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November 29, 2006

Protecting Your Earning Power With Disability Insurance

You probably have life insurance to protect your family’s lifestyle in case you die prematurely. But have you considered how your family would cope if you were unable to work for a lengthy period due to illness or injury? Only 28% of workers have some form of disability insurance (Source: SmartMoney, July 2005). Many people ignore disability coverage, hoping they won’t be affected by a disabling injury or illness. However, the Society of Actuaries indicates that an adult has a one-in-seven chance of dying before age 65, but a one-in-three chance of being disabled for at least three months.

Consider disability insurance if your current assets won’t support you until age 65. To see if this is the case, review your available options. Determine how much you need monthly to pay essential expenses and what income sources you could count on if you could not work. Review the following questions to determine if you have adequate coverage in this area:

Will Social Security provide disability benefits? The criteria for benefits are very strict — you must be unable to work at any job, expect to be completely disabled for at least one year, and have contributed to the Social Security system for a sufficient length of time. Approximately 37% of those who apply qualify. Even if you do qualify, benefits tend to be modest. As of June 2006, the average disability benefit was $943 (Source: Social Security Administration, 2006). Your annual Social Security Statement indicates what disability benefits you can expect.

Does your employer provide disability insurance? Many companies provide short-term disability insurance, which covers 100% of your salary for three to six months. Long-term disability insurance is typically less common and less generous than short-term plans. Policies frequently have strict definitions of disability, pay no more than 60% of your base salary (bonuses and profit sharing generally are not included in benefit calculations), pay benefits for only two to five years, and do not provide cost-of-living adjustments.

Do you want to use other personal assets? You can access individual retirement accounts (IRAs), annuities, or 401(k) plans without penalty if you are disabled. But first decide whether you want to risk depleting your retirement fund or children’s college fund due to a disability.

How much of your income should disability insurance replace? You should ensure that your available resources and benefits from disability insurance equal at least 60% of your pretax income. Many insurers limit coverage from all disability policies to 60% to 70% of your salary to provide an incentive to return to work. Make sure the total of your employer-provided insurance and individual coverage does not exceed the maximum that will be paid, or you could end up paying for coverage you will not receive. Insurers typically require documentation of income and may limit the maximum monthly benefit.

Are there any significant differences between employer-provided insurance and individual policies? You typically have no choice regarding the benefits offered by your employer, while an individual policy can be tailored to your needs. The most significant difference, though, is the tax treatment of any benefits. If premiums are paid by your employer, benefits are taxable. If you pay the premiums, benefits are tax free. This will have a significant impact on the amount available to pay your bills. It may make sense to reimburse your employer for the cost of this insurance so any benefits will be tax free.

What provisions should you look for when purchasing an individual disability policy? There are several provisions you should pay special attention to, including:

The definition of disability. There are three basic types of coverage: own occupation, any occupation, and income replacement. Own occupation pays benefits when you can’t work at your specific occupation. Many professionals, such as doctors and lawyers, opt for this coverage. However, due to substantial claims, this coverage is now more difficult to obtain. You may only be able to find own-occupation coverage for a specified period, with the policy then converting to any-occupation coverage. Any occupation coverage means you must be unable to work at any occupation your training and education would be suited for. Income replacement policies pay the difference between what you were earning before the disability and what you are earning now.

Noncancelable or guaranteed renewable. Noncancelable means you can renew the policy every year at the same premium. Guaranteed renewable means you can renew the policy every year, but the premium can increase as long as it is not done so in a discriminatory manner. Either provision will ensure the policy won’t be canceled due to medical problems.

Waiting period before benefits begin. If you have other resources to rely on for the short term, such as sick leave, personal savings, or short-term disability coverage, you can increase the waiting period to reduce premiums. Waiting periods can range from one week to two years, but the most common option is a 90-day delay in benefits.

Length of benefits. Disability insurance is designed to protect your financial situation in the event of a serious disability, so coverage should last for the long term. You can obtain lifetime benefits, but you may only need benefits until age 65, when presumably you could collect Social Security and other retirement benefits.

To search for Disability Insurance you may want to visit the ManagingMoney.com Insurance Center. Here you can obtain disability insurance quotes from multiple agents.

November 23, 2006

ManagingMoney.com Launches State Specific Mortgage Center

ManagingMoney.com is pleased to announce the launch of their Mortgage Center. Unlike numerous other sites where the user is expected to fill out a form in order to receive a competitive mortgage quote, the new ManagingMoney.com Mortgage Center offers State Specific mortgage quotes from both local and national lenders. Users are able to see updated quotes that show rates, APY, points and closing costs. If interested, users can then click through directly to the specific lender to fill out an application or request more information online. The new Center supports purchases, refinancings, and home equity loans. Types of loans available include conventional fixed loans, jumbo loans, adjustable rate mortgages, home equity loans, and home equity lines of credit. All companies listed are actual mortgage companies, not loan aggregators, and any listing showing rates older than 7 days are dropped so users can be comfortable they are seeing timely, relevant information.

November 17, 2006

Stick With Your Investing Strategy

We all know the basics — design an asset allocation plan, ignore market fluctuations, and stick with the plan for the long term. In other words, become a buy-and-hold investor. But in an era where everything seems to change overnight, is it realistic to expect to find investments you will be comfortable owning for years or even decades?

Before you answer that question, you should consider whether it is possible to reliably time the market. That, of course, is every investor’s dream — avoid all market losses while participating in all market gains. Unfortunately, it’s a difficult strategy to implement for a couple of reasons:

No one has been able to consistently predict where the stock market is headed. Many try, but so many factors affect the market that even professionals watching the market full time find it difficult to time the market with any degree of accuracy. In retrospect, everything seems crystal clear. Were you able to get out of technology stocks before their significant decline in 2000? While we now know that was the market top for technology stocks, very few recognized that fact in 2000. Also, significant market gains can occur in a matter of days, making it risky to be out of the market for any length of time.

Frequent trading seems to reduce, rather than increase, returns. Several studies of investor trading have found that investors who trade more frequently generally have lower portfolio returns than those who trade less frequently. Investors tend to buy hot sectors and sell underperforming investments — the opposite of a buy-low-and-sell-high strategy. In essence, they are chasing yesterday’s winners rather than tomorrow’s winners. Also, trading results in a taxable event. Even with capital gains tax rates at 15% and the highest ordinary income tax rate at 35%, taxes may significantly reduce your portfolio’s return.

Rather than trying to time the market, devise an asset allocation strategy that you will be comfortable with for years, and then purchase investments compatible with that strategy. That doesn’t mean you’ll never sell an investment, but selling should be an infrequent part of your investment strategy.

November 16, 2006

The Dangers of Delaying Retirement Savings

Delaying retirement savings is a common problem. Even though we know it’s best to start saving for retirement at a young age so our savings have long periods to grow and compound, it’s difficult to find money to save when we are getting established and raising families. Thus, it’s easy to postpone saving, waiting until your children are grown to start saving significant sums for retirement. However, if you wait until your 40s or 50s to start saving, it can be very difficult to save a large enough portion of your income to ensure adequate savings for retirement.

There may also be other obstacles that could derail your savings for retirement, based on a recent study of individuals who were between the ages of 51 and 61 in 1992. During the 10-year period ending in 2002, 40% of those individuals were diagnosed with a major medical condition, 33% developed work disabilities that curtailed employment, 20% were laid off, 10% became widowed, and 3% were divorced.

If a spouse’s health problems and job loss are also factored in, 87% of married adults between the ages of 51 and 61 experienced a major problem (Source: Older Americans’ Economic Security, January 2006). Especially hard hit were individuals with limited education.

The financial repercussions of these types of events can be serious. For married individuals, it was estimated that a serious medical condition reduced household wealth by 13%, a work disability by 14%, a job layoff by 19%, widowhood by 11%, and divorce by 38%. For single individuals, a serious medical condition reduced household wealth by 18%, a work disability by 30%, and a job layoff by 23% (Source: Older Americans’ Economic Security, January 2006).

Thus, if you wait until 10 or 20 years before retirement to seriously start saving, you may find that unplanned circumstances, such as a health problem, job layoff, or divorce, can prevent you from saving for retirement, as well as cause you to use whatever retirement savings you do have. It could also have an impact on your other retirement resources. Benefits earned under a defined-benefit plan tend to grow rapidly during the later working years, since benefits are often tied to years of service and salary earned near career end. Social Security benefits are also tied to lifetime earnings.

To get started with your retirement savings today, consider visiting the ManagingMoney.com Banking Center. Here you will be able to search and apply online for high-yielding, FDIC insured Savings Accounts and Certificates of Deposit.

November 14, 2006

Who Is Affected by the Alternative Minimum Tax

The alternative minimum tax (AMT) was originally designed to ensure wealthy taxpayers paid at least a minimum amount of tax. However, due to the tax calculation, more and more taxpayers are becoming subject to the AMT. For instance, 3.6 million taxpayers paid the AMT with their 2005 tax returns, with that number projected to increase to 30 million, or 20% of all taxpayers, by 2010.

To calculate AMT, you add several common deduction items to your taxable income, subtract the AMT exemption amount ($62,550 for married taxpayers filing jointly, $42,500 for single taxpayers, and $31,275 for married taxpayers filing separately in 2006), and multiply the result by the AMT rates — 26% of the first $175,000 of income and 28% on amounts over that. If the AMT exceeds your regular income tax, the difference must be paid as the AMT.

Why are so many taxpayers becoming subject to the AMT? A primary reason is that ordinary income tax brackets are adjusted for inflation annually, while the AMT exemption amounts are not adjusted for inflation. Thus, as income levels rise, more individuals are subject to the AMT. Another reason is that regular income tax rates were recently reduced, while the AMT tax rates remained the same.

Low-income taxpayers are typically not subject to the AMT because the AMT exemption amounts shield them from the tax. Very wealthy taxpayers are also not typically affected because their overall tax rates are higher than the AMT tax rates. The Congressional Budget Office estimates that taxpayers earning between $50,000 and $200,000 will be the hardest hit by the AMT in the near future. It is estimated that if the AMT is not revised, it will affect 17% of taxpayers with income between $50,000 and $75,000, 53% of those with income between $75,000 and $100,000, 81% of those with income between $100,000 and $200,000, and 94% of those with income between $200,000 and $500,000 (Source: Urban-Brookings Tax Policy Center Microsimulation Model, 2005). By 2007, the U.S. government will receive more tax revenue from the AMT than from regular income taxes.

While you may think it is taxpayers with complicated tax returns who are subject to the AMT, the most significant preference items when calculating the AMT in 2002 were state and local tax deductions (51% of all AMT preference items), personal exemptions (22% of all AMT preference items), and miscellaneous itemized deductions (20% of all AMT preference items) (Source: Tax Policy Center, March 13, 2006).

Because so many items are added back to income in the AMT calculation, whether you are subject to the AMT can affect tax planning strategies. Consider these tips if you are subject to the AMT:

• If you are subject to the AMT every year, it may be difficult to find strategies to reduce your liability, especially when you are subject to it due to items like state and local tax deductions and personal exemptions.

• If you are subject to the AMT in one year but not the following year, you may want to accelerate income (so income is taxed at lower rates) or postpone deductions (many of which are added back in the AMT calculation).

• If you plan to sell assets with significant capital gains, review the impact this will have on the AMT. Although long-term capital gains are still subject to a maximum income tax rate of 15%, it may cause your other income to be taxed at higher rates due to the phase out of the AMT exemption amounts.

• If you are going to exercise incentive stock options, do so in the early part of the year. For AMT purposes, the difference between your exercise price and the market price on the exercise date is considered income, even if you don’t sell the stock or the value decreases after exercise. You might want to exercise stock options early in the year. Then, near the end of the year, you can sell the stock if the price goes down so you won’t be subject to the AMT on the option exercise.

November 11, 2006

Leave Your 401(k) Funds Alone

If you leave your employer, one of your major decisions is deciding what to do with your 401(k) funds. Your worst option is to take a distribution, pay taxes and a penalty on it, and then spend the money on something other than retirement. By taking a distribution, you use your retirement funds and forego any further tax-deferred growth on those assets. In addition, you may incur a large tax bill, since withdrawals are subject to ordinary income taxes and a 10% federal income tax penalty if you are under age 59 ½ (55 if you are retiring). Do not make the mistake of thinking it is just a small amount and will not make much difference for your retirement. Over the long term, even a modest sum can grow to be a significant amount.

You have three options to keep your 401(k) funds in a tax-deferred vehicle until retirement:

Leave the funds in your former employer’s 401(k) plan. Generally, you can leave the funds in your former employer’s plan if your balance is at least $5,000. However, most plans will not allow you to borrow from your account once you leave the company. Until you consider all your options, you might want to at least temporarily leave the funds with your former employer’s plan.

Transfer the funds to your new employer’s 401(k) plan. Find out if your new employer’s plan accepts rollovers. If so, you can typically make the rollover even before you are eligible to make contributions. However, first review the investment options offered to make sure the new plan has options that will fit your investment goals. Once the funds are in your new employer’s plan, you will be able to take loans if permitted by the plan. Also, if you work past the age of 70 ½, you won’t be required to take distributions from the 401(k) plan until you retire. With individual retirement accounts (IRAs), you must take withdrawals once you turn age 70 ½, even if you are still working. If you decide to transfer the funds to your new employer’s plan, get the appropriate paperwork from your new employer so the funds can be transferred directly to the new plan’s trustee. Otherwise, if the funds go directly to you, your former employer will be required to withhold 20% for taxes. You must then replace the 20% with your own funds within 60 days or the 20% withholding will be considered a distribution, subject to income taxes and the 10% federal penalty.

Roll the funds over to a traditional IRA. Again, you should have your former employer transfer the funds directly to the IRA trustee to avoid the 20% withholding described above. Once the funds are rolled over to an IRA, you can invest in a wide variety of investment alternatives. With a 401(k) plan, you typically have a limited number of options. If you plan on leaving part of your 401(k) balance to your heirs, an IRA usually has more flexible options than a 401(k) plan. After the funds are transferred to a traditional IRA, you can then convert the balance to a Roth IRA, provided your adjusted gross income does not exceed $100,000 in the conversion year.

November 8, 2006

Retirement Planning Throughout Your Life

After working 40 or 50 years, you could find yourself retired for another 20 or 30 years. To support yourself without a job for 20 or 30 years, you should probably be planning for retirement during your entire working life. However, your concerns and strategies for retirement will change as you age. Consider the following tips from your 20s through your 60s and beyond:

In Your 20s:

While you may just be getting started in your career, don’t squander the long time period before retirement that can help your retirement funds grow and compound. Some strategies you may want to consider include:

Start saving for retirement now. Saving even small amounts now can help you accumulate significant sums by retirement age. For instance, if you invest $2,000 per year from age 25 to age 65 in a tax-deferred account earning 8% per year, you could accumulate $518,113 by age 65. (This example is provided for illustrative purposes only and is not intended to project the performance of a specific investment vehicle.) Try to save at least 10% of your income, but if you find that difficult to do, at least start saving something. Get in the habit of saving at a young age, before you get used to spending all your income.

Investigate different retirement savings vehicles. If your employer offers a 401(k) plan, start contributing as soon as possible. You should at least contribute enough to take full advantage of any matching contributions offered by your employer, which can significantly increase your savings. For instance, assume you earn $50,000 per year and your employer matches 50 cents on every dollar of contributions up to 6% of your salary. If you contribute 6%, you will make a contribution of $3,000 and your employer will contribute $1,500. If your employer doesn’t offer a 401(k) plan, contribute to an individual retirement account (IRA), either traditional IRA or Roth IRA. Investigate the differences between the two types of IRA's to determine which is better for your situation.

In Your 30s:

Typically, even though your income is rising, your expenses are also growing as you buy a house and start a family. However, don’t lose sight of retirement, since you still have significant time before retirement to help your funds grow. Consider these tips:

Start thinking about retirement. Give some thought as to how you want to spend your retirement and how much it will cost. While you may feel that retirement is too far away to gauge these things, putting a rough price tag on your retirement and calculating how much you need to save can provide significant motivation in saving for that retirement.

Devise strategies to keep saving. Look for ways to remain committed to saving, even as your expenses are increasing. For instance, whenever you receive a raise, put some of it into your 401(k) plan so you don’t get used to spending the money. Before incurring a large new expense, such as a new car or home, look at the impact the additional expense will have on your retirement.

In Your 40s:

While you still have quite a while before retirement, it’s time to get serious about saving for retirement. Especially if you haven’t saved much during your 20s and 30s, you need to really commit to saving. Some tips to consider include:

Contribute the maximum to your 401(k) plan. Don’t make excuses; just make sure you are saving the maximum in your 401(k) plan. Also look at saving in an IRA.

Review your investment strategy. Take a look at all your investments, both inside and outside of retirement accounts. Does your strategy make sense, and will it help you reach your retirement goals?

In Your 50s:

Retirement is no longer that far away. It’s time to assess where you stand and whether your retirement plans are realistic. Consider these tips:

Look seriously at your retirement plans. Make sure you have an accurate assessment of how much money you’ll need in retirement and compare that to your estimated retirement income sources. If you are short, consider revising your plans. You may need to work longer, scale back your retirement plans, or save more.

Take advantage of catch-up contributions. In addition to making the maximum contributions to 401(k) plans and IRAs, take advantage of catch-up contributions once you turn 50. In 2006, you can make a $5,000 catch-up contribution to a 401(k) plan, if permitted by your plan, and a $1,000 catch-up contribution to an IRA.

Try to ratchet up your savings. By now, hopefully, some of your large expenses will be behind you, such as funding a child’s college education, and you can divert those sums to your retirement savings.

In Your 60s and Beyond:

This is the period when people typically transition from a working life to retirement life. Some strategies to consider include:

Finalize your retirement plans. Go through your expenses and expected retirement income sources one more time to make sure you haven’t forgotten anything. Determine when you can start drawing retirement benefits, such as Social Security, Medicare, and pension plans. Before you leave your job, make sure the timing is right and you’ll be able to comfortably support yourself during retirement.

Plan before withdrawing your retirement savings. Before you start taking withdrawals from 401(k) plans and IRAs, consider all relevant factors. You don’t want to drain those funds too quickly.

Consider working on at least a part-time basis. Even if you think you have sufficient funds for your retirement, consider working at least part-time during the early years of your retirement. This will help keep you active, while also supplementing your retirement savings. It is better to work now than to find out late in retirement, when your health may not permit you to work, that you have run out of retirement savings.

To search and apply online for high-yielding, FDIC insured Savings Accounts and FDIC Insured Certificates of Deposit from online National Banks consider visiting the ManagingMoney.com Banking Center.

November 2, 2006

Finding Your Lost Pension & 401(K) Funds

People change jobs many times over a working career. Women marry and change their name over their working careers, many more than once. Adults move on with their lives, sometimes to another city, perhaps you moved across state lines. Some workers will venture across country borders forgetting they were at a particular employer long enough to have become vested with a pension benefit. As the years pass, when they don't leave a forwarding address, it becomes harder to find them and remind them of these waiting benefits, if not impossible.

What is the financial result of these minor failures to maintain contact with old employer oversights? According to government records, more than $86 million languishes in unclaimed pension benefits that nearly 37,000 retirees are owed. Most of these workers are unaware they ever earned the benefits in the first place. Others may feel they've got retirement money coming to them but have long since ceased contact with former employers, which in the meantime may have merged, dissolved or been sold.

A federal corporation created by the Employee Retirement Income Security Act of 1974, known as the PBGC, protects the pensions of 44 million American workers and retirees just like you. One daunting task they are entrusted with is to track down and match missing participants with waiting pension monies. It has been reported due to their efforts that 22,356 retirees are earned pension money richer because of their due diligence.

Amounts languishing in unclaimed pension type accounts vary from a reported $255,554 to a meager $1.09. If you are the average account holder, your balance would be in the range of $5,300, still a nice addition to your income in any amount.

A second source is the National Registry of Unclaimed Retirement Benefits (NRURB). They are responsible with keeping over 50,000 individual retirement accounts for individuals who have forgotten 401(k), profit sharing and other company sponsored plan balances that have been abandoned. These assets are invested in the most conservative low yielding vehicles available, CD’s and Money Market funds. Abandoned 401(k) type accounts here usually range in the more modest $600-$1,000 range.

A quick way to see if you have monies waiting would be to check the following website. Have your Social Security number handy (or those of your retiree aged parents and relatives) to see if any forgotten benefits are awaiting a claim.

https://www.pbgc.gov/MissingParticipant/missingParticipantSearch.jsp

http://www.pbgc.gov/workers-retirees/find-your-pension-plan/content/page676.html

https://www.unclaimedretirementbenefits.com/doParticipantSearch.m

After all it is only money….YOURS!

Author: Amy Rose Herrick, a Member of the Paladin Registry

 

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