sure that your policy provides coverage for pregnancy. In addition, some policies have a lifetime maximum benefit, the total amount that will be paid for your health care. If your policy has a lifetime benefits maximum, it should be no less than one million dollars -- which can be easily reached over a number of years of routine care, given one catastrophic illness or accident. If you can find an affordable policy without a lifetime benefits limit, it may be wise to choose that policy. Most policies have deductibles and co-payments. A deductible is the amount you will need to spend on health care covered by your policy before the policy will begin to pay. Generally, the higher the deductible is, the lower the cost of the insurance policy. So, choosing a high deductible -- as long as it's affordable to you should you need care -may be a good way to purchase a better health care policy. Co-payments are also a consideration. You may need to pay a percentage of your claims, up to a certain amount. Again, generally the higher the co-payment, the lower the cost of the policy.
You Get What You Pay For

Often, the less expensive the policy, the more restrictions on your health care choices. Health maintenance organizations (HMOs) and preferred provider organizations (PPOs) contract with health care providers to control costs. However, they often restrict which health care facilities and practitioners can provide care to you under their benefits policies. With Keep the Change you can save while you spend. Each time you buy something with your Bank of America VISA Check Card, well round your purchase to the nearest dollar amount and transfer the difference from your checking account to your savings account. What could be
Life Insurance
Life insurance comes primarily in two forms: Term and whole life. Term insurance gives those individuals or entities you designate a fixed amount of money should you die within the term of time the insurance policy covers. Term insurance is generally renewable for a specific length of time at a fixed price or with a
slight increase over a predetermined number of years. For instance, you may buy a term policy for a period of 20 years. If you bought that policy at age 30, it would renew each year you paid it through age 50. At 50, however, if you still needed life insurance, and chose to purchase another term policy, the cost would likely be much higher. Once your term policy expires, you receive no cash benefit. A whole life policy, on the other hand, acts like a savings account. It's far more expensive, but the sales pitch is that some of the money is put into an account that grows in value over time. Unlike term, this money is available to you should you decide to "cash out" of the policy.
easier?
Become Independent
Your dependency on life insurance should lessen as you progress in your life. It is intended to provide for your dependents should you pass away, especially your spouse and children. You will want a higher level of coverage with a young family than you will when your family is older.
Insurance for Disability and Long-Term Care

This section covers two types of insurance that are equally important, but sometimes overlooked. Related Information From Our Sponsor Keep the Change
Disability Insurance
Disability insurance is one of those areas that is often neglected -- we don't think we'll need it until we actually do need it. However, think about what would happen if you were physically unable to work. If such an incident would put a significant financial strain on you or your family, you should consider disability insurance. Disability insurance doesn't apply to short-term illnesses or injuries -- only to debilitating, long-term situations that leave you physically unable to earn an income. Your employer may offer disability insurance, but government-sponsored programs such as Social Security disability, worker's compensation, and state disability programs are generally grossly inadequate should the unthinkable happen to you. The amount of disability insurance you need will depend on a few things: your expenses, your savings, your willingness to sacrifice elements of your lifestyle, and the amount of time until other financial options -- retirement funds, Social Security, etc. -- become available. Generally, you will want to replace your entire after-tax pay. The good news is that if you purchase disability insurance yourself, the benefits are tax-free. However, if an employer provides it, the benefit will be taxable, so you'll want to figure that into the equation.
Long-Term Care
Long-term care insurance has received more attention lately as our population is living longer. In 1950 the average man lived to be 65 and the average woman 71, whereas by 1997 this grew to 74 and 79, respectively. One of the by-products of a longer life span, however, is that more people suffer from chronic illnesses that can be stabilized but which may eventually become incapacitating. In the case of a catastrophic illness or disability, long-term care insurance could ease the strain on family members should you need significant amounts of medical care above and beyond that which is covered by
your health insurance policy. Long-term care insurance is much like automobile or fire insurance -- you have it and hope that you don't have to use it. And you need to qualify for it. Some experts say that you should start looking for a policy when you're in your mid-fifties. At that point, the insurance will likely be more affordable. If you think it's unlikely that you'll need long-term care insurance, consider these facts: One out of every three individuals who has such a policy uses it. Over nine million men and women require long-term care. By 2020, this number will grow to twelve million. Nursing homes and assisted living facilities are not covered by health insurance policies. And they could cost as much as $4,000 per month or more, depending upon the level of care needed. Women have a 50 percent greater likelihood of needing nursing care than men. Medicare only covers the first 20 days of a stay in an LTC facility -- and it must be one approved by Medicare. If your family has any assets whatsoever, you are unlikely to qualify for Medicaid coverage of LTC facilities. It's not a pleasant subject, but it is definitely something that you should investigate to protect your spouse and your family's financial well-being.
Goodbye and Good Luck

Congratulations! By taking this course, you've taken the first step towards a secure financial future. We hope that the common-sense insights you've gained here will help you plan a comfortable retirement and confront the important decisions you need to make.
Assignment #1
Again revisit your retirement plan, this time with an eye on your time horizon. Given the amount of time you have to start saving, how aggressive should you be? Review all your options and determine what is feasible -- trading down to a smaller house, cutting spending, etc. Feel free to come discuss your goals and progress on the Message Board!
Solution
Again revisit your retirement plan, this time with an eye on your time horizon. Given the amount of time you have to start saving, how aggressive should you be? Review all your options and determine what is feasible -- trading down to a smaller house, cutting spending, etc. Feel free to come discuss your goals and progress on the Message Board!
Quiz: #1
Question 1: Which of the following is not a sensible strategy for aggressive retirement savings for late-in-life planners? A) B) C) D) Using real estate equity Playing the lottery Cutting back on spending Turning your hobby into a small business
Question 2: What is a PPO? A) B) C) D) Question 3: Why is it wise to invest in term life insurance? A) It expires B) It's less expensive and you can receive a better rate of return on the balance of the money than with a cash value policy C) D) 2003 - 2007 Powered, Inc. Cash value policies have no real value None of the above A type of health insurance policy A type of investment option A type of life insurance option None of the above

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Curs Secure Retirement

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Planning for a Secure Retirement

How the Course Is Structured

And you... Have a high income

Will still have significant mortgage payments when you retire

your checking account to your savings account. What could be easier?

What Comes In and What Goes Out

How Much Is Going Out?

your checking account to your savings account. What could be easier?

What If My Outgoing Total Was Higher Than My Incoming Total?

Figuring Out Your Net Worth

Why Are You Here?

Your Net Worth

Interest from savings

Understanding Investment Variables

Creating a Saving Style That Suits Your Personality

Determine What You Want for Your Future

Allocating Your Money

Figure 2-1: Two different strategies a 30-year-old investor might use.

Dollar Cost Averaging

Don't Fix It If It Isn't Broken

Your Investment Options: Stocks and Bonds

Your Investment Options: Mutual Funds and Tax-Advantaged Investing

Understanding Mutual Funds

Social Security: A Deeper Look

How It's Calculated

Planning around inflation.

The Impact of Inflation

401(k) and 403(b) Plans; and ESOPs and Pensions

401(k) and 403(b) Plans

Roth 401(k) Plans

ESOPs and Pensions

Individual Options: IRAs and Annuities

Individual Retirement Accounts (IRAs)

Alternatives for the Self-Employed

Defined Contribution Plan

Defined Benefit Plans

Getting Out from Under

Slash Your Expenses

Understanding Your Credit Rating

The Big Three

When It's More Than a Bad Habit

Asking for Help

Your Credit Card Company

Consumer Credit Counseling Service

Negotiating With Creditors

Your Debt Profile

Your Debt Danger Ratio

Your Debt Ratio

Ideas for Late-in-Life Planners

Insuring for Safety, Not Savings

What if You Can't Afford It?

You Get What You Pay For

Insurance for Disability and Long-Term Care

Goodbye and Good Luck

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