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July 31, 2009

Time Running Out for Student Credit Cards

Time is running out for college students to get their own credit card. Starting in February 2010, those under 21 will no longer be able to get a credit card unless they can prove they have the means to prepay the debt or a parent co-signs. The new law is meant to make it tougher for young people to get credit.

Three potential pitfalls of the new legislation are:

· Prepaid cards or secured credit cards will become the card of choice for people under 21 years of age; thereby reducing their ability to build a credit history.

· Having mom or dad co-sign won't teach teens to be financially responsible. As long as they have mom or dad bailing them out should they get into financial trouble, they won't learn how to use credit responsibly

· This legislation could lower parents' credit scores. By co-signing for their teenager to get a credit card, parents will be responsible for any charges their teen makes and this could have a devastating impact on their credit score.

The bottom line is that if you want your upcoming college student to have their own credit card, you better start the process soon. Use this as an opportunity to teach your child fiscal responsibility as they start building their own credit histories. To see a broad selection of student credit cards currently available, visit the ManagingMoney.com Student Credit Card Center.

July 27, 2009

How Much Can You Withdraw in Retirement?

How much to withdraw annually from your retirement assets is probably one of the most important decisions you'll make when you retire. Several factors need to be considered when calculating your withdrawal rate, including your life expectancy, expected long-term rate of return, expected inflation rate, and how much principal you want remaining at the end of your life. Unfortunately, life expectancies, rates of return, and inflation are difficult to predict over a retirement period that can span decades. Keep these points in mind:

Your life expectancy. While it's easy enough to find out your actuarial life expectancy, life expectancies are only averages. Approximately half the population will live longer than those tables suggest. How long close relatives lived and how healthy you are can help you gauge your life expectancy. Just to be safe, you might want to add five or 10 years to that age. After all, you don't want to run out of money at age 75 or 80, when you might not be able to return to work.

Rate of return. Expected rates of return are often derived from historical rates of return and your current investment allocation. Historical rates of return are averages of returns over a period of time. You might want to be more conservative than that, assuming a rate of return lower than long-term averages. Even if you get the average return correct, the pattern of actual returns can significantly affect your portfolio's balance. For instance, if you experience higher returns in the early years of retirement when your portfolio balance is higher and lower returns in the later years when your portfolio's balance is lower, you'll have a higher ending balance than if the opposite occurred.

Expected inflation. While inflation has been relatively tame recently (2.7% over the past 10 years), it was 4.1% in 2007. Over the past 30 years, inflation has averaged 4.2% (Source: Bureau of Labor Statistics, 2008). Inflation of 4% can have a dramatic impact on your money's purchasing power over a long retirement. For instance, at 4% inflation, $1 is worth 68¢ after 10 years, 46¢ after 20 years, and 31¢ after 30 years.

So what is a reasonable percentage to withdraw on an annual basis? To be conservative, it is typically recommended that you only withdraw modest amounts from your retirement savings, especially in the early years of your retirement. A common rule of thumb is to withdraw no more than 4% in your first year of retirement, adjusting that amount annually for inflation.

With an asset allocation of 60% stocks and 40% bonds, one study found that over a 30-year period, withdrawing 4% initially and increasing withdrawals by 3% annually would result in an 87% probability of ending that period with assets remaining. A 5% withdrawal rate would reduce the probability to 63%, with the probability going down to 38% with 6% withdrawals and 19% with 7% withdrawals (Source: AAII Journal, August 2008).

Consider these tips when deciding how much to withdraw:

Use a modest withdrawal percentage to ensure you don't deplete your assets. While you should go through the process of determining how much to withdraw based on your unique circumstances, be prepared for modest withdrawal percentages. With a $1,000,000 portfolio, a 4% withdrawal equals $40,000.

Stocks need to remain a significant component of your portfolio after retirement. While the recent stock declines have been difficult to deal with, especially for recent retirees, stocks should still remain a significant component of your retirement portfolio.

Review your calculations every year. This is especially important during your early retirement years. If you're depleting your assets too rapidly, you can make changes to your portfolio, reduce your expenses, or consider going back to work. As you age, your options tend to become more limited.

Work as long as you can. Supporting yourself for a retirement that could span 25 or 30 years requires huge sums of money. Consider working at least a couple of years longer than originally planned. During those years, you continue to build your retirement assets, and you delay making withdrawals from those assets. Once you retire, consider working at least part-time to reduce your withdrawals from your retirement assets. Even modest earnings can help tremendously. For instance, if you earn $20,000 annually, that is the equivalent of a 4% withdrawal from a $500,000 portfolio.

July 24, 2009

Saving Money is the Best Way to Reach Your Financial Goals

The whole point of an investment program is to accumulate sufficient funds to meet your financial goals. So what is the most fundamental investment principle: selecting the proper investments, accumulating the correct combination of assets, or timing the market to avoid corrections? Actually, the principle may not even sound like an investment principle at all. To help ensure you meet your financial goals, you must save significant sums of money on a consistent basis. That one habit will do more to help you reach your financial goals than anything else. The sooner you start this habit, the less you need to save. Consider the following example.

Fresh out of college and 25 years old, you decide you'll need $1,000,000 when you retire at age 65. You can save on a tax-deferred basis through your employer's 401(k) plan and expect to earn 8% compounded annually. If you start at age 25, you'll need to invest $3,860 a year for 40 years to reach your goal. However, you decide to wait 10 years. At age 35, you now need to invest $8,827 per year for 30 years. Still seems like too much? Consider that at age 45, you need to invest $21,852 annually. The really bad news is that someone waiting until age 55 will need to invest $69,029 annually to reach that goal. By postponing investing, you lose time and with it, the ability for compounding returns on your contributions to perform much of the work of attaining your goals.*

Let time work for you instead of against you. To calculate how much money you need to save for your retirement go to the ManagingMoney.com Retirement Planning Calculator.

* This example is for illustrative purposes only and is not intended to project the performance of a specific investment. It does not consider the payment of income taxes. Keep in mind that a plan of regular investing does not assure a profit or protect against loss in declining markets.

July 20, 2009

Reassess Your Life Insurance Needs at Retirement

As retirement age approaches, it's usually a good time to reassess your life insurance policies to see if your needs have changed. With your children on their own and no earned income to replace, you may no longer need a large life insurance policy. Especially if your insurance premiums are high, you may be tempted to cancel the policy, take the cash surrender value, and enjoy retirement. Before doing that, however, make sure there aren't other uses for your life insurance policy, such as:

To leave a legacy to heirs -- Even if the money isn't needed for your children's support after your death, many people like the thought of leaving a large inheritance to their children or grandchildren. With an insurance policy in place, you can feel free to spend your retirement assets, knowing the insurance policy proceeds will be paid to your beneficiaries after your death. If you have a large estate, the policy proceeds can be used to help pay estate taxes.

To pay your grandchildren's college expenses -- With the rapidly increasing costs of college making it more and more difficult for parents to cover this cost, you might want to use an insurance policy as a college fund for your grandchildren. If you're still alive when they start college, you might be able to borrow some of the cash surrender value to pay these costs.

To support adult children -- There are a variety of reasons why you might want to provide financial help to an adult child. Perhaps your child is a doctor, but has significant debt from college. Or your child might work at a job that doesn't pay a significant amount of money.

To provide a large charitable contribution -- A life insurance policy can serve a couple of purposes when making a large charitable contribution. You can name the charity as the beneficiary of the policy. Or you can leave other assets to the charity that would have been included in your estate and possibly subject to estate taxes. The proceeds of the life insurance policy, if properly structured, can then be paid to your heirs' estate- and income-tax free.

To help deal with long-term-care costs -- Many individuals don't purchase long-term-care insurance believing their spouse will take care of them. However, when one spouse dies, there may not be anyone to take care of the surviving spouse. The proceeds of a life insurance policy can be used to provide long-term care for the surviving spouse.

To optimize pension benefits -- When retiring, irrevocable decisions about pension-plan benefit payments must typically be made. An individual life income option will pay higher benefits than a joint and survivor benefit, but then your spouse will not have pension benefits if you predecease him/her. You could use the proceeds from a life insurance policy as a source of income for your spouse after your death.

While it is generally believed that life insurance needs decrease after retirement, there are a variety of reasons why you might want to retain your life insurance policy.

July 16, 2009

Job Search Scams

Looking for employment? Watch out for scammers. The economic downturn has left millions without work and vulnerable to unscrupulous who are hoping to rip-off desperate people looking for work. The Colorado Attorney General John Suthers recently issued a consumer advisory warning of an uptick in the number of reports of fraudulent job listings on Craiglist and other popular job-search Web sites and the California Society of CPAs also addressed the issue.

Some signs to look for potential fraud:

Sign 1: Anyone asking for money up front.

One common type of fraudulent job listing involves an overseas company looking for someone in the United States to handle transactions by "processing" payments through their own bank account and transferring some of the money, often via wire, to their employers. The ads promise no tax implications and assure applicants that nothing they are doing is illegal. The company sends victims fake checks and asks them to wire their own money overseas before the bad check bounces. Some of these ads request personal identifying information, including bank account numbers, from applicants.

Sign 2: Requests to take a quiz.

Another scam being reported with greater frequency to Attorney Generals involves mystery shoppers, hired to allegedly test the services of local companies. The ads say the company will pay an applicant a fixed amount of money to wire part of a check or money order elsewhere. The check sent to victims, however, never clears and the victims are left with an overdrawn bank account.

Sign 3: Requests for personal financial information.

In our quest for the perfect job, career or even our first job out of college many people turn to the internet as a source of self marketing and promotion, job finder service and networking tool. Better Business Bureaus and Employment professionals, as well as the Federal Bureau of Investigations have identified online fraud as one of the most common sources of identity theft. An online resume can be a ticket to the lotto and in some cases it's straight to the bank to cash that winning lotto check. Resumes provide identity thieves with personal information such as: name, address, telephone number, date of birth, schools attending and when, as well as references and their contact information. Some resumes even include height and weight. Consider: rewriting your resume using a functional format; include a work location; include education and work experience in general terms; create an anonymous job search email address, which does not use your name; use your cell phone number or even purchase a prepaid cell phone system while you are conducting your job search.

Additional steps you can take to protect yourself from scammers....

Step 1: Check out the company by putting its name in Google and add the word "complaint."

Step 2: Go to the Better Business Bureau website at bbb.org and check to see if the company is listed and its rating. If the company is not listed, look under its telephone number or Web address on the site.

Step 3: And remember, if the sender is too eager and the deal sounds too good to be true, run, don't walk, away.

July 13, 2009

Buying Stocks When Prices are Low

For some investors, a long or steep decline in the price of a stock is a signal to beware. For others, it's a temptation to pick up a bargain at a steep discount and make a handsome profit when the stock rebounds. In practice, it takes a lot of savvy to accomplish. Here are a few tips that will help you know when and when not to buy stocks.

Pay attention to the market trend

Most stocks follow the market trend. When you're investing in a stock that's become exceedingly unpopular, it stands to reason that you've got a better shot of making money when the trend is up than when it's flat or down.

Know the reasons for the stock's decline

You may think you know a company because it has a big name and has been around for a long time, but that alone is hardly insurance against its near-term demise. Before you snap up any shares, you need to do your homework and find out why the stock has declined. Is it just bad press over a minor mistake, or is the company's whole business model no longer valid?

Look at the fundamentals

If you're putting your hard-earned money into a troubled enterprise, you owe it to yourself to examine some of the key ratios that indicate the company's underlying strength. These include revenue and profit trends, return on equity, debt-to-equity ratios, and dividend payout ratio.

Check out the stock's PEG ratio

One of the most well-known barometers of the value of a stock is its price to earnings, or P/E ratio. This compares the price of the stock to the company's per-share earnings. An even better indicator of the value is a stock's PEG, or price to earnings growth rate. The PEG incorporates analysts' estimate of the company's future prospects to its current stock price. A PEG ratio below one means the stock may be underpriced compared to how well it will perform going forward.

Look at the stock's technical indicators

Technical analysts examine a stock's chart of price movements and changes in volume of trading over time to try to estimate which way the stock price will move in the future. While not infallible, some key technical indicators can help you gauge whether the time is right to buy a given stock.

If all of these considerations sound complicated, that's probably a good thing if it makes you hesitate. If you're not dissuaded by the relative complexity, consider three more tips:

• Don't invest too much.

• Set an intended investment amount and stick to it.

• Seek the help of an investment professional.

July 9, 2009

The Cash for Clunkers Program (CARS)

In late June President Obama signed into law the "Car Allowance Rebate System" or (CARS) or as it's also known: "Cash for Clunkers." This is a program that encourages people to trade in their cars for more efficient models. It also helps to stimulate the economy (similar to the first time home buyer tax credit) at a time when car sales are lagging. The program runs from July 1st through November 1st 2009. Cars traded in during that time could be eligible for a credit of either $3500 or $4500 depending on the car and the increase in mileage the new vehicle provides.

Steps consumers can take to participate in the new program are:

Step 1: Go to the official government website http://cars.gov for the CARS program and look-up the COMBINED mpg rating for your car. If your car is not listed, contact the National Highway Traffic Safety Administration (NHTSA.)

If your car is rated over 18 miles per gallon on the official CARS website, you DO NOT qualify. This rating is not your actual mpg but a standard rating system for the program. There are no exceptions for cars at this time that are rated 19 mpg or higher.

Step 2: If your car is rated as getting a combined mpg of 18 or less, you cleared an important first step. Now you have to make sure your car meets the other requirements for the CARS program which includes ownership, drive-ability, insurance and age. Go back to cars.gov and click on the "CARS FAQ" button. You need to read the latest rules for your trade-in. If your cars qualified based on the latest information provided on the FAQ page, go to step 3.If you have unanswered questions, contact the NHTSA.

Step 3: If your car has passed steps one and two, you can use your car as a trade in to purchase a new fuel efficient car. You DO NOT need a voucher in advance of visiting your local dealer. There is no consumer pre-registration needed. Your local new car dealer will handle all the paperwork starting late July.

Contact a local dealer as soon as the CARS program officially is started. It is estimated that the program will start in late July. When you purchase a new car make sure you inquire about additional manufacturer rebates and incentives.

Other considerations from the CARS.gov site:

· The vehicle must be less than 25 years old - No digging up a rust-beaten car from the 70's...
· You must purchase or lease a new vehicle - This doesn't qualify for used vehicles. Leases must be for at least 5 years.
· For the most part, trade-ins must get 18 miles per gallon or less (when they were new).
· Trade-in cars must have been registered and insured for at least a year prior - No buying a clunker cheap so you can trade it in. This also means you can't trade in a car sitting in your driveway that hasn't been registered.
· No voucher needed, dealer will apply the credit - You have to find a registered dealer but after that the dealer takes care of the credit.
· CARS runs until November 1st or when the funds run out - One billion has been set aside for the program so there is an aspect of first come first served.
· The car you're trading in must be destroyed/scrapped - Remember the point is to get the inefficient cars off the road. The trade-in value will most likely not exceed the scrap value. A dealer will have to provide you with an estimate of it's scrap-value.
· The car must be in drivable condition - It has to actually HAVE mileage in other words. No towing in a car that doesn't work.
· The new car must not exceed $45,000.
· You can find your car's fuel economy at FuelEconomy.gov.

July 6, 2009

Understanding Inflation, Disinflation, and Deflation

It's been a long time since the words "deflation" and "the U.S. economy" have been used in the same sentence. But with the sharp decline in the prices of stocks, real estate, and commodities over the last year, we're hearing those words in the same sentence increasingly often.

For many baby boomers, "deflation" and "the U.S. economy" conjures up images of the Great Depression, through which their parents and grandparents lived. Marked by one of the strongest bouts of deflation, unemployment, and economic misery in this country's experience, that decade haunts because so many of us have been led to believe it couldn't happen again, and because so many Americans alive today have never experienced anything but virtually uninterrupted prosperity.

Yet, while deflation is certainly not good for the U.S. economy, it may not bring with it the kind of misery that the doomsayers suggest. A review of these fundamental concepts of changes in prices may help you see and adapt to current developments a little better.

Moderate Inflation: Sign of a Healthy Economy

Simply defined, economic inflation means rising prices for goods and services. It's measured in a number of ways, but the most well known is the Consumer Price Index, or CPI. Compiled by the U.S. Department of Labor's Bureau of Labor Statistics, it measures the change in prices for an average market basket of consumer goods and services purchased by nearly 90% of the U.S. population.

Between 1926 and 2008, the U.S. experienced a healthy and moderate average rate of inflation of 3% a year. Moderate and stable inflation is good, for two reasons. First, moderate inflation is a sign of economic growth - increasing amounts of wealth - which facilitates an expansion of production and higher standards of living. Second, stable rates of inflation enable businesses and consumers to make reliable plans for spending and investment.

One way to see inflation as a positive factor is from the perspective of a homeowner. Many people who buy a new home stretch their budgets to obtain the nicest home they can. But as they earn more money, each year their debt payments eat up a smaller and smaller percentage of their income (if their mortgage features a fixed rate of interest). This gives them more money to spend on other things, which stimulates more economic growth.

The Problem with High Inflation Rates

Much above the "Goldilocks" rate of 2.5% to 3.5% a year, inflation can cause an economy to go off track. For one thing, higher inflation rates are often accompanied by instability in the rate of inflation, which disrupts investment and spending both by businesses and consumers. High rates of inflation put a strain on businesses to raise prices to balance their rising expenditures on labor and materials - without causing sales to decline.

As inflation rates increase, bond investors bid interest rates higher, which ultimately causes some borrowers to be turned down for loans. The danger is that, squeezed by higher costs of goods and debt, consumers and businesses cut back on spending - and that can lead to lower production, layoffs, and recession.

Disinflation: Slowing Inflation

Disinflation is, quite simply, the reduction in the rate of inflation. When high inflation undermines economic growth, disinflation moves the needle of price changes lower, eventually to a level where economic growth resumes. In that sense, disinflation is the remedy for inflation that is too high.

Many people confuse disinflation, which is a trend toward lower rates of inflation, with another condition: deflation.

Deflation: Falling Prices That Hurt Everybody

Deflation isn't a cure for inflation. It's the opposite of inflation - falling prices. While everybody likes to see prices come down for some things, it's only good for the economy when it's the result of higher productivity. As manufacturers of computers and color TVs, for example, became more productive, prices for those goods fell.

But deflation is said to occur when the prices of almost everything decline. The cause: people spending less. When businesses make less money, they're often forced to cut wages or lay off workers, which leads to a downward spiral of less spending, more layoffs, higher unemployment, and economic stagnation - or worse.

Returning to the example of the homeowner, it's easy to see the nastiness of deflation. Imagine a homeowner in an environment of deflation. The homeowner still has his job, but his income is reduced. This makes his debt payments relatively more expensive and reduces the amount of money he has to spend on other things. If the deflationary spiral continues over an extended period of time, the homeowner might be unable to continue making his mortgage payments and lose his home.

Deflation reflects a decline in the sum total of money chasing goods. Once an economy is caught in a deflationary spiral, it's very difficult to overcome. Central banks try to stimulate borrowing and spending by reducing interest rates, but when rates reach 0%, there's no more room left for monetary policy to stimulate growth.

Deflation Doesn't Necessarily Mean Depression

If these conditions sound familiar, they should. To date, we haven't descended into deflation -- yet -- but the U.S. Consumer Price Index recorded its lowest rate in 54 years in 2008. At 0.1%, inflation was tamer than at any time since 1955 (Source: National Bureau of Economic Research, 2009). The U.S. economy last experienced deflation in the 1930s, when six out of 10 years were characterized by deflation.

As we learned during Japan's deflationary "lost decade" of the 1990s, deflation isn't always accompanied by an economic depression. During that period, Japan's economy grew in every year except two, but its average growth rate was a meager 1.5% a year, compared to 9% a year from 1956 to 1973, and 4% a year in the 1980s.

Whether the U.S. is teetering on the brink of deflation, or has merely come to the end of a period of disinflation, matters less than what conditions are doing to the emotions of investors. Stressful times often lead investors to make the wrong decisions. Knowledge and perspective are keys to making wise decisions.

 

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