Give the Gift of Financial Wisdom this Christmas

Jane Young, CFP, EA

Jane Young, CFP, EA

This year, the best Christmas gift for your adult children may be the gift of financial wisdom. Unfortunately, most young adults successfully graduate from school without a practical understanding of personal finance.  Starting out with a solid foundation and some smart financial habits can help your children live a happier, more fulfilling life.

Upon graduation from school, young adults are starting with a blank slate.  They are probably accustomed to a frugal lifestyle that is more about friends and experiences than expensive cars and fancy restaurants.  Before they take on a host of new financial commitments, encourage them to establish a lifetime habit of living below their means and saving for the future.  Work with them to develop a budget, establish an emergency fund and save for the future.  Help them to avoid the common tendency to increase their expenses in lock step with their income.  They can experience more freedom and opportunity by living below their means and gradually increasing their standard of living.

Another concept that is not taught in school, is the difference between good and bad debt.  Help your children understand the danger of high interest rate credit cards and consumer debt.  Encourage them to limit the number of credit cards they use and to get in the habit of paying credit card balances in full every month.  Also explain the importance of establishing a good credit rating by paying their bills on time.  Help them understand that low interest, tax deductible mortgage debt can be useful where high interest credit card debt can be very detrimental to their financial security.

It’s also important for them to understand some basic investment concepts including the power of compounding.  For example, if they invest $100 per month for 30 years for a total investment of $36,000, in 30 years with a return of 6%, their money can grow to over $100,000 due to compounding.   They have the benefit of time! By investing early, they have tremendous opportunity to grow their money into a sizable nest egg by retirement.

Understanding the importance of diversification and the relationship between risk and return is also essential.  Encourage your kids to avoid putting all of their eggs in one basket and help them understand that getting a higher return requires taking more risk.  It’s best to invest in a variety of investment options with different levels of risk and return.  Caution them that anything that sounds too good to be true probably is.  There is no free lunch!

To augment the personal wisdom that you can share, consider buying your kids a book on personal finance for Christmas.  Some books to consider include The Richest Man in Babylon by George S. Clason, Coin by Judy McNary, The Young Couples Guide to Growing Rich Together by Jill Gianola and the Wealthy Barber by David Chilton.

Minimum Liability on Car Insurance Not Adequate for Most Drivers

 

Jane Young, CFP, EA

Jane Young, CFP, EA

The state of Colorado requires you to carry liability insurance in case you injure someone or damage someone’s property.  Colorado law requires liability insurance of at least $25,000 for bodily injury per person, $50,000 bodily injury per accident and $15,000 for property damage.   The law also requires insurers to offer uninsured/underinsured motorist coverage and medical coverage unless you waive them.   Generally, they also offer optional comprehensive, collision, towing and rental car coverage. 

However, the liability requirements set forth by the state of Colorado are not adequate for most car owners.  The amount of liability coverage you need is dependent on your net worth or what you have to lose, if you are at fault for an accident.  If you cause a serious car accident, where several people are injured, the medical expenses could easily cost hundreds of thousands of dollars.  With minimum liability coverage, your insurance is only obligated to pay $50,000.  In this situation, an attorney representing the injured parties would probably sue you for the rest of the medical expenses.  If you don’t have any assets this would be a futile effort, but if you have a lot of assets, this could wipe you out. 

As a general rule, according to Darrell Wilson a local insurance agent who operates Alliance Insurance Group of Colorado Springs, anyone with a reasonable level of assets should carry liability insurance of $250,000 – $500,000 for bodily injury per person, around $500,000 for bodily injury per accident and $250,000 – $500,000 for property damage.  He suggests looking at your personal situation to assess how much you have at risk.

In addition to liability insurance, be sure to carry adequate uninsured/underinsured motorist coverage.  According to Wilson, between 1 in 3 and 1 in 4 motorists are either uninsured or underinsured.  This coverage provides protection if you are in an accident caused by someone with inadequate insurance.  It’s advisable to set your uninsured/underinsured motorist coverage to levels similar to your liability limits.

If you have a reasonable level of assets you should also consider an Umbrella Liability Policy equal to 1 to 2 times your net worth.  Umbrella Liability insurance is usually above and beyond the coverage provided by your auto and home policy, but verify this with your insurance agent.

It’s advisable to meet with your agent to review your insurance coverage at least once every two years.  Periodically, you should also compare the rates you are paying, but make sure you are looking at comparable policies.  In addition to price, evaluate an insurance company’s financial stability and their record of customer satisfaction with previous claims.  On the internet, you can find information on financial stability through A.M. Best or Standard and Poor’s, and information on customer satisfaction through JD Power or Consumer Reports.   Also ask your friends and family for referrals, just about everyone has some experience with car insurance.

Don’t Let Financial Scare Tactics Steer You Off Course

 

Jane Young, CFP, EA

Jane Young, CFP, EA

It’s a formidable task to sort through the barrage of financial information from all the various media sources.  It can be difficult to separate fact from fiction.  Information is often slanted when a reporter or writer has a subtle personal or political bias.  Even heavily biased information can appear objective if the messenger has a strong belief that their story is factual.   While it’s always necessary to filter information for personal bias, financial messages designed to intentionally mislead can be especially harmful.  We are constantly bombarded by advertisements and headlines that deliberately twist the facts to scare us and encourage us to buy products or services.

All of this may sound obvious; we should be smart enough to recognize when someone is trying to sell us something or trying to pull something over on us.  However, we have to be diligent to differentiate between legitimate news and sensationalism.  Producers and editors of financial magazines, television shows, and newsletters use exciting headlines to increase circulation and keep people tuned in.   It is common for the media to exaggerate negative information to generate an emotional reaction.  As an investor, you need to keep dramatic headlines in perspective and avoid changing course based on media hype.

A more sinister scare tactic is the threat of impending doom used by some unscrupulous people to sell products such as gold, variable annuities, and financial newsletters. Recently several gold dealers have been running compelling marketing campaigns to convince you that the financial world is on the brink of disaster.  They use well known actors with an authoritative flare to scare you into believing your only salvation is gold. Depending on your situation, it may be logical for you to have some amount of gold in your portfolio.  However, you don’t need to convert your entire portfolio to gold just because a few gold dealers imply they have exclusive access to top secret information predicting imminent financial demise.

You should also be on the alert for unethical firms who use scare tactics to sell variable annuities and financial newsletters.  Some unscrupulous salespeople try to scare people into making inappropriate purchases in variable annuities by preying on their need for security.  A variable annuity may be a good option, but don’t be tricked into buying something you don’t want or need due to exaggerated threats about a pending financial disaster.  Additionally, I have recently observed a newsletter editor greatly exaggerate the impact of recent legislation to encourage people to buy his newsletter.

Appealing to our sense of fear is an age old sales gimmick.  Be on your guard, marketing campaigns have become very sophisticated.  Before making any changes, fully understand what you are buying and make sure it fits into your overall financial plan.  Avoid emotional reactions to media hype and salespeople claiming to predict the future in order to sell their products.

How to Pick an IRA That’s Right for You (via Credit.com)

One of the most common questions I hear from clients is whether they should invest in a traditional IRA or a Roth IRA. Let’s start with an understanding of the difference between the two. The biggest difference between a traditional IRA and a Roth IRA is when you pay taxes. I like to think of it…


» Read more

The Widow’s Guide to Social Security Benefits

The Widow’s Guide to Social Security Benefits (via Credit.com)

As a Certified Financial Planner™, I work with a lot of widows trying to navigate the tricky world of Social Security benefits after their spouse passes away. Social Security provides you, as a widow, with a choice between your own Social Security benefit based on your work history, and a survivor…

Understanding Mutual Fund Fees

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Jane M. Young, CFP, EA

When investing in mutual funds it is important to be aware of the associated fees.  High fees can significantly impact your total investment return.   All mutual funds have operating expenses and some have sales fees, commonly known as a load. When you invest in mutual funds you have a choice between load and no-load funds.   A mutual fund load is basically a commission charged to the investor to compensate the broker or sales person.   As the name implies, no-load funds do not charge a sales fee.

The first type of load fund is an A share fund, where you pay a front end sales charge plus a small annual 12b-1 fee.   A 12b-1 fee is a distribution fee that covers marketing, advertising and distribution costs.  The typical front-end load is around 5%, but can go as high as 8.5%.  Class A shares offer breakpoints that provide you with a discount on the sales load when you purchase larger quantities or commit to making regular purchases.  The 12b-1 fee associated with most A shares is generally about .25% annually.

The second type of load fund is a B share, where you pay an annual fee of around 1% plus a contingent deferred sales charge (CDSC), if you sell before a specified date. The CDSC usually begins with a fee of 5% that gradually decreases over five years.  After five years or so the fund converts to an A share fund.  The actual percentages and timeframes may vary between fund families.  Most mutual fund companies have stopped offering B share funds because they are usually the most expensive option for the investor and the least profitable option for the mutual fund company.

The third type of load fund is a C share that charges a level annual load, usually around 1%.  This is on-going fee that is deducted from the mutual fund assets on an annual basis.

Generally, any given mutual fund can offer more than one share class to investors.  There is no difference in the underlying fund.  The only difference is in the fees and expenses that the investor pays.

All load and no-load mutual funds charge fees associated with the operation of the fund.  The most significant of these expenses is usually the management fee which pays for the actual management of the portfolio.  Other operations related fees may include administrative expenses, transaction fees, custody expenses, legal expenses, transfer agent fees, and 12b-1 fees.

These annual fees are combined and calculated as a percentage of fund assets to arrive at the fund’s expense ratio.  The expense ratio is an annualized fee charged to all shareholders.  The expense ratio includes the fund’s operating expenses, management fees, on-going asset based loads(C shares) and 12b-1 fees.  The expense ratio does not include front-end loads and CDSCs.   According to Morningstar the average mutual fund expense ratio is .75%.

 

 

Selling Home May be Better Option Than Renting

 

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Jane M. Young CFP, EA

 

It’s time to move but you hate to sell your house when the market is down.  Maybe you should rent your house for a few years? Or, on second thought, maybe not.

There are many factors to consider before deciding to rent your home.  Do you have the temperament and the time to be a landlord?  Are you comfortable with the idea of having someone else living in your home?  Do you want to manage the rental yourself or do you plan to hire a property manager?  If you manage the property yourself do you have time to learn about fair housing laws, code requirements, lease agreements, escrow requirements and eviction procedures?  Who will take care of repairs and maintenance and are you ready for tenant calls in the middle of the night?  If this sounds a bit daunting, a property manager may be your best option.  A property manager will cost you about 10% of the rent.  Be sure to include this in your cash flow analysis.

Before renting your home do a realistic cash flow analysis.   Add up your projected expenses and deduct them from your projected rental income to see if renting will result in a profit or a loss.  If you project a loss, does your projected appreciation on the home while it’s rented compensate you for the time and money it will cost you? Do you have funds to cover a negative cash flow?  Your expenses may include your mortgage payment, property taxes, insurance, home owner’s association dues, maintenance and repairs, legal and accounting fees and property management fees.  A rule of thumb for maintenance and repairs is about 1 – 2% of the market value of your home, depending on the home’s condition.   You may need to spend money up front to attract good quality tenants.

When calculating your rental income, you need to decrease your projected rental income by about 8% to allow for vacancies.  In Colorado the average rental vacancy rate has been around 7-9 percent over the last five years, based on U.S. Census data.  When a renter moves or is evicted it can take several months to get a new renter in place.

If you rent you can take a tax deduction for depreciation against your rental income.  To calculate your annual depreciation, take the value of your home, on the date you begin renting, less the value of land and divide it by 27.5.  Unfortunately, this is just a temporary gift from the IRS.  When your home is sold you must recapture all of the depreciation at 25%.

Other potential drawbacks to renting your home include the possibility of major damage inflicted by a tenant, drawn out eviction processes, negligence or safety lawsuits and costly maintenance issues.

An additional consideration, if you have a capital gain on your home, is the loss of the capital gain exemption of $250,000 for individuals and $500,000 for a couple if you haven’t lived in your home for 2 or the last 5 years.

Stock Can Be a Good Option in Retirement

 

 

 

 

 

 

Jane M. Young

As we approach retirement, there is a common misconception that we need to abruptly transition our portfolios completely out of the stock market to be fully invested in fixed income investments.   One reason to avoid a sudden shift to fixed income is that retirement is fluid; it is not a permanent decision. Most people will and should gradually transition into retirement.  Traditional retirement is becoming less common because life expectancies are increasing and fewer people are receiving pensions. Most people will go in and out of retirement several times.  After many years we may leave a traditional career field for some well-deserved rest and relaxation.  However, after a few years of leisure we may miss the sense of purpose, accomplishment, and identity gained from working.  As a result, we may return to work in a new career field, do some consulting in an area where we had past experience or work part-time in a coffee shop.

Another problem with a drastic shift to fixed income is that we don’t need our entire retirement nest egg on the day we reach retirement.   The typical retirement age is around 65, based on current Social Security data, the average retiree will live for another twenty years. A small portion of our portfolio may be needed upon reaching retirement but a large percentage won’t be needed for many years.   It is important to keep long term money in a diversified portfolio, including stock mutual funds, to provide growth and inflation protection.   A reasonable rate of growth in our portfolio is usually needed to meet our goals. Inflation can take a huge bite out of the purchasing power of our portfolios over twenty years or more.   Historically, fixed income investments have just barely kept up with inflation while stock market investments have provided a nice hedge against inflation.

We need to think in terms of segregating our portfolios into imaginary buckets based on the timeframes in which money will be needed.  Money that is needed in the next few years should be safe and readily available.  Money that isn’t needed for many years can stay in a diversified portfolio based on personal risk tolerance.  Portfolios should be rebalanced on an annual basis to be sure there is easy access to money needed in the short term.

A final myth with regard to investing in retirement is that money needed to cover your retirement expenses must come from interest earning investments.  Sure, money needed in the short term needs to be kept in safe, fixed income investments to avoid selling stock when the market is down.  However, this doesn’t mean that we have to cover all of our retirement income needs with interest earning investments.  There may be several good reasons to cover retirement expenses by selling stock.   When the stock market is up it may be wise to harvest some gains or do some rebalancing.  At other times there may be tax benefits to selling stock.

 

Mutual Funds May be Your Best Option

 

 

 

 

 

 

Jane M. Young

Generally the typical investor is better off investing in stock mutual funds than in individual stocks. A mutual fund is an investment vehicle where money from a large number of investors is pooled together and invested by a professional manager or management team.  Mutual fund managers invest this pool of money in accordance with a predefined set of goals and guidelines.

One of the primary benefits of investing in stock mutual funds is the ability to diversify across a large number of different stocks.  With mutual funds, you don’t need a fortune to invest in a broad spectrum of stocks issued by large and small companies from a variety of different industries and geographies.  Diversification with mutual funds reduces risk by providing a buffer against extreme swings in the prices of individual stocks.   You are less likely to lose a lot of money if an individual stock plummets. Unfortunately, you are also less likely to experience a huge gain if an individual stock skyrockets.

Another benefit of stock mutual funds over individual stocks is that less time and knowledge is required to create and monitor a portfolio.  Most individual investors do not have the time, expertise, or resources to select and monitor individual stocks.  Mutual funds hire hundreds of analysts to research and monitor companies, industries and market trends.   It is very difficult for an individual to achieve this level of knowledge and understanding across a broad spectrum of companies.  Mutual fund managers have the resources to easily move in and out of companies and industries as investment factors change.

Most individual investors appreciate the convenience of selecting and monitoring a diversified portfolio of mutual funds over the arduous task of selecting a large number of individual stocks.   Stock mutual funds are a good option for your serious money.  However, if you really want to play the market and invest in individual stocks, use money that you can afford to lose.

For diehard stock investors, there are some advantages to investing in individual stocks.  Many stock mutual funds charge an annual management fee of between .50% and 1% (.25% for index funds).  With individual stocks, there is a cost to buy and sell the stock but there is no annual management fee associated with holding stock.

Another advantage of individual stocks is greater control over when capital gains are recognized within a non- retirement account.  When you own an individual stock, capital gains are not recognized until the stock is sold.   In a high income year, you can delay selling your stock, and recognizing the gain, to a year when it would be more tax efficient.   On the other hand, when you invest in a stock mutual fund you have no control over capital gains on stock sold within the fund.  Capital gains must be paid on sales within the mutual fund, before you actually sell the fund.  Mutual funds are not taxable entities, therefore all gains flow through to the end investor.

Are Your Bonds Safe?

 

 

 

 

 

 

Jane M. Young

Let’s compare some differences between stocks and bonds.  When you buy a bond you are essentially lending money to a corporation or government entity for a set period of time in exchange for a specified rate of interest.  When you invest in the stock market you assume an ownership position in the company whose stock you are purchasing.  As a result, the value of your investment will fluctuate based on the profit or loss of the underlying company.  With the purchase of a bond the value of your investment hould not fluctuate based on the financial performance of the issuer, assuming it remains solvent.  You will continue to receive interest payments according to the original terms of the agreement until the bond matures.  Upon maturity the amount of your original investment (principal) will be returned to you along with any interest that is due.   As a general rule, stocks are inherently more risky than bonds, therefore investors expect to receive a higher return.

Bonds may appear to be safe but they are not without risk. Currently, there is some risk associated with low interest rates that may not keep up with inflation.  This is especially true with many government bonds. Two additional risks typically associated with bonds include default risk and interest rate risk.

Default risk is the risk that the issuer goes bankrupt and is unable to return your principal.  Most bond issuers are assigned a rating to help investors assess the potential default risk of a bond.   Generally, investors are compensated with higher interest rates when taking a risk on lower rated bonds and receive lower interest rates on higher rated bonds.

Interest rate risk is based on the inverse relationship between interest rates and the value of a bond.  When interest rates increase the value of a bond will decrease and when interest rates decrease the value of a bond will increase. If you hold an individual bond until maturity your entire principal should be returned to you.  You have the control to keep the bond until maturity and avoid a loss.  However, if you need to sell before maturity you may lose some principal. The loss of principal is greater for longer term bonds.  This needs to be weighed against the benefit of a higher interest rate paid on longer term bonds.

Bond mutual funds can provide diversification and reduced default risk because your money is pooled with hundreds of other investors and invested in bonds from a large number of different entities.  If one or two entities within the mutual fund go bankrupt there will be minimal impact on each individual investor.  However, with mutual funds you have less control over interest rate risk.  When interest rates increase, bond fund managers often experience a high rate of withdrawals forcing them to sell bonds at an inopportune time.  This usually results in a loss of principal, the severity of which is greater for longer term bond funds.

Pitfalls in Taking Early Social Security

Jane M. Young CFP, EA

 

You can begin taking Social Security at age 62 but there are some disadvantages to starting before your normal retirement age.   The decision on when to start taking Social Security is dependent on your unique set of circumstances.  Generally, if you plan to keep working, if you can cover your current expenses and if you are reasonably healthy you will be better off taking Social Security on or after your normal retirement age.  Your normal retirement age can be found on your annual statement or by going to www.socialsecurity.gov and searching for normal retirement age.

Taking Social Security early will result in a reduced benefit.  Your benefits will be reduced based on the number of months you receive Social Security before your normal retirement age.    For example if your normal retirement age is 66, the approximate reduction in benefits at age 62 is 25%, at 63 is 20%, at 64 is 13.3% and at 65 is 6.7%.  If you were born after 1960 and you start taking benefits at age 62 your maximum reduction in benefits will be around 30%.

On the other hand, if you decide to take Social Security after your normal retirement age, you may receive a larger benefit.  Do not wait to take your Social Security beyond age 70 because there is no additional increase in the benefit after 70.  Taking Social Security after your normal retirement age is generally most beneficial for those who expect to live beyond their average life expectancy.  If you plan to keep working, taking Social Security early may be especially tricky.  If you take benefits before your normal retirement age and earn over a certain level, the Social Security Administration withholds part of your benefit.   In 2012 Social Security will withhold $1 in benefits for every $2 of earnings above $14,640 and $1 in benefits for every $3 of earnings above $38,880.  However, all is not lost, after you reach full retirement age your benefit is recalculated to give you credit for the benefits that were withheld as a result of earning above the exempt amount. 

Another potential downfall to taking Social Security early, especially if you are working or have other forms of income, is paying federal income tax on your benefit.  If you wait to take Social Security at your normal retirement age, your income may be lower and a smaller portion of your benefit may be taxable.  If you file a joint return and you have combined income (adjusted gross income, plus ½ of Social Security and tax exempt interest) of between $32,000 and $44,000 you may have to pay income tax on up to 50% of your benefit.  If your combined income is over $44,000 you may have to pay taxes on up to 85% of your benefit. 

The decision on when to take Social Security can be very complicated and these are just a few of the many factors that should be taken into consideration.

 

 

 

Luncheon Workshop on Social Security – September 19th

Please join us for our next Fireside Chat Luncheon!  I will touch on several areas that may impact your Social Security benefits including pointers on when to start taking Social Security, taxation of your benefits and spousal and survival benefits.

We will have a light lunch available starting at 11:30 and the presentation will begin at 11:45.

When & Where:

7025 Tall Oak Drive, Suite 210

Colorado Springs, CO 80919

Wednesday, September 19th, 2012

This workshop is free of charge by you must register.  Please call Shelby at (719)260-9800 to reserve a slot for this session; seating is limited.

 

Financial Guidance for Widows in Transition

 
A workshop from the heart for women who are widowed

or anticipate becoming a widow in the future . . .

or those with a widowed friend or family member

 Friday, August 3, 2012 from 9:30am – 11:30am 

at Bethany Lutheran Church

4500 E. Hampton Avenue

Cherry Hills Village, 80113

OR 

  Friday, August 3, 2012 from 2:00 – 4:00 PM
 
at First Lutheran Church

1515 N. Cascade Avenue

Colorado Springs, 80907

 There is no charge to attendees, but advance registration is required.
Call 1-800-579-9496 or email Bob.kuehner@lfsrm.org

 Join us for a special presentation by Kathleen M. Rehl, Ph.D., CFP®, award winning author and speaker. She presents practical information in an engaging and entertaining manner, along with issues of the heart. The workshop is open to all . . . although it’s especially designed for women. So, bring your gal friends for an enjoyable morning out together.

   Kathleen’s world changed forever when her husband died. From personal grief experiences, her life purpose evolved-helping widows to feel more secure, enlightened and empowered about their financial matters. She is passionate about assisting her “widowed sisters” take control of their financial future.

 Dr. Rehl is a leading authority on the subject of widows and their financial issues. She is frequently invited to give presentations across the country on this topic.

 She and her book, Moving Forward on Your Own: A Financial Guidebook for Widows, have been featured in The New York Times, Wall Street Journal, Kiplinger’s, AARP Bulletin, U.S. News & World Report, Consumer Reports, Investment News, Bottom Line and many others. The guidebook has received 10 national and international awards.

 To devote more time to writing and speaking, Kathleen closed her practice to new clients some time ago. She was previously named as one of the country’s 100 Great Financial Planners by Mutual Funds Magazine.

 Please be our guest for this educational and enlightening workshop!

 This event is a sponsored gift to the community from
 Jane M. Young, CFP with Pinnacle Financial Concepts, Inc.
   

 (719)260-9800

www.MoneyWiseWidow.com

 
   
 

Financial Words of Wisdom from Widows for Widows

Jane M. Young, CFP, EA


I have met with numerous widows over the last few years to get a better understanding of what they are experiencing and to learn how I can best support and assist them.   Below I have shared some of the most meaningful and consistent messages and comments I heard from these brave women.  I hope this is helpful to both men and women who have recently lost a spouse and family members of someone who has recently lost a spouse.

  • Avoid making major decisions during the first year.  I think I heard this from everyone I spoke with and it is very wise advice.
  • Be obsessively selfish, after the loss of a spouse it is especially important to focus on you and physically take care of yourself.  Later, once you are feeling better you can help others.
  • Grief is very sneaky, one moment you feel fine then it sneaks up on you.  Expect some irrational behavior.
  • Be easy on yourself, it is normal for grief to last three years.  The fog will begin to clear after the first year but things will still be fuzzy for up to three years.  This can be difficult because friends and family expect you to heal more quickly than is realistic.  Everyone grieves differently but three years is very normal.
  • During the first year you feel like you’re operating in a fog, it is easy to forget key dates.  You frequently feel lost and confused and forget how to do things.
  • Grief can consume hours and hours of your day.  It’s hard to focus and get things done.  There is very little energy to learn new things.  It’s normal to feel apathetic.
  • The loss of a spouse is a huge tragedy in your life.  Everyone else seems so focused on themselves. Try not to get upset at others who go on with their own lives as if nothing has happened.  They are busy and they don’t want to open themselves to the pain.
  • It’s very important to take the time to select a trusted team of professionals.  Your team should include an attorney, financial planner and an accountant, if your financial planner does not prepare taxes.
  • Being a new widow can be very scary, it is scary to be alone.  You have a tremendous need for encouragement and acknowledgement that you are making progress.  Try to spend time with positive and supportive friends and family.
  • It’s hard to shift from making plans and setting goals together to making plans and setting goals on your own.  You don’t have to do everything the way you had planned with your spouse.  You need to set your own course and reach for new hopes and dreams.

 

Learn More About Long Term Care Insurance at Our Next Fireside Chat on July 11th

Please join us for lunch, at Pinnacle, for our next Fireside Chat on July 11th at 11:30.  We will discuss Long Term Care Insurance.  As always this is purely educational and free of charge.  Please call Judy at 719-260-9800 to RSVP.  Please let us know if there are any topics that you would like us to discuss at future Fireside Chats.

Advantages and Disadvantages of Variable Annuities

 

Jane M. Young, CFP, EA

 

What is a Variable Annuity?


A variable annuity is a contract with an insurance company where you invest money into your choice of a variety of sub-accounts, similar to mutual funds. Non-qualified, variable annuities provide tax deferral on gains until the funds are withdrawn. Upon distribution your gains are taxed at regular income tax rates as opposed to capital gains rates. Variable annuities generally charge fees twice those charged by mutual funds. Additionally, you will be to subject to substantial early withdrawal charges if you purchase an annuity from an advisor who is compensated through commissions. Most variable annuities provide the option to buy a guaranteed death benefit option and/or a Guaranteed Minimum Withdrawal Benefit. These do not come without a cost and can be very complex.  Below are some advantages and disadvantages of Variable Annuities.
Advantages and Disadvantages of Variable Annuities:

Advantages:

  • Tax Deferral of gains, beneficial if you have maximized limits on other retirement vehicles such as 401ks and IRAs.
  • No Required Minimum Distribution at 70 and ½ as with traditional retirement accounts. There is no Required Minimum Distribution on Roth IRAs.
  • Death benefit and Guaranteed Lifetime Withdrawal Benefits (GLWB) riders can be purchased for additional fees. However, the death benefit is rarely instituted due to long term growth in the stock market. GLWBs can be very complex and not without risk.
  • Trades can be made within annuity without tax consequences – this is also true within all retirement accounts.
  • Non-taxable transfers can be made between companies using a 1035 exchange.
  • No annual contribution limit. Traditional retirement plans have annual contribution limits.

Disadvantages:

  • Gains taxed at regular income tax rates as opposed to capital gains rates on taxable mutual funds.
  • Higher expense structure –Mortality and Expense fees substantially higher than mutual funds.
  • Substantial surrender charges for up to 10 years on commission products
  • 10% penalty on withdrawals prior to 59 ½, this is also true with most traditional retirement accounts.
  • Complex insurance product
  • Lack of liquidity due to surrender charges and tax on gains
  • No step-up in basis, taxable mutual funds and stocks have a step-up in basis upon death
  • Loss of tax harvesting opportunities

“What is Modern Retirement and Will You be Ready?” Join us on September 7th for our next Pinnacle Fireside Chat.

Please mark your calendars for our next Pinnacle Financial “Fireside Chat”, to be held on Wednesday, September 7th from 7:30am – 9:00am.

Jane will discuss the characteristics of modern retirement and how to plan for it. She will explore different approaches to retirement and some of the factors to be considered. She will also explain the various plans available to help you save for retirement.

The Fireside Chat sessions are informational only (no sales!) and interactive — a great opportunity to learn new things and ask questions in a relaxed environment. These sessions are open to your family and friends, so please feel free to pass this email along to anyone that you think might be interested in attending.

Please call Judy (719-260-9800) if you would like to attend this session on September 7th, as space is limited.

We hope to see you on September 7th! Coffee and donuts will be served!

10 Tips for Financial Success

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Jane M. Young CFP, EA

1. Set Goals –
Review your personal values, develop a personal strategic plan, establish specific goals for the next three years and identify action steps for the coming year.

2. Understand Your Current Situation –
Review your actual expenses over the last year and develop a budget or a cash flow plan for the next 12 months. Compare your expenses and your income to better understand your cash flow situation. Are you’re spending habits aligned with your goals? Can or should you be saving more?

3. Have sufficient Liquidity –
Maintain an emergency fund equal to at least four months of expenses in a fully liquid account. Additionally, I recommend having a secondary emergency fund equal to another three months of expenses in semi-liquid investments. Increase your liquidity if you have above average volatility in your life due to job instability, rental properties or other risk factors.

4. Always save at least 10% of your income –
Regardless of whether you are saving to fund your emergency fund or retirement you should always pay yourself first by saving at least 10% of your income. Most of us need to be saving closer to 15% to meet our retirement needs.

5. Pay-off Credit Cards and Consumer Debt –
Learn the difference between bad debt (credit cards) and good debt (fixed-rate home mortgage). Avoid the bad debt and take advantage of the leveraging power of good debt.

6. Take Advantage of the Leveraging Power of Owning Your Home –
Once you have established an emergency fund and have paid off your bad debt start saving for a down payment to purchase your own home.

7. Fully Fund Your Retirement Accounts be a tax smart investor –
Participate in tax advantaged retirement programs for which you qualify. Maximize your Roth IRA and 401k contribution take full advantage of any company match on your 401k. If you are self-employed consider a SEP or Simple plan. Always select investment vehicles that provide the most beneficial tax solution while meeting your investment objectives.

8. Be an Investor, Not a Trader. Don’t time the market and don’t let emotions drive your investment decisions –
Investing in the stock market is a long term endeavor, forecasting the short-term movement of the stock market is fruitless. Avoid emotional reactions to headlines and short-term events. Don’t overreact to sensationalistic journalists or chase the latest investment trends. You can establish a defensive position by maintaining a well diversified portfolio custom tailored to your unique situation. Slow and steady wins the race!
“Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”  -Peter Lynch, author and former mutual fund manager with Fidelity Investments

9. Don’t Invest in anything you don’t understand and be aware of high fees and penalties –
If it sounds too good to be true and you just can’t get your head around it, don’t invest in it! If you want to invest in complicated products, read the fine print. Be aware of commissions, fees and surrender charges. Be especially wary of products with a contingent deferred sales charge. There is no free lunch, if you are being promised above market returns there is probably a catch. Keep in mind that contracts are written to protect the insurance or investment company not the investor.

10. Diversify, Diversify, Diversify – rebalance annually –
It is impossible to predict fluctuations in the market or to select the next great stock. However, you can hedge your bets by maintaining a well diversified portfolio. Establish an asset allocation that is aligned with your goals, investment timeframe and risk tolerance. You should have a good mix of fixed income and equity based investments. Your equity investments should be spread over a wide variety of large, small, domestic and international companies and industries. Re-balance your portfolio on an annual basis to stay diversified and weed out any underperforming investments.

You Are Invited to our 1st Fireside Chat of 2011 on Thursday, February 10th

Please join us at Pinnacle Financial Concepts, for our first Fireside Chat of 2011. This is a great opportunity to join us in a very relaxed atmosphere to ask questions, and get prepared for filing your tax return. On Thursday, February 10, from 7:30 to 9:00 a.m. our topic will be “There’s No Such Thing as a Stupid Investment Question” with a bonus (apologies to David Letterman) of “The Top 10 Things to Think About During Tax Season”. We’ll have a basic overview of investment definitions and things to know about investments to spur a discussion on the topic.

Please call 260-9800 x2 to reserve your spot at this chat. There is no charge, but we will limit the number of available seats and schedule an overflow date if needed.   Free coffee and donuts will be served and, as always, this is purely educational, no selling!!

Attend a Financial Fireside Chat with Jane and Linda on December 2nd to discuss “Year End Financial Planning Tips and Money Saving Ideas for the Holidays”

 

You and a guest are invited to a Financial Fireside Chat with Jane and Linda at our office, from 7:30 – 9:00 am on Thursday, December 2nd to discuss “Year End Financial Planning Tips and Money Saving Ideas for the Holidays.”

A Financial Fireside chat is an informal discussion over coffee and donuts, where our clients and guests can learn about various financial topics in a casual non-threatening environment. This is free of charge and purely educational. There will be absolutely no sales of products or services during this session. We will provide plenty of time for informal discussion.

The Fireside Chat will be held at the Pinnacle Financial Concepts, Inc. offices at 7025 Tall Oak Drive, Suite 210. Please RSVP with Judy at 260-9800.

We are looking forward to seeing you on Thursday, December 2nd to learn about and discuss some great year end financial planning ideas.

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