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MAY 2007
U C C E S S
Get the Basics Right
he sheer number of financial
decisions required to manage
our finances can seem overwhelming. But often we spend an
inordinate amount of time on small
stuff — getting the bills paid on
time, reconciling bank accounts, and
calling to have a late charge waived.
While those things need to get done,
how do we judge whether we’re
headed on the right course? There
are six basic financial decisions that
can determine the course of your
financial life:
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1. How you earn a living.
Sure, we all want to enjoy our
work. But within that parameter,
why not choose a job that will pay
more than another? Your income is
going to drive all your other financial decisions, so investigate your
options:
Are you sure you’re being
paid a competitive wage with
competitive benefits? Even if you
aren’t interested in changing jobs
now, pay attention to what is going
on in your field.
Do you have an outside interest or hobby that can be
turned into a paying job? This
could be a good way to supplement
your current salary, or it could turn
into a part-time job or business after
retirement.
Can you get some additional
training to help secure a promotion or qualify for another job?
Read up on what jobs are expected
to experience the highest growth
rates and/or highest salaries over
the next five years. If you don’t
enjoy your current job, you’ll have
even more incentive to implement
these suggestions.
2. How you spend your income.
The amount of money left over
for saving is a direct result of your
lifestyle choices, so learn to live
within your means. To get a grip on
spending, consider these tips:
Analyze your spending for a
month. In which categories
do you spend more than you
expected? Are you wasting money
on impulse purchases? Give serious
thought to your purchasing patterns, trying to find ways to
Continued on page 3
A Happy Retirement
o what makes a retiree happy in retirement? This is an important
question, since you could spend 25 to 30 years in retirement. Knowing what makes retirement pleasurable for other retirees may help you
plan your retirement.
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One study found that approximately 60% of retirees are very satisfied with their retirement, 32% were moderately satisfied, and 8% were
not at all satisfied. Retirees who were most satisfied with their retirement were older, had traditional pension benefits, and chose when to
retire. Working increased retirement satisfaction, although a working
spouse reduced satisfaction, indicating that spouses prefer spending
retirement together. Good health also increased retirement satisfaction.
The most significant determinant of retirement satisfaction was whether
the individual retired voluntarily. Individuals forced to retire were 30%
less likely to be very satisfied with their retirement (Source: What Makes
Retirees Happy?, February 2005). HHH
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Gifting Carefully
ith the high divorce rate in
this country, you might
have concerns about making large gifts to a married child. It’s
one thing to worry about your child
using the money wisely. It’s an
entirely different worry to think your
ex-son- or daughter-in-law might
leave the marriage with your money.
Some ways to ensure the money stays
in the family include:
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Pay for specific expenses.
Rather than making a general
cash gift to your son or daughter,
offer to directly pay for a specific
expense. You might pay for a vacation or private school for your grandchildren. Probably the best option is
to directly pay for medical expenses
or education costs, since those expenditures won’t count toward your
annual tax-free gift limit of $12,000 in
2007 ($24,000 if the gift is split with
your spouse).
Keep the money separate. If
you make cash gifts to your
children, you might stipulate that the
money be kept in a separate account
solely in your child’s name. Typically, those accounts won’t be included
in divorce settlements, so the funds
will stay with your child.
Consider trusts. One way to
keep control of the gifts is to set
up a trust, naming your children as
beneficiaries. However, due to the
costs involved in setting up trusts,
you probably won’t want to use this
strategy unless significant sums of
money are involved.
Encourage your child to sign a
prenuptial agreement. This
agreement specifies how assets
acquired during the marriage, including gifts and inheritances, will be distributed after death or divorce. While
a prospective spouse may not like the
idea of signing a prenuptial agreement, it is probably in his/her best
interest if it encourages you to gift
more generously to your child.
HHH
Using Average Returns
hen setting up an
investment program,
the assumed rate of
return is typically an average
annual return for some historical
period. While that is generally
viewed as a conservative
approach, there are some issues
with this approach:
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Average returns are an average of past returns and do
not indicate what will happen in
the future. Economic and market
events may or may not replicate
past events.
The average annual return
can vary substantially,
depending on the historical period used. For instance, from 1926
to 2005, the Standard & Poor’s 500
(S&P 500) had an average annual
return of 10.4%. From 1986 to
2005 (20 years), the average return
was 11.9% and 9.1% from 1996 to
2005 (10 years).* Those differences in average return would
project a substantially different
ending portfolio value over an
extended time.
The average return does not
reveal the pattern of returns
over that period. Some years will
experience higher returns, while
other years will experience lower
or even negative returns. Even if
you select an average return that
is exactly right, your portfolio’s
ultimate balance will depend on
the pattern of returns over that
period.
Most people don’t just
allow a lump sum to grow,
but make deposits and withdrawals over the years. Since
your actual return fluctuates from
year to year, your pattern of additions and withdrawals can also
significantly impact your portfolio’s ultimate value.
While it is instructive to consider average returns when developing an investment program,
you can’t simply project that
return into the future. Instead,
consider these steps when deciding on an estimated rate of return:
Evaluate your expectations
for future returns against
historical averages. It may be
prudent to assume lower returns
in the future. It is easier to save
less if you obtain higher returns
than to try to save more over a
short time period if your actual
return is lower.
Consider a range of possible returns for your portfolio. What would happen to your
portfolio’s balance if you earned
your expected return, 1% less, 2%
less, etc.? This analysis can help
you determine what adjustments
would need to be made to compensate for lower returns.
Review your progress
every year. This will allow
you to make adjustments along
the way, so that those adjustments
can be gradual. If your return is
lower than expected, you may
need to increase savings or
change investment allocations.
The expected rate of return
used in your investment program
is an important component in
determining how much you
should save to work toward your
goals. If you’d like help evaluating an appropriate expected rate
of return for use in your investment program, please call.
HHH
* Source: Stocks, Bonds, Bills, and
Inflation 2006 Yearbook, Ibbotson
Associates. The S&P 500 is an
unmanaged index generally considered representative of the U.S. stock
market. Investors cannot invest
directly in an index. Past performance is not a guarantee of future
results. Returns are presented for
illustrative purposes only and are
not intended to project the performance of a specific investment.
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Get the Basics
Continued from page 1
reduce spending.
One of your most significant
spending decisions will be
your home. Many people purchase
the largest home they can afford,
often straining their budget. Purchasing a smaller home will reduce
your mortgage payment as well as
other costs associated with owning
a home.
Prepare a budget to guide
your spending. Few people
enjoy setting or sticking to a budget, but inefficient and wasted
expenditures can be major impediments to accomplishing your financial goals. A budget gives you a
road map for spending your
income. Start by setting a budget
for a couple of months, tracking
your expenses closely over that
time. You can then fine-tune your
budget for an annual period.
3. How much you save.
You should be saving a minimum of 10% of your gross income.
But don’t just rely on that rule of
thumb. Calculate how much you
need to meet your financial goals
and how much you should be saving on an annual basis. If you can’t
seem to save that much, go back to
your spending analysis and cut
your spending. First, look for ways
to reduce your spending by lowering the cost of your purchases. Perhaps you can refinance your mort-
gage, find insurance for a lower
premium, or use strategies to
reduce taxes. At some point, however, you may need to cut your discretionary spending, such as entertainment, dining out, clothing, and
travel.
4. How you invest.
The ultimate size of your portfolio is a function of two factors —
how much you save and how
much you earn on those savings.
Even small differences in return
can significantly impact your
investment portfolio. Typically,
investments with potentially higher rates of return have more
volatility than investments with
lower rates of return. While you
don’t want to take on excessive
risk, you also don’t want to leave
all your savings in investments
with little growth potential. Your
portfolio should contain a diversified mix of investment categories,
based on your return expectations,
risk tolerance, and time horizon for
investing.
5. How you manage debt.
Before you take on debt, consider the effect it will have on your
long-term goals. If you are already
having trouble finding money to
save, additional debt will make it
even more difficult to save. To
keep your debt in check, consider
these tips:
Mortgage debt is acceptable,
as long as you can easily
afford the home.
Be careful about taking equity out of your home in the
form of a home-equity loan. You
might want to set up a homeequity line of credit for emergency
use, but make sure it is only used
for emergencies. It may also make
sense to use a home-equity loan to
pay off higher interest rate consumer loans, but don’t run those
balances up again.
Never purchase items on
credit that decrease in value,
such as clothing, vacations, food,
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and entertainment. If you can’t pay
cash, don’t buy them.
If you must incur debt, borrow wisely. Make as large a
down payment as you can. Consider a shorter loan period, even
though your payment will be higher. Since interest rates can vary
widely, compare loan terms with
several lenders. Review all your
debt periodically to see if less
expensive options are available.
6. How you prepare for
financial emergencies.
Making arrangements to handle financial emergencies will help
prevent them from adversely affecting your financial goals. Make sure
to have:
An emergency fund covering
several months of living
expenses. Besides cash, that fund
can include readily accessible
investments or a line of credit.
Insurance to cover catastrophes. At a minimum, review
your coverage for life, medical,
homeowners, auto, disability, and
personal liability.
A power of attorney so someone can step in and take over
your finances if you become incapacitated.
Making the correct choices for
these six basic financial decisions
will help put you on the right
financial course. If you’d like help
with these decisions, please call.
HHH
A Mortgage
and Your
Retirement
Finding Money to Save
veryone knows that they
should be saving at least 10%
of their gross income for
retirement, but that can seem like
an impossible goal after paying all
your bills. However, don’t just figure that you can’t come close to
saving 10% of your income without
looking at the after-tax cost.
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For instance, assume you earn
$50,000 annually and your employer matches 50 cents for every dollar
you contribute to the 401(k) plan,
up to 6% of your pay. So, if you
put 6% of your pay, or $3,000, in the
plan, your employer will match 3%,
or $1,500. Your contribution really
costs less than 6%, because the
money is taken out before income
taxes. If you are in the 25% tax
bracket, your $3,000 contribution
will save $750 in taxes, or 1.5% of
your pay. So, between your contributions and your employer’s
match, you will contribute 9% of
your pay toward retirement, but it
will only cost you 4.5% of your pay.
What if you don’t have a 401(k)
plan at work? Take a look at individual retirement accounts (IRAs).
While you won’t get an employer
match, you can contribute to a
deductible IRA, if eligible, and
contribute pretax dollars, which
reduces your contribution’s cost by
your marginal income tax rate. In
2007, you can contribute a maximum of $4,000 to an IRA, and individuals over age 50 can make an
additional $1,000 catch-up contribution. So, if you are in the 25% tax
bracket and make a $4,000 contribution, you will save $1,000 in
income taxes. Or, you may prefer
to contribute to a Roth IRA. While
you won’t get a current income tax
deduction for your contribution,
you can make qualified distributions free from federal income
taxes.
Don’t just assume that you
don’t have the funds to save for
retirement, without taking a look
at the after-tax cost. Please call if
you’d like help with this analysis.
HHH
Copyright © 2007. This newsletter intends to offer factual and up-to-date information on the
subjects discussed, but should not be regarded as a complete analysis of these subjects. Professional advisers should be consulted before implementing any options presented. No party
assumes liability for any loss or damage resulting from errors or omissions or reliance on or
use of this material.
ill your mortgage be paid off
by the time you retire? If not,
what impact will that have on your
retirement? Approximately 80% of
retirees choose to live in their current home after retirement. If living
in that home includes making a
large mortgage payment, that can
significantly affect the income needed for retirement.
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According to the U.S. Census
Bureau, in 2000, 45% of individuals
in their 60s had a mortgage on their
home, with 20% also having a second mortgage. But that included
individuals at all income levels. Of
individuals at all ages with incomes
between $61,000 and $121,000, 83%
had a first mortgage and 13% had a
second mortgage. Of individuals
with incomes between $121,000 and
$182,000, 82% had a first mortgage
and 51% had a second mortgage.
Mortgage obligations represented
21% of household income for individuals in their 60s and 24% of
income for individuals in their 70s.
If you’d like to discuss this
topic in more detail, please call.
HHH
Financial Thoughts
hen asked how they
viewed retirement, 64%
of respondents to a recent survey indicated that it was an
opportunity for a whole new
chapter in life, 23% indicated it
was a time for rest, 9% indicated it was a continuation of
what life was, and 3% indicated
it was the beginning of the end
(Source: U.S. News & World
Report, June 12, 2006).
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In 2004, for households
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with individuals age 65 and older,
38% of income came from Social
Security, 27% from working, 13%
from assets, 10% from private pensions, 9% from government pensions, and 3% from other sources
(Source: An Update on Private Pensions, August 2006).
Approximately 74% of individuals between the ages of 50 and 59
are very concerned about the cost of
health insurance in retirement
(Source: Kiplinger’s Personal Finance,
November 2006).
In 2005, women in full-time
jobs earned an average of 81% of
what men performing comparable jobs earned. This disparity
varied greatly depending on age.
Women between 25 and 34
earned 89% as much as men,
compared with 75% for women
between 45 and 54 (Source: U.S.
Bureau of Labor Statistics, 2006).
HHH
