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March 15, 2007

Check All Factors Before Switching Jobs

When considering a job change, it’s tempting to just look at the difference in salary between the two positions and base your decision on that. But before deciding whether to change jobs, you should consider a number of factors, including the following:

401(k) plans — Compare the 401(k) plan features at both employers. How long will you have to wait before you can start making contributions to the new plan? What matching contributions does each employer make? What investment alternatives are available with each plan? 401(k) plans are becoming increasingly important to help fund retirement, so you should thoroughly review each plan before making a job switch.

Health insurance — How much of your health insurance premiums do you have to pay at each employer? How does the coverage compare? What out-of-pocket expenses are you likely to incur with each plan?

Other fringe benefits — Thoroughly compare the fringe benefit package at each employer including: vacation days, sick days, life insurance, disability insurance, dental and optical insurance, and other benefits.

Commuting costs — How far is each job from your residence? Will there be additional commuting costs involved, including gasoline, parking fees, and wear and tear on your automobile? Will you have to spend additional time commuting, keeping you away from your family longer?

Other costs — How do you have to dress at each job? Will you need to purchase new or more expensive clothing with the new job? Will you have to go out to lunch more frequently?

Advancement opportunities — While this is difficult to quantify, what are the advancement possibilities at each job? You might want to stick with a job with a lower salary, if in the long run you have better advancement opportunities.

March 12, 2007

Protecting Your Family's Security

One of your first financial goals should be to protect your family’s financial security from major catastrophes. To protect your family's financial security consider these four items:

Cash reserve for short-term emergencies, such as a temporary job loss, major home repair, or large medical bill. A common rule of thumb states that your cash reserve should equal two to six months of living expenses. However, how much you will need depends on your age, health, job outlook, and borrowing capacity. You may need a larger reserve if you expect to be laid off or lose your job, you are the sole wage earner in the family, or your income fluctuates. A smaller reserve may be needed if you have more than one source of family income or you can borrow quickly, such as through a home-equity line of credit.

Adequate insurance in all major areas. Your insurance needs will change over the years, so you may find yourself with too much or too little coverage. Thus, periodically review your life, disability, medical, and homeowners insurance. Do not overlook disability income insurance, which can be very important if you can not work due to an illness or injury. Make sure your coverage replaces 60% to 80% of your income, cannot be canceled, and pays partial benefits when you can not return to work full time. For a selection of insurance providers visit the ManagingMoney.com Insurance Directory. Here you will be able to shop for and compare heath, life, auto, homeowners insurance, and more.

Umbrella liability insurance to protect against major lawsuits. Umbrella policies are purchased in $1 million increments and kick in once limits of your homeowners and automobile policies are exceeded. In addition to the items covered by those policies, an umbrella policy typically covers damages from use of nonowned property in your possession and from lawsuits for libel, slander, defamation of character, and invasion of privacy. While you might think you will never need this coverage, most umbrella policy claims relate to automobile accidents.

Power of attorney. A power of attorney gives an individual you designate the power to act on your behalf when you are incapacitated, allowing him or her to take over your finances and make investment decisions. For do-it-yourself legal solutions visit ManagingMoney.com's Legal Center. The Legal Center provides not only Powers of Attorney, but also, Wills, Health Care Directives, Trusts and more.

March 9, 2007

Have You Rebalanced Your Portfolio

When you developed your asset allocation strategy you did it for a reason. You wanted to control your portfolio’s risk by deciding how to allocate among different asset classes. However, your portfolio will not stay within that allocation by itself. Since different investments earn different rates of return, over time your allocation will get out of line. Thus, you need to review your portfolio periodically and make adjustments to rebalance it.

While the theory of rebalancing is easy enough to understand, it is often a difficult concept for investors to implement. The problem is that rebalancing goes against your basic instincts. With rebalancing, you are basically selling those investments performing well to purchase those that are underperforming. It might help to remember that you are following a basic investment principle when rebalancing — you are buying low (those investments that are underperforming) and selling high (those investments that are performing well).

There are three basic approaches to rebalancing:

Rebalance annually. Choose a date to rebalance, perhaps at the beginning of the year, when you receive your annual statements, or at the end of a quarter. On that date every year, compare your current allocation to your target allocation. Any allocations off by more than 5-10% would require rebalancing. Once you have rebalanced, don’t be tempted to make other rebalancing changes during the year. Wait for your next rebalancing date.

Rebalance when your allocation differs from your target allocation by a designated percentage. With this type of rebalancing, you monitor your portfolio more frequently, perhaps monthly. Once your allocation moves from your target allocation by a predetermined percentage, perhaps 5-10%, you rebalance your portfolio.

Rebalance based on current market conditions. With this approach, rather than one specific percentage for each asset class, you might have a target range. For instance, you might allocate anywhere from 30% to 50% of your portfolio to large-capitalization stocks. Depending on your views of the market, you might want to allocate near the low or high end of that range. Thus, your allocation will change as your views about the market change.

Once you have decided what needs to be rebalanced, you need to implement those changes. If the change is within a tax-deferred account, such as a 401(k) plan or individual retirement account, those changes can typically be made without tax ramifications. With taxable accounts, you will want to consider the tax ramifications before implementing the changes. If the sale of an asset will result in a tax liability, consider other methods to implement the change. For instance, new investments can be made in the underweighted portion of your portfolio or periodic interest, dividends, or capital gains can be redirected to the underweighted portion. Or you can take withdrawals from the overweighted portion of your portfolio. However, if you can’t implement the changes in a relatively short period, you might want to sell some investments. Asset allocation cannot eliminate the risks of fluctuating prices and uncertain returns.

March 8, 2007

Make Conservative Assumptions About Retirement

How can you ensure that you will have sufficient funds to last your entire retirement? So many of the variables used to calculate this amount seem uncertain. What is a reasonable rate of return for your investments over the long term? How long will you live, knowing life expectancies are increasing? How much can you count on from Social Security and pension plans? If you are concerned about running out of money during retirement, you need to be very conservative with your assumptions. Some tips you may want to consider include the following:

Assume your needed retirement income will be at least 100% of your current income. Most rules of thumb indicate you will need between 70% and 100%, but figure on at least 100% to be safe. Nowadays, retirees want to travel, pursue hobbies, and live an active lifestyle, which generally means you will need the higher end of these estimates.

Add a few years to your life expectancy. You should probably plan on living until at least age 85 or 90. If your family has a history of longevity, add a few more years to these figures. While you may find it hard to believe you will live this long, you don’t want to reach age 75 or 80 and find out you’ve run out of money. At that point, you might not have the option to return to work.

Reduce your estimates of Social Security benefits. The Social Security Administration sends benefit statements every year around your birthday, telling you how much to expect in benefits. While Social Security is currently in sound financial condition, that is expected to change after all the baby boomers retire. To be safe, count on benefits that are somewhat less than the Social Security Administration is estimating, and don’t plan on adjustments for inflation.

Cut back on your living expenses now. This has a two-fold impact on your retirement. First, it frees up money to set aside for your retirement. Second, you get used to a lower standard of living, which should also reduce your expected lifestyle for retirement.

Reach retirement with no debt. Mortgage and consumer debt payments consume a significant portion of most people’s income. Pay off all those debts by retirement and you’ll significantly reduce your cost of living.

Forget about early retirement. Saving enough to last from age 65 to age 85 or 90 is a difficult task. Trying to retire at age 55 or 60 is just not practical for most individuals, unless you’re willing to significantly reduce your lifestyle. Working a few more years can go a long way in helping fund your retirement. Those years are typically your highest earning years, so hopefully you’ll save significant sums during that period. Also, every year you work is one year you don’t have to support yourself with your retirement savings.

Consider working during retirement. Especially during the early years of retirement, you should consider working on at least a part-time basis. Even modest earnings can help significantly with retirement expenses.

Plan on taking conservative withdrawals from your retirement assets. Don’t plan on taking out more than 3% to 4% of your balance annually. Your funds should last for decades with that level of withdrawal.

March 4, 2007

FirstAgain Provides Loans to Borrowers with Excellent Credit

A new lender started business recently with an innovative loan product. If you have watched any business news on the TV the last few days, in addition to the big Stock Market swings, you have heard a lot about problems in the sub-prime lending market. Sub-prime loans are loans to borrowers who do not have the best credit credentials. Some big name lenders have gone out of business recently or had to take sizeable writedowns because of delinquent loans. No big surprises there as these are "high-risk" loans anyway.

So who and what is this new, innovative lender and product? How about a lender who only makes loans to people with excellent credit? That's right, I said excellent credit. What a concept. It's about time someone realized that even people with good credit need a loan occasionally and that they deserve preferential rates and terms for having exercised fiscal responsibility.

This new lender is called FirstAgain. They specialize in online, unsecured, simple interest, personal loans ranging from $10,000 to $100,000 to borrowers who have "excellent and substantial" credit. Some important words here. Unsecured means that if you are approved it is not necessary to pledge assets such as your house or vehicle in order to get the loan. Simple interest, as opposed to compound interest, reduces the cost of the loan over time. "Excellent and substantial" credit is open to some interpretation, but FirstAgain says borrowers share the following characteristics:

- Five or more years of significant credit history
- A credit history with a variety of account types such as major credit cards, vehicle, and mortgage debt
- An excellent payment history with no delinquencies or other problems repaying debt obligations
- A proven ability to save

Once you receive the money, the options as to how you spend it are yours. Specific examples would be home improvements, auto, motorcycle, or RV purchases, educational expenses, medical expenses, loan refinancing, or credit card consolidation.

FirstAgain was only founded in September 2006, but the company has a substantial pedigree. The founders, Gary Miller and Dave Zeller, were the co-founders of PeopleFirst.com. PeopleFirst became the nation's largest online auto lender, pioneered the concept of Blank Check® auto lending, and were acquired by Capital One of "What's In Your Wallet?" fame, in October, 2001. In addition to having their personal and family money invested in FirstAgain, funding has also been provided by Merrill Lynch & Company. Merrill Lynch, which recently made headlines with the purchase of approximately one-half of Blackrock, one of the world's largest publicly traded investment management companies, manages over $1.6 trillion in client assets. The point is that there are some deep pockets behind FirstAgain.

So, if you have "excellent and substantial" credit and are in need of a loan, visit the ManagingMoney.com Lenders Directory and take a look at FirstAgain. The rates appear to be competitive, the application is done online, there are no fees, points, or prepayment penalties, and you may be able to receive your money by the next day. It's about time someone started catering to good credit borrowers.

March 1, 2007

Benefits of Moving Gently into Retirement

For most of your working life, you have looked forward to the day when you can quit your job and start enjoying retirement. But in the face of longer life expectancies, uncertain Social Security benefits, declining pension benefits, unknown inflation rates, volatile markets, and low retirement savings, can you really afford to retire at a relatively young age and spend decades supporting yourself without a job?

The average life expectancy of a 65-year-old man is 81 and of a 65-year-old woman is 84. A 65-year-old couple has a 25% chance that one of them will live to 95. That’s a long time to support yourself without a job. More and more people are coming to the conclusion that either retiring later or continuing to work during retirement is necessary to ensure that they remain financially comfortable for the rest of their lives.

There are also some nonfinancial benefits for continuing to work:

Work keeps you healthier and mentally sharp. Of those who had completely retired, 11% experienced a decline in mental health, 8% had an increase in illness, and 23% had increased difficulty in performing daily activities over a six-year period (Source: National Bureau of Economic Research, 2006).

Work enables you to maintain social contact with people outside your immediate family. When individuals who had been retired for a year or two were asked what the hardest thing to deal with in retirement was, the number two answer, just behind loss of income, was loss of social connections at work (Source: The New Retirement Mindscape, 2006).

Working does not necessarily mean that you have to stay with your current employer. Rather, many individuals are taking on completely different jobs, which can allow them to try something totally different, provide more free time by working less, or ensure less stress.

Besides the nonfinancial reasons for working, there are several financial reasons that make this an important retirement strategy:

You have more time to save. Each additional year you work is an additional year you can continue to save for retirement. Those age 50 and over have additional means for saving, with annual catch-up contributions of $1,000 for Individual Retirement Accounts (IRAs) and $5,000 for 401(k) plans in 2007.

You shorten your retirement. The longer you work, the less time you will spend in retirement, which means you need less money to fund that retirement.

You can delay Social Security benefits. Every additional year you wait to take Social Security benefits before the age of 70 ½ will increase your monthly benefit.

You keep health insurance benefits. One of the most significant costs in retirement is health care, and you can delay the cost by working at a job that provides this benefit.

Some companies are helping employees with retirement issues by allowing phased retirement, where hours are gradually reduced until full retirement. One possible advantage of staying with your current employer is that the pay may be better than if you started over in another profession. If your employer offers a phased retirement program, find out these details before signing up:

How will phased retirement affect your pension? Many pension benefits are calculated based on your earnings in the last few years of your working career. If you do not want to take pension benefits yet, make sure your pension will be calculated using earnings while you worked full-time. You may also be able to draw a pension and work part-time. The Pension Protection Act of 2006 allows workers age 62 and older to draw a pension and work part-time.

What will happen to your salary with reduced hours? Will you receive a pro-rata share of your pay, or will a different pay scale be used? Will you be entitled to salary increases in the future? Make sure you agree on how you will be paid before going to part-time status - and get it in writing.

Will you be eligible for health insurance benefits? Find out the company’s policy about health insurance benefits for part-time employees. This will be especially important if you go to part-time status before age 65, since you won’t be eligible for Medicare.

What other details should you know about? Make sure there is a mutual understanding about your hours. Can you take time off for travel? Is this a permanent or short-term arrangement? If you do not like part-time work, can you go back to your full-time job?

If your employer does not offer a phased retirement program or you want to try something new, investigate your options before quitting your job. Consider a variety of factors:

• How are you planning on spending your retirement? If you plan to travel a lot, how will work fit into that schedule? If you plan to split your time between two homes in two locations, how will you be able to work?

• What interests you? Would you be happier pursuing a job that takes advantage of skills from your current job, or would you like to try something totally different? Do you need to obtain additional skills or go back to school?

• Do you want to work in an office, by yourself, or at home?

• Do you want a job with significant responsibility, or are you trying to reduce the stress in your life?

• Are you passionate about an interest or hobby that you may be able to turn into a business? Do you have an interest in starting your own business? If so, do you have the financial resources, without risking funds for your retirement?

• Is there a cause that is important to you? Is it time to move to the nonprofit sector, finding an opportunity that matters to you at a personal level?

Retirement is in the midst of being redefined once again. The last generation was able to retire to a life of total leisure due to the generosity of company pension benefits and Social Security. But longer life expectancies and less generous benefits mean that it is time to redefine retirement. What many are seeking is not so much total leisure as more leisure or a more meaningful life. Many are finding that those goals can be accomplished while still working, and that those additional working years can provide more financial security.

 

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