Professional Documents
Culture Documents
THE HAFT
OF IT
A collection of the most popular
financial planning newspaper
columns by
ALAN HAFT
© 2007 by TriMark Press, Inc.
This book is intended for general information purposes only. While the
publisher and author have utilized their best efforts in preparing this book, they
make no claims or warranties with respect to the accuracy or completeness of
the contents. The information may not be applicable to you and is intended
for general demonstration purposes only. There are many exceptions to the
general principles stated herein. Before you apply or act on this or any other
legal, investment, funding, tax, insurance or other financial information, you
should consult with a financial planner who can evaluate the facts of your
specific situation and advise you on the proper course of action based on that
evaluation.
ISBN: 978-0-9767528-7-5
Alan Haft
alanhaft.com
800-809-4699
DISCLAIMER
Everyone’s personal situation is uniquely different. Investments, taxes
and estate planning concepts addressed during the course of the book
are complex subjects. With this in mind, please be sure to consult with
a qualified tax, estate and/or investment advisor(s) before any action is
taken. Furthermore, because articles in this book are reprints from
various newspaper columns, some of the information might be outdated.
CONTENTS
Introduction
Chapter 2: Investing
The Benefits of Diversification........................................................................ 41
The Index Advantage and Exchange-Traded Funds........................................ 46
Small Company Stocks................................................................................... 49
Real Estate Investment Trusts......................................................................... 52
Chapter 3: Income
More Income, Less Risk ................................................................................. 71
Build a Bond Ladder...................................................................................... 75
The Power of Dividends ................................................................................ 85
Preferred Stocks . ........................................................................................... 88
Real Estate Without the Headache ................................................................ 91
Government-Backed Mortgage Securities . .................................................... 94
Chapter 4: Bonds
Understanding the Effect of Interest Rates...................................................... 97
The Attraction of Bond Funds...................................................................... 101
Chapter 5: Annuities
Index Annuities ........................................................................................... 105
Variable Annuities ...................................................................................... 110
When You Need the Cash Now ................................................................... 113
Chapter 6: IRAs
Frequently Asked Questions ........................................................................ 117
Converting to a Roth IRA............................................................................. 120
Liquidate Your IRAs? . ................................................................................. 123
Beneficiaries and Required Distributions..................................................... 127
Extending the Life of Your IRA .................................................................... 130
Create Your Own Private Pension Plan........................................................ 132
Self-Directed IRAs ...................................................................................... 137
Chapter 7: Taxes
Understanding Tax Efficiency ...................................................................... 141
Taking Advantage of the 2003 Tax Act ........................................................ 144
The New Tax Law ........................................................................................ 147
Reducing Capital Gains and Estate Taxes ................................................... 150
How Will You Spend Your Tax Refund? . ...................................................... 153
Chapter 8: Economy
Not Concerned about the Federal Budget? .................................................... 157
Currency Values........................................................................................... 160
The Price of Crude ...................................................................................... 163
The Threat of Inflation ................................................................................ 166
Conclusion
..................................................................................................................... 193
PREFACE
This book is a collection of columns I wrote. Out of all the columns I’ve
written, those found in this book are the ones that generated significant
feedback, questions, and, quite frankly, the most “thanks for writing
that” comments. Some issues are timeless, while others will one day
become outdated. Regardless, for now and the foreseeable future, these
issues underscore the importance of understanding what’s happening
with your money even if you’re looking to others for advice.
INTRODUCTION
Most of us have been on a road trip at some point in our lives. The
trip may have focused on business, or it may have been for pleasure.
In either case it required preparation and much of that preparation
is similar, regardless of the trip’s purpose. If you want your trip to be
successful and uneventful, there are always a few necessary steps to
take before you hit the road.
Of course, the first step you must take before setting out on your
journey is to first determine your intended destination. It may be
across the border into another country, into another state or down the
block. But even if it’s local, you still need to plan your route. Whenever
you’re headed into an area that you’re unfamiliar with, you will likely
need some sort of road map. Longer journeys will require plotting out
highways and other major thoroughfares. Then, once you get into an
unknown city or town, you will most certainly need a more detailed
street map to get you to your destination.
Now, what about your vehicle or how you’ll actually get to your
destination? The make and model doesn’t matter so much as does its
condition. Is it in good shape? Are all of its systems operating correctly?
Do you have a full tank of gas? Have you checked the oil and tire
pressure? You need to make sure all of the parts of your vehicle are
operating before you head out on your trip. You certainly don’t want to
break down somewhere along the road.
goals. While you may likely have a long-term goal in mind (such as
retirement), you may also have several short-term, intermediate goals.
You may wish to purchase a second home, help your children with
various expenses or make donations to charities. With proper foresight,
you can arrange to arrive safely at both your long-term and short-term
destinations. Yet besides knowing your destination, or goal, you’ll also
need a good road map and a sound vehicle.
Not only are investments covered in this book, but other areas of
financial planning as well. If properly monitored and adjusted, they
will also help you get to where you want to go. Parts of your retirement
vehicle include money, taxes, fees, estate planning, medical planning
and a long list of other things.You don’t need to know who makes your
radiator coolant, however, you do need to know when you’re having
a problem that involves your radiator. That means monitoring your
dashboard gauges to make sure your vehicle isn’t overheating. And
if something does break down, you need to be able to pull out the
manual from the glove compartment to get a better idea of what’s
going on.
When a prospective client asks “What can you do for me?” I answer
that I can help them very clearly define their financial goal, or
destination, and then help them match that goal as precisely as
possible with whatever products, or components, will best get them
there. One particular vehicle, or combination of components, doesn’t
14
necessarily fit everyone, even though they may be retired. Just because
you’re at the same point in your life – when you should be protecting
the wealth you’ve accumulated – does not mean you should have the
same investments, insurance, etc., as everyone else. You may need a
Mercedes, while a Cadillac or Lincoln is more appropriate for someone
else. One is not necessarily better than the others. All three vehicles
will carry you through retirement but in a slightly different way. While
there are many good “components” on the market that will help drive
your vehicle, everyone’s needs are different and these parts must be
considered on an individual basis.
One thing in planning for retirement does not change: You’ll still need
to review your map, or your investment plans, regularly to make sure
you’re on course. Comparing your actual performance to what you
had planned is the only way you will know whether you’re on track.
Construction zones, detours, and accidents may occur over time and
can delay your progress if you’re not alert. These unexpected incidents
may require you to change your route, or the roads you are using to
get you through retirement. Routine vehicle maintenance will also be
required from time to time. But if you keep an eye on your destination,
your map, and your vehicle by monitoring its gauges, you’ll be able
to alter your route slightly, replace a couple of components now and
then, and stay on the road. It’s only through your understanding of
what’s needed and your regular involvement that you will be able to
ride through your retirement years safely and comfortably.
Happy driving…
ONE
RETIREMENT PLANNING CHAPTER 15
You’ve probably heard the saying “people who fail to plan, plan to
fail”.That certainly holds true when it comes to your retirement. To
have the best chance of living in the style you’ve become accustomed
to during your earning years, it’s essential that you make time as soon
as you can to properly plan for the years when you won’t be actively
employed. Coming up short could be a rude awakening when you’ve
already decided to stop working at a certain age.
of the markets. But you probably know all that, even if you’ve put off
planning.
What you may not know is that there are strategies than can help you
maximize your investment dollars, which aren’t always so obvious.
There’s also much more to retirement planning than just saving and
investing. There are tax issues, estate planning, and the list goes on.
Of course you can always seek the advice of a qualified financial
advisor if you need assistance, yet finding the right financial advisor
takes some planning too.
In this chapter, we’ll cover some retirement planning points you need
to know about so you can make sure that you have the retirement you
deserve. We’ll start with a list of five common mistakes that people
make when planning for retirement.
Here are some key points to keep in mind when making your
decision:
20 RETIREMENT PLANNING
1. What do the acronyms following the advisor’s name (if any) really
mean?
It’s important that you understand the alphabet soup. The letters
following a financial advisor’s name can stand for education,
experience, or registration with a trade association. (See the
accompanying list on page 23 for a guide to the definitions of some
of the more common financial designations.)
Given someone with a Series 6 license can only sell you mutual
funds or variable annuities, I would recommend considering
someone with a Series 7 license to compare plans. At the far end
of the extreme are individuals promoting only insurance products
such as fixed annuities and/or life insurance. These people can’t
recommend any securities products, such as bonds, which are
often a staple of many people’s retirement portfolios.
RETIREMENT PLANNING 21
Some of the best financial plans I’ve seen have come from insurance
advisors who do not hold securities licenses. Yes, there are a couple
of spectacular ones out there. In fact, in one chapter of this book I’ll
outline an income plan that doesn’t include any securities products,
and it’s easily one of the best income strategies around.
Financial Designations
CFP – Certified Financial Planner
CFPs have obtained three years of financial planning experience, passed
several exams, and meet continuing education requirements. They
can offer a broad range of advice on financial planning, investments,
insurance, taxes, retirement planning, and estate planning.
RR – Registered Representative
RRs have passed a qualifying exam administered by the National
Association of Securities Dealers (NASD). They are generally sales
representatives for a brokerage firm. Their expertise is in selecting and
monitoring stocks, bonds, mutual funds, and other financial products.
RETIREMENT PLANNING 25
It’s usually easy to find financial planners in your area. You can look
through listings in the phone book or get recommendations from
friends and colleagues. But how do you know which one to hire?
One way to avoid, or at least reduce estate taxes is to give away some
of your assets during your lifetime. However, when you give a gift,
you may be subject to paying gift taxes, which are levied on yearly
gifts valued at more than $12,000 per year per “giver”. But remember,
gifts in amounts up to $12,000 per year, per giver, are not taxed. So
if you and your spouse each transfer $12,000 annually (for a total of
$24,000 per year) to a custodial account for 15 years, at the end of
that time period you will have transferred $360,000 and saved over
$100,000 in income taxes (if you’re in the 28% tax bracket). Even better
for your heirs, if you invested that money, it will have grown to even
more. Suppose you invested that $24,000 once a year and received a
hypothetical annual return of 6%. That investment would be worth
$558,623 at the end of the 15 years.
RETIREMENT PLANNING 29
One way to make a gift like this is through the use of a custodial
account, such as a Uniform Gift to Minors Act (UGMA) account
or Uniform Transfer to Minors Act (UTMA) account. Both of these
accounts are a type of trust set up for the benefit of a child. You can
open such an account at a bank or through a mutual fund company,
naming a custodian and contributing to the account. Then, when the
child reaches the age of maturity, he or she is entitled to take over
the account. Just to note: Technically speaking, once you’ve gifted the
money, you cannot take it back for your own use.
First, don’t name yourself as the custodian of the account. If you do,
and you die before the account terminates, the money in it will be
included in your estate – exactly what you wanted to avoid! This is true
even though the transfers to the account have been completed. It’s
better to name someone as a custodian who will not make any gifts to
the account, such as an uncle or myself (just kidding).
Second of all, you may use the funds in the account for the child’s
benefit, but be careful. The Internal Revenue Service (IRS) contends that
if you are a parent setting up an account, you have a legal obligation to
support your child, so if it appears that you are using any of the money
in a UGMA/UTMA account to support the child instead of doing so
yourself, the IRS may claim that any income from the account will be
taxed to you, not to your child. In addition, there is little-established
guidance on this issue. Some tax experts argue that the UGMA/UTMA
law contains language designed to prevent parents from being taxed
on custodial account income when the account is used for purposes
that fall within the parent’s support obligation. Others say the law is
unclear. So be forewarned that this may be an issue.
30 RETIREMENT PLANNING
You can avoid any possibility of these problems, and many others,
by establishing a trust instead of a custodial account. Yes, there are
additional costs involved, but they may be less than you expect. And
if you’re dealing with a large sum of money, the advantages may far
outweigh the cost. Discussing your plans with a financial advisor will
help you to more fully understand your options.
RETIREMENT PLANNING 31
With that said, it’s very rare that I see an instance where someone
cannot at least equal the returns they are getting in their employer-
sponsored account, but it’s important to consider.
Note that when you request a direct rollover into an IRA, no money
is actually distributed to you; it moves straight into the IRA. As
a result, you’re not taxed (until you withdraw the money later),
and 100% of your retirement assets can continue to grow tax-
deferred.
Keep in mind that moving assets into a rollover IRA isn’t always
the best choice. For example, if you have a retirement account with
just one employer, and you have numerous investment options
and pay low fees, it might make sense to leave your retirement
assets where they are. Should you decide that moving your assets
into a rollover IRA is right for you, check with the company’s
retirement plan administrator (who is typically part of the benefits
or human resources department) to determine whether there are
any restrictions on rollovers before you do so.
If you have a retirement plan with a current employer, you may not
be able to roll over assets from that plan into an IRA. Most retirement
plans restrict rollovers while you are employed by the company
that offers the plan. In addition, if any part of your retirement plan
investment with your current employer is held in company stock,
you’ll need to find out if the plan has any restrictions on selling your
shares, again, by contacting the retirement plan administrator.
Year-End Checklist
The top 10 money matters you don’t want to miss
Wait! Hold off for a minute. Don’t drink that champagne and sing
“Auld Lang Syne”yet. It’s not too late. As the holidays approach, many
people vow to get their finances in order, but few actually do so. If
you’re a procrastinator, here are 10 last-minute tips to help ensure
that you take at least some steps toward improving the state of your
finances by the end of the year. So before popping the cork and kissing
your significant other, take a moment to mull over these thoughts that
could have a significant impact on your financial well-being.
withdraw the remainder of the total RMD amount for each year
by the end of that calendar year. For example, if you reached age
70½ in 2005, your first withdrawal must be made by April 1, 2006,
and you must take the rest of your total 2006 RMD for the year
by December 31, 2006. If your RMD is not taken in what the IRS
considers to be a timely manner, you may be assessed a 50% excise
tax on the amount you should have withdrawn. Ouch!
So what’s the problem? The Social Security well may also run dry soon.
Baby boomers – more than 77 million strong – will start becoming
eligible for Social Security benefits in 2008. But if there’s a federal
budget deficit, as there is today, the government could be forced to
delay benefits or even cut them, a once improbable possibility that
RETIREMENT PLANNING 39
While people can be advised to plan better and save more, even that
isn’t always enough. The answer may seem obvious, but conventional
wisdom and logic doesn’t always hold true.
Many of you will think about this man’s situation and say that his
problem is easy to solve. All Joe has to do is change his asset allocation
so he can potentially earn more on the money he saves. But that strategy
may not be as helpful as it was once thought to be. According to the
popular T. Rowe Price Retirement Income Calculator www.troweprice.
com, if someone who has $600,000 in savings and a life expectancy of
25 years at retirement withdraws 5% per month, he has only a 50%
chance of meeting his retirement goals – even if he puts 90% of his
money in equities. Sounds depressing, doesn’t it?
40 RETIREMENT PLANNING
So how can you solve the problem? How can you safely obtain
significantly more income for yourself at retirement without sacrificing
a future inheritance to your heirs? Several interesting solutions exist,
and we’ll analyze one of my personal favorites in a few chapters to
come. (Hint: Pay attention to Chapter 3’s “peanut butter and jelly”.)
TWO
INVESTING CHAPTER 41
We’ll start with allocating your assets and diversifying your portfolio.
Most investors have heard of diversification and many can explain
why it’s important, but I often find that many don’t follow their own
advice. So let’s review one of the most important fundamentals of
smart, sound investing.
42 INVESTING
Let’s say that you and your financial advisor agree that a 60% equity/40%
income split is appropriate for your circumstances and your portfolio
is balanced accordingly. Over time, two things can happen.
First, your needs may change. Perhaps your tax liability has increased
and you want to consider tax-exempt investments, or you’re ready to
start taking income from your portfolio. Second, even if your needs
have remained the same, your portfolio probably won’t stay balanced.
Strength in the stock market could cause your equity holdings to
swell way beyond 60%, or a disappointing performance in income
investments could cause your income holdings to shrink to less than
40%. You’ll need to assess these factors and buy or sell securities as
needed to stay on track with your asset allocation.
So suppose your target allocation is 60% stocks and 40% bonds. For
this brief chapter, I’ll keep this pretty simple, but the overall concept
is very effective. Now, let’s say within that 60% stocks category, there
are several “sub-classes”, one of which is in technology. And let’s say
it’s the 90’s, and tech is surging beyond our wildest dreams. You wake
up and find the portfolio is now 80% stocks (mostly because of tech
in this example). What happens to bonds during this bull run? They
usually fall in value. So now you have 80% stock, 20% bonds. If you
follow a rebalancing strategy, what happens? You rebalance so that
you sell off 20% of those heated stocks at a high (for a profit), and
reallocating that 20% into bonds, right? And what happens when you
invest that 20% into bonds? You are buying at a low. That’s precisely
what every investor dreams of, and with rebalancing – I kid you not
– it really can be that simple.
Following these simple rules will most certainly provide you with
significantly better chances for long-term investment success.
46 INVESTING
health care stocks and real estate investment trusts (REITs). There are
even indices for Genome companies, water companies, biotechnology,
oil exploration, etc.
There are two main ways to invest in indices: Through index mutual
funds and through exchange-traded funds (ETFs). Both types of funds
replicate an index. Index mutual funds, as the name implies, are mutual
funds. You obtain them through your financial advisor or any mutual
fund company that sells directly to the public. ETFs, on the other hand,
are bought and sold like regular stocks, and even have stock symbols.
ETFs that track the S&P 500 include Spiders (SPY) and iShares (IVV is
48 INVESTING
one example). One thing you’ll want to watch out for, whichever you
choose, is the fees. Before you invest, check the index mutual fund’s or
ETF’s expense ratio, which is calculated as a percentage of the amount
you invest. Generally, don’t invest in an index fund or ETF with an
expense ratio greater than 0.40.
As for performance, the returns on index funds and ETFs are almost
identical. But there are a few reasons you may want to consider one
over the other. Since ETFs are bought and sold just like stocks, you’ll
probably pay a commission each time you buy and sell. So if you are
systematically investing on a monthly basis, you would likely be better
off purchasing the index as a mutual fund instead of an ETF (given
that most index mutual funds will not charge you fees when adding
more money). One distinct advantage ETFs have, however, is that they
can be traded on a moment’s notice – “intraday” – whereas shares of
a mutual fund don’t actually get sold until the end of the day. Finally,
because an ETF trades like a stock, it offers yet another significant
advantage: being able to set a “stop loss” that could potentially protect
you by automatically cutting your losses at a predetermined dollar
amount when the related index falls.
There are many reasons to invest in small-cap stocks. For one, smaller
companies tend to provide products and services for the domestic
market, so they may be less affected by economic disturbances abroad.
Secondly, their size can allow them to react more quickly to changes in
50 INVESTING
the economy than larger companies can (which explains why small-cap
stocks have traditionally performed well as the economy is emerging
from a downturn). And thirdly, they have room to grow.
That said, small-cap stocks aren’t for everyone. Typically, the smaller the
stock, the more risk it presents. Why? Because the management may
be less experienced. Business risks, such as shrinking product demand,
may be accentuated in smaller companies. Because it can be harder to
find buyers for these stocks, it may take some time to sell your shares
when the economy or markets perform poorly. But keep in mind that
as of the latest reconstitution of the Russell 2000 Index, the average
market capitalization of a company in the index was approximately
$607.1 million. A business of that size isn’t exactly a mom-and-pop
shop either.
So, if you can handle the risks, I think it’s a good idea to add some
small-cap stocks to your portfolio. How much will depend on various
factors, including your time horizon. A financial advisor can help you
determine what amount may be appropriate for you to invest.
First, let’s make sure you clearly understand what constitutes a REIT.
A REIT is a security that invests directly in real estate, either through
properties or mortgages. You can buy or sell a REIT just like you would
a stock on the major stock exchanges. At the time of this writing, one
of the best-known REITs is Equity Office Properties (EOP). Other
popular REITs, all traded on the New York Stock Exchange (NYSE),
include BioMed Realty Trust (BMR), Boston Properties (BXP), Prentiss
Properties (PP), and Trizec Properties (TRZ).
INVESTIN G 53
Other analysts, however, are predicting doom and gloom for the asset
class.You’ve probably heard rumblings about a“real estate bubble,”and
Mike Swanson, an analyst who produces a weekly newsletter called
Wall Street Window, says “the REIT bubble is about to burst”. For those
of you who agree with this outlook, ProFunds has an interesting fund
that will rise in value if the U.S. Real Estate Index falls. Check it out
at www.profunds.com, and as with any investment, be sure to read the
prospectus carefully before investing.
If indeed the real estate market does go down, that shouldn’t necess-
arily worry potential investors. You can still gain the benefits of REITs
while minimizing your risk in a number of ways. First, you can invest
in REITs in certain sectors. For example, REITs that focus on retail and
self-storage have been performing well. On the other hand, REITs that
focus on offices and apartments have been struggling, perhaps because
the U.S. economy’s recent recovery has focused on the consumer.
Regardless of which asset class or REIT sector you’re looking at, you
always want to buy out-of-favor companies with good potential
to generate cash. That’s a basic principle of investing. Yet as with
all investments, there are no guarantees. So if you’re interested in
investing in a REIT, be sure to consult with a financial advisor who
can help you select a REIT that best fits your desired level of risk to
reward.
Evaluating Performance
Using market indices
One pacesetter that investors often turn to when evaluating the
performance of their investments is an index, such as the Standard &
Poor’s (S&P) 500 or the Dow Jones Industrial Average. What they may
not realize, however, is that these indices represent only a small slice
of the market, and they may not be relevant as a comparison for their
investments.
Even for large-cap stocks and funds, the S&P 500 isn’t always an
accurate benchmark. That’s because the index isn’t equally weighted:
The largest and often most popular stocks have a weighting several
hundred times that of the less popular stocks, and thus account for the
majority of the index’s performance. In fact, in a bull market year, the
strength of just a few popular stocks can boost the S&P 500’s return
significantly. That’s just what happened in 1998, for example. The
index’s stated weighted return was 28.6%, but the average S&P 500
stock gained just a little more than half that – 15%.
That doesn’t mean you should ignore the S&P 500 and other indices.
The challenge is in finding the right index to use as a benchmark, and
understanding that differences in performance between your stock or
fund and the index may be explained by differences in your stock or
the composition of your fund versus the index.
Portfolio Rebalancing
A declining market presents good opportunities
With the domestic stock decline in May 2006 (the time of this writing),
it seems increasingly likely that the market is headed for a correction,
which is defined as a 10% drop. While most investors view that as bad
news, it does present some opportunities. One of them is the chance
to rebalance your portfolio, and perhaps buy stocks at lower prices.
There are any number of circumstances that could prompt you to take
another look at your portfolio. As you move through life, meeting some
goals and creating new ones, your financial needs will change. Perhaps
your tax liability has increased and you want to consider tax-exempt
investments. Perhaps you’re ready to start taking income from your
portfolio. Or perhaps your threshold for risk has increased and you’re
ready to add more investments with higher reward potential.
The changing circumstances of the market can also affect your portfolio.
For example, let’s say that a 60% equity/40% income split is appropriate
for your circumstances, and you set up your portfolio accordingly.
Over time, your portfolio probably won’t stay balanced in that manner.
Strength in growth stocks could cause your equity holdings to swell
beyond 60%, or a disappointing performance in income investments
may shrink your income holdings to less than the optimum 40% you
had started with. This was covered in a previous chapter, however it is
so important that I cannot help but remind you here.
Keep in mind that you shouldn’t buy a stock just because it’s cheap;
it should fit into your overall financial plan. I recommend consulting
with a financial advisor every few years at least, not only to develop an
asset allocation plan, but to make sure you’re on track.
INVESTIN G 61
Think I’m joking? Think again. Although I was a far cry from being
the King of Dating, I did have a few occasional lucky streaks in me.
And looking back over those rare few times, my moderate success
on the dating circuit did teach me quite a few things about prudent
investing.
car he drove had a weird putter that attracted nothing but aliens
from the evil Planet X. While at first the girl thought it was going to
be a dinner date from fiery hell, little did she realize that guy was I,
and I’d soon wind up being the one she’d marry.
Investing: The receptionist was sure nice, but the carpets were
dull and the musty furniture reminded you of grandma’s place
in Brooklyn. You were ready to take your money to that Private
Wealth Management Firm – the one with the white marble staircase
and baby grand – but when the well-mannered financial advisor
appeared, you figured you’d be courteous and give him a few
minutes of time. A little into his pitch, you were most pleasantly
surprised when he touted low cost, tax efficient investments with
attractive rates of return that perfectly matched your goals. It was
then you realized there’s a reason the furniture in his place is a bit
out-dated, mainly, because the guy most certainly isn’t paying for
it out of your own pocket.
Lesson Learned: First impressions can easily get the best of us.
Whether it’s a date or your money, taking a step back to peek
behind the curtain will typically put both your money and heart in
a much better place.
2. Costs count
Dating: She liked Dylan Thomas, idolized Ginsberg, despised
the conformists and was clinically depressed that she missed last
year’s Monterey Pop Music Festival. The perfect 10 from down in
the Village strummed an acoustic, wrote poetry and even donated
your favorite Levis to a homeless guy on the street. While at first
lust got the best of you, months after helping her pay the rent, her
organic meals and for all those Andy Warhol movies you pretended
to like, you were finally worn out, leading you realize that when it
comes to dating, costs most definitely do count.
Investing: The mutual fund was barely moving. Five years into it,
you just couldn’t quite figure out why you weren’t making much
money. Then, one fine day, you wisely took the time to research the
INVESTIN G 63
fees you were paying, only to realize the fund was charging you
well over 5% per year in annual costs and causing you all sorts of
taxes.
So you rolled the entire 401(k) into an IRA, only to later realize it
cost you a huge up-front commission on high fee investments that
caused you nothing but losses to boot.
Lesson learned: Treat your money like you’d treat your body: Don’t
give it up on the first date. Taking time to nurture a relationship
will not only make your mother proud, but it will certainly provide
you with one of the most important keys to financial and dating
success.
CONCLUSION
Bad date? Who cares? Next time something doesn’t turn out so well,
simply shake hands with your date and thank them for making you a
richer person.
After all, when it comes to love and money, hopefully here you’ve
learned it’s all very much the same.
66 INVESTING
With this in mind, I wanted to point out a few ideas on how to save
$100 per month. If it doesn’t sound like saving this amount would
equate to much, over time it can really mean much more than you
most likely think.
Let’s suppose you invest $100 every month, and let’s also assume you
invest it into a stock index fund that earns an average return of 8% per
year. Before revealing the results, note the emphasis on “index fund”.
This is important to highlight because when investing in an index such
as the S&P 500, not only do you get instant diversification, but you’d
also keep the fees you pay and the taxes you owe to a bare minimum
as well.
INVESTIN G 67
Let’s also suppose the amount you save increases by 3% per year
to keep in line with a hopeful increase in wages. So, invest $100 per
month in an index fund such as the S&P 500 and at an 8% average rate
of return, the following would result:
10 years $21,796
20 years $65,265
25 years $101,454
Looks good to me. Here’s a few creative ways to help you get there:
2. Brown bag it
Working? Let’s suppose you eat lunch out every day and the
average meal costs $12. That’s $240 per month in food costs. To
save money, would you eliminate dining out every day? Not unless
you wanted to miss out on the latest business news or how Jane’s
date went with Jeff. So, let’s assume you cut down on the dining
and ate out once a week. Doing so would bring the total monthly
food costs to right around $50. You still have to feed yourself, right?
So let’s assume you spent about $100 for some groceries. Do the
math, and there you have it – you’re left with a $100 dollar monthly
savings.
68 INVESTING
3. Rideshare to Work
Let’s suppose you travel 15 miles each way to work, your SUV
holds 20 gallons and gets 15 miles per gallon. Two more variables
needed: Let’s suppose gas costs $2.75 per gallon and there’s 22
working days in the month. How much would you save if you
carpooled with two friends? Sounds like one of those SAT brain
twisters, right? And you thought you were out of high school – Do
the math and that’ll save you roughly $80 per month and get you
a nice ride in that carpool lane as well. How great is that?
4. Energy Checkup
Are there ways you can save a few dollars on your monthly energy
costs? For me there was. A couple of small touch-ups around the
house and I am now helping keep Al Gore happy. With a few
mouse-clicks on the “Home Energy Checkup” at www.ase.org, I
quickly learned a few interesting ways to save a couple of dollars
every month on my energy bill and maybe you will too.
6. Clip Coupons
If you’re just like me, that means you eat a few boxes of Cinnamon
Toast Crunch every month along with a few dozen South Beach
Protein Bars and bags of Turkey Jerky. Interested in saving a few
dollars on these monthly purchases? Websites such as www.
coupons.com claim you can print a few of their coupons and save
over $100 every week. Who says Double Stuff Oreos are bad for
you? When I’m busy saving money when eating them, I would
completely disagree.
INVESTIN G 69
You may find this to be a bit “nutty”, but to begin a brief discussion
about a unique income strategy, I will first mention what I truly be-
lieve to be one of mankind’s greatest creations: Yes, the one-and-only
peanut butter and jelly sandwich. Who was the person – as bold as
Einstein, as clever as Da Vinci – to invent the pb&j? For the moment,
I’ll put this important thought aside. One thing the legendary pb&j
72 INCOME
should forever remind us of, however, is that most often “the whole is
greater than the sum of its parts”.
Alone, peanut butter and jelly are merely two separate jars of everyday,
somewhat ordinary food products. Together in a sandwich, they
represent eternal soul mates, a true marriage made in heaven.
Similarly, there are two investment products you most likely have not
considered for yourself. Just like pb&j, together these investments
could possibly create the greatest income sandwich your income-
hungry belly has ever had.
Now before I tell you about this income sandwich, let’s take a brief
look at some of the places from which you might consider getting
more income while keeping your money safe.
What about bonds? Sure, you’ll likely get your money back at the
maturity date, but to get any reasonable rate of return, you’ll have
to hold a bond longer than it’ll take my New York Islanders to win
another Stanley Cup. The bond may also be “called”, and if you sell
it before the maturity date, you may get less than what you paid for
it. In an uncertain interest rate environment, purchasing long-term
bonds with low rates of return is not something I’m a big fan of.
To solve that problem, let’s switch to the other side of Bill’s income
sandwich. For the jelly, every year Bill takes $5,008 from the $12,052
annual income stream he receives from the immediate annuity and
deposits it into a life insurance policy. This policy provides Francine (or
their children) with a $100,000 tax-free death benefit, leaving Bill with
a net income of $7,044 per year. Where else could Bill get a 7% return
for income that’s mostly tax-free, never to change regardless of market
conditions, with a guarantee that the original investment returns to his
family tax-free upon his death?
long as you can qualify for life insurance (some people simply cannot),
the numbers could work out quite well for you and your beneficiaries.
Bond mutual funds are the mainstay for many investors seeking income,
and with good reason. They provide professional management and
diversification among a number of different bonds, which could help
cushion a portfolio from a default. When interest rates rise, however,
the value of the bonds in the fund will likely fall, as will the fund’s value.
And unlike an individual bond, a bond fund doesn’t have a maturity
date at which you know you can retrieve your principal.
Yet there is a way you can allay interest rate risk – by building a bond
ladder using individual bonds. A bond ladder is simply a portfolio of
bonds with different maturities. For example, if you have $100,000 to
invest in bonds, you might have 10 bonds with a face value of $10,000
each, or 20 bonds with a face value of $5,000 each. The bonds would
have varying maturities, with one bond maturing in a year, another in
two years, another in three years, and so on. The resulting portfolio
would look like a ladder, as you will see shortly in our examples.
76 INCOME
If you have constructed a bond ladder, on the other hand, only one
of the many bonds in your portfolio will mature at any given time.
So although interest rates may be low when your one bond matures,
chances are the interest rate environment will be a little different when
the others mature.
The bonds in a bond ladder are not necessarily “locked” into place.
While you own the bond, the yield won’t change but the value will.
Depending on what happens to interest rates during the bond ladder
period, the values of each bond can rise or fall. As bond values rise and
fall, there are many opportunities for tweaking the ladder. For instance,
yield and length of time until maturity can be updated when prudent
by selling the bond and replacing it with another one. However, selling
the bond prior to its maturity date would only make sense if you can:
a) buy another bond that will provide you with equal or better yield;
b) decrease the maturity date; and finally, c) purchase a bond of equal
or better credit quality.
The maturity date comes into play if the bond decreases in value and
you want to know how soon the bond’s principal will be returned to
you. The answer, of course, is at maturity, or when the bonds reach
78 INCOME
their full face value. But remember, if you cashed in the bond prior to
maturity, you will get whatever value the market places on the bond
at the time you sell it. It can be worth more or less, and again, it all
depends on the value the market places on that bond. Think of it this
way. Suppose you bought a bond for $10,000 paying 6%, and a little
while later you want to sell that bond. But now, people can buy new
bonds of the same credit quality and maturity dates that pay not 6%,
but 8%. Who would want to buy your bond paying 6%? The only way
someone would want to is if they can get a comparable interest rate
of 8%. So what do they do to make it comparable to 8%? They will give
you less money for that bond so the yield is the same as if they were
buying a new bond at 8%.
The same thing works in reverse. Suppose you want to sell that bond
paying 6%, but at that time the same type of bonds are paying 4%. The
only way it would make sense for you to sell that bond is if someone
paid you more than what you invested.
I’ve met many income investors who put their money into bond mutual
funds instead of individual bonds. As interest rates rise, presumably
the value of their funds drop and they begin to worry. A bond ladder
can reduce that concern. With the ladder, you know the maturity dates
of your bonds, with bond mutual funds you do not. And quite frankly,
I’ve also seen many decent ladders that have provided better interest
income than bond funds. So for those seeking “more income and
less risk”, and are investing in bond mutual funds, this idea can be
a fantastic place to start when evaluating your portfolio to solve that
dilemma.
But one very important thing to remember: Whether you are investing
in bond mutual funds OR bond ladders, the same type of reinvestment
risk is inherent in both vehicles. The mutual fund manager or you/your
advisor bear the same risk. So, with this very important fact in mind,
why not go in the direction that at least gives you a significantly better
chance of preserving your principal – a bond ladder that has maturity
dates versus a mutual fund that simply does not?
INCOME 81
6.00% 6.00%
Four-year bond 4 yrs. out
interest interest
6.75% 6.75%
6.75%
AVERAGE
6 years 6 years 6 years 6 years 6 years
MATURITY
82 INCOME
Lastly, several times above I noted that it’s important to pay attention
to the credit quality of the bonds being used in your ladder. The two
agencies that are most frequently referred to in assigning ratings to
corporate bond issuers are Moody’s Investors Service (Moody’s)
and Standard & Poor’s Corporation (S&P). Both firms focus on a
company’s financial condition and the industry in which it operates at
that particular point in time. The agencies often revise their ratings of
companies, so it’s important to make sure you are looking at current
ratings and not the ratings from years ago.
BBB+,
Medium Grade: Baa1, Baa2, Baa3 BBB, BBB-
Moody’s Speculative characteristics.
Moody’s The future of these bonds cannot be B1, Ba2, Ba3 B+, B, B-
considered as stable.
S&P These bonds face exposure to adverse
business or economic conditions which
could lead to an issuer’s inadequate
capacity to meet its financial commitment.
CCC+, CCC,
Highly Speculative Grades: Caa1, Caa2, Caa3 CCC-
Moody’s These bonds are of poor standing. Such
issues may be in default, or in significant Ca CC
danger of not meeting obligations.
S&P These bonds are vulnerable to
nonpayment, and are dependent upon C C
favorable economic conditions for the
issuer to meet its financiaal commitment.
Default:
S&P These bonds are in payment default. D
INCOME 85
Prior to the bull market of the 1990s, the average dividend yield on
stocks in the Standard & Poor’s (S&P) 500 Index was about 4%,
according to the September 10, 2002 issue of Wealth Management
Insights. The S&P 500 is an unmanaged index of stocks that is generally
considered representative of the market as a whole. For every $100 you
invested in the S&P 500, you would have received $4 in dividends.
Then, in the wake of the dot-com bust, steady income came into favor
again and companies began increasing dividends. This time, however,
they had a special incentive: Tax cuts on dividend distributions, thanks
to the Jobs and Growth Tax Relief Reconciliation Act of 2003.
In the past, dividends were taxed more heavily, much to the chagrin
of many investors who argued that this amounted to double taxation
because a company was taxed on its profits and then shareholders were
taxed when those same profits were distributed as dividend payments.
The Jobs and Growth Tax Relief Reconciliation Act dramatically cut
the federal tax rate on stock dividends – from a maximum of 38.6%
to 15% – and many companies began increasing their dividends.
For example, in 2004, Microsoft made a special $32 billion one-time
dividend payment of $3 per share and doubled its regular dividend to
32 cents per share.
INCOME 87
This change in the tax law makes dividend-paying stocks and mutual
funds particularly attractive as an income-producing option for retirees.
And you need not worry that dividend paying stocks produce income
but provide low returns. If you take a look at the dividend-paying
stocks in the S&P 500, they had an average return of 28.08% in 2003,
the year of the Jobs and Growth Tax Relief Reconciliation Act.
The new tax rate is effective from 5/6/03 to 12/31/08 (retroactive to 1/1/03). After
2008, tax rates revert to the pre-2003 tax law.
88 INCOME
Preferred Stocks
Another way to create income
Many investors searching for additional income in their retirement
years automatically look toward bonds and other debt instruments.
But bonds aren’t the only way retirees can generate income. Stocks
provide viable options as well. “Stocks?” you might ask. Yes, some
stocks. Preferred stocks, for example. Even though preferred stocks are
listed as equity on a company’s balance sheet, they act more like bonds
than as common stocks.
That level of security isn’t the only reason to buy preferred stocks,
however. They’re also a great way to generate income. That’s because
INCOME 89
Where do you find preferred stock? In the same place you find common
stocks. Take a look at Yahoo! Finance or CNBC. On Yahoo! Finance,
preferred stocks are listed by the ticker symbol of the issuing company,
followed by an underscore, followed by the letter P, followed by the
series letter (if there is one, and there probably is, because companies
that issue preferred stocks often have more than one series and use
letters of the alphabet to distinguish them). On CNBC, preferred
stocks are listed by the company ticker symbol, followed by a vertical
PR, followed by a letter indicating the specific issue.
It’s a good idea, however, to know a little bit more about what you’re
buying before you dive in. So once you find a preferred stock you
think you like, take a look at the details and get down to business. It’s
important to understand what the company issuing the stock does,
just as you would before buying any stock. But you also need to do a
risk analysis like you would with bonds. In other words, how likely is
it that the company will be unable to pay its preferred dividends? One
way to figure that out it is to determine its coverage ratio. To calculate
this ratio, you simply divide the company’s EBITDA (earnings before
interest, taxes, depreciation, and amortization) by interest expense
90 INCOME
plus preferred dividends. The higher the coverage ratio, the better the
chance for success.
Of course, that may be more work than the average investor wants to
do, which is where a financial advisor comes in. He or she can help you
analyze a company’s risk of “default” and answer a number of other
key questions about investing in preferred stock. For example, are the
dividends cumulative? Are the shares redeemable, and if so, when?
What is the likelihood of redemption?
How well? Since 2001, low mortgage rates have fueled a boom in the
real estate market. Construction of new homes and apartments have
appeared to defy all forecasts of a slowdown, shooting up 14.5% in a
single month – from December 2005 to January 2006 – to a seasonally
adjusted annual rate of 2.276 million units. That was the fastest pace of
new builds recorded in the three plus decades since March 1973.
But the real estate market isn’t always easy to invest in. Buying
investment properties can require significant capital. Plus, analyzing
the residential housing market can be tricky. For example, many
experts consider the recent increase in housing starts to be a one-time
occurrence caused by unusually warm weather in January 2006, which
92 INCOME
Basically, there are two types of REITs: Public and private. The major
difference is that public REITs are just that, publicly owned and traded
on the major exchanges. But let’s look at what that means in more
detail.
Regulation
Public REITs must comply with the requirements of the Sarbanes
Oxley Act, including quarterly financial reporting. This leads to a certain
degree of financial transparency that some investors feel adds security
to the investment. Private REITs, on the other hand, are required to
do little in the way of disclosure, other than file an initial offering
registration with the Securities and Exchange Commission.
Volatility
Because they aren’t exchange-traded, private REITs aren’t subject to
the daily fluctuations of the market as public REITS are.
Liquidity
Investors can readily buy and sell public REITs, which isn’t the case
with private REITs. Private REITs charge anywhere from 10% to 16% in
up-front fees. Redemptions are generally permitted two or three years
INCOME 93
after the date of the initial investment, if at all, and are usually offered
at the par price (the price at which the security was issued) or less.
Private REITs may even restrict investor redemptions. For example, in
August 2004, Wells Real Estate Funds announced that it would only
honor redemption requests resulting from the shareholder’s death.
Dividends
Private REITS have historically yielded dividends of 7% to 8%,
compared with only 5% to 6% for public REITs.
You can invest directly in REITs or buy shares of a fund that invests
in REITS. It’s a good idea, however, to engage a financial advisor to
help with the purchase decision. Factors that must be evaluated when
investing in REITs include: the geography and type of properties the
REIT holds, the economics of those properties, the experience and
expertise of the management team, the financial terms of the REIT
investment, and your individual financial circumstances and goals.
94 INCOME
You’re probably familiar with Ginny Maes (GNMAs). You may even
think of them as so-called “safe” securities. But think again, because
they may not perform as well as you might expect in certain economic
environments.
Yet, like all fixed income funds, GNMA funds may also decline in value
when interest rates go up. This is because GNMA funds hold a portfolio
of mortgages purchased at lower interest rates, and people who took
out those mortgages have no incentive to refinance or “prepay” them
when interest rates are higher.
Today, at the time of this writing, interest rates are rising, which is
bad for GNMAs. But the Federal Reserve has thus far raised interest
rates gradually and moderately, which is good for GNMAs. The Lipper
96 INCOME
GNMA Funds Average return was 2.35 % for the year ending February
29, 2005. During the same time period, the Lipper U.S. Treasury Money
Market Funds Average returned 0.83 percent. For the time being,
GNMAs are doing all right. And if the U.S. economy continues to grow
modestly, but not enough to encourage the Federal Reserve to increase
the pace of interest rate increases, GNMAs may continue to perform
well. But remember, no investment is a sure thing.
FOUR
BONDS CHAPTER 97
Bonds have typically been used to compensate for the low return on
other interest-rate-sensitive investments, like Certificates of Deposit
98 BONDS
when interest rates drop. However, if you buy certain types of bonds
with very long maturities when interest rates are low (i.e., corporate or
municipal), you would be locking in a very low rate of return. As soon
as interest rates start moving up again, the value of those bonds will
plummet, making them a poor long-term investment. The key is the
length of time you’ll be holding the bonds, which takes into account
their maturity and duration.
With that said, you probably should still invest in bonds. Before I
explain why, let’s review how interest rates affect them.
Generally, higher interest rates drive bond prices down. If you buy a
newly issued $10,000 bond when interest rates are at 8%, your bond
yields 8%, or $800 annually. But if after your purchase the prevailing
interest rate increases to 9%, a newly purchased $10,000 bond would
yield $900 annually. If you wanted to sell your bond, who would pay
you $10,000 to get $800 in interest when the going rate is $900? You’d
most likely have to reduce your price, making your bond less valuable
than a newly issued bond.
But you shouldn’t sell all of your bonds whenever interest rates rise.
Bonds are an important part of most portfolios. Instead, I recommend
that you manage your bonds’ sensitivity to interest rate changes by
paying attention to their maturities.
When interest rates are rising and bond values are falling, you don’t
want to be “locked in” to a bond that doesn’t mature for years because
it will be worth less than a newly purchased bond. But if you purchase
faster-maturing bonds, you’ll be able to replace lower-value bonds as
they mature. You can do this yourself by purchasing individual bonds.
Or, you can purchase shares of a mutual fund that invests in bonds,
which should do this automatically.
Ideally, stick with individual bond purchases. A bond fund lacks one
major, important thing: A maturity date. If interest rates rise, the value
of the fund (in general) will drop, and you have no idea when your
principal will equal the amount you invested. When you invest in an
BONDS 99
individual bond, as long as the issuing company does not default, and
the value of the bond drops, then just hold on until maturity, the date
you will get your principal back.
Yet many people continue to invest in bond funds, and for that reason
our discussion of bond funds deserves a little further attention.
When you buy shares of a bond fund, you’ll want to look at two figures
provided by the portfolio managers: Average maturity and average
duration. Average maturity is the average time period until the bonds
in a fund’s portfolio mature. It’s usually quoted in years. Why look
at this number? Generally speaking, bond funds with lower average
maturities experience less price fluctuation than bond funds with
higher average maturities (assuming that both funds have comparable
credit quality). As a result, bond funds with lower average maturities
have less interest rate risk.
As the examples illustrate, the lower the average duration of the bonds
held in a fund, the less the bond fund’s price should fall when interest
rates rise. These calculations can get complicated, but most portfolio
managers do the work for you by classifying their bond funds according
100 BONDS
The lesson: If you want to stay in bonds and offset interest rate risk,
look at a bond fund that’s classified as short-term.
BONDS 101
With interest rates still at relatively low levels (at the time of this writing),
many investors have been looking for bond funds that generate an
attractive level of income. But which figure do you use to compare
funds: Dividend rate (also called distribution yield or distribution rate)
or Securities and Exchange Commission (SEC) yield?
First, let me explain dividend rate, which is what a bond fund pays you
in income distributions. This figure is typically calculated by:
1. Taking a bond fund’s income dividends in the most recent
month,
2. Multiplying by 12, and
3. Dividing by the fund’s share price.
Often, these two numbers are similar. At other times, one of these
numbers can be significantly higher. When interest rates are low, for
example, SEC yield is often much lower, and thus much less interesting
than dividend rate. So the question remains, which figure should you
look at? The straight answer: I can’t tell you. No one can. Some people
prefer dividend rate, some prefer SEC yield. I’d advise you to understand
how these figures are derived and make your own decision.
To get a better idea of how yield works, let’s consider a single bond
issued by a fictional company I’ll call Net Worth, a la The Apprentice.
The going rate is 6%; the bond pays $6 of interest per year for each
$100 of face value. Over time, as interest rates rise or fall, the resale
price of the Net Worth bond will fluctuate. For instance, when interest
rates decline, buyers might pay $103 or $107 for the bond’s higher
coupon, or interest rate. The company’s existing bonds will be more
attractive because the rate they are paying is higher than the rate on
bonds that are being newly issued. You can measure the current yield of
the Net Worth bond by multiplying the fixed interest payment of 6%
by the now-higher bond price (say $107). In this case, the yield would
be 6.42%. A bond fund’s dividend rate is figured similarly.
SEC yield, on the other hand, looks at things another way. It assumes
that a bond now trading at $107 is going to be redeemed at maturity for
$100, so the price will sooner or later drift down to that level and that
loss should be reflected in the yield figure. As a result, in a low interest
rate environment, when bonds tend to trade at higher than face value,
a bond fund’s SEC yield is often much lower than its dividend rate.
Again, I can’t tell you which figure to use. Some people prefer dividend
rate because SEC yield includes some worst-case assumptions. Take
load funds, for example. They calculate SEC yield as a percentage of the
share price that incorporates the highest possible sales charge, which
not all investors pay. Other people prefer to focus on the SEC yield
figure because it takes into account the eventual decline of a bond now
trading at higher than face value.
BONDS 103
My advice is that when you look at a bond fund’s yield figures, you
read the fine print to ensure that you understand what kind of yield
is being quoted, so you can accurately compare it to another fund’s
yield. Also remember that yield isn’t the only factor to consider when it
comes to bond funds. You should look primarily at total return, which
reflects a bond fund’s overall performance and includes both income
and changes in share price.
Index Annuities
Is there such a thing as no-risk gambling?
What if it were possible for you to place a bet in such a way that you
were guaranteed to win? Not only that, you couldn’t lose any of your
money either. Think about it: If you guess right, you profit, and if you
guess wrong, you won’t lose any of the money you’re betting with.
Would you do it?
Most of us would love to get in on such a game. But does it really exist?
Stock market participation offers the potential for profit but also the
risk of loss. And while there’s no such thing as a perfect investment
– there are always some drawbacks – there is at least one type of
annuity that comes close to providing you with this upside potential,
except for the unavoidable fees and taxes, of course. It’s called an index
annuity and you may want to weigh the benefits of including it as one
component in your retirement vehicle.
106 ANNUITIES
That said, there are indeed times when a variable annuity can really
benefit the investor. As I always say, what’s great for one person
might be awful for another. Everyone’s situation differs. So please, for
better or worse, always keep that in mind. Especially when it comes
to variable annuities, I despise advisors or the media that simply
make generalizations about certain investments, and especially about
variable annuities.
For these guarantees, however, you will give up a few things, such as
having full access to your money and receiving the entire return the
index, such as the S&P 500, provides. (There are usually limits on the
return you will receive.) Also, keep in mind that annuity companies
use different methods of calculating your return, and as an investor,
you need to understand how the various crediting methods work
before handing over even a portion of your money.
108 ANNUITIES
In a true S&P 500 stock market index fund, you can obviously withdraw
all of their money at any time and receive the entire value of your
account at the time of withdrawal. In an index annuity, however, most
companies will allow you to withdraw only up to 10% of your account
every year. One particular company I researched offers the opportunity
to withdraw up to 86% of your money penalty-free at any time. If you
withdraw funds above these penalty-free amounts, you will likely face
surrender charges that could be steep. Yet at the end of the term, many
annuity companies will allow you to“walk away”with your full account
value with no penalty.
The lengths of annuity contracts vary from one year to many years,
so be sure you know how long you must commit to the investment
before going in. I’ve found that some people falsely believe investing
in any annuity means you never have access to your principal again,
an assumption which is simply not accurate. As described above, that
typically happens only when investing in an immediate annuity. You
can get your principal out of other annuities, but not without paying a
penalty or other fees.
One annuity company I’ve looked into limits your growth to 12% per
year. At the end of your contract year however, that 12% is locked
in and you can’t lose it. While that limit might seem like a recipe for
disappointment, personally, I’d be happy with a 12% return on my
ANNUITIE S 109
Variable Annuities
Should you purchase one?
A financial advisor tied up almost every last dollar a client owned in a
variable annuity because of the presumably high commission involved.
The client, on the other hand, didn’t realize that only a small portion
of the investment can be accessed every year. So when an emergency
situation arose and the client needed to tap into the annuity, the client
was out of luck. “Sorry”, said the financial advisor, “I thought you
knew.”
good investments for many people, there are some situations in which
they make a great deal of sense. Here are the two such instances.
2. You’re already retired, and you’re afraid you might outlive your
savings.
In this case, a variable annuity can really help you.Variable annuities
sometimes offer an optional feature called a guaranteed minimum
income benefit. This feature guarantees a particular minimum level
of annuity payments, even if you don’t have enough money in your
account (perhaps because of investment losses) to support that
level of payments.
There are also other cases that may warrant the purchase of
a variable annuity. An annuity may be a wise investment, for
example, if you could potentially be the target of a lawsuit
because assets in annuities are safe from lawsuits in many states.
Or, a variable annuity might make sense if you’re actively trading
in a taxable account (and paying short-term capital gains as high
as 35%) because you could put your money in a variable annuity
and switch between investments at no cost or for a small fee.
• How will you use the variable annuity, and do you have
any other way to achieve the same result?
• Are you investing in the variable annuity through a
retirement plan or IRA?
• Are you willing to risk your account value decreasing
if the underlying investments perform badly?
• Do you understand the features of the variable annuity?
• Do you understand all of the fees and expenses that the
variable annuity charges?
• How long do you intend to remain in the
variable annuity?
• Does the variable annuity offer a bonus credit?
• Do you know the effect of the variable annuity on your
tax situation?
• Are you considering exchanging your current variable
annuity with another annuity that has different benefits,
features, or investment choices?
If you can’t answer all of these questions, you should work with a
reputable financial advisor who is thoroughly knowledgeable about
annuities. In the meantime, to get you started, the SEC offers a guide
to the workings of variable annuities. You can find it at www.sec.gov/
investor/pubs/varannty.htm#askq.
ANNUITIES 113
First, let me make the point that annuities, like all investments, come
with both negative and positive aspects. Recently, the media seems
to be focusing on the negatives. I agree that many people who hold
annuities shouldn’t. But that’s not true for everyone. What may be
inappropriate for one person may be correct for another. And what’s
good for a person at a particular time may just not be suitable for that
same person at another time. Annuities have their purpose, and they
have helped many people in a variety of situations.
That said, what if you’re one of those individuals for whom an annuity
was a poor investment choice? And it doesn’t have to be because you
were tricked into buying one. You may have any number of reasons
for wanting to sell your annuity. For instance, maybe your financial
114 ANNUITIES
The traditional choice for people who want to cash out of an annuity
is the 1035 transfer. Section 1035 of the Internal Revenue Code is a
statute relating to the transfer of money between financial products. It
allows you to move the money you’ve built up inside one annuity to a
new annuity, without paying taxes on the transferred funds. Moreover,
the new annuity will often pay the transfer fee, so you can get out of
your old annuity and into a new one at no cost.
The problem: You’re still in an annuity, just a different one. And while
this may make sense for some people, for others – particularly those
who want to exchange an annuity for a lump sum of cash – it doesn’t.
So how do you get out of your annuity altogether, without getting into
a new one? One option may be to sell your annuity in the secondary
market. Yes, annuities can be sold, much like stocks and bonds can.
Essentially, you sell your annuity to someone else, through a broker, of
course. You can sell it all at one time, or in parts.
Let’s say you want to make a down payment on a home and need a
lump sum of cash – $100,000 – but all you have is a monthly annuity
payment of $5,594.You could sell $2,014 of that payment for 60 months
(which would give you $120,840) for a lump sum of $100,000 –a little
less than the full value as an incentive for the buyer. In other words,
you’d receive $100,000 to make the down payment on your home, and
over the next 60 months, you’d still receive $3,580 per month from your
annuity. Sure it’s a trade-off, but it does provide you with a solution.
Selling an annuity can become much more complicated than that. For
instance, you could sell different parts of your annuity over different
periods of time, thereby raising even more cash. But the principal
remains the same: You get out of the annuity without the need to
transfer it. This process works for annuities that are currently in the
ANNUITIES 115
deferred stage, and even better for annuities that have been turned
into lifetime income (i.e., annuitized). The tax implications are the
same as if the annuity was surrendered to the insurance company,
meaning you won’t be taxed on the lump sum payment – only on the
“cost basis” of the annuity, which is something you definitely need
to discuss in detail with your financial/tax advisor before actually
surrendering the annuity.
So you can buy that house, pay those medical bills, or just get out of an
annuity whose purchase you regret. Just be sure you make that move
with an experienced financial advisor. Not all financial professionals
are skilled in this area. And as with any investment decision, it’s critical
that you are dealing with someone who thoroughly understands
the ramifications – tax and otherwise – of any transaction before it’s
executed.
116
SIX
IRA’S CHAPTER 117
Before funding an IRA, you should think about your financial needs
and how you will use your IRA during your retirement. Do you expect
that you will have to rely on your IRA for income? Or are you more
interested in creating a tax-deferred investment that you can pass on
to your heirs? In this chapter, we’ll explore some of the issues you
should carefully consider before you fund an IRA.
IRA CONTRIBUTION
Year Maximum Annual Age 50 or Over
Contribution Amount Maximum Amount
2002 $3,000 $3,500
2003 $3,000 $3,500
2004 $3,000 $3,500
2005 $4,000 $4,500
2006 $4,000 $5,000
2007 $4,000 $5,000
2008 $5,000 $6,000
Q. Are there any penalties for taking early withdrawals from my IRA?
A. Anyone may begin taking distributions from a traditional and/or
a Roth IRA, without penalty, after age 59½. With some exceptions,
such as first-home purchases and disability, withdrawals made
prior to age 59½ will be subject to a 10% penalty.
Q. If I begin taking distributions from my IRAs before age 70, will I still
have to take the same required minimum distribution (RMD) the
year I turn 70½? Or can I take credit for what has been withdrawn
earlier?
A. RMDs must begin by April 1 of the year following the year in
which you turn 70½. The amount that must be distributed each
year is determined by a formula provided by the Internal Revenue
Service (IRS). The key factors in the formula are the IRA account
IRA’S 119
the amount of your required minimum distribution (RMD) for the year
of the conversion cannot be converted. So, if you are age 70½ or older,
the first dollars coming out of your traditional IRA must be treated as
your RMD for that year, in which case they will be subject to income
tax. Only then can the remaining portion of your traditional IRA be
converted to a Roth IRA.
So, should you convert your traditional IRA to a Roth IRA? The decision
to convert, as you can see, involves an analysis of many factors, which
will vary from person to person. There is just no simple answer. Smart
Money offers a free calculator than you can use to help you decide if
converting a traditional IRA to a Roth IRA will be beneficial. See http://
nasdaq.smartmoneyuniversity.com. I also recommend that you speak to
a tax or financial advisor if you are considering converting.
IRA’S 123
But I can help you get started by going over some of the considerations
that should part of your decision.
First, let’s discuss RMDs. If you don’t need money from your IRA, it’s
nice to think of leaving it in place, to grow tax-deferred until the end of
time, or at least until your beneficiary or his or her beneficiary needs it.
But that’s not going to happen. The U.S. government has made certain
of it by setting up rules that require you, and later your beneficiaries, to
take money out of the IRA – money which is subject to income tax.
Essentially, the rule states that you must begin taking RMDs once you
reach age 70½. And, your beneficiary may also have to cash out your
IRA in as few as five years. I’d go into more detail, but these rules
get quite involved and are dependent upon whom you name as your
beneficiary, and whether you die before or after distributions must
begin. So again, it’s best to consult your financial advisor for more
specific advice.
Year Federal Gift Tax Federal Estate & GST Highest Federal Estate
Exemption Tax Exemption GST Tax Rates
The result of the latter isn’t necessarily bad for a few reasons. While
your beneficiary may owe income tax on the IRA assets, he or she
may be in a lower income tax bracket than you were, and may thus
owe less than you would. If your estate is larger than $1.5 million and
subject to estate tax, the amount of income tax due may also be offset
by a portion of the estate tax already paid on the IRA. It’s called “net
unrealized appreciation” and it’s a tax deduction on inherited IRAs
that many people miss. Or, if you have assets in addition to your IRA
when you die, your executor could pay the estate taxes due on the IRA
from funds other than those in your IRA.
Finally, when you meet with your financial advisor, you’ll want to
consider your IRA in the context of all of your assets. For example, if
you have few other assets besides your IRA, you may need to tap into
your IRA if you become seriously ill. Or, if you have substantial assets
and your adjusted gross income is below the $100,000 limit, you may
want to consider converting a traditional IRA to a Roth IRA.
126 IRA’S
You’ll have a much clearer picture of your options and you’ll be able
to decide how best to pass your IRA on to your heirs after a thorough
analysis has been conducted for your particular situation, and only a
qualified financial advisor can do that. But hopefully, I’ve been of some
assistance.
IRA’S 127
With the markets performing well again, many retired investors who
have growth or income producing investments are finding themselves
less dependent on their individual retirement accounts (IRAs). As a
result, they’re looking for ways to pass some or all of their IRA assets
on to their heirs.
You can divide up your single IRA in any way you choose – in equal
amounts, or leaving more to some beneficiaries than to others in their
own separate accounts. You can also select different investments for
each account – perhaps more aggressive stock funds for younger
beneficiaries who can afford a higher level of risk and conservative
bond funds for older beneficiaries who may need income.
Once you have split your single account into separate accounts, one for
each beneficiary, why should it matter how they are set up? Whether
you have one IRA account or several, it’s important to think about how
your RMD designations will affect the RMDs of your beneficiaries.
The IRS is very unforgiving if you should make a mistake. There have
actually been cases where an improperly filled out beneficiary form led
to a lawsuit after the IRA owner’s death. One lawsuit that I know of in
particular is still racking up thousands of dollars in legal fees, and will
likely result in the beneficiary losing at least half of the original IRA’s
value once tax matters are settled. So before you make any decisions
about your IRA accounts and beneficiaries, it’s a good idea to consult
with your financial advisor.
The tax and legal information in this article is merely a summary of my understanding and
interpretation of some of the current laws and regulations and is not exhaustive. Investors
should consult their legal or tax counsel for advice and information concerning their particular
circumstances.
130 IRA’S
Let’s create John Doe*, an investor with two children, 45-year-old Bill
and 35-year-old Denise. And let’s say that John Doe has a traditional
IRA. At age 70, right on schedule, John starts taking his required
minimum distributions (RMDs), and he continues taking them until
he dies at age 85.
Since John’s IRA is a single account, John Doe’s RMDs would begin
at $3,650 and gradually rise to $10,766 at the time of his death. Then
IRA’S 131
the IRA would pass on to his beneficiaries, and their RMDs would be
calculated based on the single life expectancy of the oldest beneficiary.
In this case, that’s Bill. He’s 60 years old and his single life expectancy
is another 19.81 years, so his RMDs would be $6,611. These distribu-
tions would be split evenly between Bill and his sister, Denise, because
they are both John’s beneficiaries. The problem is that Denise is 10
years younger than Bill and her life expectancy is 31.80 years, so she
may have to accept income more rapidly than she desires. Wouldn’t it
be better if Denise could leave more of that money in the IRA and let it
grow, tax-deferred, until she really needs it? Well, she can.
What would such a split accomplish? Let’s review the numbers and
see. Splitting the IRA into two accounts would allow each beneficiary
to stretch the IRA RMDs over his or her own life expectancy. So, with
this option, John Doe’s annual distributions would start at $1,825 per
account ($3,650 total, just as before) and gradually rise to $5,383 per
account (the same $10,766 total) at the time of his death in 2017. So
nothing changes for him. But look at what happens when John Doe
dies. Bill would start receiving distributions of $3,306 and Denise
would receive $2,422. That may be much better for Denise because
she’ll be able to leave more money in the IRA, where it will continue
to grow tax-deferred.
*Assumptions: $100,000 IRA with a hypothetical annual growth of 8%. Original owner
is age 70 at start, son is age 45, and daughter is age 35. Owner dies at age 85 in 2017, son
at age 75 in 2032, and daughter at age 90 in 2057. Distribution amounts are based on life
expectancy, not actual life span. The examples above are hypothetical and for illustrative
purposes only. They are not meant to represent the performance of any particular product.
**Mortality tables vary in their life expectancy calculations. Statistics are taken from the
Social Security Administration’s Period Life Table, 2002, www.ssa.gov/OACT/STATS/
table4c6.html, Bill’s and Denise’s life expectancy would be more accurately based on charts
at the time of their father’s death in 2017.
132 IRA’S
Often, the next generation will cash out the IRA upon inheritance,
which can result in significant tax consequences. In fact, 30%-70% of
the IRAs left to children could easily wind up going to Uncle Sam,
thanks to income tax and possibly estate taxes when they cash out.
(An IRA left to a spouse is another story, but the concept I will describe
here works well for whomever is the beneficiary of your IRA.)
You do have another option, which I like to call the “IRA pension,” and
here’s how it works.You invest IRA money in a “personal pension”and
IRA’S 133
Does this sound good so far? Now, you may be asking what happens
to the money used to finance your “pension”. The answer is you
don’t have access to it during your lifetime. But with my strategy, when
you die, it all goes back to your family tax-free.
Let’s take a closer look at the engine that drives this pension, the
machinery that makes this strategy run.
Inside your IRA, you transfer your IRA assets to an immediate annuity,
which is essentially an insurance vehicle that provides you with
a guaranteed income for the rest of your life. The transfer is a non-
taxable event; only the income that you receive from this immediate
annuity is taxable. From the annual income you receive from this IRA,
you “sweep” the premium payment for a life insurance policy that has
a death benefit equal to the amount you initially invested into the
immediate annuity. The funds that remain after you pay for the cost
of the life insurance is your spendable income. (I am not including tax
analysis in this calculation, which is certainly important to weigh and
factor in.)
Let’s say you’re 77 years old, and inside your IRA you invest $100,000
in an immediate annuity and receive a lifetime income stream of
$13,000 per year. There’s only one problem: If you die tomorrow, the
original $100,000 investment will be gone forever. So every year you
“sweep” $6,000 from your $13,000 annual income and use it to pay
the premiums for a life insurance policy with a $100,000 death benefit.
You’ll then be left with an annual income of $7,000 per year, and
because of the life insurance component, when you’re gone, your heirs
get the $100,000 back tax-free – the same amount originally used to
finance your “IRA pension.”
Now, if you recall, I mentioned that most kids who inherit an IRA will
cash it out, and they will lose anywhere from 30%-70% of the IRA’s
value to taxes. With this solution, you just gave yourself a guaranteed,
lifelong income stream of 7% from the amount you invested in the
annuity and you left the inherited value of your IRA fully intact and
tax-free. It’s not a bad deal.
There are, however, a few important things you should keep in mind:
1. IRAs left to spouses typically get rolled over and simply become
part of their IRA, which leaves your spouse with a tax burden
when taking out required minimum distributions (RMDs) and
then passes the taxable IRA to the next generation. Wouldn’t it be
better just to leave the IRA tax-free to whomever gets it next?
3. The income being paid out of your IRA will satisfy all RMDs for the
rest of your life. The only exception is if you have other IRAs not
incorporated into this strategy. In that case, the RMDs would have
to be figured out for all other IRAs.
IRA’S 135
4. Many retirees think the cost of life insurance will be too high for
this strategy to make sense because their health is poor or they are
too old. While that’s a good point, consider that if the cost of life
insurance is high because of poor health, the immediate annuity
payout can very likely be higher as well, and thus the portion
remaining for income will still fall within my median 7%. As long
as you can qualify for some level of life insurance – and granted,
some people simply cannot – the numbers could work out quite
well.
6. The life insurance’s death benefit does not always have to equal
the amount used to finance the immediate annuity. Simply put,
the less death benefit returned to your family, the more income you
will receive. So using my prior example, instead of leaving $100,000
to the kids, say $80,000 is left to them through life insurance. The
remaining income left for you to spend might then very well go up
from 7%-9%.
Some of the clients for whom I have designed these plans assume their
children will cash out the IRA. Let’s suppose, as an example, I have
$100,000 in my IRA. I am pretty sure the kids will cash it out when
inherited, and through a tax analysis, I realize the after-tax amount
they will receive will be somewhere around $70,000. So instead of the
insurance policy returning the full $100,000, I could leave them an
insurance policy worth $70,000, which would be the after-tax amount
they would have received through a direct inheritance. Yet what this
136 IRA’S
strategy does for you is lower your cost of insurance, thereby leaving
you with a higher rate of return on your “pension.”
The bottom line is that many retirees only take the RMDs out of their
IRAs, and most kids cash out the IRA and end up paying lots of tax
upon inheritance. So why not create an attractive income stream you
cannot outlive and leave the entire value of the IRA tax-free to your
family? After all, for income, where else can you get a 7% or better
guaranteed rate of return on your IRA money and leave the principal
tax-free to your heirs? That’s what this is all about. And with further
investigation, this could be one of the greatest gifts you ever gave
yourself and your family.
IRA’S 137
Self-Directed IRAs
You can even invest in real estate
Most investors believe that their only individual retirement account
(IRA) investment options are mutual funds, stocks, and bonds. But
believe it or not, you can also invest your IRA assets in real estate. Yes,
real estate. Whether it’s a fixer-upper or timberland, if it’s property, you
can invest in it, with a few limitations.
But even the fees aren’t stopping a lot of people from investing in
self-directed IRAs. According to the Wall Street Journal, Entrust’s self-
directed IRA assets have quadrupled to $2 billion in the past five years.
And Pensco’s self-directed IRA assets have doubled to nearly $1.5
billion in the past 15 months.
How do you avoid getting into a mess like that? Get a good financial
advisor to guide you through the process of setting up and administering
a self-directed IRA. He or she can help you obtain advance approval
from the Labor Department (which oversees pension plans) on any
transaction which might be questionable. An advisor can also help you
keep your traditional IRA assets separate from your self-directed IRA.
In that way, just in case you do make a mistake, you won’t be putting
your entire retirement nest egg in jeopardy.
140
SEVEN
TAXES CHAPTER 141
Many investors haven’t heard of the term “tax efficiency”, but it’s one
that you might want to become familiar with because it could save you
some money come tax time each year. A tax-efficient investment is
one that produces favorable tax consequences. For example, a 401(k),
variable annuity, or other investment whose taxes can be deferred
might be considered tax-efficient. A municipal bond fund – whose
income is free from federal and state taxes – might also be considered
tax-efficient.
142 TAXES
You can determine a fund’s turnover rate easily because the Securities
and Exchange Commission (SEC) requires every mutual fund to
publish this number. Typically, it can be found in the financial high-
lights section of annual and semiannual shareholder reports, as well
as in prospectuses.
The difficulty is that all funds do not publish this ratio. One helpful
hint: Tax efficiency ratios for mutual funds are available on Morningstar.
com. (Note that a few steps are necessary to get to this information. On
the Morningstar home page, enter the name of the fund or its ticker
symbol in the box in the upper left section of the screen. When the
fund information appears, click on the light gray “Tax Analysis” tab on
the left side of the screen.)
TAXES 143
You can expect to see some trends in tax efficiency by type of mutual
fund. Value style stock funds, for instance, tend to have relatively low
portfolio turnover rates. That’s because their strategy often demands
holding on to a stock until the market recognizes its value, which could
be a long time. Stock index funds also tend to have limited portfolio
turnover because the stocks that make up their respective indices
change infrequently.
So as you prepare for next tax season, you may want to keep the tax
efficiency of your investments in mind. While you shouldn’t base your
investing solely on tax factors, in light of ongoing tax law changes, taxes
are just one more thing to consider when reviewing your portfolio.
144 TAXES
Taking Advantage
of the 2003 Tax Act
Many investors are still missing out
The Jobs and Growth Tax Relief Reconciliation Act of 2003 may be
old news, but a lot of investors aren’t fully taking advantage of it. Are
you?
This act included the third largest tax cut in history, and if you invest
in mutual funds, you may benefit. Certain types of mutual funds in
particular are more likely to pass on tax savings as a result of the
act than others. If you understand how that is so, you too can take
advantage of the new tax rules by investing primarily in those types of
funds and boosting your portfolio’s return potential.
Which mutual funds are the biggest beneficiaries of the 2003 tax act?
Funds that pay relatively high dividends. But before we explain why,
let’s go over what dividends are.
TAXES 145
As you know, the main goal of any business is to earn a profit for its
owners. When a company earns a profit, some of this money is typically
reinvested in the business (and is referred to as retained earnings) and
some of the profits are paid to shareholders as a dividend. If you own
stock in the company, you’ll receive the dividend directly. If you own
shares of a mutual fund, the fund will receive the dividend from the
stock and in turn distribute it to you.
So why is the 2003 tax act good for funds that pay relatively high
dividends? Because dividends, which were previously taxed at ordinary
income rates (currently 25%, 28%, 33%, and 35%), are now taxed at
a special lower rate of 15% (or 5% for those in the two lowest tax
brackets, which many retirees find themselves in).
Other mutual funds that have benefited from the 2003 tax act are those
that tend to produce long-term capital gains. That’s because long-term
capital gains, which used to be taxed at 20% (or 15% for those in the
lowest tax brackets), are also now taxed at 15% (or 5 % for those in the
lowest tax brackets).
It may make sense, then, to invest the equity portion of your portfolio
in stock funds that do two things. First, they should focus more on
dividends than on growth, which will allow you to take advantage
of the lower tax rate on dividends. Second, they should have little
portfolio turnover, so you can also benefit from the lower tax rate on
long-term capital gains.
Stock index funds – those that track a particular index (such as the
Standard & Poor’s 500 index) — are another category of mutual funds
that typically have lower portfolio turnover and therefore should
benefit from the 2003 tax act. That’s because the stocks that make up
an index, and thus the fund’s portfolio, change infrequently and incur
few capital gains.
Less desirable for investors concerned about taxes will be funds that
have high portfolio turnover as they’ll tend to have a higher level of
short-term capital gains, which are still taxed at ordinary income rates.
(Remember, even if you don’t sell or exchange your fund shares, you
must pay taxes on the distributions you receive from the mutual fund
itself.) Many growth funds, particularly those that focus on sectors
such as technology and health care, are examples of funds with higher
portfolio turnover and would thereby cost you more in taxes.
TAXES 147
Good news! Long-term capital gains rates are extended. The biggest
and best news in TIPRA is the extension – through 2010 – of the
current federal tax rates for long-term capital gains and qualified
dividends. Qualified dividends are those which: 1) were paid by a U.S.
corporation or a qualified foreign corporation; 2) meet the holding
period requirement – you held the stock for more than 60 days during
148 TAXES
the 121-day period that begins 60 days before the ex-dividend date,
which is the first date following the declaration of a dividend on which
the buyer of a stock will not receive the next dividend payment but
the seller will (it simply means that as long as you are the shareholder
of record when a company declares a dividend, you will be paid the
dividend even though you sold the stock); and 3) are not excluded by
the Internal Revenue Service (IRS) for various reasons. The tax rates
for long-term capital gains and qualified dividends will remain at 15%
through 2010. (Taxpayers in the 10% and 15% brackets get an ever
better deal, paying 5% in 2006 and 2007, and 0% from 2008 through
2010.)
Good news! Temporary help for the AMT. Ah, the much-dreaded
alternative minimum tax (AMT). The AMT is a tax system with its own
set of rates and its own rules for deductions, which are usually less
generous than the regular rules. Individuals with annual incomes above
$75,000 and larger write-offs are often hit by it. The TIPRA reduces
the odds that you will be hit. First, it increases 2006 AMT exemptions
(deductions claimed when calculating whether you owe the AMT or
not) to $62,550 if you’re married and file jointly (up from $58,000 for
2005); $31,275 if you’re married and file separately (up from $29,000
for 2005); and $42,500 if you’re single or the head of a household (up
from $40,250 for 2005). And, it lets taxpayers use their personal tax
credits (such as for dependent care or education) to reduce both their
regular 2006 tax bill and their AMT 2006 tax bill.
TAXES 149
Good news! Section 179 deduction rules are extended. If you own a
small business, you’re probably familiar with Section 179, which allows
many small business owners to deduct the full cost of most equipment
and software in the year it’s purchased. The maximum deduction,
which is $108,000 for 2006, was scheduled to drop to $25,000 after
2007 but the TIPRA extended the current rules through 2009.
Bad news. More dependents exposed to the ”kiddie” tax. Under the
“kiddie” tax rules, a dependent child’s unearned income (typically
from investments) can be taxed at the parent’s federal income tax rates.
That’s bad news because the parents’ tax rates can be much higher than
the child’s – 35% (or 15% for long-term capital gains and dividends,
as mentioned above). Before 2006, this tax only applied to dependent
children who had not reached age 14 by year-end. Starting in 2006,
the tax applies to dependent children who have not reached age 18 by
year-end. However, you can breathe one sigh of relief: The tax applies
only to unearned income in excess of $1,700.
How would you like to lower your capital gains and estate taxes at the
same time? Yes, it can be done through a charitable remainder trust
(CRT) or a private annuity trust (PAT). Setting up either of these trusts
will allow you to reduce your estate taxes. But hardly anyone knows
that depending upon which you choose, you will also be able to defer
paying capital gains taxes on highly appreciated assets – such as real
estate and stocks – or avoid paying them altogether.
With the CRT, you make an irrevocable gift of assets (such as appreciated
securities, real estate, or cash) to a trust. For the remainder of your life,
you (or a party you designate) receive the investment income from the
assets held within the trust. Upon your death, the principal value of
the assets is transferred to your designated beneficiary, which must be
a recognized non-profit organization.
TAXES 151
People typically shy away from the CRT because while the donors
receive income for life, the “donated” asset gets left behind to charity,
which disinherits heirs. To solve this problem, many people who do
set up a CRT “sweep” some of the income off the income stream and
use it to pay for a life insurance policy that replaces the amount of the
donated asset tax-free upon their death.
There are a number of benefits to setting up a CRT, but the three major
reasons pertain to reduced taxation. First, you won’t pay any capital
gains tax on the appreciated assets in the trust, making CRTs ideal for
assets with a low-cost basis but high-appreciated value, such as real
estate. Second of all, contributions to a CRT are considered charitable
contributions, so they qualify for an income tax deduction (and any
deduction not taken in the year of contribution can be carried forward
for the next five years). And third, the value of the assets held in a CRT
trust is considered “outside of your estate” by the Internal Revenue
Service (IRS), meaning it’s excluded from the calculation of your estate
taxes. This could reduce your estate tax rate by as much as 46 cents of
every dollar, given current estate tax rates.
It’s really not a bad deal, and it is something that certainly should at
least be considered by those who are planning to sell highly appreciated
assets and have lots of taxes awaiting them.
A PAT is another type of trust that’s similar to a CRT. With a PAT, you
transfer the desired assets into the trust, the assets are then sold, and
the proceeds are used to purchase an annuity. As with a CRT, the assets
held in a PAT are excluded when calculating your estate taxes. But part
of each payment you receive from the PAT will contain a portion of the
152 TAXES
capital gains which were due on sale. So while a CRT eliminates the
capital gains tax, the PAT spreads them out over the rest of your life.
This latter point may make the PAT less desirable than the CRT. Yet
some people consider the PAT a better option because over time, the
investor and the investor’s family receive all proceeds from the sale
of the asset. Thus, if you create a PAT, upon your death the asset will
be removed from your estate and your heirs will receive whatever
portion of the asset remains, free of estate taxes, gift taxes, generation-
skipping taxes, and transfer taxes. However, your heirs will have to pay
any remaining capital gains tax due.
How much income can you receive from a CRT or PAT? That depends.
With a CRT, for example, your income will be based on the amount
of income your assets generate while inside the CRT, as well as the
“payout percentage”, or the size of the payments you choose to receive.
The IRS requires CRTs to distribute a minimum of 5% of the net fair
market value of its assets annually. If you don’t need income from the
CRT in one year, you can defer it through a “makeup provision”, but
the CRT’s net distributions must eventually equal 5%. This means that
you don’t have to start taking income right away. In some cases, if you
defer taking the income, you can potentially take more income out
later than if you would have taken the distributions in the first place.
One caveat here: The higher the payout percentage, the lower your
charitable income tax deduction will be, so you’ll want to talk to an
advisor about striking the right balance between the two.
Many people use their tax refund money for a vacation or a down
payment on a new car, but not the financially savvy. Here are five
smarter things you can do with your tax refund instead.
years, and the IRA grows at 8%, compounded quarterly. If you make
the contribution at the end of each year – in December – you’ll end
up with $166,385. But if you make the contribution sooner – say, in
April – you’ll end up with $181,281. That’s because by making the
contribution earlier in the year, you’ll gain additional months of
compounding.
So, as you can see, what may seem like little things can add up in a big
way when it comes to your money. Long-term, you will also be further
ahead financially than if you bought that new boat or car, and you
won’t have the payments to keep up with either.
156
EIGHT
ECONOMY CHAPTER 157
Not Concerned
about the Federal Budget?
The deficit: Why you should care
You’ve looked forward to retirement for years. You’ve planned and
saved so you’d have plenty of money in addition to what your Social
Security check would cover. But wait! A day of reckoning is coming
and your retirement could be in jeopardy. Yes, you read that right. At
any point, the economy could cause the federal government to make
changes in policies that could affect your spending power.
Many people think they don’t need to pay attention to what happens
with the U.S. economy once they’ve retired, and as long as they have
money in the bank. What they may not realize is that even after they
retire, economic issues affect just about everything related to their
money – from grocery store prices to the value of their investments. If
you want to continue to have a smooth ride through your retirement
years, you need to keep an eye on inflation, interest rates, and other
158 ECONOMY
The U.S. budget deficit is just one aspect of the economy, and one of the
most troubling. Just four years ago there was a record federal budget
surplus – that is, the government took in more money (mostly in the
form of tax dollars) than it needed to run its programs. But now there’s
a federal budget deficit, or in other words, a shortfall of government
funds. And it’s getting worse. The Bush administration has estimated
that the federal budget deficit will reach a record $521 billion this year,
or 4.25% of the total economy.
That’s scary stuff. However, I tell my clients they have an option: Plan
now. Adjust your finances while you can, rather than waiting until you
retire to see if you get the benefits you’re expecting. You may think it’s
too late to start investing, but the power of compounding can work in
your favor.
Now, let’s use compounding in a real life example. Say you were born
in the middle of the baby boom years, in 1955. You’ll be 65 in 2020,
which means you have about 15 years until retirement. What happens
if you start investing $300 a month in a tax-deferred account now
and continue for 15 years? Well, you’d invest a total of $54,000. At a
hypothetical growth rate of 8%, after 15 years that investment would
be worth $103,811.47 – a difference of $49,811.47!
The lesson: The federal budget deficit could threaten your financial
security in retirement. But planning now and investing monthly can
help you build assets over time, and possibly make up for any future
shortfall in Social Security and Medicare. A financial advisor can help
you learn how to take the right steps to make sure you have the money
you need for a comfortable retirement.
160 ECONOMY
Currency Values
The falling dollar
Many people become worried when the value of the U.S. dollar rises,
but I’m not sure they need to be. Instead, I think they should worry
when the dollar loses value.
Before I explain why, let’s look at what happens when the dollar’s
value rises. For starters, U.S. exports become more expensive. As a
result, American companies are less competitive against their foreign
counterparts. That’s bad news for the American manufacturing sector,
which has struggled since late 2000. Indeed, last month the government
reported that the U.S. deficit in international transactions, mainly trade,
reached an unprecedented $666 billion in 2004, a 24% increase from
2003 levels. That’s 5.7% of the U.S. economy. Many economists believe
it is two to three times higher than it should be.
ECONOMY 161
But the good news is that when the dollar rises in value against other
currencies, imports – such as Italian leather goods and French wines –
are less expensive. That’s because importers and retailers in the United
States buy goods in a foreign currency that is falling relative to the
dollar, so they’re able to pay less to obtain the goods than they did
previously.
While this makes some sense, I disagree with the Bush administration.
Hedge funds – not investment by foreign governments – were
responsible for much of the net foreign capital the United States
attracted in January. And that’s worrisome because hedge funds
often make short-term investments.
I believe that what has attracted foreigners to the U.S. dollar has been
higher interest rates, and that’s a short-term attraction. As long as the
Federal Reserve (Fed) keeps raising interest rates, foreign investors
will keep buying U.S. dollars. But what happens when the Fed stops
raising interest rates, as they eventually must do? The dollar fell recently
when one key member of the Fed just suggested that interest rates
might peak at a lower level than expected. Want evidence of my theory?
When officials from Japan, South Korea, India, and Russia made
comments about diversifying away from U.S. dollars, the financial
markets didn’t like this at all.
162 ECONOMY
Many investors are feeling jittery about higher oil prices, and it’s no
wonder. Most economists agree that 9 of our 10 post-war recessions
began with oil price increases. Could high oil prices cause an economic
slowdown today, you might ask? Should you prepare by adjusting your
portfolio?
Because the economy is dynamic, it’s difficult to draw hard and fast
rules. Even the opinions of economists differ on how much the recent
spike in prices will affect economic growth and whether the current
expansion is at risk. But here’s what we do know.
Oil prices are high. The cost of a barrel of crude oil neared $50 in August,
the first time in more than two decades of government reporting.
Secondly, high oil prices do create an economic headwind, because
when oil prices rise, almost everyone is affected.
164 ECONOMY
If you drive, for example, you’ll pay more for gas. According to the
U.S. Energy Information Agency, a family with two cars that logs
22,000 miles a year, at an average of 20 miles per gallon, will spend an
additional $550 per year if gasoline rises 50 cents a gallon.
Yet even people who don’t drive are affected by high oil process. The
manufacturers from whom you buy the products you use every day,
such as groceries, use fuel to transport those products. A rise in fuel
costs could lead them to raise prices too. When products cost more,
consumers tend to buy less. And when consumers buy less, the whole
economy suffers. In fact, this may already be happening: Consumer
spending started slowing down last spring, and the U.S. Gross
Domestic Product expanded at a slower-than-expected annual pace of
3% in the second quarter, down from 4.5% in the first quarter.
But before you start to panic, consider the positive news. Although
what most consumers see is that the cost of gasoline has jumped
tremendously since it was less than $1 a gallon in the late 1990s, oil
prices are still historically low. Consider that the price of a barrel of
crude, adjusted for today’s dollars, was more than $75 in 1980. Also,
our dependence on oil has decreased. Our factories and homes have
become more energy efficient, and in a service economy like ours,
business is increasingly being conducted over fiber optic cables rather
than roads. Finally, high oil prices don’t always lead to a recession. Four
times during the 1980s and 1990s recessions did not follow spikes in
oil prices, according to the Dallas Federal Reserve.
But that’s not happening. Even though oil prices are high, they are
not continuing to climb. In late August, for example, they fell for four
straight trading sessions after Iraq boosted oil exports and fears about
Russian production eased. That was the longest sustained fall since
early February.
So, although any disruption, however minor, may cause prices to spike
again, I’m not worried. And even if I were, I wouldn’t advise you to
change your investments on that basis. Yes, higher oil prices could
cause an economic slowdown, which could be bad for certain elements
of your portfolio. But it could also be good for investments such as
oil company stocks. And regardless, timing the market is seldom a
successful, long-term investing strategy. Instead, I advise you to build
a portfolio that works for the long term, then stick with it.
166 ECONOMY
While the Federal Reserve (Fed) does not appear to be too concerned
about inflation, the economic policy makers have said that inflation
risks have increased, and therefore interest rates need to be raised. To
many income investors, this opens up an entirely new issue – falling
bond values.
Assume you buy a $10,000 bond when interest rates are at 5%. In this
case, your bond yields 5% of $10,000, or $500 annually. Suppose that
after you purchase that bond, interest rates rise to 8%. Now a newly
purchased $10,000 bond yields $800 annually. Your existing bond
pays $300 less a year, so it is less valuable and its price will tend to fall.
ECONOMY 167
When interest rates fall, the opposite is true: Existing bonds become
more valuable. The rise and fall of interest rates not only impacts bonds,
but the share prices of mutual funds that hold bonds.
No one can predict what will happen to interest rates in the near
future, but the Fed has suggested that it will continue raising interest
rates throughout this year and maybe even into 2006. And since higher
interest rates lead to lower bond prices, bond prices can be expected
to fall – except for one thing. Yes, there is an exception. Bond prices
have already fallen in anticipation of the Fed raising rates. So bond
prices will likely only fall more if the Fed raises interest rates higher
than the bond market has anticipated. That’s good news for those of
you who already own bond and bond mutual funds.
Plus, whatever happens, it’s important to remember that price isn’t the
only factor to consider when investing in bonds. When interest rates
rise and bond values fall, higher yields could be available, making it
possible for mutual funds invested in bonds to raise income dividends.
In fact, bond fund managers sometimes take advantage of rising
interest rates by purchasing higher yielding bonds.
1. Move more of your portfolio into stocks if you can tolerate the
increased risk.
Historically, stocks have had higher returns than any other asset
class, especially bonds. So your best chance for keeping your money
growing ahead of inflation is to move it into stocks. Needless to
say, this will most certainly increase the risk to your principal.
For that reason, make sure you read my previous chapter on the
importance of diversifying your portfolio.
2. Look for bond mutual funds that hold bonds with lower maturities
and average duration.
If interest rates rise, you don’t want to be “locked in” to bonds
that don’t mature for years because they will be worth less than
168 ECONOMY
4. Diversify.
The same old advice remains true: When you have a mix of different
types of investments, such as stocks and bonds, you can better
weather the ups and downs of the market.
Many people put off estate planning because they don’t want to think
about their death. But taking the time to plan now – while you are
able to –can make the transition easier for your heirs. It can also make
certain that your assets are distributed according to your wishes.
Relying on a will as your primary estate planning tool can have big
disadvantages. Specifically, before listed assets can be distributed, they
must be processed in state probate court, which can be time-consuming
and expensive, and is open to the public.You may, therefore, find that a
revocable living trust is a better option.
A revocable living trust establishes a legal entity with the power to hold
title to assets. In other words, assets are owned not in your personal
name but in the name of the trust. While that may sound frightening,
in reality it’s a pretty simple legal construct.
170 ESTATE PLANNING
The assets are still yours. And, depending upon state law, you may be
able to act as trustee and receive income from the trust as a beneficiary
during your lifetime. Then, when you die, or if you become disabled,
the successor trustee named in the agreement will take over the
management and distribution of assets from the trust according to the
terms of the trust. This successor trustee can be a legal advisor or a
friend.
Other assets, however, can be probated, and you should carefully weigh
whether or not those assets belong in a trust. Although any assets
owned by a trust pass through it probate-free, revocable living trusts
aren’t for everyone. Establishing one requires the services of an estate
planning professional, since the trust agreement is a legal document
and is governed by state law, which varies from state to state. There can
also be federal and state tax consequences, depending on how the trust
is structured. For example, the assets held in the trust will generally be
included when calculating any applicable federal estate tax.
There are far too many different situations to discuss here. If any of
these subjects are of interest, you should consult an estate planning
attorney to figure out which estate planning structure would best suit
you and your heirs. If you have not thoroughly considered your own
circumstances, or received qualified advice from an estate planning
attorney, you could be doing yourself and your family a tremendous
disservice.
Yet for countless retirees, those golden years can be anything but, due
to illness of one type or another. It may be the consequence of aging, or
the result of years of bad habits. Obviously, medical care then becomes
a primary issue. And even more troublesome is the thought of long-
term care.
But the fact is, many of us will need help when we’re older, and the
costs of such services can be overwhelming. However, planning now
can help you prepare for those financial demands, and that includes
thinking ahead about long-term care.
Faced with this prospect, more people are opting to purchase long-
term care insurance to ensure that they’ll be taken care of in their later
years. But how do you decide if long-term care insurance meets your
needs?
Medicaid Eligibility
Even the middle-income may qualify
Many people believe Medicare covers the costs associated with long-
term care. Actually, Medicare usually covers only about three months
of nursing home care immediately following a hospitalization, and
even then co-pays may apply. But you do have other options when it
comes to your long-term care, and they include Medicaid.
Medicaid typically pays for medical care for individuals and families
with low income and few resources, and does cover some long-term
care expenses. However, to be eligible, you have to exhaust most of
your personal resources. The amount of assets that you’re allowed to
keep and still remain eligible for Medicaid benefits differs from state
to state. In general, the person entering the nursing facility may have
no more than $2,000 in “countable” assets. If assets are greater than
$2,000, it is required that the person “spend down” or exhaust their
personal assets until they reach the qualifying level.
LONG-TERM CARE 177
Does this mean that Medicaid is only for the very poor? Not necessarily.
“If I were single”, many people reason, “Medicaid ‘spend-down’
rules wouldn’t be such a concern. Sure, I’d have less to leave to my
heirs, but I’d be cared for. Since I’m married, these rules could create
complications for my spouse. She may not have the same assets or
income to live off of if I enter a nursing home and depend on Medicaid
to finance it.”
Because of this belief – that Medicaid benefits will only kick in once
a recipient’s assets have been drained – many couples purchase long-
term care insurance, which can be expensive. It currently ranges from
about $300 a year if you’re 50 to more than $5,000 a year if you’re over
75. Yet middle-income married couples may, in fact, be able to bypass
long-term care insurance and rely on Medicaid for their long-term care
needs due to spend down exclusions. While the person entering the
nursing facility may have no more than $2,000 in “countable” assets
in 2004, that patient’s spouse (called the community spouse) can keep
half of the couple’s countable joint assets up to $92,760. Some states
are even more generous, allowing the community spouse to keep up
to $92,760 regardless of whether this represents half of the couple’s
assets.
What’s even better news is that not all assets are counted against this
limit. Excluded, for example, is the couple’s primary residence, as long
as the community spouse or another dependent relative lives there.
Even if the community spouse doesn’t live there, the nursing home
patient may be able to keep his or her home. In some states, the
home will not be considered a countable asset for Medicaid eligibility
purposes as long as the nursing home resident intends to return home.
In other states, the nursing home resident must prove a likelihood of
returning there.
Other assets excluded from Medicaid spend down rules are one motor
vehicle of any value; personal possessions, such as clothing, furniture,
and jewelry; prepaid funeral plans and a small amount of life insurance;
and other assets that are considered “inaccessible” for one reason or
another. Finally, in all circumstances, the income of the community
178 LONG-TERM CARE
What does this mean for you? Well, let’s say you and your spouse
have a home worth $400,000, a car worth $20,000, and savings and
investment accounts worth $200,000. If you enter a nursing home, your
spouse would be able to keep the house and the car. Before Medicaid
kicked in to pay for your care, you’d have to spend down your savings
and investments to $92,760, but that would be your spouse’s to keep.
Your spouse would also be able to keep any income he or she earned.
You may not need prescription drug coverage from Medicare. Right
now, retirees receive Medicare coverage in a number of different ways.
How you happen to receive yours will determine the usefulness of
the new Medicare prescription drug coverage. For example, if you
have the original Medicare, as well as a Medigap supplemental policy
with drug coverage, the new Medicare drug coverage will probably
provide much more comprehensive coverage at a lower cost. However,
if you have a Medicare Advantage Plan through a Health Maintenance
Organization (HMO) or Preferred Provider Organization (PPO) which
already includes drug coverage, the new Medicare drug plan may not
offer any further benefit.
180 LONG-TERM CARE
You have choices. If you decide that you want to take advantage of
the new Medicare drug coverage plan, there are two ways you can do
so. First, you can add drug coverage to traditional Medicare through
a “standalone” prescription drug plan. Or, you can get Medicare and
drug coverage together through a Medicare Advantage Plan. To help
you find Medicare plans by state, the Centers for Medicare & Medicaid
Services created an online resource: See “Landscape of Plans” at www.
medicare.gov.
Know that you may qualify for extra help. Individuals who have limited
income and resources (less than $11,500 for individuals or $23,000 for
married couples) but don’t have Medicaid may be eligible to have about
95% of their drug costs paid. Find out if you meet those qualifications
by visiting www.medicare.gov/medicarereform/help.asp.
Let’s say 16-year-old Marie earns $4,500 from her summer job at the
mall. Since she has earned income, she can deposit up to $4,000 in a
Roth IRA. If that money is left untouched until Marie retires at age
182 GIFTING
UGMA/UTMA Account
Even if your teenage grandchild doesn’t have earned income and thus
can’t contribute to an IRA, he or she is eligible for another type of long-
term savings plan: A Uniform Gift to Minors Act (UGMA) account or
Uniform Transfer to Minors Act (UTMA) account. As a grandparent,
you can open a UGMA or UTMA account in a grandchild’s name and
designate yourself, the child’s parent, or even a friend to administer
the account until the child reaches the age of majority.
You can contribute as much as you want to the account, but the first
$12,000 given, per person, counts toward the annual gift tax exclusion.
So, if your spouse consents and you file IRS Form 709 (or, if applicable,
form 709-A), you and your spouse may “gift” up to $24,000 per year
tax-free.
Coverdell ESA
A Coverdell Education Savings Account (ESA) is an investment tool
specifically designed to pay for a child’s education. Almost anyone
may contribute – including relatives and friends – up to $2,000 per
year (assuming the person has a modified adjusted gross income
below certain limits). A child can receive a combined total of $2,000
per year from all contributors. Contributions aren’t tax-deductible,
but qualified distributions are tax-free, which means that investment
earnings won’t be taxed.
The greatest benefit of the Coverdell ESA is that the money can be used
be used for any qualified expenses. That may be tuition for private or
parochial schools, or the cost of state-approved home schooling from
kindergarten through 12th grade, as well as college. Other qualified
expenses include academic tutoring, student uniforms, extended day
care programs, Internet access, and computer equipment. If the assets
aren’t used by the time the child reaches age 30, the child has two
GIFTING 183
options: He or she can roll the assets over to another family member’s
Coverdell ESA or the assets can be withdrawn, but in this case
investment earnings will be taxable as income and subject to a 10%
penalty.
Finally, remember that starting early can pay off. If you had opened a
UGMA or UTMA account when your grandchild was born in December
1975 and put a little more than $3 a day ($100 a month) in the Standard
& Poor’s 500 Index (say, through an index fund) until he or she turned
18 in December 1993, that account would have grown to $65,443,
thanks to an average annual return of 9.45%. If your grandchild got
a scholarship and didn’t touch the money, by the end of 2004, that
account would have exceeded $150,000.
Maybe you didn’t have $3 a day to invest for your child when he or she
was growing up. Maybe you didn’t think so little would grow enough
to make that much of a difference. So why not invest that $3 now, or
whatever amount you can, for your grandchild?
184
TWELVE
EDUCATION CHAPTER 185
First, let’s go over how 529 plans were intended to work. Initially, they
were designed to help people save money on a tax-deferred basis
for their children’s, grandchildren’s, or their own college education.
You open an account, contribute, and the account operates like a tax-
deferred investment portfolio. You retain full control of the account’s
expenditures and you can switch the beneficiary designation to
another member of the beneficiary’s family at any time. You can also
withdraw money from the account at any time by paying income tax
on the earnings as well as a 10% penalty.
186 EDUCATION
To illustrate how that could happen, let’s assume you have three
children and six grandchildren. You set up 529 plan accounts for all of
them. At $120,000 for each beneficiary, that’s more than $1,000,000 in
assets you could transfer at once (nine descendants x $120,000). And
that’s $1,080,000 that is removed from your taxable estate.
But there’s another way you can use 529 plans as a retiree – for yourself.
Say you want to save money, tax-deferred, for use later in your life.
You can designate yourself as the beneficiary of a 529 plan account.
You save money for a number of years, then when you’re ready, you
go back to school part-time. The money in the 529 plan can be used
to help pay not just for your education expenses, such as tuition and
books, but for certain living expenses like an apartment.
Yes, this is completely legal. It can all be found under U.S. Code Title
26 (Internal Revenue Code), Subtitle A, Chapter 1, Subchapter F,
Part VIII, Section 529. For more information, check out the Internal
Revenue Service Web site at www.irs.gov and search the above
mentioned section.
Additionally, no one knows what will happen with 529 plan rules
in the future. The law governing 529 plans – the Economic Growth
EDUCATION 187
and Tax Relief Reconciliation Act of 2001 – expires at the end of 2010.
Unless the law is extended by Congress and the president, the federal
tax treatment of 529 plans will revert to their status prior to January 1,
2002 – distributions for qualified educational expenses are taxable to
the recipient.
4. Diversify.
You’ve heard it a thousand times, but it’s amazing how few people
actually do it. Diversification saves lives and prevents disasters,
especially when you don’t ever put too much money in one place.
Also be certain to understand the concept of “rebalancing.”That’s
important stuff, and if you don’t understand it, go back and read
that section in this book to make sure you do. Rebalancing, together
with diversification, will likely one day save your investment life.
THE TEN COMMANDMENTS OF I N V E S T I N G 191
Conclusion
Have you learned anything new? Do you have a better idea of how
your retirement vehicle operates? Have you become more familiar
with its parts?
Upon beginning your journey through this book, you were asked
whether you thought you were prepared for retirement. Now that
you’ve had a chance to review the chapters on various topics – the
operating manual for your retirement vehicle – do you feel the same
way?
If you thought you were prepared for retirement and you still feel you
are, congratulations, you are in the minority. But if not, if you realize
there are issues that need your attention, or you knew you weren’t
prepared, I hope this book has been of some help. I would like to think
the information presented here has at least shed some light on the
long highway of retirement, put you on the right road, and helped
ensure you are headed in the right direction.
And now that you have some idea of what to look for, have you assessed
the condition of your retirement vehicle? Is it in good shape? Are its
systems operating correctly? Do any parts need to be replaced?
Only you can determine your destination, but the right financial advice
can make it easier for you to get there. A qualified financial advisor can
help you plan your route, after you’ve had a chance to get to know one
another and thoroughly discuss your personal financial situation.
194 CONCLUSION
Remember, reaching retirement may signal the end of one trip, but
it also marks the beginning of a marvelous new adventure. So try to
maintain a full tank of gas if you can, keep an eye on the road, and
monitor the gauges. Stay on the lookout for accidents, roadblocks, and
detours – anything that can get in the way of you moving forward. And
be prepared to take an alternate route if you need to.
Most of all, don’t be afraid to stop and ask for directions. The financial
world has become quite complicated and very overwhelming, but the
ride through your retirement doesn’t have to be. With so many good
ideas and products to choose from, you can’t be expected to learn
everything. And there are so many parts to a retirement vehicle that it’s
easy to overlook some of them. That’s where asking someone who has
the expertise to help you get your vehicle in the best possible condition
to navigate smoothly through retirement can be invaluable.
As you plan, begin, or continue along your retirement road trip, I want
to wish you and your family a very safe and pleasant journey ahead.