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Health Care and Education Reconciliation Act of 2010

2010-09-07T12:57:45Z

On March 30, 2010, the Health Care and Education Reconciliation Act of 2010 was signed into law, representing a massive overhaul of the health care system that will affect almost all taxpayers, many employers, and much of the health care industry. However, the provisions will be implemented over a number of years. Here is a summary of the major provisions by implementation date:

]]> 2010

• Medicare beneficiaries will receive a $250 rebate when they reach the gap in coverage for prescription drugs, known as the "doughnut hole." The gap exists when total costs exceed $2,830 until they reach $6,440.

• A national high-risk insurance pool will offer insurance to individuals who have a preexisting condition and have been uninsured for at least six months until 2014.

• All insurance policies must offer dependent coverage to children who have not yet attained age 27.

• Insurance companies must cover certain preventive services. They also can no longer impose lifetime coverage limits, rescind coverage for any reason other than fraud, or exclude preexisting conditions for children.

• Businesses with less than 25 full-time workers who are paid less than $50,000 per year in salary get a tax credit of up to 35% of the health insurance premiums paid for employees. The credit rises to 50% in 2014.

2011

• The costs for over-the-counter drugs not prescribed by a doctor can no longer be reimbursed through a health reimbursement account (HRA) or health flexible spending account (FSA) or be reimbursed on a tax-free basis through a health savings account (HSA) or Archer Medical Savings Account (MSA).

• The tax on distributions from a HSA or an Archer MSA that are not used for qualified medical expenses is increased to 20% of the disbursed amount, up from 10% for HSAs and 15% for Archer MSAs.

• Medicare recipients receive free preventive services and a 50% discount on brand name drugs purchased in the Part D doughnut hole.

2013

• Starting in 2013, single individuals with earned income in excess of $200,000 and married couples with earned income in excess of $250,000 will pay an additional 0.9% Medicare tax on the excess over those base amounts.

• A 3.8% Medicare tax will be imposed on net investment income of single individuals with adjusted gross income over $200,000 and joint filers over $250,000. Net investment income includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and the net gain from the disposition of property (other than property held in a trade or business). This tax applies only to income in excess of the thresholds. Thus, if a couple earns $150,000 in wages and $150,000 in capital gains, $50,000 will be subject to the new tax.

• The threshold for deducting medical expenses on a tax return increases from 7.5% to 10% of AGI. Individuals age 65 and older are exempt from this increase through 2016.

• Allowable flexible spending account contributions are limited to $2,500 per year. The dollar amount will be indexed for inflation after 2013.

2014

• All U.S. citizens and legal residents must have qualifying health insurance or pay a tax penalty. The tax penalty will be the greater of:

-- $95 per year (maximum of three times that amount or $285 per family) or 1% of taxable income in 2014

-- $325 per year (maximum of three times that amount or $975 per family) or 2% of taxable income in 2015

-- $695 per year (maximum of three times that amount or $2,085 per family) or 2.5% of income in 2016

After 2016, the penalty will be increased annually by a cost-of-living adjustment. Exemptions will be granted for financial hardship, religious objections, American Indians, individuals without coverage for less than three months, aliens not lawfully in the United States, incarcerated individuals, individuals who find the lowest cost plan option exceeds 8% of household income, individuals with incomes below the tax filing threshold ($9,350 for singles and $18,700 for couples in 2010), and individuals residing outside the U.S.

• Individuals and small businesses with fewer than 100 workers will be able to purchase health insurance on state-based health insurance exchanges. When insurance is purchased on the exchange, the individual reports his/her income. Low- and middle-income individuals and families may then be eligible for a tax credit based on the income reported. The IRS will pay the premium assistance credit directly to the insurance plan, with the individual paying the difference in premium. The premium assistance credit is available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, based on 2009 poverty levels) who are not eligible for Medicaid, employer-sponsored insurance, or other coverage.

• Businesses with 50 or more workers will pay an annual penalty if they do not provide health insurance coverage to workers.

2018

• "Cadillac" health insurance plans must pay a 40% tax on the portion of coverage worth more than $10,200 for individuals and $27,500 for families.

Stock Selling Mistakes

2010-08-25T12:52:07Z

An important part of any investment strategy is developing a methodology for ultimately selling your investments. Unfortunately, many investors sell based on emotional factors, making one of several mistakes:

]]> • Holding on to an investment with a loss. Psychologically, it's difficult for investors to sell an investment with a loss. Many prefer to wait until the investment at least gets back to a break-even level. However, that may never happen or may take a long time to do so. Take a hard look at the investment and consider selling if you can reinvest in an investment with better prospects.

• Hanging on to capture more gain. When an investment has increased dramatically, you may be reluctant to sell, even if you feel its price has gone too high too fast. There's always the risk you'll sell and the price will keep going up. But sometimes it's best to protect your gains and sell while you're ahead.

• Not setting price targets. One way to take the emotion out of selling is to set high and low price targets for reevaluating an investment. You don't have to sell when the investment reaches those targets, but at least review whether you should sell. Sticking with rigid rules for selling when an investment declines by a certain percentage can help ensure you sell before incurring substantial losses.

• Trying to time the market. It's difficult to predict when the market will rise and fall. Even if the stock market is following a general trend, there will be up and down trading days. Trying to buy and sell stocks based on those daily fluctuations is difficult.

• Worrying too much about taxes. Taxes can consume a significant portion of your investment gains. Even if you have long-term capital gains, 15% of your gains will go to the federal government in capital gains taxes (taxpayers in the 10% or 15% tax bracket pay 0% in 2010). However, avoiding taxes may not be a good reason to hold on to an investment. There are typically strategies that can be used to help offset the tax burden, but there's not much you can do about a loss in investment value. If it's time to sell an investment, you should probably do so, even if you have to pay taxes on your gains.

• Not paying attention to your investments. Your portfolio needs to be evaluated on a periodic basis, or you could miss signals that it may be time to sell. You should reevaluate an investment when the company changes management, when the company is acquired or merges with another company, when a strong competitor enters the market, or when several top executives sell large blocks of stock.

Why You Need Bonds in Your Investment Portfolio

2010-08-17T14:36:23Z

Why should you consider bonds for your investment portfolio? Below are three primary reasons why you should consider bonds:

]]> • Bonds add diversification to your portfolio. One strategy to help counter the effects of stock market volatility is to add investments to your portfolio that aren't highly correlated with the stock market. Historically, stocks have a low positive correlation with corporate and government bonds.

• Bonds offer fixed, periodic interest payments and the return of your principal at maturity. Thus, even in the event of a significant market decline, you'll receive some return in the form of interest payments, and you'll receive your principal at maturity.

• Bonds are often better suited to short- and medium-term financial goals. If you need your money in a few years, you may not want to keep those funds in stocks, since a major stock market decline could occur when you need your money.

Most investors will hold stocks, bonds, and cash in their investment portfolios. How much you should allocate to the bond portion will depend on your circumstances, but over time that percentage is likely to change. For instance, young investors are likely to be more concerned with growth, so bonds may only make up a small percentage of their portfolio. On the other hand, those who are retired or close to retirement are likely to own a higher percentage of bonds as safety of principal and a steady income stream are more important. In general, the percentage of bonds you own should increase as you become more averse to putting your capital at risk.

How to Improve Your Credit Score

2010-08-11T15:23:18Z

As lenders have clamped down on issuing credit, your credit score now has a more significant impact on loans available to you, the interest rate and fees you'll pay, and other terms of the loan. Thus, it is more important than ever to understand your credit score and how you can improve it.

]]> When lenders evaluate a credit application, they usually request both your credit report and your credit score, which is a mathematical calculation based on the information on your credit report. The score is intended to rate your credit risk, although other factors, such as your income, length of employment, and years in your home, are also considered.

Credit scores are often referred to as FICO scores, since they are produced from software developed by Fair, Isaac and Company (FICO). While all of the major credit reporting agencies use FICO scores, your score from each agency can differ because information on your credit report differs by agency. Your FICO score is used in more than 75% of mortgage lending decisions and by 90% of the largest lenders (Source: MSN Money, December 29, 2008).

FICO scores range from 300 to 850, with higher scores indicating lower levels of credit risk. The major factors affecting your FICO score include:

• How you pay your bills -- A significant portion of your FICO score is based on how you pay your bills. How consistently do you make your payments on time? If you've paid bills late, how many times were you late? How late were you? How much money did you owe? Have you ever had a debt in collection? What was the size of the debt? Have you ever filed for bankruptcy?

• Your total outstanding debt -- Outstanding debt is debt of all kinds, including mortgages, car loans, credit cards, home-equity lines of credit, and any other loans that are reported to a credit agency. Another important factor here is how much unused but available credit you have on your credit cards. The absolute amount of available credit you have is less important than how close you are to maxing out the credit you've been granted. The highest scores go to people who use credit sparingly and keep balances low. Ideally, you should use no more than 30% of your available limit, with 10% being even better.

• Length of your credit history -- The longer you've had and used credit, the higher your score. You get even more points if you have established long-term credit with the same lenders -- a reason why you might not want to close long-term credit cards, even if you don't use them very much.

• Mix of credit types -- Your score is higher if you have a variety of fixed payment loans and revolving credit.

• Recent applications for credit -- A number of applications for credit over a short period of time raises a red flag for lenders, as it is often a sign that a person is in a cash-flow crunch. The FICO formula takes points away for this. Multiple applications for a specific type of credit in a concentrated time frame -- when you're rate shopping for a mortgage, for example -- won't count against your credit score.

Typically, scores of 720 and above receive the best deals on interest rates. Based on the way the FICO score is calculated, there are strategies to improve your score if you're not at that level:

• Review your credit report. Your FICO score is based on your credit report, so you should get copies of your report from each of the three main reporting agencies and make sure there are no errors. You are entitled to one free report every year from each of the agencies. Your information can vary by agency, so don't just look at one. Contact the agency if you find any mistakes.

• Make sure all your bills are paid on time. Check your credit report to see if there are any late notices. If so and you have a good credit rating, ask the lender to remove the notice.

• Reduce your credit utilization ratio. You receive a better score when your outstanding debt as a percentage of your available debt is lower. Make sure your credit utilization never goes over 50%. If you can't pay down your debt, ask your lender to increase your available credit. This will have the same result as paying down your debt, but make sure you aren't tempted to use that additional credit.

• Don't close credit cards you don't use. This has the result of increasing your credit utilization ratio because you have less available debt. However, if you have too many credit cards, typically over five, close the newest ones. Too many credit cards make lenders uneasy.

• Consider an installment loan. FICO scores reward people who use both revolving credit accounts and installment loans. Thus, using an installment loan, such as a car loan or mortgage, can increase your score.

• Minimize requests for additional credit. Inquiries regarding additional debt appear in your credit file and hurt your credit score.

Evaluating Long-Term-Care Insurance

2010-08-04T03:38:33Z

How likely is it that you'll need long-term-care insurance? As life expectancies have increased significantly and are expected to continue to increase in the future, you are more likely to develop conditions that limit your ability to live independently. Surprisingly however, it is estimated that only 14% of households have purchased long-term-care insurance (Source: Long-Term Care Costs and the National Retirement Risk Index, March 2009).

]]> It is estimated that approximately one-third of individuals age 65 and older will require at least three months of nursing home care, 24% more than one year of care, and 9% more than five years (Source: What Is the Distribution of Lifetime Health Care Costs from Age 65?, March 2010). Those figures do not include individuals who require home care services. In 2008, the average annual cost of a nursing home was $71,000 (Source: What Is the Distribution of Lifetime Health Care Costs from Age 65?, March 2010).

Who needs long-term-care insurance? If your assets, not including your home, equal at least $2 million, you can probably fund long-term-care costs with those assets, although you may not want to deplete your assets for this care. Those with very few assets will probably be covered by Medicaid. It is the people between these two extremes who should consider long-term-care insurance. This coverage may be especially important for women, who tend to outlive their husbands.

If you're considering long-term-care insurance, review these points:

• Purchase the insurance at a relatively young age. You should probably purchase the insurance by the time you are in your 50s or early 60s. After that, the premiums get much more expensive. Also, if you develop a serious health condition, you may not be able to purchase the insurance.

• Check for inflation provisions. Since you may not receive benefits for many years and costs for long-term care have been increasing significantly in recent years, check inflation protection in your policy. You can obtain simple or compound inflation protection. Simple protection increases the benefit amount by a specific percentage of the original benefit each year. Compound inflation increases the benefit on a compounded basis, so it provides substantially more protection. Another option is to make sure your policy contains an annual renewal option, so you can buy additional coverage in the future.

• Obtain insurance from a stable insurance company. You want to obtain insurance from a company that is sure to be around for the long term.

• Make sure the policy terms are reasonable. Many people choose a benefit period of three years to cover the average nursing home stay. However, due to the substantial costs associated with long-term care, you may want to select a longer period. Benefits should be paid in as many situations as possible, including skilled care, intermediate care, custodial care, home health care, and adult day care. Many people prefer to remain at home for as long as possible, so make sure that the policy covers a wide range of home services. Review the waiting period carefully to ensure a good balance between premium costs and out-of-pocket costs.

• Review carefully the level of assistance needed to qualify for benefits. Typically, benefits are paid when you are unable to perform two of six activities of daily living, including bathing, eating, using the bathroom, moving back and forth from a chair to a bed, and remaining continent. Typically, benefits are also triggered when a cognitive impairment, such as Alzheimer's disease, requires substantial supervision.

• Determine how benefits are paid. Some policies pay a set daily amount, regardless of your actual costs. This may be a good alternative if you are staying at home and want to compensate a friend or family member for helping you. Other policies will only pay your actual out-of-pocket expenses up to a daily limit or may only pay reasonable and customary costs. Find out how you prove you're entitled to benefits. Some plans require an in-house doctor to review your health, while other plans allow your own doctor's review.

• Review new policy provisions. Long-term-care policies are relatively new, so policy riders are evolving. Make sure to check out new provisions, such as the ability to combine a life insurance and long-term-care policy, an accelerated premium provision that allows you to stop making premiums after a certain number of years, or a provision that returns premiums if you die without using benefits. Also look into partnership policies, which allow you to qualify for Medicaid after exhausting the policy's benefit while keeping more assets than normally allowed by Medicaid.

• Consider sharing a policy with your spouse. Some companies now offer policies that allow spouses to share the policy, which can operate in several ways. Spouses may take out separate policies, with a rider allowing the spouses to use each other's unused benefits. Another alternative is to purchase one policy that both spouses can use. A third alternative gives each spouse a specified amount of benefits plus a third amount that can be drawn on by each spouse.

• Check the policy's tax status. A qualified policy allows you to deduct a certain percentage of the premium, depending on your age, as a medical expense on your tax return. Medical expenses are deductible to the extent they exceed 7.5% of your adjusted gross income. Also, payouts from qualified policies are received free from federal income taxes.

How Much Life Insurance Should You Have?

2010-07-28T15:32:15Z

While life insurance can serve a variety of purposes, one of the most common is to maintain your family's standard of living in case you die. Thus, you need to purchase an appropriate amount of insurance to ensure your family is adequately protected. Many rules of thumb exist, such as five to seven times your annual income, but don't rely on rules of thumb to determine your coverage. These rules don't take into account your individual circumstances, so they could leave you with an inadequate amount of insurance.

]]> Your insurance needs will probably change over time. When you are a young, single adult, you may have little reason to purchase life insurance. As you start a family, your insurance needs will be greater, since other family members are depending on your income. As your children become independent, your insurance needs may decline. However, at that point, you may need life insurance for other purposes, such as to help fund estate taxes or for a business buy out.

To determine how much insurance you need, consider these questions:

What lifestyle do you want to provide for your spouse and dependents after your death? Review your needs in detail, taking a look at items such as:

• Do you want to provide the same standard of living, including things like vacations and club memberships? Will your spouse and children live in the same house?

• Will the family have to make different child care arrangements?

• Do you want to provide for college educations for your children?

• If your spouse doesn't work, do you want that to continue or do you expect him/her to work after your death? If you expect your spouse to work, what is a reasonable amount of income to expect him/her to earn?

• Do you need to consider the support of elderly parents or other relatives?

• How long must your family live off the insurance proceeds? Will your current retirement fund provide enough income for your spouse to live on after retirement or do you need to provide income until his/her death?

• Do you want to pay off a mortgage or other debt with insurance proceeds?

• Do you have estate tax considerations you want to address with life insurance?

How much will that lifestyle cost? Come up with an estimate of how much this lifestyle will cost. Include all of your current expenses that would remain the same as well as any new expenses you have identified, such as child care. Remember to factor in hidden costs, such as providing for health insurance that was paid for previously by your employer. For large debts, such as a mortgage, determine whether it makes sense to pay the loan off in full or to continue making monthly payments.

How much life insurance do you need? First, consider what other income sources your spouse and/or dependents will have. This could include your spouse's earnings, retirement plans, Social Security benefits, savings, and investments. Life insurance proceeds will be needed to provide the difference.

Your life insurance needs will change over time, so you should periodically go through this analysis.

Ally Bank Announces Rate Increase

2010-07-26T22:09:33Z

Ally Bank announced a rate increase on their 12 month High Yield Certificate of Deposit effective 7/26/10. Ally Bank, originally part of the GMAC family of companies, is a subsidiary of Ally Financial Inc. Ally Financial Inc. is a FDIC-insured institution (NYSE:GJM). Click here to search and apply for online high-yielding, FDIC insured Certificates of Deposit, Savings & Money Market Accounts.

Why Asset Allocation Strategies Are Necessary

2010-07-25T16:17:16Z

Your asset allocation strategy represents your personal decisions about how much of your portfolio to allocate to various investment categories, such as stocks, bonds, cash, and other alternatives. When stock market returns were above average for an extended period, investors did not have much interest in asset allocation. Then, the best strategy seemed to be to only own stocks. But with the stock market volatility of the past several years, investors are again focusing on asset allocation. Some of the advantages of an asset allocation strategy include:

]]> • Providing a disciplined approach to diversification. An asset allocation strategy is another name for diversification, an important strategy for reducing portfolio risk. Since different investments are affected differently by economic events and market factors, owning different types of investments helps reduce the chance that your portfolio will be adversely affected by a particular risk type.

• Encouraging long-term investing. An asset allocation strategy is designed to control your portfolio's long-term makeup. It should not change based on economic conditions or market fluctuations.

• Eliminating the need to time investment decisions. Market timing is a difficult concept to implement. Not only do investment professionals have a difficult time accurately predicting the market's movements, but waiting for the perfect time to invest keeps many investors on the sidelines. With an asset allocation strategy, you don't have to worry about timing the market, you just have to ensure your investments stay within the proper percentages.

• Reducing the risk in your portfolio. Investments with higher returns typically have higher risk and more volatility in year-to-year returns. Asset allocation combines more aggressive investments with less aggressive ones. This combination can help reduce your portfolio's overall risk.

• Adjusting your portfolio's risk over time. Your portfolio's risk can be adjusted by changing allocations for the different investments you hold. By anticipating changes in your personal situation, you can make those changes gradually.

• Focusing on the big picture. Staying focused on your asset allocation strategy will help prevent you from investing in assets that won't help accomplish your goals. Rather than investing in a haphazard manner, it gives you a framework for making investment decisions.

Your asset allocation strategy will depend on a variety of factors unique to your situation, including your risk tolerance, return expectations, investment period, and investment preferences.

Investing in Municipal Bonds

2010-07-22T14:10:12Z

Whether you're just investigating municipal bonds or are reviewing your current muni bond portfolio, consider the following guidelines:

]]> • Compare the returns from municipal bonds to other types of bonds. Since the interest income is exempt from federal, and sometimes state and local, income taxes, your marginal tax bracket is a significant factor in deciding whether municipal bonds are appropriate for you. (Any capital gains are subject to taxes. Interest income for some investors may be subject to the alternative minimum tax.) Make sure to determine how a muni bond's yield compares to the after-tax yield on a comparable taxable bond. To do that, calculate the tax-equivalent yield for the municipal bond. If you're not investing in a municipal bond issued within your resident state, which also exempts income from state and sometimes local income taxes, the calculation is fairly straightforward: the taxable equivalent yield equals the tax-exempt interest percentage divided by one minus your marginal tax bracket.

• Don't simply select the bond maturity that offers the highest return. Since interest rate changes can significantly affect your bond's market value, it may make more sense to select a maturity that coincides with when you need the principal.

• Look at a bond's call provisions. Most municipal bonds come with a call provision, which allows the issuer to redeem the bonds prior to their scheduled maturity. Calls are generally only exercised when market interest rates are lower than the interest rate being paid on the bond and are generally not good news for the bondholder. Purchase bonds with call provisions that are most favorable to you.

• Review the bond's credit quality. While municipal bond defaults are rare, they do occur, so review carefully the credit quality of muni bonds. You may want to stick with investment-grade ratings, which means that the issuer is considered financially stable and unlikely to default.

• Hold a diversified portfolio. You should plan to hold at least seven to nine different issues to ensure adequate diversification.

• Consider bonds issued in your resident state. Purchasing muni bonds issued in the state in which you reside means that your interest income will also be exempt from state, and sometimes local, income taxes.

• Review your holdings periodically. Review the credit ratings of all your municipal bonds at least annually. Check the call provisions so you aren't surprised by a call in the coming year. Also, review your holdings to see that they are still consistent with your overall investment objectives and asset allocation plan.

How to Evaluate P/E Ratios

2010-07-14T14:56:07Z

Price/earnings (P/E) ratios are a common measure of stock value, both for individual stocks and the overall market. Calculating a P/E ratio is straightforward -- it is simply the price of a single share of stock divided by the company's per share earnings. For example, a stock selling at $50 per share with $2 per share of earnings would have a P/E ratio of 25. However, P/E ratios can be calculated using different earnings numbers. Trailing P/E ratios, which are typically reported in newspapers, use earnings per share for the most recent four quarters, while forward P/E ratios use forecasts of future earnings per share.

]]> To understand what a P/E ratio represents, consider what it means in terms of how much you would pay for a business you want to purchase. The value of that business would be largely determined by how much income it generates and how long it would take to recover the purchase price with that income. You might be willing to pay four or five times earnings (for a P/E ratio of 4 or 5), realizing it would take that many years to recover the purchase price. However, if you felt earnings had the potential to increase significantly in future years, you might be willing to pay a higher multiple of current-year earnings.

When considering public companies, it seems reasonable that well-established businesses growing in a fairly predictable pattern would command a higher P/E ratio than a small private business. Since you don't have the risks or responsibilities that come with owning a business, you would probably pay a premium. Typically, companies with higher growth rates command higher P/E ratios.

The difficulty is deciding what a reasonable P/E ratio is for a particular company or for the overall stock market. For individual companies, investors' expectations about future earnings affect the P/E ratio. Confidence that a company will improve its profitability or remain profitable generally results in a higher P/E ratio. If profits are threatened or weak, the P/E ratio is likely to drop. P/E ratios for the overall market change based on broad market conditions and investors' views about how desirable stocks are compared to other investments.

There is no absolute measure of what P/E ratio should be paid for a given company with a given growth rate. P/E ratios can fluctuate significantly over time and among companies and industries. It generally helps to follow the P/E ratios of stocks that interest you, along with companies in similar industries, to develop a feel for how the P/E ratios fluctuate. Reviewing a company's P/E ratio for prior years can also be helpful. If a company's growth rate in the past is expected to continue in the future and market conditions are similar, you might not expect much change in P/E ratios. But you also must evaluate whether changes to the company, its industry, or the overall stock market would cause an increase or decrease in the company's P/E ratio.

One way to evaluate P/E ratios is to consider a company's current P/E ratio divided by its historical P/E ratio. If it is much lower than 1, you might want to investigate why. It could mean the business is in decline or having other problems. It may also imply that the stock is reasonably priced now. If the value is much higher than 1, carefully assess whether you want to invest at this time. You may want to wait until the P/E ratio returns to a more historical level.

You can also divide a company's current P/E ratio by the market's overall P/E ratio. If that figure is much higher than 1 (and thus higher than the overall market), you should evaluate whether the company's prospects justify that valuation.

Bond Strategies

2010-07-07T13:35:35Z

The strategies used for bond investing will depend on the financial objectives you are pursuing. Consider these financial objectives and bond strategies:

]]> • Earning interest while preserving principal. This is the most typical role for bonds and is usually accomplished with a buy-and-hold strategy. With this strategy, you purchase a bond and hold it to maturity, looking for the highest return potential for a given time frame within a comfortable risk level. By holding the bond to maturity, you don't have to worry about interest rate changes impacting your bond's price.

• Maximizing income. Since bonds with longer maturities typically have higher interest rates, this strategy typically involves investing in longer-term bonds. Interest rate changes will typically affect a longer-term bond's price more because long-term bonds have a longer stream of interest payments that don't match current interest rates. Someone looking to maximize income will also be more likely to sell a bond before maturity to lock in capital gains. Another strategy to help achieve this objective is to invest in high-yield bonds, which are bonds with lower credit ratings. Due to the lower credit rating, these bonds often have to offer higher interest rates to obtain investor interest.

• Managing interest rate risk. One of the most significant bond risks is interest rate risk, or the risk that increases in interest rates will cause a decrease in your bond's price. Bond ladders can help manage this risk. A bond ladder is a portfolio of bonds of similar amounts maturing in several different years. When one of the bonds matures, the principal is reinvested in another bond at the bond ladder's longest maturity. By spreading out maturity dates, you lessen the impact of interest rate changes. Holding the bond to maturity prevents interest rate changes from resulting in a loss when you sell the bond. Since your bonds mature every year or so, your principal is reinvested over a period of time instead of in one lump sum. If interest rates rise, you have principal maturing every year or so to reinvest at higher rates. In a declining interest rate market, you have some funds in longer-term bonds with higher interest rates. But the main advantage is you don't continue to hold only short-term bonds while you wait for interest rates to peak, an event that is difficult to predict.

• Help reduce the volatility of stock investments. The advantage of including both stocks and bonds in your portfolio is that when one category is declining, the other category will hopefully help offset this decline. For instance, in 2008, the Standard & Poor's 500 (S&P 500) returned -37%, while long-term government bonds returned 25.9%, and intermediate-term government bonds returned 13.1%.* One way to assess the percentage of bonds to include in your portfolio is to look at how holding varying percentages of stocks and bonds would have impacted your average return.

• Investing for a specific future goal. Because bonds have a definite maturity date, you can select maturity dates to coincide with when you need your principal. You might want to consider zero-coupon bonds for this purpose. Zero-coupon bonds are issued with a deep discount from face value and do not pay interest during the bond's life. The return results from the bond's price increasing gradually from the discounted value to face value, which is reached at maturity. The longer a zero-coupon bond has until maturity, the greater its price discount will be. Like other fixed-income investments, a zero-coupon's price moves up when interest rates fall and down when rates rise. However, since zeros lock in a fixed reinvestment rate of return, they are affected more drastically by interest rate changes. One important fact to consider is taxation. Even though you do not receive any interest income until the zero-coupon bond matures, you are taxed on the yearly growth in the zero's value (called accretion).

• Recognizing a loss for tax purposes. A bond swap, which is simply the sale of one bond and the purchase of another, can help achieve this objective without changing the basic composition of your bond portfolio. In essence, you sell a bond with a current market value less than your purchase price to realize a loss and deduct it on your tax return. You then use the proceeds to purchase similar bonds. The end result is that you still own a comparable bond, but you also have a tax loss. Review the cost of the swap before executing the transactions to ensure costs don't offset most of your expected tax savings. Make sure to comply with the wash sale rules or your loss won't be deductible. A wash sale occurs when an investor sells a security and within 30 days before or after, purchases a substantially similar security. Bonds purchased within the 30-day window must differ from the bonds sold in a material way, which includes different issuers, coupon rates, or maturity dates.

• Reducing income taxes. One strategy would be to invest in municipal securities, since municipal bond interest is generally exempt from federal, and sometimes state and local, income taxes. Your marginal tax bracket is a major factor when deciding whether to include municipal bonds in your portfolio. Thus, you should compare a muni bond's yield to the after-tax yield of a comparable taxable bond. To do that, calculate the muni bond's taxable equivalent yield. If you're not investing in a municipal bond issued in your resident state, the calculation is: the taxable equivalent yield equals the tax-exempt interest rate divided by one minus your marginal tax bracket. For instance, if you are considering a municipal bond with a yield of 4.5% and you're in the 25% tax bracket, the taxable equivalent yield is 6.0% (4.5% divided by 1 minus 25%). Thus, you should compare 6.0% to any corporate bonds you are considering.

* Source: Stocks, Bonds, Bills, and Inflation 2010 Yearbook, Ibbotson Associates. The S&P 500 is an unmanaged index generally considered representative of the U.S. stock market. Investors cannot invest directly in an index. Past performance is not a guarantee of future results. Returns are presented for illustrative purposes only and are not intended to project the performance of a specific investment.

Clamp Down on Your Spending Habits

2010-06-24T18:26:31Z

If you're trying to increase savings, remember that savings are directly tied to spending -- the less you spend, the more you have to save. Some tips to help you clamp down on your spending include:

]]> • Analyze your spending for a month. Are you surprised by how much you spend on dining out, groceries, entertainment, or clothing? Give serious thought to your purchasing patterns, looking for ways to reduce spending. Clean out your closet and really assess whether you need new clothes. Cut back on how often you dine out or at least go to less-expensive restaurants. Rent a movie instead of going to the theater. Make a list before grocery shopping and don't deviate from it. Look for coupons and sales before shopping.

You may scoff at these ideas for saving money, thinking you can't possibly add much to your savings. After all, you're just spending a few dollars here and there. But over a long time period, even modest amounts can grow to significant sums.

• Go over major expenditures also. When was the last time you comparison shopped your auto or homeowners insurance? Have you checked mortgage rates lately to see if you should refinance? Have you reviewed strategies to reduce your income taxes? Take a look at all major expenditures, looking for ways to save money.

• Make a spending plan and put it in writing. Budget for all major expenditures and resolve not to purchase items that aren't in your budget.

• Throw out your credit cards (or at least hide them for a while). Most people find it more difficult to spend cash than to charge a purchase. So, for the next couple of months, make sure to only purchase items with cash.

• Don't purchase items over a fairly low dollar amount on your first shopping trip. How often have you purchased something on impulse, only to realize when you got home that you really didn't need it? To control those impulses, compare price and value on your first shopping trip. Then go home, think about whether you really need the item, and purchase it on another trip. Often, you will find that you realize you don't even need to make the purchase.

• Think carefully before making major purchases. Often, upkeep and maintenance can add significantly to your costs. Consider a less-expensive car or a used car. Keep your car for four or five years instead of getting a new one every two or three years.

• Figure out the maximum amount you can afford for a house and then buy one substantially less expensive than that. Not only will you save on your mortgage payment, other costs associated with owning a home will be lower. Living well within your means is one of the best ways to ensure you have money left over for saving.

Estate Distribution to Grown Children

2010-06-16T14:27:50Z

When your children were young, your primary concern was probably how to provide for them in the event you and your spouse died. Even though they may now be grown, your children are probably still the center of your estate plan. Just because they are adults doesn't mean that you have to leave their entire inheritance to them outright. Consider these factors first:

]]> • Do you want to distribute your estate gradually? If substantial assets are involved, you may want to set up trusts to distribute your assets gradually, such as in thirds when each child reaches ages 25, 30, and 35. You can always give the trustee power to make early distributions for items like paying for college, starting a business, or purchasing a home.

• Have you selected a trustee carefully? If trusts are involved, you want a trustee who is impartial and will deal fairly with all your children. Think twice before naming one of your children as trustee. One sibling in a position to decide what happens to another sibling's inheritance can cause disagreements between them.

• Have you thought about the consequences of a child divorcing? You probably don't want a portion of your assets distributed to an ex-daughter-in-law or ex-son-in-law, so special provisions may need to be added to trusts.

• Have you considered how assets will be distributed among children? Perhaps one child is better off financially than your other children. Do you divide your estate equally or give less to the financially well off child? Children often feel a right to an equal share of their parents' estate, even if they have a substantial estate of their own. If you decide to make unequal distributions, be sure to explain why personally or in a letter left with your estate planning documents. Hopefully, this will prevent hurt feelings or disagreements among siblings.

• Do you need to make special distributions to even out inheritances? Perhaps you have paid all college costs for some children, while other children have not attended college yet. You may want to ensure that all children receive a college education, and then distribute the rest of your estate equally among your children.

• Should you coordinate your estate plan with your children's estate plans? If your children have substantial estates of their own, it may not make sense to leave additional assets to them. They may prefer those assets go directly to their children, helping to minimize family estate taxes.

• Have you explained the need for estate planning to your children? Especially if you are leaving a substantial estate to your children, they may need to plan their own estates. You don't need to dictate what they should do with their estates, but gently remind them why they need an estate plan. After major life events, such as marriage, divorce, or a child's birth, remind your children to revise their estate plans.

Get Your 401(k) Plan On Track

2010-06-08T14:36:12Z

To make sure you have sufficient funds for retirement, you need to get your 401(k) plan on track. To do so, consider these tips:

]]> • Increase your contribution rate. With investment values down and future stock market returns uncertain, you need to boost your savings to help increase the value of your 401(k) plan. Strive for total contributions from you and your employer of approximately 10% to 15% of your salary. At a minimum, make sure you're contributing enough to take advantage of all employer-matching contributions.

• Rebalance your investments. You can't select your investments once and then just ignore your plan. Review your allocation annually to make sure it is close to your original allocation. If not, adjust your holdings to get your allocation back in line. Selling investments within your 401(k) plan does not generate tax liabilities, so you can make these changes without tax ramifications. Use this annual review to make sure you are still satisfied with your investment choices, and your allocation is still appropriate for your situation.

• Don't raid your 401(k) balance. Your 401(k) plan should only be used for your retirement. Don't even think about borrowing from the plan for any other purpose. You don't want to get in the habit of using those funds for anything other than retirement. Similarly, if you change jobs, don't withdraw money from your 401(k) plan. Keep the money with your old employer or roll it over to your new 401(k) plan or an individual retirement account.

• Seek guidance. It is important to manage your 401(k) plan carefully to help maximize your future retirement income. If you're concerned about the long-term impact of the recent market declines, call for a review of your 401(k) plan.

Coming to Terms With Stock Market Volatility

2010-06-03T13:16:45Z

With all of the volatility in the stock market over the past few years, it can be difficult to determine how to devise an investment strategy to help reach your financial goals. To help you determine a reasonable rate of return to expect on your stock investments, it might be instructive to review some "facts" about the stock market:

]]> • The stock market's historical return can change dramatically depending on the period considered. For instance, from 1926 to 2008, the Standard & Poor's 500 (S&P 500) had an average annual return of 9.6%. From 1984 to 2008 (25 years), the average return was 9.2% and 6.4% from 1999 to 2008 (10 years).*

• The market tends to revert to the mean. There is a tendency for the stock market, when it has an extended period of above- or below-average returns, to revert back to the average return. Thus, following an extended period of above-average returns in the 1990s, the stock market experienced a significant downturn, bringing the averages back in line.

• History may not be a good predictor of future returns. The expected rate of return for your investment program is typically based on an analysis of past returns, since no one can predict future returns. However, realize that those returns may not be replicated in the future. During much of the stock market's history, the United States was in a substantial growth phase as it grew from a struggling nation to a superpower. Growth in the future may not approach those levels, which could dampen stock returns.

• The pattern of actual returns affects your investment balance. Even if you get the average rate of return exactly right, your portfolio's balance will depend on the pattern of actual returns during that period. Some years will experience higher-than-average returns, while other years will have lower or even negative returns. If you experience high returns in the early years, your portfolio's value will be lower than if those returns occurred in the later years. If you encounter negative returns in the early years, you will have a higher balance than if those negative returns came in the later years.

• Historical returns do not include several items that investors must deal with. Two of the most significant items not accounted for in historical returns are inflation and taxes. Over the long term, from 1926 to 2009, inflation averaged 3.0%.* Short-term capital gains are taxed at ordinary income tax rates of up to 35%, while long-term capital gains and dividend income are taxed at 15% (0% for taxpayers in the 10% and 15% tax brackets).

• Investors have a difficult time earning historical returns. Several studies have found that investors' returns tend to lag the overall market, since investors have a tendency to buy high and sell low. One study found that the average investor's return is at least 2% lower than the market return (Source: Money, January/February 2010).

What does all this mean to an investor? When designing an investment program, use a conservative estimated rate of return, since it may be difficult to earn the historical returns of the past. It's easier to start out with a lower expected rate of return and find out later that your actual return is higher, which means you just need to save less. However, if you use a higher estimated rate of return than you actually earn, it may be difficult to increase your savings to make up for that difference.

Consider these strategies when designing your investment program:

• Take a fresh look at your financial goals. Reevaluate your goals, how much you need to reach them, and how much you should be saving annually based on lower expected returns.

• Save more of your income. If you can't count on returns to provide growth in your portfolio, you should compensate by saving more of your income. That may mean you'll need to work overtime or take on a second job to provide additional income. Another strategy is to reduce your living expenses and save the reductions.

• Invest in a tax-efficient manner. Taxes are often a significant investment expense, so using strategies to defer the payment of taxes can make a substantial difference in your portfolio's ultimate size. Utilize tax-deferred investment vehicles, such as 401(k) plans and individual retirement accounts. Or emphasize investments generating capital gains or dividend income rather than ordinary income. Minimize turnover in your portfolio, so unrealized gains can grow for many years.

• Adequately diversify your investment portfolio. Typically, you do not know which asset class will perform best on a year-to-year basis. Diversification is a defensive strategy -- it helps protect your portfolio during market downturns and helps reduce your portfolio's volatility. Diversify your investment portfolio among a variety of investment categories, such as stocks, bonds, cash, and other alternatives. Also diversify within investment categories.

• Evaluate your portfolio's performance annually. That way, if returns are lower than you targeted, you can make adjustments to your strategy to compensate for these variations in return.

* Source: Stocks, Bonds, Bills, and Inflation 2010 Yearbook. The S&P 500 is an unmanaged index generally considered representative of the U.S. stock market. Investors cannot invest directly in an index. Past performance is not a guarantee of future returns.