Winter 2001 Newsletter

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Winter 2001 Newsletter

IN THIS ISSUE . . . Click on the Below Topics to Jump to That Area:

Accelerating Your Retirement Savings

Take Another Look at Education Savings Accounts

Deciding between Section 529 Plans and Education Savings Accounts

Tips for Your Bond Holdings

Rating Bonds

Avoid Natural Tendencies

News and Announcements - Your Spouse and Family Finances

Investing Fashions

ACCELERATING YOUR RETIREMENT SAVINGS

If you’ve reached your 40s or early 50s and find you haven’t saved much for retirement, don’t just abandon your retirement goals. You can still save significant sums by approaching the task seriously. Some strategies to consider to accelerate your retirement savings include:

	CALCULATE PRECISELY HOW MUCH YOU’LL NEED FOR RETIREMENT AND HOW MUCH YOU CURRENTLY HAVE SAVED. Although it’s tempting to avoid this task, finding out how much you’ll be short can be a very big motivator in changing your behavior.
	USE YOUR PEAK EARNING YEARS TO SUBSTANTIALLY INCREASE YOUR SAVINGS. Typically, your last few years of employment are your peak earning years. Instead of increasing your lifestyle as your pay increases, save all future pay raises. Consider downgrading your lifestyle, putting any cost reductions into savings.
	HAVE A NONWORKING SPOUSE REENTER THE WORK FORCE. Your children may now be out of the house or at least won’t require as much supervision. It may make sense for a nonworking spouse to reenter the work force, saving all earnings for retirement. Or you might want to take on a second job or start a business.
	CONTRIBUTE THE MAXIMUM TO TAX-ADVANTAGED RETIREMENT PLANS. If your employer matches contributions to a 401(k) plan, contribute enough to take advantage of all matching amounts. This automatically increases your savings by the amount your company matches. Also look into traditional and Roth individual retirement accounts.
	CONSIDER SELLING YOUR HOUSE AND BUYING A SMALLER ONE. At a minimum, the move should reduce your living expenses, allowing you to put the difference in savings. If you have significant equity in your original home, you may have proceeds left over that you can put into savings. If they have owned and lived in their home in at least two of the last five years, single taxpayers can exclude $250,000 of capital gain on the sale of a principal residence and married taxpayers filing jointly can exclude $500,000.
	SELECT YOUR RETIREMENT DATE CAREFULLY. If you can’t save the amounts needed by your desired retirement date, consider postponing retirement. Working a few extra years gives you more time to accumulate your savings and delays when you start withdrawing from those savings. Or consider working after retirement at least part time. Even a modest amount of income after retirement can substantially reduce the amount needed for retirement.
	STAY FOCUSED ON YOUR GOALS. At this age, it’s imperative that you maintain your commitment to save for retirement. If you’d like help accelerating your retirement savings, please call us at (800) 878-4036.

TAKE ANOTHER LOOK AT EDUCATION SAVINGS ACCOUNTS

The Economic Growth and Tax Relief Reconciliation Act of 2001 (Tax Act) significantly expanded the tax advantages of education IRAs, now called Coverdell Education Savings Accounts (ESAs). Starting in 2002, the key features of ESAs include:

Annual contributions will be increased to $2,000 per beneficiary under age 18 (up from $500 previously). This amount is in addition to the $2,000 limit for other types of IRAs. The following table shows how much you could have when your child turns 18 of you invest $500 versus $2,000 annually starting at various ages, and earn 8% compounded annually:

Age start Invest	Invest $500	Invest $2000
Newborn	$18,725	$74,900
5 Years Old	$10,748	$42,991
10 Years Old	$ 5,318	$21,273
15 Years Old	$ 1,623	$ 6,493

This example is provided for illustrative purposes only and is not intended as a projection or reflective of any specific investment

	Contributions aren’t tax deductible, but earnings can grow tax free as long as they are used for qualified education expenses as defined by the Tax Act.
	Previously, tax-free distributions could only be used for qualified higher-education expenses, including tuition, certain room and board, books, and other supplies. Starting in 2002, tax-free distributions can also be used to pay elementary and secondary school tuition and expenses, including tutoring, room and board, uniforms, and extended day-care programs, and to purchase computer technology and equipment, including Internet access and services.
	Eligibility to make contributions is phased out at adjusted gross income levels of $95,000 to $110,000 for single taxpayers and beginning in 2002, $190,000 to $220,000 (formerly $150,000 to $160,000) for married taxpayers filing jointly. If your income exceeds these limits, you can ask other relatives to contribute for your children. Your child can also make the contribution to his/her own ESA since there is no earned income requirement for contributions.
	Corporations and other entities can now make contributions to ESAs, regardless of their income.
	Contributions can be made until April 15 of the following year (formerly contributions had to be made by December 31).
	Distributions must be made before the beneficiary turns 30. Any funds not used for qualified education expenses are subject to normal income taxes and a 10% federal income tax penalty. However, the ESA balance can be rolled over to another family member.
	Contributions can now be made to both an ESA and a Section 529 plan for the same beneficiary in the same year.
	You can now claim the HOPE Scholarship Credit or Lifetime Learning credit in the same year tax-free distributions are taken from an ESA, as long as the credit is not claimed for amounts paid with the tax-free distributions.
	For special needs beneficiaries, contributions can now be made after age 18 and tax-free distributions can be taken after age 30.

Like other provisions of the Tax Act, provisions regarding ESAs are scheduled to expire in 2011 unless further congressional action is taken. Before contributing to an ESA, consider the impact on financial aid. Typically, an ESA is considered your child’s asset for financial aid purposes. Please call us at (800) 878-4036 if you’d like to discuss whether you should use an ESA.

DECIDING BETWEEN SECTION 529 PLANS AND EDUCATION SAVINGS ACCOUNTS

The Economic Growth and Tax Relief Reconciliation Act of 2001 has provided significant new benefits for both Section 529 plans and Coverdell Education Savings Accounts (ESAs). With all the new provisions, you may have difficulty deciding which to use for your college savings. Some factors to consider include:

Your income must not exceed certain limits to contribute to an ESA, while there are no income restrictions for Section 529 contributions. However, there are ways around the ESA limits, such as having another relative or your child make the contribution.
You can only contribute $2,000 per year to an ESA, while much larger contributions can be made to a Section 529 plan. Thus, if you are trying to fund college expenses for an older child or want to invest a large amount immediately, a Section 529 plan may be the better alternative.
Once you make a contribution to an ESA, you cannot get your money back. The ESA is owned by your child, who can use the funds as he/she wishes. You own the Section 529 plan assets, so you can get your contributions back if permitted by the plan. However, you will have to pay ordinary income taxes on earnings and a 10% federal income tax penalty. If you think you might need to get your funds back, you might want to consider the Section 529 plan.
For financial aid purposes, ESA assets are considered your child’s assets and distributions are considered your child’s income. With a Section 529 plan, the assets are considered your assets while distributions are considered your child’s income. Since a greater proportion of your child’s assets and income must be devoted to college expenses, a Section 529 plan will typically be more favorable for financial aid purposes.
You can invest ESA assets in a wide variety of investments, while your Section 529 plan contributions can only be invested in the limited choices offered by the plan. Also, once you make the contribution to the Section 529 plan, you can only change investments by transferring to another plan.
ESA assets can be used to fund a wider variety of qualified education expenses. In addition to college expenses, you can use ESAs to fund elementary and secondary school expenses.
Contributions to ESAs can only be made until a beneficiary turns 18, while there is no age limit for Section 529 plan contributions. ESA assets must be used by the time the beneficiary turns 30 or transferred to another beneficiary. There is no similar age restriction for Section 529 plans. Thus, Section 529 plans may be the better alternative for older students.

There are a number of factors that should be considered before deciding between an ESA and a Section 529 plan. Please call at (800) 878-4036 if you’d like to discuss your situation.

TIPS FOR YOUR BOND HOLDINGS

Determine your objectives before investing. Decide how much of your portfolio you want invested in fixed-income securities.
Diversify your bond holdings among different bond types. Consider government, corporate, and municipal bonds, as well as different industries, credit ratings, and maturities.
Choose maturity dates for bonds carefully. When you need your principal is a major factor, but the current interest rate environment may also affect your decision.
Follow interest rate trends. Understand the significance of the yield curve and track its pattern over time.
Compare interest rates for specific bonds before investing. Interest rates can vary substantially between different bond types and between bonds with different maturities or credit ratings.
Research a bond before purchase. Review the credit quality, coupon rate, call provisions, and other significant factors.
Consider the tax aspects of the bond. By comparing the after tax rate of return for various bonds, you may be able to increase your return.
Review your bond holdings periodically. Evaluate the credit ratings of all your bonds at least annually to ensure that the quality hasn’t deteriorated. Also, ensure that your holdings are still consistent with your overall investment objectives and asset allocation plan.
Call us at (800) 878-4036 with your bond holdings.

RATING BONDS

Rating agencies assign ratings to bonds to give investors an indication of the bond’s investment quality and the relative risk of default. The two largest bond rating services are Standard & Poor’s Corporation (S&P) and Moody’s Investors Service (Moody’s), both of which evaluate thousands of bond issues.

The ratings assigned by S&P and Moody’s are as follows:

S&P Moody’s	Description
AAA-Aaa	Highest quality, extremely strong ability to repay debt.
AA-Aa	Very strong ability to repay debt.
A-A	Strong ability to repay debt, somewhat more susceptible to adverse changes.
BBB-Ba	Adequate ability to repay debt, adverse conditions are more likely to lead to weakened ability to repay debt.
BB-Ba	Faces major uncertainties which could lead to nonpayment.
B_B	Has the ability to repay debt, but adverse conditions will likely impair the capability to repay debt.
CCC-Caa	Vulnerable to nonpayment.
CC-Ca	Highly vulnerable to nonpayment.
C-C	Bankruptcy may have been declared, but payments are still continuing.
D-D	Currently in default.

Within each category, each agency uses qualifiers: + or - for S&P and 1, 2, and 3 for Moody’s. The first four categories are considered investment grade bonds, while the lower categories are considered speculative.

After a bond is issued, the rating agencies continue to monitor it, making changes if warranted. A rating is merely a general guide of a bond’s investment quality and risk of default, not a recommendation to buy the bond. Other factors should be considered before investing in a particular bond.

AVOID NATURAL TENDENCIES

In investing, our natural tendencies sometimes makes it difficult for us to follow fundamental principles. So, as we face this volatile period, make sure to understand these tendencies so your investment performance isn’t adversely affected:

We tend to think the stock market can only continue in its current direction. When the market was going up, we thought that trend would continue indefinitely. Now that it is going down, don’t make the mistake of thinking that is the only thing it can do. This can lead you to become discouraged and sell your stocks at market lows. Remember that market fluctuations and corrections are a normal part of the stock market cycle.
While investors hate risk, they tend to become more risk tolerant when they have gains on their investments. However, as those gains disappear, investors often become more risk averse, since their principal is now at risk. Again, this can lead to selling when stocks are at market lows.
Many investors felt their recent investment performance was a result of their ability, rather than an overall rise in the market. As the market declines, those investors can lose confidence in their investment abilities, leading them to inaction or rethinking their investment strategy.
Investors hate to sell stocks at a loss, which can result in holding the investment, hoping to recoup those losses. It may be a better strategy to sell the investment, using the money for investments with better prospects.

The incredible bull market of the past few years has led many investors to become overconfident in their abilities and to take on added risk in their portfolios. Now that the market has shown it can do down as well as up, investors need to keep their natural tendencies in check so they don’t overreact. Please call us at (800) 878-4036 if you’d like to review your portfolio in light of current market conditions.

NEWS AND ANNOUNCEMENTS

YOUR SPOUSE AND THE FAMILY’S FINANCES

In many families, one spouse takes primary responsibility for the family’s finances, doing everything from paying bills to making investment decisions to reviewing insurance policies. If that spouse dies first, the other spouse may have difficulty taking over these tasks. Therefore, if you take care of money matters in your marriage, one of your more important financial duties is to prepare your spouse for handling the family finances. Some strategies to consider include:

Maintain good records. Financial records should be well organized, located in one central spot, and contain only pertinent information. Old or outdated information may confuse your spouse.
Prepare written instructions. These instructions should cover everything from insurance policies to investments to company benefits to monthly bills, ensuring that nothing will be overlooked. Also list all your assets, why you own them, and where important documents are kept. Update these instructions at least annually.
Discuss your finances with your spouse. Go over your written instructions, explaining your rationale for major financial decisions. Your death would likely necessitate changes in investment allocations, insurance policies, and other financial matters, so encourage your spouse to explore all options before making decisions.
Involve your spouse in the family’s finances now. Your spouse can start by paying monthly bills, balancing the checkbook, or reviewing credit card charges. Increase his/her involvement as confidence builds.
Line up professionals for your spouse. Even if your spouse assumes some financial duties, there may be areas that he/she will never feel comfortable handling. Identify those areas, find knowledgeable professionals who can help, and introduce your spouse to those professionals now.

INVESTING FASHIONS

Just as different types of clothing, music, and food move in and out of fashion, so do different types of investments. A short time ago, technology stocks were the darlings of the investment world, only to see many of their values come crashing down. With investing, it is important to avoid the latest fashions and concentrate on selecting investments that help you meet your financial needs.

Determining your personal investment profile is an important factor in deciding where to put your investment dollars. This, in turn, can directly affect your comfort level with your investments. The recent market volatility has most investors concerned. However, if you are excessively worried about your investments, review your needs and concerns with a trusted professional. Keep in mind your investment requirements can change as you age and as your circumstances change.

Please contact me at (800) 878-4036 if you would like to review your investment portfolio.

If you have any questions about a specific newsletter article, please call us (800) 878-4036 so we can discuss its implications. Additionally, if you have any questions about our services, please let us know.

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