Investing Through Life’s Stages

Generally speaking, how you allocate your investment portfolio among different types of investments will depend largely on your unique investment goals, time frame and tolerance for risk. Yet most investors will experience some common life events—getting married, buying a first home, starting a family, becoming an empty-nester and retiring—that will require them to reassess their investment situation and make adjustments as needed.

Getting Started

The first part of a lifelong investment strategy is establishing disciplined savings habits. Regardless of whether you are saving for retirement, a new house or just that extravagant dining room set, you will need to develop strict budgetary practices. Regular contributions to savings or investment accounts are often the most productive; and if you can automate them, even better.

Universal Factors That Affect Your Investment Decisions

Once you begin saving on a regular basis, you will soon have to decide how to invest the money you are saving. Regardless of what financial stage of life you are in, you will have to determine what your needs are and how comfortable you are with risk.

• Investment objectives. What do you need the money for? The answer to this question will help determine whether you want to put your savings into investment products that produce income for you, or that concentrate on growing the value of your investment. For instance, a retirement fund does not need to produce income until you retire, so your investing strategy should focus on growth until you are close to retirement. After you retire, you’ll want to draw income from your investment while keeping your principal intact to the extent possible.
• Time and risk tolerance. All investing involves a certain amount of risk. How well you tolerate price fluctuations in your investments will need to be balanced against your required rate of return in determining the amount of risk your investments should carry. An offsetting factor to risk is time. If you plan to hold an investment for a long time, you will probably tolerate more risk because you have the time to make up any losses you may experience early on. For a shorter-term investment, such as saving to buy a house, you may want to take on less risk and have more liquidity in your investments.

Investing—A Lifelong Journey

Although everyone’s attitude toward investing and money is different, most investors share some common situations throughout their lives. The following are some major life events and some investment decisions that you may want to consider:

When you get your first “real” job:

• Start a savings account to build a cash reserve.
• Start a retirement fund and make regular monthly contributions, no matter how small.

 When you get a raise:

•  Increase your contribution to your company-sponsored retirement plan.
• Increase your cash reserves.

 When you get married:

•  Determine your new investment contributions and allocations, taking into account your combined income and expenses.

 When you want to buy your first house:

• Invest some of your non-retirement savings in a short-term investment specifically for funding your down payment, closing and moving costs.

 When you have a baby:

• Increase your cash reserves.
• Increase your life insurance.
• Start a college fund.

 When you change jobs:

• Review your investment strategy and asset allocation to accommodate a new salary and a different benefits package.
• Consider your distribution options for your company’s retirement savings or pension plan. Discuss with an advisor if a roll over into a new plan or IRA is appropriate.

When your children have moved out of the house:

• Boost your retirement savings contributions.

 When you reach age 55:

• Review your retirement fund asset allocation to accommodate the shorter time frame for your investments.
• Continue saving for retirement.

 When you retire:

• Carefully study the options you may have for taking money from your company retirement plan. Discuss your alternatives with your financial advisor.
• Review your combined potential income after retirement. Reallocate your investments to provide the income you need while still providing for some growth in capital to help beat inflation and fund your later years.

 Discipline and a Financial Advisor Can Help

One of the hardest things about investing is disciplining yourself to save an appropriate portion of your income regularly so that you work towards your investment goals. And if you’re not fascinated with investing, it may be hard to force yourself to review your financial situation and investment strategy on a regular basis. Establishing a relationship with a trusted financial advisor can go a long way toward helping you practice smart money management over your entire lifetime.

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This article was prepared by Wealth Management Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc., or its sources, neither Wealth Management Systems Inc., nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content.

There is no assurance that the strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to effect some of the strategies. Investing involves risks including possible loss of principal. Asset allocation does not ensure a profit or protect against a loss.

The Economics of Borrowing from Your 401(k)

When times are tough, that pool of dollars sitting in your 401(k) plan account may start to look attractive. But before you decide to take a plan loan, be sure you understand the financial impact. It's not as simple as you think.

The basics of borrowing

A 401(k) plan will usually let you borrow as much as 50% of your vested account balance, up to $50,000. (Plans aren't required to let you borrow, and may impose various restrictions, so check with your plan administrator.) You pay the loan back, with interest, from your paycheck. Most plan loans carry a favorable interest rate, usually prime plus one or two percentage points. Generally, you have up to five years to repay your loan, longer if you use the loan to purchase your principal residence. Many plans let you apply for a loan online, making the process quick and easy.

You pay the interest to yourself, but…

When you make payments of principal and interest on the loan, the plan generally deposits those payments back into your individual plan account (in accordance with your latest investment direction). This means that you're not only receiving back your loan principal, but you're also paying the loan interest to yourself instead of to a financial institution. However, the benefits of paying interest to yourself are somewhat illusory. Here's why.

To pay interest on a plan loan, you first need to earn money and pay income tax on those earnings. With what's left over after taxes, you pay the interest on your loan. That interest is treated as taxable earnings in your 401(k) plan account. When you later withdraw those dollars from the plan (at retirement, for example), they're taxed again because plan distributions are treated as taxable income. In effect, you're paying income tax twice on the funds you use to pay interest on the loan. (If you're borrowing from a Roth 401(k) account, the interest won't be taxed when paid out if your distribution is "qualified"--i.e., it's been at least 5 years since you made your first Roth contribution to the plan, and you're 59½ or disabled.)

...consider the opportunity cost

When you take a loan from your 401(k) plan, the funds you borrow are removed from your plan account until you repay the loan. While removed from your account, the funds aren't continuing to grow tax deferred within the plan. So the economics of a plan loan depend in part on how much those borrowed funds would have earned if they were still inside the plan, compared to the amount of interest you're paying yourself. This is known as the opportunity cost of a plan loan, because by borrowing you may miss out on the opportunity for additional tax-deferred investment earnings.

Other factors

There are other factors to think about before borrowing from your 401(k) plan. If you take a loan, will you be able to afford to pay it back and continue to contribute to the plan at the same time? If not, borrowing may be a very bad idea in the long run, especially if you'll wind up losing your employer's matching contribution.

Also, if you leave your job, most plans provide that your loan becomes immediately payable. If you don't have the funds to pay it off, the outstanding balance will be taxed as if you received a distribution from the plan, and if you're not yet 55 years old, a 10% early payment penalty may also apply to the taxable portion of that "deemed distribution."

Still, plan loans may make sense in certain cases (for example, to pay off high-interest credit card debt or to purchase a home). But make sure you compare the cost of borrowing from your plan with other financing options, including loans from banks, credit unions, friends, and family. To do an adequate comparison, you should consider:

• Interest rates applicable to each alternative
• Whether the interest will be tax deductible (for example, interest paid on         home equity loans is usually deductible, but interest on plan loans usually isn't)
• The amount of investment earnings you may miss out on by removing funds from your 401(k) plan

Broadridge Investor Communication Solutions, Inc. does not provide legal, taxation, or investment advice. All the content provided by Broadridge Investor Communication Solutions is protected by copyright. Forefield claims no liability for any modifications to its content and/or information provided by other sources.
Copyright 2011 by Broadridge Investor Communication Solutions Inc.
All Rights Reserved.

A Clean Slate: Review and Rebalance Your Portfolio

There is no better time to take a fresh look at your investment strategies than the beginning of the new year. And while there is no one-size-fits-all approach to investing for the future, reviewing your goals annually can help you stay on track from month to month--and year to year.

Progress Check

The goal of an investment review is to make sure you’re in position to pursue important short- and long-term goals during the coming year. However, it is difficult to get a clear vision of the future without first reviewing whether you have managed to stay on track during the past year.

For example, ask yourself the following questions:

·         Are your savings and investing goals still realistic, or might you now need to accumulate more (or less) money than originally planned?

·         Has the time frame for any of your financial goals--such as your retirement date--changed in the past year?

·         Have you been contributing as much as possible to your tax-deferred retirement accounts? The 2013 and 2014 contribution limits are $17,500 for employer-sponsored retirement accounts, such as 401(k)s and 403(b)s, plus another $5,500 in catch-up contributions if you are over the age of 50. For traditional and Roth IRAs, the limits are $5,500 with another $1,000 in catch-up contributions.

Correcting for Asset Allocation “Drift”

You should also be aware that your asset mix, or asset allocation, is always subject to change.¹ That’s because investment performance could cause the value of some of your assets to rise (or fall) more than others. When an asset allocation shifts due to market performance, it is said to have “drifted” or become unbalanced.

To better appreciate how performance differences can affect a portfolio over time, consider what might have happened to a hypothetical portfolio of 70% U.S. stocks, 10% bonds, 10% foreign stocks and 10% cash equivalents if left untouched for the 20-year period ended December 31, 2012.
In this example, the original 70% allocation to domestic stocks would have grown to 79.4%, while all the other allocations would have shrunk, reducing their intended risk reduction role in the portfolio. As always, past performance is no guarantee of future results.²

Bonds haven’t been as volatile as stocks over long periods of time, but recent history shows that they too can experience performance patterns that may alter asset allocation over time. Consider the divergence of the stock and bond markets in 2008 and how that affected asset allocations. While the S&P 500 lost 37% during this period, long-term U.S. government bonds gained 23%. A portfolio composed of 50% of each at the start of the year would have shifted to an allocation of 34% stocks and 66% bonds at year’s end.³

Seeing the Whole Picture

If you have multiple investment accounts, determining whether to rebalance may involve several steps, beginning with a check of your overall allocation.⁴ This entails figuring how your money is divided among asset classes in each account and then across all accounts, whether in taxable brokerage, mutual fund or tax-deferred accounts.

How often should you rebalance, and what are some general guidelines? The usual answer is anytime your goals change; otherwise, at least once a year. However, to keep close tabs on your investment plan and make sure it doesn’t drift far from your objectives, you may prefer to set a percentage limit of variance, say 5% on either side of your intended target that would trigger a review and possible rebalancing.

How you go about rebalancing will depend on your particular circumstances. If you are making regular contributions to a retirement plan, the easiest way to adjust the makeup of your contributions is to build up underweighted assets. This avoids transaction costs and does not require liquidating and reinvesting assets, which can have tax consequences. In general, it’s a good idea to avoid liquidating existing assets unless the tax consequences work in your favor.

If you must rebalance assets outside of your retirement plan, try to do it in another tax-deferred account such as an IRA, again to avoid immediate tax consequences. And if you’re looking for new money to help rebalance your portfolio, consider using a lump-sum payment such as a bonus or tax refund.

This article is not intended to provide specific investment advice or recommendations for any individual.  Consult your financial advisor, or me, if you have any questions.

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¹Asset allocation does not assure a profit or protect against a loss.

²Source: Wealth Management Systems Inc. The performance shown is for illustrative purposes only and is not indicative of the performance of any specific investment. The hypothetical returns used do not reflect the deduction of fees and charges inherent to investing. Your results will vary. Example is for the 20 years ended December 31, 2012. Domestic stocks are represented by the total returns of Standard & Poor’s Composite Index of 500 stocks, an unmanaged index that is generally considered representative of the U.S. stock market. Bonds are represented by the total returns of the Barclays Aggregate Bond index. Money markets are represented by the total returns of the Barclays 3-Month Treasury Bills index. Non-U.S. stocks are represented by the total returns of the Morgan Stanley Capital International Europe, Australasia, Far East (EAFE^®) index. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.  

Investing in stocks involves risks, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations, and may not be suitable for all investors. Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, offer a fixed rate of return and fixed principal value.

³Source: Wealth Management Systems Inc. The performance shown is for illustrative purposes only and is not indicative of the performance of any specific investment. Your results will vary. Stocks are represented by the S&P 500, bonds by long-term U.S. government bonds, which are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, offer a fixed rate of return and fixed principal value. Investors cannot invest directly in any index. Past performance does not guarantee future results.

⁴Rebalancing strategies may involve tax consequences, especially for non-tax-deferred accounts.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

This article was prepared by Wealth Management Systems Inc., and is not intended to provide specific investment advice or recommendations for any individual. Please consult me if you have any questions.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc., or its sources, neither Wealth Management Systems Inc., nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content. Wealth Management Systems, Inc. and LPL Financial are not affiliated entities.

Tracking #: 1-231895

Pay Yourself First—and Regularly—With Dollar Cost Averaging

To remain financially responsible, everyone must pay bills on a regular basis. These bills include mortgages, utilities, car loans and credit cards. Unfortunately, many people do not also heed the oft-quoted advice to pay themselves first.

The reality is that a steady saving and investing plan is sometimes necessary to help pursue such financial goals as paying for a wedding or new car, buying a house and funding retirement. One strategy that can help you develop a systematic investing plan, while potentially saving you money and easing your mind along the way, is dollar cost averaging (DCA).

DCA Defined

Dollar cost averaging is a technique in which investments of defined amounts are made on a regular basis.¹ As a long-term, disciplined strategy, DCA can help you take advantage of the benefits of compounding to potentially build a sizable sum.

Aside from offering a disciplined, trouble-free way to save and invest, another potential benefit of using DCA is that it ensures that your money purchases more shares when prices are low and fewer when prices are high. Over time, the result could be that the average cost to you may be less than the average share price. For example, consider the accompanying chart, which shows the result of investing $50 in stocks every month for 12 consecutive months.²

As you can see, every month the share price fluctuates a bit, and by the end of the 12-month period, your $600 would have bought you 42.7 shares. The average price per share, as calculated by adding up the monthly price and dividing by 12, would have been $14.25. However, the average cost that you would have actually paid, as calculated by dividing the total amount invested by the number of shares, would have been $14.05 per share. Over the years, this method could potentially save you a lot of money.

The Benefits of DCA
Month	Share Price	Shares Bought
Jan.	$15	3.3
Feb.	$13	3.8
Mar.	$12	4.2
Apr.	$14	3.6
May	$13	3.8
June	$12	4.2
July	$13	3.8
Aug.	$14	3.6
Sept.	$16	3.3
Oct.	$16	3.1
Nov.	$17	2.9
Dec.	$16	3.1
Total Shares		42.7
Average Price Per Share		$14.25
Average Cost Per Share using DCA		$14.05

Dollar cost averaging also can offer the psychological comfort of easing into the market gradually instead of plunging in all at once. Although DCA does not assure a profit or protect against a loss in declining markets, its systematic investing “habit” helps encourage a long-term perspective, which can be soothing for people who might otherwise avoid the short-term volatility of riskier, but potentially more profitable, investments, such as equities.

And last, DCA may help you make savvy investment decisions if you stick with it. For example, if your investment rises by 10%, you will likely post big gains because of the shares you have accrued over time. And if it declines by the same amount, take comfort in knowing that your next investment will purchase more shares at a less expensive price—shares that may regain their value and even exceed the higher price in the future.³

Regular Investing Makes Sense

As a long-term strategy, you may find DCA can help to potentially lower your average cost per share, while allowing you to feel more comfortable during uncertain markets. Keep in mind, however, that you should consider your ability to purchase over long periods of time and your willingness to purchase through periods of low price levels.

¹Periodic investment plans do not assure a profit and do not protect against loss in declining markets. Dollar cost averaging is a strategy that involves continuous investment in securities regardless of fluctuating price levels of such securities, and the investor should consider their financial ability to continue purchasing through periods of low price levels.

²Source: Standard & Poor’s. Stocks are represented by the S&P 500 index.

³Past performance is no guarantee of future results.

This article was is not intended to provide specific investment advice or recommendations for any individual. Consult your financial advisor, or me, if you have any questions.

________________________________

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness, or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special, or consequential damages in connection with subscribers’ or others’ use of the content.

Tracking # 1-095838

Changing Jobs or Retiring? Don’t Forget Your Retirement Savings!

Changing Jobs or Retiring? Don’t Forget Your Retirement Savings!

If you’re like many Americans, you probably intend to rely on your employer-sponsored retirement plan savings for a significant portion of your retirement income. So when it comes time to make important decisions, such as what to do with the money in your plan when you change jobs or retire, you should be fully aware of your options.

“Distribution” Defined

You may have read about or heard benefits administrators at your workplace refer to retirement plan “distributions.” This is just a fancy term used to describe a payout of the money that has accumulated in your retirement savings account. Distributions may include amounts you have contributed and the “vested” portion of any amounts your employer has contributed, in addition to any earnings on those contributions.

Retirement plan participants have several options for managing the money in their account when they change jobs or retire. Depending on your age and goals, each option may carry different tax consequences and investment opportunities. That’s why it is important to think through each option carefully before making any decisions.

Typical Distribution Options

Keep money in a former employer’s plan. Depending on the plan’s rules, you may be able to leave your savings in your former employer’s retirement plan whether you are changing jobs or retiring. Retirees -- particularly those who plan to work in some capacity or who can draw on other sources of retirement income -- may want to leave the money where it is and continue to reap the benefits of tax deferral. In addition, if you plan to start your own business when you leave the company, keeping your retirement money in your former employer’s plan may help protect your retirement assets from creditors should your new venture run into unforeseeable trouble.

While you will no longer be able to contribute to the plan, you will still have control over how your account is invested. If you are happy with the investment options available through your former employer’s plan, this may be a choice worth considering. Of course, keep in mind that minimum distributions must begin after you reach age 70½.¹

Make a “direct rollover” to another retirement account. You can move your money into another qualified retirement account, such as an individual retirement account (IRA), or, if you’re changing jobs, your new employer’s retirement savings plan. With a “direct rollover,” the money goes directly from your former employer’s retirement plan to the IRA or new plan, and you never touch your money. With this method, you continue to defer taxes on the full amount of your plan savings.

If you are about to retire, are between jobs or simply prefer the flexibility and wider assortment of investment choices offered through an IRA, then an IRA rollover may be a better option.

Take a cash distribution. You can choose to have your money paid to you in one lump sum when you retire or change jobs. This action is considered a cash distribution from your former employer’s retirement account. The cash payment is subject to a mandatory tax withholding of 20% and possibly a 10% penalty if you were under age 55 at the time you left the company.²

Lump-Sum Distributions: Not Always What They Appear to Be

Amount of distribution	$25,000
Amount withheld for federal income taxes	$5,000
(Potential) 10% penalty	$2,500
Additional tax obligation (based on 25% tax bracket)	$1,250
Net Payout	$16,250

This hypothetical example has been simplified for illustrative purposes. It is not representative of any specific situation. Your results may vary.

Consider an “indirect rollover.” You can avoid paying taxes and any penalties on a cash distribution if you redeposit your retirement plan money within 60 days into an IRA or your new employer’s qualified plan. With this strategy, called an indirect rollover, you’ll still have to pay the 20% withholding tax out of your own pocket, but the tax will be credited back to you when you file your regular income tax, and any excess amount will be refunded. If you owe more than 20%, you’ll need to come up with the additional payment when you file your tax return.

Seek Guidance

It is important to remember that these are complicated choices with lasting implications for your retirement years. Before making any decisions, consider talking to a tax and/or financial advisor who has experience helping people make prudent choices for funding their retirement years.

¹Distributions will be taxed at then-current rates.

²Additional taxes may be due, depending upon an individual’s tax bracket.

This article is not intended to provide specific investment advice or recommendations for any individual. Please consult me if you have any questions.

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Tracking #1-205374

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content. 

Four Retirement Planning Mistakes to Avoid

We all recognize the importance of planning and saving for retirement, but too many of us fall victim to one or more common mistakes. Here are four easily avoidable mistakes that could prevent you from reaching your retirement goals.

1. Putting off planning and saving

Because retirement may be many years away, it's easy to put off planning for it. The longer you wait, however, the harder it is to make up the difference later. That's because the sooner you start saving, the more time your investments have to grow.

The chart below shows how much you could save by age 65 if you contribute $3,000 annually, starting at ages 20 ($679,500), 35 ($254,400), and 45 ($120,000). As you can see, a few years can make a big difference in how much you'll accumulate.

Note:   Assumes 6% annual growth, no tax, and reinvestment of all earnings. This is a hypothetical example and is not intended to reflect the actual performance of any investment.

Don't make the mistake of promising yourself that you'll start saving for retirement as soon as you've bought a house or that new car, or after you've fully financed your child's education--it's important that you start saving as much as you can, as soon as you can.

2. Underestimating how much retirement income you'll need

One of the biggest retirement planning mistakes you can make is to underestimate the amount you'll need to accumulate by the time you retire. It's often repeated that you'll need 70% to 80% of your preretirement income after you retire. However, depending on your lifestyle and individual circumstances, it's not inconceivable that you may need to replace 100% or more of your preretirement income.

With the future of Social Security uncertain, and fewer and fewer people covered by traditional pension plans these days, your individual savings are more important than ever. Keep in mind that because people are living longer, healthier lives, your retirement dollars may need to last a long time. The average 65-year-old American can currently expect to live another 19.2 years (Source: National Vital Statistics Report, Volume 60, Number 4, January 2012). However, that's the average--many can expect to live longer, some much longer, lives.

In order to estimate how much you'll need to accumulate, you'll need to estimate the expenses you're likely to incur in retirement. Do you intend to travel? Will your mortgage be paid off? Might you have significant health-care expenses not covered by insurance or Medicare? Try thinking about your current expenses, and how they might change between now and the time you retire.

3. Ignoring tax-favored retirement plans

Probably the best way to accumulate funds for retirement is to take advantage of IRAs and employer retirement plans like 401(k)s, 403(b)s, and 457(b)s. The reason these plans are so important is that they combine the power of compounding with the benefit of tax deferred (and in some cases, tax free) growth. For most people, it makes sense to maximize contributions to these plans, whether it's on a pre-tax or after-tax (Roth) basis.

If your employer's plan has matching contributions, make sure you contribute at least enough to get the full company match. It's essentially free money. (Some plans may require that you work a certain number of years before you're vested in (i.e., before you own) employer matching contributions. Check with your plan administrator.)

4. Investing too conservatively

When you retire, you'll have to rely on your accumulated assets for income. To ensure a consistent and reliable flow of income for the rest of your lifetime, you must provide some safety for your principal. It's common for individuals approaching retirement to shift a portion of their investment portfolio to more secure income-producing investments, like bonds.

Unfortunately, safety comes at the price of reduced growth potential and the risk of erosion of value due to inflation. Safety at the expense of growth can be a critical mistake for those trying to build an adequate retirement nest egg. On the other hand, if you invest too heavily in growth investments, your risk is heightened. A financial professional can help you strike a reasonable balance between safety and growth.

This publication is not intended to provide specific investment advice or recommendations for any individual.  Consult your financial advisor, or me, if you have any questions.  

_____________________________________________________________

Broadridge Investor Communication Solutions, Inc. does not provide legal, taxation, or investment advice. All the content provided by Broadridge Investor Communication Solutions is protected by copyright. Forefield claims no liability for any modifications to its content and/or information provided by other sources.Copyright 2011 by Broadridge Investor Communication Solutions Inc. All Rights Reserved.

Using 529 Plans to Invest for College and Manage Wealth

Paying for a child’s or grandchild’s college education is an expensive proposition, even for many high-net-worth Americans. Today’s elite institutions promise graduates a rewarding future, but at a cost that more often than not extends well into six figures. Enter the 529 plan, a tax-advantaged investment vehicle generally available to families regardless of their income level. For affluent parents and grandparents, a 529 plan offers a variety of potential benefits—including some that go beyond the scope of college planning. A 529 plan may in fact play an integral role in an estate plan.

First and Foremost, a College Savings Tool ...

Before you consider the potential role of a 529 plan in your estate plan, it is important to understand a few basics.

• There are two types of 529 plans—prepaid tuition plans, which let you lock in tomorrow’s tuition at today’s rates, and college savings plans, which let you choose from a menu of investments and offer more return potential, as well as risk. Both types of plans are generally sponsored by a state government and administered by one or more investment companies. (Tax law also permits certain educational institutions to sponsor prepaid tuition plans).

• Many 529 plans offer age-based asset allocation portfolios that become more conservative as the beneficiary grows older. Others let account owners choose from individual investment options to create a customized portfolio.

• Originally, 529 plans offered the benefit of tax-deferral—taxes on earnings were not due until withdrawal and then only at the beneficiary’s rate. But a few years ago Uncle Sam sweetened the pot, and now qualified withdrawals are federally tax free.

• Eligibility to contribute to a 529 plan is not limited by age or income. In addition, total plan contribution limits often exceed $200,000.

• Withdrawals can be used to pay for undergraduate or graduate school expenses. Withdrawals used for purposes that fall outside of the “qualified education expenses” category are subject to ordinary income taxes and a 10% penalty tax.

... But With Valuable Wealth Transfer Potential

The IRS clearly had college planning in mind when it drafted Section 529 of the Internal Revenue Code. However, it also left the door open to use 529 plans as wealth transfer tools. That is because a contribution to a 529 plan is considered a completed gift from the donor to the beneficiary named on the account, even though the account owner, not the beneficiary, maintains control over the money while it is in the account. Tax rules permit you to give $13,000 (indexed to inflation) to as many individuals as you choose each year, free from federal gift taxes. Couples can give $26,000 without incurring taxes. As a result, one method of reducing a taxable estate is to make scheduled gifts up to the tax-free limits each year. For instance, you might give $13,000 to each grandchild on an annual basis.

But there is more. Under special rules unique to 529 plans, donors looking to remove large sums of money from their taxable estates can make five years’ worth of $13,000 gifts in one year—that’s $65,000 per individual donor or $130,000 per couple. Of course, you would not be able to make additional taxable gifts to that beneficiary during the five-year period. And if you use the five-year averaging election and die before the five years are up, a prorated portion of the contribution may be considered part of your taxable estate.

But the wealth transfer potential can be substantial. For instance, an individual who has five grandchildren could immediately remove up to $325,000 from his or her taxable estate by contributing the money to five separate 529 plan accounts. Five years later, he or she could do it again.

You Stay in Control

It’s worth emphasizing: Although the assets contributed to a 529 plan are no longer considered part of your taxable estate, you still exercise control over the money. You decide how it will be invested—within the confines of the plan’s available investment options—and when it will be withdrawn. You also have the right to change beneficiaries, in the event that the original beneficiary decides not to attend college, for example. And doing so generally will not trigger tax consequences if you choose a beneficiary who is a member of the original beneficiary’s family. (As spelled out in Section 529, qualified family members include the beneficiary’s brothers, sisters, mother, father, sons, daughters, nieces, and nephews, among others.) If there is not another suitable beneficiary, you also have the option of closing the account and taking the money back, although earnings will be subject to income taxes, as well as a 10% penalty.

When choosing a 529 plan, you will need to look beyond estate planning considerations. There are dozens of plans available and their features and rules can vary greatly. To help narrow down the choices, consider working with a qualified financial professional. And be sure to consult with an estate planning attorney or tax professional before making any decisions that could affect your tax liability.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program.

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1Asset allocation does not assure a profit or protect against a loss.

Consult your financial advisor, or me, if you have any questions.

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness, or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special, or consequential damages in connection with subscribers’ or others’ use of the content.

Your Second Wind—Starting a New Business in Retirement

For generations past, retirement represented an extended period of leisure time punctuated by occasional games of golf and bridge. But today, with lengthening life expectancies and dwindling pensions, many Americans are looking to retirement as an opportunity to start a new business.

Senior Start-ups: Common Characteristics

Older entrepreneurs differ from their younger counterparts in several critical ways. For one, seniors are usually in a much better financial position than younger entrepreneurs. Their bigger financial cushion—retirement packages, savings or home ownership—affords them flexibility in the initial stages of a start-up, where funding is often critical. Because they can often rely on other sources for current income, they are in a better position to take greater entrepreneurial risks. Start-up funding may also be easier to come by for seniors, who can draw from personal savings and a lifetime of business and professional contacts. Senior start-ups may also be looked on more favorably by lenders, who often associate older entrepreneurs with a lower risk of default.

Creativity and business acumen are also key characteristics of elder entrepreneurs. Older entrepreneurs often possess valuable intangible assets, such as a broad network of contacts, professional credibility and investment experience. Having been tested again and again in their lives, they may be less afraid of failure or worried about what others will think. Instead of that urgency to “make it,” they get satisfaction from the process of building their companies.

What Color Is Your Parachute?

The type of businesses started by seniors varies widely. Consultancies, small retail businesses and bed-and-breakfast establishments are perennial favorites. For many, web-based businesses offer particular appeal, since they can be operated right out of your home in the early stages, often requiring no more than a high-speed Internet connection and a phone line. While most senior start-ups are related to an individual’s former career, some break out into completely new territory. This is often the case with “serial” entrepreneurs—those who have started many businesses over their lives and are experts at the start-up process itself. Whatever business you might consider, make sure to first do your homework. Talk to owners of similar businesses and scope out the market for such products or services in your area. Then, take the time to draft a formal business plan.

Not for Everybody

As attractive as starting a new business in retirement may sound, there are several considerations you should bear in mind before taking the leap. Start-ups can be physically and emotionally draining for a retiree. Seniors tend to work fewer hours and take more vacations than their younger counterparts. Ask yourself: Are you willing or able to work the long hours that may be required in a fledgling business? There is also the issue of health to consider. For seniors, health problems can come at any time. Even if you are in top shape, you should factor in contingencies for unexpected health issues for yourself and your spouse.

Then there’s financial vulnerability. The real possibility of failure and money loss is much more significant at the age of 60 or 65 than at 30 when there is ample time to rebuild your assets and start over. Seniors also rely much more on personal investments to supply a portion of their income. For these reasons, seniors are advised not to sink too great a portion of their investment portfolio into a new business and should avoid using personal assets, such as a home, as loan collateral.

Successful Start-up Tips:

• Build on already established contacts and expertise. Seniors have a distinct advantage over younger entrepreneurs in their experience and long-established business network, which can give them a competitive advantage in virtually any business.

• Start small. When starting up a new business in retirement, many begin with a small consultancy and gradually work their way into a full-blown business. This will give you time to assess whether you are willing or able to take on another full-time career.

• Don’t bet the farm. If you're retired, you probably rely on personal investments for a portion of your income. Consider your income needs before investing a portion of your savings in a new business, and think twice before taking on any personal debt.

Popular Choices

Some popular businesses among retirees include:

• Adult day care
• Driving service
• Home handyman
• Sales
• Real estate agent
• Business consultant
• Home/pet sitting
• Arts/crafts

This article was is not intended to provide specific investment advice or recommendations for any individual. Consult your financial advisor, or me, if you have any questions.

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content.

Tracking #1-071202

Good Debt, Bad Debt: Keys for Knowing the Difference

Today debt and instant credit are part of our everyday lives. The convenience of instant credit, however, has taken its toll. Many individuals use credit cards to spend more than they earn. Some, who never use credit, can be denied a loan or credit when they have a justifiable use for it. Using credit establishes a history of financial responsibility: Until you establish a credit history, your chances of qualifying for an important loan, such as a mortgage, are greatly reduced.

Where is the balance between using credit wisely and staying out of overwhelming debt? Let’s look at the facts and some pros and cons.

Installment Debt

Debt comes in many forms, and most types help us in our daily lives -- when used responsibly. For instance, the money borrowed to purchase large-ticket items, such as a home or a new car, is called installment debt: The debtor pays a portion of the total at regular intervals over a specified period of time. At the end of that period, the loan with interest is paid off.

Installment debt allows you to purchase items at a competitive interest rate: for example, 3% to 7% for a 30-year home mortgage and 6% to 9% for a car loan. The loan is paid back in monthly installments of a fixed amount that remains constant over the life of the loan. At first, most of the monthly payment consists of interest. In later years, principal begins to be paid down.

Installment debt is easily budgeted, and the debt is eliminated on a predetermined date. Even for those who may actually have the cash to purchase the desired item, installment debt can make financial sense if you can earn a higher return (after taxes) on your investment of cash than you must pay on your installment debt.

Revolving Credit

A revolving line of credit is made available to you for use at any time. Examples of revolving credit are credit cards such as Visa, MasterCard and department store cards. When you apply for one of these cards, you receive a credit limit based on your credit payment history and income. When you use the credit line, you must make monthly minimum payments based on the total balance outstanding that month. Some lines of credit will also have an annual account fee.

While revolving credit is a convenient way to borrow, it can also become an endless pit of minimum payments that barely cover the interest due. Many cards charge annual rates of interest of 18% or higher. As you pay off your debt, the minimum payment is also reduced, thus extending your payoff period and, consequently, the interest you pay. Paying just the minimum due on a $2,000 credit card loan could mean making monthly interest payments for 10 or more years!

Revolving credit, in addition to being convenient, eliminates the need to carry a lot of cash and can help establish you as a creditworthy risk for future loans. But some people yield to the temptation that the convenience of credit cards offers. Impulse buying, failing to compare costs and purchasing large items you can’t afford are all downfalls brought on by always-available purchasing power. Spending more than you earn in any given period is a dangerous practice at best, but doing it over an extended period of time can be financial suicide.

Installment Debt vs. Revolving Debt

(Lower interest rates and an amortizing repayment schedule can make installment debt a much cheaper alternative to revolving credit.)

                                                                                 Installment         Revolving
              Beginning Balance                                       $2,500               $2,500
              Interest Rate                                                8.0%                 18.0%
              Years to Repay                                            4                       19.3*
              Interest Cost                                                $430                 $4,829

                 *Paying the higher of 2% minimum monthly payment or $25.

Using Credit Wisely

To use credit intelligently, start by examining the terms of the card(s) you are currently using. Keeping track of your cards, their rates and your current balances will help you to be aware of how you use credit cards. Increased competition in recent years has led some credit card companies to offer enticing features to attract new cardholders, including no annual fees and low interest rates for an introductory period. (And credit card companies sometimes will give their introductory rates to existing cardholders so that they won’t transfer their balances to another credit card company.)

Eliminating Credit Card Debt

If you think you may have too much credit card debt, begin to address it by honestly evaluating your spending habits. Examine your existing expenses to analyze how your money is spent. You will most likely be able to identify the problem areas where you are more likely to spend too much with credit cards. Then, based on your current spending practices, create a realistic budget to pay off your credit card debt in the shortest time possible while not adding any more debt to it. For assistance, you may want to turn to your financial advisor, who can help you to allocate your resources wisely to address your credit card debt.

As the aging baby boomers get closer to their peak earning years, many are realizing the need to reduce debt and increase savings. Even though analyzing your spending habits and creating a budget to address your debt may seem a little overwhelming, the simplicity of the philosophy of the Depression era still stands: Never spend more than you earn. Once you have come to grips with this basic fact, managing your debt will become far easier and more rewarding.

This article is not intended to provide specific investment advice or recommendations for any individual. Consult your financial advisor, or me, if you have any questions.


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Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content.



Tracking # 1-062613

Tax Strategies for Retirees

In this world nothing is certain except death and taxes. - Benjamin Franklin

That saying still rings true centuries after the former statesman coined it. Yet, by formulating a tax-efficient investment and distribution strategy, retirees may keep more of their hard-earned assets for themselves and their heirs.

Less Taxing Investments

Municipal bonds, or “munis” have long been appreciated by retirees seeking a haven from taxes and stock market volatility. In general, the interest paid on municipal bonds is exempt from federal taxes and sometimes state and local taxes as well (see table below). The higher your tax bracket, the more you may benefit from investing in munis.

It is also important to review which types of securities are held in taxable versus tax-deferred accounts. Why? Because at least through the end of 2012, the maximum federal tax rate on some dividend-producing investments and long-term capital gains is 15%. Work with your financial advisor to review your overall investment holdings and determine which investments might be best suited for tax-deferred accounts versus taxable accounts.

The Tax-Exempt Advantage: When Less May Yield More

Would a tax-free bond be a better investment for you than a taxable bond? To find out, compare the yields. For instance, if you were in the 25% federal tax bracket, a taxable bond would need to earn a yield of 6.67% to equal a 5% tax-exempt municipal bond yield.

Federal Tax Rate         15%         25%         28%         33%         35%

Tax-Exempt Rate                           Taxable-Equivalent Yield

          4%                  4.71%      5.33%      5.56%      5.97%        6.15%

          5%                  5.88%       6.67%      6.94%      7.46%       7.69%

          6%                  7.06%            8%      8.33%      8.96%       9.23%
      
          7%                  8.24%       9.33%      9.72%     10.45%     10.77%

          8%                  9.41%      10.67%     11.11%     11.94%    12.31%
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This hypothetical example is used for illustrative purposes only and does not reflect the performance of any specific investment. State, capital gains and alternative minimum taxes are not considered. This formula is only one factor that should be considered when purchasing securities and is meant to be used only as a general guideline when calculating the taxable equivalent yields on Municipal securities.


Which Securities to Tap First?

Another decision facing retirees is when to liquidate various types of assets. The advantage of holding on to tax-deferred investments is that they compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts.

On the other hand, you will need to consider that qualified withdrawals from tax-deferred investments are taxed at ordinary federal income tax rates of up to 35%, while distributions -- in the form of capital gains or dividends -- from investments in taxable accounts are taxed at a maximum of 15%. (Capital gains on investments held for less than one year are taxed at regular income tax rates.) For this reason, it may be beneficial to hold securities in taxable accounts long enough to qualify for the 15% tax rate.

The Ins and Outs of RMDs

The IRS mandates that you begin taking an annual distribution from traditional IRAs and employer-sponsored retirement plans after you reach age 70½. The premise behind the required minimum distribution (RMD) rule is simple: The longer you are expected to live, the less the IRS requires you to withdraw (and pay taxes on) each year.

RMDs are calculated using a Uniform Lifetime Table, which takes into consideration the participant’s life expectancy based on his or her age. Failure to take the RMD can result in a tax penalty equal to 50% of the required amount.

TIP: If you will be pushed into a higher tax bracket at age 70½ due to the RMD rule, it may pay to begin taking withdrawals during your 60s.

Unlike traditional IRAs, Roth IRAs do not require you to take distributions at all during your lifetime and qualified withdrawals are tax free. For this reason, you may choose to begin withdrawing assets held in a Roth IRA after you have exhausted other sources of income. Be aware, however, that any named beneficiaries of a Roth IRA will be required to take RMDs following the rules that govern traditional IRAs after your death.

Estate Planning and Gifting

There are various ways to make the tax payments on your assets easier for heirs to handle. Careful selection of beneficiaries is one example. If you do not name a beneficiary, your assets could end up in probate, and your beneficiaries could be taking distributions faster than they expected. In most cases, spousal beneficiaries are ideal because they have several options that are not available to other beneficiaries, including the marital deduction for the federal estate tax.

Also, consider transferring assets into an irrevocable trust if you are close to the threshold for owing estate taxes. In 2012, the federal estate tax applies to all estate assets over $5.12 million, but this threshold is scheduled to revert to $1 million in 2013, unless Congress elects to extend it. Assets in an irrevocable trust are passed on free of estate taxes, saving heirs thousands of dollars.

TIP: If you plan on moving assets from tax-deferred accounts, do so before you reach age 70½, when RMDs must begin.

Finally, if you have a taxable estate, you can give up to $13,000 per individual ($26,000 per married couple) each year to anyone tax free.

Strategies for making the most of your money and reducing taxes are complex. Please meet with an estate attorney and/or a financial advisor to help you sort through your options. For specific tax advice, please see a tax professional.

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1Capital gains from municipal bonds are taxable and may be subject to the alternative minimum tax.

2Withdrawals prior to age 59½ are subject to a 10% penalty.

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This article is not intended to provide specific investment advice or recommendations for any individual. Consult your financial advisor, or me, if you have any questions.

Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content.