Haft of it

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THE HAFT OF IT

A collection of the most popularfinancial 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.

All rights reserved. No portion of this publication may be reproduced or transmitted in any form or by any means, electronic, mechanical or otherwise, including photocopy, recording, or any information storage or retrieval system now known or to be invented without permission in writing from the author, except by a reviewer who wishes to quote brief passages in connection with a review. Requests for permission should be addressed in writing to the author.

ISBN: 978-0-9767528-7-5

Published in Boca Raton, Florida, by TriMark Press, Inc.800.889.0693

Printed and bound in the United States of America.

Alan Haftalanhaft.com

800-809-4699

D I S C L A I M E R

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because articles in this book are reprints from various newspaper columns, some of the information might be outdated.

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CONTENTS

About the Author

Introduction

Chapter 1: Retirement PlanningFive Common Investment Mistakes............................................................... 15 Considering a Financial Advisor? ................................................................. 19Interviewing Your Next Financial Planner ..................................................... 25Custodial Accounts and Trusts ...................................................................... 28Employer-Sponsored Retirement Plans .......................................................... 31Year-End Checklist ........................................................................................ 34Will Your Well Run Dry? ............................................................................... 38

Chapter 2: InvestingThe Benefits of Diversification ....................................................................... 41The Index Advantage and Exchange-Traded Funds ....................................... 46Small Company Stocks .................................................................................. 49Real Estate Investment Trusts ........................................................................ 52

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Chapter 2: Investing (continued)

Evaluating Performance ................................................................................ 55Portfolio Rebalancing .................................................................................... 586 Things Dating Teaches Us About Money .................................................... 617 Ways to Save $100 per Month ................................................................... 66

Chapter 3: IncomeMore Income, Less Risk ................................................................................ 71Build a Bond Ladder ..................................................................................... 75The Power of Dividends ............................................................................... 85Preferred Stocks ............................................................................................ 88Real Estate Without the Headache ............................................................... 91Government-Backed Mortgage Securities ..................................................... 94

Chapter 4: BondsUnderstanding the Effect of Interest Rates ..................................................... 97The Attraction of Bond Funds ..................................................................... 101

Chapter 5: AnnuitiesIndex Annuities .......................................................................................... 105Variable Annuities ...................................................................................... 110When You Need the Cash Now ................................................................... 113

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Chapter 6: IRAsFrequently Asked Questions ....................................................................... 117Converting to a Roth IRA ............................................................................ 120Liquidate Your IRAs? .................................................................................. 123Beneficiaries and Required Distributions .................................................... 127Extending the Life of Your IRA ................................................................... 130Create Your Own Private Pension Plan ....................................................... 132Self-Directed IRAs ...................................................................................... 137

Chapter 7: TaxesUnderstanding Tax Efficiency ..................................................................... 141Taking Advantage of the 2003 Tax Act ....................................................... 144The New Tax Law ........................................................................................ 147Reducing Capital Gains and Estate Taxes ................................................... 150How Will You Spend Your Tax Refund? ....................................................... 153

Chapter 8: Economy

Not Concerned about the Federal Budget? ................................................... 157Currency Values .......................................................................................... 160The Price of Crude ...................................................................................... 163The Threat of Inflation ................................................................................ 166

Chapter 9: Estate PlanningIsn’t a Will Enough? ................................................................................... 169

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Chapter 10: Long-Term CareLong-Term Care Insurance ......................................................................... 173Medicaid Eligibility .................................................................................... 176Medicare Prescription Drug Plans ............................................................. 179

Chapter 11: Gifting

The Gift of a Lifetime ................................................................................. 181

Chapter 12: EducationNot for School Only ................................................................................... 185

Chapter 13: The 10 Commandments of Investing .................................................................................................................... 189

Conclusion .................................................................................................................... 193

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ABOUT THE AUTHOR

Alan Haft is a nationally recognized investment advisor who has been featured in a variety of media outlets including Money Magazine, Forbes, Morningstar, BusinessWeek, The Los Angeles Times, The Chicago Tribune and many others.

His financial column “The Haft of It” appears in a variety of newspapers around the country and he has two books soon to be published including “The 10 Most Common Mistakes People Make With Their Money… and how to avoid them” and “You Can Never Be Too Rich…simple and essential investment advice you cannot afford to overlook” (John Wiley & Sons, November 2007).

With his partners, he has conducted hundreds of financial planning seminars and workshops. The firm currently services retirees and pre-retirees in southeast Florida, southern California, the New York Tri-State area and many other areas around the country.

For more information, please visit www.alanhaft.com

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PREFACE

As a financial advisor, I find many of the questions investors ask generally fall into four main areas:

• How do I keep my money safe? • How do I keep my money growing ahead of inflation?

• How do I minimize taxes for myself and for heirs? • How do I make sure I do not outlive my money?

These concerns kept arising during many conversations with clients and over the years, I felt I should create some type of written material to answer them. I felt if I could just address the most frequent concerns and misconceptions about various financial topics, I believed a lot of people could benefit from some informal handouts.

So that’s what I did. I wrote a few answers to the “frequently asked questions” and put together some handouts for people coming into our office. One of the individuals who came in to meet with me had a contact with a local newspaper and as a result, he asked if I’d be interested in providing information in the form of a column. That’s when my financial column – “The Haft of It” – was born. A positive response from readers led the newspaper to ask for more content and pretty soon, other papers were carrying the columns as well. Using the feedback I received after the publication of my first few columns, I wrote the next set. Whether readers wanted to know how dividend-paying stocks worked or where they could get a better return on their CDs, I answered their questions with more and more columns. Eventually, the columns were distributed in papers and various media outlets across the country.

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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.

*Note to readers: 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.

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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.

Your financial future is really no different. Your first step is to at least have some idea of where you’re going or, better stated – your financial

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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.

Many of my clients are retirees or they’re near retirement. When they’ve arrived at their destination – in this case, retirement – their lifestyle changes and so must their route, or their investment strategy. They’ve been accustomed to investing for growth and wealth accumulation, making as much money as possible so they could live off their portfolio in retirement. But many times, once they retire, they often forget that their destination has changed – they’ve already reached retirement. Now that they’re in their retirement years, their plans for getting to their destination and the investing habits and strategies they’ve been using need to change as well. The bumpy dirt roads they’ve traveled in the past should be replaced with paved freeways. They must make the transition from wealth accumulation to wealth preservation and in later years, the focus should be on wealth transfer.

Most importantly, your vehicle must be prepared for retirement, since once you arrive at retirement years, you’ll be driving this same vehicle presumably for the rest of your life. Most of us won’t have much of an opportunity to build additional wealth, and that’s not what retirement is about anyway. If you’re like most people, you’ll want to be able to enjoy your post-work life as much as you can and make certain you can afford ongoing living expenses as well as have money for the things you’d like to do and were probably looking forward to for all those working years. What good is it to have a retirement vehicle if you can’t play a round of golf every once in a while or go off on some of those adventures you’ve been thinking about? That can only happen if you have at least a basic understanding of how your vehicle operates.

Wouldn’t it be helpful if you had a manual of some kind so you could at least become familiar with your retirement vehicle? Consider the columns that follow – and this book – as a helpful manual for your

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retirement vehicle or at least information covering some of its “basic” parts. This “how-to” troubleshooting guide will assist you in steering through the years up to retirement and making sure your retirement vehicle itself is kept in good working order. While this book is not meant to be an encyclopedia of retirement that covers all issues, The Haft of It columns were created to help clients understand some of the basics of what drives an investment vehicle. These are the areas I’ve received many questions about and the columns that resulted in the greatest amount of feedback. They will help you learn how to monitor the gauges and what to look for while you’re on the road, to make sure your engine isn’t low on oil or you don’t run out of gas. The following chapters cover a variety of subjects. After all, to build a well-performing vehicle, you cannot only focus on the fuel. You need to consider the oil, transmission, steering system, air filter, spark plugs, belts, tires, radiator, etc. Ignore one thing and the entire vehicle could easily break down. These components together drive your retirement vehicle. Although all of the parts are important, the columns are grouped by subject matter and are not necessarily in any order of priority.

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

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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.

So from me to you, here’s hoping that your retirement vehicle will be able to take you on the wonderful trip you envisioned – with beautiful scenery, interesting places, and memorable people. May the operating manual provided here help ensure that you’re well-prepared for whatever you encounter. And when it’s time to hand your keys over to the next generation, may they inherit a vehicle that’s not only served you well, but one that will provide a nice ride for many more miles to come.

Happy driving…

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Five Common Investment Mistakes How many are you making?

So you think you’re ready for retirement? Don’t be so sure. With people today living longer and leading more active retirement lifestyles than in the past, you may need to set aside more money and invest differently than you had planned.

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.

Starting sooner is always better. It requires you to set aside fewer dollars at a time, gives your money a longer period in which to grow, and makes it easier for your investments to weather the ups and downs

RETIREMENT PLANNING CHAPTERONE

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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.

1. Thinking it’s too late to start planning. Once you reach your 50’s or 60’s, it may seem too late to start

investing. After all, how can you possibly accumulate enough money to make a difference when you retire? Fortunately for you, thanks to the power of compounding, boosted by the tax-deferred growth offered by individual retirement accounts (IRAs), 401(k) plans, and annuities, it may not take as much as you think to build up a sizeable nest egg.

2. Underestimating your life expectancy. Although you may think you have an idea as to how long you’ll live

in retirement, life expectancies are increasing and you may need to plan for a much longer retirement than you initially anticipated. Almost 20% of workers expect their retirement to last 10 years or less, while an additional 15% expect their retirement to last 11 to 19 years. But according to the 2000 Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI), half of the men who reach age 65 have an additional life expectancy of approximately 17 years, while half of the women reaching age 65 can expect to live for about another 21 years.

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3. Not calculating your savings needs. Most financial planners will tell you to plan on needing 60% to 85%

of your pre-retirement income to maintain your standard of living in your retirement years. I’ve heard another “simple” formula that merely says you should multiply your annual income requirement times 25. Yet can you really predict how much you’ll need based on general percentages or formulas? According to the EBRI survey, only 53% of those currently employed have tried to determine how much money they’ll need to save by the time they retire. And half of the workers who did try to estimate their financial requirements in retirement increased their investments or changed their asset allocation as a result of their calculations. This suggests that many people may not be correctly estimating the amount of money they’ll need when they retire. But with software and online calculators, it’s easy to work through that equation properly. Quicken offers a calculator, as do many mutual fund companies. One fund company in particular – T. Rowe Price www.troweprice.com – has some of the best tools available, such as my personal favorite, their Retirement Income Calculator.

4. Not taking inflation into account. Many investors, particularly those who are older, are uncomfortable

with market volatility. As a result, they invest solely in Treasury bills, fixed-rate CDs, and savings accounts. What they may not realize is that doing so will likely eat away at most of their investment return because these vehicles tend to provide rates close to or less than inflation. As you approach retirement – and even after you’ve retired – it’s important to consider keeping some of your money in growth investments, such as stocks and low-cost stock mutual funds. You need a higher rate of return so your money will continue to grow and you can stay ahead in the investing game. Needless to say, if you are at a much later stage of retirement, vehicles such as CDs and other safe instruments are completely acceptable, especially if they are generating the income one requires.


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5. Putting other financial goals first. Saving for retirement probably isn’t your only financial goal. You

may also be saving for your children’s or grandchildren’s college education, or for the down payment on a second home. While these other goals are certainly important, it’s not a good idea to place them ahead of a financially secure retirement. It’s easier to fund your retirement account with smaller amounts of money now than try to catch up later. You’ll also lose the advantage that comes from years of compounding and tax deferral if you wait until you’ve funded your short-term goals first.


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Considering a Financial Advisor?Key questions to ask.

According to some estimates, half a million people in the United States call themselves financial advisors. But not all are. By legal definition, a “stockbroker” is not a “financial advisor”. At the time of this writing, the definition of a “financial advisor” is very murky, and there are a lot of debates going on as to whether or not someone can use this title with only a “stockbroker’s” license. Personally, although the ability to “pick” investments does require talent, I firmly believe entrusting your retirement to a person who only has a stockbroker’s license is a dangerous proposition given, that there are so many other important parts to one’s overall retirement vehicle.

So how do you know if the person you’re considering is really qualified? That’s pretty tricky. Needless to say, a great recommendation is always helpful, but from the feedback I’ve gotten across the country a “great recommendation” is often tough to find.

Here are some key points to keep in mind when making your decision:

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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.)

2. Is this person really a financial advisor? Know what’s behind the “financial advisor” title. As I mentioned

above, many stockbrokers call themselves financial advisors when, in fact, they are not. Generally, a Certified Financial Planner and a Registered Investment Advisor (RIA) is truly a financial advisor due to licensing and educational requirements. Personally, I would not consider anyone to watch over my investments unless they had this license or were a Certified Financial Planner (CFP).

3. What licenses does the financial advisor hold? The National Association of Securities Dealers (NASD) works to

protect the public by requiring individuals to pass a Registered Representative (RR) exam before they can sell a product. The two major exams and related licenses are the Series 6 and Series 7. A financial advisor who holds a Series 6 license can sell only mutual funds and variable annuities, which is fine if that’s all you want to buy. But a financial advisor who holds a Series 7 license can sell you many types of securities – except commodities and futures – which gives you more investment options.

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.


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How do you know if someone only has an insurance license and nothing else? Easy, check out their business card. Someone with a securities license will always have the name of their broker-dealer in the small print of the card, most of the time starting with the words “securities offered by”. Now, to make matters a bit more complicated, someone can be a Registered Investment Advisor but not have a broker-dealer.

To make it simple, follow this simple rule of thumb: If there is no broker-dealer fine print on the bottom of the business card, ask the person if they are a Registered Investment Advisor. If the answer is no, then chances are very high that they only have an insurance license.

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.

4. Have you checked out the financial advisor’s background? Before you hire a financial advisor, verify his or her credentials

with the NASD. You can do this by visiting the NASD Web site at www.nasd.com. When you get to the page that shows the financial advisor’s information, you will see a section labeled “disclosure events.” If this term is highlighted, the financial advisor may have had legal problems related to his or her business or otherwise. If you request additional information about the issue, the NASD will mail it to you within 10 days.

5. Has the financial advisor explained risks and rewards? There is no such thing as the perfect investment, and a good

financial advisor will explain that. Don’t agree to work with anyone who has “the perfect investment” or doesn’t very clearly explain the advantages and disadvantages of what he or she is recommending. No disadvantages discussed? Then it’s simple – walk away.


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6. How is the financial advisor paid? Some financial advisors are paid by commission, that is, they take

a percentage of every transaction they make on your behalf. Some are paid a fee, which is often a percentage of the assets they manage for you each year. Some are paid by the hour. And some are paid by a combination of commissions and fees. Be sure you know how the financial advisor you are considering is going to be paid and how much he or she charges. A good financial advisor will also explain any additional fees, such as those you will pay for any load funds that are purchased for you.

Generalizing which type of fee arrangement you should consider is very difficult. Everyone’s situation is different. What might be right for one could be entirely wrong for another. But understanding the fee arrangement and how the advisor is getting paid is critical to know before any commitments are made. More on this in the next chapter.


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Financial Designations

CFP – Certified Financial PlannerCFPs 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.

CFA – Chartered Financial AnalystCFAs have earned a college degree, completed at least three years of study, been tested by the Association for Investment Management and Research, and meet continuing education requirements. They are generally money managers and stock analysts.

ChFC – Chartered Financial ConsultantChFCs are typically life insurance agents who have completed coursework in financial planning, passed an exam, and obtained three years of financial planning experience. They generally provide all-around financial planning with an emphasis on insurance.

CPA – Certified Public AccountantCPAs are required to pass a rigorous national exam and meet continuing education requirements. They can advise you on income tax, investment and estate planning issues.

PFS – Personal Financial SpecialistPFSs are CPAs who have received accreditation from the American Institute of Certified Public Accountants (AICPA). This accreditation requires that a PFS prove financial planning experience, pass an exam, and submit references every three years.

RIA – Registered Investment AdvisorRIAs are usually financial professionals, such as accountants and insurance agents, who have registered with the Securities and Exchange Commission (SEC) or individual states. The title does not constitute an endorsement by either or require an adherence to a code of behavior.


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RR – Registered RepresentativeRRs 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.



Interviewing Your Next Financial PlannerDiscuss fees as well as services

I believe that virtually anyone with a decent income can benefit from the services of a financial planner, and by financial planner I don’t mean a broker whose only interest is obtaining a commission on a financial product. I’m referring to a professional who will assess every aspect of your financial life – from savings to investments to insurance – and help you develop a detailed strategy for meeting all of your financial goals.

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?

Before deciding on a financial planner, you’ll want to interview several, and you’ll want to ask all of them questions about their education and experience. But most people know this. What’s more difficult is interviewing financial planners about their investment approach and fee arrangements – two subjects that may be closely tied together.

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These two topics are more difficult to discuss because financial planning services vary widely. Some planners offer only investment advice, some offer estate planning, and others even do your taxes. The fee structure that financial planners use to charge for their services also varies widely. Some charge either a fixed or hourly fee for the time it takes to develop your financial plan, but they don’t sell investment products. Some simply receive commissions on the products they sell. And still others are paid by a combination of fees and commissions.

When hiring a financial planner, then, it’s important to know in advance exactly what services you think you’ll need and what services the planner can deliver – and to ask how much those services cost, as well as how the planner gets paid. For example, if you need a comprehensive investment plan but are willing to invest your funds yourself, a financial planner who charges by the hour may be your best choice. After obtaining a clear understanding of your financial goals and risk tolerance, the financial planner will develop an asset allocation plan for you – that is, tell you how much of your money you should have invested in different asset classes such as stocks and bonds. He or she will then recommend some specific investments to help you achieve that asset allocation, but you’ll do the actual investing yourself.

On the other hand, if you already have a number of investments with different firms, and you want a financial planner to manage your money on an ongoing basis, and maybe even do some estate planning for you, consider a planner whose fees are asset-based. In other words, you pay the planner a percentage of the assets you have invested on an annual basis, and the planner provides all the services you need. In this case, it’s important to understand what you’re getting. Exactly what services will the planner provide? How regularly will the planner provide those services? Will you always be working with the planner directly, or will other people be involved?

Finally, you’ll want to listen to how each financial planner answers your questions. Does the planner seem genuinely interested in learning more about your personal situation, such as your risk tolerance, before


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making any recommendations? Does he or she clearly express that there are no guarantees when it comes to investing? Remember, you’re looking for someone who will tailor a financial plan for you and won’t promise more than he or she can deliver. Forget about the planners that make everything sound way too easy, such as getting you returns of 12% per year without any problem. Those are just accidents waiting to happen. If you don’t feel comfortable with a planner you’re interviewing, for any reason, interview someone else. This is a person you’ll ideally want to be working with for a long time to come.


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Custodial Accounts and TrustsUsing them to avoid estate taxes

If you have an estate that is large enough, a share of what you would like to leave to your heirs may go to the government in the form of estate taxes when you die. But it doesn’t have to, if you know how to make use of custodial accounts and trusts.

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.

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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.

These accounts are well-suited to relatively small dollar amounts because they’re easy to set up and relatively inexpensive to maintain. However, there are some caveats to keep in mind when establishing one.

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.


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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.



Employer-Sponsored Retirement PlansShould you roll yours into an IRA?

Around 47 million Americans are participating in qualified employer-sponsored retirement plans. Undoubtedly, these people think they’re taking control of their financial future by investing in a 401(k), 403(b), or government 457 plan. But are they?

Employer-sponsored retirement plans are a great way to save for retirement. However, a problem arises when you keep accounts with several past employers. Holding your accounts in many different places can make it difficult to manage your investments effectively as your goals, and the markets, change.

Whenever I encounter people in this situation, I often suggest that they take control of their retirement assets by moving them from those employment accounts to a rollover individual retirement account (IRA). Here are three reasons why:

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1. A rollover IRA may provide better investment options. Some people feel that keeping retirement plans with several

different employers is a good way to diversify their investments. In reality, most employer-sponsored retirement plans offer very limited investment options. That limitation could put your retirement savings at risk, particularly if your savings are concentrated in just a few funds or your employer’s stock. In contrast, rollover IRAs offer a variety of investment options, allowing you to better allocate your retirement funds according to your personal investment goals.

On the flip side of this, every once in a while I meet a person who has money in an employer’s retirement plan with a rate that absolutely cannot be found anywhere else. For example, the New York Teacher’s Union (at the time of this writing) still maintains a fixed account that pays better than 7% per year. A fixed interest rate such as that is impossible to find anywhere else, and it’s for this reason I would tell those people not to roll their money into an IRA because they’ll never (again, at time of this writing) be able to replace it in a rollover, self-directed IRA. It’s sad to think there are financial advisors out there trying to roll this money into an IRA for their own benefit, not the client’s.

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.

2. It can be difficult to manage investments spread between multiple retirement plans.

If you have more than one retirement account, consolidating your retirement assets into a single rollover IRA can make managing them easier. There will be considerably less paperwork, which will aid in tracking your investments. Additionally, keeping retirement assets in one place simplifies beneficiary designations and estate planning.


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3. The mutual funds available through your current retirement plan may have high expense ratios.

A small savings of even half a percentage point in mutual fund expenses can mean thousands of dollars more in your pocket over a few years. If you’d like to see a demonstration, try using the mutual fund cost calculator available from the Securities and Exchange Commission (SEC). Just go to www.sec.gov and click on “Calculators for Investors” under “Investor Information.”

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.

Finally, when you’re ready to move your assets, be sure to contact a financial advisor. Many rollover IRAs are available, and a professional can help you select one that best fits your long-term investment needs.


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Year-End ChecklistThe 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.

1. Take your required minimum distributions (RMDs). If you’re an individual retirement account (IRA) owner age 70½

or older, and you haven’t taken your RMDs for the year, you need to do so by the end of the calendar year. Internal Revenue Service (IRS) Code regulations require that you take initial withdrawals from traditional, Simplified Employee Pension Plan (SEP) and Savings Incentive Matching Plan for Employees (SIMPLE) IRAs by April 1 in the calendar year following the year you reach age 70½ and each year thereafter. Then, on an ongoing basis, you must


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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!

2. Spend the balance of your Flexible Spending Account (FSA). If you participate in an FSA for either health or dependent care,

check to see if the plan has implemented the new 2½ month extension provision, which allows 2006 FSA money to be used for expenditures through March 15, 2007. If the plan doesn’t have the extension, be sure to use up any balances before the end of the calendar year or they will be forfeited. One way to do so: Stock up on over-the-counter medicines for next year.

3. Make last-minute charitable contributions. Maximize itemized deductions by making donations in the form

of cash, property, or appreciated stock. The latter helps you avoid capital gains taxes too.

4. Make an extra mortgage payment. Making that one extra payment will, over time, cut the amount

of interest you’re paying on your mortgage and actually reduce the number of years you’ll need to make payments before your house is free and clear. It will also help you maximize itemized deductions. This could make a tremendous difference in your long-range plans.

5. Consider making deductible business purchases by the end of the year.

If you’re self-employed, and know you’ll need to buy deductible business-related items in the following year, you may want to buy them now to maximize your deductions in the current year (and take advantage of holiday sales).


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6. Think about gifting. At the time of this writing, you can gift up to a total of $11,000 per

year (per person) to as many people as you want. That $11,000 may be given to one person, or distributed to any number of individuals. Your taxable income will be reduced by the amount that you gift.

7. Review and balance your capital gains and losses. Make note of capital gains you’ve realized this year from the sale

of stocks or mutual funds. Also find out if any of your mutual funds will be distributing capital gains. When you’ve added up your gains, check to see if there are any losses you can carry forward from previous years to offset these gains. If there aren’t, consider selling under-performing securities. Taxes should never be the sole reason you buy or sell investments, but it may be possible to improve your tax and your investment situations at the same time. Think of it as being a good time to “clean out the closet”.

8. Consider increasing your final 401(k) contribution. If you haven’t already contributed the maximum of $14,000

($18,000 for those 50 and older) to your 401(k), consider increasing your contribution amount from your final paycheck. You have until December 31 to make your final contribution for the year. (Note: All figures are at the time of this writing. Check resources such as www.irs.gov for current information.)

9. Open and fund a 529 plan college savings account. A 529 plan account offers high maximum contribution limits and

significant tax benefits. Money in the account can grow tax-free for years. And, withdrawals are tax-free if used for any number of expenses related to higher education. But some people are using them for estate planning as well, since the money you put into a 529 plan account is considered a “gift”. You’re allowed to contribute up to $55,000 – which is considered five years’ worth of gifting – at one time. The rule is based on a calendar year, so if you make a contribution in December, one of the five years (or $11,000) is applied to the current year. The balance of your gift will carry over and be credited in subsequent years ($11,000 per year).


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10. Make your IRA contributions. You can make IRA contributions through April 17th, but why not

consider doing it now so you don’t forget? The IRA contribution limit for 2007 is $4,000, and $5,000 if the person is age 50 and over.

One last very important point: I have known many people – especially business owners (sole proprietor, C Corporation, S Corporation, and others) – who amazingly have not set up programs such as Keoghs, SIMPLE IRAs, 401(k)s, etc. What a shame! The ability to “take income off the top” and place it into a qualified plan is a true misfortune. With enough time until the end of the year, it is still possible to set up a qualified plan. I cannot stress this enough: If you have no qualified plan for your business, you absolutely, positively need to make inquiries as to whether or not you can and which one is best for you. Speak to your accountant or a financial advisor. This could be the best thing you do for yourself before popping the cork!


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Will Your Well Run Dry?Preparing for retirement

Baby boomers – those of us born between 1946 and 1964 – are in a predicament. We’re getting ready to retire, and most of us won’t be able to afford it. In days past, when people retired they had approximately 70% of their annual pre-retirement income to live on. It was that simple, thanks to employers managing retirement plans.

Today the responsibility for retirement planning has shifted from employer to the employee. Gone are most pension plans; these days, most people have 401(k) plans. You, the employee, must decide how much you’ll contribute and how you’ll invest that money. If there isn’t enough in your well at retirement, you’ll have to “rely” on Social Security.

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


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previous Federal Reserve Chairman Alan Greenspan warned of somewhat recently.

That’s all bad news, because according to the Employee Benefits Research Institute, the average person in his 60’s had a balance of $105,822 in his 401(k) at the end of 2001. What does that mean? Most people entering retirement seem to be planning to rely almost exclusively on Social Security for their retirement income. And how far will that go?

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.

To illustrate the point, consider Joe, a hypothetical 24-year-old who starts planning for retirement now and does everything “right”. Joe has a good job, with a salary of $35,000. He gets 6% raises each year, and he contributes 10% of his salary to his 401(k) plan every year. Joe’s also lucky with his investments: They return a solid 8% annually during his working years, and later, 5% per year after Joe retires. When our hypothetical worker reaches age 59½, he’ll be earning $253,785 a year and his 401(k) balance will be $1.24 million. He’s set, right? Not quite. Joe will need 70% of his salary – $177,650 per year – when he retires just to maintain his pre-retirement standard of living. Assuming he gets the maximum Social Security payment of $45,000 ($10,800 in today’s dollars, with a 3% annual increase for inflation), he’ll still have to withdraw $132,650 a year from his nest egg. And at that rate, he’ll be out of money by his 69th birthday!

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?


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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”.)


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The Benefits of DiversificationBalance and portfolio stability

There are several aspects involved in successful investing. The first, of course, is asset allocation, or determining how much of your money belongs in each asset class – equities, debt instruments, and cash equivalents. Then there is selecting specific investments, meaning individual stocks or bonds, mutual funds, money market accounts, etc. The third aspect of successful investing involves monitoring and evaluating the performance of the investments you hold in your portfolio, followed by making any necessary adjustments, either by selling poor performers, buying potential profit-makers, or just rebalancing your holdings.

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.

INVESTING CHAPTER TWO

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Different asset classes – such as domestic stocks, international stocks, bonds, real estate, commodities, and cash equivalents (i.e., money market accounts) – perform differently in different markets. In other words, they’re usually uncorrelated. While some asset classes may be in favor and more profitable, others may be out of favor at the same time. Allocating your assets involves dividing up your investment funds among these classes. Diversification is simply the process of spreading your investments across multiple asset classes so that your invested dollars are not solely dependent on the performance of any one asset class. While diversification doesn’t eliminate the risk of loss, it can help you better manage the effects of market volatility on your portfolio. Rather than trying to guess which part of the market will be up and which part will be down in any given period, a diversified portfolio will almost always reduce the risk and stabilize your return over time.

As evidence, if you look at a number of asset classes over the past 10 years – large-cap value stocks, large-cap growth stocks, small-cap value stocks, small-cap growth stocks, international stocks, real estate, commodities, and bonds – the best and worst performers have varied every year, as shown in the chart. Asset allocation can be thought of as a strategy for assisting you in achieving sensible diversification. Investors often think of a traditional asset allocation as 60% stocks and 40% bonds, but it doesn’t stop there. You will also want to spread your investments among different sectors (i.e., health care and technology), companies with varying sizes of market capitalizations, and domestic and international categories.

Consider the performance of this hypothetical diversified portfolio: An unmanaged combination of indices representing 40% bonds, 15% large-cap growth stocks, 15% large-cap value stocks, 10% international stocks, 5% real estate, 5% small-cap growth stocks, 5% small-cap value stocks, and 5% commodities. A portfolio invested in this manner would have returned 22.06% in 2003, 11.67% in 2004, and 8.81% in 2005.

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Year Best Performer

Worst Performer

1995 Large-cap value stocks, 38.35% International stocks, 11.21%

1996 Real estate, 37.04% Bonds, 3.63%

1997 Large-cap value stocks, 35.20% Commodities, –14.08%

1998 Large-cap growth stocks, 38.70% Commodities, –35.73%

1999 Small-cap growth stocks, 43.10% Real estate, –2.57%

2000 Commodities, 49.73% Small-cap growth stocks, –22.44%

2001 Small-cap value stocks, 14.02% Commodities, –31.91%

2002 Commodities, 32.02% Small-cap growth stocks, –30.26%

2003 Small-cap growth stocks, 48.54% Bonds, 4.10%

2004 Real estate, 33.82% Bonds, 4.34%

2005 Commodities, 25.55% Bonds, 2.43%

With all those asset classes to choose from, however, allocation isn’t quite as simple as it sounds. Many investors make the mistake of being too conservative in their asset allocation. As you approach your investment goal – be it the purchase of a home or retirement, for example – of course you’ll want to take fewer risks with your money. You may allocate more money to bonds and cash, and less to international stocks and commodities. But you need to realize that it’s still important to maintain an allocation to what are traditionally considered to be more risky investments because they also bring the greatest potential for reward. If you allocate too little to stocks, your portfolio probably won’t grow enough to significantly outpace inflation. Just look at the chart and see in how many of the past 10 years bonds were the worst performers.

Another asset allocation mistake is failing to rebalance your portfolio regularly. You’ve probably heard of this concept before, that of “re-balancing,” and either ignored it or didn’t understand it. But suffice it to say, it’s one of the most important concepts you can ever implement in a portfolio. Why? Well, what’s the single most desirable situation in investing? Selling high and buying low, correct? How do you do that? Easy – through rebalancing.

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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.

If you’ve had the unfortunate experience of incurring significant losses in the markets, it was most likely the result of a poorly structured portfolio that was too heavily “weighted” in one sector. Those who invested too heavily in technology during the bust of 2001-2002 can probably vouch for that. To avoid market disasters, don’t ever weight your portfolio too heavily in any one sector, diversify among the

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standard asset classes, and make sure to rebalance your portfolio at least once a year. (I personally do so once or twice a year, but certain market conditions may prompt me do it more or less often.) Following these simple rules will most certainly provide you with significantly better chances for long-term investment success.

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The Index Advantage and Exchange-Traded Funds

Play the market with less cost and risk

Mutual funds, which offer professional stock selection and diversification, are popular investment options today. But they aren’t always what they’re cracked up to be, thanks to high management fees and excessive trading activity (which can result in capital gains taxes). What if you could reap the benefits of mutual fund investing without the associated costs? Well, you can – with an index fund.

An index is a group of stocks selected to represent a certain portion of the stock market. The Standard & Poor’s (S&P) 500 Index, which consists of 500 large-capitalization (large-cap) domestic stocks, such as Microsoft and General Electric, is widely considered to be representative of the market as a whole. The Russell 2000 Index consists of small-capitalization stocks. The Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index holds international stocks. You will find that there’s an index for just about every segment of the market, including specialized segments, such as

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health care stocks and real estate investment trusts (REITs). There are even indices for Genome companies, water companies, biotechnology, oil exploration, etc.

An index fund invests in the stocks that make up a specific index. An S&P 500 index fund, then, would try to replicate, as closely as possible, the allocations to stocks found in the S&P 500. When you match the investments in an index, you also match the return of that index – and that’s something most mutual funds can’t do. According to investor information sources such as the Wall Street Journal, Motley Fool, and many, many others, less than 20% of actively managed, diversified, large-cap mutual funds have outperformed the S&P 500 over the last 10 years. Part of the problem is stock selection; managers make mistakes and trade on emotion. But another big factor is fees and expenses.

Index funds invest in whichever stocks are in a particular index, in the same allocations. They don’t hire analysts with Ivy League MBAs, and they usually don’t develop a lot of slick marketing materials to convince you that their fund is the best. This significantly reduces the operating fees the fund must charge shareholders, which leaves more of your money to grow.

Moreover, actively traded mutual funds do just that, actively trade. And when a mutual fund sells stocks, the capital gains (or losses) are passed on to you, meaning you have to pay taxes even though you haven’t sold anything. Typically, trading is only done within an index fund when the composition of the index it represents changes. The result is much less of a tax bill for you, given the fact that these changes are usually quite infrequent.

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

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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.

So should you invest in an index mutual fund or an exchange-traded index fund? My bet has always been in favor of index exchange-traded funds. But as with any investment, make sure you understand all the facts before jumping in.

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Small Company StocksProviding big results and portfolio balance

Small-capitalization (small-cap) stocks, which typically lead the market as the economy comes out of a downturn, finished near the top of the performance charts in 2004. The Russell 2000 Index – the index that is used as a benchmark for small-cap performance – returned 18.33% that year. As a result, many investors are asking if they should move more of their portfolio into this asset class. But that’s not an easy question to answer.

What exactly is a small-cap stock? If you’re considering small-cap stocks, it’s important to understand what they are. Simply put, they’re stocks of companies that have a relatively small market capitalization – market capitalization being the total dollar value of all outstanding shares of a company’s stock.

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

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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.

Overall, I like small-cap stocks. And their tendency to perform well when others asset classes are not is one of the reasons why. Investing in small-caps helps provide your portfolio with diversification. Just take a look at the chart for more evidence.

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.

And lastly, if you’re going to add small-cap stocks to your holdings, I recommend that you do so by investing in a variety of small-caps to further diversify this component of your portfolio. You can do this by selecting individual stocks, or you can purchase shares of a mutual fund that invests specifically in small-cap stocks.

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YearMarket as a Whole: S&P 500 Index

Large-Cap Stocks: Russell 1000 Index

Small-Cap Stocks: Russell2000 Index

1993 10.06% 10.15% 18.90%

1994 1.32% 0.38% - 1.82%

1995 37.58% 37.77% 23.34%

1996 22.96% 22.45% 16.49%

1997 33.36% 32.85% 22.36%

1998 28.57% 27.02% - 2.55%

1999 21.05% 20.92% 21.26%

2000 - 9.10% - 7.80% - 3.02%

2001 - 11.88% - 12.46% 2.48%

2002 - 22.09% - 21.65% - 20.48%

2003 28.67% 29.90% 47.25%

2004 10.87% 11.40% 18.33%

Index returns assume reinvestment of dividends and capital gains, and unlike fund returns, do not reflect fees or expenses. You cannot invest directly in the index. During the periods discussed, a number of index stocks could have had significantly negative performance. Therefore, it is possible for index performance to be positively influenced by a relatively small number of stocks.

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Real Estate Investment TrustsIs the boom over?

Real estate investment trusts (REITs) have had an incredible run. For the past five years or so, they’ve earned investors 20.37% per year, as measured by the Morgan Stanley Capital International (MSCI) U.S. REIT Index. But many analysts are predicting that the future for REITs isn’t so bright. With that said, should you invest in them?

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).

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Like most securities, REITs have historically experienced cyclical ups and downs. Typically, they have performed poorly when interest rates have risen. But the past year-and-a-half has been an exception. Despite interest rates rising, the returns on REITs have been up – 17.74% over the past year – as measured, again, by the MSCI U.S. REIT Index. Some analysts think that REITs are going to continue to perform well. In a recent issue of the National Association of REITs’ Real Estate Portfolio, for example, the CEO of Vornado Realty Trust, Steven Roth, who has 40 years of experience in the business, proclaimed income-producing real estate to be in “a secular bull market – emphasis on secular”.

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.

It’s also important to consider the quality of a REIT’s management, tenants, and underlying properties. BioMed Realty Trust, for instance, specializes in leasing lab space to tenants such as biotechnology and pharmaceutical companies. If you believe that there will be growth in the health care sector, it may also follow that BioMed Realty Trust will do well.

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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.

With all this in mind, be sure to recall a very important previous chapter: That on diversification and the importance of rebalancing. A well-diversified portfolio, as far as I am concerned, should always have exposure to real estate, and for that reason, an investment in a REIT always plays a role in a balanced portfolio.

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Evaluating PerformanceUsing 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.

The S&P 500 is a good example. It’s designed to be a broad indicator of stock price movement and is the most commonly used benchmark for stock fund performance. The index consists of 500 leading companies in major industries, chosen to represent the American economy. That may seem like a big field until you consider that there are more than 5,000 stocks listed on the New York Stock Exchange, and the S&P 500 tracks only a small percentage of the stocks on the market. Moreover, the S&P 500 consists of essentially one asset class: Large-capitalization (large-cap) companies.

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Market capitalization, a measure of a company’s size, is the total dollar value of all outstanding shares of a company’s stock. Stocks with a relatively large market capitalization are considered large-cap stocks. Because the S&P 500 is limited to 500 of these companies, smaller companies – which can drive U.S. economic expansion – are excluded from the S&P 500. So if you have a small-capitalization (small-cap) stock or fund, comparing it to the S&P 500 may not be an accurate gauge of its performance.

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.

Information about which index is used as a benchmark by a stock or fund’s portfolio managers can typically can be found in the performance section of their annual and semi-annual reports. But of course it’s not just the S&P 500 Index that’s used as a performance benchmark. A few of the other indices you may see listed include:

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Russell 1000 Growth Index Measures 1,000 large-cap growth stocks

Russell 1000 Value Index Measures 1,000 large-cap value stocks

Russell 2000 Index Measures 2,000 small-cap growth stocks

Russell 3000 Index Measures the performance of the 3,000 largest U.S. companies based on total market capitalization

MSCI EAFE Index Measures the performance of the developed stock markets of Europe, Australasia, and the Far East

Lehman Brothers Aggregate Bond Index Measures U.S. government, corporate, and mortgage-backed securities with maturities of up to 30 years

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Portfolio RebalancingA 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.

Most financial advisors agree that setting asset allocation targets and occasionally rebalancing your portfolio as part of investment maintenance is a good idea. But different advisors recommend different time frames for rebalancing. On one end of the spectrum, some say you should do it every month. On the opposite end of the spectrum, others say you should do it every few years. I take the middle ground and say you should rebalance whenever changing circumstances make it necessary.

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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. You may specifically want to take a look at your international asset allocation. Over the past few years, international stocks – particularly those of emerging market countries – have gained substantially. It’s likely that these stocks now make up a greater percentage of your portfolio than they ideally should, and that could increase your overall risk.

It can be hard to sell a stock or mutual fund when it’s performing well. Year-to-date gains in many international markets, for instance, already exceed 20%. “Why not hold onto the stock and realize even more gains?” you might ask. But remember, it’s almost impossible to accurately predict market movements. You could miss an upturn, but you could also fall victim to a downturn. Price-to-earnings (P/E) ratios for many international stocks now exceed those of their more stable domestic counterparts – not a good sign. And if international stocks take a nosedive, they could do so quickly.

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If you do sell some of your investments, you’ll want to replace them – and a market downturn presents a good opportunity to find some bargains. Technology stocks haven’t been doing well lately. Consider, for example, eBay and Yahoo!, which hit 52-week lows in April 2006, and are trading at P/E ratios not seen in years. A strategy of shopping for investment bargains even helps you ride out market volatility with some peace of mind. Instead of fretting about how much your holdings have declined, why not make a shopping list of asset classes that interest you, and watch to see how much cheaper they’re becoming? You may decide that a couple of them are worth picking up.

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.

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6 Things Dating Teaches Us About Money

Bad date last night? Don’t despair. It’s not as bad as you may think. Here’s some good news: You may not know it, but when it comes to your money, that bad date can teach you an awful lot about successful investing.

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.

Here’s a few quick examples…

1. Don’t judge a book by its cover Dating: The guy was over a half-hour late, his outdated shirt barely

matched his Taco Bell stained pants, the rain gave him a lethal dose of bed-head and back then the busboy was making more than he was. If that wasn’t bad enough, his humor was a bit stale and the

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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

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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.

Lesson Learned: When it comes to investing and dating, costs most definitely do count. Taking the time to evaluate how much you’re paying for your dates and funds is an essential part of anyone’s success.

3. It doesn’t have to be complicated for it to be effective Dating: For many people, the best dates are the simple ones such

as times spent on the couch during a cold winter night, wearing soft flannel pajamas under a fluffy blanket watching a classic Bogart movie with, of course, hot green tea and a hearty bag of Fritos nearby. While dining at Nobu certainly has its place in time, looking back on all the great dates we’ve had most likely reminds us it’s the simple ones that scored the most.

Investing: When it comes to investing, many of the most successful investors I’ve helped are those with the simplest portfolios. On the other end of the spectrum are investors that spend every waking hour chasing returns, analyzing complicated charts, dissecting corporate balance sheets or scouring the market on a daily basis searching endlessly for a perfect buy.

Lesson Learned: There are roughly 15,000 mutual funds in the

country with approximately two professional fund managers each. Of those 30,000-ish fund managers, guess how many have beat the static, mindless S&P 500 index more than ten years in a row? Answer…? …. Get this: Just one. The legendary Bill Miller from Legg Mason. Undeniable statistics prove that the S&P typically out-performs over 80% of managed mutual funds year after year, leading the sharp ones to realize that when it comes to efficient and successful investing, it rarely has to be complicated for it to be effective.

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4. Cut the losers, ride the winners Dating: The first handful of dates were the stuff legends are made

of, but by the time mid terms rolled around, Crazy Mindy crashed my college roommate’s car, emptied his bank account, shredded his classic Dark Side of the Moon poster, caused him to miss the Macro Economics final and managed to give him one very fat lip. By the time graduation took place, my roommate ended up blowing his entire senior year trying to turn Crazy Mindy into the person she once appeared to be.

Investing: On paper, the company looked like a true winner. Not only was the stock going through the roof but even Madonna used its products. At first the investment took off, but no thanks to a deadbeat CEO and a few federal regulations tossed in, the stock began its perpetual downward spiral. Convinced it would come back, you held on, only to wake up realizing you would have been far better off giving Crazy Mindy your money to invest.

Lesson Learned: Crazy Mindy could care less about my roommate and likewise, stocks could care less about you. They don’t know who you are and only you can fall in love with them. Love or money, when something isn’t working, get out. Just cut the losses, move on and live to fight another day. The quicker you do that, the better things typically turn out.

5. Don’t give up on the first date Dating: Dinner at The Palm was better than if your Mets won

another Series. The guy made you laugh, he held the door and a Grey Goose made him look like Brad Pitt. But back at your place, just as the room sweltered to high noon out on the Serengeti, your mother’s voice politely whispered to you, “Not on the first date.” Wisely, you pushed back and let something called “time” nurture the relationship.

Investing: The financial advisor seemed like a nice guy. He showed you attractive rates of return, sported a Tom Cruise smile and even served cappuccino in fancy bone china with lace doilies to match.

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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.

6. Diversification is the key to success Dating: Adam looked like Alan; Alan acted like Arnold; Arnold

smelled like Arnie and Arnie reminded you of Alex. And just when you thought you found the Perfect-A, Aden stood you up just like Albert and Abe once did (or was that Alfonse?). It was then, in one fleeting moment of revelation, you finally realized the problem had nothing to you, but everything to do with guys whose names start with the letter “A”.

Investing: Dot-coms. … Late 90s. … Need I say more?

Lesson Learned: Diversifying your investments is a critical key to investment success. Load up in one sector or stock and it’s not a question of if disaster will strike, it’s usually a question of when. Spread the risk, diversify your investments into the prudent, timeless fundamental asset classes and of far more importance, stop dating guys whose names start with the letter A.

CONCLUSIONBad 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.

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7 Ways to Save $100 per Month

Saving for retirement is not always easy. There are bills to pay, clothes to buy, movies to see and a long list of many other things that can easily get in the way.

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.

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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:

IF YOU INVEST FOR… YOUR INVESTMENT WILL GROW TO…

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:

1. Invest your refund Are you one of the unlucky people to get a tax-refund this year?

Remember, your tax refund is merely an overpayment of estimated taxes or withholdings that earned Uncle Sam interest, not you. If you were one of the unlucky people to receive a refund, evaluate your estimated taxes or withholdings and don’t give it to Uncle Sam as a tax-free loan. Instead, invest it. Doing so could very well get you that $100 monthly savings you’ve been looking for.

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.

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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.

5. Skip the Root Beer It’s a rare day when I don’t have a craving for an ice-cold Root Beer.

Suppose I didn’t listen to my own advice above and ate out five times a week. If a Root Beer costs $1.50, I just spent $30 per month. For savings and nutritional reasons, I should have been drinking water. While the $30 savings won’t get me my $100, it’ll definitely help get me there and make my Mother happy along the way as well.

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.

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7. In-Home Beauty Regime Thanks to a thinning hairline and my Flowbee, it’s been at least

a decade since I paid someone to cut my hair. Suppose each cut costs an average of $50 and I need to cut my hair once every two months. By doing it myself, I’ve basically saved $25 per month. Care to come by for a Flowbee? Would you do it yourself? Doubtful on the former, possible on the latter. There are also a few possible things you can do to reduce your monthly beauty costs such as a do-it-yourself manicure or mudpack.

Better nutrition? Energy efficiency? Getting yourself rich instead of Uncle Sam? As far as I’m concerned, over a ten-year period of time, I can think of 21,796 reasons to save $100 per month and hopefully you can too.

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More Income, Less Risk The genius behind a

peanut butter and jelly sandwich

Compared to previous generations, people are living longer in their retirement years. But with that advancement comes increased concerns – the rising cost of living, and even worse, running out of money. Those worries are leading more investors to seek new and innovative ways to get higher returns on their investments, although sometimes they’re disregarding the safety of their principal. Yet there are income strategies that can do both for you – provide a decent rate of return without jeopardizing your principal.

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

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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.

Certificates of Deposit (CDs) certainly are safe. Between today’s low interest rates and taxes on the earnings, yes, you’ll protect your principal, but you’ll starve while doing so. If you put $100,000 in a five-year CD, you’ll earn around 5%, or $5,000 a year. But if you’re in the 28% tax bracket, after taxes you’ll only net around $3,600. Furthermore, the increased taxable income could push you into a higher bracket and possibly affect your Social Security taxation.

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.

Then, of course, there’s the stock market – for dividends, preferred stocks, real estate investment trusts (REITs), Collateralized Mortgage Obligations (CMOs), etc. Unless you have the stomach for potential loss and uncertainty, to get more income you need to be creative. Think “outside the box.” Be imaginative. And that’s where my income sandwich comes in.

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The peanut butter side of this income sandwich is something called an immediate annuity. Offered by insurance companies, many of which have been around for well over 100 years, an immediate annuity is essentially an investment vehicle that provides you with a “pension” for the rest of your life.

Consider, for example, my friend Bill, who’s 77 years old. Laws of probability say he can easily live another 10+ years, and Bill is hungry for more income. After we explored all his options, Bill fell in love with my income sandwich and decided it was what he wanted to eat. So Bill put $100,000 into an immediate annuity, and in exchange for this one-time deposit, he gets a lifetime income stream of $12,052 per year. All through Bill’s life most of the income is tax-free, thanks to the Internal Revenue Service (IRS) gift known as the exclusion ratio rule. The problem is, if Bill dies tomorrow, his original $100,000 investment is gone, which is a great deal for the insurance company, but not so good for Bill’s wife, Francine.

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?

I’ve worked with many “Bills”, especially during the time of ultra-low interest rates. Some have invested thousands to create their income sandwich, others have done it with millions. Needless to say, you must have ample savings outside this income strategy for various needs, especially for protection against inflation, healthcare considerations, and other things. Keep in mind that age, health, and other factors will ultimately determine your bottom line and whether or not the strategy makes sense for you. In general, the older you are, and the better health you’re in, the tastier this sandwich becomes. As

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long as you can qualify for life insurance (some people simply cannot), the numbers could work out quite well for you and your beneficiaries.

Bonds? CDs? Stock market? Creamy? Crunchy? Super-chunky? Everyone has their own taste, but one thing is for sure: In a low interest rate environment filled with risk, uncertainty, and the fear many share about outliving their savings, this income sandwich could be one well worth sinking your teeth into.

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Build a Bond LadderControl cash flow and maturities

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.

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The main benefit of this investment strategy is that by staggering the maturity dates of the bonds, you won’t be locked into any particular bond for any significant length of time. Let’s say that you invest your $100,000 in a single bond with a 5% yield and a 10-year maturity. During those 10 years until the bond matures, interest rates are likely to rise and fall, and bond values will follow suit. (Remember, bond values move inversely to interest rates.) But if interest rates are low at the time your bond matures – and you’re ready to invest in another bond – you’ll be stuck buying a bond with a low interest rate, or putting the money into a money market account and waiting until the investment environment improves.

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.

Bond laddering is particularly beneficial in a rising interest rate environment because it allows you to readily move your money out of lower yielding bonds and into those with higher yields as interest rates rise. You could argue that if you buy shares of a bond fund the portfolio manager would do this for you, but some investors prefer to have control over the process themselves.

A secondary benefit of bond laddering is that it lets you adjust the income you receive from the bonds based on your personal cash flow needs. With a bond, “What you see is what you get”. So suppose the bond ladder you (or your advisor) are creating provides you with a combined return of 7%, but you need 7.5%. To get that extra .5%, you can usually swap one bond on the ladder for another. Typically, to get that extra yield you would either increase the maturity length of a bond or invest in a bond of a lesser credit quality. One or a combination of these two elements will usually get you that extra yield. Needless to say, adjusting maturity dates and credit quality can bring additional risk into the ladder, hence the reason you never want to overload an investment in one bond, but rather spread the risk out among many bonds.

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Let’s take a look at a simple example. Suppose you need before-tax income of around $6,000 per year and you have $100,000 to invest. You can certainly invest the full $100,000 into a single bond paying 6%. But that “puts all your eggs in one basket”, and furthermore, it won’t provide you with the flexibility you’d have from “laddering” the $100,000 into several bonds, as shown below.

BOND AMOUNT YIELD INCOME

1 10,000 4.0% $4002 10,000 4.5% $4503 10,000 5.0% $5004 10,000 5.5% $5505 10,000 6.0% $6006 10,000 6.0% $6007 10,000 7.0% $7008 10,000 7.0% $7009 10,000 7.0% $700

10 10,000 8.0% $800

TOTAL INCOME $6,000

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

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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.

Another point worth mentioning: Cash flow planning. Each bond usually pays the interest income at different times. For example, one bond might pay you in January, two more might pay in March, another in July, etc. Any advisor constructing a bond ladder will almost always be constructing it with computer software that will provide an instant cash flow report. The total amount of income being paid from my simple example above might be 6%, but remember, it gets paid out at different months during the year. For those who need exactly $500 per month ($6,000 per year paid out monthly), a cash reserve outside the bond ladder would be required to keep income consistent. This is usually perceived as a disadvantage of bond ladders versus bond mutual funds, but I very strongly believe the extra “frustration” of a bond ladder is very much worth the rewards in return. And as creating a bond ladder is something that is typically done with an advisor, planning cash flow with a “side pool” of cash reserves is actually a very simple process.

Something else to keep in mind is that all my examples have not included a discussion on taxes. Income from corporate bonds are fully

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taxable. Income from municipal bonds are tax-free on the federal level and typically tax-free on the state level (as long as you reside in the state where the bond is issued) as well. Government bonds are typically taxed only at the federal level.

Many financial advisors overlook bond ladders because it’s easier to drop a client’s money into a bond fund than it is to research and purchase a number of individual bonds. So if you are interested in individual bonds and building a ladder of your own, be sure to ask your advisor about this strategy.

If you’re looking to preserve your investment principal, especially in your retirement years, a bond ladder can be an excellent choice for a portion of your overall investment portfolio. A well-diversified ladder, built with bonds that have good credit quality, and not a lot of money put into any one bond, can bring peace of mind to an income investor.

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.

There are a couple of caveats that need to be pointed out, however. In general, you shouldn’t attempt to build a bond ladder unless you have enough money to fully diversify and create at least five rungs – each in the $10,000 to $20,000 range, preferably. However, depending on a variety of factors, especially if you are investing a small amount of money, buying bonds at $5,000 can also be prudent. Secondly, a bond ladder presents less risk only if there is no default on a bond, so be sure you understand bond credit quality before buying any bonds.

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Personally, this bond ladder concept is one of my all-time favorites, and I hope you’ll get as much use out of it as I have. The following table illustrates how you could construct a 10-year bond ladder by buying bonds that mature in two, four, six, eight, and 10 years. Then, every time one of these original bonds matures, you purchase a new 10-year bond. Bear in mind that my example below assumes a rising interest rate environment. Needless to say, it is entirely possible that when you set up a bond ladder you can be reinvesting during a declining interest rate environment, hence maintaining a bond ladder involves reinvestment risk. This is one of the major risks in building a bond ladder and should not be overlooked.

It is always best to construct bond ladders during rising interest rate environments, but certainly no one can guarantee what will happen to interest rates once a ladder is established. These are careful considerations that need to be factored into one’s own personal situation and something that certainly deserves further attention prior to investing.

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?

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AVERAGE MATURITY

AVERAGE RETURN

6 years

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INITIAL PORTFOLIO FUTURE PORTFOLIO

Two-year bond

5.75% i interest

2 yrs. out

Four-year bond

6.00% interest

6.00% interest

4 yrs. out

Six-year bond 6.25% interest

6.25% interest

6.25% interest

6 yrs. out

Eight-year bond 6.50% interest

6.50% interest

6.50% interest

6.50% interest

8 yrs. out

Ten-year bond 6.75% interest

6.75% interest

6.75% interest

6.75% interest

6.75% interest

REINVESTMENT 6.75%

6.75%

6.75%

6.75%

6.75%

6.75%

6.75%

6.75%

6.75%

6.75%

6.25%

6.45% 6.60% 6.70% 6.75%

6 years 6 years 6 years 6 years

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As a side note, you will frequently hear investors refer to bonds as being “short term”, “intermediate term”, and “long term”. Gener- ally, just know that a short-term bond is one that matures in less than five years, an intermediate bond in five to 12 years, and a long-term bond in over 12 years.

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.

Conceptually, corporate bonds are broken down into two categories: investment grade and below investment grade (aka “Junk Bonds”). Investment grade bonds bear less risk than Junk Bonds, so as a rule of thumb, if you see a bond in your ladder paying an abnormally high rate of interest, high chances are that it is a junk bond.

The chart below summarizes the different ratings each company places on bonds. Keep in mind that a bond ladder can also incorporate Certificates of Deposit and government-issued bonds. For purposes of this section, however, I am focusing primarily on corporate bonds, which typically comprise the majority of the bond ladders I construct, and are the ones I have seen in many other portfolios.

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High Grade:

Moody’s Best quality, smallest degree of risk.

S&P Ability to meet financial obligation on the bond is extremely strong.

High Grade:

Moody’s High quality by all standards. Not as strong as higest grade.

S&P Ability to meet financial obligation on the bond is vey strong.

Upper Medium Grade:

Moody’s Contains many favorable investments attributes, secure.

S&P The issuer’s capacity to meet its financial obligations is strong

Medium Grade:

Moody’s Speculative characteristics.

S&P The issuer’s capacity to meet its financial obligations is strong.

Investment Grade Moody’s S&P

Aaa AAA

Aa1, Aa2, Aa3 AA+, AA, AA-

A1, A2, A3 A+, A, A-

Baa1, Baa2, Baa3 BBB+, BBB, BBB-

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Speculative Grades:

Moody’s The future of these bonds cannot be 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.

Highly Speculative Grades:

Moody’s These bonds are of poor standing. Such issues may be in default, or in significant danger of not meeting obligations.

S&P These bonds are vulnerable to nonpayment, and are dependent upon favorable economic conditions for the issuer to meet its financiaal commitment.

Default:

S&P These bonds are in payment default.

Below Investment Grade Moody’s S&P

Ba1, Ba2, Ba3 BB+, BB, BB-

Caa1, Caa2, Caa3CCC+, CCC,

CCC-

D

B1, Ba2, Ba3 B+, B, B-

Ca CC

C C

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The Power of Dividends Using stocks to generate income

Most investors have some familiarity with stocks. Each share of stock you hold represents actual ownership in a company. Thus, as a large or even a small stockholder, you stand to gain or lose money based on how that company performs.

Stock investments in your portfolio can increase in value in one of two ways: By moving up in price, or by generating income in the form of dividends. The latter tends to be underrated, so I’d like to spend some time discussing it.

First, let’s review our understanding of dividends. When a company makes a profit, a portion of that money is often distributed to its stockholders (individual stockholders or mutual fund shareholders) in the form of cash. That distribution is called a dividend.

Dividends are typically paid by large companies that generate regular profits but are too mature to grow significantly. Examples of those companies are General Electric and Coca-Cola. Fast-growing

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companies in new industries such as telecommunications and biotechnology seldom pay dividends. Instead, they reinvest their profits in technology that will encourage the company’s further growth. 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.

During the 1990s, however, dividends declined as many companies reinvested their profits in an attempt to generate much-desired growth. By the time the bull market ended in 2000, according to Smartmoney.com (October 7, 2002), the average dividend yield on stocks in the S&P 500 had declined to 1.5%.

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.

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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.

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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.

Holding preferred stock, like common stock, means you have ownership in a publicly held corporation. Yet preferred stockholders are in a different class, which generally has priority over common stockholders when it comes to earnings and assets in the event of liquidation. For instance, if the company goes bankrupt, preferred stock dividends are paid after the company’s debt but before dividends on the company’s common stock.

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

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preferred stocks have a stated dividend which must be paid before dividends are distributed to those who hold common stock. Dividends typically range from 5% to 9% per year and are paid quarterly or monthly. And, most preferred stocks are eligible for the 15% tax rate on dividends (preferred stocks issued by real estate investment trusts, or REITS, being the notable exception). So if you’re looking for less volatility, and a higher cash return with more liquidity than bonds for your retirement portfolio, preferred stocks are worth considering.

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.

As with any investment, some preferred stocks are of a better quality than others. One way to determine the quality is by looking at the stock’s rating. Like corporate bonds, preferred stocks are rated by Standard & Poor’s or Moody’s. Although the agencies use different scales, the general rule of thumb is much like a school report card: You want to get an A, and the more the better. Anything below a B grade is garbage.

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

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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?

Another key detail to understand: The maturity date, which on preferred stocks can often be quite lengthy. Similar to a bond, preferreds do have a maturity date, and those dates are sometimes very, very long. Stay away from the long maturities – the higher interest rates go, the quicker the value on the preferred will drop. As much as possible, stay with short-term preferreds with higher credit quality.

So before you rush to take advantage of investing in a “preferred” class of stock, be sure you know the answers to these and other issues. If you’re unable to find the answers on your own, ask someone who’s qualified to help you.

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Real Estate Without the HeadacheUsing REITs for income

Many investors want to participate in the real estate market – with good reason. Real estate can help diversify a portfolio of stocks, bonds, and cash. And although past performance is no guarantee of future results, recently the real estate market has being performing well.

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

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likely prompted builders to start work on more homes. Other data suggest that the housing boom is moderating: Average U.S. home prices increased 12.02% from the third quarter of 2004 through the third quarter of 2005. That represents a 2% decline from the previous year’s approximately 14% increase.

The difficulty of investing in the real estate market in part led Congress to enact a law in 1960 providing for the creation of real estate investment trusts, or REITs. REITs are companies dedicated to owning and sometimes operating income-producing real estate such as apartments, shopping centers, offices, and warehouses. Essentially, REITs allow investors to participate in the benefits of owning larger scale real estate – often commercial properties – which tend to be less volatile than the residential real estate market.

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.

RegulationPublic 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.

LiquidityInvestors 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

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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.

DividendsPrivate 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.

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Government-Backed Mortgage SecuritiesIntroducing Ginny Mae

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.

How do you know if GNMAs are a good investment? First, let’s go over what they are. Certain U.S. government agencies are authorized to sell debt instruments, or bonds. GNMAs are debt instruments issued by the Government National Mortgage Association (GNMA), which is part of the U.S. Department of Housing and Urban Development (HUD). Essentially, the Government National Mortgage Association packages or pools together mortgages. Bonds based on these mortgages are issued in denominations of $25,000. GNMA investors are paid monthly distributions that represent both interest payments and principal repayments on those mortgages.

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Most investors have a hard time scraping together $25,000, so those interested in GNMAs usually purchase shares of a mutual fund that invests in them. Because GNMAs are backed by the full faith and credit of the U.S. government, many investors think GNMA funds are “safe”. But this guarantee is limited; it covers timely payments of principal and interest on the loans underlying the securities while the price of the securities will still rise and fall. As a result, the value of a mutual fund that holds them will fall too.

The major price fluctuations of GNMAs are related to prepayment risk, which is the risk that homeowners will pay off their mortgages early. And you can get an idea of how many homeowners are likely to do that by looking at the economy.

GNMAs are also affected by changes in interest rates. When interest rates decline, people with mortgages usually refinance at the lower rates. As they do so, more money is returned to the GNMA pool, and GNMA fund managers in turn, are forced to reinvest that money at prevailing lower interest rates. Therefore, GNMAs tend to perform poorly when interest rates are declining.

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.

If GNMAs usually provide investors with poor returns when interest rates are either rising or falling, you may be asking, just when do GNMAs tend to perform well? The answer: When interest rates are stable, or rising only modestly. It’s at those times that GNMAs are inclined to earn more than comparable bond funds.

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

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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.

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Understanding the Effect of Interest Rates

Duration: What is it?

Many of us first became aware of bonds – in the form of savings bonds – when we were children. Years ago, they were thought of as a good way to save money. Chances are, you received a bond or two very early in your life. It may have been your grandparents, or your aunt and uncle who gave you a bond for some special occasion. Years later, when you cashed them in to buy your first car, a guitar, or some other “necessity”, it was kind of neat to see that bonds bought at roughly half their face value could later be redeemed for much more. Bonds are still considered, by many people, to be a very safe investment and a component that can add stability to their retirement vehicle. To some extent that’s true. But it’s not quite that simple.

Bonds have typically been used to compensate for the low return on other interest-rate-sensitive investments, like Certificates of Deposit

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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

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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.

Average duration is an even better reflection of a bond fund’s sensitivity to interest rate changes. That’s because it indicates the percentage change in the price of a bond fund for each 100-basis-point (1%) change in interest rates. For example, let’s say the bonds in Fund A have an average duration of three years. That means, for each change of 100-basis-points in interest rates (which is 1%), the bond fund’s price should move 3% (1% x three years) in the opposite direction of the interest rate change. So when interest rates rise 1%, the bond fund’s price should fall 3%.

Another example: Let’s say the bonds in Fund B have an average duration of 10 years. For each change of 100-basis-points in interest rates, the bond fund’s price should move 10% – again, in the opposite direction of the interest rate change. When interest rates rise 1%, the bond fund’s price should fall 10%.

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

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to average duration. Short-term funds, for instance, generally hold bonds that mature within one to four years. Intermediate-term funds generally hold bonds maturing in five to 10 years. And long-term funds generally hold bonds that mature in five to 10 years or more.

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.

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The Attraction of Bond FundsDemystifying yield

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.

Because this calculation assumes that distributions are constant for a year, and that may not always be the case, the SEC developed another figure called SEC yield and now requires mutual fund companies to quote SEC yield whenever they quote dividend rate.

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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.

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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.

The tax and legal information in this chapter 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.

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Index AnnuitiesIs 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.

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I’ve received many inquiries asking for my opinion about index annuities, but before discussing the specifics of these investments, it’s important to understand the distinction between the types of annuities because people confuse them far too often. To keep it simple, there are essentially three categories of annuities: Immediate, variable, and fixed.

An immediate annuity, sometimes referred to as an “income annuity”, is an account with an insurance company where you invest a sum of money in exchange for an income stream. Once the income starts it cannot be stopped, and you no longer have access to your principal. While these features may sound negative, an immediate annuity could be a good investment for a small portion of your portfolio if it is used to generate a safe and steady income stream that you cannot outlive. Furthermore, income from an immediate annuity can be largely tax-free due to something the Internal Revenue Service (IRS) calls the “annuity exclusion ratio rule”. Be sure to consult with your financial advisor and/or Certified Public Accountant (CPA) for more details on the exclusion ratio based on your specific situation.

A variable annuity is an investment with an insurance company where your money is allocated into “subaccounts”, which typically try to mirror the performance of certain mutual funds. Gains in the subaccounts are tax-deferred until withdrawn, and there are far too many options found within variable annuities these days to outline them in this column. It’s important to mention that these features, such as return of principal, guaranteed growth, income, etc., come at a price and should be investigated closely.

Before investing in a variable annuity, be sure to weigh the fees you pay against the benefits provided. In many cases, you need to be careful about investing in a variable annuity due to the high fees often associated with them. Consider what one woman discovered when she recently visited my office: Upon calling her annuity company to check on her annuity’s fees, we found out she was paying just under 5% per year for “benefits” that turned out to be completely different from what she was told when initially agreeing to the investment.

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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.

A fixed annuity is also a tax-deferred investment with an insurance company, but your money is invested directly with the company itself and not in mutual funds. Returns are based on a fixed rate of return that will not change for the term in which you choose to invest. There are also fixed annuities that offer a rate of return that can fluctuate every year, however they usually have a minimum rate guarantee. So here you have some upside potential and protection of your principal. But another way that the rate of return is determined when you invest in a fixed annuity is by the annuity company “linking” your earnings potential to stock market indices, which is where index annuities come into play. Basically, an index annuity is a fixed annuity that bases its returns on market indices such as the Standard and Poor’s (S&P) 500, NASDAQ 100, Dow Jones Industrial Average (Dow), etc. If the index your money is linked to goes up, you make money. If the index goes down, you won’t lose your principal or prior year’s earnings because gains on your investment are typically “locked in” automatically on your contract’s anniversary date, which is a nice feature of most accounts.

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.

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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.

In addition to limiting the access you have to your money, many companies offering index annuities also limit the return you receive if the indices rise. So now you may be thinking, if index annuities limit my access to my money and to growth, why would I want to invest in them? While those limits may not sound appealing, for the portion of your money that you’ve earmarked for growth and that you absolutely don’t want to lose, I certainly would not discount the peace of mind an index annuity can offer. Many people want to keep their money totally safe yet would like to have the opportunity to participate in the stock market. For that mindset, an index annuity is certainly worthy of consideration for a portion of your retirement portfolio.

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

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market investments that gets locked in at the end of every year. I believe, and I’m sure many people would agree, that the toughest part of stock market investing is knowing how to keep what you’ve earned without giving it back, which makes the index annuity’s annual “lock in” feature an attractive part of the investment.

On a final note, I often get asked if an annuity is a good investment for an individual retirement account (IRA), given the fact that an IRA already has tax deferment. While adding an annuity to your IRA portfolio is certainly overkill in the tax deferment department, it does not take into account the value of investing your money in a safe place that offers stock market participation. And there is something to be said for that feeling of security.

So, is there such a thing as no-risk gambling when it comes to investing? Is an index annuity a good investment? My simple answer is that it depends. As with any investment, there are advantages and disadvantages that only you can determine based on your personal needs, goals, tolerance for risk, etc. But if you want to keep your money safe and have the opportunity for stock market participation, I would recommend considering an index annuity for a portion of your money. After all, I just invested a portion of my risk-averse wife’s IRA into one. Upon further inspection of an index annuity, you may wind up doing the same.

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Variable AnnuitiesShould 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.”

Horror stories abound about variable annuities being used to take advantage of senior citizens. Of course, there are unscrupulous people in every profession, and the financial industry is no exception. Without knowing what you’re getting into, you too may agree to purchase investment products that are inappropriate for you. For that very reason, it’s important to ask plenty of questions and make sure you understand exactly what you’re buying before you invest your money with anyone. As for variable annuities, although it’s true that they aren’t

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good investments for many people, there are some situations in which they make a great deal of sense. Here are the two such instances.

1. You’re saving for retirement and have maxed out contributions to other retirement savings vehicles, such as individual retirement accounts (IRAs) and 401(k) plans.

If this is the case, and you’re currently saving for retirement in a taxable account, a variable annuity might make sense – if you won’t need the money for a number of years. Why? Because you’ll only pay 15% on any long-term capital gains realized in your taxable account, while withdrawals from annuities are taxed at rates as high as 35%. As a result, you’ll probably need 10 to 20 years for an annuity’s tax-deferral benefit to exceed the benefit of a lower tax rate on long-term capital gains in a taxable account. Of course, this depends on your tax bracket in 10 to 20 years as well: The lower it will be, the better the case for a variable annuity.

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.

If you find yourself in one of these situations, a variable annuity may be right for you. But not all variable annuities are created equal, so

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it’s important to know how variable annuities work before diving in. According to the Securities and Exchange Commission (SEC), this means asking a number of questions.

• 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.

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When You Need the Cash NowGetting out of your annuity

Not all investments work out as you’d like them to, whether they’re certificates of deposit, bonds, stocks, or even real estate. With annuities, however, liquidating can be particularly difficult because you often must pay a surrender fee. But even with annuities, you do have options.

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

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circumstances have changed. Perhaps you want to purchase a new home, or are facing higher than expected medical bills, and you need a lump some of cash right now. You want to get out of your annuity, but you don’t want to pay a surrender fee.

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

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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.

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Frequently Asked QuestionsContributions, withdrawals, and penalties

What’s involved in setting up an individual retirement account (IRA)? Surprisingly, more than you might think. It’s not quite as simple as deciding that you’d like to make a contribution for a particular tax year and then funding an IRA. There’s beneficiary selection, which presents other issues you’ll need to consider besides who should get your IRA when you die.

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.

As a financial advisor, I get a lot of complicated questions about traditional IRAs, particularly during tax season. For this column, I’ve chosen to answer five of the most common that I’ve received.

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Q. I will turn 70½ in 2005. Can I still contribute to my IRA? A. Because you will not yet have reached age 70½ in 2004, you will

be eligible to make an IRA contribution for the 2004 tax year (assuming you have had earned income). Since you are over age 50, you qualify for the 2004 “catch up” contribution limit of $3,500. The maximum contribution allowed each year changes, as the accompanying chart shows.

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

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balance on December 31 of the preceding calendar year and the remaining life expectancy of the taxpayer (as determined by the IRS in the RMD uniform lifetime table). If you took money out in years prior to reaching age 70½, your current balance (which is used to calculate your RMDs) will be smaller, but no credit is given toward your future RMDs. In other words, you cannot use an earlier year’s distribution as a credit against a future year’s distributions.

Q. I have several IRAs, a 401(k) plan, a 403(b) plan. Do I have to include the 401(k) and 403(b) balances with my IRAs when determining my RMD?

A. At age 70½, you would be required to take three RMDs: one from your 401(k) pool, one from your 403(b) pool, and one from your IRA pool. Since you have multiple IRAs, once you determine your total IRA RMD, you can either withdraw that amount from each IRA on a pro-rata basis or from one IRA.

A couple of important points need further explanation. First, if you contributed to a 403(b), the money that accumulated in that account before January 1, 1987 does not have to be distributed until you are age 75. So at age 70½, the amount accumulated prior to January 1, 1987 can be excluded from your RMD calculation. Second, employees who are not 5% owners of a business and continue to work past 70½ for an employer offering the 401(k) or other qualified plan they participate in may delay the required beginning distribution date for their 401(k) pool of money to April 1 of the calendar year in which they actually retire.

Q. Is it illegal for a custodian to charge a fee for processing IRA RMDs?

A. No. However, the fees must be fully disclosed to the customer before they are applied. You can most likely find this information in the plan document for your IRA or in a fund prospectus. These disclosure documents must be sent to new customers if a fee exists, or to existing customers if a fee is being implemented or changed.

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Converting to a Roth IRAFactors to consider

Given the recent popularity of the Roth individual retirement account (IRA), many individuals over age 70½ ask whether they should convert their traditional IRAs to Roth IRAs. Essentially, this involves paying income taxes on the traditional IRA assets in the year of the conversion and creating a Roth IRA. Clearly there are consequences to taking this action, and there are many factors to consider before making the move. Let’s review some of them.

FACTOR 1: Can you convert your traditional IRA to a Roth IRA?You may not be eligible to convert a traditional IRA to a Roth IRA. You cannot convert if: 1) your income tax filing status is “married, filing separately”; 2) your modified adjusted gross income exceeds $100,000, regardless of your filing status as a single or joint taxpayer (starting in 2010, this law no longer applies but be sure to speak to your advisor for more details); or 3) you inherited the traditional IRA. In addition,

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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.

FACTOR 2: How will you use your IRA?This is the most important factor to consider in converting your traditional IRA to a Roth IRA. If you intend to use the funds for your retirement, you may not want to convert, because doing so will cause the traditional IRA to be included in your income, in which case it will be subject to income tax. You may instead want to keep a traditional IRA and preserve the tax deferral opportunity. On the other hand, if you do not need to use the funds for your retirement, and you have sufficient assets to pay the income tax due upon conversion, you may want to convert to a Roth IRA and let the new earnings accrue. That way, your IRA can one day be distributed to your beneficiaries tax-free.

FACTOR 3: Do you expect your tax bracket to change?Another factor to consider is whether you expect your income tax bracket to change during your lifetime. For example, if you have little taxable income and are currently in the lowest tax bracket, it may make sense to convert your traditional IRA to a Roth IRA because you will pay taxes on the conversation at a relatively low rate. However, if you now have a lot of taxable income and are in a higher tax bracket, you may want to delay converting until you drop into a lower tax bracket or not convert at all.

FACTOR 4: How do you feel about RMDs?A traditional IRA owner must take RMDs every year once he or she reaches age 70½. But there is no RMD for a Roth IRA until after the owner’s death. So if you don’t want to take RMDs, a Roth IRA may be a better choice for you.

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FACTOR 5: Is it likely that you will want or need to withdraw the money?A Roth IRA owner can withdraw all of the funds from a Roth IRA account tax-free, for any reason, as long as the account has been held for the greater of five years or until the IRA owner reaches age 59½, whichever is longer. So someone who converts a traditional IRA to a Roth IRA at age 40 cannot withdraw the entire converted amount without penalty until age 59½. This may still make the Roth IRA more appealing than the traditional IRA, which limits withdrawals. On the other hand, if the IRA owner is older than 59½ when the traditional IRA is converted to a Roth IRA, the account owner can withdraw any growth on the account before the five-year waiting period is up (and be taxed on those withdrawals). To simplify, if a 60-year-old traditional IRA holder converts $50,000 to a Roth IRA and two years later it’s worth $52,000, only the $2,000 increase in the account is eligible for withdrawal, and that $2,000 will be fully taxable. After the five-year wait, however, the entire value can be withdrawn tax-free.

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.

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Liquidate Your IRAs?Why you may want to cash out

You have a traditional individual retirement account (IRA). You’re retired. And you want to make the best possible estate planning choices. Should you cash out now, when all or part of your IRA’s value will be hit with income tax, to reduce the amount of your assets potentially subject to estate tax? Or should you leave the IRA in place until your death, possibly subjecting it to estate tax, but continuing to defer income tax for as long as you live, except for the required minimum distributions (RMDs) after age 70½?

One question to ask is which of these two approaches would provide a greater benefit to those you have named as your IRA’s beneficiaries? The answer becomes complicated, for a number of reasons. It depends on your particular financial circumstances and estate tax rules, for one. I don’t know your situation, and I don’t know how the estate tax rules will be structured after 2010, which is when the recently enacted estate tax changes are due to expire. As a result, I can’t give you a one-size-fits-all answer, other than it would be best to consult a financial advisor.

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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.

When making your decision as to whether you should maintain your IRA’s status or cash it out, it’s also important to consider who your beneficiary is. If your spouse is your sole beneficiary, your IRA will be included in your gross estate, but it will not be subject to estate tax as it will qualify for the marital deduction. And your spouse may have the ability to roll over your IRA into his or her own IRA or qualified retirement savings plan and continue to defer income tax. On the other hand, if your beneficiary is someone other than your spouse, your IRA will likely be subject to estate tax, assuming that your taxable estate exceeds the exclusion amount of $1.5 million in 2005. The amount of your estate exempt from federal estate tax, and the estate tax rate, will also change over the years, as the following chart shows.

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Federal Estate Tax Exemption Chart

Year Federal Gift Tax Federal Estate & GST Highest Federal Estate Exemption Tax Exemption GST Tax Rates

2002 $1,000,000 $1,000,000 50%

2003 $1,000,000 $1,000,000 49%

2004 $1,000,000 $1,500,000 48%

2005 $1,000,000 $1,500,000 47%

2006 $1,000,000 $2,000,000 46%

2007 $1,000,000 $2,000,000 45%

2008 $1,000,000 $2,000,000 45%

2009 $1,000,000 $3,500,000 45%

2010 $1,000,000 Unlimited N/A

2006 $1,000,000 $1,000,000 55%

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.

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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.

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Beneficiaries and Required Distributions

How your designations affect your heirs

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.

If this scenario applies to you, it’s important to remember two things. First of all, having one IRA account may not be the best choice. Secondly, how you designate the required minimum distribution (RMD) to be calculated for each account is important. The RMD matter pertains to Roth IRAs as well as traditional IRAs. While the original owner of a Roth IRA is not required to take minimum distributions, RMDs are required of Roth beneficiaries.

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If you have beneficiaries whom you would like to treat differently, splitting your IRA into a number of accounts may be advantageous. If there’s a significant age difference among the beneficiaries, setting up separate IRAs can enable those who are younger to maximize their potential for tax-deferred growth. Then, upon your death, the RMDs can be calculated for each beneficiary based on his or her own life expectancy instead of the life expectancy of the oldest beneficiary, as would be the case if there was one account. Younger beneficiaries would then be allowed to take smaller distributions, reducing their current taxable income and leaving more in their accounts to grow tax-deferred.

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.

Your IRA’s RMD will depend on the standardized mortality tables established by the Internal Revenue Service (IRS) and on the designated method of calculation you choose. While the IRS defines who can use which designation, it’s up to you to make a selection. Your choices are as follows: 1) the single life expectancy of the IRA holder, 2) the joint life expectancy of the IRA holder and his or her spouse beneficiary, and 3) the joint life expectancy of the IRA holder and his non-spouse beneficiary. Let’s take a brief look at each one.

Single life expectancy – This designation generally provides for the largest distributions and highest potential taxable income, so it’s most appropriate for IRA holders who plan to withdraw most of their IRA during retirement. If you’re already into retirement, this selection is probably not for you.

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Joint life expectancy with a spouse beneficiary – Using this designation can reduce the IRA holder’s required minimum distribution and current taxable income, and increase the potential for tax-deferred growth. Also, upon the IRA holder’s death, the spouse beneficiary generally has more distribution timing options.

Joint life expectancy with a non-spouse beneficiary – This may be an even better selection. Because the beneficiary may be a child or grandchild, this designation may be most appropriate for IRA holders who wish to maximize tax-deferred growth and leave a legacy for their heirs.

In general, your selection of an RMD designation is tied to your marital status (and should be updated if that changes). Someone who is single, for instance, usually must choose “single life expectancy.” However, there are possible deviations from the standard IRS guidelines. There are also other special rules, like those that apply to non-spouse beneficiaries when determining life expectancy.

Suffice it to say that the matter of designating RMDs and IRA beneficiaries is a complex subject, with too many details to fully discuss here. Just be aware of the potential for problems when setting up your IRA.

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.

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Extending the Life of Your IRATax deferral for the next generation

I meet with a number of clients who have individual retirement account (IRA) balances that they don’t need to tap into for retirement income and they often ask: What is the best way to maximize tax-deferred growth and create an income stream for my beneficiaries? The answer is to establish what’s called a “stretch” or “generational” IRA. This isn’t a different type of IRA, like a Roth. It’s a traditional IRA split into separate accounts for each beneficiary. To illustrate, let me give you an example.

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

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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.

As an alternative to holding a single account, John Doe could set up two separate IRA accounts, one for Bill and one for Denise. If the IRA custodian won’t do so, John Doe can split his IRA assets by transferring them into two separate IRAs. One IRA would list Bill as a beneficiary and the other one would list Denise. This must be done before John Doe’s death or by September 30 of the year following his death.

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.

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Create Your Own Private Pension Plan

Income you can’t outlive

Many financial advisors promote the idea of a “stretch” Individual Retirement Account (IRA). And retirees generally buy into it, leaving their IRAs to their kids, who will supposedly “stretch” the inherited IRAs over their own life expectancies. But it usually doesn’t work that way.

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

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in return receive a generous, guaranteed monthly income for the rest of your life. Whether you’re around for a few more years or many, you can count on the income always being there. The payment amount you will get from this pension depends on a number of factors, but using the average median return for those whom I’ve set up this pension plan for thus far, expect to receive around 7% for the rest of your life, never to change regardless of market and/or interest rate conditions.

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.)

To make things easier, let’s look at a hypothetical example for one particular individual for whom I recently made this arrangement. In the “real world” much more money was used, but for simplicity I’m using $100,000 to help you understand the concept. Remember, everyone is different and there are a variety of factors that will ultimately determine exactly how your plan would work, and if it makes sense for you to consider it.

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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?

2. The locked-in return will depend on three primary factors: Your age, your health, and interest rates at the time the plan is implemented. I’ve created plans that have returned (after cost of life insurance) anywhere from 5%-15%. Typically, the older your are, the better this plan looks.

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.

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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.

5. A key consideration: If you “turn your IRA into a pension,” you no longer have access to the funds you invest, just the income coming from the IRA. To solve that problem, I recommend people use only portions of their IRA and/or have enough savings outside the IRA to eliminate this concern. For the plan to work, you must have additional ample resources for a number of reasons, including but not limited to: An inflation hedge, emergency cash needs, unforeseen emergencies, health care issues, and a variety of other factors.

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

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strategy does for you is lower your cost of insurance, thereby leaving you with a higher rate of return on your “pension.”

As you can see, there is no science to the IRA pension. It can be designed and implemented in any number of ways. As an example, on the flip side of what I just mentioned, I’ve also structured some IRA pensions so that the amount that heirs receive from the life insurance policy is more than the amount used to fund the pension. The way the plan is ultimately designed really depends on only one thing – you. What are your goals? How much income do you need? How much do you want to leave to your children? All these elements need to be explored so that you are happy with the plan.

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.

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Self-Directed IRAsYou 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.

The investment vehicle that allows this option is called a “self-directed” IRA. As with traditional IRAs and Roth IRAs, these self-directed accounts enable their owners to pursue a wide variety of investments, including single-family homes, urban real estate developments, farms, liens, and mortgage notes. You can even use the money to start a small business. The only things you can’t invest in are life insurance and collectibles.

Setting up a self-directed IRA is relatively simple. You open an account with a custodian or administrator that specializes in self-directed IRAs. Two of the larger ones are Entrust Group, Inc., based in Oakland,

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California, and Pensco Trust Company, based in San Francisco, California. You transfer assets from your traditional IRA to the new self-directed IRA and then seek out investments such as real estate. When you’re ready to make a purchase, you simply tell your custodian to cut the seller a check.

Of course, self-directed IRAs aren’t free. Costs typically include an annual custodial fee and transaction fees. Entrust and Pensco, for example, charge $50 to open accounts. In addition, Entrust charges an annual record-keeping fee based on asset size that can range from $125 to $1,750. Pensco also charges an annual maintenance fee which runs from $150 to $1,000.

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.

There is one thing to keep in mind if you’re interested in using IRA assets to invest in real estate: The limitations. A lack of understanding about those limitations makes self-directed accounts “accidents waiting to happen,” according to the Wall Street Journal. What’s the biggest risk? Something that’s usually referred to as “self-dealing.”

According to Internal Revenue Service (IRS) regulations, an IRA is supposed to provide for your retirement, not your current living expenses. So you can’t benefit now from an investment you make in real estate via a self-directed IRA. That means you can buy property and rent it out to a stranger, but you can’t buy property and live in it yourself, or rent it out to a family member. If you do, the IRS could step in and disqualify the IRA, resulting in a large tax bill as well as some penalties for account holders who are younger than age 59½. In other words, you could lose your IRA.

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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.

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Understanding Tax Efficiency Tips to save you money on April 15

Taxes. The word alone is enough to make people cringe. We hate to pay them, and always look for ways to reduce them, but unfortunately, there’s just no way to completely get around them, legally, that is. Good financial planning strategies that can help you lower your tax burden include taking advantage of tax law changes and even paying attention to your investment choices. Then, when you get your tax refund, deciding what to do with that money can impact your financial future too.

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.

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Some mutual funds that invest in stocks and non-municipal bonds can also be considered tax-efficient, at least those that “turn over” or sell fewer of their portfolio holdings. That’s because when mutual fund portfolio managers buy and sell securities often, it translates into more taxes to be paid by shareholders. (Even if you don’t sell or exchange your fund shares, you must pay taxes on distributions you receive from the mutual fund itself.)

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.

Although portfolio turnover is a good indicator of tax efficiency, it’s not the sole measure. Portfolio turnover alone doesn’t reflect the type of selling activity. It doesn’t tell you whether securities were sold at a gain (the result could be a taxable capital gains distribution to shareholders) or a loss (there may be no additional tax, and a loss could even be used to offset capital gains). It also doesn’t tell you whether capital gains were long-term or short-term. That’s important because gains are taxed differently based on how long the security was held.

If you want an objective measure of a fund’s tax efficiency, you can look at its tax efficiency ratio, which is calculated by dividing its tax-adjusted return by its pre-tax return. This is the percentage of the total return that an investor keeps after taxes. The higher the ratio, the more tax-efficient the fund has been.

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.)

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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.

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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.

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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.

Mutual funds with those characteristics – focusing on dividends and turning over less of their portfolios – may be value style funds. Value funds invest in stocks of larger, more established companies, and those companies tend to use their profits to pay dividends to shareholders rather than reinvesting it for their own growth. They also are inclined to invest in out-of-favor stocks and hold on to them for long periods, which results in the lower long-term, rather than short-term, capital gains taxes.

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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.

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The New Tax Law

Mostly good news for investors

President George W. Bush has signed the Tax Increase Prevention and Reconciliation Act (TIPRA) into law, and that’s mostly positive for taxpayers. Capital gains taxes, Roth individual retirement accounts (IRAs), small business deductions, and the alternative minimum tax (AMT) are several of the areas that were affected.

Here are some of the highlights.

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

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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! More Roth conversions starting in 2010. Investors who convert a traditional IRA to a Roth IRA can usually save on taxes at the time they begin taking withdrawals, given the fact that Roth earnings are not taxed (although withdrawals made prior to age 59½ are subject to a penalty). In the past, investors have been ineligible for the Roth conversion in any year in which their modified adjusted gross incomes exceeded $100,000. The TIPRA eliminates this restriction starting in 2010. But don’t get too excited yet: Congress could change its mind before then.

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.

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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.

Hopefully, you will find the TIPRA to be of some benefit.

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Reducing Capital Gains and Estate TaxesTwo trusts that can help

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.

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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.

To summarize the workings of a CRT, when including life insurance as part of the plan, the donor: 1) avoids capital gains tax when donating the asset and selling it; 2) gets income for life from the CRT, which has its own tax breaks given the donation of the asset itself; 3) removes the asset from the estate, which would lower the estate tax, if there is any; and lastly; 4) replaces the donated asset tax-free to heirs through the life insurance policy.

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

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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.

I would strongly urge anyone considering a CRT or PAT to speak with a qualified estate planning attorney. Although the concepts as presented here are somewhat simple, the complexity of the taxation, along with one’s estate and income requirements, all need to be well factored into the decision making process. This is not run of the mill type planning, and it definitely takes an experienced individual to assist you.

That said, don’t be shy. A CRT or a PAT can be an excellent choice in helping you reduce taxes, create lifetime income and of most importance to some – leaving a legacy behind.

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How Will You Spend Your Tax Refund?

Five things financially savvy people do

According to a recent USA Today analysis of Internal Revenue Service (IRS) records, taxpayers overpaid their federal income taxes by 29% in both 2003 and 2004. And the overpayment trend seems to be continuing in 2005. Tax refunds are currently up 4% from 2004, with an average 2005 tax refund of about $2,400.

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.

1. Invest the money in an IRA. As they say, the early bird catches the worm. By investing earlier in

an individual retirement account (IRA) this year, you gain the full benefit of tax-deferred compounding. As a hypothetical example, let’s assume you invest $3,000 in an IRA each year for the next 10

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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.

2. Make an extra mortgage payment. Your mortgage will probably be the largest expenditure of your

lifetime and paying even a little bit extra towards it each year can add up to substantial savings. For example, if you buy a $150,000 home and take out a $120,000 mortgage for 30 years at an interest rate of 9%, at the end of that 30 years, you will have paid over $227,500 in interest alone – in addition to your original $120,000 mortgage. Your total expense will be more than two-and-a-half times the cost of your home. Making even one extra principal payment every year can help lower your total interest charges. Or, if you could pay an extra $100 each month, you’ll save over $82,000 in interest – and pay off your mortgage nine years and two months earlier! Can’t afford $100 a month? How about an additional $50 a month? That will cut your payment time by five years and seven months and save you $52,000. An extra $25 will shave off three years and three months, saving you $30,000. And as little as an extra $10 a month will cut your mortgage payment time by one year and save you $13,500.

3. Pay off your credit card balances. The principle above applies to interest on consumer loans or any

other kind of debt repayment, including credit cards. The national average for credit card debt is $7,000. At an interest rate of 18%, it could take over 29 years to pay that debt off. That’s almost as long as it takes to pay off a typical home mortgage! And the interest paid on the credit card account would be around $18,400 – almost three times the original debt! Paying the debt off, or even paying it down, could save you a lot of money.

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4. Hire a financial advisor. A bigger refund isn’t necessarily a good thing. Getting a refund

means you overpaid on your taxes over the course of the tax year, which means you’ve essentially loaned money to the government – interest free. A financial advisor can help you better plan so you can keep more of that money in your pocket throughout the year.

5. Give your child or grandchild a gift that can last a lifetime. Each state has adopted a Uniform Gift to Minors Act (UGMA)

or a Uniform Transfer to Minors Act (UTMA). These acts allow individuals – such as parents, grandparents, other relatives, and even friends – to set up a custodial account for the benefit of a minor. Let’s assume you’d like to help your 10-year-old grandson David save for college, so you start investing $200 per month, or $2,400 per year for David until he starts college at age 18. With a hypothetical average annual return of 8%, David will have $26,541 in his account when he reaches age 18. If David earns his own college money or gets a scholarship, and the UGMA/UTMA account is left untouched until he reaches age 65, he will have $832,882 in his account (again, assuming the investment continues to grow at 8% each year for 47 years).

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.

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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

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economic factors in case you’ll need to make adjustments to the components that make up your retirement vehicle.

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.

Think that’s no big deal? Think again. According to Federal Reserve Chairman Alan Greenspan, the federal budget deficit is more problematic than any other economic issue in the United States, including the soaring trade deficit and record levels of household debt. Why is this such a problem? The shortfall in government funds has occurred just before a huge portion of the population will need those funds most – the baby boomers are retiring.

The “baby boom” occurred from January 1, 1946 to December 31, 1964. During that period, the birth rate in the United States skyrocketed. More than 77 million babies who were born over those years – called baby boomers – will start becoming eligible for Social Security and Medicare benefits in 2008. But if there’s a federal budget deficit, the Social Security and Medicare wells could run dry. The government could be forced to say, “Sorry, we miscalculated. You’re on your own”.

The Bush administration says it plans to handle the problem by cutting the federal budget deficit in half over the next five years, before the onset of shortfalls hit Social Security and Medicare. But come on, governments aren’t known for their ability to spend less money. Greenspan, who also isn’t convinced that the Bush administration’s plan will work, has even suggested raising the retirement age or scaling back annual cost-of-living adjustments for Social Security.

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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.

What is compounding? To explain, let’s say you make a one-time deposit of $1,000 into an investment account that returns 10% and is compounded annually. At the end of the first year, you’ll have $1,100 – the original investment of $1,000 plus the $100 you’ve earned. At the end of the second year, you’ll have $1,210 – the $1,100 you started the year with and $110 of “compounded” earnings. But that’s just the beginning. Each year, compounding will increase your investment even if you don’t contribute another penny. Eventually, the earnings on earnings could exceed the earnings on your original investment.

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.

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Currency ValuesThe 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.

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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.

Now, the Bush administration expects foreigners, primarily Asian central bankers, to keep the dollar high by continuing to invest huge sums in it. As evidence, it cites a recent government report showing that the United States attracted $91.5 billion in net foreign capital in January, easily covering that month’s near-record trade deficit of $58.3 billion. Why would foreign investors buy a depreciating currency? According to the Bush administration, doing so increases their countries’ exports – which American consumers buy plenty of very cheaply, as described above.

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.

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So what will happen if the world’s central bankers accumulate fewer dollars? The dollar will weaken and Americans will need to borrow more. That could lead to higher interest rates and higher prices, and ultimately, a lower standard of living. Why? Because the opposite of what I described above will happen – U.S. exports will be less expensive and imports will be more expensive, which will be good for the American manufacturing sector, but not so good for American consumers. That’s why I think Americans should be more worried about a falling, not rising, dollar.

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The Price of CrudeOil and your money

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.

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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.

I think most economists would worry more if we were seeing severe energy shortages, as we did in the 1970s. If that happens, the odds of a recession occurring could rise, because when people panic they become excessively cautious, and their loss of confidence can be much more devastating than oil price increases alone.

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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.

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The Threat of InflationRising interest rates and bonds

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.

The price of a bond changes throughout its life in response to many factors, one of which is interest rates. When interest rates go up, bond prices tend to move in the opposite direction, making existing bonds less valuable.

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.

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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.

If you’re still concerned about the effects of rising interest rates on bonds, however, you do have some options.

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

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newly purchased bonds. But if you purchase shares of a fund that specializes in faster maturing bonds, the portfolio manager will be able to replace lower price bonds as they mature.

3. Consider municipal bonds. Municipal bonds – typically debt securities issued by a state or local

government or governmental entity to raise money for building roads, schools, etc. – tend not to be as affected by interest rates as are other types of bonds. This may be because a strengthening economy, which generally accompanies an interest rate hike, can improve issuers’ financial health and bolster the returns on municipal bonds.

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.

It doesn’t hurt to give at least some attention to what’s happening in the U.S. economy. After all, it’s better to make adjustments to your retirement portfolio – if they are needed – than to wish you had.

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Isn’t a Will Enough?Why you may need a living trust

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.

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A revocable living trust is created and governed by the terms of a trust agreement. This agreement lists the assets held in the trust; names a trustee, who is the individual with the power to manage and distribute those assets; and states the beneficiaries, or the individuals entitled to benefit from those assets (such as you and your family).

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.

There are several advantages to having a revocable living trust:

1. It avoids the probate process. As a result, distributions in accordance with the terms of the trust

can occur relatively quickly after your death.

2. Unhappy relatives will find it more difficult and expensive to challenge the provisions of the trust as they will be forced to bring litigation against the trustee.

While wills can be contested, if the will is part of a trust, any assets being passed on through that trust, in accordance with the will, cannot be contested.

3. The trust will bypass the probate process. That makes your estate less subject to public scrutiny than a will

would be. In general, individual retirement accounts (IRAs), annuities, and life insurance policies do not need to be placed in a trust. The beneficiary is listed on each of these assets and, based on federal law, they already bypass probate and their proceeds are turned over directly to the beneficiaries. Yet there are a few reasons why you may want to consider placing these three assets in a trust, and only after meeting with a qualified estate planner should you decide whether to do so.

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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.


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Long-Term Care InsuranceIt’s not for everyone

The years following your retirement are supposed to be your “golden years” – the time of your life when you can enjoy the fruits of your labor. For some, that may mean finally having the opportunity to travel or indulge in a hobby. Maybe it’s golf, spending time with grandchildren, or engaging in some other leisure activity. However you choose to spend your post-work life, the idea is to relish the fact that you don’t have to worry about work anymore.

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.

There’s no doubt about it: Long-term care insurance is a touchy subject. Nobody wants to think about a time when they may be ill or disabled.

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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.

Long-term care is expensive, and many people underestimate the cost. Nationally, nursing home care ranges from $137 to $260 a day, or $50,000 to $95,000 a year, including room and board, drugs, and medical supplies. In-home health care runs more than $300 a day in some parts of the country, according to the New York State Partnership for Long-Term Care and the Connecticut Department of Social Services. Even worse, the costs of long-term care are expected to triple over the next 20 years, according to the U.S. General Accounting Office, which makes planning for care crucial.

Many of us assume that Medicare or Medicaid will cover the expense of long-term care. In reality, Medicare coverage for long-term care is limited. It generally covers only about three months of nursing home care immediately following a hospitalization (and co-pays may apply). While Medicaid will cover some long-term care costs, to be eligible for coverage, you must exhaust virtually all of your personal resources. If you’re single, this may not be worrisome; you’ll have less to leave to your heirs, but you’ll be cared for. But if you’re married, draining your joint assets may not leave your spouse with enough money to live on. The end result is that more than half of nursing home bills are paid out-of-pocket by individuals. And as you can see by the estimates, costs can mount up very quickly.

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?

Essentially, if you either have substantial assets or very little money, bypassing long-term care insurance may be the right choice. Although that may sound crazy, let’s look at the two extremes. If you’re financially well-off and can set aside enough money for four years of long-term

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care ($150,000 to $200,000, plus allowances for inflation) while still leaving enough funds to support dependents, you probably don’t need long-term care insurance. On the other hand, if your annual income is $30,000 or less and your savings aren’t extensive, you’re likely to qualify for Medicaid soon after entering a nursing home, so purchasing long-term care insurance probably wouldn’t make sense for you either.

If you fall somewhere between these two extremes – as most people do – the United Seniors Health Cooperative, a nonprofit consumer organization based in Washington, D.C., recommends you consider long-term care insurance provided you meet four basic criteria:

1. Your annual household income averages at least $30,000 for every person in your household;

2. You have more than $75,000 in saved assets for each person in your household, excluding house and car;

3. The cost of the policy is no more than 10% of your annual income (and preferably closer to 5%); and 4. You could afford the policy if the cost increased by 30%. (It doesn’t make sense to pay for a policy for years and then cancel it.)

Of course, deciding to purchase long-term care insurance is just the first step. Determining at what age it is appropriate to buy a policy and what kind of policy to buy can also be major challenges. How much should you pay? Is it tax deductible? Even if you think you know the answers, it’s best to contact a professional, such as a financial advisor, who is knowledgeable about the subject and can walk you through the options that are available to you. He or she can give you the information you need to help you make a decision most suitable for your situation.


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Medicaid EligibilityEven 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.


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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


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spouse may continue undisturbed. The community spouse does not have to use his or her income to support the nursing home spouse receiving Medicaid benefits.

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.

Of course, this is only the tip of the iceberg. An excellent online resource for more information, with a state-by-state guide, is Elder Law Answers at www.elderlawanswers.com (the source for all Medicare and Medicaid information). And you can always consult a financial advisor for assistance.

I frequently get questions about how to protect assets against the Medicaid “spend-down”. While there are many ways to protect assets, this is a highly complex subject that is beyond the scope of this section. It can be done, and if you are interested in getting more details, I advise you to speak to a qualified Medicaid planning attorney to discuss your own personal situation.


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Medicare Prescription Drug PlansCompare before you decide

Beginning January 1, 2006, everyone with Medicare will have access to a prescription drug coverage program. While that’s welcome news for many retirees, it’s also causing a great deal of confusion. Many people are just not sure of what they’re supposed to do. So if you’re a retiree, here’s what you need to know.

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.


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Do your homework. Information is readily available, and before you make any decision you should compare coverage. If you qualify for Medicare, you’ve probably already received the Medicare & You 2006 Handbook from the government. Another good reference is a brochure called What Medicare Prescription Drug Coverage Means to You: A Guide to Getting Started. If you want to compare specific plan details based on what matters to you most, you can get personalized information from the Medicare Prescription Drug Plan Finder. And, to find out how much you can save with Medicare prescription drug coverage, visit the Medicare Prescription Drug Plan Cost Estimator. All of these resources are available at www.medicare.gov, or by calling 1-800-MEDICARE. The phone line is staffed 24 hours a day, seven days a week.

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.

There are a number of ways to enroll. You can enroll in a new Medicare prescription drug plan beginning on November 15. That’s when Medicare will have an online enrollment center available at www.medicare.gov. You can also enroll by calling any plan’s toll-free number, by mailing an application in to the plan, or by visiting the plan’s Web site. If you want your coverage to start on January 1, 2006 you must sign up by December 31, 2005. You can enroll in a plan as late as May 15, 2006, however if you do so, you won’t receive coverage for the entire year.


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The Gift of a LifetimeSavings accounts for kids

For many people, being a grandparent presents an opportunity to share accumulated wealth with a grandchild. But have you considered giving a gift that can last the child a lifetime? Or encouraging your teenage grandchild to do the same? Consider the following options.

Individual retirement accounts (IRAs) For many teenagers, summer offers a chance to earn some extra cash. But earning money also means your teenage grandchild is eligible to open an individual retirement account (IRA). The teenage years may seem early to start investing, but it can make a big difference.

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

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66, and the investment grows at a hypothetical rate of 8% each year, Marie could accumulate more than $130,000 – money that could be distributed tax-free.

UGMA/UTMA AccountEven 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 ESAA 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

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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?

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��EDUCATION

Not for School Only529 plans for retirees

Your children are grown and you’re well past the thought of college expenses. But you may be surprised to learn that 529 plans aren’t just for couples with college-aged children. They’re for retirees too, thanks to a regulatory loophole that allows them be used to shelter millions of dollars from estate taxes. Could you possibly benefit?

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.

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So why would retirees be interested in these plans? Well, as you probably know, a person can normally give another individual $12,000 per year without tax consequences through what’s called a gift tax exemption. And 529 plans allow people to use five years of this gift tax exemption at one time. So you and your spouse could contribute $120,000 to a single 529 plan account at once. That would certainly reduce your estate taxes!

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.

Of course, there are some caveats. Specifically, the improper use of 529 plans can trigger taxes and penalties. For example, if you group five years of gifts into one year and you die before the five-year period is up, only a prorated portion of the gift will stay out of your estate. Or, if a beneficiary designation is changed to someone in a younger generation, the original beneficiary may have to pay taxes.

Additionally, no one knows what will happen with 529 plan rules in the future. The law governing 529 plans – the Economic Growth

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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.

In summary, 529 plans provide plenty of financial flexibility, so you may want to find out how you can make use of them to accomplish financial and tax objectives for yourself or your family. But be sure to talk to a financial advisor who knows how 529 plans work before attempting to implement any of the strategies discussed in this column as it can get tricky.


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While wrapping up this book, I felt compelled to provide a very brief summary of what I would call my “10 Commandments of Investing.” Consider this my extremely abbreviated summary of the things you should never forget when investing and planning your future. Please be advised: These commandments are not listed in any order of priority, so don’t think of “number one” as being the most important. At some level, they are all very important. On your journey to and through retirement, if you remember only one chapter of this book, try your best to remember this one.

Drum roll, please. Here they are, my “10 Commandments of Investing“:

1. Stick with the indexes. Leave the individual stock picking to gamblers and speculators.

Very few people really understand how to successfully pick individual stocks, and if they do, the news that drives markets today is totally unpredictable, making individual stock picking a highly risky venture. Reams and reams of statistics prove index investing almost always outperforms the financial advisors, money

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managers, and stockbrokers. Stick with the indexes and you’ll likely wind up far ahead of the game.

2. Watch those fees. Wall Street loves investors that don’t watch their fees. For those

investing in funds, check out www.personalfund.com. You might be shocked to find out the total cost your funds are charging you to own them year after year. Especially over the long haul, fees can destroy your returns. Minimize fees as much as possible by investing in low-fee, highly diversified investments such as one of my personal favorites, Exchange-traded Funds.

3. Create a bond ladder. For income, bond funds are the favorites among many advisors.

They’re simple, quick, and unfortunately, usually loaded with fees. Consider laddering bonds instead. Why? Mutual funds consisting of bonds have no maturity dates. If the value of the fund goes down, good luck trying to guess when your principal will “come back.” With a laddered bond portfolio, as long as the bonds don’t default, you have a date when your money will be returned to you. Creating a bond ladder is not as easy as choosing a few bonds funds; it usually requires the assistance of a skilled advisor. But the next time an advisor recommends bond funds for income, be sure to strongly suggest this as an alternative. However, many advisors don’t know how to construct a ladder, and if they have little or no experience doing so, I would suggest finding someone else to be your advisor.

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.

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5. Watch your money. No one else will ever keep track of your money like you will. Don’t

get lazy and stop paying attention. Read your statements every month and monitor your progress and returns. This is your life we’re talking about, and don’t ever forget that.

6. Don’t rush in. You’ve likely heard the saying “only fools rush in”. On every level,

rushing into things can cause great harm. Whether it’s rushing in to get high returns, rushing out as a result of emotion, or rushing into a decision as to where to invest, first pause, take a deep breath, sleep on it, and then make your decision. As a “subset” of this commandment, I would also include: Be careful when listening to others. What’s good for one person is terrible for another. The media does a great job of generalizing advice and investments, and I think that’s an awfully dangerous game to play. Unless someone really understands your personal situation and goals, I firmly believe it’s nearly impossible to make conclusive statements about “what’s good” and “what’s bad.” No good doctor could ever diagnose a problem without getting the answers to some basic questions. If they fail to do this, prescribing a pill can literally kill you. The same is true with investing. Only when a few key questions are answered could anyone really give prudent advice on “what’s good” or “what’s bad” for you. So the next time someone tells you to “stay away from __________,” or “you should invest in_________,” be very cautious. Educate yourself, assess the advantages and disadvantages of the advice you’re getting, pause, then make your decision.

7. Don’t take the risk if you don’t need the return. Many people would do perfectly fine getting 7-10% returns on

their money, yet their portfolios are invested in things that strive for well beyond that. Especially if you’re a retiree, if you doubled or tripled your money overnight, would you go out and buy a fancy new sports car? A mansion on the water? Few of us would. And for that reason, always ebb towards the safer side of investing as much as you possible can.


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8. Get out if something isn’t working. The greatest investors I’ve ever known are the ones who don’t get

emotional about their money. I’m not talking about the Warren Buffets of the world. I’m talking about highly successful investors I’ve met who were schoolteachers, electricians, and small business owners. Some of the best investors I’ve met are those who understand that becoming emotional about an investment often leads to disasters. Easier said than done, I know, but this one is very important: Don’t ever fall in love with an investment. If it isn’t working, cut it off before you really regret it.

9. Understand tax consequences. I’d place this right alongside number two above. Over time, the tax

ramifications of your investments can really help or hurt you. It’s been said that “It’s not what you earn, it’s what you keep.” Amen. You absolutely, positively need to understand the basics of what happens with your taxes when you move money, especially if you are investing in mutual funds that often create taxable events beyond your control.

10. Keep it simple. Only one more commandment? That’s too bad. I can think of

many more favorites – start as early as possible, take advantage of compounding, max out your qualified plans, etc. But if I had to pick only one more point to complete this list, it would have to be keep it simple. I once met a very successful investor who did quite well for himself over many years. His entire portfolio consisted of literally three positions: a Standard & Poor’s (S&P) 500 index fund, a low-cost bond fund and a low-cost international stock fund. Other than some cash sitting on the sidelines, that’s it, and not surprisingly, he did better than most investors I’ve met with phone books of investments to keep track of. While I certainly don’t endorse keeping your entire portfolio in three positions, I can say that keeping it simple is a universal lesson of life itself, and in the world of investing, it allows you to do one very important thing: keep track of what you have and how it’s doing. The more complicated things get, the more room there is for disaster. It really is as simple as that.


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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.

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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.

Finally, don’t be afraid to open up your “manual” once in a while as a refresher. After all, you’re not a mechanic, you’re not required to remember the details of how each part of your vehicle operates, and frankly, that’s what manuals such as these are for.

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.

For more information, visit www.alanhaft.com.

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For more information, visit alanhaft.com

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Economy & Finance

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