Don't Forget These 2009 Tax Breaks!

The year goes by, you get busy … and tax-saving opportunities slip away. So as a reminder, this article is here to reacquaint you with some of the notable federal tax breaks offered this year.

The first-time homebuyer credit. This is the up-to-$8,000 credit available in 2009 to anyone who hasn’t owned a home during the previous three years. (It is subject to phase-outs at certain income levels.) The home you buy has to be your principal residence, and you have to buy it before December 1, 2009. The credit does not have to be paid back.1

The IRA charitable rollover. This is the move that lets your IRA trustee make a tax-free direct transfer of up to $100,000 from your IRA to a charitable organization. This option is scheduled to go away in 2010. You must be age 70½ or older to do this.2

3 don’t-miss deductions for businesses. When it comes to new cars and light trucks used for business means, the maximum first-year depreciation deduction has been increased by $8,000 for cars placed in service before 2010. The Section 179 deduction (that’s the one that lets you write off the costs of certain new and used business assets during their first year of use) is still at $250,000 for 2009, instead of the prior $133,000. The first-year bonus depreciation break of $50,000 is still in place for 2009, and even the biggest businesses can take advantage of it.3

The new car sales tax deduction. Okay, “cash for clunkers” is over, but you still may be able to deduct state and local sales and excise taxes if you buy a car, motorhome, motorbike or light truck. You can itemize the deduction or just add it to the amount of your standard deduction.4

A major tuition tax break. In 2009, you can claim an above-the-line deduction for “qualified tuition and related expenses” relating to the enrollment or attendance of you, your spouse or your dependent at an eligible college or university. While it is subject to phase-outs at higher income levels, the deduction can be as large as $4,000.4

The classroom teacher credit. Are you a primary or secondary school teacher? If you were an educator who worked more than 900 hours on campus in 2009, you can claim an above-the-line deduction for up to $250 of personal expenses for schoolbooks and school supplies that see classroom use. You don’t even have to itemize.4

COBRA continuation. Did you get laid off this year? Were you insured under an employer-sponsored health plan? Well, you may qualify for up to nine months of (COBRA) coverage. As for the company where you worked, it can claim a credit for the COBRA subsidy it extends to you.4

$2,400 in unemployment income tax-free. That’s right: this year, the first $2,400 of federal unemployment compensation benefits you receive are excluded from gross income.4

An extra deduction for state and local property taxes. Do you usually claim the standard federal deduction? If that’s your plan, this year you can take an additional deduction for state and local property taxes. The ceiling is $500, $1,000 if you are filing jointly.5

The capital gains tax break. If you are in the 10% or 15% tax bracket, note that the current tax rate for long-term capital gains is 0% - and it is slated to stay at 0% through 2010.6

The homebuilder tax credit. Do you build homes? If so, you may claim a credit of up to $2,000 for each qualified energy-efficient home constructed and acquired from you for use as a residence. This credit is set to expire December 31, 2009; President Bush’s signature extended it into this year.7

And of course, the exemption from required IRA distributions. The federal tax mandate requiring IRA owners age 70½ to take Required Minimum Distributions (RMDs) was suspended for 2009, but it will be reinstated for 2010. Worth noting: in 2010, anyone will be able to convert a traditional IRA into a Roth IRA.4,8

This is just a sampling. There are other tax breaks out there during this unusual year for the federal tax code, and it is worth asking your accountant or advisor to do some research and/or collaborate to find you as many as possible.


These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.


Citations.
1 federalhousingtaxcredit.com/2009/glance.php [9/18/09]
2 irs.gov/newsroom/article/0,,id=203313,00.html [2/4/09]
3 smsmallbiz.com/taxes/4_Stimulus_Plan_Tax_Perks_for_Businesses.html [3/4/09]
4 articles.moneycentral.msn.com/Taxes/CutYourTaxes/12-tax-breaks-get-em-while-you-can.aspx?page=1 [7/20/09]
5 hrblock.com/press/Article.jsp?articleid=22617 [1/28/09]
6 forbes.com/2008/02/13/capital-gains-taxbreak-pf-education-in_dp_0212investopedia_inl.html [2/13/08]
7 acca.org/blog.php?id=303 [1/6/09]
8 usatoday.com/money/perfi/columnist/block/2009-08-31-roth-ira_N.htm [8/31/09]

Getting a Mortgage Today

What can you do to help yourself get pre-approved?

Remember when getting a mortgage was easy? Now, you need pre-approval. So how can you increase your chances of passing that all-important test?

You want a lender in your corner. Sellers and agents don’t want to waste their time working with a buyer who isn’t pre-approved. Why should they contend with uncertainty?

A buyer with a pre-approved loan gets respect when a seller gets multiple offers. A pre-approval shows the seller the size and terms of the loan the bank is ready to greenlight. Commonly, a pre-approval is good for 90-120 days.1

Pre-approval is a whole different level than pre-qualification. You can supply very basic financial information to a bank or lender and walk out with an estimate of how much mortgage you might be able to carry. However, that is no promise. Pre-approval is an actual commitment from the lender to you.

So what can you do to earn that commitment?

Test the waters well before you test the housing market. Visit more than one lender, and see what you can borrow, just how much home you can afford, and what kind of mortgage options you have. Keep in mind that a pre-approval is a pledge that a mortgage lender makes to you, not a contract. Should some other bank or mortgage company make you a more attractive pledge, you are free to switch horses.2

Make your case. Don’t skimp on the documentation you bring to the appointment. Usually, a mortgage lender will want to see the hard data of your financial life over the last couple of years: the bank statements, the federal tax returns, the W2s, the pay stubs. If you earn investment income, bring paperwork showing that you do. If you deposited any big sums into your bank account recently, you’ll probably be asked what that deposit represents.

The amount you are pre-approved for typically reflects three factors: how much you have saved up for a down payment, your FICO score and your current address. It should only take a few business days for a lender to get back to you and let you know how much mortgage it will pre-approve for you.1

Aim to get pre-approved within 30 days. This way, you don’t risk harming your FICO score so much. The majority of credit-scoring paradigms out there don’t penalize your credit rating for home loan, student loan and car loan inquiries made 1-30 days prior to the score calculation.2
Don’t expect all the details right away. When you apply for a loan, your lender is using that day’s mortgage rates to calculate costs and payments, and rates move. So the pre-approval may be light on particulars about the interest rate or the loan type.

Avoid fly-by-night lenders. The seller and the seller’s agent want to see that a reliable, “name” lender is issuing its stamp of approval here, not an obscure Johnny-come-lately. Credibility counts.

Can’t get a standard loan? Don’t forget about the Federal Housing Administration, through which you might be able to arrange a mortgage with as little as 3.5% down. Most lenders can process an FHA loan like a standard loan, and commonly the rates are about an eighth of a point higher than a standard mortgage. Also, remember that first-time buyers have until the end of 2009 to qualify for an $8,000 federal tax credit which can be put toward the down payment and closing costs.1

These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.


Citations.
1 forbes.com/2009/07/01/pre-approval-mortgage-personal-finance-ask-money-builder.html [7/1/09]
2 smartmoney.com/personal-finance/real-estate/7-tips-for-getting-a-preapproved-mortgage/ [8/6/09]

Coping with a Layoff

What can you do to help yourself?

You go to work and get the word … you’re being laid off. Maybe it’s no surprise. Maybe it comes as a shock. The question becomes: what now?

Basically, you have three quick to-dos: leaving work with as much money as possible, securing health insurance for the interim, and arranging unemployment benefits. Beyond these items, stay calm and stay in the hunt – or alternatively, work for yourself.

Negotiate your exit. While no law requires your employer to give you a severance package, some employers do provide them.1 Severance package or not, you may very well receive two weeks pay and perhaps compensation for unused vacation or sick days.

Don’t be meek here. If you’ve been a key employee or simply a good employee, make the case for your company to extend your health coverage a little longer or give you a true severance package. They may see the merit if you have proven yours.

In tax terms, it may be better to receive your severance pay in the form of recurring checks rather than a lump sum. If you get a lump sum, it’s quite possible you could have too much withheld.

If you know you are getting laid off in the next few months, you can request to reduce the amount of withholding taxes on your last few paychecks to give yourself more take-home pay. And if it looks like you are going to receive a lump sum severance before December 31, think about deferring that payment until 2010 so you don’t have to include it on your 2009 tax return.

Keep yourself insured. If you can sign up as a spouse for the plan offered by your spouse’s employer, it makes sense to do it as soon as you can. If that doesn’t describe your situation, then the options are extending coverage through COBRA or keeping up the payments on private life or disability insurance that your company provided.

If you sign up for COBRA at the moment, the federal government will subsidize 65% of the cost for nine months as a result of the federal stimulus. In COBRA, you will have to pay the entire premium on your health insurance plus a 2% administrative fee.1

Sign up for unemployment benefits. As few of us have bank accounts equal to six months or a year of salary, it is wise (not demeaning) to sign up for these benefits. You will want to do so ASAP, because it may take a few weeks for that first check to arrive. In some states, you can receive unemployment checks even if you have been given a severance package – although you may have to wait until the entirety of the severance is issued to you before jobless benefits can follow.1

Remember that the federal government is pulling out all the stops right now. Take advantage of the federal economic stimulus effort, which is directing $500 million toward helping the jobless find jobs. New search assistance, education, and retraining programs are available. The government is also boosting unemployment payments a bit and elongating parameters of eligibility. Currently, the average weekly unemployment check in America is about $300. Jobseekers can receive unemployment benefits for up to 46 weeks – up to 59 weeks in states where the unemployment rate tops 6% for more than three months in a row, which would be just about everywhere right now. Under the stimulus, weekly unemployment checks will increase by $20 – and the first $2,400 of unemployment payments will be tax-exempt.1

Press flesh, not just keys. Despite the buzz surrounding job boards like Monster.com, Dice.com and CareerBuilder.com, an article this winter in the San Francisco Chronicle noted that only about 2-3% of new hires find their jobs through such resources. About 15% of new hires find work directly by applying at a company’s web site, and about 65% find new jobs through that old standby – networking.2

Older employees may actually cope with layoffs better. That’s what a collaborative study coming from the Federal Reserve Bank of Chicago and Columbia University has just concluded. It found that laid-off workers younger than 55 experience a much greater increase in “mortality hazards” than their older counterparts – stress and health risks, addictions, and negative personal behaviors. Perhaps this is because workers over 55 are somewhat less likely to deal with making ends meet and the pressures of raising a family; they may have already thought about (and planned for) a retirement transition and they have the options of Medicare and Social Security now or in the near future.3

Have you been given a gift? That’s one way to look at it: one door closes, another opens. If you have an entrepreneurial ambition, or just suspect that like many Americans you will one day have to be your own boss, then maybe now is the time to talk over your options with a potential mentor – a friend who owns a business or makes a living as an independent professional in your industry. If you are mature and want or need to keep working, you might even think about a life or career coach – someone who can help you see the full range of possibilities, including those that you may not have considered five or ten years ago.

These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Citations.
1 smartmoney.com/personal-finance/employment/4-ways-to-survive-a-layoff/ [7/2/09]
2 sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/12/20/BU2914Q1JE.DTL [12/20/08]
3 usnews.com/blogs/the-inside-job/2009/07/01/the-correlation-between-health-employment-and-layoff-fears.html [7/1/09]

EACH DAY IS A NEW ACCOUNT

If you had a bank account that credited your account each morning with $86,400,
That carried over no balance from day to day,
Allowed you to keep no cash in your account,
And every evening canceled whatever part of the amount you had failed to use during the day,
What would you do?
Draw out every cent every day, of course, and use it to your advantage!
Well, you have such a bank—and its name is “Time”.
Every morning, it credits you with 86,400 seconds.
Every night, it rules off as lost whatever of this you have failed to invest to good purpose.
It carries over no balances.
It allows no overdrafts.
Each day, it opens a new account with you.
Each night, it burns the records of the day.
If you fail to use the day’s deposits, the loss is yours.
There is no going back.
There is no drawing against the “Tomorrow”.
It is up to each of us to invest this precious fund of hours, minutes, and seconds in order to get from it the utmost in health, happiness and success!

A Simple Thought…

“Flatter me, and I may not
believe you. Criticize me,
and I may not like you.
Ignore me, and I may not
forgive you. Encourage me
and I will not forget you.”

Credit Cards: The New Rules

With the stroke of a pen on May 22, President Obama authorized major changes to the way American credit card issuers do business. In the President’s view, these are “common-sense reforms designed to protect consumers.”1 Consumer advocates are rejoicing, but banks are already contending that the reforms might be bad for cardholders in the long term.

Here is a rundown of the notable changes within the Credit Card Accountability, Responsibility and Disclosure Act (CARD). Some of these changes will happen in 2010; others will occur within 90 days.2

No surprise interest rate increases. If your credit card company wants to hike interest rates, it will now have to inform you at least 45 days beforehand and tell you why in writing.3

New restrictions on retroactive rate increases. Under the new law, the interest rate on an existing balance cannot increase unless the customer is more than 60 days behind on a payment. Get this, though: even if that happens, the credit card company will have to restore the prior, lower interest rate if you pay the minimum balance on time for the six months that follow.3

Statements mailed 21 days in advance. The new rules say that your monthly bill has to be mailed to you by the credit card company at least 21 days prior to the payment due date.2

Pay before 5:00pm EST and you are on time. That’s right: all credit card payments made before 5:00pm Eastern Standard Time will be considered paid on that day. If your payment due date falls on a holiday, a weekend, or any day on which the credit card issuer is closed for business, your payment cannot be subject to late fees.2

You can choose to attack the highest interest rates. Do you pay different rates for different kinds of credit card transactions? Under the new law, you will be able to apply any payment above the minimum to your highest-rate balance. 2

More protection for teens and young adults. The new legislation bars companies from issuing cards to most people under age 21. Those younger than 21 will only be able to use a credit card under one of the following conditions:
They can prove they have the means to pay the debt (or their parent or guardian promises to pay it off if they default)
They are emancipated minors
They are designated secondary cardholders on a parent or legal guardian’s account.2,4

No exploitation of college students. College-age Americans will still be able to get credit, but within reason. Account limits will be either 20% of their annual income or $500, whichever is greater. So this market will grow less attractive for credit card companies.2

An end to universal default. If you make a late payment to one credit card issuer, other issuers will not be able to hike your rate as a consequence.2

Cardholder permission for over-limit fees. Credit card companies now have to get your OK before they can process a transaction that would put your account over its limit.2

Why are credit card companies crying? Cut out all the nickel-and-diming, and credit card issuers will be left with lower revenues. So where are they going to get the money back? Think reduced rewards for cardholders. Think new and inventive annual fees.

Edward Yingling, president and CEO of the American Bankers Association, fears that now “less credit will be available generally, which means some consumers and small businesses will not be able to obtain credit cards at all, particularly younger people and start-up small businesses.” But Sen. Chris Dodd (D-Conn.), the driver behind CARD in Congress, thinks such claims sound “a little like Chicken Little.”5

Joshua D. Tirado is a Representative with Cambridge Investment Research and may be reached at www.JTFinancialgroup.com, (610) 438-8595 or josh@JTFinancialgroup.com

These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.


Citations.
1 cnbc.com/id/30872387 [5/22/09]
2 smartmoney.com/personal-finance/debt/tighter-credit-card-rules-pass-senate-milestone/ [5/22/09]
3 latimes.com/business/la-fi-credit-card23-2009may23,0,2309867.story [5/22/09]
4 cnbc.com/id/30873054 [5/22/09]
5 cnbc.com/id/30872387 [5/22/09]

U.S. Savings Bonds...Subject to Tax Penalties

You weren’t expecting the second half of that title, were you? Well, it is sad but true. Many people are subject to income tax penalties every year because of their US savings bonds. The government runs on taxes and expects their cut from profitable investments, such as bonds. This is where the trouble starts for most people. The IRS mandates that once a bond passes its final maturity date, the accumulated interest must be reported on that year’s federal income tax return. But if you continue to hold your bond beyond its maturity, not only will you owe taxes when you cash it in, but quite possibly a penalty as well. The IRS views it as though you are holding out on them and not cashing in your bond and paying them their fair share. They frown on underreported unearned income.

So what should you do now? First, go find your bonds and check the maturity date. If they are past maturity and it’s within the first three years, you may be able to file an amended income tax return and claim the income. If it is more than three years overdue, then the sooner you cash it in and pay the corresponding taxes the better. There will be a lesser chance that you will be penalized, and if you are penalized then it will be a smaller amount. Now please do not take my word as law, and check with your CPA or tax professional.

Besides, there is no point in holding a bond past maturity since you will not earn any more interest. Please also remember that these bonds are exempt from state and local taxes, but as we have discussed, are subject to federal income tax. So when considering bonds, please choose wisely, and check your current bonds so you can stay tax penalty free.

The Hot Dog Vendor

There was a man who lived by the side of the road and sold hot dogs.
He sold very good hot dogs.
He put up signs along the highway and advertised in the newspaper telling how good they were.
He stood on the side of the road and cried: “Buy a hot dog, Mister?”
And people bought.
He increased his meat and bun orders.
He bought a bigger stove to take care of his trade.
He finally got his son home from college to help him out.
But then something happened.
His son said, “Father, haven’t you been listening to the radio and watching TV?
There’s a big depression.
The foreign situation is terrible.
The domestic situation is worse.”
Whereupon the father thought,
“Well, my son’s been to college, he listens to the radio and watches TV and he ought to know.”
So the father cut down on his meat and bun orders, took down his signs and cancelled his newspaper ads and no longer bothered to stand out on the highway to sell his hot dogs.
And his hot dog sales fell almost overnight.
“You’re right, son”, the father said to the boy.
“We certainly are in the middle of a great depression.”

401k In-Service Withdrawals

We all know that you can’t take out your 401k money while you are still working for that company…or can you? The answer is maybe. Some retirement plans allow what is called an in-service withdrawal, or non hardship in-service withdrawal. No one really publicizes this part of the plan. You have to ask your human resources or benefits person to see if your plan has this provision. For many companies the benefits person may not even know without checking, but one way or another you should check the “Summary Plan Document”. This form lists all of the provisions available in your retirement plan. If you are lucky enough to work for a company that offers these withdrawals, you still need to check the fine print. Some plans only allow 10% of your balance to be moved, while other will allow the entire balance. In general, plans limit these withdrawals to about 20-30% of your current balance. There can also be other stipulations. Many plans allow you only to pull out the money that you have contributed and not the company match money. Also, some will suspend your company match for 6-12 months if you take a withdrawal. The last provision is that you are usually limited to how often a withdrawal can be taken.

Once you cut through all of the red tape, and determine that you can take some of your money, it opens up many investments opportunities for you. One of my biggest gripes about 401k plans is there lack of choices, and poor disclosure of fees and expenses. If you can take this money out, you can decide where to invest it and what kinds of fees you are comfortable paying. 401k plans are limited in what they can offer you as far as investing, but on your own, you have unlimited choices. One common fear is that once you pull this money out, you will be subject to taxes and a penalty. Not so, if you plan properly. When your 401k people process your request for this distribution, you let them know which investment company or brokerage account custodian to make the check payable to. You never touch the money and it is moved easily into an IRA with a company of your choosing. If you take the money yourself, you have 60 days to invest the money in an IRA, and you will avoid the penalty and taxes. This second method is far more of a pain then it is worth. Just have your company cut the check to where the money is going in the first place and save yourself the hassle.

Utilizing this provision in your retirement plan, can give you and your advisor much more flexibility in designing the best plan for you. Whenever I come across a new client (especially executives) who have almost all of their investments tied up in 401k plans and company stock, I check for the in-service withdrawal. It is one of the only ways to free up some of this money and get proper diversification for the client. This little known tool may work well for you as well. Another use for this tool is to start taking income payments from your 401k while you are still working. This isn’t used often, but in-service withdrawals used in conjunction with IRS rule 72(t) can provide penalty free income payments from a portion of your 401k, while you are still working at the company and are enrolled in your 401k plan. For more advice on any of these techniques, please feel free to contact my office. Until next time, Happy Investing.

Why You Can't Save Now

No matter at what stage of life you may be, there are simply bound to be many good reasons why you cannot save money at this particular time.

AGE 20-30 I can’t save now. I’m just getting started in my life, I don’t make a lot yet, and I’m entitled to a little fun while I’m young. There is plenty of time. Wait until I start making a little more. Then I’ll save.

AGE 30-45 I can’t save now. I’ve got a growing family on my hands. Children and a house cost a lot of money. It takes all I have to keep them going. As soon as they are a little older, it will cost less. Then I’ll save.

AGE 45-55 I can’t save now. I’ve got two children in college. It’s all I can do to pay their expenses. In fact, I had to borrow for their tuition last fall. This is the most expensive period in one’s life. I can’t save a penny.

AGE 55-65 I can’t save now. I know I should, but things aren’t breaking like they were. It’s not easy for someone my age to step out and get a better job. I will have to ride along where I am. Maybe something will break.

AGE 65 I can’t save now. We’re living with my son and his wife. My Social Security doesn’t go far. I wish I had started saving twenty years ago, but it’s too late now. You can’t save when there’s no income.

THE CONVENIENT TIME TO START SAVING NEVER COMES…

Risky Business

No, not the old movie with Tom Cruise. If you haven’t seen it, it’s a classic, but still fiction. The types of risks I’m talking about are very real and directly impact your money. Most people have heard that investing can be risky. Many people even know that the level of risk can be associated with the volatility and potential return of an investment. What many people don’t know about is the different type of risks your investments are exposed to. I will briefly touch on a couple of the biggest and most overlooked.

First there is business risk. This is fairly strait forward. If you own stock in a company, those shares of stock are considered tiny pieces of ownership in that company. So when the company does well, your stock goes up because the company’s value goes up and vice versa. Business risk is when your particular business does not do well and your stock value drops. Management may be to blame, a faulty product, or a general change in customer preference. Whatever the case, if your company does not do well, neither will you. This type of risk can be one of the easiest to counter act. By owning a mutual fund, you are exposed to tens or hundreds of different companies’ stocks. So if a few of them don’t do so well, they won’t affect the mutual fund as a whole very much. It allows you to spread your risk out so one company failure won’t wipe you out.

The next type of risk is what I call sector risk. This is where only a particular part of the market or society is affected. The best example of this is when the “tech bubble” burst in 2000-2001. Most of the market was not negatively affected, but tech companies lost a lot of value or went out of business on a daily basis. There was a trickle down affect to some other parts of the stock and bond market, but the damage was tech specific. This is why good advisors advocate exposure to different parts of the market with your money. If you only owned tech during that time period, there is a good chance you got wiped out. If you only had 10% of your money in tech, then you only lost a portion of that 10%. That is why owning some large companies, small companies, bonds, real estate, and other investments is a good idea. They all have pros and cons, but if something falls apart, it normally won’t hinder all of your different holdings.

Now we are moving on to market risk. This is what we are experiencing right now. This is when the entire market goes up or down. Your individual company or mutual fund will have trouble escaping the pull of the entire market. This most often is fueled by scared people who sell off investments in a panic. Or, people, who get greedy and caught up in the moment and buy investments without understanding them or checking to see if they fit into their investment strategy. This type of risk can be further reaching than the other types and will affect a broad spectrum of investments. Regardless of the reasons behind these market moves, it is akin to throwing out the baby with the bathwater. Your investments will either lose or gain despite what you think should happen.

Another type of risk is political. This could be seen recently with the stock market reacting to the election of a new President. Also, when government makes policy changes or announcements, the markets will react to this information. Even political elections in other countries will affect our domestic markets in the US. The world is becoming a smaller place all the time. Political events no longer shape one country, but now can have far reaching effects on economies on the other side of the world.

The last risk I will cover (since I worry about the level or boredom I can render via this topic) is inflation risk. This can be looked at from the standpoint of our current economy. As the recovery takes place we may enter into a period of inflation where goods and services will go up in price. That is to say your money’s purchasing power goes down every year, as goods and services get more expensive. There will almost always be mild inflation and that is actually a sign of a healthy economy. So just remember, over time, your money will be worth less as the costs of products goes up. This is one more reason why investing can be so important. If your savings account or money market is paying a low interest rate, that money will actually lose value over time if it continues to sit there. That is not to say that you should not have adequate savings or an emergency fund. You should have money put aside, but once your savings are adequate, adding more money will become counterproductive. Over time investing in the market can help you to make a large enough return to make some money after you consider inflation and taxes.
....Until next time, I wish you happy and smart investing.

Pension: An Endangered Species

Pensions may soon become a distant memory in all but a handful of jobs. Just a few years ago 28% of employees were working towards receiving a pension. As of last year that number was down to 18%. If you look back just one generation that number was almost 75% of the population. As the American economy has headed towards service based business, not manufacturing business, the number of pensions has dropped significantly. Pensions used to be the norm. However, companies found this type of retirement plan to be very expensive to adequately fund, maintain, and disperse. Pensions are referred to as “defined benefit” plans. This means that once an employee retires, the amount of their retirement is calculated and the chosen payout frequency and amount are set. Then it continues on until the person passes away, and in many cases will continue to pay a reduced benefit to the surviving spouse until he or she passes away. In this respect, the company has “defined” the benefit amount by promising how much your check will be very month. It is also for the actuaries to figure an almost definite amount of money that will need to be paid out over the course of one’s retirement.

This type of plan became problematic for the companies offering them. People began to live much longer and receive their pension payments for many more years. When social security was enacted a person’s typical retirement was only 2-5 years. Many pensions were only paid out along that same time line. Retirement today can routinely last 20-30 years. So, these companies simply cannot afford to pay out an employee for this length of time. Another issue with pension plans is the amount of money that must be pumped into them and the amount of risk that can be taken. You probably noticed in recent headlines that some pension plan administrators ignored some guidelines and lost pension money. But by and large, pension plans are good stewards of the company’s money. The company is making ongoing contributions while the person is working. So they can’t wait for a person to retire to put his or her money into the pension plan. The money the company contributes could be used to expand and grow, but rather it has to be put aside. To compound that problem, the pension plan must be very cautious with its investing. Preserving the principal becomes job number 1. The pension must then hoard large amounts of cash and invest it very conservatively, limiting its ability to make money once you consider inflation and taxes. All of this combined to make pension plans large, expensive drains on the companies offering them.

The solution was found in what is known as “defined contribution” plans. Well, at least the “solution” as far as companies are concerned. These are your 401k, 403b, and other present day retirement plans. The “defined contribution” part is directed at the fact that the payout is not guaranteed, but what is quantifiable is the amount of money you contribute to a plan, and the amount the company will contribute on your behalf as well. Now, many of these plans either have no employer match or something along the lines of 50 cents on the dollar up to 3-6%. Each plan can be different, but I’m sure you can see how this will cost a company far less money. The burden of saving towards your retirement is now on you, the employee. The company can spend less, offer you a 401k, and not be on the hook for any payments that may extend 30 years into your retirement. The company also illuminates investment risk since it doesn’t have to manage a portfolio any longer. All of the investment decisions are up to you…for better or for worse. It does give you much more flexibility and a number of choices. In fact, if you are the type of person who switches jobs every few years, this type of retirement plan is a better fit for you. You can usually enroll fairly soon after starting a new job and the plan is portable. It is easily rolled into an IRA and taken with you. If however, you plan on making a career with one company or are a safer minded person who likes guarantees, then a pension plan would be a better choice.

Please stay tuned for my next article in this series on pensions. I will cover how to plan effectively for retirement while incorporating your pension. We will also cover the 3 biggest mistakes people make with their pension.

The Upcoming 2009

As I write this, the market has mounted a comeback over the past two weeks. This is undoubtedly good news for everyone. But I assure you that this is not going to be a steady rise back up the charts. The market will go back down again. Maybe we have seen the very bottom, but no one can be sure of that until we are further out and can look back. This will be a roller coaster year for investments. The stock market is very efficient at taking information, or the perception of new information, and almost instantly reflecting it in the price of stocks. There is so much happening in the country right now and so much information immediately accessible, that any major announcement can and will directly impact the market. In fact, the assumption of a major announcement can be priced into the market days before the news is even released. The glut of information and very excitable people will create a roller coaster for the rest of this year. I’m not making 2010 predictions, but I do think this year will see many ups and downs. I also expect the market to finish the year better then it finished 2008. I know this doesn’t seem like much to hope for, but remember; this financial crisis was not created overnight and cannot be fixed overnight.

Many people are scared right now. Investments have gone down and some investors have headed for the hills. The worst time to make decisions, especially financial ones, is when you’re acting out of fear. Fear clouds judgment and causes otherwise smart people to do dumb things. Greed and fear are the two most prevalent emotions when it comes to money, with fear being the worst. This is because the human brain perceives a small loss with much greater intensity then it does a small gain of equal size. For instance, most people report that fear of losing 10% of their money evokes a stronger response than the thought of making 10% on their money. Both outcomes involve 10%, but the fear of losing bothers us much more and sticks with us much longer. Therefore, when a market such as this comes along, fear drives many people to behave in uncharacteristic ways.

I say this, to first try to calm you. Take a deep breath and don’t become a victim of fear. Unless you need to use every penny of your money all at once in the next couple of years, you will be alright. We know that there is risk and investments can go down. This is why we plan and diversify. Our goal is to minimize any losses while putting you in the best possible place to gain from the recovery. Investing in the market will be a fact of life for your entire life. To keep pace with inflation, cost of living, health care, taxes, and all the while trying to make some money, no other place can offer these benefits like the market can. As you get older your exposure should be reduced, but very few people in the world today will be able to avoid the market entirely. So if you think of this in terms of needing to be in the market for life…your time horizon just got longer. Another consideration centers on the market and your retirement. You will not need all of your retirement money on the very first day you retire. Your retirement money needs to provide you with an income after your full time working life is done. This time frame can stretch to thirty years or longer. The increasing cost of living can impact your nest egg significantly over that many years. Even a modest gain from your investments will allow you to stave off the affects of inflation and allow your money to last longer and continue working for you. So even if the recovery takes a little longer, you have longer to let the bulk of your money continue to grow.

Those of you who have stayed in the market and continue to contribute will be rewarded. You are buying in at lows that haven’t been seen since 1997 and you will be in a better position for it. The people that make the most money are those that get in on the ground floor. Well my friends this is the ground floor that has not been around for 12 years. Now is the time to get in. This window in time allows us to plan for the ideal market approach of buy low and sell high. With that in mind, I hope you are all well and spring time has arrived. Hang in there.

Smoke ‘Em if You Got ‘Em

For those of you who enjoy a good cigar, the following story will be rather easy to follow. For those of you who do not, it will still be easy to follow. So let’s get started. I would like to demonstrate how my smoky pastime mirrors what’s going on in the economy. More importantly, is how my story will also illustrate how to handle this market. So on occasion I enjoy a good cigar. I have also discovered that a number of my clients also enjoy a good cigar on occasion. So giving cigars as small gifts to my clients has become a fun hobby. I realized that buying the cigars buy the box is very cost efficient. To the point where I could give away quite a few and still save money compared to buying them individually. Problem is that once you have them, they need to stay in a humid and preferably constant temperature environment to keep them fresh. Once they get hard and dried out they are no fun to smoke, so keeping them moist and happy is key. This story will pick up soon. So I receive as a birthday gift a large lovely humidor. (A humidor is the box that you keep cigars in to keep them fresh. You set it up so inside the box stays nice and humid.) Cigars are nothing more than processed tropical plants and like to stay tropical. I prepared the humidor, what’s referred to as seasoning it. (Not all that different than seasoning a pan.) Then go about buying some of my favorites to store in there. Everything seems to be going along just fine.

This last part is what you have been doing in the market. You take the time to save and invest. You try to be prudent and pick quality investments and you know you have enough time to invest for a while. This is very similar to my buying in bulk to save money and creating the right environment for my cigars, just like the right environment for your money to grow. Here is where my story gets bad. I did not season my humidor quite enough and the humidification device that came with my humidor was not big enough to handle the volume. My humidor is larger and the same humidification device is used for my smaller humidor as well. Everything seemed to be working fine until one day I lift the lid to check on my cigars only to find the humidity way too low and a pile of dried out cigars. This is the same point where the market went bad. We did what we were supposed to do, but we did not know the trouble brewing with the subprime lending mess, and the number of people fudging the numbers at big companies to make themselves look good. All of this came crashing down. Two thousand and eight was not a good year, but the fourth quarter is where most of the damage occurred. Oddly enough that is exactly when I discovered my cigar issues. A lot of people did the right things and still got burnt by this market. A collection of things working together and against them that they had no control over.

So what to do? Well I could have gotten mad and thrown out all the “ruined” cigars. Just like you can get mad at the markets and pull all of your money out and never invest again. I didn’t throw out my stogies and I don’t think you should give up on the markets and investing either. You see, you can bring dry cigars back from the dead. You have to give them the proper moisture and time. It usually takes a few months of some TLC and vigilance but they do moisten up again and make a comeback. Markets come back as well. It will take more than a few months, but then again they are not just plants. Now is the time to fix anything that isn’t working in your portfolio. Rebalance and adjust your strategy. If your investments are not appropriate for you then get rid of them now and invest in something better suited to your situation. This can work in your favor. You may be able to get a tax loss write off and buy a better investment while the price is down, (making it on sale.) Once you do the correct adjusting and planning, it will require patience and time to fix the situation. The problems weren’t created overnight and neither will be the solutions. So my cigars are already starting to come back and I am pleased. It only takes a little progress to give people hope. I think that 2009 will be better then 2008, but it won’t be a smooth trip. Rather it will be more rollercoaster-like, but with any luck this year will be better. That can signal the start of the comeback. Just remember that patience is quite a virtue. Until next time, happy investing and try not to be so stressed. No one ever said it was going to be easy, but in the end you will be better off.

A Quick Note about Disability Insurance

Go buy some. Okay, that was pretty easy, now on to my next article. If you have made it to this third sentence you either think I’m a jerk or you’re at least smiling. I’m hoping for the smiling reaction. Now on to the serious part of this article. I’m not joking when I said this one will be quick. Disability insurance may be the single most important insurance product made. I know that auto insurance is mandated by law and you can’t get a mortgage without homeowners insurance. But when you get right down to it, it’s a coin toss between medical and disability insurance for the top spot. I started as primarily a life insurance guy and then moved into all personal insurances and investments, and finally to full financial planning. So believe me when I say that even as a former life insurance guy, I still think disability takes the top spot in most cases. This is of course on a case by case basis, where disability, health, or life insurance at any one time can be the most important. The reason I want to direct people’s attention to disability insurance is that it has become almost extinct in many areas of the economy where it once thrived. This is a very bad thing and can most easily be seen in home foreclosures of all places.

It is often said that health insurance is important in case you get sick. I know we hear quite a bit about uninsured Americans, but the vast majority of people still get their health insurance through their employers. Most people also receive a minor amount of life insurance through work as well, with options to purchase more at ridiculously low rates. Disability insurance also once lived in the employee benefits world, but sadly no longer. With the increasing costs of doing business more and more employers are looking for ways to cut costs. This often is in the form of cutting employee benefits, specifically disability insurance. It may still be around for top execs, but gone for the masses, or significantly reduced. It is the easiest thing to get rid of since most people don’t even notice it’s gone. They know someone who got sick, and realize that health insurance is important. Everyone knows someone who has passed away and did not leave enough for their family, so people see the benefit in owning life insurance, (although that value seems to have diminished in many people’s eyes as well). But when you think of someone who has been hurt, is very sick or disabled and can’t go to work anymore, you just think “That won’t happen to me.” So we go into a type of denial and try to block unpleasant things out of our lives. This is why so many people do not have disability insurance, or have it at work but don’t know the details or think it’s a waste of money and never purchase it. This is a sad state of affairs and cannot be allowed to continue.

I know the news is constantly broadcasting what terrible shape the economy and housing markets are in. They say how many homes are being foreclosed on and how many Americans cannot afford to stay in their homes. A person losing their home for different reasons has occurred since people first could buy homes. But despite all of the news reports, (who conveniently leave this next part out) the main reason for home foreclosure and late payments is still the disability or serious illness of the main bread winner. It always has been and is projected to stay that way. Even with the headlines and subprime crap, the number one reason people lose their homes is failure to pay, due to a disability or serious illness. Now wouldn’t it be great if there was something out there that could pay your bills and mortgage for you if you get hurt. Hey, wow, look at that, that crazy old disability insurance is designed specifically for that purpose. I know this last part may seem dumb but I hope I have made my point.

Most people who become disabled are not permanently disabled. In fact, the average person who has to leave work because of a disability did not get hurt while at work, and furthermore will be able to return to work in some capacity in 18 months. So you see, for most people disability doesn’t replace their income forever, just for as long as they need it. There is also a residual benefit available with almost all policies that allows you to go back to work, even if you aren’t making as much as you used to and the residual benefit will pay you the difference until you can work back up to your previous income level. This type of benefit usually lasts for up to two years. Disability insurance policies can cover you for just a few months all the way up to age 67 if your disability is or becomes permanent. This policy is designed for you to keep your house or pay your rent, and pay your bills so you don’t lose services and ruin your credit. In addition to disability and illness being the number 1 cause of home foreclosures, it also is the number 1 cause of personal bankruptcies. So this insurance can protect you in so many ways. This is the reason I view it as the most important insurance. Please give me or your advisor a call to learn more and see what type of disability insurance is right for you. Until next time…happy and safe investing.

When Good Funds Go Bad

With all of the world’s markets down, how can you tell if your fund is really bad or just a helpless victim? If your fund is down, don’t be too upset because so is everyone else’s. It used to be that if stocks weren’t doing well you could go to bonds. If US companies weren’t performing well, then you could look overseas. There were even commodities, options, futures, and REITs…but now where can you go? It’s hard to find a place right now. There are still good investments out there, but they are a lot harder to find. If you are a rather wealthy person and by that I mean you have in the tens of millions to invest, there are some preferred investments that you will have access to and be able to do better than the average Joe. Also, if you have a broker who is very good and trades your money frequently and with a sharp focus you can make some returns. Some of the problems associated with this are increased fees, expenses, tax consequences, and a lot more risk. If you can’t take on more risk, and those other features don’t appeal to you then this might not be the best option for you as well. So here you are stuck and feeling hopeless. Some people opt not to look at their investment statements, while others are just mad at all of their holdings and want to do something completely different.

Neither the “ostrich with its head in the sand” or the “I hate everything” approach is going to work for you. You need to look at your statements, and have a chat with your advisor. Some of those funds may not be in your best interest any longer and should be removed or swapped for something else within that portfolio. Also, don’t get mad at everything, since everyone else is in the same boat. You shouldn’t scrap everything and start over (unless your original investments were wrong for you from the start). Some of your holdings may be fine and the first to bounce back. So how can you tell which holdings are great and which are losers? First off, let me remind you that one of my guiding principles is that unless there is fraud or bad intentions from the start, there is no inherently good or bad investment. They are simply tools, and we must pick the best tools for the job. More specifically, the best tools for your job.

So let’s assume either you are handling your investments yourself or you are working with an advisor that you are happy with. If you have an advisor and are not happy with him or her, now would be an excellent time to start looking around for a new person. Now please don’t hate your current person strictly because you have lost money. If you find a new advisor who promises that you won’t lose money, then you should run the other way. Unless you move all of your money into something fixed, there is no one who can guarantee against losses in the market. You should look for a new advisor if you don’t get good service, have different investment philosophies, or if you just don’t get along as people. But if your investments are suffering, it is a good time to sit down with them and perhaps change your game plan so you can better deal with today’s current situation. If your advisor is lacking in the service and personality areas then you should consider moving on. If you don’t have an advisor, then now would also be a good time to go looking. Most advisors will give you a free initial consultation so you can gauge how good their advice is and see if they offer something of interest to you. If you still want to handle your own investments that is fine as well.

Good advisors pay quite a lot to have good software to help then analyze different investments. But there is a lot you can do for free or almost free. If you Google your funds, then one of the choices on the first page is almost always a link to Morningstar. This will give you your funds style, past performance, a list of its expenses, who the managers are, and the Morningstar rating (from1-5 stars). That is free and very useful. The style is important because it lets you know what industries you are investing in, and whether or not this fund is aggressive or safe. There have been a number of times when after further examining a fund you discover that it is different than what its name implies, or invests in companies you had no idea about. The past performance numbers show you obviously the past performance. That is not nearly as useful as many people think. What you want these numbers for is to do a comparison. One of the available charts shows you how your fund performed compared to other funds in its own category or against the funds benchmark. This is very useful. If your fund is not doing as well as other funds just like it, or against the benchmark or standard that is used, then your fund may have problems. Either its fees are too high, or its managers are not that great. It provides no exact answers but it is a good guide as to the quality of your fund.

Another number listed is the expenses for your fund. Again, this is almost useless unless you have other like funds or funds in your portfolio to compare this to. You ideally want to keep these expenses low. But if you have been happy with the fund, and its performance has been good enough to justify a slightly higher fee then it’s worth it. This report also lists the fund managers. You already think that is boring, I don’t know any of them and who cares. This can make or break the fund. After all, a person or team is running the fund, choosing the investments, and when to buy and when to sell. If your fund has done well and all of a sudden starts tanking you need to look at the management as well as the market. Maybe the great fund manager left to go run a different fund. Now you have a replacement manager or a team without a leader and performance may suffer. This is why keeping tabs on managers is important. This can also signal a turnaround in bad funds. If a new manager comes in, he or she can turn around a fund and all of a sudden a dud becomes a star. That is nice when it happens, but you would think it was just luck if you weren’t following who was steering that ship. Lastly is the Morningstar rating. It sounds nice being able to say how many stars your fund has. But remember some of these stars are tied to performance, regardless of how the market is doing. There are some great funds out there who have suffered with the market and their star rating has dropped because of it. These are not bad funds; it is that their style of investing does not coincide very well with what is going on right now.

When you are determining whether or not your funds are good, please use a guide that includes your risk tolerance. Too many online calculators or fund guides only look at how many years you have to invest, or your age. Find one where you can answer some personality and investing questions to determine your risk profile. After all you are more than just your age. People of the same age have different goals, time horizons, and attitudes towards risk. Taking this into consideration can keep your portfolio better on track and allow you to sleep better. This will also let you know that your fund that is down 60% might not have been the correct fund for you to own in the first place. Moving forward you may want to avoid funds like that, or invest less in them. Selling off that bad fund and putting that money where it belongs now, may seem like quitting but it is not. Rebalancing when the market is down is a crucial step towards good money management. You may be able to “harvest” a tax loss as well. If you should have been in an investment to start with, sticking it out will not make the situation any better. I hope this helps you gain some perspective on your situation, and points you in a better direction with respect to your funds. Until next time…happy investing.

Those Four Dirty Words

There is an old Chinese proverb that says: “Insanity is doing the same thing in the same way & expecting a different outcome.” In plain English it can be expressed as: This time is different. It seems to be a guiding principal among many when it comes to investing. They hop on the latest bandwagon towards quick money again and again. The reason these people are not rich is that something always goes wrong and their plans don’t work out. I knew something was going very wrong back in 2000 before the tech bubble burst. I met a nice older woman whose complaint was that her investments were only making 22% and she wasn’t keeping up with her friends. At that point I realized that these big returns had become commonplace and people were beginning to think that they would last forever. Investing in something “riskier” just meant that you were going to make more money, not actually have a chance of losing money. This scene played out again until the spring of last year. When it comes to money nothing has had more power over people’s investing decisions then fear and greed.

I wrote an article about fear a few months ago. This one article will have an underlying theme of greed. It’s that force that causes the 4 dirty words of investing. The whole concept of “this time is different”. It is a cop-out so people can follow the crowd and hope for the best. If it’s the same thing only packaged differently, then the outcome will be the same time and again. People need to understand that sometimes good things take time. Growing your wealth slowly may not be fun, but it will help you appreciate your money more and it is a more proven track to success. You need to do homework on the investments you are buying. Try to stay on top of them and make sure that the risks you are taking are appropriate for you. That is why all of the disclaimers on investment prospectuses say that past returns do not indicate future performance. Things can always change. This really is meant more as a warning for people to watch out when it comes to their money. This time will be different is something that you hear at the racetrack or in Vegas…not a sentiment that should be expressed when it comes to retirement planning. The same old money management habits will lead to the same outcomes. If you have seen anything reputable on dieting, the advisors always say that diets are short term, and what people really need for sustained weight loss is a lifestyle change. That is the same thing that you need when it comes to your money.

With that being said, many people do not have the time to study all of their investments and they turn instead to professionals. Don’t get me wrong, we are all human and we are not perfect. Advisors can make mistakes, so can fund managers, even the treasury secretary can’t get it right all of the time. What I do know is that a knowledgeable professional can be a great asset, money well spent and peace of mind worth having. While it’s true that no one will care more about your money then you do, at least someone else can come in a close second. Having someone who watches finances daily and has specific training is a good thing. I’m not trying to toot my own horn, or anyone else’s for that matter. Let me be so bold as to assume that you are good at your job. Because you are good at your job let me also assume that you are well compensated or on your way to being well compensated for your job. Now, wouldn’t it make sense for you to focus on what you are good at and what makes you the most money and try to delegate as many other things as possible? If you can spend a small portion of the money that you invest or save every year and recruit the skills of a professional wouldn’t it be worth it? Someone who spends all of their time reviewing investments and insurance products. Who is trained in advanced planning techniques, tax strategies, risk management, and asset preservation.

If you don’t think you need such a person and you have the time and a good head on your shoulders, you can still invest and make money. That is a simple fact. I’m advising the people who don’t have the time or acumen towards investing to use a professional. There is also a time of life when a financial advisor can be priceless. That is after you are done working and saving and want to retire and use your money. It is much easier to accumulate your wealth than it is to properly distribute it and make it last. Consider the situation if you start saving and investing in earnest when you are about 30 and you retire at about age 60. This will give you 30 years to save for retirement. Your life expectancy will be about 90. That means that you will be retired for 30 years as well. That can be a scary thing when you figure that whatever you have put aside now needs to last that long. This is where an advisor with the correct training and tools can make sure you don’t outlive your money. At that point in your life an advisor can make all the difference in the world.

Now back to the concept of “this time will be different”. If you have tried investing before with less than acceptable results, an advisor may be able to help. He or she can help direct you and make sure that “this time will be different.” They can help you avoid some of the pitfalls of investing and break some of those bad money management habits that are holding you back. Someone who can help distinguish the good ideas from the bad, and help you safely through the landmines. Someone to figuratively and literally hold your hand through the bad times and prevent you from doing something rash. Those panicked moves made at the wrong time can do the most damage to your portfolio and derail your hard work. During the good times it becomes easier to make money. It’s during the bad times that a quality advisor really earns their money by providing the best advice and support that you need. Now I suppose I will get down off of my high horse and let you go make your own wise decision about how to carry on with your finances. I only encourage you to think about what I have said. Until next time… happy investing.

Laid Off…Fired…Let Go

People get fired every day. It happens year round. Some people get temporarily and permanently laid off. In more discrete corporate situations you may be asked to leave and given the opportunity to resign or retire in lieu of being fired. But in today’s economy it’s happening more and more frequently. It’s happening across the board, large companies, small companies, blue collar, and white caller. It is truly getting rough out there. The old adage of doing the best job you can and exceeding expectations is about the only thing you can do to try and create some job security. Beyond that, there isn’t much I can say that would help someone keep their job. What I can write about is what someone should do concerning their finances once they are no longer employed.

My first bit of advice would be to look for a job. Some people take a little time off to relax or catch up on something. But unless you are very close to retirement and can afford to go right into retirement now, you will have to get a job again. Ideally you have at least 6 months worth of living expenses put aside. The two main reasons that advisors suggest savings anywhere from six to twelve months worth of income are in case of short term disability or unemployment. You can live off your savings while you look for another job. So there is no need to hit the panic button yet. If your savings are not as robust as they should be, you still have options and can put together a game plan.

Your biggest asset will be whatever money you have in your employer sponsored retirement plan. Whether it be a 401k, 403b, SEP or Simple IRA they can all be useful. That money should be rolled over to an IRA when you leave your job. Then you can have control over where the money is moved to and what investments your money is allocated to. The IRA is a great place for rollover money. It gives you the ability to control the fees and investment options so much better than in an employer’s plan where you don’t have a say in what investments are available. This money can also be the seed money for you to start your own business. Now there are tax consequences and IRS penalty concerns but it may be the only place to get money. Banks have tightened up lending and this applies even more to a small start up business without a proven track record. This is why many people who are a little older and looking to start their own business as a second career often turn to a franchise. But even a franchise requires serious up front money and this is where your retirement plan money can come into play. A risky move for sure, but many people do it every year.

The second use for your retirement plan money can be to help pay bills if your job hunt does not prove fruitful. If you go through your savings and have taken on all the additional credit card debt you can handle then going to your investments may be a necessity. The reason I said about taking on some more credit card debt before going to your investments may seem odd, but follow me on this for a second. I don’t want you to max out the cards but perhaps take on a minimal to moderate amount more debt. Once you get a job again you can begin paying that debt down. But if you take a lot of money out of your retirement plan you will not be able to put it back in. The contributions you can make to your IRA every year will not be enough to pay back the money you took out. Not to mention whatever money you withdraw will be subject to taxes and in most cases an IRS penalty. This can reduce your money by 40% or more. Also, when you are spending it, that money is not invested and working for you. That is why I say if you have to, the money is there to take but don’t use it as your first resort.

Another consideration you may have is your health insurance benefits, or sudden lack thereof. If you are single or cannot pick up benefits through your spouse, this can be a very scary thing. The following does not apply to every state; however let me comment on PA, NJ, and NY as they are the three closest states to my office. In all three states you can take COBRA. This will extend your health care coverage and keep you in the same plan you had when you were working. COBRA may be very expensive to what you were used to paying. This is because COBRA is the health insurance you had with your employer but now you are paying the full price with no employer contribution to offset the cost. To recoup the administrative costs of filing paperwork and keeping you on the insurance plan your former company can also charge up to an extra 10% of your premium as their fee. So you may be on the hook for quite a bit of money. But hey, you will still have health insurance.

In the state of PA, you can also go get your own health insurance for you and your family. PA has underwriting on insurance policies in the state. So your premium will vary depending on the plan selected and general health of those covered under the plan. You can get a short term major medical plan. This will cover any major problems that come up. Your prescription and routine doctor visits will not be covered, but anything major will be covered. Your premium will be considerably less than a full plan, but there will be more out of pocket costs if you need something routine. The limitation of this type of coverage is that you can only carry it for a year, and then you must switch to some other type of plan. In NJ and NY there is no underwriting on individual health insurance plans. This means to you that whether you are healthy or sick, the insurance companies will have to accept you and everyone of the same age and sex with the same plan will pay the same premium. This makes your premiums higher than in most other states, so the healthy people help to offset the cost of the not as healthy people. That may seem like a bad deal if you are healthy, but the coverage is guaranteed and you have a set price. Shopping between companies for the best deal is easier for you or your agent and you know exactly what you are getting.

The last point to take away from this about health insurance is that COBRA is not guaranteed to be offered. If your former employer files bankruptcy under chapter 7, they will go completely under and not have a health insurance plan in place. In this case, there is no health insurance plan in place for you to retain coverage under. This is about the only situation under which you would not be able to get COBRA and retain your old coverage if you desire. The other coverage that you will lose is your disability insurance. If you have no job and are not earning an income there is no income to protect and replace if you get hurt. In these cases you will be able to either get disability insurance with your next employer or if they don’t offer it, pick up the insurance on your own. One side note about disability insurance is that if you have it, you should review your coverage. Most employees do not know how much coverage they have and many do not have enough to cover their bills if they do become disabled. In the meantime, I hope you are gainfully employed for as long as you wish to work. If you do find yourself on the wrong end of a pink slip, I wish you Godspeed in finding another job. If losing your job does happen please contact a good advisor to help you with your health insurance coverage and your retirement plan rollover.

You just received your inheritance, now what?

Receiving an inheritance can be a mixed blessing. It is great to get money or property for free. The bad part can be how and why you received this gift. Losing a loved one is never an easy thing. Often times people who receive an inheritance respond in one of two ways. They either feel that they deserve or were somehow entitled to the money. This usually comes from a child receiving money from the passing of a parent within a wealthy family. The other popular response is to feel that you don’t deserve the money and experience some feelings of guilt about the money. This comes most often from someone who hasn’t come from money or is not used to handling large sums. Neither of these responses is ideal and can lead to money management problems. The good thing is that whether you are inheriting a lot or a little there are steps you can take to insure your inheritance is handled properly and to maximize your opportunities.

Let’s start with some smaller denominations and work our way up. If you inherit anywhere from a couple thousand up to ten or twenty thousand there are some practical day to day things to look at. If you don’t have at least 3 and preferably 6 months worth of living expenses put aside, this should be the first place to look. Use some of your new money to build up your savings. If your savings are in good shape, the next place to look is paying down your debt. If you are carrying a large amount of bad debt (debt with a high interest rate and no tax incentives) then please consider paying some of that debt down. The other option is to beef up your retirement plans. Especially if you’re young, the extra seed money contributed now can really add up over time. The last fun thing you can do is to use a little of the money to take a long weekend or get a massage. Reducing stress is good for the mind and body, and in this economy stress is in abundance.

I think my long weekend, or massage suggestion should apply to any amount inherited. Next is if you inherit ten thousand and up to about a hundred thousand. At this point you can take care of savings, paying down debt, and doing some additional investing. Now you realize that you still have some money left over and the idea of buying something new pops into your head. This is where you need to be careful. If you are going to upgrade something in your home, please consider the kitchen or bathroom. These are the areas that offer the best return on your investment when resale time comes around. If you are considering a new purchase, make sure it is something you need or is at least a little practical. Many people get caught in the trap of buying a new car and using the money as a down payment. This can still leave you with a monthly payment. Now your monthly bills are higher than they were before you inherited the money…not a good situation to be in.

Now we are up to the nice spot of inheriting an amount in the hundreds of thousands. At this point things start to change. Somehow people find out how much money you have come into, and will start approaching you about a gift or loan. You may feel that you can now afford to help these people. If they are family, you may even feel obligated to give them some money. This is the spot where I have to say from this point and up, in money, you need a good advisor. If you do not have one, please go get a good one. Your current advisor may be fine for this task, or you may need to upgrade. Whatever your situation please discuss with the advisor what your situation is, what you need help with, and what you expect out of the relationship. Having the “wrong” advisor for your situation can be as bad as not having one at all. Now the reason you want an advisor is partially for scapegoat duty. When someone approaches you for money, you can kindly let them know that you would like to help them, and may be able to, but your hands are tied until you go over it with your financial advisor. It is a nice out, can give you time to review the situation, and may save you from making a mistake. With this amount of money, you feel empowered to help people but you have to be careful. It may seem like a lot of money but you can burn through it quickly. Investing in someone’s business as appose to a gift is also a risky proposition and should be viewed as a gift regardless. If you can get your principal back and turn a profit, wonderful… but if not, you won’t be let down.

Besides people approaching you for money, this amount of inheritance can affect your tax bracket. You will need to talk this over with your financial advisor and accountant to avoid any tax missteps. This is also a great opportunity to review your retirement game plan. If you are behind, this money can help you catch up. If you are on track this money can help you retire earlier then originally anticipated. Perhaps help to pay for more of your kid’s college, or be philanthropic. Giving money to charity isn’t just for the rich anymore. For just a couple thousand dollars for a few years, you can give a gift in the hundreds of thousands of dollars to your favorite charity. That same concept can be used to leave more money to your family when you pass away as well.

Now we are into the big boy money of inheriting millions. This is a small club you have just entered and statistics show if you inherit in the millions there is a good chance that you were a millionaire already. This may mean business as usual or a radical life change. If you already have this level of money, you know how important a good advisor can be. If you are new to this level of money, then you need to get a good advisor and accountant immediately. Now you are in the territory where you can hold property and business interests in addition to your equity positions. This is also the spot where you can start utilizing trusts to maximize your wealth, charitable giving, and inheritance to your own family. There really is a whole new world of opportunities now opened up to you in relation to your investments and ability to help others. Now here comes my cautionary tale. If you are working please do not quit your job. Once you meet with your professionals and get your plan together, then you can look into perhaps switching jobs to something you enjoy if your current job is not fulfilling. But please do not quit your job. Many surveys show that people who win the lottery or inherit large sums of money are prone to quitting their jobs. They are also prone to burning through their money, and ending up back at their jobs in just a few years, with less money then they started with. So please keep your job, don’t go crazy with your money, and get some good professionals around you. In cases like this, you may need to be protected from yourself, so you can make your new found wealth last.

Whatever category you fall into, I hope these guidelines will help direct you. There can be some great opportunities, but also some unforeseen problems in your path. Be smart, be grateful and pace yourself. Combining common sense with professional advice can make your life easier and more rewarding. Until next time, happy investing.