Every year, the Trustees of the Social Security and Medicare Trust Funds release reports to Congress on
the current financial condition and projected financial outlook of these programs. This year’s reports,
released on May 31, 2013, show that both programs face urgent financial challenges that should be
addressed as soon as possible. (Click Here To Read Full Story)

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photo credit: kenteegardin via photopin cc

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To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.

As I turned and faced the class, I nonchalantly emptied a bag of several one-pound chocolate bars and jumbo packs of candy. I noticed that the kids had big smiles on their faces and I even received a few cheers. Miraculously, they were paying very close attention!

I had decided to invent a game to teach the students about the stock market. I gave out a list of stocks that they would likely be familiar with (companies like Apple, Abercrombie & Fitch, Facebook, and Best Buy), and we talked about how to buy equity in a company, how to track performance and also the basics of what a mutual fund is.

The kids caught on quickly how to play the imaginary stock market game, and I gave out prizes based on who had picked the best performing stocks from the previous year. We talked about why certain companies performed better than others, and I sent the students home with an article I wrote about kids and investing. Over the next couple of days, I was surprised at how many parents approached me as a result of the kids showing their parents the article and asking questions about my presentation.

These parents wanted to talk more about how to educate their kids about finance, investing, and saving, and were looking for ideas about how to do it. From those conversations, I thought I’d share a few tips on teaching your kids about financial management.

Have the Conversation

Even if your child isn’t particularly interested in the stock market or financial planning, having a sense of how to make financial or investment decisions and knowing the vocabulary will help them as they grow into adults making their own decisions.

My daughter Abby, for example, has completely lost interest in investing for the time being. No matter how hard I try, she just won’t listen — and for any of you that have had a 16 year old daughter, you know not to persist! However, I’m confident that with the lessons she’s gotten over the years she’ll know which questions to ask when she encounters her first 401(k).

To get these basics instilled in your child’s mind, I think the most important thing you can do is to simply share your financial life with your child. Whether it’s showing them your retirement account statement and taking the opportunity to talk about retirement planning, or involving them in major purchases to teach them about interest rates and planning ahead, just getting the concepts in your child’s mind will go a long way.

Of course, I find it helps to keep it simple and stick with the basics. Otherwise you might find their eyes starting to glaze over!

Make it a Game

If your family plays games together, consider creating an investing game, where you invest in particular stocks and see who gets the best performance (based on historical stock prices). Or, have everyone pick one stock and track it for a month or two, with the winner receiving a prize. Or you can invent another game altogether – There are countless resources for creating activities around investment education, and I think this is a great way to teach new skills and concepts, like looking up stock prices, differentiating between stock exchanges, and finding ways to analyze a stock.

Whatever game you choose, make it fun and make it personal. I find that prizes like money, chocolates, candy, etc. really help to keep kids interested and involved. In other words, bribe them. At Career Day, word quickly got out to other classrooms that my presentation came with these treats, and suddenly my speech was in great demand!

Open an Account

One thing I did with both my kids was to open an investment account for each of them and encourage them to set aside part of any earned money or cash gifts. It’s a great experience to show your child how these things work, and seeing the rewards from it as the account grows really helps to drive home the lesson that saving pays off! Of course, at some point, when performance isn’t as good, I sometimes throw a little extra into the account to keep them motivated. Some could construe this as misleading; however, I believe it’s equivalent to my wife, Sally,  sprinkling bran powder into their brownies!

Another great thing about this is that you’ll discover important information about your child’s investing personality. For example, Abby prefers to keep more money in cash, while Clay likes to invest as much as he can. I try to help each of them work with their preferences by showing them ways to manage their money that matches their personalities. This way, they learn important lessons about saving and the value of a long term plan, but they also learn the skills to implement those lessons in real life.

In the end, making savings and investment a part of your child’s life, and incorporating fun and rewards, will help you teach them important skills that will last a lifetime. So whether it’s a quick conversation about Google, Apple, or opening a new investment account, take a small step today that will help educate your kids!

For more information about putting together an investment game or advice about investing with your child, don’t hesitate to reach out.

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To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.

Stop Procrastinating

Every time I write an article like this, I receive many calls from people who have been meaning to make important changes to their accounts, but haven’t gotten around to it yet or just don’t know where to start or who to turn to. Time flies! Instead of waiting until tomorrow to start working out your retirement planning muscles, you need to take action, no matter how small that first step is.

Of course, we often procrastinate on losing weight for the same reason we procrastinate on retirement planning: we avoid pain at all costs. You know you need to do it, but you just don’t. For a lot of people, it feels overwhelming to think about the big goals because they come with a lot of worries and anxiety.

So, try thinking about it this way: If you’re reading this, you probably already know a lot about what you should be doing. Diversify, make sure your risk levels are appropriate to your strategy, manage the downside, and keep on top of your portfolios – or make sure your advisor is doing this for you.

To get past the mental roadblocks and start the process, try the 15 minute strategy: All you need is 15 minutes to pick up the phone and call your advisor, to get online and check out your allocation. If you still have a 401(k) at an old employer, find out how to roll it over into an IRA. Pick one small task to do, and you can build on that.

You’re Not Alone!

I want to give you a couple of examples of smart people, who are probably a lot like you, who got caught in the procrastination trap.

I had a new client who came to me with an IRA rollover account. At the time of the rollover, her former advisor recommended she purchase an annuity. Because of market conditions, she wanted to keep that money in cash for a while. However, procrastination set in and she never moved her assets into equities, and she was never advised to do so. So, for 13 long years, the annuity charged annual fees of close to 1.5 percent on the account, meaning that this person was guaranteed to lose money every single year with no chance of growth! My new client had known on some level she was not getting the advice she needed, which is why she eventually came to me, but taking the step of making a change seemed difficult.  She put it off for a long time, which ended up costing her a lot of money.

Another investor who read a few of my articles sent me a list of his holdings and asked me to take a look. This was another simple situation from an investing standpoint: His portfolio was concentrated in a few sectors of the market, so it was grossly underperforming its benchmarks. We talked about his allocation, and made some simple changes to expose him to a wider spectrum of the market. I believe that our 10 minute conversation put him on a better path towards long-term performance, and he was surprised at how easy it was and how much better he felt afterwards! The low-grade worry about his allocation had been adding stress to his life for years.

There are many more examples that I could share with you; however, in both of these cases, the solution came because these people made a decision to pick up the phone and ask for help. And once that was done, making the changes they needed was easy and left both clients feeling much better and more confident about the future.

The Benefit of the Right Advisor

Let me bring you in on a little secret: The best thing about having a trustworthy and competent advisor is that they will keep an eye on you and prevent you from getting too lazy or emotional in your investing. They are the personal trainers of retirement planning. An advisor is the influence that prevents you from leaving retirement planning for another day… or another year. And just like a personal trainer, you should make sure that you have one you feel comfortable with.

Of course, unbiased advice, a solid knowledge of the market, and an understanding of how different investment products might best suit different situations are also critical, but it’s that ability to help you over the psychological roadblocks that can make the difference between a good advisor and a great one. So, if you’re struggling to get your retirement house in order, consider it. And remember that taking control and seeking advice isn’t just about retirement assets, it’s about your non-retirement accounts as well!

For now, just take one small step today for your retirement planning. Whether it’s getting the paperwork you need to set up an IRA rollover, adding a few percentage points to your 401(k) paycheck deduction, or just checking the performance of your account relative to the market, just do one thing that will help you on your way. It’s amazing how quickly those little steps, taken over time, can add up to great things!
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photo credit: Alejandro Hernandez. via photopin cc
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To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.

The Trouble with Social Security

Trustees of the Social Security Administration expect the program’s trust fund to run out in 2033. After that, incoming Social Security tax revenue would only cover 75 percent of projected benefits. That might not sound so dire, until you find out that one-third of seniors depend on Social Security for 90 percent or more of their income, and two-thirds of seniors rely on it for over half their income. When you look at female seniors who are widowed, divorced, or never married, the numbers are even higher (and given that women generally outlive men, this represents a significant number of people).

Given that a large percentage of seniors depend on Social Security for the majority of their income, a 25 percent drop in benefits could present a serious problem. While there are many measures that company 401(k) plans take to help people save more for retirement, Social Security will likely remain a major source of income to retirees going forward. This means that it’s unlikely that people will take a drop in benefits easily.

Of course, some might argue that the government will be forced to deal with this issue before the trust fund runs dry, and that is probably true. However, it’s quite a risky assumption to make that the government will find a way to finance Social Security without looking at reducing payouts. Realistically, regardless of economic or other policy changes, I believe there will be a combination of reduced benefits, increased retirement age, and an effort at increasing funding to Social Security, and therefore I think it makes the most sense to plan ahead.

Longer Lifespans Mean Even Greater Risk

Now, take into account that we’re living longer. The combination of reduced benefits and longer lifespan could make for a serious risk of running out of money while you’re still alive, which is something no one wants to face.

That being said, in your retirement planning you have to consider not only the risk that Social Security will be offering reduced benefits, but the fact that you’ll probably be living far longer than your parents. Something has to finance those additional years and those lost benefits.

What You Can Do 

This might be somewhat sobering to think about. You may have been factoring Social Security into your retirement planning, considering that it seems to be working quite well for your parents or grandparents, and you may not have thought about what your lifespan might be (a topic few people enjoy thinking about). However, don’t let these worries paralyze you. Instead, realize that with this knowledge, you can take action!

As someone who is already thinking about retirement, you are miles ahead of most people when it comes to this issue. The next step is taking measures to protect your retirement. The first and foremost thing to do is simple: save. If you’re already saving, think about saving more. If you get a pay raise, maybe put that towards your savings too and keep your current cost of living. Make saving for retirement part of your lifestyle, and you’ll be amazed at how it starts to add up.

This is also exactly why you cannot neglect your retirement assets once they’re in an account. So if you have a 401(k) at an old employer, you should seriously consider rolling it over, and if you have a stagnant IRA, you should consider actively managed funds. See my article 5 Things You Must Know About Your Old 401(k) or Existing IRA for more! You might also want to read about Dusting Off Your Retirement Accounts and the Case for Active Bond Management.

The other important part about taking action is to do it now. Do not procrastinate! If you’re in your 20s, 30s, or 40s, you might not think that saving for retirement is important right now because of your age, but this couldn’t be further from the truth. Start saving, and keep saving more whenever you can. Your 65 year old self will thank you for thinking ahead, as those extra years of compounding will pay huge dividends down the line.

Conclusions

I often tell clients that starting a retirement savings program is sort of like quitting smoking. It might hurt at first, and you won’t see the benefits until later — just like you don’t generally see the costs of not quitting smoking for many years. But you know you have to do it, so it becomes a matter of getting your behavior on board with your opinions.

So start today, right now: Call your advisor, change your retirement plan deduction, create an automatic transfer from your bank account to your IRA, or reduce your spending to save more money. Whatever that first step is, I challenge you to give yourself 15 minutes and do it today. You’ll feel great for doing it, and I am sure you’ll feel even better when you’re 65 years old and facing your well-funded golden years. You’ll be there a lot sooner than you think!

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photo credit: Ano Lobb. @healthyrx via photopin cc
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To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.

Investors like to diversify into bonds to reduce the overall risk of their portfolio, which can make a lot of sense. However, you have to remember that there’s a big difference between individual bonds and bond mutual funds, and that there are important risks you need to take into account if you invest in bond funds.

Individual Bonds versus Bond Mutual Funds

When you invest in an individual bond, you have complete transparency on the bond’s duration, interest rate, and credit rating. You know that even if the price of the bond falls, you’ll continue to get your interest coupon. This can provide an important steadying influence on your overall portfolio, especially if you’ve invested aggressively on the equity side (presuming the bond does not default). You also have the luxury of waiting for the bond to mature, meaning you get paid out at par in spite of any price changes in the interim.

Bond mutual funds, on the other hand, are pooled holdings of many bonds. Because these funds want to deliver returns to their investors, they might include lower-quality holdings in the portfolio or use leverage to enhance returns. Some funds also pursue investments in longer duration bonds in order to chase higher interest rates, especially at a time like now, when interest rates are still low. These actions expose the portfolio to additional risks which most investors don’t know about or take into account. I call it “chasing yield.” This may have been a good strategy in the past, or even currently. However, if and when yields rise it won’t seem like such a good idea, if your principal starts to fall.

But I Can’t Afford Individual Bonds!

Many investors can’t invest in individual bonds in their 401(k) and 403(b) accounts regardless of how much money they have. In this case, I advise that you take a close look at your bond mutual funds and make sure of the following:

-  The funds you are invested in do NOT employ leverage

-  The holdings are of a high credit quality that you are comfortable with

-  The holdings are of short to medium duration

If you’re using bond funds to reduce the risk in your portfolio, you’ll want to focus on high credit quality and short to medium duration. These bonds will have lower risk in terms of defaults and in terms of interest rate changes. Why? Well, credit quality speaks to the quality of the borrower and the likelihood that they’ll default. To reduce risk in a portfolio, you’ll want better quality borrowers! As for duration, it’s an important part of fixed income investing because bond prices tend to fall as interest rates rise. The bonds that are most affected by these price movements are longer-term, or long duration.

You’ll also want to avoid leverage at all costs. While it can be very tempting to invest in a bond fund that produces levered returns, it’s important to remember that in times of instability they may perform very badly, and it’s precisely in those times that a secure bond allocation makes itself useful.

Understand that taking these steps will produce less yield, which may be frustrating, but if interest rates rise, your principal should not decrease as much. At that point, I promise you won’t find it frustrating at all!

Don’t Get Greedy

One of the biggest pieces of advice I give my clients when investing in bonds is to stop chasing yield. Bonds are a great part of a diversified portfolio because they provide income and a steadier source of returns than equities. Chasing yield through low credit quality, long duration, and leverage are a surefire way to introduce unnecessary risk to your portfolio. Unless you are really sure of what you’re doing and it’s part of an overall strategy developed with your advisor, leave the speculation to the institutional investors.

Revisit Your Allocation

One of the most important pieces of advice I can give is to remember to revisit your allocation. Don’t just set it and forget it, as this is a recipe for a stagnant portfolio that doesn’t adjust to your changing needs and changing economic conditions. For this reason, if you can, I advise employing actively managed individual bond portfolios for this reason. In this scenario, you own the bonds directly rather than investing in a bond mutual fund, which I believe is preferable.

However, no matter what you invest in, there is still no replacement for regularly revisiting your investment strategy. Click here for a previous article I wrote explaining the importance of active bond management.

Get the Help You Need

Bond mutual funds can be a great way to diversify your retirement savings, but it’s important to know what you’re investing in and to avoid chasing returns. Don’t be afraid to ask your advisor for help understanding your investments. Remember, these are your hard-earned assets, and whether it’s retirement savings or other savings, it’s worth taking the time to ensure that your portfolio strategy is appropriate for your risk level!

While interest rates might not be going up in the very near future, I do expect to see them rise over the next few years. Because the market is anticipatory, this means bond prices will begin to shift ahead of interest rates. There is no time like the present to take a look at your investments and ensure that your strategy is being carried out appropriately. I’ve written about this in the past, and though I was ahead of the trend at the time, the lessons of preparing your portfolio for a recovery are the same. Click here to learn more!
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In this article, I’ve tried to put together some solid information on a variety of topics that are relevant to your child’s college journey. I’ve found a lot of this to be useful in our own planning and decision-making for Abby and I want to pass along some of the important issues we’ve considered and the lessons we’ve learned (and have yet to learn).

Although there is an abundance of information out there, I hope the resources here can be of help to you and reduce any stress and feelings of not knowing where to start and what you should be doing next, so that you can enjoy the college prep process for what it is: an incredible and important milestone in both your life and your child’s life. Make sure you click through all the  links in this article so you can get the most out of it!

Financial Planning

Saving for College will give you an overview of the different savings accounts you can use for your child, and some of the benefits and special considerations for each one. I chose the 529 plan for my kids when they were very young, but another option might be better for you.

Already at the application phase? Eight Tips for Reducing the Financial Burden of College is geared both for parents of students who are already applying and for those who are thinking ahead. There’s so much to consider when planning a financial strategy for college, and this article covers some of the most critical basics, such as residency, tax breaks and federal programs, and investment strategies.

Check out A Winning Strategy for College Scholarships for even more practical advice. This article outlines 6 important tips about making the most of you child’s scholarship and financial aid opportunities, including how to get them involved and things to think about when applying to colleges.

Wealth Management also has some great tips for tackling financial aid, and I recommend the article The Ticking Time Bomb, which directly addresses common pitfalls that people experience in filling out (or forgetting about!) the Free Application for Federal Student Aid (FAFSA). It’s written by Lynn O’Shaughnessy, bestselling author of The College Solution: A Guide for Everyone Looking for the Right School at the Right Price and Shrinking The Cost of College, a workbook for families looking to reduce the price tag of higher education. You might find the book to be a useful resource as you plan your child’s college journey.

Finally, no article about college would be complete without mentioning The College Board, a very informative website devoted to higher education.

ACT vs. SAT

Which admissions test is the right fit for your child? The Princeton Review and Peterson’s both have quick guides that highlight the main features of each test and give some guidance on deciding which is best for your child (most universities accept either). While  the ACT and SAT are similar in many ways, there are some differences that might help you strategize so that your child’s abilities are best highlighted. However, a lot of kids take both tests, so you don’t have to choose just one. In our case, Abby is taking the SAT for now, but she might take the ACT later on as well. Also, you might find this ACT/SAT score conversion chart helpful when trying to understand how each test score is equivalent to one another.

Application Time

Applying for College outlines the general application process and timeline that you’ll most likely be facing. This article also sheds some light on important topics that can be confusing for many people, such as the differences between various early admissions programs and their potential costs and benefits.

Peterson’s also has a wealth of articles about choosing a college and the application process. Clicking through these links could help you strategize any current applications and help you prepare for the future if your child is younger.

While it can feel overwhelming at times, the college application process can be smoother and more manageable with some strategizing, good information, and planning. I hope these resources can be of help to you, and I wish all of us good luck as we prepare to send our kids into the next chapter of their lives!
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The Fiscal Cliff & The Economy

The fiscal cliff loomed large over the last part of the year as well, and while 2012 closed with us going over the cliff, albeit only for a day as Congress passed new legislation on New Year’s Day. Some highlights include an extension of income tax rates and long term capital gains and dividends tax rates for those with income up to $400,000 ($450,000 for married couples). For those above this threshold, maximum rates will rise to 39.6 percent for income and 20 percent for capital gains and dividends. Estate tax rates will also be extended, and indexed for inflation. Take a look at this short recap for more information about the new legislation.

While you may be completely tired of the phrase fiscal cliff, I can assure you that we’ll be hearing just as much about the debt ceiling in the coming months. Now that the fiscal cliff has come and gone, focus is turning to entitlements, government spending, and the national debt, which are major issues both politically and economically. While the fiscal cliff deal will raise government revenue (through tax increases) by about $620 billion over 10 years, it still leaves spending cuts to be negotiated in the future.

Is this enough for us to ensure a solid financial future for the country? No, and some argue that we would need to cut spending or raise taxes (or both) by an additional $3 trillion over the next decade, in addition to the $620 billion deal reached, in order to close the gap. As most of us instinctually know, leaving government debt levels unaddressed will leave our children and grandchildren holding the bag, but unfortunately these debates often come down to politics. As a result, I expect future debates will go down to the wire, just as this one did.

With respect to the effect of these debates on your portfolio, we saw a short decline and a bounceback on fiscal cliff fears, and I would expect the short term volatility to continue over the next couple of months as these issues remain on the forefront of the government’s agenda.  As I stated in my recent newsletter about the fiscal cliff, for short-term trading accounts I generally advise nimbleness and risk management with stop losses in the face of volatility, while for longer-term accounts I usually recommend an actively managed and well-diversified strategy. It can be hard to keep emotions out of investing, especially for important accounts like your retirement savings, so focus on building around a solid strategy for the long term that you can understand and stick with.

Taking Control of Your Finances in the New Year

In the last year, I’ve seen a lot of clients rolling their old 401(k) accounts into an IRA and consolidating retirement savings accounts to better see and control their portfolios. I attribute a lot of this to employment changes and retirement, but I hope my articles have also helped to keep this subject at the forefront of people’s minds. Again, I believe it’s important to have a long-term strategy for your retirement savings, and taking control by putting accounts together in a place with a lot of options for active management is a critical first step.

So, as we transition into the New Year, if you haven’t done so already, now is the time to think about taking control of your finances. It is an especially good time to think about rolling over a 401(k) from a former employer into an IRA, or consolidating multiple IRA accounts into a single one. Rolling over into an IRA will give you the chance to revisit and revise your strategy for the long run.

I pride myself on the educational information I provide to my clients during the rollover process and the guidance I give to make it as seamless (and as little work!) as possible for each client. A good advisor will quarterback the whole process and provide advice in setting an asset allocation that meets your goals. However, even if you’re rolling an account over on your own, remember it is not as challenging as it looks! The first step is to choose where the account will go. Many people stick with their current custodian (the company currently managing their 401(k)) because it seems difficult to shop around, but with all the information available online, take a few minutes to see if you might find lower fees, more managers, or different asset classes available that would suit your strategy better for the long run.

From here, there are generally a few forms to fill out and mail. This is where many people lose their nerve, as filling out paperwork can seem like way too much trouble. But stick with it, and keep in mind that you’ll feel great for taking this important step in managing your retirement savings. There’s nothing like the feeling of making the right financial moves to help secure the future for you and your family, so get the year off to a great start by taking some time to make a change.

Educate Yourself for Financial Success

I’ve gotten a lot of positive feedback about these educational articles, and I’m thankful for the opportunity to provide service that is valued and useful to my readers and clients. To learn more about retirement planning, take a look at some of my popular articles from the past year:

The Biggest Risk Facing Your Retirement: Procrastination

Free Money: Take Back Your Unclaimed Funds

Are You Struggling to Understand 401(k) and 403(b) Share Classes and Fees?

Pre & Post Planning for the Loss of a Spouse: Advice on Financial Planning for Couples

5 Things You Must Know About Your Old 401(k) or Existing IRA

I hope this article will help jumpstart your own planning for the New Year – maybe think about making it a New Year’s Resolution to initiate some important moves, like tackling that rollover!

Wishing you a happy and prosperous 2013.

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To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.

In this article, I’ll explain the basics of the fiscal cliff and its potential effects on your investment accounts. While these issues can quickly become complicated, knowing the basics will help you to ask your advisors the right questions and get the best advice possible for your situation!

What is the Fiscal Cliff Anyway?

The fiscal cliff is basically just a series of tax increases. The Bush tax cuts, along with a few other programs, are scheduled to expire at the end of 2012. Their expiration, alongside scheduled spending cuts to several government programs, including Medicare and defense spending, are expected to raise hundreds of billions of dollars in revenue for the federal government. However, given the weak economy, there is a lot of concern among commentators that tax raises could harm American economic growth in the coming years.

These scheduled tax increases would affect many different areas of financial planning, including dividend income, capital gains, income tax rates/credits, and estate taxes.

Income Tax Brackets

One very notable change driven by the fiscal cliff would be an adjustment to federal income tax rates. Instead of the current six tax brackets (10%, 15%, 25%, 28%, 33%, and 35%), we would move to five federal brackets (15%, 28%, 31%, 36%, and 39.5%). This may help to make those retirement savings contributions more attractive!

Currently, there are no specific changes scheduled when it comes to tax breaks for 401(k) and IRA contributions, but there is speculation that Congress may reduce these benefits. In my opinion, it’s best to assume that everything is on the table for the coming negotiations.  Of course, planning ahead without knowing what will happen to these tax breaks is impossible. However, keep in mind that with higher taxes and no changes to tax breaks for traditional 401(k)s and IRAs, you might want to consider increasing your savings to take advantage of the benefit.

Capital Gains and Investment Income

The fiscal cliff would also have an effect on your investment income. If a deal is not reached, existing legislation would mandate that long term capital gains taxes would increase to a maximum of 20% (from 15%) and all dividend income would be taxed as ordinary income (currently, qualifying dividends fall under the long-term capital gains structure of 15%). Should these go into effect, you may want to revisit the distribution of your holdings across taxable and tax-deferred accounts, as the incentive to keep dividend-paying and high- growth stocks in tax-deferred accounts could be a lot stronger.

You may have also noticed some of your holdings paying out special dividends in preparation for the fiscal cliff – companies such as Wal-Mart and Costco have already announced special dividends alongside several other publicly traded firms. This could affect your current-year tax bill depending on where you hold these stocks.

Another scheduled change is a new 3.8% Medicare contribution tax on unearned income for high-earning individuals. Unearned income is any income you receive from sources other than employment, such as interest and dividends, annuities, or rental income (among others). The new tax would apply only to people with an adjusted gross income (AGI) of over $200,000, or $250,000 for married couples filing jointly and $125,000 for married couples filing individually.

So, take for example a single taxpayer with an AGI over $200,000 who earned $50,000 in dividends and interest from her investments. Assuming she has no allowable deductions or other sources of unearned income, her net unearned income would be $50,000 and she would be taxed an additional 3.8% on this amount on top of any other taxes owed.

The Fiscal Cliff and the Markets

The markets already seem to be responding with volatility to the approaching fiscal cliff, and I expect this to continue. However, even if we do go off the cliff, I think it’s important to keep a level head. Remember that this isn’t the end of the world, and that tax cuts can still be enacted in the New Year. I believe a deal will be made whether we go off the cliff or not. However, as always, the devil will be in the details when it comes to what that deal might look like.

In the meantime, it’s important to keep in mind that the markets might be increasingly volatile as we approach year-end based on news developments and worry about what will happen next. Uncertainty, in my opinion, makes markets much more reliant on news rather than fundamentals, and this can add additional worry to an already uncertain time.

How do you deal with it? I believe that the market is likely to decline if we go off the cliff, but I also believe it’ll bounce back. I’m advising my clients to be prepared for some big swings over the next month, and I’m taking a cautious and nimble approach with higher-risk trading accounts. For accounts with more stable, long-term allocations I generally advise sticking with a well-diversified and actively-managed strategy that utilizes alternative investments and other asset classes less correlated to the overall market, as they generally provide some protection from big downward swings.

More Information

While the fiscal cliff is presenting investors and financial planners alike with a lot of uncertainty, keeping yourself informed about the basics and the moves you might be able to make in response should help reduce any fears or concerns you might be experiencing. To learn more, read about the fiscal cliff and its importance to tax planning and your investments. To learn more about building a solid long-term portfolio, take a look at my articles on Institutional Investing for the Individual Investor, Managing Market Volatility, and Managing Your Downside Risk.

Finally, don’t be afraid to ask questions and talk to your advisor as deliberations about the fiscal cliff unfold. Remember, knowledge is power!

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To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.

Richard did his best to prepare his family for the worst, and in my opinion he did a very good job. However, his wife Rebecca found all the documents and planning confusing and stressful when added to the grief of losing her husband. After talking about the challenges of facing these issues, Rebecca and I decided together to share some important lessons on how to prepare, as a couple, for the loss of a spouse.

Communicate and Plan Ahead

What are your preferences for hospital treatments? Would you or your spouse want to be resuscitated in the hospital? Do you prefer to be buried or cremated? What kind of memorial service would you prefer? These are all difficult but important aspects of death that should be discussed long before they become relevant. By communicating about your respective wishes, you give each other the gift of removing doubt and uncertainty from at least one aspect of the grieving process.

Moreover, wherever it makes sense, put your wishes in writing. Whether it’s a Do Not Resuscitate (DNR) directive, a will outlining preferences for burial, or an update to your preferred account beneficiaries, putting it all in writing and ensuring these documents are legally valid will reduce tension around these decisions. One unexpected but common occurrence after the death of a loved one is dispute about what his or her wishes really were, which is often fueled by grief and shock; by making your wishes clear ahead of time you can also go a long way towards alleviating family conflict.

Know Your Business as a Couple

Even if one member of the couple takes primary responsibility for financial planning, you should both be fully apprised of everything that is going on in your financial lives. The easiest way to do this is to check in regularly about your plans. Still better, start and regularly update a list of your financial details, including bank accounts, safety deposit boxes, investment accounts, insurance policies, pensions and other retirement accounts, and Social Security benefits. You should also make a list with the contact information of advisors such as financial advisors, insurance brokers, lawyers, and accountants. Keep your files organized so that your loved ones can easily find out about any outstanding debts and keep track of loose items like stock certificates.

Both you and your spouse should also at least be aware of the basic steps that would need to be taken to transfer accounts and claim benefits in the event of a death. Even just having an idea about the procedure will go a long way towards reducing the confusion that can come with all the paperwork.

Keep this information alongside your personal documents, such as health directives, wills and trusts, and directives pertaining to burial and memorial services. The surviving spouse will inevitably have a lot to do, and grief can make even the simplest tasks so much harder. Having all the information in one place will help. For more information about financial planning after the loss of a spouse, please read Organizing Your Finances After the Loss of a Spouse.

Also keep in mind that with the loss of a spouse, the surviving spouse may see significant changes to income and lifestyle needs. Understanding your current spending and anticipating how your budget might change in the event of a death can help you plan ahead to ensure your financial security. Either way, it is a very good idea to understand your spending habits in order to effectively manage your budget. Making Sense of Your Spending Habits is a brief article with information on tackling this process and includes a spreadsheet to help get you started.

Take Care of Yourself

Be sure to take time out to take care of yourself, especially if you are currently a caregiver to your spouse. Caring for your loved one is not only physically demanding but incredibly emotionally demanding as well, and it can be hard to recognize the need to take time out to rest. Remember that without fortifying yourself, whether it be through a nap, reading a book, a hobby, exercise, or time with friends, you won’t be able to care for your beloved as effectively, so push through any feelings of guilt and remember to be good to yourself too.

Taking care of yourself is just as important in the event that your spouse passes away. Whether it’s a surprise or the result of a long-term illness, the death of a spouse is likely to affect you for years to come. Unfortunately, with the loss of a spouse there is often a lot of good advice about what to do or how to feel, but what you hear won’t necessarily be the right advice for you. Don’t feel bad about not listening to everyone, as hard as this can be during such a tumultuous time. I find that people believe they should feel or act a certain way, and that doing otherwise would be wrong, but in reality you have to do what’s right for you based on your individual feelings. This is a critical part of caring for yourself during such a difficult time.

Seek Help and Advice

It’s important to know that you can turn to friends, family, and your advisors and that they will be there to help during the worst of times. Don’t be afraid to let your loved ones help out, and don’t be afraid to ask for help; don’t feel embarrassed that you’re not completely educated on everything that’s going on.

Having a professional advisor to turn to can also help to reduce the stress and uncertainty around the financial planning required after a death. Whether it’s by moving accounts, quarterbacking other professional advisors, or providing an empathetic sounding board for your fears and questions, a good advisor will provide you with logistical and compassionate support that isn’t just limited to financial advice. However, remember that the best time to ask for advice is before you need it: Get familiar with your advisor ahead of time and take the time now to tackle these important questions and issues. If your spouse primarily deals with your advisors, make sure you get to know them a bit too so that you feel comfortable turning to one or all of them in a time of need.

Conclusions

While it’s often hard to broach the subject, communicating openly with your spouse about your respective preferences, planning ahead, and keeping each other informed are a vital part of helping each other in the event of a death. As Rebecca described it to me after the loss of her husband, it is such a vulnerable time in her life. If you can communicate and plan ahead you’ll be better positioned to get through the process.
This article is dedicated to the memory of my good friend Richard. Thank you to Rebecca for sharing her thoughts and advice for this article.

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To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.

In December 2010, Congress extended the so-called Bush-era tax cuts. However, for investors, the legislation may have been a stay of execution rather than a full pardon. As of January 1, 2013, federal tax rates on income, qualifying dividends, and capital gains (among other provisions) are scheduled to revert to previous levels. (Click Here To Read Full Story)

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To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.