March 2010 Newsletter
March 9, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The March 2010 Newsletter is now available. It includes an investment market update, Part II in my series on how to tap into your home equity in retirement, considerations in evaluating an early retirement offer, information on 2009 tax deduction for 2010 Haitian relief contributions, 2011 tax rate proposals found in the federal budget, credit card act provisions, and a reminder on the deadline to take advantage of the home buyers credit. Click here to read it.
Motley Fool Endorses Garrett Planning Network
March 3, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
I’m writing to let you know about an exciting new development in my business. The Motley Fool has exclusively endorsed and is promoting the services of financial advisors affiliated with the Garrett Planning Network, the international organization of fee-only financial advisors with which I am proud to be associated.
The Motley Fool has long admired Garrett’s approach to fee-only financial advice. And we are fans of The Fool’s
approach to everything they do to educate, empower and amuse the public and their members about investing. Garrett, The Motley Fool and I share a commitment to make trustworthy financial advice accessible to everyone.
The Motley Fool is one of the most admired financial brands in the world. Each month, 4 million unique visitors visit its website at Fool.com. At the core of The Fool’s business model are hundreds of thousands of premium members—many enjoying subscriptions to multiple investment newsletters. Clearly, the company is fulfilling its quest to broaden access to winning financial advice, and I am delighted to have access to all of these resources through our partnership with The Motley Fool. (If you’re not familiar with The Motley Fool, please find some additional information below.)
While there’s no doubt that The Motley Fool’s advisory services are answering a great need among individual investors, the company came to recognize that many of its members yearn for more hands-on help managing life’s complex financial decisions—especially in light of the recent rollercoaster stock market. The Fool decided it was time to look at expanding into the direct financial advice category.
Rather than building a financial advisor network from scratch, The Fool kicked off a search for a well-established, like-minded outfit with similar values with which to partner. I am delighted that they found a new match in an old friend—the Garrett Planning Network! As we know well, when it comes to financial planning, Garrett advisors offer the same kind of trustworthy, transparent, and community-driven advice that The Fool has built its business on. The Garrett-Motley Fool relationship has the makings of a great partnership.
Thanks for reading, and thanks for your support. Please don’t hesitate to contact me with your questions.
February 2010 Newsletter
February 9, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The February newsletter is now available. It includes an update on January stock and bond market performance, the first article in a two-part series on how to tap into your home equity for retirement income, a preview of a new financial planning service, and more. Click here to read the newsletter.
Texans’ Options with 529 Education Savings Plans
January 27, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
Many states provide an incentive for their residents to use their state’s 529 plan through use of a state income tax deduction. Because Texas doesn’t have a state income tax, your options are really completely open in terms of what state’s 529 savings plan you use. You can go shopping for the best options and lowest costs for your particular situation. You can also use any state’s plan regardless of where your child plans to attend school.
Understanding the pros and cons of 529 plans
529 plans represent a solid savings opportunity because of the opportunity for the money to grow tax-free over an extended time horizon. Funds are deposited after tax. Principal and earnings may be withdrawn for qualified educational expenses tax-free. The more time you have, the more beneficial the tax-free growth is. But even within a year or two of starting college, 529 plans can be helpful.
There are also drawbacks to 529 plans. You lose flexibility in how you use the funds — if you withdraw funds for non-qualified expenses, you will be subject to income taxes and a 10% penalty on the portion representing earnings. 529 plans also carry increased investment expenses and have fixed investment options.
Selecting the Right Plan for you
In determining which plan is right for you, there are some factors that matter to everyone and some unique to your situation. Everyone’s consideration should include review of:
- quality of investment options offered in the plan
- costs of the plan — both administrative fees and investing costs (these vary widely from state to state)
- ease of access in opening your account, recurring deposits, withdrawals, investment changes, and reviewing statements
Most states also offer a direct plan option and an advisor option. The direct option allows you to open an account directly with the state’s plan without paying any investment sales commissions. The advisor option generally results in you paying investment sales commissions up to 5.75% on all deposits into your 529 plan. These commissions can require you to save a lot more to reach your savings goals. You can still use the direct plans and receive advice from an advisor on college planning and investing even by working with a fee-only advisor.
Other factors that may be relevant to your particular situation:
- Specific plan rules around which relatives can be named as a beneficiary in the event you want to transfer your 529 account balance to a different beneficiary.
- Contribution maximums
- Time limits for using your 529 account balances
- Investment options that match your particular needs:
- for a child close to college a guaranteed principal plus interest option is a must
- for someone who doesn’t want to monitor and adjustment their investments on an ongoing basis, a target-date investment program may be attractive that gets more conservative as the child get closer to college (although you need to exercise caution in selecting these)
One of my favorite sites for comparing different option 529 savings plan options is www.savingforcollege.com. Providing recommendations on how much you need to contribute, how your contributions should be invested, and which plan offers the best balance of low fees, features, and investment options for your situation is also one of the services that Keener Financial Planning provides.
Getting the Most of Employer Matching
January 19, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
Many employers have reduced or eliminated matching in the past several years. If you’re fortunate enough to still have a match, you want to take full advantage of this potentially significant boost to your retirement plans. Every dollar your employer contributes toward your retirement is a dollar you don’t have to.
To make the most of employer matching, you need to answer two questions:
- What’s the formula?
- How does my employer handle “maxing out” — reaching the federal limits of $16,500 for 401(k) plans for those under 50, and $22,000 for those 50+ — before the end of the year?
The first part – understanding the formula — is usually the easy part. Once you know the formula, you need to contribute at least as much as they match if at all possible. A common formula is 100% up to 3% and then 50% on the next 2% — so you would need to contribute a minimum of 5% to get the full match. Other times, employers match up to 6%, 10% or more, so your contributions to make the most of the match are higher.
The next part – answering the max out question — can get more complex. Sometimes the most aggressive and well-intentioned savers actually hurt themselves by completing their full contribution before the end of the year. Companies have several choices in how they approach calculating your match, and it all really depends on your plan’s summary plan description. Here are some of the ways it’s handled:
- If you don’t make a contribution in a particular pay period, no match for that pay period. This way can result in forfeited matching contributions if you don’t spread your deferrals out over the whole year.
- The employer spreads your “earned” match out over the entire year regardless of how early in the year you max out your contributions. This way never results in forfeited matching.
- Employer stops matching when your contributions max out, but then “trues up” their match early the following year.
As you can see, front-loading your contributions doesn’t hurt you in the second and third scenarios, but can reduce your match significantly in the first scenario. To find out how your company handles it, read your plan description or make a call to your 401(k) provider or benefits departments. Then make sure you time your contributions to comply with your company’s practices on awarding the full match. It’s also a good idea to monitor your paycheck stubs and retirement plan account statements to ensure that matches are happening correctly.
With saving enough for retirement an increasingly big challenge, it’s important to take full advantage of every bit of help we can get.
January 2010 Newsletter
January 12, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The January 2010 newsletter is now available. Beginning in 2010, it will be published the second week of each month. This month’s newsletter includes a brief 2009 market update, an update on the estate tax for 2010, how to conduct a home inventory, and more. Click here to read it.
Recovering from Unemployment
January 11, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
If you’ve been out of work for a period of time, it’s a huge relief when the paychecks start rolling in again. Depending on how long you were unemployed, what your finances were like before the job loss, and other sources of income in your household, getting back to work could be just the beginning of a long recovery process for your finances.
But here’s the good news. While you were unemployed, you and your family probably got used to spending less. Those habits can now be a huge benefit to your finances long-term, in some cases even allowing you to be stronger financially within a couple of years than you were before the lay-off.
To make this work, you need to resist the status quo expectation that your spending “should” return to former levels. This doesn’t mean you can’t celebrate the new job or enjoy a few small additional luxuries. But, if you can consciously choose to maintain a lower level of spending, you will have a powerful tool to quickly rebuild. With the cash you’re saving, here’s a 6-item priority list to tackle:
1) If your emergency fund is completely depleted, rebuild a small buffer first (start with $1,000 to one month’s expenses). See my blog post on 10 ways to rebuild an emergency fund for ideas on this.
2) If debt has been accumulated, create the typical debt “snowball” program by paying off highest interest rate debt first. See my December 2008 newsletter for details on this strategy.
3) If you borrowed from retirement plans, be mindful of the plan’s rules for repayment to avoid a taxable distribution which could trigger taxes and penalties that would hurt your recovery efforts. These rules could trump the ideal strategy of paying back the highest interest debt first.
4) If you let critical insurance lapse, get your insurance back to the needed levels. This is also a good time to re-assess your insurance needs. It’s possible to be over-insured, and there may be some policies you let lapse that you’re better off without.
5) As the worst debt is eliminated, start adding to the emergency fund to get to 3-6 months’ expenses while paying off the last of the debt.
6) Update your retirement or other goal projections to determine what your contributions need to look like to make up for the lost time.
Once you’ve accomplished these 6 priorities, you will be well on your way to creating your desired financial future. You’ll probably be used to living on less by this point. And you’ll have created the freedom to choose when you’ll indulge in a splurge that you’ll really enjoy, as opposed to feeling trapped with a high level of fixed expenses.
If you have other ideas on financially recovering from unemployment, I’d love to hear them. Please feel free to contact me directly or post them as a comment to this article.
Pension Max: Is it right for you?
December 15, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
If you’re near retirement and have a pension, you may be considering a pension max strategy. With all the variables involved, it can be challenging to determine if it’s really in your best interest.
First – what is pension max?
Pension max is used by married couples to increase their net retirement income while still protecting the surviving spouse’s income in the event the pension recipient dies first. Basically, the pension recipient elects a single life pension instead of one with a survivor benefit for their spouse. This results in a higher monthly pension benefit. Then the pension recipient purchases life insurance to allow the surviving spouse to replace the pension income in the event that the pension recipient dies first. In some situations, this approach can result in a higher net retirement income if the cost of the needed life insurance is less than the increased pension benefits.
Pension max always results in more premiums for the insurance company, but doesn’t always result in more income for you. How do you decide if it’s in your best interest?
First — at the risk of stating the obvious — if you’re not married, there’s no reason to consider it. Depending on your estate goals and health, there may be other strategies that make sense.
Second – the health and age of the pension recipient matters a great deal. If the pension recipient is in excellent health and can likely qualify for preferred life insurance rates, pension max has a lot better chance of being a good idea.
Third – you need to determine how much and what kind of life insurance is needed to replace the income. As the pension recipient gets older, less life insurance death benefit will be required to replace the pension income. Usually some combination of tiered term-life policies and a small amount of permanent insurance fit the bill.
Fourth – the surviving spouse should have an idea of how they will use the life insurance death benefit to replace the pension income. For many, a single-premium immediate annuity makes the most sense, however other draw-down investment scenarios can also be considered.
Fifth – you need to consider taxes in your calculations on both the life insurance benefit and the increased pension benefit.
- Life insurance death benefits are generally not subject to income taxes. With an unlimited marital exemption, the estate tax will not be an issue when the first spouse dies. However, depending on the overall size of the estate and the death benefit, it could be an issue when the second spouse dies.
- The increased pension benefit will be subject to income taxes. So when you’re comparing the net effect on your income, you need to calculate how much your pension will be worth after taxes because you will be paying the life insurance premiums with after-tax dollars. This is an easy area to ignore, but depending on your tax bracket the effect of taxes can make or break the plan.
Sixth – consider the convenience factor. If there’s just a very small financial benefit to using a pension max strategy in your situation, it may still make sense to forego it. You need to weigh the simplicity of just taking the pension against the extra effort of going through life insurance underwriting and paying the premiums ongoing.
If you’re seriously considering using a pension max strategy, it’s a good idea to have an uninterested third party talk through the analysis with you. A fee-only financial advisor who doesn’t have a big insurance commission at stake based on your decision will be able to offer objective advice. And even though you spend some money on the advice, it may help you save much more over the long term and at very least feel confident that you made the right decision based on your unique situation.
Quoted in Kiplinger Personal Finance Magazine
December 7, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
I was recently quoted in “4 Ways to Trim Your Spending” by Laura Cohn in the January 2010 issue of Kiplinger Personal Finance Magazine. Laura and I discussed that having one or two areas of luxury in your life is not a bad thing — it’s actually a good thing because it helps avoid a sense of deprivation that can lead to seriously blowing your budget. But choosing an area or areas of indulgence that makes sense given your income, other expenses, and goals is important. Where we can really get into trouble is allowing the indulgence to spread to too many aspects of our lives. The luxury vehicle, a nice home, designer clothes, fine dining, spa services, wine and grocery purchases, and lots of travel are some of the areas that can be just fine if we have one area of indulgence and it’s supported by our budget. But these same areas can lead to spending trouble for all but the wealthiest if we enjoy too many on a regular basis.
December 2009 Newsletter
December 3, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The December 2009 newsletter is now available. It includes a market update, tips on tracking your expenses, year-end investing moves designed to save on taxes, and more. Click here to read the newsletter.