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May 23, 2007

Bank of America Offering NASCAR Checking Accounts

Hoping to build on its newfound expertise in credit cards and on NASCAR fans' loyalty, Bank of America Corp. has begun offering a NASCAR checking account to try to drive more retail business to its automated teller machines and branches. This follows on the heels of the NASCAR RacePointsSM Visa® Credit Card issued by FIA Cards Services, N.A. which we discussed in a previous blog entry. It appears that "sports affinity" marketing and the financial services industry have discovered one another.

May 22, 2007

Finding Money to Save

We all know that we should be saving at least 10% of our gross income for retirement, but, that can seem like an impossible goal after paying all of our bills. Before coming to the conclusion that you can’t come even close to saving 10% of your income, you should look very closely at the after-tax cost.

For instance, assume you earn $50,000 annually and your employer matches 50 cents for every dollar you contribute to the 401(k) plan, up to 6% of your pay. If you put 6% of your pay, or $3,000, in the plan, your employer will match 3%, or $1,500. Your contribution really costs less than 6%, because the money is taken out before income taxes. If you are in the 25% tax bracket, your $3,000 contribution will save you $750 in taxes, or 1.5% of your pay. So, between your contributions and your employer’s match, you will contribute 9% of your pay toward retirement, but it will only cost you 4.5% of your pay.

Made over long periods of time, those levels of contributions can help significantly in funding your retirement. If you contribute $4,500 annually starting at age 30, you would accumulate $837,460 by age 65 with an investment return of 8%. (This example is provided for illustrative purposes only and is not indicative of the rate of return of a specific investment.)

What if you don’t have a 401(k) plan at work? Take a look at individual retirement accounts (IRAs). While you won’t get an employer match, you can contribute to a deductible IRA, if eligible, and contribute pretax dollars, which reduces your contribution’s cost by your marginal income tax rate. In 2007, you can contribute a maximum of $4,000 to an IRA, and individuals over age 50 can make an additional $1,000 catch-up contribution. So, if you are in the 25% tax bracket and make a $4,000 contribution, you will save $1,000 in income taxes. Or, you may prefer to contribute to a Roth IRA. While you won’t get a current income tax deduction for your contribution, you can make qualified distributions free from federal income taxes.

In summary, don’t just assume that you don’t have the funds to save for retirement without taking a very close look at the after-tax cost.

May 17, 2007

Points to Consider When Deciding on a Guardian for Your Children

For parents with minor children, the most important reason for estate planning is to ensure that provisions have been made for their children. While it can seem overwhelming to deal with all the issues involved, consider what would happen if you and your spouse died without a will, with no provisions for a guardian, and without adequate money to help raise your children, making them dependent on the goodwill of relatives. One of your most important parental responsibilities is to make sure this does not happen. Some items to consider include:

Carefully select a guardian. While your first inclination may be to select your parents, make sure they will have the energy to raise your children. A better alternative may be a sibling or friend. If you have several children, decide whether it is reasonable to expect one person to raise them all. You may want to name more than one guardian, but make sure the guardians will work together to keep the children as close as possible. If the person lives in another city or state, consider whether you want to uproot your children while they are going through the trauma of their parent’s death.

Talk to your selected guardian. Once you have settled on a guardian, discuss your decision with that person to make sure he/she is willing to take on the responsibility. Name a contingent guardian in case your first choice is unable to serve.

Make adequate financial arrangements. You would not want your children to be a financial burden, or their presence may be resented. Determine how much is needed for living expenses, hobbies, medical expenses, and college. Consider other items as well. For instance, will your guardian’s home comfortably accommodate your children, or should you leave funds for an addition to the home? Include a financial cushion so there is plenty of money until your children reach adulthood.

Decide who should manage your children’s finances. The person with physical custody of your children may not be the best person to handle their finances. Thus, you may want to select another individual for that role. You should also consider whether trusts need to be set up and how money should be distributed when your children reach adulthood.

Express your wishes to your selected guardian. This will help ensure your children are raised according to your beliefs. Make sure to indicate your preferences for education, religion, lifestyle, and other factors.

Review your choice of guardian every year. As your children grow, you may realize that the person you originally selected as guardian is no longer the right choice.

May 14, 2007

People Must Learn to Pay Themselves

May 9, 2007

Reassessing Your Retirement at 60

Approximately five years before you want to retire, thoroughly reconsider your retirement plans and make sure all significant financial pieces are in place. Once you retire, you probably won’t have the option of going back to your pre-retirement job. So, before you retire, consider these points:

Take a serious look at your retirement plans. By now you’re close enough to retirement that you should have a good feel for your retirement expenses and expected income. While you may be anxious to retire, remain flexible about your retirement date. Working an additional year or two can add substantially to your retirement savings and may boost your retirement benefits.

Get a fix on your Social Security and pension benefits. Make sure you know exactly how much you can expect from Social Security and any defined-benefit plans. How much will your benefits increase if you delay retirement by one year, five years, etc.? If you retire before normal retirement age for Social Security purposes, do you plan on working? Be aware that for those under full retirement age for Social Security purposes, earnings over $12,960 in 2007 will cause you to lose $1 of benefits for every $2 of earnings over that threshold. Make sure you understand your distribution options for any defined-benefit plans. In most cases, those decisions are irrevocable, so you’ll want to take some time to assess those options.

Determine how much income your retirement investments will generate. As a general rule of thumb, you can multiply your retirement investments by 4% to get an idea of how much you can withdraw annually. You can go through a more detailed analysis, reviewing a wide range of variables, for a more precise answer. However, the younger you retire, the more conservative your withdrawals should be, since your funds will have to last for a longer time period.

Investigate work options. If you plan on working at least part-time during retirement, have you decided what you’ll do and how much it’ll pay? Make sure you investigate your options, including finding out if your current employer provides part-time opportunities after retirement.

Finalize living arrangements. Determine whether you want to stay in your current home or move to another one, either in the same city or a different location. At this point, you should be able to determine whether you will have a mortgage and how much equity you’ll have in your home. While approximately 80% of retirees continue to live in their current home, explore whether it makes sense to downsize, freeing up home equity for investments or retirement income.

Deal with health insurance and long-term-care costs. Two of the most significant costs in retirement are medical care and long-term care. Make sure you have plans to deal with both. If you are retiring at age 65 or later, you’ll be eligible for Medicare, although a spouse under age 65 will not be eligible. You will probably need supplemental coverage with Medicare. If you are retiring before age 65, make sure you know exactly how much coverage will cost you, especially if health insurance is not provided by your employer after retirement. Now is also a good time to take a look at long-term-care insurance, since premiums get significantly more expensive as you age.

Live with your retirement budget for a couple of years. Want to really make sure your retirement budget is reasonable? Try living with your retirement budget for a couple of years before retirement. If you can do so without increasing your debt, you can be reasonably confident that the budget will work during retirement.

May 7, 2007

Financial Aid Basics

The basic premise of financial aid is that it is need based. Families fill out the government’s aid form, the Free Application for Federal Student Aid, so mathematical formulas can determine a family’s eligibility for federal financial aid. Colleges can use a different, though similar, methodology to make financial aid awards. However, the same student can obtain very different financial aid packages from colleges with similar costs. If the financial aid process is truly need based, how could that happen?

Part of it results from how individual colleges define your assets for financial aid purposes. For instance, some include home equity, while others do not. Another part of the difference results from colleges competing to attract top students. High-caliber students increase the college’s prestige, making the college a more attractive alternative to subsequent years’ students. To encourage these students to attend their college, merit scholarships are often given, or the mix of traditional need-based financial aid is altered. Financial aid consists of grants (which do not have to be repaid), loans, or work study programs. Two financial aid packages may have the same dollar value, but the one with a higher percentage of grants will be more valuable to the student.

What implications does this have for a child approaching college? Consider these tips:

• Encourage your child to perform well in high school and on college entrance exams. Not only will this make him/her eligible for acceptance at a broader range of colleges, it may increase your financial aid package.

• Don’t start the financial aid process determined to attend just one particular college. Consider a few alternative colleges that would be acceptable and apply for financial aid at all of them. You may be surprised at how different the financial aid awards are, especially if your child is a strong student. Your expected family contribution remains the same, whether your child attends a public, private, or Ivy League college. Many private colleges have more merit aid and discretion than public colleges do when making financial aid offers.

• Review aid packages over the four years your child will be attending college. Find out how the aid package will change from year to year and whether there are any conditions for renewal. Keep in mind that the package is need based. So, in future years, if your income changes dramatically or you have fewer children attending college, your aid package may decrease. Even if nothing changes in your family situation, the college may admit new students with greater financial need, decreasing your aid. Many packages have conditions, such as maintaining a certain grade point average. Make sure those conditions are reasonable for your child. Another complicating factor is that most aid packages do not increase with inflation, while college costs have been increasing by more than the inflation rate. Thus, by the time your child reaches his/her senior year, the amount you need to contribute could rise substantially.

• What should you do if your child has his/her heart set on going to one college, but you receive a better financial aid package from another college? Talk to the financial aid officer. While some colleges are receptive to matching other colleges’ offers, others are not. In those cases, your best strategy is to review the financial aid calculations with the officer, looking for ways to increase the award. Many subjective factors go into calculating financial aid awards and you may be able to convince the officer to change some of them so the total award is increased. Perhaps just changing the composition of the award so more is given in grants will help.

May 2, 2007

How to Develop an Investment Plan for College Expenses

To meet your goal for funding a child’s college education, you typically need to develop an investment plan. One of the more important factors is your child’s age:

Children ages 10 or younger: With eight or more years until college, you should be able to fund your child’s education by setting aside reasonable sums. Since inflation can have a major impact, consider investments with higher return potential. Your long-term time frame should give you sufficient time to overcome any short-term setbacks while keeping ahead of inflation.

Children ages 11 to 14: With four to seven years until college, you may want to select more conservative investments. If you are just starting to save now, you may find the needed amounts quite large. However, start saving so you’ll have some funds accumulated by the time your child enters college.

Children ages 15 to 18: At this point, continue switching to more conservative investments as college quickly approaches. If you are just starting to plan for college now, it may be very difficult to save the large sums needed in such a short time. Investigate the financial aid process to see if you will qualify for aid and research your borrowing options.

Other items to keep in mind when developing an investment strategy include:

Start investing as soon as possible. This can have a huge impact on the amount you need to save on an annual basis. For instance, assume you intend to send your newborn to a public college that currently costs $16,000 per year, the average cost of a public university (Source: Trends in College Pricing, 2006), with expected increases of 5% per year. After 18 years, you would need $165,965 to pay for four years at a public university. If you start saving now, you’ll need to save $4,432 per year to reach that goal in 18 years. Waiting until your child is age five increases your annual savings amount to $7,721 for 13 years. Start saving when your child is 10 and you’ll need to save $15,603 a year for eight years, while the amount grows to $51,123 a year for three years if you wait until your child is age 15. (These figures assume an after-tax rate of return of 8%. This example is for illustrative purposes only and is not intended to project the performance of any specific investment.)

Look for tax-advantaged ways to invest. If your earnings are tax deferred or tax free, you could end up with a much larger balance than if you had to pay taxes on earnings over the years. Take a look at section 529 plans and Coverdell education savings accounts, both of which allow tax-free distributions as long as the proceeds are used for qualified education expenses. Investigate these options thoroughly, however, since various qualifications and restrictions apply.

Select investments that allow periodic contributions. You may want to make contributions on a weekly or monthly basis, so select investments that allow small contributions. You may also want the ability to automatically transfer funds from a checking or savings account to your college investments.

Adjust your investment mix over time. As your child gets closer to college age, start moving investments from more aggressive ones with higher return potential to more conservative ones that will help protect your principal. This can help protect your investments from a major downturn that may occur right before your child enters college.

Review your progress annually. Review your investments at least annually so you can make any necessary adjustments. You may decide to change investments or increase the amount you are saving on an annual basis.


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