Manage Your Money Carefully This Holiday Season

            As you know, the holiday season can be joyous, hectic, celebratory — and expensive. And while you certainly enjoy hosting family gatherings and giving presents to your loved ones, you’ll find these things even more pleasurable if they don’t add a lot more weight to your debt load. And that’s why you’ll want to follow some smart money-management techniques over the next few weeks.

            To begin with, try to establish realistic budgets for both your entertaining and your gift giving. When you host family and friends, don’t go overboard on your expenditures. Your guests will still appreciate your efforts, which, with a little creativity, can create a welcoming and fun experience for everyone. As a guiding principal, keep in mind these words attributed to Johann Wolfgang von Goethe, the famous German poet and philosopher: “What you can do without, do without.” Set a budget and stick to it.

            And the same rule applies to your gifting. You don’t need to find the most expensive presents, or overwhelm recipients with the sheer volume of your gifts. This is especially true if you, like so many people, have been affected by the tough economy. Everyone you know will understand that gifts don’t have to be lavish to be meaningful.

            Furthermore, by sticking to a budget, you won’t be tempted to dip into your long-term investments to pay for fabulous parties or mountains of gifts. It’s never a good idea to tap long-term investments for short-term needs, but can be especially bad when your investment prices are down, as they may well be this year.

            So, if you want to stick to a budget but you don’t want to raid your investments, how can you pay for your holiday season expenses?  If you can spread out your purchases, you may be able to pay for them from your normal cash flow. But if that’s not possible, you might  want to consider  “plastic” — your credit card.  Using your credit card does not, by itself, need to amount to a financial setback, especially if you’ve chosen a card that offers favorable terms and you’ve already shown the discipline not to over-use that card. Just try to minimize your credit card usage over the holidays and pay off your card as soon as you can.

            Of course, you can make your holiday season much easier, financially speaking, if you’ve set up a holiday fund to cover your various expenses. While it’s too late to set up such a fund this year, why not get an early start on the 2012 holiday season? All you need to do is put away some money each month into an easily accessible account, separate from your everyday accounts. You don’t have to put in a great deal, but you do need to be consistent, which is why you may want to have the money moved automatically, once a month, from your checking or savings account to your holiday fund. When next year’s holiday season rolls around, you might be pleasantly surprised by how much you’ve accumulated.

            But for now, following some common-sense money management practices can help you  get through the holiday season in  financial shape — and that type of result can get your new year off to a positive start.  

It’s a Good Week to Think About Retirement Savings

Oct. 10, 2011

                      

 You may not see it posted on your calendar, but Oct. 16 – 22 is National Save for Retirement Week.  This annual event, endorsed by Congress, is designed to raise awareness about the importance of saving for retirement — so you may want to take some time this week to review your own strategy for achieving the retirement lifestyle you’ve envisioned.

If you’re not convinced of the need for an event such as National Save for Retirement Week, just consider these statistics, taken from the Employee Benefit Research Institute’s 2011 Retirement Confidence Survey:

• The percentage of workers not at all confident about having enough money for a comfortable retirement grew from 22 percent in 2010 to 27 percent — the highest level measured in the 21 years of the Retirement Confidence Survey.

• 56 percent of respondents say that the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit plans (i.e., traditional pension plans) is less than $25,000.

• Less than half of the respondents say they and/or their spouse have tried to calculate how much money they will need for a comfortable retirement.

            These numbers are obviously troubling — and they indicate that most of us probably need to put more thought and effort into our retirement savings. What can you do? Here are a few suggestions:

            • Determine how much you’ll need in retirement. Try to define the lifestyle you want during retirement. Will you travel the world or stay close to home? Will you work part time or spend your hours volunteering or pursuing hobbies? Once you know what your retirement might look like, try to estimate how much it might cost.

            •  Identify your sources of retirement income. Take into account your IRA, 401(k) or other employer-sponsored retirement plan, Social Security and other savings and investments. How much income will they provide? How much can you withdraw from these vehicles each year without depleting them?

            • Calculate any retirement shortfall. Try to determine if your savings and investments will be enough to provide you with an income stream that’s adequate to meet your retirement needs. If it isn’t, develop an estimate of the size of the shortfall.

            • Take steps to close savings “gap.” If it doesn’t look like you’ll have enough to meet your retirement needs, you may consider adjusting your savings and investment strategy. This may mean contributing more to your IRA, 401(k) and other retirement accounts. Or, perhaps your investment mix may need to be reviewed to find a better balance growth potential with risk. Or you may need to take both of these steps. 

            • Monitor your progress. Once you’ve put your investment strategy into place, you’ll need to monitor your progress to make sure you’re on track toward achieving your retirement savings goals. Along the way, you may have to make adjustments, if there are changes in your objectives or your specific situation.

            Taking these types of action can be challenging, so you may want to work with a professional financial advisor who has the experiences and resources necessary to help you identify and work toward achieving your retirement goals. In any case, though, National Save for Retirement Week is a great time to consider your course of action.

Grandparents May Need to Balance Gifts and Goals

             Grandparents Day falls on Sept. 11 this year. While not as widely observed as Mother’s Day or Father’s Day, Grandparents Day nonetheless serves a valuable purpose in reminding us of the importance of grandparents in the lives of their grandchildren. If you’re a grandparent yourself, you already know the joy your grandchildren bring you, and through the years, you have probably been generous with them in many ways. At the same time, though, you probably need to strike a balance between your heartfelt gifts and your financial goals.

It can be challenging to achieve that balance. For one thing, you and your fellow grandparents have not been stingy in your giving over the past several years. America’s grandparents provided an estimated $370 billion in financial support to their grandchildren between 2004 and 2009, according to a survey by the MetLife Mature Market Institute. This averages out to $8,661 per grandparent household over that same period. However, many of these same grandparents may not be accumulating sufficient financial resources to enjoy the retirement lifestyle they’ve envisioned. In fact, the median balance of retirement accounts for 55- to 64-year-olds is only about $100,000, according to the Center for Retirement Research. That’s not a lot of money for an age group that could spend two or even three decades in retirement.

So, as a grandparent, what steps might you take to bolster your retirement savings while simultaneously helping your grandchildren? Here are a few ideas:

• Maintain permanent life insurance. Once your children are grown, you may feel less compelled to carry life insurance. But the right type of life insurance can benefit you throughout your life. Permanent life insurance offers you the chance to build cash value, which you may be able to access, depending upon the specifics of your policy. And you can name your grandchildren as beneficiaries of your policy.

• Open a 529 plan. Use the money you’re already gifting to fund a 529 plan to help your grandchildren pay for college. These plans have generous contribution guidelines, and withdrawals are tax-free, provided the money is used for qualified expenses. There may be state tax incentives available to in-state residents who invest in their home state’s 529 plan. And a 529 plan offers you a degree of flexibility; if the beneficiary grandchild decides to forgo college, you can transfer the unused funds to another grandchild, tax and penalty free. However, withdrawals used for expenses other than qualified education expenses may be subject to federal and state taxes, plus a 10% penalty.

• Contribute to a Roth Individual Retirement Account (IRA). The Roth IRA is a powerful retirement savings vehicle. You can fund your IRA with virtually any type of investment, such as stocks, bonds and government securities, and your earnings grow tax free, provided you don’t take withdrawals until you’re at least age 59½ and you’ve held your account at least five years.

Your grandchildren may appreciate your generosity, but they’ll also no doubt want you to enjoy a comfortable retirement. As always, you need to do what makes sense for your situation. You may find there are ways to help both your grandchildren and yourself. 

Grandparents May Need to Balance Gifts and Goals

             Grandparents Day falls on Sept. 11 this year. While not as widely observed as Mother’s Day or Father’s Day, Grandparents Day nonetheless serves a valuable purpose in reminding us of the importance of grandparents in the lives of their grandchildren. If you’re a grandparent yourself, you already know the joy your grandchildren bring you, and through the years, you have probably been generous with them in many ways. At the same time, though, you probably need to strike a balance between your heartfelt gifts and your financial goals.

It can be challenging to achieve that balance. For one thing, you and your fellow grandparents have not been stingy in your giving over the past several years. America’s grandparents provided an estimated $370 billion in financial support to their grandchildren between 2004 and 2009, according to a survey by the MetLife Mature Market Institute. This averages out to $8,661 per grandparent household over that same period. However, many of these same grandparents may not be accumulating sufficient financial resources to enjoy the retirement lifestyle they’ve envisioned. In fact, the median balance of retirement accounts for 55- to 64-year-olds is only about $100,000, according to the Center for Retirement Research. That’s not a lot of money for an age group that could spend two or even three decades in retirement.

So, as a grandparent, what steps might you take to bolster your retirement savings while simultaneously helping your grandchildren? Here are a few ideas:

• Maintain permanent life insurance. Once your children are grown, you may feel less compelled to carry life insurance. But the right type of life insurance can benefit you throughout your life. Permanent life insurance offers you the chance to build cash value, which you may be able to access, depending upon the specifics of your policy. And you can name your grandchildren as beneficiaries of your policy.

• Open a 529 plan. Use the money you’re already gifting to fund a 529 plan to help your grandchildren pay for college. These plans have generous contribution guidelines, and withdrawals are tax-free, provided the money is used for qualified expenses. There may be state tax incentives available to in-state residents who invest in their home state’s 529 plan. And a 529 plan offers you a degree of flexibility; if the beneficiary grandchild decides to forgo college, you can transfer the unused funds to another grandchild, tax and penalty free. However, withdrawals used for expenses other than qualified education expenses may be subject to federal and state taxes, plus a 10% penalty.

• Contribute to a Roth Individual Retirement Account (IRA). The Roth IRA is a powerful retirement savings vehicle. You can fund your IRA with virtually any type of investment, such as stocks, bonds and government securities, and your earnings grow tax free, provided you don’t take withdrawals until you’re at least age 59½ and you’ve held your account at least five years.

Your grandchildren may appreciate your generosity, but they’ll also no doubt want you to enjoy a comfortable retirement. As always, you need to do what makes sense for your situation. You may find there are ways to help both your grandchildren and yourself. 

Is Your Portfolio Like a Baseball Team?

Is Your Portfolio Like a Baseball Team?

            If you’re a baseball fan, you’re no doubt aware that the MLB All-Star Game is being played on July 12. But while you’ll probably appreciate the grace and skill of the players, you may not realize just how much a baseball team can teach you about other aspects of life — such as investing.

            Specifically, consider the following characteristics:  

• Consistency — Baseball teams need to be consistent. They choose quality players and must have the patience and discipline to stick with those players during slumps. As an investor, you should choose quality investments and have the patience and discipline to stick with them over the long haul.

• Diversification — A baseball team doesn’t have just one type of player — it contains pitchers, catchers, infielders and outfielders. Your portfolio also needs to be diversified because if you own only a single type of investment, and a market downturn strikes that asset class particularly hard, your portfolio could take a big hit. Owning a diversified mix of stocks, bonds, government securities, certificates of deposit (CDs) and other investments can help reduce the effect of market volatility on your holdings. Keep in mind, though, that diversification, by itself, can’t guarantee a profit or protect against loss.

• Unity — While a baseball team contains a diverse collection of players, they all strive toward a common goal. And the mix of investments in your portfolio needs to work together to help achieve the various goals you’ve established, such as a comfortable retirement, college for your children and a legacy for your family. To work toward your individual objectives, you will need to create an investment mix that’s based on your risk tolerance, time horizon, family situation and other factors. 

• Flexibility — While every member of a professional baseball team is a good player, one might be better than another in a given situation. For instance, a faster runner might pinch-run for someone else. And as you move on in your “game” of life, you will need flexibility in making your investment decisions. As one example, when you near retirement, you may want to reduce your exposure to risk somewhat, so you might decide to replace some — but certainly not all — of your growth-oriented vehicles with investments that can offer greater protection of your principal.

• Good management — Even the best group of baseball players needs a manager to guide them and make decisions during a ballgame. And to help you make investment choices during different times in your life, you might benefit from working with a financial professional — someone who knows your risk tolerance, investment preferences and long-term aspirations.

You may never find yourself surrounded by the greatest ballplayers in the world — but remembering these traits can help keep your portfolio “in the game.”

             

Explore Different Options When Purchasing Bonds

Explore Different Options When Purchasing Bonds

As an investor, you may find that bonds can be a valuable part of your holdings. But there’s more than one way to own bonds, so you’ll want to be familiar with the various investment vehicles available — because the more you know, the better the choices you’ll be able to make.

So, let’s look at three popular ways of owning bonds:

• Individual bonds —When you buy an individual bond, you will receive predictable interest payments. And when your bond matures, you’ll get the original principal back, unless the issuer defaults, which is not common in cases of “investment grade” bonds. However, the value of your bond — the price you could get for it if you sold it on the open market before it matured — will fluctuate over time, primarily in response to interest rates. (When market rates go up, the value of your bond drops, and vice versa.) In general, you’ll pay at least $5,000 for an individual bond, though that amount may vary. Consequently, while this approach gives you more control, it can be more time consuming and require a larger investment in order to   build a diverse fixed-income portfolio.   

• Bond funds — By investing in a bond-based mutual fund, which may own dozens of different types of bonds, you can efficiently increase your diversification, which is important, because diversification can help reduce    credit risk (although it can’t guarantee a profit or protect against a loss). A bond fund does not pay you a fixed rate of return; instead, you receive dividends, which will fluctuate based on the underlying bonds’ interest rates and capital appreciation. In addition, bond funds don't have a maturity date when principal is repaid.  Keep in mind that when you purchase bond funds, you could be subject to capital gains taxes in two different ways: if you sell your fund shares for a profit or if the fund manager sells an underlying bond for more than it’s worth. This increased capital gains liability is one reason that many people put bond funds in a tax-deferred vehicle, such as an IRA or a 401(k). 

            • Bond UITs —  A unit investment trust (UIT),   like a mutual fund, contains a variety of bonds, so you get the benefit of diversification. Unlike a mutual fund, however, a UIT is not actively managed and does not change its holdings. And since no manager is involved in making changes or trades, a UIT has low management fees. A UIT is typically established for 20 to 30 years, but, as an individual investor, you can sell your shares whenever you want, for whatever the market will bear.

Although UITs can be some of the most cost-efficient, low-risk options in the fixed-income arena, they are not without risk. Specifically, since a UIT’s bonds provide fixed interest rates, there’s always the possibility that the bonds will lose purchasing power to inflation over time.

            When choosing how to own bonds, you’ll need to evaluate many factors — and we’ve only looked at some of them. You may want to consult with a financial advisor to determine which methods of bond ownership are appropriate for your needs. By doing your homework, and getting the help you need, you can maximize the advantages of adding bonds to your investment mix.

FINANCIAL FOCUS Own a Small Business? Consider These Retirement Plans

For a variety of reasons, many people, particularly those in the baby boom generation, are considering retiring later than they might have originally planned. If you’re in this group, you’ll want to take full advantage of those extra working years by contributing as much as you can to a retirement plan that can help you build resources, defer taxes and, ultimately, maximize income. And if you own a small business, you’ve got some attractive plans from which to choose.

Let’s look at two of these retirement plans — the “owner-only” 401(k) and the defined benefit plan.

If you have no employees other than your spouse or a partner, you can establish an “owner-only” 401(k), also known as an individual 401(k). This plan offers many of the same advantages of a traditional 401(k): a range of investment options, tax-deductible contributions and the opportunity for tax-deferred earnings growth. You may even be able to choose a Roth option for your 401(k), which allows you to make after-tax contributions that have the opportunity to grow tax free.

            Your owner-only 401(k) contributions consist of two parts: salary deferral and profit sharing. In 2011, you can defer up to $16,500 of income, or $22,000 if you’re 50 or older. The amount of your profit-sharing contribution is based on your earnings. The sum of your employer contribution and your salary deferral contributions can’t exceed $49,000 in 2011 (or $54,500 if you’re 50 or older). Keep in mind that if your spouse is employed by your business, you each can contribute the maximum amount allowed.

            You’ve got considerable flexibility in funding your owner-only 401(k). Both the salary deferral and the profit-sharing contributions are discretionary, so you can change them at any time based on your business’s profitability.

            Now, let’s move on to the defined benefit plan, which might be appropriate for you if you are highly compensated and have no other employees. By establishing a defined benefit plan, you’ll be providing yourself with a monthly payment (or “benefit”)           

for life, beginning at the retirement age specified by your plan. In 2011, the yearly benefit limit is $195,000.

            The amount you can contribute to your defined benefit plan each year is based on several variables, including your current age, your compensation level and your retirement age. But you’ll certainly be able to contribute large amounts: A defined benefit plan is the only retirement account that allows contributions in excess of the limits placed on 401(k)s and other defined contribution plans. Generally speaking, the closer you get to retirement, the larger your maximum yearly contributions will be. (This is because you’ll have fewer years left in which to fund your defined benefit.) And since your defined benefit contributions are tax-deductible, you are, in effect, getting a big boost from the government to fund a generous retirement plan.

Here’s one more benefit to owner-only 401(k) and defined benefit plans: You can contribute to both of them at the same time. But before you choose either or both of them, consult with your tax and financial advisors. After all, you work hard to help provide for a comfortable retirement tomorrow — so you’ll want a retirement plan working hard for you today.

           

Lifetime Income: A Great Mother's Day Gift

Mother’s Day will soon be here.  If you’re a mother, you will (hopefully) receive thoughtful cards and gifts. But there’s one present you may eventually want to give yourself, and it’s a gift that truly does keep on giving: a strategy for your retirement. Of course, it’s important for everyone to build adequate financial resources for retirement — but the challenge is even greater for women. Largely due to family responsibilities, women spend, on average, 12 years less in the workforce than men, according to the Women’s Institute for a Secure Retirement. Less time in the workforce equates to lost earnings, missed promotions, smaller and fewer raises and reduced retirement plan benefits. In fact, men have, on average, about $91,000 in Individual Retirement Accounts (IRAs), including all IRA types and the amounts rolled over from other retirement accounts into IRAs, compared to just $51,000 for women, according to a recent report issued by the Employee Benefit Research Institute.

Whether you’re married, divorced, widowed or single, you’ll want to build financial resources of your own and be prepared to manage your finances during your retirement years. You’ll be helping yourself, and, by becoming financially independent, you’ll also avoid the possibility of depending on your grown children for support.

To help ensure a financially secure retirement, consider these ideas:

• Fully fund your IRA each year. As the numbers above show, women are way behind men when it comes to funding their IRAs. And IRAs, with their tax advantages, are great retirement-savings vehicles. A traditional IRA has the potential to grow on a tax-deferred basis, while Roth IRAs have the potential to  grow tax-free, provided you’ve had your account at least five years and you don’t start taking withdrawals until you’re 59-1/2. So make it a priority to “max out” on your IRA each year. In 2011, you can put in up to $5,000 to a traditional or Roth IRA, or $6,000 if you’re 50 or older. 

• Boost your 401(k) contributions. Put in as much as you can afford to your 401(k) or other employer-sponsored retirement plan. At the very least, contribute enough to earn your employer’s match, if one is offered. (In 2011, you can put in up to $16,500, or $22,000 if you’re 50 or older.) Your earnings have the opportunity to grow tax-deferred and you have a range of investment options, so your 401(k) or other retirement plan can be an effective, flexible way to put money away for the future.

• Invest in an annuity. If you’ve reached the contribution limits of your IRA and 401(k), you may want to consider purchasing an annuity, which can be structured to provide you with regular payments for the rest of your life. And this lifetime income source is especially important to women, who, at age 65, can expect to live, on average, almost 20 more years, compared to slightly over 17 for men of the same age, according to the Centers for Disease Control and Prevention.

As a mother, you willingly spend a great deal of time and effort on your children. But it’s important to also think about yourself and your future, so review your strategy for retirement with your financial advisor, and take the actions needed to help make sure you can enjoy all the Mother’s Days of your life in the comfort you deserve.