It sounds a little crazy, doesn’t it? But that’s what investing without setting clear-cut goals is like. If you’re lucky, you may end up with enough money to meet your needs, but you have no way to know for sure.

How do you set investment goals?

Setting investment goals means defining your dreams for the future. When you’re setting goals, it’s best to be as specific as possible. For instance, you know you want to retire, but when? You know you want to send your child to college, but to an Ivy League school or to the community college down the street? Writing down and prioritizing your investment goals is an important first step toward developing an investment plan.

What is your time horizon?

Your investment time horizon is the number of years you have to invest toward a specific goal. Each investment goal you set will have a different time horizon. For example, some of your investment goals will be long term (e.g., you have more than 15 years to plan), some will be short term (e.g., you have 5 years or less to plan), and some will be intermediate (e.g., you have between 5 and 15 years to plan). Establishing time horizons will help you determine how aggressively you will need to invest to accumulate the amount needed to meet your goals.

How much will you need to invest?

Although you can invest a lump sum of cash, many people find that regular, systematic investing is also a great way to build wealth over time.

Start by determining how much you’ll need to set aside monthly or annually to meet each goal. Although you’ll want to invest as much as possible, choose a realistic amount that takes into account your other financial obligations, so that you can easily stick with your plan. But always be on the lookout for opportunities to increase the amount you’re investing, such as participating in an automatic investment program that boosts your contribution by a certain percentage each year, or by dedicating a portion of every raise, bonus, cash gift, or tax refund you receive to your investment objectives.

Which investments should you choose?

No matter what your financial goals, you’ll need to decide how to best allocate your investment dollars. One important consideration is your tolerance for risk. All investments carry some risk, but some carry more than others. How well can you handle market ups and downs? Are you willing to accept a higher degree of risk in exchange for the opportunity to earn a higher rate of return?

Whether you’re investing for retirement, college, or another financial goal, your overall objective is to maximize returns without taking on more risk than you can bear. But no matter what level of risk you’re comfortable with, make sure to choose investments that are consistent with your goals and time horizon. A financial professional can help you construct a diversified investment portfolio that takes these factors into account.

Investing for retirement

After a hard day at the office, do you ask, “Is it time to retire yet?” Retirement may seem a long way off, but it’s never too early to start planning–especially if you want retirement to be the good life you imagine.

For example, let’s say that your goal is to retire at age 65. At age 20 you begin contributing $3,000 per year to your tax-deferred 401(k) account. If your investment earns 6 percent per year, compounded annually, you’ll have approximately $679,000 in your investment account when you retire.

But what would happen if you left things to chanceinstead? Let’s say that you’re not really worried about retirement, so you wait until you’re 35 to begin investing. Assuming you contributed the same amount to your 401(k) and the rate of return on your investment dollars was the same, you would end up with approximately $254,400. And, as this chart illustrates, if you were to wait until age 45 to begin investing for retirement, you would end up with only about $120,000 by the time you retire.

 

(This is a hypothetical example and is not intended to reflect the actual performance of any investment.)

Investing for college

Perhaps you faced the truth the day your child was born. Or maybe it hit you when your child started first grade: You only have so much time to save for college. In fact, for many people, saving for college is an intermediate-term goal–if you start saving when your child is in elementary school, you’ll have 10 to 15 years to build your college fund.

Of course, the earlier you start the better. The more time you have before you need the money, the greater chance you have to build a substantial college fund due to compounding. With a longer investment time frame and a tolerance for some risk, you might also be willing to put some of your money into investments that offer the potential for growth.

Investing for a major purchase

At some point, you’ll probably want to buy a home, a car, or the yacht that you’ve always wanted. Although they’re hardly impulse items, large purchases are usually not something for which you plan far in advance–one to five years is a common time frame.

Because you don’t have much time to invest, you’ll have to budget your investment dollars wisely. Rather than choosing growth investments, you may want to put your money into less volatile, highly liquid investments that have some potential for growth, but that offer you quick and easy access to your money should you need it.

Review and revise

Over time, you may need to update your investment plan. No matter what your investment goal, get in the habit of checking up on your portfolio at least once a year, more frequently if the market is particularly volatile or when there have been significant changes in your life. You may need to rebalance your portfolio to bring it back in line with your investment goals and risk tolerance. If you need help, a financial professional can help.

Investing for Your Goals

Investment goal and time horizon	At 4%, you’ll need to invest	At 8%, you’ll need to invest	At 12%, you’ll need to invest
Have $10,000 for down payment on home: 5 years	$151 per month	$136 per month	$123 per month
Have $50,000 in college fund: 10 years	$340 per month	$276 per month	$223 per month
Have $250,000 in retirement fund: 20 years	$685 per month	$437 per month	$272 per month
Table assumes 3% annual inflation, and that return is compounded annually; taxes are not considered. This is a hypothetical example and is not intended to reflect the actual performance of any investment.

Copyright 2006-2011 Broadbridge Investor Communications Solutions, Inc. All rights reserved.

What is financial aid?

Financial aid is money distributed primarily by the federal government and colleges in the form of student loans, grants, scholarships, and work-study jobs. Loans and work-study must be repaid (through monetary or work obligations), while grants and scholarships do not. A student can receive both federal and college aid.

Financial aid can be further broken down into two categories: need-based, which is dependent on your child’s financial need, and merit-based, which is awarded according to your child’s academic, athletic, musical, or artistic merit. Most financial aid is need-based.

How is financial need determined?

The federal government’s aid application, the FAFSA, uses a formula known as the federal methodology. A detailed analysis of the formula is beyond the scope of this discussion, but generally speaking, parent and child income and assets are tallied and assessed at certain rates. There are certain deductions and allowances against income, and certain assets are excluded from consideration, specifically, home equity, retirement plans, annuities, and cash value life insurance. The result is a figure known as your expected family contribution, or EFC. This is the amount of money you must contribute to college costs to be eligible for aid. Your EFC remains constant, no matter which college your child applies to.

Your EFC is not the same as your child’s financial need. To calculate financial need, subtract your EFC from the cost at a given college. Because tuition, fees, and room-and-board expenses are different at each college, your child’s financial need will vary depending on the cost of a particular college.

Colleges have their own way of determining financial aid. Basically, the process works the same way as with the federal government, except that the institutional methodology embodied in the standard college PROFILE application typically takes a more in-depth look at your income and assets to determine how “needy” your child really is. For example, colleges often consider your home equity and retirement accounts in assessing your ability to pay college costs.

How do I apply and when?

The FAFSA can be completed manually and mailed to the regional processor listed on the form, but the better option is to complete and file it online at www.fafsa.ed.gov. The online version flags suspected mistakes immediately and takes only one week to process (compared to two to four weeks for paper FAFSAs).

The FAFSA relies on information from your previous year’s tax return, so it can’t be filed before January 1 in the year that your child will be attending college (the official federal deadline for filing the FAFSA is June 30, but many colleges have an earlier deadline). Parents should try to submit the FAFSA as close to January 1 as possible because some financial aid programs operate on a first-come, first-served basis. Even if you haven’t completed your federal income tax return, Uncle Sam lets you base your FAFSA answers on an estimated return, though you will have to provide a copy of your final income tax return later.

After your FAFSA is processed, your child will receive a Student Aid Report either in the mail or electronically (depending on how you filed the FAFSA), which highlights your EFC. Colleges that you list on the FAFSA will also get a copy of the report. Then, the financial aid administrator at each school will try to craft an aid package to meet your child’s financial need.

Comparing aid awards

Sometime in early spring, your child will receive financial aid award letters that detail the specific amount and type of financial aid that each college is offering. When comparing awards, first check to see if each college is meeting all of your child’s financial need. Then, look at the loan component of each award and compare actual out-of-pocket costs. Remember, grants and scholarships don’t have to be repaid and so don’t count toward out-of-pocket costs.

If you’d like to lobby a particular school for more aid, tread carefully. A polite letter to the financial aid administrator followed up by a telephone call is appropriate. Your chances for getting more aid are best if you can document a change in circumstances that affects your ability to pay, such as a recent job loss, unusually high medical bills, or some other unforeseen event. Also, your chances improve if your child has been offered more aid from a direct competitor college, because colleges generally don’t like to lose a prospective student to a direct competitor. Remember, the fewer loans, the better.

The most common federal aid programs

Here are some names you’ll be hearing as you navigate the world of financial aid:

• Stafford Loan–The most common federal student loan for college and graduate students. Interest may be subsidized (paid by the government during school, the grace period and deferment periods) or unsubsidized. The interest rate is fixed at 6.8% for unsubsidized loans and is currently 3.4% for subsidized loans disbursed on or after July 1, 2011 and before July 1, 2012.
• Perkins Loan–A federal student loan for college and graduate students with the greatest financial need. The interest rate is fixed at 5%.
• PLUS Loan–A federal education loan for parents of college students and independent graduate students available through financial institutions. A separate application is required, though filing the FAFSA first is a prerequisite. Parents can borrow the full cost of their child’s education, minus any financial aid received; the only criteria is a good credit history. The interest rate is fixed at 7.9% for new loans.
• Pell Grant–The Pell Grant is available to undergraduates with exceptional financial need.

A word about merit aid

In recent years, merit aid has been making a comeback as colleges use favorable merit aid packages to attract certain students to their campuses, regardless of their financial need. However, the availability of college-sponsored merit aid tends to fluctuate from year to year as colleges decide how much of their endowments to spend, as well as which specific academic and extracurricular programs they want to target.

Besides colleges, a wide variety of groups offer merit scholarships to students meeting certain criteria. There are several websites where your child can input his or her background, abilities, and interests and receive (free of charge) a matching list of potential scholarships.

How much should you rely on financial aid?

With all this talk of financial aid, it’s easy to assume that it will do most of the heavy lifting when it comes time to paying the college bills. But the reality is you shouldn’t rely too heavily on financial aid. Although aid can certainly help cover your child’s college costs, student loans make up the largest percentage of the typical aid package, not grants and scholarships.

As a general rule of thumb, plan on student loans covering up to 50% of college expenses, grants and scholarships covering up to 15%, and work-study jobs covering a variable amount. But remember, parents and students who rely mainly on loans to finance college can end up with a considerable debt burden

Do you ever wonder where your money goes each month? Does it seem like you’re never able to get ahead? If so, you may want to establish a budget to help you keep track of how you spend your money and help you reach your financial goals.

Examine your financial goals

Before you establish a budget, you should examine your financial goals. Start by making a list of your short-term goals (e.g., new car, vacation) and your long-term goals (e.g., your child’s college education, retirement). Next, ask yourself: How important is it for me to achieve this goal? How much will I need to save? Armed with a clear picture of your goals, you can work toward establishing a budget that can help you reach them.

Identify your current monthly income and expenses

To develop a budget that is appropriate for your lifestyle, you’ll need to identify your current monthly income and expenses. You can jot the information down with a pen and paper, or you can use one of the many software programs available that are designed specifically for this purpose.

Start by adding up all of your income. In addition to your regular salary and wages, be sure to include other types of income, such as dividends, interest, and child support. Next, add up all of your expenses. To see where you have a choice in your spending, it helps to divide them into two categories: fixed expenses (e.g., housing, food, clothing, transportation) and discretionary expenses (e.g., entertainment, vacations, hobbies). You’ll also want to make sure that you have identified any out-of-pattern expenses, such as holiday gifts, car maintenance, home repair, and so on. To make sure that you’re not forgetting anything, it may help to look through canceled checks, credit card bills, and other receipts from the past year. Finally, as you list your expenses, it is important to remember your financial goals. Whenever possible, treat your goals as expenses and contribute toward them regularly.

Evaluate your budget

Once you’ve added up all of your income and expenses, compare the two totals. To get ahead, you should be spending less than you earn. If this is the case, you’re on the right track, and you need to look at how well you use your extra income. If you find yourself spending more than you earn, you’ll need to make some adjustments. Look at your expenses closely and cut down on your discretionary spending. And remember, if you do find yourself coming up short, don’t worry! All it will take is some determination and a little self-discipline, and you’ll eventually get it right.

Monitor your budget

You’ll need to monitor your budget periodically and make changes when necessary. But keep in mind that you don’t have to keep track of every penny that you spend. In fact, the less record keeping you have to do, the easier it will be to stick to your budget. Above all, be flexible. Any budget that is too rigid is likely to fail. So be prepared for the unexpected (e.g., leaky roof, failed car transmission).

Tips to help you stay on track

• Involve the entire family: Agree on a budget up front and meet regularly to check your progress
• Stay disciplined: Try to make budgeting a part of your daily routine
• Start your new budget at a time when it will be easy to follow and stick with the plan (e.g., the beginning of the year, as opposed to right before the holidays)
• Find a budgeting system that fits your needs (e.g., budgeting software)
• Distinguish between expenses that are “wants” (e.g., designer shoes) and expenses that are “needs” (e.g., groceries)
• Build rewards into your budget (e.g., eat out every other week)
• Avoid using credit cards to pay for everyday expenses: It may seem like you’re spending less, but your credit card debt will continue to increase

Copyright 2006-2011 Broadbridge Investor Communications Solutions, Inc. All rights reserved.

Whether you are a first-time parent or a veteran of refereeing sibling squabbles and who-put-the-empty-milk-carton-back-in-the-fridge inquisitions, parenthood can be both wonderfully rewarding… and frighteningly challenging. Our children give us gifts only a parent can understand–from sticky-finger hugs to “Can I come?” pleas to tag along on Saturday morning errands. We raise them with a clear goal that we secretly dread will actually take place–that someday they will be grown, independent, ready to move out into the world on their own, and our work will be over. As our children travel this long and never-dull road from infancy to adulthood, we nurture them, worry about them, scold them, love them.

Most of all, we try to protect them. We want them to grow up in a stable world, one in which they are physically safe, emotionally nurtured, and financially secure. Still, meeting expenses can be a challenge.

How expensive is raising a child?

The United States Department of Agriculture estimates that the average nationwide cost of raising one child from cradle to college entrance at age 18 ranges from $163,440 to $377,040 depending on income. (Source: Expenditures on Children by Families, 2010) Then, when they turn 18, add in college expenses, and your financial outlay can get even worse. How much worse? According to the College Board, for the 2011/2012 school year, the average cost of one year at a four-year public college is $21,447 (for in-state students), while the average cost for one year at a four-year private college is $42,224. Even if those numbers don’t go up (and they have increased each year for decades), that would come to $85,788 for a four-year degree at a public college, and $168,896 at a private university. Oh, and don’t forget graduate school.

The bottom line: Children are expensive! Between raising them and educating them and making sure they get a good, strong start in life, one thing is obvious when it comes to children–they are a major responsibility. Fortunately, as long as we remain alive and healthy, we manage to somehow meet these expenses. It’s part of what parenthood is all about.

Have you taken steps to protect them?

But here’s a question you need to consider: What would happen to them if something happened to you? No, it’s not the kind of question we like to dwell on. But these matters are important. This is why many financial professionals recommend that, above and beyond the day-to-day efforts to provide for their children, parents should take specific steps to help protect their financial well-being.

Review your life insurance coverage

Life insurance is one of the most effective ways to protect your family from the uncertainty of premature death. Life insurance can help assure that a preselected amount of money will be on hand to replace your income and help your family members–your children and your spouse–maintain their standard of living. With life insurance, you can select an amount that will help your family meet living expenses, pay the mortgage, and even provide a college fund for your children. Best of all, life insurance proceeds are generally not taxable as income.

Purchase disability income insurance

If you become disabled and unable to work, disability income insurance can pay benefits–a specific percentage of your income–so you can continue meeting your financial obligations until you are back on your feet. What about Social Security? If you do become permanently and totally disabled and are unable to do work of any kind, you may be eligible for benefits, but qualifying isn’t easy. For more flexible and comprehensive protection, consider buying disability income insurance.

Start building a college fund now

College costs may seem daunting (and they are expected to continue increasing), but you have about 18 years before your newborn will be a college freshman. By starting today, you can help your children become debt-free college grads. The secret is to save a little each month, take advantage of compound interest, and have a sum waiting for you when your child is ready for college.

The following chart shows how much money might be available for college when your child turns 18, if you save a certain amount each month.

Child’s Age Now$100/month$200/month$300/month$400/monthNewborn$38,735$77,471$116,208$154,9414$26,231$52,462$78,693$104,9248$16,388$32,776$49,164$65,55210$12,283$24,566$36,849$49,13214$5,410$10,820$16,230$21,64016$2,543$5,086$7,629$10,172Table assumes an after-tax return of 6%, compounded monthly. This is a hypothetical example and is not intended to reflect the actual performance of any investment.

 But keep saving for your own retirement, too. Many well-intentioned parents put their own retirement savings on hold while they save for their children’s college education. But if you do so, you’re potentially sacrificing your own financial security.

 Finally, enjoy watching your children grow up. And remember, just as they are important to you, you are important to them. Make sure they’re protected financially, no matter what.

Copyright 2006-2011 Broadbridge Investor Communication Solutions, Inc. All rights reserved.

Each new year brings the chance for a fresh start, and the opportunity to improve your financial picture. As you make financial resolutions for 2012, looking back at what happened last year can help you make some positive changes this year.

If you spend any time on any of the finance-related websites like Yahoo! Finance, MarketWatch, BankRate or SmartMoney you are bound to see articles with various “tax tips” (e.g., http://www.bankrate.com/finance/taxes/12-tax-tips-2012-1.aspx) and other start-of-the-year advice for your finances. Some of these tips can save you big money, so make sure to bring these items up with your financial planner and/or tax professional.

As always, if we can help you with any of your financial planning needs please feel free to get in touch with our office.

When markets are volatile, sticking to a long-term investing strategy can be a challenge. To keep the ups and downs in perspective, it might help to look at past market cycles to see how recent market action compares.

Bears versus bulls

Corrections of 10% or more and bear markets of at least 20% are a regular occurrence. Since 1929, there have been 18 previous 20%-plus bear markets (not including 2011 market action). Losses on the S&P 500 in those markets ranged from almost 21% in 1948-1949 to 83% during 1930-1932; the average loss for all 18 bears was 37%.*

However, since 1929, the average bull market has tended to last almost twice as long as the average bear, and has produced average gains of about 79%.* Individual bull market gains have ranged from 21.4% at the end of 2001 to the nearly 302% increase registered during the 1990s.* The worst annual loss–47%–occurred in 1931, but the all-time best annual return–a capital appreciation gain of just under 47%–happened just two years later in 1933.**

Points of reference

This year has seen extreme volatility, with weeks and even days when swings of several hundred points in both directions on the Dow seemed to become commonplace. In the first week of August alone, 2 of the Dow’s 11 best days in history alternated with 2 of its 11 worst daily point losses ever.***

While by no means normal, the highs and lows are hardly unprecedented. Even though the 634-point drop on August 8 felt historic, it didn’t begin to match the real record-holders. The single biggest daily decline occurred in September 2008, when the Dow fell 778 points. The biggest percentage drop was October 1987′s “Black Monday,” when the Dow fell almost 23%; that makes the Dow’s 5.5% loss on August 8 of this year seem relatively tame by comparison. And August 8 was followed by the Dow’s 10th best day ever, with a gain of 430 points. While that upward movement may seem exceptional, the Dow’s best day ever came during the dark days of October 2008, when a 936-point move up on October 13 represented a gain of more than 11% in a single day.***

Stocks versus bonds

The last decade has been a challenging one for stocks. Between 2001 and 2010, the S&P 500 had an average annual total return of just 1.4%, while the equivalent figure for Treasury bonds was 6.6%.**** For much of that time, interest rates were falling, helping bonds to outperform stocks. However, interest rates are now at record lows, and rising rates could change the relative performance of stocks and bonds.

Many experts predict that the global economic recovery will continue to create an uncertain investing environment in coming years, with both strong rallies and strong downdrafts. While there may be ongoing volatility in the markets that needs to be monitored, it’s important to keep things in perspective; your ability to meet your long-term goals could be affected if you change your overall game plan with every new headline.

Past performance is no guarantee of future results. Market indices listed are unmanaged and are not available for direct investment. All investing involves risk, including the risk of loss of principal, and there can be no guarantee that any investment strategy will be successful. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The Standard & Poor’s 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.

DATA SOURCES: *Bull and bear market time frames, gains/losses: all calculations based on data from the Stock Trader’s Almanac 2011 for the Standard & Poor’s 500.

**1931 and 1933 annual stock returns: based on Ibbotson SBBI data for capital appreciation of S&P 500.

***Based on data from the Stock Trader’s Almanac 2011 .

**** 10-year rolling stock returns: based on Ibbotson SBBI data for annual total returns between 2001 and 2010 of S&P 500 and an index of U.S. Treasury bonds with an approximate 20-year maturity.

Copyright 2006-2011 Broadridge Investor Communication Solutions, Inc. All rights reserved.

The window of opportunity for many tax-saving moves closes on December 31. So set aside some time to evaluate your tax situation now, while there’s still time to affect your bottom line for the current tax year. With that in mind, here are 10 things to consider as the curtain closes on 2011.

1. Deferring income to 2012 means postponing taxes

Consider opportunities you might have to defer income to 2012. You might be able to delay a year-end bonus, for example. If you’re able to push what would have been 2011 income into 2012, you may be able to put off paying income tax on the deferred dollars until next year.

2. Paying deductible expenses sooner may help you in 2011

Does it make sense for you to accelerate deductions into 2011? If you itemize deductions, it might help your 2011 bottom line to pay deductible expenses like medical costs, qualifying interest, and state and local taxes before the end of the year, instead of waiting until 2012.

3. Income tax rates to remain the same in 2012

The same six federal income tax rates that apply in 2011 will apply in 2012.
So, depending upon your income, you’ll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket. And, as in 2011, long-term capital gains and qualifying dividends will continue to be taxed at a maximum rate of 15% in 2012; and if you’re in the 10% or 15% tax rate brackets, a special 0% tax rate will generally continue to apply.

4. Is AMT a factor?

If you’re subject to the alternative minimum tax (AMT), special rules apply. For example, the AMT rules can effectively disallow a number of itemized deductions, making it a potentially significant consideration when it comes to year-end planning. You’re more likely to be subject to AMT if you claim a large number of personal exemptions, deductible medical expenses, state and local taxes, and miscellaneous itemized deductions. If you’ve been subject to the AMT in the past, or think that you might be for 2011, you’ll want to make sure that you understand how the AMT rules might affect you.

5. IRA and retirement plan contributions

Employer-sponsored retirement plans like 401(k) plans and traditional IRAs (if you qualify to make deductible contributions) present an opportunity to contribute funds on a pre-tax basis, reducing your 2011 taxable income. Contributions that you make to a Roth IRA (assuming you meet the income requirements) aren’t deductible, so there’s no tax benefit for 2011–they’re still worth considering, though, because qualified distributions are free from federal income tax. The window to make 2011 contributions to your employer plan closes at the end of the year, but you can generally make 2011 contributions to your IRA up to April 17, 2012.

6. Special distribution requirements at age 70½

Once you reach age 70½, you’re generally required to start taking required minimum distributions (RMDs) from any traditional IRAs or employer-sponsored retirement plans you own. It’s important to make withdrawals by the date required–the end of the year for most individuals. The penalty is steep for failing to do so: 50% of the amount that should have been distributed. Barring additional legislation, 2011 will be the last year to take advantage of a popular provision allowing individuals age 70½ or older to make qualified charitable distributions of up to $100,000 from an IRA directly to a qualified charity (these charitable distributions are excluded from your income, and count toward satisfying any RMDs that you would otherwise have to take from your IRA for 2011).

7. Depreciation and expense limits to drop for business owners and the self-employed

If you’re a small business owner or a self-employed individual, you’re allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011; this “bonus” first-year additional depreciation deduction will drop to 50% for property acquired and placed in service during 2012. For 2011, the maximum amount that can be expensed under IRC Section 179 is $500,000, but in 2012 the limit will drop to $139,000.

8. Last chance to deduct energy-efficient home improvements

This is the last year you’ll be able to claim a credit for energy-efficient improvements you make to your home (up to 10% of the cost of qualifying property). Improvements can include a qualifying roof, windows, skylights, exterior doors, and insulation materials. Specific credit amounts may also be available for the purchase of energy-efficient furnaces and hot water boilers. However, there’s a lifetime credit cap of $500 ($200 for windows). So, if you’ve claimed the credit in the past–in one or more years since 2005–you’re only entitled to the difference between the current cap and the amount you’ve claimed in the past.

9. Other expiring provisions

Barring additional legislation, this is the last year that you’ll be able to elect to deduct state and local general sales tax in lieu of state and local income tax, if you itemize deductions. This also will be the last year for both the above-the-line deduction for qualified higher education expenses, and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals.

10. Get help

Making effective year-end moves requires a solid understanding of the rules that are in effect for both 2011 and 2012. It also requires a comprehensive grasp of your overall financial situation. A financial professional can help you evaluate potential opportunities, and can keep you apprised of any last-minute legislative changes.

Copyright 2006-2011 Broadridge Investor Communication Solutions, Inc. All rights reserved.

Background

Despite more aggressive debt shedding by American consumers since the recession, student loan debt continues to grow. According to the federal government, 36 million Americans have federal student loan debt. Last summer, total student loan debt surpassed credit card debt for the first time, and this year outstanding student loan debt is on track to reach $1 trillion, according to the Federal Reserve Bank of New York.

In addition, in September, the U.S. Department of Education released data showing that the percentage of student loan borrowers who defaulted in 2009 (the latest year for which figures are available) rose to 8.8% from 7%. That percentage is likely higher now due to the recession, as millions of cash-strapped college students attempt to pay back student loans in a tough economy. According to the Chronicle of Higher Education, last year the unemployment rate for college graduates under the age of 24 rose to 9.4%, the highest level in at least 15 years.

In the meantime, college tuition continues to rise; the College Board recently announced in itsTrends in College Pricing 2011 report that tuition costs for the 2011/2012 academic year increased 4.5% for private colleges and 8.3% for public colleges (to view the report, visit www.collegeboard.com/trends). The average total cost of attendance this year is now $42,224 for private colleges and $21,447 for public colleges. And next July, the interest rate on federal Stafford Loans is scheduled to double–to 6.8%–costing the average borrower thousands of dollars over the life of the loan.

Against this backdrop, following are the highlights of President Obama’s plan.

Loan consolidation

Students who hold both direct federal student loans and federal student loans made by private lenders under the now defunct Federal Family Education Loan Program would be able to consolidate their loans between January and June 2012 into a single government loan at an interest rate of up to 0.5% less. The White House estimates this could help approximately 5.8 million borrowers.

Income-based repayment

President Obama’s plan will accelerate the start of an income-based repayment program to 2012 from the original start date of 2014. The program, approved by Congress last year, caps monthly federal student loan payments at 15% of income and forgives all remaining debt after 25 years. Under the new plan, federal student loan payments will be capped at 10% of income with all remaining debt forgiven after 20 years. The White House estimates this could help 1.6 million borrowers.

Who qualifies?

According to the U.S. Department of Education, to qualify for loan consolidation, borrowers must have both a direct federal student loan and a federal student loan under the Federal Family Education Loan Program. To qualify for the accelerated component of the income-based repayment plan, borrowers must take out a loan in 2012 or later and have taken out a loan sometime between 2008 and 2012. Borrowers who are already in default won’t qualify.

For more information on the new programs, you can call the office of Federal Student Aid, a division of the U.S. Department of Education, at 1-800-433-3243 (1-800-4fedaid) or visitwww.studentaid.ed.gov.

Copyright 2006-2011 Broadridge Investor Communication Solutions, Inc. All rights reserved.

The 2% difference

If you’re an employee, 6.2% of your wages (up to the taxable wage base–$106,800 in 2011) would normally be withheld for your portion of the Social Security retirement component of FICA employment tax. But legislation passed in December 2010 included a temporary one-year 2% reduction in this tax. That means for 2011, you’re paying the tax at a rate of 4.2%. If you’re self-employed, the 12.4% you would normally pay for the Social Security portion of your self-employment tax is reduced to 10.4%.

Have you earmarked the resulting extra dollars in your paycheck efficiently by, for example, paying down high-interest debt or saving for retirement? If you haven’t, consider making up for it by contributing an extra 4% of your income to your 401(k) or an IRA for the remainder of the year. By applying the extra money toward a long-term goal, the potential benefit of the temporary tax reduction can extend beyond 2011.

Tax rates

The same federal income tax rates that applied in 2010 continue to apply in 2011 and 2012 (depending on your taxable income, you’ll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket). And, as in 2010, long-term capital gains and qualifying dividends in 2011 and 2012 continue to be taxed at a maximum rate of 15%; if you’re in the 10% or 15% marginal income tax brackets, a special 0% rate will generally apply. So, unlike this time last year, you don’t have to contend with the uncertainty of not knowing what next year’s tax rates will be.

That consistency, however, does not apply to the alternative minimum tax (AMT)–essentially a parallel federal income tax system, with its own rates and rules. While the December legislation extended regular income tax rates through 2012, it only extended AMT relief (in the form of increased AMT exemption amounts) through 2011. You can probably expect another AMT fix in legislation later this year, since without it there would be a dramatic increase in the number of individuals subject to AMT in 2012. But that leaves a fair degree of uncertainty today, however, as you consider your overall tax situation.

Also worth noting

Small business stock: Generally, individuals may exclude 50% of any capital gain from the sale or exchange of qualified small business stock provided they meet certain requirements, including a five-year holding period. For qualified small business stock issued and acquired after September 27, 2010, and before January 1, 2012, however, 100% of any capital gain may be excluded from income if the stock is held for at least five years and all other requirements are met.

IRA qualified charitable distributions: Absent additional legislation, 2011 will be the last year that you’ll be able to make qualified charitable distributions (QCDs) of up to $100,000 from an IRA directly to a qualified charity if you’re age 70½ or older. Such distributions may be excluded from income and count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to receive from your IRA in 2011.

Depreciation and IRC Section 179 expensing: If you’re a business owner or self-employed individual, you’re allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011 (the “bonus” first-year additional depreciation deduction will drop to 50% for property acquired and placed in service during 2012). For 2011, the maximum amount that can be expensed under IRC Section 179 is $500,000, but in 2012 the limit will drop to $125,000.

Prepared by Forefield, Inc. Copyright 2011.

Effect of policy loan on policy

You can generally borrow an amount up to the policy’s cash surrender value (less an adjustment for interest) from the insurer. The insurer will charge you interest on the loan. Generally, interest is not actually paid, but is added to the amount of the loan. Interest charged on a policy loan is not generally deductible for income tax purposes. There could be other adjustments as well under the contract; for example, a participating policy may restrict the payment of dividends to you while a loan is outstanding.

You are not required to repay a life insurance policy loan. But you can generally repay a life insurance policy loan at any time while the insured is alive. If you do not repay the loan, the cash surrender value paid to you or the policy proceeds at death will be reduced by the amount of the loan (plus interest). Thus, a loan generally reduces life insurance protection.

If the amount borrowed plus interest ever equals or exceeds the cash surrender value, the policy can terminate if additional amounts are not paid into the life insurance policy. Life insurance protection could be lost.

If you have any incidents of ownership in a life insurance policy on your life, proceeds paid at death are includable in your gross estate for federal estate tax purposes. The right to obtain a policy loan is an incident of ownership. Generally, life insurance proceeds received at death by your beneficiary are received income tax free.

Taxation of policy loan

You can borrow against your life insurance policy, and the loan proceeds are generally not taxable to you (unless the policy is a modified endowment contract (MEC), see sidebar).

A loan from a MEC is treated as a distribution from the MEC. A distribution from a MEC is subject to the income-out-first rule. As amounts are distributed, they are treated as consisting of taxable income to the extent that they do not exceed the excess of the cash surrender value of the policy over the investment in the contract (generally, premiums paid less tax-free distributions). The taxable income will also be subject to a 10% penalty tax unless the distribution is made after age 59½, on account of disability, or as part of a series of substantially equal periodic payments.

Example: You have a MEC with a cash surrender value of $100,000. You have paid premiums of $50,000. You take a policy loan for $60,000. The first $50,000 ($100,000 cash surrender value – $50,000 investment in the contract) of the loan is taxable income to you.

Lapse or surrender of policy

An outstanding loan is generally treated as an amount received if a policy lapses or is surrendered and may result in taxable income. A policy can lapse if premiums are not paid and the policy terminates when any policy benefits are exhausted as a result. Also, as noted above, if the amount borrowed plus interest ever equals or exceeds the cash surrender value, the policy can terminate if additional amounts are not paid into the life insurance policy. You can cash in a policy by surrendering the policy to the insurer in return for the policy’s cash surrender value (as reduced by the amount of the loan plus interest).

If you surrender your policy to the life insurance company or the policy lapses, any gain realized is taxable at ordinary income tax rates. The gain is the excess of the amount you receive over the net premium cost. The net premium cost is the total premiums you paid less any tax-free distributions received. An outstanding loan is generally treated as an amount received if a policy is surrendered or lapsed and may result in taxable income.

1) Over the next 75 years, Social Security’s shortfall is equal to about 0.7 percent of GDP. Source(PDF).

2) For the average 65-year-old retiring in 2010, Social Security replaced about 40 percent of working-age earnings. That “replacement rate” is scheduled to fall to 31 percent in the coming decades. Source.

3) Social Security’s replacement rate puts it 26th among 30 Organization for Economic Cooperation and Development nations for workers with average earnings. Source.

4) Without Social Security, 45 percent of seniors would be under the poverty line. With Social Security, 10 percent of seniors are under the poverty line. Source.

5) People can start receiving Social Security benefits at age 62. But the longer they wait, up until age 70, the larger their checks. Waiting to 66 means checks that are 33 percent larger. Waiting to 70 means checks that are 76 percent larger. But most people start claiming benefits at 62, and 95 percent start by 66. Source.

6) Raising the retirement age by one year amounts to roughly a 6.66 percent cut in benefits. Source.

7) In 1935, a white male at age 60 could expect to live to 75. Today, a white male at age 60 can expect to live to 80. Source.

In 1972, a 60-year-old male worker in the bottom half of the income distribution had a life expectancy of 78 years. Today, it’s around 80 years. Male workers in the top half of the income distribution, by contrast, have gone from 79 years to 85 years. Source.

The conclusions I draw from these numbers are:

1) Social Security’s 75-year shortfall is manageable. In fact, it’d be almost completely erased by applying the payroll tax to income over $106,000. Source (PDF).

2) Most opinion elites — Simpson being one good example, and the U.S. Senate being another — show a very strong preference for working as long as possible. Most Americans show a very strong preference for retiring as early as possible. Elites who enjoy their jobs need to be very careful about generalizing their experience to people who don’t enjoy their jobs. More bluntly: Raising the retirement age is the worst of all possible options for reforming Social Security. It’s not only regressive, but it also falls most heavily on those with the worst jobs. Means-testing would be much better.

3) Social Security is fairly stingy and getting stingier. We also know most 401(k)s are underfunded, and the same goes for many defined-benefit pension systems, both public and private. We need to be very careful not to “solve” the Social Security problem by worsening a broad retirement-security problem, and that requires approaching Social Security as part of our retirement-security infrastructure rather than simply as a budgetary question. Here are some ideas on how to do that.

Source: Ezra Klein, Washington Post

“The average American family’s household net worth declined 23% between 2007 and 2009. A rare survey of U.S. households, first performed in 2007 but repeated in 2009 in order to gauge the effects of the recession, reveals the median net worth of households fell from $125,000 in 2007 to $96,000 in 2009.”

This is, as you might guess, an unfortunate effect that the recession has had on many of us. For many families, this recession resulted in lost jobs, lost homes and had, in some cases, devastating effects on overall financial and retirement plans. The good news is that the economy is starting to recover (albeit slowly, and with fewer good jobs than we would hope for). This recovery gives everyone an opportunity to start to pick up the pieces and begin the process of rebuilding their finances. I am currently reviewing many of my personal client’s situations, and in many cases we are altering course somewhat in order to give them the best chance at reaching their goals.

If you haven’t reviewed your financial plans in a while, perhaps it is time to start thinking about it. It’s never too late to develop or revise a plan, and it certainly never too early! Please contact my office if I can be of assistance. I would be more than happy to assist you with a review of your plans.

1. Health care, including cost of care and ability to stay healthy
2. Running out of money, including spending down their wealth efficiently
3. Maintaining independence/self-sufficiency

There are ways to deal with all of these, and more. It just takes some good retirement planning ahead of time.

Because bond prices typically rise when interest rates fall, that decline in yields has produced a bull market in bonds over the last decade. But what happens when the trend reverses? Even if they continue to remain relatively stable for a while, ultra-low interest rates have nowhere to go but up. When the economic recovery begins to show signs of strength, at some point the Federal Reserve Board will begin to raise the target rate again. When that happens, bond prices also will begin to reverse their long-term direction.

Here are some factors to consider in anticipation of a future with rising interest rates.

Bond maturities: when short is sweet

When interest rates rise, longer-term bonds typically feel the impact the most. In an extended period of rising interest rates, bond buyers become reluctant to tie up their money for longer periods because they foresee higher yields in the future; the later the bond’s maturity date, the greater the risk that its yield will eventually be superseded by that of newer bonds. As demand drops and yields increase to attract purchasers, prices fall.

There are various ways to manage that impact. If you own individual bonds, you always have the option of holding them to maturity; in that case, you would suffer no loss of principal unless the borrower defaults. Bond investments also can be laddered. This involves buying a portfolio of bonds with varying maturities; for example, a five-bond portfolio might be structured so that one of the five matures each year for the next five years. As each bond matures, it can be reinvested in an instrument that carries a higher yield. Laddering also can be used with certificates of deposit (CDs).

If you own a bond fund, you can check the average maturity of the fund’s holdings, or the fund’s average duration, which takes into account the value of interest payments and will generally be shorter than the average maturity. The longer a fund’s duration, the more sensitive it may be to interest rate changes.

Rising rates and other assets

Higher interest rates often are an attempt to prevent rising prices. When prices go up, purchasing power goes down, including the purchasing power of a bond’s fixed interest payments. That can make bonds less attractive to buyers. However, not all investments are hurt by higher prices. For example, commodities such as oil and wheat typically do well in inflationary periods; in fact, increases in commodity prices are often what trigger a bout of inflation. If you’re primarily interested in the overall value of your portfolio rather than a regular income stream, your financial professional can help you explore whether you should consider diversifying into asset classes that tend to benefit from inflation and that might help counteract the potential impact of falling bond prices.

Though bonds are affected most directly, equities aren’t necessarily immune to rate increases. Though many companies borrowed money in recent years to take advantage of low rates and postpone the need to issue bonds for some time, those that haven’t may see their borrowing costs increase, which could affect their bottom lines. Even those that squirreled away cash could be hit when they return to the bond markets eventually. Also, if interest rates rise to a level that’s competitive with the return on stocks, that could reduce investor demand for equities.

Higher rates aren’t all bad news

For those who’ve been diligent about saving, or who have kept a substantial portion of their investments in cash, higher rates could be a boon. Savings accounts, CDs, and money market funds are all likely to do better at providing income than they have in recent years. The downside, of course, is that if higher rates are accompanied by inflation, such cash alternatives might not keep pace with rising prices. And bear in mind that a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money investing in a money market fund.

*Source: Federal Reserve Statistical Release Historical Data for Fed funds rate weekly since 1954.

Prepared by Forefield, Inc. Copyright 2011.

Every October, the College Board releases its Trends in College Pricing report that highlights college cost increases and trends. While costs can vary significantly by region and individual college, the College Board publishes average cost figures, which are based on its survey of 3,500 colleges across the country.

Here are highlights from its latest report:

• At four-year public colleges for in-state students, tuition and fees increased an average of 7.9% from last year to $7,605, and room and board costs increased an average of 4.6% to $8,535. Total average cost for 2010/2011 is $20,339.
• At four-year public colleges for out-of-state students, tuition and fees increased an average of 6.0% from last year to $19,595, and room and board costs increased an average 4.6% to $8,535. Total average cost for 2010/2011 is $32,329.
• At four-year private colleges, tuition and fees increased an average of 4.5% from last year to $27,293, and room and board costs increased an average of 3.9% to $9,700. Total average cost for the 2010/2011 year is $40,476.

“Total average cost” includes tuition and fees, room and board, books and supplies, transportation, and a small amount for miscellaneous expenses.

To read the Trends in College Pricing report, visit www.trends-collegeboard.com.

Student aid trends

The College Board notes that the average cost figure is not necessarily representative of what most college students pay. That’s because approximately two-thirds of undergraduate students receive grants that reduce the actual price of college. The largest provider of grant aid is individual colleges, followed by the federal government, private sources and employers, and state governments. Some students and their parents also benefit from federal education tax benefits.

The College Board estimates that for the 2010/2011 academic year, students at public colleges will receive an average of $6,100 in grant aid from all sources and federal tax benefits, while students at private colleges will receive an average of $16,000 in grant aid from all sources and federal tax benefits. Federal tax benefits include the American Opportunity tax credit (formerly called the Hope credit), the Lifetime Learning tax credit, and the deduction for qualified higher education expenses.

Every year, the College Board releases a sister report to Trends in College Pricing, called Trends in Student Aid, that examines student financial aid in more detail. To read this report, visit www.trends-collegeboard.com

Prepared by Forefield, Inc. Copyright 2011.

There’s been much debate in investing circles over the last year about whether inflation or deflation represents a more likely threat to the future of the U.S. economy. With a recovery that’s still tentative compared to previous recessions, measures designed to stimulate the economy or cut spending to rein in the budget deficit provoke warnings about their potential to create one or the other.

Learn the basics about disability insurance in a flash. Hear from a one of the nation’s top insurance advisors who will explain why disability insurance is so important, help demystify the disability insurance process and quickly provide you with a good understanding of important insurance terms and concepts.

Learn the basics about life insurance in a flash. Hear from a one of the nation’s top insurance advisors who will explain why life insurance is so important, help demystify the life insurance process and quickly provide you with a good understanding of important insurance terms and concepts.

Infographic by Smarter.org

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According to an article on the Investor’s Business Daily Politics and Market Blog Friday, the iShares Silver Trust (SLV) rose nearly 2.5% on Friday to $31.78 per share and at least one analyst thinks that silver could be on it’s way to $50 per ounce.

So, does investing in silver make sense for you? It might. There is a strong case to be made for investing in hard assets like gold and silver in times when inflation can eat away the purchasing power of your dollars. Inflation alone can drive the price of commodities like silver higher. In addition, silver is an important industrial metal with a wide variety of uses, so an expanding economy might contribute to the demand for silver which could, in turn, drive prices higher.

Silver and other precious metals can play a role in an well-diversified portfolio. In addition to the factors listed in the previous paragraph, consider the fact that silver is largely uncorrelated to the market in general. This means that up and down moves don’t have a significant correlation to the price movement in silver, helping you to achieve good diversification in your investment assets.

There are a number of ways to add silver to your portfolio. The ETF mentioned above (SLV) is a convenient way to get some exposure to silver. This what we typically use in our clients’ portfolios. Another way to own silver is to simply purchase the raw metal or silver bullion coins. I personally own some silver in the form of U.S. Silver Eagles, kept in a safe deposit box for safekeeping.

Regardless of how you choose to own it, silver and other precious metals can be a valuable addition to your holdings. Contact us for more information about the ways that we can help you seek maximum gains while taking minimum risks.