Dying Rich

Retirement Plan Providers Try New 401k Ideas

2012-01-30T04:16:00.000-08:00

Several 401(k) providers are rolling out new bells and whistles.

Some of the changes are driven by the realization that many individuals haven’t saved enough to get them through retirement. In addition, the market’s volatility has reduced balances yet again and prompted many to pull their money out of the market.

“Given the low balances in 401(k) plans, if our industry doesn’t help provide better solutions, at some point the government will come under pressure to do something,” says Chuck Cornelio, president of defined contribution at Lincoln Financial Group. “Sometimes government solutions are good sometimes they’re not.”

Here’s a snapshot of some new ideas:

Pension-like income

Companies are trying to come up with ways to offer account-holders a guaranteed income stream, much like traditional pension plans once did.

The latest effort comes from Hartford Financial Services Group, which has designed a plan that allows 401(k) account-holders to buy what it calls income shares. Each share is guaranteed to pay $10 of monthly income for life beginning at age 65. A worker could buy 50 income shares during working years to generate $500 a month in retirement, for example.

The cost of each income share is based on the person’s age, current interest rates and is predicated on retirement at age 65. The amount of income from each unit will increase if the participant retires later or decrease if the participant retires earlier. Retirement plan participants can buy shares through regular payroll deductions and lump-sum payments.

The income is provided from an annuity that’s an investment option within the 401(k) plan.

Here’s an example: Let’s say Mary, 30, has an annual salary of $40,000 and saves $200 a month in her 401(k). She wants to be sure she has $500 a month in retirement to cover basic expenses. To do that she could contribute $86 a month toward the purchase of income shares until age 65. Her total contribution would be $36,120, yet she would be paid a total of $120,000 from age 65 to 85 — or $500 a month. If she lives longer, the guaranteed income would be $180,000 from age 65 to 95.

The option should be viewed as another investment choice within a 401(k) plan, said Patricia Harris, director of retirement income products at Hartford.

The concept was to create an option that fills the space of a pension plan for 401(k) participants, but enables workers to control and manage the money on their own, Harris said.

Just for small businesses

The Vanguard Group has launched a 401(k) plan for small businesses, which are defined as those with assets of less than $20 million. The plans include index funds and target-date funds. Employers pay one fee for record keeping and administrative costs.

Vanguard says one of its small business plans — with a mix of its index funds and some active funds, about $5 million in assets and an average account balance of $50,000 — would charge 0.32 percent of plan assets. The industry median for small plans between $1 million and $10 million in assets is 1.27 percent.

To keep costs down, the plans primarily feature index funds — those that closely mirror the performance of a broad index such as the Standard & Poor’s 500. They will include target-date funds, which are diversified funds with asset allocations that become more conservative as the investor ages.

Socially responsible investing

The number of 401(k) plans offering investment choices focusing on companies that promote environmentally sustainable practices, human rights, and diversity — known as socially responsible investing or SRI — could double in the next few years, according to a new report.

Business benefits consultant Mercer and the Forum for Sustainable and Responsible Investment surveyed more than 400 companies offering 401(k) plans earlier this year. While 14 percent surveyed said they already offer one or more SRI options, an additional 13 percent said they are discussing an SRI option or intend to add one within the next two to three years. More than 84 percent said they expect demand for socially responsible options to increase over the next five years.

Those that offer such options say they do so to align their retirement plans with their company’s goals and to meet employee demand.

Automatic enrollment

Human resources consultant Aon Hewitt says nearly 76 percent of eligible workers participated in their company’s 401(k) plan in 2010; the highest level since the company began tracking data. It credited automatic enrollment with the increased participation.

Auto enrollment is particularly important for low-income minorities, who are far less likely to participate in a plan under voluntary enrollment. The participation rate in voluntary enrollment plans among black workers earning less than $30,000 a year is only 35 percent. It is 36 percent for Hispanic workers in the same income group. These rates jump to 93 percent for blacks and 94 percent for Hispanic workers under automatic enrollment.

Source: http://www.knoxnews.com/news/2011/nov/07/retirement-plan-providers-try-new-401k-ideas/

How to Maximize the Higher 401(k) Contribution Limit

2012-01-29T04:09:00.000-08:00

Diligent savers will have the opportunity to tuck away extra money in their retirement plan next year. Investors will be able to contribute up to $17,000 to their 401(k) plan in 2012, up $500 from 2011. Retirement savers age 50 and older can defer taxes on as much as $22,500 because the IRS will allow older workers to make catch-up contributions worth as much as $5,500 next year. Here's how to make the most of the higher 401(k) contribution limit in 2012.

Break it into smaller increments. To completely max out your 401(k) and get the best possible tax benefits, you will need to save about $1,417 per month, which comes out to $327 per week. Workers age 50 and older who want to capture the entire tax break will need to tuck away $1,875 each month, or about $433 weekly.

Remember to reset your direct deposits. If you have direct deposit set up from your paycheck to your 401(k) and already contribute the maximum amount allowed, remember to boost the amount by $500 next year if you can. The extra savings comes out to about $42 per month. "Tell your employer's payroll department to take out the maximum amount," says Don Martin, a certified financial planner for Mayflower Capital in Los Altos, Calif. "You might have to go on their website to authorize the increase to the maximum amount."

Watch out for lower limits. The Internal Revenue Service may set the 401(k) contribution limit at $17,000, but some individual employers might set lower limits for their employees. "Your plan might not allow that much of a contribution," says Mike Branch, a certified financial planner for Focus Financial in Roseville, Minn. "Some plans might cap you at a 10 percent contribution."

Consider a Roth 401(k). The $17,000 contribution limit applies to both traditional and Roth 401(k)s, or a combination of the two. Traditional 401(k)s give you a tax break in the year you make the deposit, but taxes are due upon withdrawal. Roth 401(k) contributions are made with after-tax dollars, and withdrawals from accounts that are at least five years old are tax-free in retirement. "If you are in a high tax bracket, like 25 percent or more, it could make better sense to take the 401(k) deduction now," says Linda Stratton, a certified financial planner for Stratton Advisors in Oro Valley, Ariz. "If you are in the 15 percent bracket or below, it might make more sense to do the Roth."

Don't be discouraged if you can't save the max. While it's a worthy goal to max out your 401(k) contributions, most people don't save anywhere near the tax-deductible limit. Only 9 percent of Vanguard 401(k) participants hit the 401(k) limit of $16,500 in 2010. And just 13 percent of older workers used catch-up contributions when they were offered in 2010, Vanguard found. A Government Accountability Office report found that only about 5 percent of more than 40 million 401(k) participants contribute the maximum tax-deductible amount. Most of the people who are able to completely max out their 401(k)—72 percent—earn $126,000 or more per year, GAO found. If you're not able to take advantage of the entire tax break, at least strive to contribute enough to capture any 401(k) match offered by your employer. "The fact that the IRS increased the contribution limit doesn't really mean anything if you are not saving the maximum amount right now," says Branch. "If you are saving the maximum amount, it is an opportunity to put more away."

Source: http://money.usnews.com/money/retirement/articles/2011/11/07/how-to-maximize-the-higher-401k-contribution-limit

How to Claim “Free Money” Through a 401k

2012-01-28T04:05:00.000-08:00

It’s fall, so you’ve probably already received that infamous thick packet in the mail. You know, the one that says “401k Retirement Options” in big letters on the front and provides way too much information about a sea of investment choices.

Aren’t these packets overwhelming? They’re too long, and you need a dictionary to understand every other page. Most of us take one look at it and say, “I’ll come back to it later.”

Yet for all its flaws, that packet serves as a good reminder to make sure you’re contributing to your retirement plans.

Retirement?! Already? Isn’t this a blog for young professionals?

Hear us out. Even at the age of 22, you can ensure that your hard work sets you up for later. The earlier you plan, the smarter you’ll look, feel and be when you hit your 30s and 40s and beyond. Young adults lose out on hundreds of thousands of dollars for failing to put money into their retirement accounts. Don’t be one of these suckers.

Instead, know the basics. You have many retirement vehicles at your disposal; 401k or 403b, Traditional IRA, Roth IRA and Roth 401k, to name a few. But the one that’s really special is the 401k.

In simple terms, a 401k account allows you to set automatically aside money from each paycheck into a separate account, one administered by your employer. Once the money is in the separate account, you allocate how you want to invest it, usually in mutual funds.

A 401k account is tax-deductible — it reduces the amount of cash Uncle Sam uses to calculate how much you pay in taxes today, and out of each paycheck going forward. Later, when you retire and want to use that money, you pay taxes. So you don’t get away from paying taxes, you just delay! If you want more technicalities, check the IRS website.

So why is the 401k special?

The really awesome part is when your employer puts money into that 401k at the same time as you. This is called “matching.” In best case scenarios, firms will do “dollar for dollar” matching, meaning that for every $1 you put in, your company will put in $1.

If your firm does this, it’s a Gold Mine! The grandfather of behavioral economics, Richard Thaler, in his book Nudge, says that “this match is virtually free money. Taking full advantage of the match should be a no-brainer for all but the most impatient or cash-strapped households.”

Here’s why this “free money” is such an awesome perk. The charts below show the results of putting money into a 401k, including the employer match. One chart shows what happens if you start immediately, the other shows what happens if you start three years from now.

In both cases, look at the savings you’ll accumulate just from putting 5 percent of your salary in a 401k account. Yes, you will have less take-home money, but the savings you’ll receive are almost three times as much.

Here’s another way to look at it: If you leave your job in three years, you’ll have $17,250 saved up. If you do nothing, look at your total savings: $0. Don’t be a sucker!
So what should you do if you want to take advantage of this “free money?” Here are four easy steps to get started:

1. If your employer offers $1 for $1, or a 100 percent match up to a certain percentage of your salary, put at least that percentage of your salary into your 401k. You double your money at no cost to you – cha-ching! You get more bang for your buck putting money here than paying off your student loan or credit card debt.

2. Ask your employer questions about their 401k plans. Those 401k packets can be daunting, but don’t let that stop you from getting ahead and planning for the future. The packets at least have a number for you to call.

3. Figure out where to put the money. This can also be intimidating, so if you’re unsure, choose one of the pre-selected options offered by your employer. You can always change those investments later. Putting money into the account is the first and most important step.

4. Continue to seek out resources that help young adults plan their finances in a language that speaks to you.

One last tip: The IRS’ 2011 limit for contributing to your 401k is $16,500. If you make over $245,000, then you’re not eligible.

So if your employer offers matching — and even if they don’t — put some money into a 401k. If you’re already doing that, consider increasing your contribution amount.

You’ll thank us down the road when you’re basking in the financial freedom you deserve.

Source: http://www.businessinsider.com/how-to-claim-free-money-through-a-401k-2011-11

New Rules Could Improve 401(k) Advice, But Be Prepared to Ask

2012-01-27T04:03:00.000-08:00

For years, employers have been replacing traditional pensions with worker-directed, 401(k)-like plans, placing the cost and responsibility of retirement saving firmly in our hands.

Yet many shied away from offering workers advice on how to invest their money, partly out of fear of being sued if participants were unhappy with the outcomes.

Late last month, federal regulators finalized steps aimed at getting rid of those excuses. The U.S. Department of Labor amended federal rules to make investment advice more available to 401(k) participants.

The move is part of an ongoing effort to improve 401(k)-like plans, the key retirement vehicle for nearly half of America's workforce. But it's still up to your employer to make advice available in your office. You could end up paying extra for it. And it's still ultimately on you to seek out help and follow through.

Don't you already get mailings, websites and occasional seminars about your plan? The ones touting the virtues of diversification, maxing out your employer's match and using active versus passive funds?

That's technically considered investor education -- general vanilla info that applies to all investors. This rule change covers more specific advice tailored to your age, needs, savings rate and appetite for risk.

You'd think advice would come with the 401(k) account. Often, it doesn't.

In some cases, plan sponsors flirted with violating the federal Employee Retirement Income Security Act. Part of that law tries to protect workers from falling victim to conflicts of interest among the parties managing the plan.

For instance, some plan sponsors get a cut of revenue from certain mutual funds in the plan. If that sponsor's adviser recommends those funds over others, it's not clear they have the worker's best interests in mind.

This new rule gives plan providers two ways to get around that part of the Act.

First, they can provide advice based on an unbiased, regularly audited computer model.

Second, they can show that their income doesn't change based on the funds they recommend. The fees must be disclosed and the arrangement regularly audited by an outside party.

"The lines now are very bright rather than very hazy," said Francis Vitagliano, a visiting scholar at the Center for Retirement Research at Boston College who spent his career designing retirement plans. "As a result of that, we're going to see more advisers willing to give advice."

Many big names in the financial services industry -- Fidelity, Morningstar and Vanguard -- already offer or make available such computerized solutions to employers who choose to pay for it. I highlighted a couple of them in a column early this year.

But not all of you are hip on taking direction from a machine. You probably shouldn't be, either.

Of course, cost is an issue. Scott Schiele, a retirement-plan consultant at Mercer in Portland, says participants might have to pay for the advice themselves. If so, I fear, many of you won't seek it.

It'd be better if employers and plan providers realize that by offering more advice, they'll improve worker savings habits and grow the money in the plan, which, under most plan designs, generates more income for them.

Then there's employee retention. Preisz Associates Inc., which offers planning advice to 90 small retirement plans, works with a handful of employers that actually require their workers to attend one-on-one meetings each year with a Preisz financial planner or adviser.

"They look at it as a way to differentiate their firms from their competitors," says Tom Davenport, retirement plan service manager for the Portland firm. "There are employers out there that realize how valuable human capital is, and they're trying to do the right thing."

The bigger point: Consider getting some advice, whether your employer offers it or not. Most of us are prone to investing missteps, from diversifying poorly to panic or inaction, either of which can be harmful at any given point.

The Labor Department estimates that such mistakes cost retirement plan investors more than $114 billion in 2010, foregone income that only compounds as workers near retirement. The new rules, the department says, could reduce those mistakes by at least $7 billion a year.

Whether you believe that savings estimate or not, studies show that when 401k participants get some level of investment advice, their contribution rates go up and, overall, their investment performance improves, Vitagliano and others say.

"It has, in other words, a calming effect." said Rick Meigs, president of 401khelpcenter.com, a Portland-based research and consulting service.

These rules are a good attempt at removing many of the last excuses your employer has given for not offering one-on-one help more explicitly.

Which is to say you might also have to nudge your employer to provide the advice.

"They need to be asking their employer to provide something," Meigs said. "There are no issues now other than potentially costs for employers not to provide some level of advice. And we desperately need it."

Source: http://www.oregonlive.com/finance/index.ssf/2011/11/new_rules_could_improve_401k_a.html

New Rule Enables 401(k) Advice

2012-01-26T03:53:00.000-08:00

A revised U.S. Labor Department rule will soon allow you to get investment advice from the company that administers your company's 401(k) retirement savings account plan. Previous regulations had prevented this to prevent conflicts of interest between financial advisers and their clients.

The rule, which goes into effect Dec. 27, will require advisers to follow steps designed to ensure objectivity. Advisers must either use a certified computer model to make recommendations on the best savings accounts decisions for you, or they can only be paid using a level-fee system that reduces the temptation for the advisor to sell you additional products.

The new rule stems from the fact that Americans are relying more on their 401(k) retirement savings accounts and Individual Retirement Accounts (IRAs) than previous generations.

Another good reason for the rule, according to recent data, is that many consumers make questionable decisions when it comes to choosing investments for retirement savings accounts.

A recent study from Aon Hewitt and Financial Engines reported that people who get advice on their savings accounts see a median annual return 3 percent higher than those who go it alone.

That's not an insignificant difference, particularly since current interest rates for savings accounts and CDs fall well below that 3 percent figure. Calculated over the course of a career, a 3 percent return difference could mean thousands more in retirement savings for those who seek professional advice.

The Aon study noted that unschooled investors too often stay in the same risky investments they made when they were in their 30s, even though they should be moving to safer funds with less risk as they approach retirement. Inexperienced investors also too often panic when the market drops, moving out of a fund when prices are low and not returning until prices have started to climb, according to the study.

The new rule is expected to reduce investment losses by up to $18 billion a year, though employers and plan administrators are not required under the new rule to offer advice.

Source: http://www.money-rates.com/news/new-rule-enables-401k-advice.htm

Stock Market Risk & Misconception of 401(k) Mutual Funds

2012-01-25T03:51:00.000-08:00

A common question I get from the Minnesota company 401(k) retirement plan participants that I meet with has to do with how the mutual funds they own in their company retirement plans perform during a stock market decline.

The majority of company 401(k) retirement plan participants think that because all mutual funds are professionally managed, there is a built in risk management strategy in how the mutual fund is managed.

Many of these company retirement plan participants think that their mutual funds have a game plan to protect their retirement plan account values when the stock markets begin to decline in a big way.

Not true. The mutual fund companies that manage your company retirement plan account mutual funds don’t manage stock market risk. They never have and they never will.

You will never see a mutual fund manager sell stocks in their mutual fund in the early stages of a stock market decline. You will never see a mutual fund manager maintain a large money market balance in order to preserve the value of their mutual fund shares in a declining stock market environment.

Mutual fund companies and mutual fund managers are both compensated by the amount of money that is invested in their mutual funds. The total dollar amount of money invested in their mutual fund, multiplied by a percentage of that money, is how mutual funds and mutual fund managers are paid.

The investment theme of “buy-and-hold” through all economic and stock market cycles originated in the mutual fund industry. Mutual fund managers never think about taking a “defensive” position in their mutual funds because if they did, their mutual fund company revenues and their individual compensation would decline.

When the stock market goes down again, like it has several times in the last few months, mutual fund managers lose money, and the price of their mutual funds share drop in value. The only problem is, the money that they lose is your company 401(k) account money invested in their mutual funds.

As every Minnesota company retirement plan participant is painfully aware, remaining fully invested in the stock market at all times is often not in your financial best interest. Stocks markets drop very quickly, and have taken several years to recover those short-term losses.

The amount of risk you take owning mutual funds in your company retirement account is always up to you. Don’t ever count on the mutual fund company or the mutual fund manager to take the necessary steps to preserve your company retirement plan principal. They don’t manage your money that way.

Source: http://goldenvalley.patch.com/blog_posts/stock-market-risk-misconception-of-401k-mutual-funds

401(k) Matches Restored by 75 Percent of Companies

2012-01-24T03:43:00.000-08:00

Three-fourths of employers who suspended their 401(k) matches during the economic downturn have restored them, according to a survey by Towers Watson.

The professional services company surveyed 260 mid-sized to large employers that had stopped making matches.

Among the 75 percent that restored their contributions, 74 percent returned to their previous match level. Twenty-three percent brought their matches back at a lower percentage of pay. Three percent increased their contributions to a higher rate than before.

Towers Watson said most employers that offer 401(k) contributions match 50 percent of their employees’ salary deferrals, up to 6 percent of pay.

The survey found that the median length of time that company matches were suspended was 12 months. It tracked suspensions that occurred from January 2008 through January 2010 and found that 83 percent started in the first half of 2009.

Robyn Credico, a senior retirement consultant at Towers Watson, noted that 401(k) plans are the primary retirement savings instrument for most workers and that “it is very encouraging” to see the match reinstatements.

Source: http://www.kansascity.com/2011/11/03/3245855/401k-matches-restored-by-75-percent.html

These 2012 Tax Law Changes Will Affect Your 401(k) And Your IRA

2012-01-23T10:42:00.000-08:00

The IRS just announced four tax changes for 2012 that will affect your retirement plans... And this time it's good news.

In case you haven't noticed what your wallet has been trying to tell you, the cost of living has been rising lately.

According to the Bureau of Labor Statistics, the consumer price index (CPI) has risen 3.9% over the past 12 months.

The price of energy (including gasoline) alone has increased by nearly 20%, and food prices have gone up 6% over the past year as well.

Fortunately, the rise in the cost of living has increased enough for the the IRS to take notice.

##Because they are required to make tax rule adjustments that keep up with inflation, the IRS has announced that they will increase certain retirement plan contribution limits and slightly relax income limit restrictions.

The adjustments will allow higher income workers to contribute to popular retirement plans such as IRAs and Roth IRAs.

So why should you care?

Thanks to income-limit increases on a number of tax-sheltered retirement accounts, you may suddenly be eligible for tax breaks and receive tax credits that could significantly cut your tax bills.

In addition, the 2012 changes will allow all workers to contribute more towards retirement through their 401(k) plan.

Also under these changes: If you're a worker with a low to moderate income, you may now become eligible to claim the saver's credit when you file your 2012 return.

The IRS has recently announced the following changes affecting 2012 tax-year retirement plans:

1. You May Contribute More to Your 401(k) Plan or other Employer-Sponsored Plan

The IRS has increased the amount you may contribute towards your 401(k) plan:

For the 2012 tax year, workers may contribute up to $17,000 ($500 more than in 2011) into their 401(k) plan, 403(b) plan, 457 plan or Thrift Savings Plan.
If you're over age 50, you'll be able to contribute up to $22,500 into your employer-sponsored retirement plan (Note: The Catch-Up Contribution Limit of $5,500 remains unchanged for 2012).

Remember, every dollar you contribute into your 401(k) or other employer-sponsored plan (other than Roth plans) is tax-deductible. The more dollars you contribute, the smaller your tax bill will be.

It's a difficult feat for most, but if you could possibly manage to sock away $17,000 every year starting in 2012 (That's about $1,417 a month), you could grow your nest egg balance to $99,000 in 5 years, or $655,000 in 20 years -- assuming a 6% annual return.

[Have an old 401(k) sitting with a previous employer? Roll Over Your 401(k) Plan in 5 Easy Steps]

2. The IRA Income Limit Restrictions Have Been Loosened for 2012

While anyone can contribute to their own IRA, only workers who earn below a certain income level may receive a tax break (i.e. tax deduction) for each dollar they contribute. Next year, the income limit cap will be increased by $2,000, so people making more money will now be eligible for the tax-deductible contributions.

If you earn a modified adjusted gross income (AGI) that is under $58,000 ($92,000 for married couples) for 2012, you'll be eligible to get a tax-deduction for every dollar you contribute (up to the existing annual contribution limit of $5,000 or $6,000 for those over age 50) into an IRA.
The IRA tax-deduction phases out for those who earn a modified AGI between $58,000 and $68,000 ($92,000 to $112,000 for married couples).
If you're a married couple that is filing jointly, but only one of you has an employer-sponsored plan, the IRS has increased the modified AGI limit for full tax-deduction eligibility to $173,000. This tax-deduction phases out for those who earn a modified AGI between $173,000 and $183,000. Note: These income limit caps have been increased by $4,000 over the 2011 tax year.

3. Roth IRA Income Limit Restrictions Have Also Been Relaxed for 2012

The Roth IRA, a popular retirement account that offers tax-free withdrawals after age 59 ½, will see a slight change in eligibility rules as well. The IRS is raising the income caps on Roth IRAs, allowing higher income earners to contribute to the plan. The 2012 income cap will be $3,000 higher for single and head-of-household filers, and $4,000 higher for married couples filing jointly.

For 2012, you'll be able to contribute to a Roth IRA if you earn a modified AGI below $110,000 ($173,000 for married couples).
If you earn a modified AGI between $110,000 and $125,000 ($173,000 to $183,000 for married couples), you'll still be able to contribute to a Roth IRA; however, the amount you'll be able to contribute annually is more limited (i.e. phased out).

4. Eligibility for Saver's Credit Has Been Expanded

The income limit restrictions to be eligible for saver's credit have been loosened as well for 2012.

##The income limit cap has been raised by $500 for single filers, $750 for head of household filers and $1,000 for married couples over 2011's limits.

Like the other income limit cap increases, this change will allow more workers with higher incomes to claim this popular tax credit.

The saver's credit -- also known as the retirement savings contributions credit -- rewards low income or moderate income workers who are contributing towards their retirement plan.

If you're eligible for the saver's credit, you can receive a tax credit up to $1,000 ($2,000 for joint filers) depending on the amount you contribute towards a 401(k) plan, IRA, Roth IRA or other retirement plan.

You may claim the saver's credit if you contribute toward a retirement account and your modified AGI is below $28,750 (or $57,500 for married couples) for the 2012 tax year.
The modified AGI limit for head of household filers is now $45,125; so if you qualify as head of household and make below that amount, you too may claim this rewarding tax credit.

The Investing Answer: 2012 is just around the corner, so keep these income limits and contribution limits in mind when tax planning next year. Whether you'll be eligible after these changes or if you've always been eligible to contribute to an IRA, Roth IRA or 401(k) plan, be sure and take advantage of these tax-sheltered plans if you have the means to do so.

If you're worker who makes a low or moderate income, the saver's credit could be looked at as free money on the table. Similar to a company's 401(k) match, this credit rewards you for every dollar you put into a 401(k) plan, Roth IRA or IRA. If you earn less than the income limit shown earlier, and you can put $2,000 towards retirement, you could potentially receive up to a $1,000 tax credit (depending on your actual level of income); Take advantage of this credit if you can.

Source: http://www.businessinsider.com/these-2012-tax-law-changes-will-affect-your-401k-and-your-ira-2011-10

Know Your 401(k) Options When Retiring Early

2012-01-22T10:34:00.000-08:00

As we approach the end of the year with the economy and markets looking a bit more stable, retirement seems to be on the minds of people in Northwest Indiana.

In just the last two months my office has helped more preretirees engineer their retirement than we have in about the last two years.

With the 401(k) being such an important part of any retirement planning in the United States today, one question we are always assisting with during the retirement process is “what to do” with these important assets.

Now I know conventional wisdom with these plans is that when you leave your job the proactive things to do is to direct rollover of your 401(k) to your IRA account. By the way, teachers and nurses, this conversation also applies to your 403(b) or tax-sheltered annuity plans.

When you implement a direct rollover, the money in the 401(k) moves directly to your IRA custodian, without going into your name. This transaction is a tax-neutral exchange and completing it correctly allows you to avoid the taxes and penalties typically associated with a 401(k) withdrawal.

The conventional wisdom also says once the money is in your IRA you should have many more investment choices available. When it comes time to take money out for retirement spending needs (or pass it on to your heirs) you will find the IRA quite a bit more flexible in this regard as well.

In most cases the conventional wisdom is right, and as a rule, rolling money over into an IRA is typically a solid, proactive financial planning step. But when it comes to early retirement there may be exceptions, and they are important exceptions.

The exception stems from a lesser-known Internal Revenue Service rule that allows employees who terminate their employment between the ages of 55 and 59½ to access the money in their 401(k)s without the 10 percent tax penalty typically associated with early retirement plan withdrawals.

This exception allows those retiring before age 59½ a very important tool, and that tool is flexibility. Maintaining penalty-free access to these 401(k) funds early allows retirees to structure a flexible retirement income stream during these early retirement years.

Unfortunately, the service reps of many of the large 401(k) providers have incentives to encourage participants to roll over their 401(k)s to IRAs with the same company.

Also in our area, there are planners who will attempt to have retirees set up “solo 401(k)” plans and transfer 401(k) funds into these solo plans (with the planner’s firm, of course) in order access fund through loans. This is an aggressive, untested maneuver that should be questioned.

The correct approach is to understand and evaluate all your options. Most of us will only retire once. It’s very important we get this process right.

Source: http://posttrib.suntimes.com/business/8487366-420/know-your-401k-options-when-retiring-early.html

Study Shows Solo 401K PLAN Outpacing SEP Self Directed IRA as Most Popular Retirement Plan for the Self-Employed

2012-01-21T10:29:00.000-08:00

IRA Financial Group study shows Solo 401K Plan becoming retirement plan of choice for the self-employed.

IRA Financial Group, the leading provider of IRS compliant solo 401(k) plans, isn’t the only company that has noticed a growing trend of self-employment retirement investors moving from the SEP IRA to the solo 401k plan.

A study commissioned by the IRA Financial Group has shown that over an 18 month period, a growing number of self-employed individuals are choosing the solo 401(k) plan over a SEP IRA or SEP self directed IRA. The results were based off over 450 interviews of self-employed individuals examining a self-employment retirement plan solution.

“The trend is not surprising considering the solo 401(k) plan offers far more tax planning advantages than a SEP IRA,” stated Adam Bergman, a tax attorney with the IRA Financial Group. For example, if a self-employed individual over the age of 50 earned $100,000 of earned income, with a SEP IRA that individual would only be able to defer $25,000 for that year (25% of $100,000). Whereas, in the case of a solo 401(k), thanks to the 2002 EGTRRA Act, the self-employed individual would be able to defer $42,000 ($22,000 as an employee deferral and 20% of his/her compensation as a profit sharing contribution).

IRA Financial Group’s solo 401K plan is unique and so popular because it is designed explicitly for small, owner only business. With IRA Financial Group’s solo 401K plan, self-employed individuals or small business owners with no employees can benefit by making high annual contributions – up to $49,000 - with an additional $5,500 catch-up contribution for those over age 50, make traditional as well as non-traditional investments, such as real estate, as well as borrow up to $50,000 or 50% of their account value tax-free and penalty free. IRA Financial Group’s solo 401(k) plan is a trustee directed plan meaning the trustee and not the custodian is in charge of making investment decisions on behalf of the plan. With a solo 401(k) plan, in most cases the trustee will be the plan participant providing the plan participant with greater control and investment authority over his or her retirement funds. In addition, with IRA Financial Group’s solo 401K Plan, the plan account can be opened at any local bank, including Chase, Wells Fargo, and even Fidelity.

IRA Financial Group’s solo 401K plan is easy to operate. There is generally no annual filing requirement unless the fair market value of the assets in the solo 401K Plan exceed $250,000, in which case a short information return will be required to be filed with the IRS (Form 5500-EZ).

“Thanks to increased media attention on the benefits of the solo 401(k) plan, more and more self-employed individuals and their advisors are beginning to choose the solo 401(k) plan over the SEP IRA as a retirement plan,” stated Mr. Bergman.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP and Dewey & LeBoeuf LLP.

IRA Financial Group is the market’s leading “Checkbook Control” Self Directed IRA and Solo 401k Plan Facilitator. We have helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate tax-free and without custodian consent!

Source: http://www.prweb.com/releases/2011/10/prweb8919505.htm

Employers Sued for 401(k) Plans Provided to Employees

2012-01-20T10:26:00.000-08:00

After years of controversy and delays, the Department of Labor has issued new 401(k) regulations which involve full transparency of fees to both employers and employees. Bryan Binkholder, The Financial Coach and Jim Winkelmann of Blue Ocean Portfolios, were asked whether this was a good move, or if it would, like many regulations, cause unintended results.

According to the Department of Labor ruling, starting in 2012, plan packagers will be required to provide employers and employees with a full breakdown of costs in quarterly statements. These statements will detail investment performance, include a clear breakdown of fees among funds, and all administrative costs.

For plan participants this will mean the costs will be spelled out in plain English. For employers, the DOL ruling is meant to provide an opportunity to better understand and tweak their current 401(k) plan.

Bryan Binkholder, The Financial Coach, author of 401K Conspiracy: How Companies and Employees Are Being Robbed By Wall Street While the Government Looks the Other Way, and host of a nationally syndicated financial radio broadcast out of St. Louis, MO provided additional insights on the changes, "For decades, the fees surrounding 401(k) plans were largely invisible, not only to employees, but to business owners and plan providers themselves.

Many employers, wanting to offer their employees the benefit of a retirement nest-egg are now finding themselves at risk of 401(k) related lawsuits. Transparency in the industry is something we've been fighting for, but turning on the employer and holding him personally responsible for the excessive fees that were purposely hidden within 401(k) plans by the brokers and insurance companies who package and push these plans is what's now occurring."

The 401(k) Conspiracy

In an effort to keep small business owners informed, Bryan Binkholder and James A. Winkelmann, Registered Fiduciary™ and co-founder of Blue Ocean Portfolios have recently published the 401(k) Conspiracy, which details the increased risks of the small business owner and other fiduciaries who are being sued by the participants of company 401(k) plans.

"The trend," according to Jim Winkelmann, "is to increase the liability of plan sponsors, holding them to a fiduciary standard which places them as the responsible party for the excessive fees wrapped up in many of the 401(k) plans.

One attorney we spoke to has called this 'open season' on fiduciaries. The bottom line here is that small business owners, as fiduciaries, are now at risk for being held personally liable. They could lose their home, savings, and other assets if they inadvertently breach their fiduciary duty, and are then sued by a plan participant."

What About the Plan Packagers?

"While the business owner or plan sponsor is held to a fiduciary standard," explains Bryan Binkholder, "others involved with the plan, such as stockbrokers, mutual fund companies, insurance brokers, and other plan packagers are conveniently not considered to be fiduciaries. If this sounds backwards, it is.The professionals who work in the field on a day-to-day basis, providing investment advice and selling financial products are only held to what's called a 'suitability standard,' which is much lower than the fiduciary standard."

What can the small business owner do to protect against potential lawsuits? According to Binkholder, "The best defense is to rethink your current 401(k) plan. Cutting excess fees and working with a plan manager who will share the fiduciary role, in writing, are the first and most important steps to take."

Bryan Binkholder and Jim Winkelmann have co-authored 401(k) Conspiracy which includes an entire chapter dedicated to bulletproofing businesses against 401(k) related lawsuits. It will be available on The Financial Coach website in November of 2011.

Source: http://www.digitaljournal.com/pr/470854

SEC Defers to Labor Department on 401(k) Fee-Disclosure Actions

2012-01-19T10:19:00.000-08:00

Information provided by 401(k) plan sponsors to participants that satisfies Department of Labor fee-disclosure rules will also satisfy the SEC’s advertising rules, the Labor Department announced.

The ruling came in a “no-action” letter from SEC that had been requested by DOL’s Employee Benefits Security Administration.

The SEC polices advertising by registered investment companies to ensure that their performance information is accurate and relevant to current performance. The “no-action” letter agreed to treat information from those companies “as if it were a communication that satisfies” SEC rules if it meets DOL disclosure rules, the letter states.

“It’s great to have it because it makes clear that providers don’t have to worry about SEC issues as they comply with DOL fee-disclosure rules,” Brian Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries, said in an interview. “It’s just an added level of comfort for compliance folks who were worried. Now they’re warm and fuzzy about it.”

Source: http://www.pionline.com/article/20111028/DAILYREG/111029881/sec-defers-to-labor-department-on-401k-fee-disclosure-actions

The 411 on 401(k)s

2012-01-18T08:23:00.000-08:00

Advisors are turning to muckraking firms to get previously undisclosed data on retirement plans.

Retirement planning is no simple task - but it just got a little easier. A growing number of specialized firms have started digging deep into retirement plan documents to unearth competitive details about how the plans work. This new due diligence is developing ahead of Labor Department regulations, which are scheduled to take effect early next year, that will require more detailed disclosures of underlying plan expenses.

In February, the Labor Department will begin requiring retirement plan providers and third-party administrators to reveal investment expenses and service provider fees to plan sponsors. Employers, as the plan fiduciaries, will be required to disclose what participants' share of the plan costs are. The idea is to give firms and investors the data they need to make informed decisions about their retirement savings.

"This is probably one of the most transformational events I've witnessed since the elimination of front-end loads" from many mutual funds, says Ryan Peterson, president of Wisdom & Wealth Solutions, a registered advisory firm based in Raleigh, N.C. The new disclosures certainly could have far-reaching effects. There are 498,000 retirement plans with 401(k) features in the U.S., with 43.1 million active participants holding $2.8 trillion in assets, according to research from Cerulli Associates.

One firm specializing in retirement plan scrutiny is BrightScope, a San Diego-based startup that rates the quality of 401(k) plans at public and private U.S. companies. BrightScope's co-founders recognized that Americans needed better information about their 401(k) plans because the plans had become their primary means of saving for retirement, says Mike Alfred, the firm's co-founder and CEO.

"You could not go online and look up how good a plan was. You couldn't figure out if the match was good," he says. "We thought that was a problem that needed to be fixed."

That widespread opacity could affect American's ability to retire comfortably. It could also obstruct plan sponsors' judgment, because they do not always understand the fees behind their plans, Alfred says.

BrightScope takes a lot of its inspiration from Morningstar, which is credited with helping purge loaded mutual funds from the industry, simply by publishing their associated costs.

Along with co-founder Ryan Alfred, he developed a process of sifting through third-party audited retirement plan tax filings at firms with more than 100 employees. BrightScope investigated about 50,000 plans, chosen based on initial criteria for company headcount and independent auditing.

BrightScope measures each plan's costs, company generosity, quality of investment options, employee participation rate, salary deferrals and account balances, and factors them into an overall rating on a scale of zero to 100. Every report displays the plan's all-in ranking and compares it with that of six other companies in its peer group. BrightScope puts its reporting front and center - posting some of it on its website for free.

"When we talk to plan sponsors, I don't think they understand the liability they face," says Peterson, a BrightScope subscriber. "When the detailed 401(k) statements come out and participants see the fees, there is a lot of potential for lawsuits to occur."

Ameriprise Financial learned that in early October, when several former employees sued. They accused the firm of steering participants toward investments that were too expensive, costing them $20 million in excessive fees.

"This is a copycat lawsuit by a law firm that has brought similar cases against companies across the country, and we plan to defend it vigorously," Ameriprise said in an emailed statement.

Peer Pressures
In mid-July, a Denver-based 401(k) plan service provider, Lincoln Trust Co., introduced the personalized expense ratio, a customized 401(k) plan cost calculation. Lincoln Trust calculates the ratio on an average daily basis, and then compares costs with average costs of similarly sized plans. To get that benchmark, Lincoln Trust relies on data from the 401(k) Averages Book, which offers independent comparisons of 401(k) fees. It also relies on the most recent findings from the Deloitte and the Investment Company Institute's Defined Contribution/401(k) Fee Study.

A plan with an ending balance of $82,581.20 and $238.16 in quarterly plan fees would end up with a personalized expense ratio of 1.20%. That example falls below the $298.54, or 1.50% cost, for a similarly sized plan, according to the 401(k) Averages Book.

The Labor Department's new rules don't go this far, as they will only require plan sponsors to disclose the expense ratio of the fund, per $1,000 balance in the participant's quarterly statements. Each investor must calculate the ratio to get a more precise breakdown.

SOURCE: http://www.financial-planning.com/fp_issues/2011_11/the-411-on-401ks-muckraking-firms-retirement-plans-2675698-1.html

New Rules for the Retirement Game

2012-01-17T13:26:00.000-08:00

Retirement planning has never been a more exact science. Or a bigger crapshoot.

There are low-risk investment options yielding many safe and secure golden years, and boatloads of professional advisers ferrying wannabe retirees to those sunny shores. The metrics of comfortable retirement have been established, analyzed and polished to a high sheen. But a down economy confounds even the best laid retirement plan. Professional careers are being extended by financial need and longer, healthier life spans. Buying a boat at 65 and floating into the sunset was granddad's ideal, but this generation thinks differently.

It all adds up to new rules for the retirement game, played on a shaky field. There's no right answer, according to those advisers. Each retirement plan is as individual as each retiree. But whatever form it takes, a winning plan must expect the unexpected.

Recessions and excellent cardiograms challenge the done-at-65 strategy, but it's not impossible to pick a retirement date and stick to it, according to Ed Slott, president of Rockville Centre accounting firm Ed Slott & Co. "You can have a goal," Slott said. "But you're going to have twists and turns along the way, and you're going to have to make changes. The roof leaks. You lose your job. Life happens. You can't be so strict that you freak out when you can't stick to your plan. You have to have flexibility built in."

The roll-with-it-baby approach is useful to those forestalling retirement by necessity or choice. "Some clients of mine never stop working," said Seymour Goldberg, senior partner at Goldberg & Goldberg in Jericho and professor emeritus of law and taxation at Long Island University. Goldberg cited clients who "lost money on the market and have obligations" and one who won't retire because he's afraid he'll be bored without a 9-to-5 schedule. Such you- never-know factors are exactly why retirement planning must be nimble - and why Slott touts the Roth IRA as the consummate retirement investment.

A Roth IRA accrues tax-free interest, provided certain conditions are met. While a Roth IRA generally carries fewer restrictions on how funds can be invested, its principal difference from other tax- advantaged individual retirement accounts is granting a tax break on funds withdrawn from the plan, instead of funds deposited. Despite the up front tax burden, Slott called it the "perfect safety hatch" for anyone requiring a dynamic retirement strategy. "It grows tax- free," he said. "And you can always access your original contributions tax and penalty free."

Goldberg concurred a Roth IRA can be the backbone of a worthy retirement plan, "but only if the market remains stable." Investment markets have recently done anything but that, he noted, leading to several Roth "recharacterizations" this year.

Goldberg hypothesized an investor putting $1 million into a Roth IRA in 2010. That investor had a choice: Pay full taxes on the principal investment in 2010 or defer those payments to $500,000 in 2011 and $500,000 in 2012. Most investors defer, Goldberg noted.

Flash forward to 2011. The rough economy has sapped the value of the investment portfolio, now worth $900,000, and the hypothetical investor has another choice: Switch back to a regular IRA that will tax the gains later, or stick with the Roth IRA and pay taxes now on a million-dollar investment suddenly worth substantially less.

"A lot of people have gotten into [Roth IRAs]," Goldberg said. "And a lot of people have gotten out. There were many Roth recharacterizations in 2011."

Unsteady markets certainly challenge the value of Roth IRAs, but they challenge virtually any investment plan, and Slott insists Roth remains the best long term bet. "When you're not working and you're most vulnerable, that's not when you want to pay a huge tax bill," he said. "Tax free is a lot better."

This leads to another crucial play in the retirement planning game; owing as little as possible when that career finally wraps. Like a looming tax bill, a big debt can deflate a retirement strategy and there are varying opinions which is most important - saving up or paying down.

"There's no replacement for saving money," Slott noted. "When people get a nice bonus or a nice hit from a customer, instead of putting that money away, they spend it on a trip. That's the money you put away for the lean years."

But even this champion of saving for a rainy day believes paying down debt is probably more important than squirreling away cash. "The last thing you want to do is go into retirement with debt," Slott said.

Craig Silverman, a retirement planning specialist with AXA Advisors in Melville, sees an inexorable connection between reducing debt and increasing savings.

"The faster you pay down the debt, the more money you will have available to save for retirement," Silverman said. "If someone has high-interest credit cards, they should pay those down more quickly. The extra money that isn't spent paying off the interest can be put toward their retirement nest egg

SOURCE: http://insurancenewsnet.com/article.aspx?id=294377

Pensions: Don't Put Your Retirement at Risk

2012-01-16T08:12:00.000-08:00

Planning for tomorrow is something people need to think about today, financial solutions company Think Money has stressed. The company was responding to ONS figures showing that the number of people paying into an occupational pension scheme has fallen to a level not seen since the mid-1950s.

In 1967, 12.2 million people were paying into an occupational pension scheme - but by last year, this figure had dropped to 8.3 million. This 32% decline is all the more worrying when you consider that the population grew from around 55 million to 62 million in that time.

A spokesperson for Think Money commented on the findings: "Saving for the future is crucial if people want to enjoy a decent standard of living once they've stopped working.

"This drop-off in occupational pension schemes has been going on for decades, but recent years have seen it accelerate - 2010's figure of 8.3 million represents a massive drop from the 9.0 million we saw as recently as 2008.

"Clearly, rising unemployment and falling levels of disposable income are forcing households across the country to rein in their spending, but we would advise people to think very carefully before deciding how they'll do that."

It's easy to make 'snap' decisions when money's tight, but sitting down with a calculator and a budget planner can help people make informed choices when they're looking to address a shortfall in their finances.

It can show them how much they need to cut back and the best ways of doing that. Equally important, it can also help them identify areas where they shouldn't consider cutting back.

During tough times like these, things like insurance and pension contributions might look like obvious candidates for cutting back since there's no immediate impact, but the consequences could be extremely far-reaching. An effective budget can help people better understand their financial situation so they can find better ways of reducing their spending.

"Having said that," the Think Money spokesperson continued, "budgeting isn't always enough. Many households will find that there just isn't enough coming in, and that no amount of cutting back will help them keep on top of their credit cards and other debts at the same time as paying the mortgage, putting food on the table, paying the utility bills and so on.

"In cases like this, they may feel it's virtually impossible just to 'stay afloat' - let alone put their debts behind them and give their retirement planning the necessary attention."

However, many borrowers will find they can renegotiate the terms of their debt repayments, perhaps with the help of a professional debt management company. This can help them bring their debts under control and work on improving their financial situation, so they're focused on getting out of debt as quickly as realistically possible.

"With this behind them, they'll be in a better position to give their pension the attention it deserves and get some advice from a qualified financial adviser: once they've finished paying for yesterday's expenses, they'll be better placed to figure out exactly how they'll pay for tomorrow's."

SOURCE: http://www.marketwatch.com/story/pensions-dont-put-your-retirement-at-risk-2011-11-02

Employees Becoming More Self-Reliant in Retirement Planning

2012-01-15T13:10:00.000-08:00

Employees continued to focus on retirement planning in the third quarter, a report released Friday by Financial Finesse found. Over one-third of calls to the financial education firm’s hotline were related to retirement planning, up from 25% in the second quarter.

Despite 91% reporting that they are contributing to their retirement plan, though, just 15% said they are on track to replace at least 80% of their income, down from 17% in 2010. Part of their lack of preparedness can be blamed on market volatility, Financial Finesse reports, although the percentage of investment-related questions rose just two percentage points from the first half of the year to 14%.

“There’s so much skepticism out there about our economic future, especially with current global financial crises occurring,” Liz Davidson (left), CEO of Financial Finesse, said in a statement. “If the economy takes another dip, we believe employees will be better equipped to handle it, but they will still struggle as many don’t have emergency savings nor can they rely on equity in their homes.”

The increase in retirement planning-related questions along with higher participation rates in retirement plans indicates that employees are recognizing a need to be more self-reliant, the report found. Employers are helping their workers by increasing awareness of retirement planning tools and resources.

In spite of increased awareness of retirement unpreparedness and market volatility, financial stress overall is dissipating, according to the report. Less than 21% of employees reported high or overwhelming stress, compared with 32.3% in 2010. This may simply be a factor of lowering the bar far enough, though. Financial Finesse attributes employees’ lower levels of stress to their improved financial wellness, a result of the “‘new normal’ which includes lower expectations in employer and government benefits and stock market performance.”

“Employees realize they are behind, but they’ve also been forced to equip themselves with the tools and knowledge necessary to be able to manage,” Davidson said. “They are handling their money better on the day-to-day basis, which has a huge impact on how much stress someone feels.”

SOURCE: http://www.advisorone.com/2011/11/01/employees-becoming-more-self-reliant-in-retirement

Women in Asia Still Trail Men in Planning for Retirement

2012-01-14T12:51:00.000-08:00

Men are taking the lead in decision-making across most aspects of financial planning, according to a latest report by HSBC: "The Future of Retirement: Why family matters". Conducted by Cicero Consulting across over 17,000 people in 17 countries, the research explores changing attitudes towards retirement and financial planning.

Sixty eight per cent of Asian men and 65 per cent of men worldwide say they make all or most of the financial decisions in the household, compared to 58 per cent and 53 per cent of women in Asia and globally, respectively. The only exception in Asia is China, where 63 per cent of women claim they make all or most of the financial decisions, compared to 58 per cent of men. However, managing the household budget is the only area where more Asian women (35 per cent on average), compared to men (30 per cent), are taking sole responsibility.

In terms of retirement planning, only 29 per cent of Asian women are most likely to take sole responsibility, compared to 37 per cent of men. The picture is somewhat consistent across countries: India (21 per cent women vs 43 per cent of men), Singapore (21 per cent vs 38 per cent), Malaysia (27 per cent vs 33 per cent), Hong Kong (28 per cent vs 38 per cent) and South Korea (32 per cent vs 35 per cent). In China, this is true for 36 per cent of both genders and in Taiwan, for more women (39 per cent) than men (35 per cent).

Louisa Cheang, Group General Manager and Regional Director for Retail Banking and Wealth Management HSBC Asia-Pacific, said: 'The gender divide in saving for retirement persists in Asia, leaving Asian women potentially exposed to financial hardship later in their lives. One can expect this gap to narrow as more women in the emerging world receive education, join the workforce or start a business, and make more decisions for themselves and for their families.'

The HSBC report points to a myriad of evolving financial needs as individuals and families go through various life stages. Across Asia, an average of 66 per cent respondents say that they have a financial plan in place, yet despite these plans, there appear to be significant gaps in the financial planning throughout adult life.

For example, six in 10 Hong Kong respondents aged 30-39 years old do not have any short-term savings. Only 19 per cent of Taiwan respondents aged 40-49 are protecting their assets; 48 per cent and 47 per cent of parents in Malaysia and Hong Kong, respectively, have no life insurance; three in four South Koreans in their 50s are not saving for retirement. In Singapore and Hong Kong, only a tenth (12 per cent and 10 per cent, respectively) in their 50's are undertaking tax planning with 80 per cent and 94 per cent of all respondents, respectively, without a will.

Ms Cheang said, 'Life events are useful prompts to either start or review a financial plan. Being able to manage a household income and build financial assets for the long term, while protecting against financial risks throughout life, will be critical for Asian families in the 21st century. Asians need to balance the need to protect wealth and investments in the short- and medium-term with the need to generate an adequate retirement income in the long-term.' Across Asia, 23 per cent of respondents regard themselves as conservative investors, with women (28 per cent vs 20 per cent of men) more likely to sacrifice returns to protect their investment. This general risk aversion is also reflected in how people are currently saving for retirement.

"Fifty-four per cent of Asians fund retirement via cash savings accounts and nearly half (49 per cent) hold insurance ie endowments and investment-linked insurance, led by Singapore (72 per cent and 67 per cent, respectively);

"A third (33 per cent) rely on state pensions such as social security, led by China (67 per cent);

"31 per cent invest in bonds and term savings accounts and 29 per cent hold mutual funds and investments, led by India (40 per cent and 55 per cent, respectively); and

"Over a fifth of Asians on average invest in annuities to fund retirement.

Ms Cheang added: 'Asians tend to apply a do-it-yourself approach combined with advice from family, friends and occasionally, a professional financial advisor. HSBC works closely with our customers to understand their needs and provide integrated solutions that harness our strengths in insurance, wealth and asset management to help customers protect and growth their wealth for every stage and ambition of their life.

SOURCE: http://www.thefinancialexpress-bd.com/more.php?news_id=154666&date=2011-11-01

Approaching Retirement FAQ

2012-01-13T12:36:00.000-08:00

This article explores the frequently asked questions of those individuals and families approaching retirement or already retired.

Is it usually beneficial to rollover money from an employer plan to an IRA?
Generally, yes. This is especially true if the adviser acts as a fiduciary and utilizes institutional funds with a long-term asset class investment approach. Unlike an individual retirement account (IRA), employer plans typically offer limited investment opportunities, especially among the various asset classes.
An IRA has substantially similar asset protection planning features found with employer-sponsored plans. Additionally, the distribution options available under an IRA following your death are usually more flexible for your beneficiaries than employer-sponsored plans.

How do I avoid commission-based products with a rollover?
Commissions (or loads) are a real and significant drag on a portfolio’s performance. Commissions are common with actively managed mutual funds and are often classified as Class A, B or C. These fund designations have nothing to do with the quality of the funds or its performance and instead it merely signifies how the commission will be paid to the broker. This commission is paid on top of the annual expense charges of the mutual fund or exchange-traded fund (ETF). We have similar thoughts and, to be certain, even more heightened concerns with annuities and limited partnerships.

The best practice for low cost investing is passive institutional investing (wholesale) as opposed to retail investing described above. The problem for investors is that most advisers have limited or no access to passive institutional investments. Investors should seek out fee-only fiduciary advisers who offer 100 percent passive institutional investments that are no-load, penalty-free investments.

How should I invest my retirement funds?
With an adviser that applies similar rigor and study to the field of investing that a scientist applies to his or her field of endeavor. The science of investing is the use of research and statistical models to design portfolios that track the efficient frontier. The efficient frontier represents the optimal volatility (for sake of simplicity we call this risk or volatility risk) and expected return tradeoff between various asset classes. The questions advisers should ask are which asset classes to include (or exclude), what is an optimal allocation of asset classes, and how to design and rebalance a portfolio suitable to an investor’s risk and return profile?

What experts and amateurs alike cannot do is predict which asset classes will outperform others, or when it will happen, or for how long it will continue, and certainly not in the long run. That being said, a passively managed or structured portfolio consisting of diversification both within and among various assets classes in relation to a low cross-correlative relationship will mitigate the downside volatility risk of any one stock or asset class. Indeed, if designed correctly, an investor can enhance his or her expected return while lowering the volatility risk until the investor has reached the optimal efficient frontier tangency. If a portfolio is not found along the efficient frontier, then it is found somewhere beneath it—this is an inefficient portfolio.

Inefficient in that an investor is taking on volatility risk for which he or she is not compensated. Significant uncompensated volatility risk and other inefficiencies are created mainly in three ways: high costs of investing, excessive trading and attendant costs (viewing the portfolio as a short-term play to somehow time the market as a risk manager), or inexpertly designed portfolios.

Should I avoid annuities and other forms of insurance-based investing?
Yes, avoid most annuities and especially avoid annuities inside of an IRA or other tax-qualified accounts. An annuity is an insurance product that, with limited exception, we do not recommend to investors. We encourage investors to review the State of Michigan Attorney General Bill Schuette’s recent consumer alert regarding annuities as well as the State of Michigan Office of Financial and Insurance Services unambiguous warning letter to the public on annuities entitled: “Seniors Beware: Variable Annuities May Not Make Sense For You!” These State of Michigan warnings about annuities are similar to warnings issued by the federal government at the SEC and FINRA.

How do I manage my fixed-income retirement when taxes are likely to increase in the future?
Through expert tax management at both the advisory level and fund level. Tax management consists of designing investment portfolios utilizing an optimal balance between investment performance (including expected return and risk characteristics) and the attendant tax consequences specific to a particular investor. It is the systematic and continual application of evolving tax strategies based upon new information, changing tax rates and laws, and the needs peculiar to the investor. At its core, tax management concerns itself with after-tax returns over time. Tax management is not a product. It is a process that comes directly from applied research found in professional journals and academic literature.

If your current wealth adviser is not a CPA or tax lawyer, then you may be missing opportunities to reduce taxes beyond simply the subjects concerned herein—for example, tax loss harvesting and HIFO accounting methods. Ask your fee-only CPA investment adviser about these and other tax-saving strategies.

I know that I need an estate plan, so what do you recommend?
The modern estate plan consists of a revocable living trust, pour-over wills, durable powers of attorney for property, healthcare and mental healthcare. A more involved estate plan arrangement for tax planning would include the use of A/B trusts, irrevocable trusts, qualified gifting strategies, family limited partnerships, or a family foundation. Regardless of the type of estate plan that you have or will require, it is vital that your estate plan and retirement plan are seamlessly connected and kept up to date. Without excluding other well-qualified advisers, we recommend working with wealth advisers holding law degrees to best coordinate efforts with your estate lawyer. After all, a wealth adviser with a law degree speaks the very same language as your estate lawyer.

What do I look for in a financial adviser?
A fee-only fiduciary adviser is an adviser who has the highest legal duty to his client, and accordingly, can have no conflicts of interest with his client, offering only objective and truly independent advice, who must operate with complete transparency and disclosure to the client of all fees, costs, expenses, expected rates of return, risks and so on. A fee-only fiduciary adviser is not a broker whose limited duty is merely “suitability.” Investors receive far more utility in an adviser who must, by operation of law, put his client’s interest first and not his fee.

There is simply no substitute for substantial education, training and experience. An adviser needs all three to be truly successful for his client. For wealth adviser educational credentials, we recommend advisers holding a JD, PhD, DBA, MS, MBA, CPA, PFS, and/or CFA. Indeed, it is probably best that the adviser hold some combination of the above degrees and designations. Such sentiment has been echoed by many academics and practitioners especially in recent years as the complexity of finance, law, accounting and taxation has turned financial advising into a rigorous profession.

In his well-regarded and top selling book, The Millionaire Mind, Dr. Thomas J. Stanley, professor and prolific author on the affluent, makes clear that today wealthy investors almost always look to investment advisers who are lawyers and/or CPAs and seldom engage financial planners and brokers.

The best practice in the industry is to have a multi-disciplinary team approach, which has the wealth adviser working with the investor’s lawyers, CPAs, insurance professionals and so forth, to develop an integrated and comprehensive retirement, tax and estate plan. If your wealth adviser is a lawyer and CPA, this takes the multi-disciplinary team approach to a whole new level of expertise and efficiency that is demanded by today’s high net worth retirees.

SOURCE: http://www.lansingbusinessmonthly.com/articles/department-columns/110-current-month/2363-approaching-retirement-faq.html

Retire? Not till We're 70

2012-01-12T12:11:00.000-08:00

Middle class workers aged 50 and above are being forced to delay their retirement until they are ‘at least 70’, with many blaming their children, a report revealed yesterday.

It said their retirement dreams are being crushed with most postponing their retirement date by around five years.

The report, from the investment firm Heartwood, said the delay is ‘not driven by a love of their job, but by concerns of their ability to fund their retirement’.

It is not just the soaring cost of living which is triggering the delay. Many blame the fact that they are constantly having to bail out their grown-up children at an age when they presumed they would be financially independent.

Asked about the reason for the delay, one in five middle class workers said they ‘needed to keep working in order to support their children’.

Many grown-up children need help to get on to the property ladder, while others ask their parents to clear their university debts.

More than 40 per cent said they plan to remain in work ‘for an average of five years longer that they had originally planned’. Around one in four said they will delay their retirement until they are aged 70 or above.

Many are planning to ‘semi-retire’, which means they will stop working full-time to switch to part-time work.

Simon Lough, chief executive of Heartwood, said longer periods of semi-retirement are ‘increasingly becoming the norm’ among wealthier people in their 50s and 60s.

He added: ‘In many cases, they are being faced with greater demands being placed on their pension pots, rises in the cost of living and unexpected financial commitments, such as supporting their children for longer than they had originally anticipated.’

It comes as a separate report, from the pensions giant Scottish Widows, found one in four women is saving ‘nothing at all’ for their retirement, compared to 17 per cent of men. This leaves many forced to rely on the State pension, which is just £102.15 a week if they are eligible for the full amount.

To make matters worse, the age when a woman can claim her State pension is being increased. It used to be 60 but it will reach 66 in 2020 – and will continue to rise in the future.Overall, Scottish Widows’ report found record numbers of women are saving ‘adequately’ for their retirement, with the number hitting 50 per cent for the first time.

SOURCE: http://www.dailymail.co.uk/news/article-2055951/Retirement-age-Squeezed-middle-classes-working-age-70.htm

Planning Ahead: Calculating Retirement Income

2012-01-11T12:04:00.000-08:00

Retirement can be an enjoyable, rewarding time of your life - as long as you don't outlive your financial resources. To help make sure that doesn't happen, you need to know how much you can withdraw from your savings and investments each year during your retirement.

How can you establish this figure? Suppose you've determined that your annual expenses during retirement will be $80,000. You've also estimated that you can count on $20,000 from Social Security and $20,000 from an annuity in which you've invested. To meet your yearly expenses, then, you still need $40,000 of income from your investment portfolio, which includes your 401(k) or other employer-sponsored retirement plan, your IRA, and any other savings and investments you've accumulated. If you had a $500,000 portfolio, and you withdrew $40,000, your withdrawal rate for that year is eight percent ($40,000 divided by $500,000).

As you can see, it's easy to calculate a withdrawal rate for your retirement years. But to determine if this withdrawal rate is sustainable - that is, if it can be maintained throughout your lifetime or if it will need to be adjusted - you'll need to consider a variety of factors, such as the following:

Lifestyle - Your projected income needs - and, as a result, your withdrawal rate - may be based on a certain lifestyle. For instance, early in your retirement, you may be planning to travel the world. Later on, though, if you decide to slow down, you may find you need less income to cover your spending needs (though you may need to spend more on health care).

Time horizon - Generally speaking, the longer your retirement, the smaller the percentage of your retirement savings you can withdraw each year. But this time horizon isn't fixed; you could decide, for example, to work longer and retire later than you had originally planned.

Inflation - In recent years, inflation has been low, but no one can predict its future course. But even at a relatively mild three percent annual inflation rate, that $40,000 you were planning to withdraw each year will, after 20 years, only have the equivalent purchasing power of about $22,000 in today's dollars.

Market activity - Movements in the financial markets could positively or negatively affect the size of your portfolio and, therefore, the amounts available to you for withdrawal on an annual basis.

Estate planning goals - Over time, your estate planning goals can change. Different events - such as the college funding needs of a grandchild or new philanthropic interests that you've developed - may cause you to spend more money in your lifetime than you had once thought, thereby altering the amounts available to you for withdrawal during retirement.

As the above factors indicate, you may need to adjust your withdrawal rate repeatedly over the years. But as long as you're aware of these changing withdrawal rates, you should be able to avoid unpleasant "surprises" during your retirement years while you enjoy the lifestyle you've envisioned.

Finally, know that making decisions of this nature do not have to fall solely on your shoulders. Consider speaking with a financial advisor who can provide knowledge and resources to help you invest in a way that enables you to make progress toward your financial goals for retirement.

SOURCE: http://www.hometownannapolis.com/news/bus/2011/11/01-17/Planning-Ahead-Calculating-retirement-income-Know-your-withdrawal-rate.html

Why Reverse Mortgages Are Not a Retirement Option

2012-01-10T11:46:00.000-08:00

Everyone has seen how housing prices have taken a nosedive in most markets across America since the start of the 2008 recession. Almost $3 trillion worth of equity has disappeared, and homes are now worth significantly less than what their owners paid for them. This evaporation of equity has dealt a devastating blow to many elderly Americans who were originally planning on tapping into that equity to supplement their retirement through reverse mortgages.

The truth is that reverse mortgages shouldn't be used as a last minute tool to fund your retirement . Unfortunately, the lack of homeowners' equity and a host of other factors have made reverse mortgages a thing of the past as a retirement option.

What is a reverse mortgage?
A reverse is much like a standard mortgage for your home. It is called a reverse mortgage because the homeowner will receive a cash payment based on the amount of equity he or she has in their home. So, after you finally get your home mortgage paid off and you own your home free and clear, you can go back into debt again for the exact same house with a reverse mortgage.

In contrast to a conventional mortgage, however, there is no repayment requirement as long as the homeowner meets certain requirements, such as continuing to use the home as his or her primary residence. Once the borrower dies, the loan must be repaid.

Reverse mortgages require equity
One of the biggest realizations to come out of the current housing crisis is that fund require homeowners to have equity in their homes. If you've been banking on a reverse mortgage to fund your retirement instead of investing for your financial goals that you should be been doing all long, you could be in for a rude awakening if the equity in your home has vanished.

This is exactly what happened during the recent (and ongoing) housing crisis, and many Baby Boomers and retirees have been left in a tough situation with little in the way of retirement savings and a hope of using home equity and a reverse mortgage to fund their retirement dreams. But, when the equity disappeared, so did their ability to borrow against their home for retirement. Traditionally, homeowners thought that home prices would rise forever, but that has proven not to be the case in recent years.

Reverse mortgages can hurt your heirs
When you borrow against your home equity to cover living expenses in retirement, you're putting your heirs at risk of some serious estate planning consequences. When you die, your reverse mortgage must be repaid. Many estates do this either with insurance proceeds or by selling the primary home that was mortgaged. This can be devastating news to family members who may have been counting on those funds for one reason or another - e.g., daily living expenses, paying for a future college education, or paying off other debts of the deceased. Reverse mortgages also have the potential to forcing the sale of homes that have been in families for generations.

Reverse mortgages aren't a substitute investing
When home prices in America were skyrocketing, many people skipped funding their retirement accounts in favor of buying a bigger home and paying down their mortgage. The trouble with this is that you really need to have a well-rounded financial plan that includes investing for retirement and other goals, saving, paying down debts, and protecting yourself and your family with insurance. Banking on the ability to borrow against the equity in your home during your retirement years is a very risky strategy that can blow up in your face.

Reverse mortgages are expensive
Historically, reverse mortgage are very expensive because of very high fees . These fees erode the value of what little equity you have built up in your home. Like all home loans, there is an origination fee, appraisal fees, closing costs, insurance, and a host of other fees that are tacked onto your reverse mortgage. Because of this plethora of fees, the cash payout that you receive in this depressed housing market will be even further reduced.

In the final analysis, there's no better alternative to investing for retirement than a well-balanced portfolio of stocks, bonds, and/or mutual funds. Using your home as a way to fund your retirement dreams is fraught with potential drawbacks, and the expectation that you'll have a ton of equity at retirement is based on the faulty assumption that your home will necessarily increase in value, or at least retain its current value.

Do you have any experience with reverse mortgages? Has your declining home value now made a reverse mortgage impossible? I'd love to hear your thoughts in the comments section.

SOURCE: http://www.foxbusiness.com/personal-finance/2011/11/01/why-reverse-mortgages-are-not-retirement-option/

4 Tips to Break Into Closed Mutual Funds

2012-01-09T09:36:00.000-08:00

Closed funds are a harsh reality of mutual fund investing and 401(k) investing. Sometimes there are great investments and fund managers that are just not available to you.

Has this happened to you? You hear about a hot fund, go online and do your due diligence only to be turned away like Dorothy at the door to the Emerald City? It’s happened to me and countless other mutual fund investors over the years, and if I’ve learned one thing it’s this: Don’t give up!

As the leading authority on Vanguard funds and a resource for tens of thousands of 401(k) investors, I’ve heard from many folks over the years who have been frustrated by closed funds. It’s no fun to be turned away at the door after strong track records prompted fund managers to close a hot fund. It can be worse than waiting in line for a table on the Upper East Side of Manhattan! But like the old saying says, “When one door closes, a window opens.” And today, I’m going to show you four ways to prop open the door on a closed fund!

Mutual funds close because fund managers have limitations on how much cash they can handle. When a fund has a hot streak of performance, investors hoping to join the party pour their money in, and managers can’t always find places to put the new cash. Sometimes that’s because of the fund’s investment mandates or SEC regulations, and sometimes it’s just because there’s a lack of good buying opportunities in the market.

Some funds only close to new investors. That means if you had an account in the fund when it closed, you can keep putting money into it. But some funds close completely. That means no one can put any more money into the fund. Either way, if you don’t already have an account in the fund, you’re locked out.

If a fund closes its doors, investors still have four options to get in on the action:

Tip #1: Wait Until the Fund Reopens (If it Reopens)

Believe it or not, funds don’t always remain closed forever. In the past, Vanguard reopened several of its top-performing closed funds to investors in its Flagship program (meaning they are kind of open, but not entirely… I’ll get to that in a moment), and a series of well-known value investing shops from Tweedy Browne and Dodge & Cox, to Southeastern Asset Management and Third Avenue, reopened their own closed funds after the markets stumbled in 2008 and 2009.

Tip #2: Go Through the Back Door

Going in through the “back door,” so to speak, is an investor’s best bet if you are not sure whether that fund will ever open its doors again. Here’s how you do it: Ask your fund company for a “Transfer of Shares to New Owner” or “Change of Ownership” form — most fund companies have one.

Then, find a trusted friend or family member who’s already a shareholder in the fund, and give your friend enough money to meet the fund’s investment minimum. Once it’s invested, he or she can transfer the appropriate number of shares of the fund to you. It’s the same thing as if someone transferred shares of IBM or Google into your name. (Note: Not all funds will allow this, and you might have to sort through a lot of rules, but it can work. A number of my readers and clients have reported success with this technique with the Vanguard Fund Family over the years.)

Tip #3: Find the Fund’s Long-Lost Twin

So you’ve waited outside the front door, gone around back and knocked only to find the fund is really closed. There’s no loophole, no window, no way to get in on the profits. Don’t give up. You still have another option: Start looking for the fund’s long-lost twin. Seriously, if all else fails, look for a clone of the closed fund.

Tip #4: Clone Management Style

Even if you can’t find a similar fund managed by the same team, you often can find a fund that’s just as good but managed by another team.

One final word of advice: Dorothy got to see the Wizard. She wasn’t going to be turned away at the front door. You should take the same philosophy with your 401(k). Never settle for less when it comes to your retirement.

So, next time your favorite fund family slams the door in your face, go around back and knock again!

SOURCE : http://www.investorplace.com/2011/10/closed-mutual-funds-401k-vanguard-funds-investing/

How 401(k) Profit Sharing Helps Small-Business Owners Maximize Their Savings

2012-01-08T09:28:00.000-08:00

When the IRS recently announced new initiatives that will increase 401(k) contribution limits, the one that drew the greatest attention was the increase in employee contribution limits from $16,500 to $17,000.

However, there’s another change that’s just as important for small-business owners looking to maximize their savings while minimizing next year’s taxes: it’s the annual tax-deferral limit. This is the annual amount any individual employee can contribute and receive into their 401(k) plan in a given year. For 2012, the tax-deferral limit increases from $49,000 to $50,000 (or $55,500 if you are 50 years of age or older).

Employer Contributions Help Grow Your Savings

Employer contributions are what can help some employees, including owners themselves; reach the tax-deferral limit. Most 401(k) plans offer an employer match– which is great incentive for employees to both save as well as stay with their company. It’s also an important piece of building towards the tax-deferral limit. Many employers provide a matching contribution of up to three to six percent of an employee’s W-2 wages. But that won’t get most people near the limit. The key component to do so is Profit Sharing.

The Ins and Outs of 401(k) Profit Sharing Options

An optional feature that any employer can use in maximizing contributions is to share some of the profits into employee 401(k) accounts. Because employer 401(k) contributions, which includes profit sharing, are tax deductible for the business and benefits the owner’s 401(k) account too, it’s a common practice for many businesses to execute during years they perform well, and not in years the business may have weaker results.

A standard profit sharing plan provides the same percentage of salary contributions to every employee in the firm directly into their 401(k) account. So with a three percent profit share, an employee earning $100,000 would receive an added $3,000 in their 401(k), and one earning $50,000 would receive $1,500. Additionally, the percentage to share can be determined after year-end but prior to the annual tax deadline (typically March 15 for corporations and April 15 for partnerships, sole proprietors and other business structures for those on a calendar fiscal year). This profit sharing component is also popular with the self-employed who can use the profit sharing component with their Individual 401(k).

Advanced Profit Sharing Enables Even More Control

While a standard profit sharing model is the most commonly used in a 401(k), advanced profit sharing is the preferred plan design for businesses with consistently strong profits and fewer than fifty employees. This profit sharing design enables employers to profit share different salary percentages based on unique employee groups within a company.

For example, a legal firm typically has partners, attorneys, as well as support staff that make up the practice. Each group is distinct, has differing compensation levels and is essential to the firm’s success. A different percent of salary can be provided as a profit share for each defined group to reward employees based on the group’s role, compensation or age. A new comparability analysis is done by the company’s 401(k) provider or advisor to determine the optimal levels that best meet the business’ compensation objectives. This can be great for the employees and a smart way for the firm to better manage the rewards of sharing profits too.

If you already have a 401(k) plan and think this can benefit your company, talk to your provider about how you can best use the profit sharing feature to meet your business goals. If you’re thinking of starting a 401(k) plan for 2011, you can typically purchase a plan until mid-December and you will have until near your tax deadline to make any profit sharing contributions for 2011.

SOURCE: http://www.forbes.com/sites/stuartrobertson/2011/11/01/how-401k-profit-sharing-helps-small-business-owners-maximize-their-savings/

Finally, A Decent 401(k) for Small Business

2012-01-07T09:15:00.000-08:00

Used to be, giving your employees a 401(k) retirement investment plan was one of those good deeds that never went unpunished. While corporate giants have had decent 401(k) plans for years, small business 401(k)s always came larded with stiff fees and sales charges. Generally, it was your employees who paid, not you, although the fees were so well disguised that your employees were usually in the dark about how much they were being fleeced. Well, the lights are about to be switched on: As you may know, next year new 401(k) fee disclosure regulations go into effect, and your employees will see what they’re on the hook for. You don’t want to be the one blamed for the gouging.

Two of the financial industry’s most efficient providers, Employee Fiduciary Corporation and Vanguard, have entered the market for small business 401(k)s. Finally!

Employee Fiduciary Corp. This 401(k) administrator offers only Vanguard funds (which invariably have among the lowest operating costs in their category), and its administrative fees are rock bottom. Record keeping and administrative fees were only $1,500 annually for plans with under $1 million and 0.06% of assets for plans with more. There is also a one-time startup fee of $500 for a new plan and $1,000 to modify an existing plan. In my personal blog, I called this the best small biz 401(k) provider.

Just a few weeks ago, Vanguard launched its own new 401(k) plan for small businesses. Vanguard, which is mainly a money management and mutual fund firm, is partnering with ascensus as record keeper and administrator. Vanguard spokesperson Linda Wolohan estimated that fees would be about 0.32 percent annually for a $5 million plan. While more expensive than the Employee Fiduciary Corp option, it’s likely that this includes more services.

Times have changed

As a business owner, you don’t have the cash to play retirement Santa Claus. For years that meant you had two unpleasant choices: either pay high costs out of your own pocket; or opt for a 401(k) that cost you almost nothing but took its fees out of the hides of your employees.

Now you don’t have to settle. These new low-cost options arrive just as the Labor Department’s 401(k) fee disclosure regs kick in and pull the veil back on the real cost of small business 401(k)s. They couldn’t come at a better time.

SOURCE : http://www.inc.com/articles/201110/finally-a-decent-401k-for-small-business.html

Financial Planning in Times of Uncertainty

2012-01-06T09:10:00.000-08:00

High unemployment, out of control government spending, homes worth less than the mortgages on them, volatile equity markets, European debt problems, a slowing Chinese economy. These are once again the times that try men's souls or maybe their wallets. Since nobody knows when the bluebird of happiness will c--p all over us, it is best to heed the motto of the boy scouts and be prepared. Depending on our age, being prepared means different things. Perhaps the best and simplest advice is to prepare for the worst. Basically this means saving for that rainy day that all of us will inevitably face and to not live beyond our means.

When we finish our education and embark into the real world, many of us will have incurred tens of thousands of dollars in student loans. In addition, we will need a place to live that must be furnished and a means of transportation for our commute to work. The tradeoffs that we make between what we can afford and what we desire can have a significant impact on our financial health. Incurring debts that we cannot adequately cover with our current income (Financial Obligation Ratio), would leave us without any meaningful means to save. Furthermore, by maintaining outstanding balances on our credit cards to finance our current consumption on items such as entertainment, gourmet meals, expensive vacations, etc., we exacerbate our financial difficulties. As we progress in our careers, we see a natural progression in our income until we reach a plateau, a period in which our income may not even keep pace with inflation, the deterioration in the purchasing power of the dollar. Depending upon our education and professional accomplishments, this income stagnation may occur at any stage in our careers. Hopefully, for most of us this will occur as we approach retirement and not in our earlier years. Another potential obstacle to achieving our own individual definition of financial security is serious illness that may leave us with large medical bills, inability to work, or even in our demise. Given the current state of the American economy, all but the most Pollyannaish among us have good reason to be concerned about our finances.

At the risk of being repetitive, the most important consideration in financial planning, irrespective of your stage in life and income level, is to live within your means, i.e., a budget. This means minimizing your fixed costs, those for which you are obligated to pay for regardless of how much you use them. Examples of fixed costs are car payments, rent or mortgage payments, insurance premiums, etc. Younger people, anticipating professional and income progression, can better afford such costs than those approaching retirement that might not have enough retirement income to cover their fixed financial obligations. Financial obligations whose cost vary with usage are called variable costs. Examples of such costs are food, utilities, gasoline, etc. The last costs are discretionary costs which are expenditures that are not necessary but are used to reward ourselves. While designer dresses, European sports cars, gourmet meals may be necessities of the elite, for the rest of us mere mortals these are discretionary if not frivolous expenditures.

The most basic protection that we can have is insurance. In addition to mandatory insurance for our automobiles, health insurance protects us from the burden of bills that can arise from a serious illness, disability insurance provides a source of income to cover our financial obligations in event that we are unable to work, long term care insurance covers expenses should we be unable to care for ourselves, and life insurance provides money to support those that depend on us in the event of our demise. Prior to getting married most younger people have no responsibilities for the well being of others. As they get married and have children that changes as their financial obligations and responsibilities increase. Life insurance is a means of providing protection for their families. As they get older consideration should be given to long term care insurance. It should be noted that as one grows older it becomes more expensive to obtain age based insurance such as life and long term care insurance. Those with a preexisting medical condition may be denied access to affordable insurance coverage if they can get coverage at all.

All of us need a safety net, a source of readily available funds that can be used to cover unforeseen expenses. This can range from the need to pay unexpected repair bills to cover our living expenses during times of unemployment. Due to factors such as globalization and the scarcity of well paying jobs, many of us will at least once in our careers find ourselves without a job.

While Social Security currently represents a reliable source of income to today's retirees, whether it will be able to do so for future generations is a subject of intense public debate. Irrespective of its viability, Social Security benefits are insufficient to provide the income necessary to support the retirement goals of many of us. With fewer companies providing defined benefit retirement programs, it is incumbent on each of us to provide for ourselves. This means saving for our retirement through vehicles such as IRA's and 401K's. The sooner we start our contributions, the more likely it is that we will achieve our retirement goals.

SOURCE: http://www.expertclick.com/NewsReleaseWire/Financial_Planning_in_Times_of_Uncertainty,201138005.aspx