Special Bulletin

In light of the economic tremors that are going on in the financial sector today, I felt compelled to provide a comment: The failure of certain firms who took part (on the institutional side) in the personal real estate frenzy was not unexpected. The problems produced by the greed of that event were bound to "come home to roost". It is unfortunate that this part of the inevitable cycle has to come at this point, though. Just last week, we saw very favorable signs of resolution to the overall financial marketplace's woes: mortgage rates plunged, consumer confidence surged (partly in response to the strengthening dollar), commodity prices declined, and other systemic gauges improved. These signs all point to an overall improvement in the outlook for the home price issue (and the overall economy) at the root of the market's problems of late.

As with the demise of Bear Stearns earlier this year, our marketplace will absorb this action regarding Lehman. The improving underlying forces of the market mentioned above will continue to move forward, and we'll see an end to this current turmoil soon. Using history as our guide, we know that "this too shall pass".

Going forward, I expect for confidence levels to continue to increase, in spite of today's news, and for the market issues to eventually work themselves out - most likely by the Spring. All of these factors' improvement are building the basis for home prices to stabilize, and the overall marketplace is getting back on track.

In short - as many of you have heard me say before: When the markets are down is not the time to make brash moves. We can be our own worst enemy if we think we can resolve this problem on our own. Don't just do something, stay put.

And as always, if you want to talk it over, please give me a call.

It Has Fell

So - Fall has fell. As far as I can tell, it looks like we're in for Autumn weather from here on out. That's not such a bad thing, really, except for the fact that we had so little Summer-like weather this year here in the Midwest. I suppose there's not much we can do about it, besides, as I've mentioned on these pages before, Fall is one of my favorite seasons anyhow. This year isn't bringing the promise of post-season baseball for the Cardinals, but I know that the Cubs fans are really looking forward to October. Good for you - make the most of it!

I have an article for you this month which explains (briefly) the concept of the Stretch IRA, and how you may use this as an estate planning tool for your family. As always, feel free to call me if you have any questions about the articles, or if you'd like to discuss your specific situation more completely.

Stretching Your IRA - A Legacy in the Making

The term "stretch IRA" has become a popular way to refer to an IRA (either traditional or Roth) that has provisions that make it easier to "stretch out" the time that funds can stay in the IRA after the death of the owner. A stretch IRA is not a special type of IRA under the Internal Revenue Code, rather, it's a traditional or Roth IRA that has language in the custodial or trust document that gives a beneficiary or contingent beneficiary the option to take distributions from an inherited IRA over the beneficiary's life expectancy. This language also generally allows for successor beneficiaries to be named, facilitating the further tax-deferred growth of the IRA over (possibly) more than one generation. There's nothing really dramatic about this "stretch" language; any IRA provider can include it. The fact is, though, many don't. Absent the "stretch" language, IRA funds might have to be distributed on a much more aggressive basis upon the death of the IRA owner or original beneficiary.

Why Is Stretching an IRA So Important?

Earnings in an IRA grow tax deferred. Over time, this tax-deferred growth can help an individual to accumulate significant funds in her IRA. For someone fortunate enough to have the funds to support himself in retirement without the need to tap into his IRA, continuing this tax-deferred growth for as long as possible may be a priority. These folks may want for their heirs to benefit from this tax-deferral as well.

As an example, let's say Phred, age 62, has a $400,000 IRA. In addition, having recently retired, Phred has a pension from his former company that pays $40,000 per year, and he has other funds (outside the IRA) that provide an additional $15,000 per year in income. Phred's annual living expenses are (conveniently enough for our example) exactly $55,000 per year. With those circumstances, there is no need to withdraw funds from his IRA until he is required to do so (at age 70 1/2). Phred has named his wife Ethyl, age 60, as the beneficiary (Phred didn't name her Ethyl, her parents named her Ethyl - he only named her the beneficiary!). They have agreed that, should Phred pass away, Ethyl also would not take distributions from the IRA until required (or necessary), with the intention of leaving the balance of the IRA to their grandchildren. Phred dies at age 70, before reaching age 70 1/2. At this point, the IRA has grown to $687,000 (7% per year). Ethyl rolls over the IRA into a new IRA in her name, and does not take a distribution until her age 70 1/2, at which point the IRA has grown to more than $813,000.

Clarifying Two Important Points

Now, a couple of things need to be clear at this point, as the Internal Revenue Code has made this matter quite complicated. The first is that, had Ethyl been under age 59 1/2 and needed the income from the IRA, she could have begun taking distributions of income from Phred's IRA immediately - using his attained age rather than her own. Given that she did not need the funds, though, it was beneficial for Ethyl to roll over the IRA to her own IRA, which allowed for the deferral of the Required Minimum Distribution (RMD) beginning date. It's also important to note that, if Phred were the younger of the two, Ethyl could have deferred that RMD beginning date until the date that Phred would have attained age 70 1/2.

The second point that needs to be clear is that, when Ethyl sets up her rollover IRA, it is critical that the beneficiaries are specifically named on the beneficiary form. The reason for this is that, upon her death, if the beneficiaries are not specifically named, or if the beneficiaries have pre-deceased the IRA owner and subsequent or contingent beneficiaries are not named on the beneficiary form for the IRA, an entirely new set of rules applies (see Non-Designated Beneficiaries below for this explanation).

By naming the beneficiaries specifically, the intentions of the account owner are clear, and will be carried out as she wished. However - if there is more than one beneficiary, it is important to make sure that each beneficiary has had a receiver (rollover) IRA set up and the funds rolled over into the account by the end of the year following the year of death. If these separate accounts have not been established in this timely fashion, the funds must be distributed using the age of the oldest beneficiary as the lifetime. If the accounts are set up as directed though, each beneficiary uses his own age as the lifetime for the distributions.

Meanwhile, Back at the Example...

Continuing our example, let's assume that Ethyl passes away at age 72, having taken two minimum distributions from her account, and the account is now worth over $868,000. She and Phred had three grandchildren as beneficiaries: Chip, age 30, Robbie, age 20, and Ernie, age 10. (I know I'm off on a tangent here, but they had chosen to disinherit their oldest grandson Mike, since he wasn't around any more after the first season.) Since Ethyl had wisely specifically designated the three boys as beneficiaries, each one could draw out the Required Minimum Distributions using their own ages. For Chip, this means that his first distribution would have to be at least $5,431, for Robbie, $4,595, and for Ernie, $3,976. Of course the three boys had had their own separate accounts set up to roll over their inheritances as the law requires. Had they not set up these accounts, all three would have to take distribution of the amount of the oldest beneficiary, Chip. This would mean that Robbie and Ernie would be unnecessarily taking additional (taxable) distributions from the inheritance.

Another way to deal with this would be to set up a trust as the beneficiary of Ethyl's IRA, naming the grandsons as specific beneficiaries of separate trust shares. In this fashion, each would still be able to take distributions over their own lifetimes.

Bear in mind, these beneficiaries are REQUIRED to begin taking distributions upon their inheritance of the IRA proceeds. The only way to defer taking distributions from an inherited IRA is if the beneficiary is the spouse, which we discussed earlier above. Any other person or trust (who is not a spouse) must begin taking distributions upon inheriting the IRA, per their own life, using the Single Life table from the IRS.

Non-Designated Beneficiaries

As mentioned above, if the beneficiary of an IRA is not properly designated on the IRA beneficiary form, a completely different set of rules comes into affect. This situation comes into play when your primary beneficiary pre-deceases you, or if for some reason the original documentation of your beneficiary can not be found (happens more often than you want to know!). This is why it is critical to make copies of your beneficiary designation form, as well as to check up with your IRA custodian to ensure that the proper information is applied to the account. Update these records if your primary or contingent beneficiaries should happen to die before you.

So, if a properly designated beneficiary is not named on the account information, your will (or the state's probate law) will determine the non-designated beneficiary. At that point, if the RMD beginning date for the owner of the IRA has already passed, the beneficiary may take distributions over the remaining life span of the original owner using the Uniform Life table from the IRS. If the RMD beginning date has not passed (that is, the owner of the IRA is less than age 70 1/2), then the non-designated beneficiary must take distribution of the entire account's proceeds within five years of the end of the year in which the account owner died. Obviously, this is not a preferred method, as all of these distributions are taxable as ordinary income, and this five-year method results in very large distributions.

Back to our example - had Ethyl NOT properly designated her grandsons as beneficiaries and had passed away prior to age 70 1/2, each grandson would be required to take distribution of nearly $290,000 within five years of Ethyl's death. Conversely, if Ethyl had attained age 70 1/2 by her death, the boys could stretch out their payments over the Uniform Table's span, amounting to required distributions of just a little over $10,000 to each boy, increasing each year until the account is exhausted.

In a nutshell, that's the stretch IRA. It can be pretty complicated, depending upon your wishes, but in most cases it's not too difficult to work out a proper plan. Hopefully my examples have shown the benefit of properly setting up your IRA beneficiaries, as well as making sure that your wishes and directions are well understood by your heirs and executor. If I can be of any help to you as you set up your IRA to stretch for your heirs, please let me know.

Don't Want To Think About It

Even though we're only halfway through August, the weather 'round here has been surprisingly mild, bringing to mind thoughts of the coming Autumn. For those in the audience that are big fans of the Summertime, I'm sure you can understand what my headline means - good grief, we have hardly had any Summer weather this year at all here in Central Illinois! It's been so mild and rainy ever since the Spring - why, we've only this week begun to harvest any tomatoes from our garden! I can't imagine that the past week or two of very mild weather (low 80's) will maintain without raising temperatures back up to our normal 90's, but it does make you wonder, doesn't it? I sure hope we've got a little more Summer in store for us - I've barely gotten to put a fishing line in the water!

In this month's edition, we'll work through an example of a pension question that comes up quite often: when should I start taking payments? As you'll see, it gets pretty complicated, but hopefully the examples I provide will give you a foundation to begin thinking about as you address this question in your own life.

Ready, Set, Go! When To Start A Pension Payout?

The question comes up often: I’m ready to retire at age 55, and I can begin collecting my pension right away. Should I? The amount of the pension increases to almost double if I wait to start collecting at age 62, and two-and-a-half times if I wait until age 65. What’s the best way to do this?

Obviously, there are a lot of factors that will go into the answer to such a question, so right off, it’s hard to say for sure, but here are the basics of making this decision:

These types of pensions are based on the employer’s assumption about your life expectancy. If you live to exactly the expected age, the cost to the employer will be roughly the same no matter which option you choose. You just need to do the math – bigger payments later are made for (expected) fewer years.

It goes without saying that if you were sure you’d die at age 60, you would be much better off starting your pension payout as early as possible. On the other hand, if you live longer than expected, starting your payout as late as possible will likely make up for the late start. But at what projected life span does this make sense?

An Example To Consider

Let’s start with an example: Say at age 55 you could begin a pension paying $700 per month, or at age 62, $1,303 per month, or you could begin receiving $1,737 per month if you wait to age 65 to begin collecting. For the purpose of simplicity, the example will not factor in taxes or any cost-of-living adjustments.

At age 70, your first option is still ahead of the other two. So, if you were to die before age 71, the first option, collecting at age 55, works the best, because you would have collected a total of $126,000 by that point, versus $125,095 for the age 62 option and only $104,225 with the age 65 option.

However (and isn’t there always a however in life?) – if you lived beyond that age, the other options begin to take the lead. If you lived to at least 72 but not to age 75, the age 62 option would work out the best. Anything from age 75 on up, you’re best off to wait until age 65 to get started.

Throw in a Wrench Or Two

This has been a very simplistic look at the arithmetic behind this question – but there is more. Remember when I mentioned above that if you live to the expected age, the cost to your employer is roughly the same no matter which option you choose? How can this be, you might ask…? Well, during the time that you’re not taking your pension payments, your employer has control over the money in the pension fund, and they’ve got it invested, so it’s growing over that 7 or 10 years (between age 55 and either 62 or 65). The returns that your employer achieves over that time helps to balance out whichever choice you make.

Why is this important? Consider it this way: Instead of spending the money when you receive each pension payment, what would your results be if you invested them? If you took your pension of $700 at age 55 and invested each payment for a conservative return of 6%, by age 62 you would have amassed $72,852 in savings, a gain of more than $14,000 over the total of your payments. Using this strategy, you remain in the driver’s seat until age 78 with the age 55 option, when the age 62 option takes over until age 80, at which point the age 65 option is the clear winner.

Okay, Maybe a Third Wrench in the Works

Now – the problem with that last calculation is that it assumes you have the wherewithal to get by without spending your pension money… which isn’t out of the question for the earlier years, you’d still be plenty young and spry enough to earn a part-time living that could make up the difference and allow you to continue your lifestyle, but at some point you’d probably like to stop working altogether.

Back to our example, if we make the assumption that at age 65 you begin spending your pension and savings, at the rate of $1,737 per month (the amount of your pension if you started drawing at age 65). Oddly enough, using this strategy, you start running out of money in your surplus fund at approximately the same crossover point as in the earlier strategy: if you used the age 55 option you’d have used up your surplus by age 78; while with the age 62 option, your surplus would be gone by age 80. At those ages, you would have to get by on the $700 or $1,303 of your original pension, plus any social security and other retirement savings.

And The Point of This Is...?

The point of all this, well actually there are two points: First – the answer to the question of when to take the pension depends on what you’ll do with it, and whether or not you need those funds right away. Couple those factors with how long you’ll live. If you’ll need a larger amount to live on, such as if you don't have any other retirement savings, the longer you can wait before starting your pension payouts, the better, especially if you’re in good health and expect to live beyond age 80.

The second point is that, even if you have a pension available to you, it is definitely in your best interest to develop a savings strategy in addition to the pension. And this is doubly important if your pension is fixed (no cost-of-living adjustments) as in our example.

The best way to answer this question is to gather all of these factors, along with considerations regarding investment risk tolerance, tax implications, family longevity and your own health, as well as your lifestyle costs, healthcare costs, and propensity to continue working after your official “retirement” – at whatever age that might be – and then run the calculations.

As you might have guessed, this is just the sort of thing that I do, and I’d be happy to help you get an understanding of the numbers as they relate to your situation. Just give me a call.

That’s all for now – until next month…

Vacation Time

As many of you know, we often travel to Pensacola Beach for vacation, and soon (in fact, in a few days) we'll be making our annual trip. Of course, this year, we'll be spending considerably more on fuel to get there, but still it's a reasonable alternative to flying - and we wouldn't consider NOT making the trip, it's just too much a part of our lives. I think that traditions like this trip make our lives more complete, as we have the familiar friends to connect with, and the beautiful surroundings to help us "decompress" from the stress of day-to-day life. Hopefully you also are able to do your traditional "vacating" this Summer - it's too important to miss. Make sure to take this time for yourself and your family!

In light of the economy's present doldrums, and since everyone who is eligible to receive a Stimulus Check should have received it by now, I thought it would be interesting to talk about ways to use this check within your own economy to stimulate things. That is, how you can use the Stimulus Check to improve your financial outlook, regardless of what they're saying on the evening news. I hope the article this month gives you some ideas!

Stimulating YOUR Economy

So anyhow, if you qualified to receive one (and have filed your 2007 taxes in a timely fashion) you should have received your Economic Stimulus Check from the IRS. It's possible that some of you might not have received it yet, since they're being delivered through July, so if you don't have it yet you should have it soon. So - what should you do with the check? How can you impact YOUR economy in a positive fashion? Obviously, retailers would like for you to rush right out and spend the money on something - preferably just a down payment on something really big - and they are coming up with some very enticing offers to get you to do just that. Below are some alternative that you might consider, that will have a positive impact on your overall financial picture:

• Cash the check and use the money when and where you want. By doing so, you won't be locked into spending all the money in one place, and there are never any fees involved with using cash. This is suggested as an alternative to taking on some of the offers that retailers are promoting, with extra fees and time payment plans (that are never a good idea in the first place). Use the money to just augment your overall cash flow.
• Pay (or Pre-Pay) a bill. The lump sum provided by the stimulus check may be just what you need to pay your real estate taxes or car insurance. Or, you might start prepayment plans with you home heating contractor to lock in fixed fuel prices for the coming winter (if this is available to you). Another option might be to pre-pay a tuition bill or student loan.
• Start or add to your emergency fund. For those of you that have worked with me, you know that I advocate this as a way to ensure that you're not caught "off guard" when those inevitable surprises come up, like needing roof repairs or new tires on your car. By having an emergency fund available, you won't have to use costly personal credit (credit cards) or negatively impact your month-to-month cash flow in these emergencies. Put these funds in a savings account or money-market account, so that you'll earn some interest (even though it's paltry) on the balance.
• Pay off some or all of a high-interest rate debt. If you have outstanding credit card balances, you might want to give some thought to paying off some or all of those balances, starting with the balance that carries the highest rate of interest. $1200 applied toward a credit card balance with an annual percentage rate of 14.9% could same roughly $180 in interest charges in the course of one year!
• Invest in the future. Start (or add to) a Roth IRA, deductible IRA, Coverdell Education Savings Account, or a 529 College Savings plan. A single contribution of $600 to an education account can grow to over $1,700 (at a rate of 6%) in the eighteen years between now and your newborn's first day of college. Likewise, a similar contribution to an IRA, left alone for 30 years at a rate of 6%, would grow to nearly $3,500!
• Make a tax payment and adjust your withholding. Stay with me on this one - you could actually come out ahead if the circumstances fit for you. If you aren't taking full advantage of your employer-matching funds in your 401(k) plan, making a payment on your income tax obligation for the year and then adjusting your withholding to match will free up $100 a month in your take-home pay (using the $600 check as an example). If you then started or increased your contributions to your 401(k) plan and your employer matches fifty cents on the dollar, you'll actually come out ahead! You would have contributions in your 401(k) plan of $900, plus your take home pay would still be slightly more than before you started this plan, due to the pre-tax 401(k) contribution. Just remember to adjust your withholding back again in January, 2009, or make other adjustments to ensure that you don't come up short next year!
• Invest in yourself. Use the stimulus check for those books you wanted to buy about gardening, self-improvement, or investing education. Or, take a class at your local community college in a subject that stimulates YOU! You might also use the funds to buy a gadget or gizmo you'd been wanting that will make your life easier or more enjoyable.
• Invest in your community. Consider making a donation with your stimulus money. There are many deserving charities (I'm sure you can come up with a list of several without much difficulty) that would LOVE to have a donation of $600 or $1,200. And you can take a deduction on your tax return for the donation (assuming that you itemize your deductions).

The Bottom Line

The point of these suggestions are to give you some food for thought. Congress started this program to help stimulate the economy (whether it will have an impact is debatable, I think the economy will stimulate itself) so why not figure out how you can use these funds to stimulate YOUR economy? Too often when "found money" makes its way into our checking accounts, it just flows through and nothing meaningful happens with that specific sum. With these ideas, I challenge you to come up with a use for the funds that has a lasting, meaningful impact - on your life, on your financial condition, or on the life of someone else. As I've often said, putting this kind of thought into the use of these funds has little chance to be something you'll regret. "Gee, I wish I hadn't paid down that debt. Now I'm all debt free. I don't know what do do with myself." Yeah, that's not a likely conversation you'll have with yourself!

All's Fair

June brings us the traditional beginning of the summer season, and with the weather we've been having, this year is no exception. For those of you that know me well, you know that this includes a healthy portion of Fair time - that is, the Sangamon County Fair. I am heavily involved in the Fair, and I'd like to take this opportunity to invite all of you to join us at the Fair, beginning on Wednesday, June 18, and running through Sunday, June 22. As always, we have some great entertainment lined up, with Little Big Town on Thursday evening, Kelly Pickler (of American Idol fame!) on Friday, and Randy Owen, formerly of the legendary group Alabama, on Saturday evening. If you're not familiar with the way the Sangamon County Fair works, once you've paid the admission price, you have access to the grandstand shows and all other entertainment, rides, and shows throughout the fair, for no additional cost. You can find out more by going to www.SangCoFair.com.

Given the volatility we've been experiencing of late in the financial world, I thought it would be timely to revisit some of the ways that we can help ourselves to maintain confidence throughout these uncertain periods. This month's article addresses these concerns and I hope will help your confidence in your financial matters. As always, I am available to talk about your concerns if you'd like, just give me a call!

Maintaining Confidence in an Uncertain World

All around us, every day, we see signs of an unstable financial world. The price of gasoline is out of sight, and instability continues in the Middle East; while at home we're confronted by a presidential election that offers little choice other than to hold your nose and vote for the one that you believe is likely to do the least damage. Add to this the stock market's volatility, the rising cost of "getting by", and the subprime mortgage crisis, and there's little wonder many folks are very concerned about the future.

What Can You Do?

I don't suggest hiding under your bed - this has never worked for me, and sometimes you find things there that you would rather not! On the other hand, there are few things that you can do to help get through this uncertainty, and maybe you'll decide that it's not so scary after all.

For starters, all of the headlines we see, especially the financial ones, must be taken with a grain of salt. For example, back in early 2001, CNN reported that seven cows, born and raised in Germany, had been diagnosed with mad cow disease. Within six weeks, beef consumption in Germany dropped in half. Yet, throughout the 20+ years since mad cow disease was discovered, a total of 150 deaths have been attributed to this disease. On the other hand, we are told that salmonella poisoning kills more than 600 people in the US every year, along with making an additional 1.4 million of us sick. But the popularity of chicken, the primary food source that hosts salmonella poisoning, continues to increase.

This odd behavior comes about because of how we perceive and interpret information. Obviously, our personal experiences have the greatest weight, followed by experiences related to us by friends and family. The next most believable source of information is mass media, including the largely undocumented internet, while last in line is documented, statistical evidence. So, while most folks have had enough experience with food poisoning to put the salmonella statistics in their proper context, Mad Cow disease, with its sensational name and (at the time) largely unknown characteristics, made us sit up and take notice. And, more importantly from the perspective of the media provider, the sensational SELLS!

So What Does This Mean For My Finances?

Consider how this phenomena impacts your financial decisions. For several years, the watch-word has been to stay out of medium- and long-term bonds as investments, because the long-term rates are going up. This talk began in 2001 - and long-term rates have gone up since then, a little, but not enough to make an appreciable difference in using medium- and long-term bonds in your portfolio.

This is not to say that you should ignore the news - but rather, you should keep your trusty grain of salt handy as you do follow the news. And ask your trusted advisor to help you interpret the news that you find particularly troubling. In addition, it doesn't add value to check your portfolio's value every day and wring your hands over every headline in the various financial news outlets. Generally speaking, these headlines provide no value to the average investor, and more often than not they serve to distract you from the aim of your long-term plans.

Understand Why You Choose Investments

One of the more difficult things for most folks to understand is that it is near impossible to always choose a "big winner" mutual fund. Consider this: if, over the past five years, a mutual fund manager has had a better-than-average result from his mutual fund (meaning, he's beating the indexes over that period), he's one of approximately 3% of all mutual fund managers. When you consider that new funds are introduced every year, replacing old "losers", you begin to realize that this 3% is actually a smaller number, since the losing funds have disappeared from the list.

Add to this mix the fact that "past performance doesn't guarantee future results". In other words, just because a particular fund manager has beaten the average in the past doesn't mean that he will do so in the future. What I'm driving at is this: There is no point in chasing the "best" managed mutual fund, especially when the index is likely to beat or equal any given manager 97% of the time, at a cost of far less than half (in terms of internal expense ratios). You're much better off spending time making sure that your portfolio is well diversified and matches your risk tolerance, and then maintaining solid discipline to not run for the exits when a headline looks scary to you.

Have a Trusted Adviser to Lean On

This goes for all facets of your life, obviously - and of course it's a bit self-serving when coming from me. The point is, while we all would like to believe we can "do it on our own", we eventually come to realize that we need some additional expertise to help us plan. And once we've made those plans, having someone to help us review and consider options is a must - because simply having a plan isn't enough, we must execute and review results. Once we've seen those results, we can then determine how to make minor adjustments for the future, and then again, execute the plans. Especially when the environment has been volatile, it's important to review our results and make sure we're still on track.

You might think that the work a financial planner does is based primarily in the future, but the past is at least as important - especially when things haven't gone the way we'd hoped. In other words, while we're aiming for a particular goal in the future, it is where we are "today" that gives us our starting point. Confucius said "A journey of a thousand miles begins with a single step". But if you never stopped during that thousand miles to consider where your destination is relative to where you are right now, you'd likely end up somewhere else.

The Point of All This (FINALLY!)

I know I've rambled a bit, but I think you get the gist of my message - Lay out careful plans, don't allow the "pundits" and headlines to distract you, use the market averages to your advantage, diversify to match your risk tolerance, and check your progress regularly. The author Michael Pollan presented a seven-word mantra in his best-selling book "In Defense of Food" that provides clarity when making choices there:

"Eat food. Not too much. Mostly plants."

From this idea, I've built the following mantra for investing and planning:

"Plan regularly. Don't be distracted. Save lots."

I hope this will help you as you go forward in your financial life. In these uncertain times, having a sound foundation to guide you is your most important tool. Take care, and best wishes for this month.

May Flowers?

Throughout the month so far, we've had much more rain than normal - I thought the saying was "April showers bring May flowers"!! Instead, the April showers seem to just be bringing more May showers, at least around here. The flowers have been coming up, though, and right now the iris outside my office door is just about to bust with blooms.

Even with the weather being as it has been, we still have made it out to find a few mushrooms, and even got to take in a Cubs/Cards game. I won't go into detail on the outcome - let's just leave it that we had a nice time at the game and at least one of us (not me, the Cubs fan in the house) came home happy.

One of the big issues that many people face when planning for retirement is getting a handle on their income needs. This month's article should help to shed some light on that calculation. By gaining an understanding of the retirement income requirement, we can look forward to our golden years without the fears associated with not knowing if we've done enough saving, or if we're retiring too soon.

Retirement Income Requirement

You know how important it is to plan for your retirement, but how do you get started? One of the first steps should be to come up with an estimate of how much income you'll need in order to fund your retirement. Easy to say, not so easy to do! Retirement planning is not an exact science. Your specific needs will depend on your goals, lifestyle, age, and many other factors. However, by doing a little homework, you'll be well on your way to a comfortable retirement.

Start With Your Current Income

A rule of thumb suggests that you'll need about 70 percent of your current annual income in retirement. This can be a good starting point, but will that figure work for you? It really all depends on how close you are to retiring. If you're young and retirement is light years away, that figure probably won't be a reliable estimate of your income needs (and let's face it, over a long period of time it's not much more than a wild guess!). That's because many things will change dramatically between now and the time you retire. As you near retirement, the gap between your present needs and your future needs will likely narrow. But remember, you're only going to use your current income only as a general guideline, even if retirement is well within sight. In order to accurately estimate your retirement income requirement, you'll have to do some more cipherin'.

Project Your Retirement Expenses

As with any budgeting exercise, annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That's why estimating expenses is a big piece of the retirement planning puzzle. It's bound to be difficult identifying all of your expenses and projecting how much you'll be spending in each area, especially if retirement is still a ways off. To help you get started, here are some common retirement expenses:

• Food and clothing
• Housing: Rent or mortgage payments, property taxes, homeowners insurance, property upkeep and repairs
• Utilities: Gas, electric, water, telephone, cable TV
• Transportation: Car payments, auto insurance, gas, maintenance and repairs
• Insurance: Medical, dental, life, disability, long-term care
• Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs
• Taxes: Federal and state income tax, capital gains tax
• Debts: Personal loans, business loans, credit card payments
• Education: Children's or grandchildren's college expenses
• Gifts: Charitable and personal
• Recreation: Travel, dining out, hobbies, leisure activities
• Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living
• Miscellaneous: Personal grooming, pets, club memberships

Don't forget that the cost of living will go up over time. The average annual rate of inflation over the past 20 years has been approximately 3 percent. And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children's education early in retirement. Other expenses, such as health care and insurance, are bound to increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it's always best to be conservative). Finally, have a financial professional review your estimates to make sure they're as accurate and realistic as possible. Don't forget to factor in insurance benefits (especially medical) as your out-of-pocket costs are likely to be much different in retirement than when you're working.

Decide When You'll Retire

To determine your total retirement needs, you can't just estimate how much annual income you need. You also need to figure out how long you'll be retired. Why? The longer your retirement, the more years of income you'll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it's great to have the flexibility to choose when you'll retire, it's important to remember that retiring at 50 will end up costing you a lot more than retiring at 65.

Estimate Your Life Expectancy

The age at which you retire isn't the only factor that determines how long you'll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you'll have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. To guard against that risk, you'll need to estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you'll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There's no way to predict how long you'll actually live. With life expectancies on the rise, it's probably best to assume you'll live longer than you expect. To be conservative, you might project out to age 100 (or longer, if longevity is in your genes!).

Don't Forget to Inflate!

But you can't just come up with an expense figure and simply multiply it by the number of years you're planning on living... remember that little factor we talked about earlier - inflation? Not considering the impact of inflation can cause your plan to run off the rails - and soon you'd run out of money altogether. As we sometimes morbidly joke in this business, you may want to increase your bacon intake to match up with your portfolio's longevity!

It's a fairly simple matter to project out the future value of your retirement income requirement, using the average inflation rate of 3% (or higher to be more conservative), to give you a pretty good picture of the amount of money you'll need when you retire. There are many calculators available on the internet to help you with this process - just go to your favorite search site (MSN, Yahoo!, Google, etc.) and search for "retirement calculator". As an alternative, I'll be happy to work with you to come up with a reasonable figure for your own circumstances.

Identify Your Sources of Income

Once you have an idea of your retirement income requirement, your next step is to determine just how prepared you are to meet those needs. In other words, what sources of income will be available to you in retirement? Your employer may offer a traditional pension that will pay you monthly benefits (although this is becoming increasingly rare, especially in the private sector). In addition, you can likely count on Social Security to provide a portion of your retirement income, although many younger folks are making their plans without factoring in Social Security, just in case it's not there in the long run. You should be receiving an annual update of your estimated Social Security benefits. If not, to get an estimate of your Social Security benefits, visit the Social Security Administration website (www.ssa.gov) and order a copy of your statement.

Other sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and additional investments. The amount of income you receive from those sources is dependent upon the amount you invest, the rate of return on your investments, the internal costs of the investments, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.

Make Up Any Shortfall

If you've been diligent about saving, or are fortunate enough to have a funded traditional pension plan, your expected income sources may well be more than enough to fund even a lengthy retirement. But what if it looks like you're going to come up short? Don't run screaming down a hallway -- there are always steps that you can take to bridge the gap. A financial professional can help you figure out the best ways to do that, but here are a few suggestions:

• Try to cut current expenses (in your working years) so you'll have more money to save for retirement. This will have the added benefit of teaching you to get by on a little less both now and in the future, as well.
• Shift your asset allocation to increase the potential returns on your portfolio (always keeping in mind that a portfolio that offers higher potential returns most likely involves greater risk of loss)
• Lower your expectations for retirement so you won't need as much money (no beach house on the Riviera, instead maybe you'll plan to buy a Buick Riviera to drive to the rental beach house once a year!)
• Work part-time during retirement for extra income. Many folks are doing this nowadays, as the "kick back and relax" style of retirement is not their cup of tea. Staying active tends to maintain your health as you age, both physically and mentally.
• Consider delaying your retirement for a few years. Instead of a big fat "I QUIT" at your planned age, consider shifting gears and pursuing a different career, something that you're passionate about that you always dreamed of doing.

I hope the above discussion helps you to be better prepared as you plan toward your retirement. Too often, I talk to folks about their goals for retirement, and they've never considered the income side - the primary aim they have in mind is a particular age. By focusing on the retirement income requirement, you can be much better prepared for a long, happy, restful vacation from "work".

April Greetings

Well, it seems that I was a little premature in my call for Spring in last month's letter. As I write these lines, we had a bit of snow earlier in the day, so I'm thinking that the groundhog's call was better than mine altogether, and he really pushed it this year! This makes more than 10 weeks of Winter after he saw his shadow back in February...

Enough about the weather though - it's April, so what should we be focusing on? I mean, besides the fact that the Cardinals and the Cubs are both playing very well... With the cold weather, we haven't had much thought of mushroom hunting or turkey hunting, so - I thought now was a good time to bring up some issues surrounding inter-family loans, which I've addressed in my second article. Many times this issue comes up and you may find some interesting tidbits in that article.

The first article this month covers the question "what can I do to prepare more for retirement goals beyond my 401(k) and IRA?" While most folks are, understandably, at their limits by making the maximum annual contributions to the "regular" kinds of accounts, some folks would like additional avenues to use. This article should help you to think through some of the possibilities, and as always, I'm available to talk it over if you'd like.

Beyond 401(k) and IRA

You're contributing as much as you're allowed to a 401(k) or other employer-sponsored retirement plan. You're also contributing the maximum annual amount to your Roth or traditional IRA. But you want to set aside still more money to make sure your retirement is everything you hoped for. What options do you have? Here are some things to consider...

Before moving beyond - are you really maxing our your 401(k) and IRA?

IRAs and employer-sponsored retirement plans like 401(k)s have some real advantages when it comes to saving for your retirement. So, before you go any further, make sure you're really contributing all you can.

In 2008, most individuals can contribute up to $15,500 to a 401(k) plan, and up to $5,000 to a traditional or Roth IRA. If you're age 50 or better, though, you can make up to an additional $5,000 in "catch-up" contributions to your 401(k) in 2008, and an additional $1,000 to your traditional or Roth IRA. What's more, if you file a joint tax return with your spouse, your spouse may be able to make a full IRA contribution, even if he or she has little or no taxable compensation. (Call my office if you need help with the details on this one.)

Looking at deferred annuities

If you are looking beyond 401(k)s and IRAs, one option you may be aware of is a deferred annuity. Deferred annuities are generally funded with after-tax dollars, but earnings are tax-deferred; you don't pay tax until you take a distribution from the annuity, and then you only pay tax on the portion of each distribution that represents earnings. There is also no annual limit on contributions to an annuity.

The tax deferral offered by a deferred annuity is a nice feature, but it comes with some tradeoffs that you'll need to weigh carefully:

• There are associated fees and costs, including annual fees, investment management fees, and insurance expenses
• A surrender charge may be imposed if you withdraw funds within a certain period of time (generally 7 years!)
• A 10% federal penalty tax (in addition to any regular income tax) may apply if you withdraw funds from an annuity before age 59 1/2
• Investment gains are taxed at ordinary income tax rates, not at the lower capital gains tax rates

Annuities do have some unique benefits beyond tax deferral. With annuities, you can elect an annual payment amount that is guaranteed for the rest of your life (the guarantee is subject to the payment ability of the issuing institution) - this relative degree of certainty can be psychologically and financially comforting. In addition, annuities may offer some creditor protection under state law.

Taxable investment accounts

Your other basic option is to invest through a taxable investment account. The lower federal income tax rates that apply to long-term capital gains and qualifying dividends go a long way toward taking the bite out of holding investments outside of a tax-advantaged retirement account like a 401(k) or IRA. And, a taxable investment account offers one enormous advantage: You gain a tremendous amount of flexibility. You can choose from a virtually unlimited selection of specific investments, and there's no federal penalty for withdrawing funds before age 59 1/2.

Investment options worth mentioning:

• Mutual funds or separately managed accounts (SMAs) managed for tax efficiency intentionally minimize current taxable distributions
• Indexed mutual funds and exchange-traded funds (ETFs) trade infrequently and therefore tend to have low annual taxable distributions
• Tax-free municipal bonds and municipal bond funds generate income that is free from federal and/or state income tax

Always keep the big picture in mind

Your investment decisions should be based on your individual goals, time frame, risk tolerance, and investment knowledge. You should evaluate every investment decision with an eye toward how the investment will fit into your overall investment portfolio, and whether it will meet your general asset allocation needs. A financial professional can be invaluable in helping you evaluate your options.

Inter-Family Loan Topics

Often, the topic of Inter-Family Loans comes up in my discussions with clients. Many times a parent wishes to help out a child with the purchase of a home, or some other financial goal - but they don't want to just hand over the money with no responsibility attached. Inter-family loans can be a good way to approach this topic - the child continues to have fiscal responsibility, and the parent is able to earn a bit on the loan, while still feeling as if they're in a "helping" position with the child. Below are a few items to think about, along with the additional topic of co-signing loans with family members.

Should I lend money to a family member?

Lending money to a family member may seem like the right thing to do. After all, what could go wrong? Your son, sister, father, or cousin really needs your help, and there's no question that he or she will pay you back.

Or is there? Lending money to anyone, even someone you trust, is risky. No matter how well-intentioned the borrower is, there's always the chance that he or she won't be able to pay you back, or will prioritize other debts above yours.

When deciding, consider these tips:

• Don't lend money you can't afford to lose. If you make the loan, will you still be able to meet your savings goals? If the loan isn't paid back, will the financial effect be negligible or substantial?
• Avoid becoming an ATM. Relatives (especially your children) may ask you for a loan because it's convenient, but they may be able to obtain the money easily elsewhere. Explore other options with them first.
• Think through the emotional consequences. Will you be able to forgive and forget if loan payments are sporadic or if the loan isn't paid in full? How hurt will you be if your relative freely spends money (on a vacation, for example) before paying you back?

If you decide to go through with the loan, make sure expectations on both sides are clear. Discuss all terms and conditions and consider putting them in writing. You may even want to draft a formal loan agreement. At the very least, settle on the amount of each loan payment and the date by which the loan must be paid in full. Open-ended obligations inevitably lead to misunderstandings.

On the other hand, don't feel guilty if you decide to turn down your family member's loan request. It's hard to say no, but it's still easier than repairing a damaged relationship if things don't work out.

Is it a good idea to cosign a loan?

At some point, you may be asked to cosign a loan for a friend or relative who is unable to qualify for one independently. While it's noble to want to help someone you care about, think carefully about the consequences. Some people readily agree to cosign a loan because they believe it won't affect their own finances, but unfortunately, that's not the case.

When you cosign a loan, you're guaranteeing the debt. Legally speaking, this means that you're equally responsible for paying back the loan. If the primary borrower misses a payment, the lender can ask you to make the payment instead. If the borrower defaults on the loan, you may have to pay off the outstanding loan balance as well as cover late fees and collection costs, if any. In many states, creditors can even try to collect the debt from you before trying to collect from the borrower.

You should also keep in mind that when you cosign a loan, it becomes part of your credit history and may negatively affect your ability to get credit if the borrower makes late payments or defaults on the loan. And when you apply for credit, lenders will generally include the monthly payment for the cosigned loan when calculating your debt-to-income ratio, even though you're not the primary borrower. This ratio is one of the most important factors lenders use when making credit decisions, so the outstanding loan debt could make it harder for you to obtain a mortgage, buy a car, or secure a line of credit.

Cosigning a loan is risky enough that the federal government requires creditors to issue a notice to all cosigners that explains their obligations. If, after careful consideration, you decide to cosign a loan, make sure you also get copies of the loan contract and the Truth-In-Lending Disclosure and thoroughly read them. Monitor the loan as closely as possible (you may want to ask the loan officer to contact you in writing if the borrower misses a payment), and occasionally review your credit report so that there are no unfortunate surprises down the road.

March Forth

Greetings – I think Spring has sprung (or it’s about to!).

I don’t think I can recall a Winter that has seemed as long as this one has… it seems like we’ve had bad weather, bitter cold, and dreary skies for six months! It’s awful nice to begin to see the warmer weather returning to Central Illinois .

In this month's newsletter, I talk about a couple of issues I've uncovered recently in the area of income taxes. Then I've included an article about identity theft that I think we can all learn from - and put to use. Let me know if you have any questions!

Income Tax Items of Interest

I received something in the mail that was a bit disturbing to me, so I thought I’d mention it for your information. There is a tax preparation outfit in the Springfield area (I won’t mention it by name, but if you have been on Wabash Boulevard recently you’ve seen their pitchman dressed in green waving at cars), who has sent a notice out to, presumably, the entire area, advertising that they will do your taxes for free.

I’m as big of a bargain hunter as the next guy, so when I see something for free it piques my interest. When I read the fine print on the ad, it points out that the free tax preparation doesn’t apply to refund anticipation loans (RALs). Now we’ve arrived at the crux of the matter. As it turns out, this outfit (and most other “tax prep in a box” stores) have very little vested interest in preparing your return accurately – except for the fact that they want to saddle you with the fees associated with a refund anticipation loan.

According to the Center for Responsible Lending, RALs are nothing short of the Pay-Day check cashing stores in sheep’s clothing – offering short-term cash advances at amazing rates: starting at around 40%, and ranging as high as 700% in some cases. Obviously this is a lucrative game, as the big name tax preparation firms are into it in a big way, and many other, smaller firms (like the one I received the advert from) are also looking for a piece of the pie.

The long and the short of it is this – as enticing as it may sound to get your refund immediately when you sign your tax return, don’t do it! With e-Filing and direct deposit, most of the time you’ll have your refund back in just a few weeks. And if you’re getting so much back that this becomes a life-changing event for you, you should probably review your W4 and have a little less withheld – thereby giving yourself a raise with every paycheck.

Another point that I wanted to mention, regarding tax refunds: Does everyone realize that the Economic Stimulus payments (the one that Congress has decided all of us Americans need to fix the economy) are simply a refund of your own money? And that at some point we’re going to have to give it back, with interest?

Identity Theft Protection

Whether they’re snatching your purse, diving into your dumpster, stealing your mail, or hacking into your computer, they’re out to get you. Who are they? Identity thieves.

Identity thieves can empty your bank account, max out your credit cards, open new accounts in your name, and purchase furniture, cars, and even homes on the basis of your credit history. If they give your personal information to the police during an arrest and then don’t show up for a court date, you may be subsequently arrested and jailed.

And what will you get for their efforts? You’ll get the headache and expense of cleaning up the mess they leave behind..

You may never be able to completely prevent your identity from being stolen, but here are some steps you can take to help protect yourself from becoming a victim.

Check Yourself Out

It’s important to review your credit report periodically. Check to make sure that all the information contained in it is correct, and be on the lookout for any fraudulent activity.

You may get your credit report for free once a year, from each of the three national credit reporting agencies. To do so, contact the Annual Credit Report Request Service online at www.annualcreditreport.com or call (877) 322-8228.

If you need to correct any information or dispute any entries, contact the three national credit reporting agencies:

• Equifax – www.equifax.com – phone 800-685-1111
• Experian – www.experian.com – phone 888-397-3742
• TransUnion – www.transunion.com – phone 800-916-8800

Secure Your Number

Your most important personal identifier is your Social Security number (SSN). Guard it carefully. Never carry your Social Security card with you unless you need it for a specific purpose (such as applying for a passport or driver’s license). The same goes for other forms of identification (such as health insurance cards) that include your SSN. If your state uses your SSN as your driver’s license number, request an alternate number. Don’t have your SSN pre-printed on your checks, and don’t let merchants write it on your checks. Don’t give it out over the phone unless you initiate the call to an organization that you trust. Ask the three major credit reporting agencies to truncate it on your credit reports. Try to avoid listing it (where possible) on employment applications; offer instead to provide it during your interview.

Don’t Leave Home With It

Most of us carry our checkbooks and all of our credit cards, debit cards, and telephone cards with us all the time. That’s a bad idea – if your wallet or purse is stolen, the thief will have a treasure chest of new toys to play with.

Carry only the cards and/or checks you’ll need for any one trip. And keep a written record of all your account numbers, credit card expiration dates, and the telephone numbers of the customer service and fraud departments in a secure place – at home. It may be useful to make a photocopy (or as I do, a computer-scanned image) of all of your credit cards, driver’s license, insurance cards, etc., and keep those images in a safe place where you can get to them quickly in the event that your cards are stolen.

Keep Your Receipts

When you make a purchase with a credit or debit card, you’re given a receipt. Don’t throw it away or leave it behind – it may contain your credit card number, plus it is your sole defense in the event of fraud within the store. And don’t leave it in the shopping bag inside your car while you continue shopping either; if your car is broken into and the item you bought is stolen, your identity could be stolen as well.

Save your receipts until you can check them against your monthly statements, and watch your statements for purchases you didn’t make, or for amounts that don’t match. When you’re finished matching them, shred them!

When You Toss It, Shred It

Before you throw out any financial records such as credit or debit card receipts and statements, canceled checks, or even offers for credit cards you receive in the mail – shred the documents, preferably in a cross-cut shredder. If you don’t, you may find that the panhandler going through your dumpster was looking for more than just discarded leftovers. These cross-cut shredders are very affordable (around $20) and available at most discount stores and office supply outlets.

Keep A Low Profile

The more your personal information is available to others, the more likely you are to be victimized by identity theft. While you don’t need to become a hermit in a cave, there are steps you can take to help minimize your exposure:

• to stop telephone calls from national telemarketers, list your telephone number with the FTC’s National Do Not Call Registry by calling 888-382-1222 or registering online at www.donotcall.gov
• to remove your name from most national mailing and e-mailing lists, as well as most telemarketing lists, write the Direct Marketing Association at 1120 Avenue of the Americas, New York, NY 10036-6700, or register online at www.optoutprescreen.com
• when given the opportunity to do so by your bank, investment firm, insurance company, and credit card companies, opt out of allowing them to share your financial information with other organizations.
• You may even want to consider having your name and address removed from the telephone book and reverse directories.

Take a Bite Out Of Crime

Whatever else you may want your computer to do, you don’t want it to inadvertently reveal your personal information to others. Take steps to help assure that this won’t happen.

Install a firewall to prevent hackers from obtaining information from your hard drive or hijacking your computer to use it for committing other crimes. This is especially important if you use a high-speed connection that leaves you continuously connected to the internet, such as cable or DSL. Moreover, install virus protection software and update it on a regular basis as well.

Try to avoid storing personal and financial information on a laptop; if it’s stolen, the thief may obtain much more than the value of your computer. If you must store such information on your laptop, make things as difficult as possible for a thief by protecting these files with a strong password – one that’s at least eight characters long, and that contains uppercase and lowercase letters, as well as numbers and symbols.

“If a stranger calls, don’t answer.” Opening emails from people you don’t know, especially if you download attached files or click on hyperlinks in the message, can expose you to viruses, infect your computer with “spyware” or “malware” – software that captures information by recording your keystrokes – or lead you to “spoof” websites (websites that impersonate legitimate business sites) designed to trick you into revealing personal information that can be used to steal your identity.

If you wish to visit a business’s legitimate website, use your stored bookmark or type the URL address directly into your browser. If you provide personal or financial information about yourself over the internet, do so only at secure websites – to determine if a website is secure, look for a URL that begins with “https” instead of “http” or a padlock icon in the bottom of the browser’s status bar.

And when it comes time to upgrade to a new computer, remove all your personal information from the old one before you dispose of it. Using the “delete” function isn’t sufficient to do the job; overwrite the hard drive using a “wipe” utility program (several are available on the market). The minimal cost of investing in this software may save you from being wiped out later by an identity thief.

Lastly, Be Diligent

As the grizzled old duty sergeant used to say on the television show “Hill Street Blues” – Be careful out there. The identity you save may be your own!