An Estate Plan... Who, Me? Meet Your Financial Team 10 Tips for Saving More Pop Quiz: Test Your Financial Savvy! How to Boost a Credit Score
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Smart Money Tips, from Tots to Retirees Insurance 101 What a Widow Must Know Charitable Giving in Good Times and Bad
Life Planning Guide • January 2011 •
question
1
According to actuarial charts, how many years can you expect to live? question
2
At what age is a worker born between 1943 and 1954 eligible for full social security benefits? a. 62 c. 66 b. 64 d. 68
question
3
What percent of a retiree’s income will be spent on healthcare, on average? a. 5 percent b. 10 percent c. 15 percent d. 20 percent
question
question
5
6
How many years, on average, will a U.S. citizen spend in retirement? a. 10 b. 15 c. 20 d. 25
What percent of early baby boomers, age 56 to 62, are expected to run out of money to cover basic retirement living expenses?
question 4: Income taxes go away after a worker retires. True or false?
a. 17 percent b. 23 percent
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c. 42 percent d. 47 percent
question
8
Insurance is a way of: a. saving for a rainy day b. preventing unplanned events c. handling risk d. all of the above
A How Do You Rate? 10 correct: Warren Buffet is your new best friend! 9 correct: Close… but we are not playing horseshoes! 8 or less correct: It’s time to do some homework!
question
10
question 7: True or False: If you die without a will, your surviving spouse will be granted all or most of your assets.
Your credit score is: a. a snapshot of your credit risk b. an objective measurement used by lenders c. available to you on request d. all of the above
You can improve your credit rating by a. correcting inaccurate information as soon as possible b. disputing negative information c. correcting only the worst report d. asking that negative information not be included in your credit report © CTW Features
1. The U.S. Social Security Administration estimates that a man reaching age 65 today can expect to live, on average, until age 83. A woman turning age 65 today can expect to live until age 85. To calculate your expected lifespan, go to: http://www.ssa.gov/planners/lifeexpectancy.htm 2. C: 66 years old 3. D: 20 percent 4. False. Pre-tax money a worker contributed to a retirement plan is subject to income taxes when it’s withdrawn during retirement years. 5. C: 20 years 6. D: 47 percent 7. False. Every U.S. state has unique laws governing who will own the property. To calculate the outcome in your state, go to www.mystatewill.com 8. C: Handling risk 9. D: All of the above 10. A: Correcting inaccurate information as soon as possible © CTW Features
3 • Life Planning Guide • January 2011
Pop Quiz: Test Your Financial Savvy
Procrastination is one of the main ways the average Joe and Jane get in trouble with their finances. Break the bad habit – starting now! Answer these basic questions and see how you rate
Life Planning Guide • January 2011 •
An Estate Plan… Who, Me? You don’t need to live in a fancy house in a gated community to have an estate. Establishing a solid financial plan, with documents that govern what you own and bequeath, is key to moving ahead in life with confidence and security Dawn Klingensmith CTW features
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people tend to delay or avoid estate planning as
though drafting a will might somehow hasten their demise. But thought of another way, estate planning actually prolongs one’s presence among the living. An
estate plan allows for calling shots from the grave. The value of property at the time of its owner’s death is an estate. Estate planning begins by taking inventory of
someone’s assets, including investments, retirement savings, insurance policies, real estate and business interests, and then deciding to whom these assets should go. Individuals also must decide who should handle financial and medical affairs if they are incapacitated and ask if they’ll serve as financial and health care powers of attorney, respectively. It’s smart to work with a qualified lawyer to create the legal documents that govern the process of protecting the estate and passing along assets as planned. Take time to get educated on the basics before choosing a professional and sitting down to work on a plan. A Will The centerpiece of a comprehensive estate plan is a will. The reason a will is important, regardless of net worth,
Get Organized Assemble and store these documents in a bank safe deposit box and/or a fireproof safe to which a trusted individual besides your spouse has access. • Will, trust agreements and letter of instruction • Contact information for advisers including attorney, accountant, financial planner and stockbroker • Powers of attorney (financial, health care) • List of retirement, bank and brokerage accounts with PINs • Investment documents (certificates of deposit, stock certificates, etc.) • Life insurance policies • Health and long-term care insurance policies • Social security and pension information, and military discharge papers (if benefits transfer to survivors) • Marriage certificate • Funeral prearrangements and cemetery plot deed • Real property documents, such as deeds • Titles and extended warranties to cars, boats, travel trailers, etc. • Safe combinations • List of stored or loaned valuables © CTW Features
is so assets go to the right people, says Alexandra Armstrong, certified financial planner with the Washington, D.C.-based investment advisory firm Armstrong, Fleming & Moore. Die without one, and in most cases each state applies its standard formula to decide who gets what, without regard to wishes or the needs of heirs. For example, in the absence of a will in the District of Columbia, only onethird of the deceased’s assets not jointly held will go to a surviving spouse; two-thirds goes to the children. In most places, when a single dies without a will, his or her parents inherit all assets or, if Mom and Pop are dead, the siblings inherit in equal measure. That means the brother who won the lotto gets the same amount as the brother who went into social work
and the estranged sister with a gambling addiction. A will is also the best place to name guardians of children. Standard forms are available for the simplest of situations. “But most people should consult an estate-planning lawyer” for will preparation, Armstrong advises. Leave a copy of the will with a lawyer, and keep a copy. A Letter of Instruction A letter of instruction to survivors includes bequests not specified in the will, including sentimentally valuable possessions like Grandma’s china and the oil painting over the mantel. Here’s where to communicate to family members the type of memorial service wanted, including “in lieu of flowers” specifications and wishes to
A Living Will A living will or advance medical directive spells out wishes regarding life support or medical intervention and care. For someone in a coma who does not want to be kept alive on life support, a living will spells that out. A health care proxy names a person to carry out those wishes. A lawyer can create this document. Keep signed, witnessed copies at home; give signed copy to those
entrusted to make decisions. Because of strict privacy rules that govern doctors and hospitals set forth by the Health Insurance Portability and Accountability Act, a HIPAA waiver also should be considered. This lets people name individuals with whom health care providers can discuss condition and care. Unlike a power of attorney, folks named in the waiver are not entitled to make medical decisions on someone else’s behalf. Power of Attorney A durable power of attorney names a person to act on an individual’s behalf in all finan-
cial matters: investing money, signing checks, selling real estate. Keep a signed copy at home and give a copy to the person designated. A Trust In some cases, individuals decide to create a trust, which puts conditions on how and when assets will be distributed. Trusts are designed to achieve different goals. Often, they allow the wealthier among us to reduce estate taxes. They can also be used to hold money for underage children; provide care for disabled children; or equalize inheritances. A financial adviser can help determine
whether it makes sense to set up a trust, Armstrong says. Keep in mind that retirement accounts such as IRA and 401k plans, have designated beneficiaries apart from what it says in someone’s will, Armstrong says. So it’s important to review and amend these accounts periodically – along with a will, pension plans and life insurance policies – especially if marital status changes. A rainy day fund of three to six months’ expenses is also a key component of an estate plan. “Settling an estate doesn’t happen overnight,� Armstrong says, “and meanwhile a surviving spouse
needs something to live on, a cash reserve to carry them through.� A final and crucial step in estate planning is assembling pertinent documents (see sidebar) and making sure a survivor is aware of and has access to them. “You’d be surprised by the number of life insurance policies that are issued but never paid because the survivors don’t even know they exist,� says Wayne Copelin, founder and president, Copelin Financial Advisors, Sugar Land, Texas. He recommends keeping original documents in a bank safe deposit box and a set of copies at home. It’s impor-
tant to designate a signatory who is authorized to unlock the box in the event we die; otherwise, a court order must be obtained, he adds. Š CTW Features
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be cremated or buried. Individuals might even write down key points for their obituary in case loved ones omit one of our prouder accomplishments.
Life Planning Guide • January 2011 •
Meet Your Financial Team It takes a team to make financial goals a reality. Here is the roster of folks you want to have working for you Taniesha Robinson CTW features
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personal finance can be a source of stress, which is why a lot of folks like to rely on a professional when it comes to crunching numbers. Whether the goal is to dig out of debt or to get ahead on retirement savings – and stay there – turn to someone trained and qualified to offer professional guidance in matters of saving, investing
? Questions to Ask a Financial Planner There’s no substitute for a face-to-face chat to decide if a professional financial planner is right for you. Among the questions you should ask:
and planning to get on the road to financial balance. Read on to learn more about the pros to recruit for a top-notch personal finance team. Financial Planner/Adviser Financial planners help clients invest and increase capital at an acceptable level of risk. “I look at my role as being the quarterback of the financial team, bringing all the other financially related people who a client interacts with togeth-
er,” says Paul Winter, president of Five Seasons Financial Planning in Salt Lake City. To do this, planners attempt to obtain a comprehensive look at clients’ entire financial situation – bank accounts, brokerage accounts, retirement accounts and other investments. Winter refers to himself as “a conduit of information” and formulates plans for his clients based on the information he collects regarding the client’s assets and goals. Interview a few planners before
• What is your area of expertise? • What is your educational background? • What financial planning credentials have you earned? • What further education in financial planning do you plan to pursue? • Are you a member of any professional financial planning association? • How long have you been offering financial planning services? • Will you provide references? • Have you ever been cited by a professional or regulatory governing body for disciplinary reasons? • In the last year, how many clients have stopped using your services? Why? • Do you do the work or will I be turned over to another employee in your firm? • How are fees calculated? • What is your approach to saving and investing?
committing to one, and be sure to find out if the planner’s services are commission-based or fee-based. Stock Broker A broker isn’t just the person
• Will you provide an individualized financial plan? Can I look at a recent example of a plan prepared for someone in similar financial circumstances? • What kinds of communications can I expect from you on an ongoing basis (account statements, newsletters, etc.)? • How often will you review my portfolio? • How are you compensated for the services you provide? • On average, how much can I expect to pay for your service? • What do I receive in return for that fee? • What, if anything, do you expect of me during our relationship? Source: www.ChoosetoSave.org © CTW Features
that carries out desired investment transactions. According to the Financial Industry Regulatory Authority, a broker’s role is legally defined as a person or company that buys and sells stocks, bonds, mutual funds and other securities on behalf of customers and/or for its own account. Brokerage firms fall into two categories: discount and full-service. Transaction services from discount brokers are usually cheaper but come with little advice. For investment counsel, investors can employ a full-service broker. To learn more about how to find a qualified broker go to www. finra.org and click on “Investors.” Use the FINRA BrokerCheck tool to track down background information on brokers. Insurance Agent Licensed insurance agents are essentially salespeople who provide clients with life, health or property insurance
policies. FINRA outlines two categories for agents: an independent insurance agent who may represent multiple companies to find the best coverage for an individual client; and a “captive” agent who only recommends policies from one company. Agents are licensed by the state. Find financial and disciplinary information on insurance companies nationwide on the National Association of Insurance Commissioners website, www.naic.org. Certified Public Accountant Those who are self-employed or simply have complex tax situations should consider employing the expertise of a CPA. CPAs undergo rigorous certification and licensing procedures in most states. As a result, they can handle the nuances of self-employment and can also provide some financial planning advice. Their services can be expen-
Estate Lawyer Shockingly, simply signing away worldly possessions on a cocktail napkin doesn’t pass muster for a will. That’s where a lawyer schooled in estate planning comes in. This specialized attorney will draft proper wills, living wills and trusts, which dictate how property and assets will be distributed upon death or in the event one becomes incapacitated. The more complex familial circumstances are – multiple marriages or children, for example – the more critical it is to have plans in place.
Personal Banker The friendly faces at the bank are not just there to transact deposits and withdrawals all day. Personal bankers can review accounts to determine eligibility for a higher-yielding account and if there are new credit or debit cards available that offer better rates or rewards. They will also field questions regarding mortgages or car loans and can put individuals in touch with the appropriate loan officer. At-Work Human Resources Professional Lyons Cole says that HR managers are some of the most underutilized financial resources. They know the details about the company’s
insurance policies and 401(k) or other retirement programs sponsored by the company. “That’s really their job, to provide for their employee in many financial spheres so employees can go to work, be productive and not have to worry about benefits,” Winter says. © CTW Features
7 • Life Planning Guide • January 2011
sive. A cheaper option may be an enrolled agent, says Lauren Lyons Cole, financial planner in residence at LearnVest.com, a personal finance website.
Life Planning Guide â&#x20AC;˘ January 2011 â&#x20AC;˘
Retirement Living: Should We Stay or Should We Go? As they near retirement, itâ&#x20AC;&#x2122;s the question all boomers are asking Barbara Ballinger CTWâ&#x20AC;&#x2C6;features
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as more baby boomers reach their 60s and start to ponder retirement, many begin to debate where they should spend their golden years.
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Stay Close to Home Because relationships are so important to this generation, many choose to stay within the same community, Orsborn says. In fact, most of those who move into Dublin, Ohio-based Epcon Communities’ various boomergeared developments come from a 7-to-10-mile radius, says Nanette Overly, vice president of sales and marketing. But if they stay put in their own home, many opt to redecorate or remodel so it’s more convenient for their empty-nest years. Others downsize to a smaller home or condo to cut expenses and upkeep. And still others upgrade to have more room for kids and grandkids. Find a More Appealing Locale All sorts of reason spur
boomers to move – from wanting to be closer to children, live in a different climate, find a state with lower costs of living and estate taxes, or to simply have a new adventure in a new community. They also look for a variety of housing stock, from single-family homes to condos and retirement villages. With so many options, it’s not surprising that the easiest solution for many is to stay put. Nevertheless, the visibility and affluence of this generation has given rise to experts from different disciplines who have lots of advice to share on how boomers – and anyone debating what to do – can be better prepared. Here are nine questions experts suggest boomers ask themselves to make the smartest, happiest move: 1. What are your goals? Before you focus on the type of house you seek, think about your big-picture goal, whether it’s to be closer to your children and grandchildren or even farther away, says Marion Somers, the nationally recognized geriatric care manager and author of “Elder Care Made Easier” (Addicus Books, 2006). 2. Are you up for the upheaval? Redecorating, remodeling and moving all require time, money and patience, and typically add to stress levels. “Ask yourself whether you have the stomach to go through a remodeling or move,” suggests Laura Meyer, co-author of “Remodel This!” (Perigee, 2007). Some older homeowners tolerate stress better since they’re not dealing with young children.
Retirement Communities Banish the phrase “old folks home” from your vocabulary. Retirement living options have never been more varied. Among them: Age-Restricted Communities Great for people interested in living amongst their peers, these communities have a mix of housing types and feature amenities like tennis courts and golf courses. College Town Retirement Communities Ideal for anyone seeking a more youthful environment, these communities include varying forms of independent off-campus housing while providing access to university facilities and programs Assisted living These residences provide apartment-style living and offer personal care and support services with basic daily activities ranging anywhere from bathing and dressing assistance to medication management. Communities also include meals, housekeeping, activities, transportation and varying levels of security.
3. Are you ready to cut the umbilical cord? People become attached to their homes, Meyer says. “Are you really ready to leave?” she asks. 4. Will you continue to have a good support system where you are or where you go? It may be your children or a good network of friends, but you need to know that you have people you can rely on, says Ann A. Fishman, president of Generational-Targeted Marketing Corp., New York. Even if you move to be closer to children, realize they may not always stay there. 5. Will you be with like-minded folks? Boomers are social and like to
be surrounded by a people of varied ages, says Fishman. One solution for some boomers is to share a condo or house. Smart development companies are building communities targeted at homeowners with like-minded interests, Overly says. 6. What type of house and community makes the most sense? Boomers need to carefully weigh their housing choice and what level of services they want, based on realistic factors such as health and not just pipe dreams, Somers says. They also need to be sure their setting offers the right amenities. For those not sure, Somers has them answer questions, talk about possibilities, and put down responses on paper.
Co-housing In co-housing communities, residents actively participate in the design and operation of the neighborhood. Each home is privately owned and decisions are made cooperatively. Residents often share the cost of health aides or an on-site healthcare provider. Naturally occurring communities NORCs are a response to retirees who want to remain in their homes for as long as possible. Essential services are pooled so that maintenance, transportation, eldercare, shopping and other basics are readily available to the community’s seniors. Sustainable communities For seniors who want to live green into their old age, these communities promote conscious living practices in every aspect from the neighborhood building materials to waste disposal. © CTW Features
—Danielle Cadet, CTW Features Sources: Co-Housing Association of the United States; Campus Continuum; NORC; Ecovillage Network of the Americas
7. When is your decision going to be made? Somers has clients determine a timetable rather than put it off indefinitely. 8. Can you afford your decision? Too many boomers don’t know how much money they need to age, Fishman says. They need to take into account state and estate taxes and the cost of daily living, including housing, health care and entertainment costs, she says. You also have to take into account any possible income changes. 9. Have you tried out your decision? It’s hard to test-drive a decision without owning a home, but The North Carolina Cen-
ter for Creative Retirement, part of the University of North Carolina at Asheville, offers seminars and a Creative Retirement Exploration Weekend program. Many communities may offer similar programs. © CTW Features
9 • Life Planning Guide • January 2011
seem to be communities close to home with residents who vary in age – where boomers can continue to feel young and maintain friendships – and downtown urban centers, where they can make do with less space and fewer cars, all while staying close to hospitals, a host of restaurants, shops and cultural events. Ann Fry, a life coach and speaker who focuses on reinvention, is a prime example of this trend. When she hit 60, she relocated to New York from Austin, Texas. Fry decided to rent initially, explaining “I love it, being able to call the super and say, ‘Fix this’.” Boomers contemplating retirement choose one of two main paths: find a location close to home, or move to a new location that’s closer to family or that offers longed-for social, cultural or natural amenities.
Life Planning Guide • January 2011 • 1
Credit Check For better or worse, there’s a number associated with your name. Make sure your credit score is all it can be Dawn Klingensmith CTW features
now more than ever, it pays to have an excellent credit score. The best interest rates on auto loans go to folks with scores of 730 and above. And 60 percent of
employers pull credit reports for some or all of their prospective hires, according to the survey by the Society of Human Resource Management. The rationale: people with a pattern of mismanaging their own finances exhibit poor judgment, an indication that they may lack the
maturity and sense of responsibility it takes to be a trusted employee. Don’t let a low number hold you back in life. It can take months or even years to boost a low score, but there are steps you can take to gain a few points and perhaps qualify for a lower interest rate.
Get your credit history for free from annualcreditreport.com – the only authorized source for the free credit report that’s yours by law. The report does not include your credit score, which costs a few dollars to obtain. What you’re looking for is negative information that could be lowering your score. Correct any errors or inaccuracies, such as accounts that aren’t yours or old information that should no longer have any bearing on your score. Under the Fair Credit Reporting Act, credit bureaus must investigate any disputed items and remove them from your credit report if they cannot be verified. Though there is no quick fix for poor credit, paying down credit card balances can boost your score, says Gail Cunningham, vice president of public relations, National Foundation for Credit Counseling. A history of late payments will hurt you, but you can start to mend your credit by paying every bill on time from now on. “Time is your best friend. Treat your debt obligations responsibly and your score will start to reflect that,” Cunningham says. Although closing unused accounts may seem like a good idea, “That’s shooting yourself in the foot,” Cunningham says. The amount of your total debt relative to your total available credit has a significant impact on your score. Ten thousand dollars in credit card debt looks better if your line of credit is $100,000 vs. $15,000, she says, because you’re not as close to maxing out your
accounts. The length of your credit history also affects your score, so don’t close your oldest accounts. Use those cards occasionally to keep the accounts active and avoid cancellation. Borrowers should pay off any overdue bills or old debts they forgot about, and pay down high credit card balances to improve their credit utilization ratio (how much of their available credit line they owe.) Credit card balances in
“It’s critical that you have your ducks in a row so you can do your shopping within that time frame,” Cunningham says. If you end up shopping over a longer period, bring a printout of your credit report and see what dealerships have to say before they check your credit, since each inquiry can decrease your score by five points, says financial planner Joel J. Ohman, founder of CreditCardChaser.com, a credit card comparison
Mind Your Finances Take this award-winning online e-learning series at your own pace, and put yourself on the road to financial wisdom: understanding credit reports, credit terms and definitions, appropriate levels of debt, creating spending plans, goal setting and other core financial skills. The interactive sessions from InCharge Education Foundation, a non-profit organization dedicated to supporting the personal financial literacy, include quizzes, interactive games and a certificate of completion. http://elearning.mindyourfinances.com/
excess of 50 percent of their limits will raise eyebrows, while 30 percent or lower is seen as responsible, says Cunningham. Credit bureaus generally don’t like to see too many inquiries about your credit history because it suggests you are desperate for money. However, the bureaus realize that if you’re shopping around for a major purchase, such as car, you may go to several dealerships in search of the best deal. Each of those places will check your credit to determine the interest rate for which you are qualified. Multiple credit checks from dealerships will be reported as a single inquiry provided the inquiries all occur within a 14-day period.
site that promotes responsible credit management. Only time and discipline can mend a damaged credit record. “Don’t fall for credit doctoring or credit repair services. Start treating your debt obligations responsibly, and over time, your credit report will improve,” Cunningham says. © CTW Features
11 â&#x20AC;˘ Life Planning Guide â&#x20AC;˘ January 2011
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Life Planning Guide • January 2011 • 12
10 Tips to Jump-Start Your Savings Last we checked there was no bailout money for regular folks. Are you saving enough? Dawn Klingensmith
TIP No.
2
CTW features
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rule of thumb: Everyone should have six months’ worth of living expenses tucked away in savings. Reality: Few folks do, and the proverbial “rainy day” looms. Remedy: Start setting aside money today. Here are 10 ways to save before you get soaked. TIP No.
1
Set a budget and stick to it. “Budgeting is the No. 1 surefire way to save money,” says Ethan Ewing, president of Bills.com, San Mateo, Calif. Set specific goals, such as lowering grocery bills, and budget accordingly.
Carry cash. People who count out bills instead of paying with debit or credit tend to spend less and make fewer unplanned purchases.
TIP No.
3
Optimize your cell phone plan. “I like Billshrink.com, where you can find better credit cards and cell phone plans to suit your individual needs,” says Ramit Sethi, author and founder of iwillteachyoutoberich.com, San Francisco.
Start Early, Save More The longer money is invested, the more time it has to grow, thanks to compound interest. See how a conservative four percent annual rate of return can make a small stash grow big over time: steps to fix any errors you may find. © CTW Features
TIP No.
4
Buy a la carte. This seems counterintuitive, but it may be cheaper to cancel subscriptions and memberships and pay as you go instead. In a study of three fitness clubs, “Two researchers from Stanford and Berkeley showed that people overestimate how much they’ll use their gym membership by over 70 percent,” Sethi says. Members who chose a monthly fee of around $70 attended an average of 4.3 times per month. That comes out to more than $17 per visit, whereas a day pass only cost $10. Likewise, downloading your favorite TV shows off the Internet for a per-episode fee might be cheaper than cable.
TIP No.
5
TIP No.
6
TIP No.
Redeem reward points. If your credit card offers them, check your statement to see how many you have and then go to the rewards website to find out if it’s possible to convert them into cash or gift cards. Some credit cards double the value of rewards at specific retailers, Ewing says.
Ferret out special offers. “Any time you make a purchase from a major retailer – a new computer, flowers, furniture – check out your credit card and car insurance websites for deals,” Sethi says. “My credit card gives me discounts of up to 30 percent off for things I’m going to purchase anyway.”
Negotiate car insurance. Once a year, compare different providers’ rates. Even if you stay with the same company, you likely can save money by adjusting your deductible; unloading unnecessary services (such as roadside assistance if you’re an AAA member); or asking about repeat-customer,
Saved $2,000 per year Kept money in account until age 65
amount invested $0
$20K
$40K
$60K
$80K
7
interest earned $100K
$120K $140K
$160K
$107,209
From age 20 through age 30 From age 20 to age 65
$251,578 $152,288
From age 30 to age 65 $85,688
From age 40 to age 65 From age 50 to age 65
final total
$180K $200K $220K $240K $260K
$41,015
Source: American Savings Education Council; Employee Benefit Research Institute
TIP No.
8
Sell stuff. Auction off unneeded items on eBay or hold a yard sale. Sock away windfalls.
TIP No.
10 Eliminate temptation: unsubscribe. Many retailers send special offers via e-mail. If you’re the sort of shopper easily tempted to overspend on an impulse, click on the “unsubscribe” link at the bottom of such e-mails to stop receiving them. © CTW Features
TIP No.
9
When you receive extra cash – such as a tax return, bonus, birthday gift or proceeds from your yard sale – save it rather than indulging in a splurge.
In Over Your Head? Financial journalist Catey Hill, selfdescribed shoe addict and money editor of NYDailyNews.com, says an overspending habit is hard to admit to and even harder to curb, but imperative
nonetheless. “Until you control how much you spend, you’re never going to have enough money,” she says. When Hill realized her irresponsible spending habits, she started a “cash-only diet” and wrapped a piece of paper around her credit card that read, “Do I need this?” Here are signs you may be in need of your own spending diet from her new book, “Shoo, Jimmy Choo!” (Sterling, 2010). • You have no concrete plan for a secure financial future. • You have significant debt and no solid plan to get out of it. • Less than 13 percent of your income goes to your retirement savings (or worse, you haven’t even thought of saving for retirement). • You have only a small in-case-ofemergency fund, or none at all.
• You pay only the minimum, or a little extra, toward your credit card every month. • You don’t understand the difference between a Roth IRA, a traditional IRA and a 401(k)... • ... Nor do you know the best ways to invest in these retirement plans. • You get a huge income tax refund each year. • You don’t have the insurance you need. • You don’t have a clue about where your money goes each month (but it sure goes somewhere). © CTW Features
Source: “Shoo, Jimmy Choo: The Modern Girl’s Guide to Spending Less and Saving More,” by Catey Hill (Sterling, 2010)
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13 • Life Planning Guide • January 2011
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Life Planning Guide • January 2011 • 14
Insurance for Beginners Genuine financial security often includes a few safety nets. Here’s an intro to insurance options to get on the road to feeling secure Marilyn Kennedy Melia CTW features
it doesn’t matter if every penny is pinched. A calamity can arrive unannounced and wipe
out any family’s financial security. The only way to ensure protection is to start paying attention to the invisible risks that could lie ahead. It’s not easy, though, to get a focus on the insur-
ance protection a family really needs – and can afford. Here, experts share tips for those who want to guard their financial security – without wasting a penny:
Life Insurance Even the financially unsophisticated have heard about life insurance, an insurance policy that pays a sum to a spouse, or provides for children or other dependents should one suddenly pass away. In fact, that’s the central reason to buy life insurance: to replace the income dependents would need, says James Hunt, a former Vermont insurance commissioner who now analyzes life policies for the Consumer Federation of America. “Term” life policies are the least expensive, which is why it’s often the choice of young adults who have responsibilities, such as
kids and a mortgage, but not a lot of extra cash, Hunt says. The premiums for term life insurance only pay out should you die during the specified period. “Permanent” life insurance pegs a portion of each premium payment as savings, which the insured can borrow against – or in some instances, withdraw from – to pay for certain expenses, explains Catherine Theroux, a spokeswoman for LIMRA, an insurance research group. Permanent insurance comes in two main types: whole and universal. Premiums for whole life policies tend to stay level, while premiums for universal policies allow you to
elect to pay certain minimums, with a lesser investment build-up over time. Your Action Plan Contact agents in your area to investigate possible prices and coverage plans. Check with current car or homeowner’s insurance companies to see if they provide life policies as well. Speak to your employer’s human resources department about potential life policies available as part of its group benefits. Disability Income Insurance Death is certain. But none of us know whether an accident or serious illness will prevent us from work-
put a drain on life savings. Fortunately, as long-term care needs become more prevalent, insurers are offering more ways to insure against the cost. For instance, many states now participate in a “Partnership for LongTerm Care” program – a cooperative program between state governments and insurers that “is one of the best-kept secrets,” says Jesse Slome, executive director of the American Association for Long-Term Care Insurance. The partnership programs allow more affordable long-term care insurance and provide special asset protection. Private insurance agents sell the partnership plan and traditional long-term care plans. The cost of long-term care plans varies, depending on the amount of coverage and whether home, assisted-living and nursing care are included.
Your Action Plan Talk to your employer’s human resources department about what disability policies are available as part of the group benefits. Your state’s insurance department will have names of agencies and companies offering policies in your state; find them at www2.iii.org/ stateorganizations/. Visit the Social Security website at www.ssa.gov/disability/ to learn more about disability programs.
Your Action Plan To find out if your state has a LTC partnership, visit http://www.aaltci. org/long-term-care-insurance/.
Long-Term Care Insurance In our aging society, nearly everyone knows someone who needs years of nursing care, which can quickly
Blending Health Insurance and Savings Paying for health insurance and saving are two of the biggest financial challenges families face. If you purchase a highdeductible health insurance plan – either on your own or through your employer – you may qualify for a health savings account, paying less for premiums and building savings. Your employer’s benefit
manager or a health insurance provider can help with details, but briefly, because deductibles are high – for 2010 and 2011 it’s at least $2,400 for families – monthly premiums are lower. An employee can contribute to a taxadvantaged savings account and tap it to pay the deductible when needed, or keep on saving, perhaps for retirement health expenses, explains Roy Ramthun, a fellow at the Council for Affordable Health Insurance.
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Your Action Plan Review your health insurance plan and/or speak with your employer’s benefits manager to see if health savings accounts are available as part of your plan. © CTW Features
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15 • Life Planning Guide • January 2011
ing for a prolonged period. According to the Insurance Information Institute, 43 percent of workers between ages 40 and 65 will suffer a disability that causes an earnings disruption of at least 90 days. The Social Security system has a disability benefit program, and many lower income workers depend on this, Hunt says. Some employers also offer disability coverage as part of their group benefits. For those who are high earners but do not have an employer-based disability plan, neglecting to purchase private disability coverage could mean a dramatic change in lifestyle should they be injured or unable to work and their paychecks stop, says Jeffrey Shaw, executive director of the Life Insurers Council. Purchasing a plan on your own is similar to buying term life; there are various coverage levels and prices.
Life Planning Guide • January 2011 • 1
The Gift that Keeps on Giving At a time when so many need so much, here’s how to determine a charitable giving plan that makes sense Danielle Cadet CTW features
istockphoto.com
in tough economic times, when people are more conscious of where every dollar goes, charitable giving can easily fall off the “to do” list. But there are benefits – for the giver and the charity – to sustained, consistent donations to a worthy cause, especially when there are funds on hand that will likely outlive the owners. “The reality is, it’s all going to go away. There’s no U-Haul in the back of a hearse,” says Brian Kluth, a Colorado Springs, Colo.based pastor and financial author who wrote and published “You Are Invited on a 40 Day Spiritual Journey to a More Generous Life,” a 2006 Biblebased guide to inspire generosity and increase giving to local churches. Developing a charitable giving plan can be a small or large part of financial planning, ranging from a one-time gift to a large donation outlined in a will. Regardless of the size of a bequest, the choice to give requires time and thought. Even for small gifts, Kluth recommends that donors choose a charity carefully, and make sure it lines up with his or her val-
ues. “Givers should focus on their passions, and what’s made a difference in their own lives. It will make giving that much more significant,” he says. Finding the right charity can be as simple as choosing an organization the giver is already familiar with or doing some research to find a perfect match. Guidestar.com provides information about non-profit organizations ranging from the company’s mission and goals to financial details on staff salaries and fiscal operations. CharityNavigator. org uses a numbers-based rating system to assess the financial health of more than 5,000 charities. Kluth says these sites offer to track the percentage of income a giver donates annually. “Sometimes people get into giving ruts and keep giving the same amounts even though their incomes continue to rise. Usually only systematic givers continue to grow their giving as their incomes go up,” he says. Some charities offer gift annuity plans that provide income and tax savings to givers who make substantial donations. There are two types of plans that provide the giver with revenue: a charitable gift annuity and a charitable
remainder trust, says Greg Ring, founder of Fulcrum Philanthropy Systems, a Colorado Springs, Colo.based advisor to non-profits. In a charitable gift annuity, an individual transfers cash or property to the organization in exchange for the charity’s promise to make fixed lifetime payments. In a charitable remainder trust, the grantor turns over property or money to a charity but continues to use the property and receive income from it while living. The grantor’s beneficiaries receive the income and the charity receives the principal after a specified period of time. The grantor avoids capital gains tax on the donated assets and also gets an income tax deduction for the fair market value of the remainder interest that the trust earned. In addition, the asset is removed from the estate, reducing subsequent estate taxes. While the contribution is irrevocable, the grantor
? Ask Before Giving
may have some control over the way the assets are invested, and may even switch from one charity to another. With charitable annuities, individuals can donate to a cause while avoiding taxes on their income at the time of their death or the deaths of their loved ones. “At a simplistic level, people can take the money that was going to go to the government and instead give it to charity,” Ring says. Annuity gifts don’t have to be cash. Securities and assets, which typically constitute a larger percentage of net worth, can also be transferred. “In a tough economic time when people are watching their budgets and salaries are going down, other folks may find they can do much more if they give assets rather than cash,” Ring says. This option is ideal for a donor with any range of income.
No matter what the financial climate, donating money to charity is always relevant. Developing a charitable giving plan that
Money magazine offers these tips for best initial questions to ask a charity (answers in parentheses) to evaluate its worthiness: • Does the IRS recognize you as a charity? (Yes) • How long have you been around? (Five years or more)
makes sense and reinforces individual values can be beneficial to the giver and the world at large. © CTW Features
• What percentage of my donation will go to charitable works? (75 percent or more) • Do you have a year's worth of working capital? (Yes) • Are you slashing services this year? (No) © CTW Features
17 • Life Planning Guide • January 2011
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Life Planning Guide • January 2011 • 1
When Home Alone Isn’t Enough Families face difficult choices when one or both of their parents can no longer live on their own Jim Gorzelany CTW features
istockphoto.com
one of the toughest decisions many of us will face in our lifetimes is what to do when an aging parent can no longer live independently. Just ask Theresa Duff of Joliet, Ill. Her mother, Rita, already losing her eyesight from macular degeneration, was further hobbled by a broken shoulder and two shattered wrists due to a fall. “It was painful to see mom, who had raised a house full of kids, nursed her husband after his stroke and remained active into her 80s, suddenly become so frail,” Duff says. As the population ages, the number of adults who need long-term care rises. About nine million senior citizens will need some form of long-term care this year, according to the U.S. Department of Health and Human Services. While the department says family members and friends are the sole caregivers for 70 percent of the
elderly, this may not always be possible or practical. “Mom wasn’t ready for a nursing home just yet, but none of the family members still living in the area had homes that could accommodate her limited mobility,” Duff says. “We had to weigh our choices carefully to address her needs, wishes and dignity.”
Take Care People age 60 and up are twice as likely to be t h e v i c t i m s o f f r a u d a n d f i n a n c i a l s c a m s . To register a telephone number on the federal g o v e r n m e n t ’s n a t i o n a l D o N o t C a l l R e g i s t r y c a l l (888) 382-1222 or go online at www.donotcall.gov.
If a family member feels a parent who’s living on his or her own is on the decline and needs custodial assistance, he or she should consult with a medical professional. Either way it’s essential to determine what level of care is needed. This can run from simple help with housekeeping and shopping to more acute levels of care such as health monitoring and physical, speech or occupational therapy. Ultimately, this becomes a decision based as much on a family’s financial resources as it is on an aging parent’s needs. That’s because neither
grams will generally pay for basic nursing home services, but only after an individual’s personal assets are exhausted and he or she has no other means to cover the cost. All nursing homes that participate in Medicare or Medicaid are subject to annual inspections. In addition to personal vetting of any facilities under consideration, it’s a good idea to compare these inspection records by consulting the “Nursing Home Compare” resource at www. medicare.gov. So how did the Duff family finally decide to care for their mom, Rita? “We wrestled with our options and though the family would have preferred that she live out her final years at home, we finally settled on moving her to an assisted living center,” Duff says. “We didn’t have to worry about caregivers not showing up or being inattentive to mom’s needs, and it afforded her some independence and socialization without her having to be cooped up alone at home.” © CTW Features
Long-Term Care Resources • For help in identifying elder care services and facilities in the community, contact the state or city’s elder care agency. Find the contact information online at www.eldercare.gov or by calling (800) 677-1116. • Locate a local home health care agency at the National Association for Home Care’s website, www.nahc.org. Click on “Consumer Information.” • For information on assisted living homes, consult the Assisted Living Federation of America at www.alfa.org. • Check local home healthcare agency and nursing home accreditation via the Joint Commission on the Accreditation of Healthcare Organizations at www.jointcommission.org. • Research inspection records of nursing homes at www.medicare.gov. Click on “Resource Locator.”
© CTW Features
19 • Life Planning Guide • January 2011
Medicare nor most supplemental health insurance policies pay for long-term care costs. For many, in-home health care can be a desirable and reasonably affordable option. Those who require only modest assistance may have their needs served by a parttime caregiver. Those requiring additional help may require 24-hour live-in assistance. Aside from the cost, family members have to consider the effort involved in hiring a caregiver and following up regularly to ensure that proper care is being given. Another approach is to use the services of a licensed home health care agency, which is a necessity if an individual requires skilled nursing care or physical therapy services. The National Association for Home Care & Hospice maintains a national database of such agencies with tips on how to choose and deal with one on an ongoing basis at www.nahc. org. If living at home proves to be particularly difficult because of stairs or other hazards, placing an elderly parent in an assisted living facility may be best. Residents often live in separate apartments, enjoy communal meals and participate in planned activities. Costs usually depends on the size of the living area, services required and where the facility is located, adding up to several thousand dollars a month. For those who require constant care, a nursing home may be the only option, albeit a costly one. Medicare pays for skilled nursing facility care for a limited period following a hospital stay for rehabilitative purposes, but not for ongoing care. State Medicaid pro-
Life Planning Guide • January 2011 • 2
Financial Planning Timeline Taniesha Robinson CTW features
istockphoto.com
good financial habits start early. The very best last well into old age. For those somewhere in the middle and still trying to figure it all out, there’s help. No matter what stage of life, a person can always take steps to improve his or her finances, says Julie Jason, president of the Jackson, Grant Investment Advisors, Stamford, Conn. Here are tips on what family members need to think about and plan for at all stages of life, from childhood to retirement.
children
If little ones start to learn the basics of money management as they grow, perhaps they can avoid the debt and exuberant spending habits that plague many adults. It’s important to teach children that every dollar they receive is not a dollar they can spend, says Manisha Thakor, personal finance expert for women and author of “Get Financially Naked,” (Adams Media, 2009). Kids should learn to divide allowances into three buckets: one for savings, one for charity and one for spending. Thakor recommends parents help children allocate 10 percent for savings, 10 percent for charity and 80 percent for spending.
tip Help kids learn to save: Fiddle with the online allowance calculator at www. threejars.com to come up with a weekly sum that’s reasonable, based on the age of the child and the parent’s own experience.
How to think smarter and plan better in money matters at all stages of life, from tots to retirees teens
As kids approach their teenage years, they can start to grasp the truth in the old adage “money doesn’t grow on trees.” Thakor tells teens to think about how many hours they would have to work to earn enough to buy an item they want. This way, they begin to understand how much labor really goes into an iPod or Xbox purchase. Encourage a teen to find a part-time job, and share your views on money matters and what you’ve learned about saving and spending.
tip Required reading: Jean Chatzky, award-winning financial journalist, wrote “Not Your Parents’ Money Book: Making, Saving and Spending Your Own Money,” (Simon & Schuster, 2010) to help start teens on a path to financial success.
college students
The average college-age credit card holder carries a balance of more than $3,000, according to Sallie Mae. Fortunately for frisky, young credit users, credit card reform measures that started rolling out in 2010 make it more difficult to overload on credit and debt, requiring anyone under age 21 to show proof of income or get parents to co-sign in order to get a credit card. College students shouldn’t avoid credit cards completely, however. A student should get one credit card in his or her name; monitor his credit record at the three major agencies; and pay off the bill every month. Used responsibly, a credit card can help young adults build a strong credit profile.
newlyweds
A new couple’s main financial goal should be to build a solid foundation that includes an emergency fund to cover three to six months of living expenses, Thakor says. However, this should happen only after each partner pays down any debts they may have accumulated before marriage. Thakor urges newlyweds to conduct financial check-ins on all assets at least semiannually. Couples should save 20 percent of their income, Thakor says.
tip Investment smarts: If your employer offers a tax sheltered savings plan, such as a 401(k), sign up and contribute all you can. Your taxes will be lower, your company may kick in more, and automatic deductions make it easy.
Once the storks start dropping baby bundles at the doorstep, it’s time to think about life insurance. Whole life insurance is expensive and unnecessary in Thakor’s opinion. She suggests acquiring term life insurance instead, which provides coverage for a set time period – usually five to 30 years – at a fixed rate. Keep retirement saving in mind, despite the focus on children. You can put $5,000 a year into an Individual Retirement Account (IRA) and delay paying taxes on investment earnings until retirement age. If you don’t have a retirement plan (or are in a plan and earn less than a certain amount), you can also take a tax deduction for your IRA contributions.
tip College planning: The College Savings Plan calculator at the financial education website www.mindyourfinances.com, can help families develop or fine-tune a college savings plan, factoring in number and ages of children in the family. Click on “Financial Tools.”
In your 30s and early 40s
“The challenge as you enter into these years is to avoid lifestyle creep,” Thakor says. “It’s very easy to start living beyond your means. The more you earn, sometimes the more you spend.” This presents a big problem for savings for a couple’s retirement and their children’s college education. Thakor has noted another dangerous trend in this age bracket: risky investments. An investment portfolio at this age should be a lowcost, high-quality mix of stocks, bonds and mutual funds that grows conservatively over time, she says.
tip Start early. Make retirement saving a priority. Devise a plan, stick to it and set goals. Grab a quick estimate of your retirement needs using the “Ballpark Estimate” tool at www.choosetosave.org/
In your 50s…
In your 60s…
“Fifty is the time of preparation and a time of opportunity,” says Julie Jason, author of “The AARP Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad,” (Sterling, 2009). Make catch-up contributions, an extra amount those over 50 can add to 401(k) and other retirement accounts. At age 59 1/2 you will no longer be hit with tax penalties on withdrawals from retirement accounts, but leaving money in means more time for it to grow. Imagine you’re retiring on Monday and need to calculate how long your funds will last. Jason says this scenario forces people to look at their expenses, savings and income sources outside of work. “If you do the analysis, you can adjust your savings and investing,” she says.
The minimum age to receive Social Security benefits is age is 62, but delaying to a later year will mean a bigger monthly benefit. Generally, government-sponsored Medicare health insurance is available to those age 65 and older. At 66, those born between 1943 and 1954 are eligible for full Social Security benefits. Jason says that those at age 65 must realize that they’re targets for every ambitious financial advisor. “Put on a skeptics hat,” she says. Retirees should interview professionals to make sure they have prior experience with retirement accounts and clients in financial situations similar. Making decisions for a $100,000 account is very different from making decisions for a million-dollar account, Jason says.
tip
tip
Get Going! Are you on track financially for a comfortable retirement? The Financial Planning Assoc. offers an interactive Financial Roadmap tool to help highlight areas where you need to improve: Go to www.fpaforfinancialplanning.org/ and click on “Financial Roadmap” under Tools & Resources.
Learn what your estimated social security benefit will be at retirement by using the retirement estimator at www. ssa.gov/estimator or call 1800-772-1213.
In your 70s…
“Now is the time to review assumptions and make adjustments to your cash flow and to your investments,” Jason says. At the outset of retirement, people assume that healthcare will be their greatest expense. It turns out that the largest expense is most often taxes. Plan to begin taking minimum withdrawals from most retirement accounts by 70 1/2 or you may be charged a penalty.
80s and beyond
Healthcare and legacy planning should come into the picture around age 85, Jason says. Long-term care for husbands and wives should be determined. “At a certain point you have to bring in your spouse and see if you’re in sync with each other,” Jason says. She reminds retirees to include the desire to leave an inheritance in their planning. © CTW Features
21 • Life Planning Guide • January 2011
Married with a family
Life Planning Guide • January 2011 • 2
What a Widow Needs to Know
Checklist for New Widows & Widowers
The death of a husband launches many women into uncharted territory: financial planning Dawn Klingensmith CTW features
istockphoto.com
although women generally outlive their spouses, it’s still common in this day and age for husbands to handle long-term financial planning with little or no involvement from their wives. Once widowed, women often find that financial advisers who did business with their husbands fail to address their concerns. In fact, 70 percent of widows considered firing their advisers within three years of their husbands’ deaths, according to research by Minneapolisbased Allianz Life Insurance Co. “Advisers often aren’t as responsive as they should be, they talk down to widows, or they take the ‘Don’t bother your pretty little head’ approach and fail to explain things,” says Washington, D.C.-based financial planner Alexandra Armstrong, co-author of “On Your Own: A Widow’s Passage to Emotional and Financial Well-Being” (Armstrong Fleming & Moore Inc., 2006).
Some women cede control not only because they’re overwhelmed by the estatesettling and grieving processes but also because they doubt their abilities when it comes to “high finance,” says behavioral psychologist Matt Wallaert, the lead scientist at Thrive, a New York-based financial management Web site (JustThrive.com). Women routinely handle day-to-day household finances such as paying bills and managing bank accounts, Wallaert adds, but due to lack of exposure they tend to underestimate their investment-management capabilities. When put to the test, though, women usually know more about investing than they think they do. The basics of financial planning can be learned. Meanwhile, newly widowed women should make it clear they intend to retain control over their investments, that they’ll make adjustments in their own time and that they won’t tolerate strong-arm tactics or dismissive treatment. However, Armstrong advises against making immediate changes. Unless an adviser’s dealings seem
shady, in the beginning it’s easiest to work with that person because he or she is already familiar with the couple’s situation. This also applies to lawyers and accountants, Armstrong says. “In six months to a year, you can reassess these relationships,” she says. A widow’s first order of business when working with an adviser is calculating how much it will cost her to live. The adviser should provide her with a list of records she needs to assemble. She might want to take someone with her who’ll ask questions that don’t occur to her. Before inviting a family member, she should consider whether that person’s interests might be self-serving. She should take notes and ask that any recommendations be put in writing. “It’s a difficult time. Things go in one ear and out the other,” Armstrong says. A widow also should find out whether the adviser has an assistant who can answer basic questions. That way, she’s less likely to feel like a burden or like she’s being ignored in the event the adviser is busy with other clients.
Initially, the goal is to make sure the widow has sufficient income to pay her current expenses. “Very rarely is there a situation where something immediate needs to be done with the investment portfolio,” Wallaert says. So if an adviser presses, a widow might want to hire a replacement once the estate is settled. Often, “adult children kind of swoop in and take over,” Armstrong says. “Don’t succumb to any undue pressure from anyone, including family.” If a widow ultimately decides to hire a new financial planner, she should ask other trusted advisers (accountant, lawyer, banker) for recommendations, as well as her widowed friends. An adviser should offer an initial consultation for free. Wallaert recommends ask-
ing whether the adviser is incentivized to steer clients toward certain investments and to regard such a setup as a potential red flag. Armstrong recommends asking whether the adviser belongs to an Estate Planning Council. Many competent advisers don’t, she says. But membership is a good indication the adviser is interested in working with widows. © CTW Features
• Get multiple, certified copies of the death certificate • Find the will and any trusts • Find any life insurance, including company insurance, and put in a claim immediately • Inventory the safety deposit box • If you’re covered under your spouse’s company health insurance, find out immediately about keeping the policy • Find the rest of the assets (including deeds, securities, bank accounts, retirement accounts, stock options) and liabilities (including mortgages and debts) • Pay all bills on time if they relate to your personal life • Claim any benefits you’re entitled to • Call your spouse’s employer to see how much money is due, and follow up with a letter Source: “Making the Most of Your Money” by Jane Bryant Quinn (Simon & Schuster, 2010) © CTW Features
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