Financial Idea's Blog

What Does A College Plan Do For Me?

mlarkin19 — Thu, 02 Sep 2010 17:30:39 +0000

Well, it does lots of things – so where do we start? OK, before the first thing , let’s point out that anyone can contribute to it. That is, you can be our future student’s mom and dad, or grandma and grandpa, or godparents, or just family friends wanting to give a shower gift.
That aside, what it does for everyone involved is make it possible to have enough money for post-secondary education, which goes up at a rate of about 7% every year, double the amount of normal inflation.
This happens as a result of putting together a plan well before the last minute to ensure that your goals can happen. I can’t tell you how many people in my neighborhood are pushing baby carriages with the attitude that they don’t have to worry about that for a long time. Technically, they don’t, but I guarantee it will be a lot more expensive later than it is now. Personally, I’d rather see my clients making realistic choices based on their incomes and lifestyles now, with plenty of time to make adjustments as necessary later, and that means putting together a plan that picks out a price range for various colleges, forecasts the future cost, and lets you know how much you’d need per month, per year or as a single lump sum in order to reach that goal.
Only that way can you know if it’s realistic to want to pay for four years, all expenses, or if your child is going to have to live at home, or some other variant, like you pay for the first two years and they pay for the last two or they go to junior college for the first two years and then transfer to a major university. All of those are valid family value approaches – you just need to know as early as possible what’s possible given your situation.
After that, we can get into the various benefits that a 529 plan offers beyond just having any money at all for the purposes of school.
So, most people ask me at this point, “Is this good for any school?” Or do I have to choose one now? Good news – the program does NOT make you pick a school ahead of time. In fact, there’s not even a requirement that your student go to a four-year university! You can use 529 funds at any institution which accepts U.S. Federal Financial Aid. That includes trade schools and special purpose schools, like cooking school or golf school or a school for private pilots. It also includes some 500 or more universities OUTSIDE the United States.
The only word of caution there is: don’t model your plan based on a junior college somewhere if you’re certain your child is Harvard material. It won’t work.
Another question people have includes, “What about scholarships?” More good news! If your child gets an academic or athletic scholarship which means that you’ve saved too much in the 529, you get to withdraw an amount matching the scholarship to be used for some other purpose, without penalty.
Yet another question is: “What if there’s money left over when they graduate?” Well, there’s a few answers to that. The first is that it doesn’t belong to them in the first place – the way this plan is structured, they are your beneficiary instead and you are granting the money to them to pay college expenses. So, if they have younger siblings, those younger ones can become the new beneficiary. Or, if they want to go past the bachelor’s level to one or more graduate programs, the remaining money can be used there, up to 30 years after high school graduation.
Failing that, you could make yourself the beneficiary and use the remaining funds to pay for adult continuing education later in life. Finally, the worst case, you could just take it out and not use it for education at all, but the IRS will charge you a 10% penalty on that amount. Maybe that’s a big deal that you want to avoid, and maybe it’s not – that’s a case-by-case situation.
Next to last, you don’t have to be a resident of the state where the plan is based in order to participate. For example, the state of Virginia plan is hosted by American Funds, the state of West Virginia by Hartford Funds, Ohio by Blackrock funds, Oregon by MFS funds, Arizona by Fidelity, etc. The only reason to pick a plan from your home state is in the cases where you get a state income tax break for doing so. Not all states offer this, and if you live in one of the states that has no income tax, then it doesn’t matter anyway.
And, last but not least, the VERY BEST PART about 529 plans: if you’ve stayed with this article so far, they are FEDERALLY TAX FREE. That’s right, you start putting money away now, while baby is 1 year old, and it grows until they need it at 18 or 19. All of that growth will never be taxed. Now that’s a sweet deal!
Want to know more? Let’s talk, and create a plan that’s right for you and your family.

Technorati Tags: college plan, Invest in college, pay for school, student loans

Your Kid’s College Loan: Who Should Foot The Bill?

Investopedia.com Headlines — Thu, 02 Sep 2010 15:02:42 +0000

Discover the federal student loan options for both parents and students.

If you could afford it, you’d pay for your kid’s future education expenses and not borrow a cent. But after reviewing your finances and potential scholarships offered, you may realize that student loans will be required to pay for part or all of the cost of college for your entering freshmen.

What are the federal student loan options for both parents and students for borrowing money? Read on to find out.

Technorati Tags: Financial Ideas, Investing strategy, Retirement

All Annuities Are Bad, Right?

mlarkin19 — Thu, 22 Jul 2010 19:10:19 +0000

This is a tricky one for most people, and for a couple of reasons.

One is that people like Suze Orman tell us that they are bad, and therefore they must be. Keep in mind that Suze Orman used to have a federal license for the securities industry, and that she let it lapse. The reason for that only she knows, but one characteristic of having such a license is that you are obligated to tell the objective truth or face possible civil or even criminal charges while perhaps even being barred for life from the industry. If you’re not licensed, you can say whatever you want within 1st Amendment rights. Why she says it is a different story which I won’t speculate on.

A second reason this is tricky is because many of them really used to be bad. While it’s not an absolute rule, it’s true in many cases that annuity contracts written prior to about 2003 lacked some of the really great features that are now available. We’ll get to that in a second.
A final reason comes down to how a professional advisor explains them to you, and whether they fully explain the four basic types of annuities, so that, if one is appropriate for you, you’ll know which type best fits your needs.

So, what is an annuity basically? It is an insurance contract, written by an insurance company, and like with most insurance policies, the company is betting that you won’t live as long as you think you might. This insurance contract guarantees either a specified amount of money which will come to you every month for the life of the contract, or it guarantees a minimum income or a minimum withdrawal which you could, but don’t have to, take every month. The contract runs typically for your life and the life of your spouse, but that’s just one of many choices. You could choose a reduced benefit if only your spouse remains, or no benefit, or you could choose to have a benefit which lasts for your life plus 10 years to any named beneficiary, or even just have it last for ten years and that’s it, even if you’re still alive.

Which choice you make depends on your purpose for the money. Is it to supplement other sources of income, which is most often, or might it just tide you over for ten years after which you plan to sell some rental properties and get income that way? Only a professional advisor, who is preferably not tied to one particular provider, can help you sort through all this.

Annuities are also offered as Fixed or Variable, where Fixed is a pure insurance contract in which you are guaranteed a return, typically small, like 3%, 3.5% or 4%, no matter what the market is doing. Variable can be better or worse than that, as they are based upon the performance of underlying mutual funds. You could have a negative 10% or worse year, or you could have a positive 20% or better year.

Here’s the bell and the whistle about the variable offerings though. In the last few years, many annuity companies have begun to offer “step-up” riders that say in essence, if we have a really good year, it’s all yours, and if we have a year that is less than 5% positive, even negative, we’ll guarantee you 5% positive. Guarantee! And if next year is better than 5%, you’ll get that. The first catch is that, if you have a number of down years in a row, and giving you that more than 5% would still leave them underwater, then they might restrict the gain for that year. The second catch is that, well, this whole guarantee costs money. Not a big surprise, and actually still quite worth it. Now, this is case-by-case, and not necessarily exactly what you should expect, but for example, if it costs you 4% of your total investment to get in to this annuity, it might cost you an extra ¾% to get the guarantee as well. That’s a pretty cheap guarantee in my book.

The next concept is Immediate versus Deferred. This is simple. Immediate means you put money in and you start getting it out next month. This is a frequent choice for someone already retired who wants to protect the money and guarantee a steady income stream. Deferred just means you’re starting to put money in now, but you won’t need it for awhile.

The last concept is something called “annuitization”. That seems kind of redundant, the idea of annuitizing an annuity, but that’s what it’s called. What it is, is electing to lock down the contract, to say, I will never contribute another dime, and I want to know exactly how much I’m going to get each month from now on, and there’s no changing your mind. That has its place, but it used to be the only option, which is one reason some people still think they’re bad.
With the reforms, you can now keep adding after you’ve taken some out, if an inheritance or other windfall comes your way, or you just change your mind. And you can choose to not take any for awhile, even if you’ve already taken some. You do this by getting certain types of annuities that don’t require “annuitization”.

There are a lot of moving parts here, and there are also some tax advantages, but the bottom line is that they can be a very good idea.
Want to know more? Let’s talk, and create a plan that’s right for you and your family.

Technorati Tags: annuities, annuity, Retirement

What’s Wrong With Getting A Big Tax Refund?

mlarkin19 — Mon, 12 Jul 2010 14:21:05 +0000

The obvious answer here seems to be “nothing”. But actually, it’s a big something.

I know many people who tell me that getting a big tax refund is actually a part of their “budget”, because it means they know that every April they can take a family vacation or upgrade their big screen TV or pay off some more debt or whatever it is in their case.

The first bit of honest truth is that these people don’t have a budget. A budget is something you create and live by, with periodic adjustments, which is intended to keep you living within your means and actually saving and investing for your future as well. It doesn’t allow for splurging without planning.

(On that note, before you all click the back button in disgust J, it is still possible with a budget to take a family vacation and upgrade your TV, you just have to plan for it and allocate a bit each paycheck instead of getting wild and crazy every April!)

Last off topic bit about budgeting, make sure that whatever budget form you use, that it starts with you putting down your Gross Income at the top, and the VERY NEXT THING should be how much you can save and invest. If that is 10% of your gross income, you have a pretty good chance of reaching some of your goals. If it’s 20%, you have really good chance of reaching all of your goals. After that comes taxes, housing, insurance, utilities and everything else. Most budget forms have taxes and such right after income, with saving at the bottom. That says “save whatever is left over”, while the message should be “pay yourself first.” Ok, I’ll get off that soapbox for now.

Why don’t you want a big refund? Simple, because it means that you’ve been paying too much every paycheck in taxes, and they’re just giving you back your own money, AND they’re giving it back to you after using it for up to a year, with ZERO INTEREST.

Guess what happens if you’re short in paying them? There’s a possibility of interest AND penalties.

With just a little bit of discipline, you can increase the withholding exemptions on your W-4 form, so that your company withholds a little bit less for the federal government and your paycheck is that much larger. Now, instead of spending that extra because you have it, you add to your budget the capability to save and invest that amount. Now it’s working for you. If you want to save it for a vacation, so be it, it’s still working for you in the meantime, making interest which you get to keep!

That said, you still need to be fully aware of what you need to be prepared to retire someday, and that needs to take the front seat. You can’t borrow for retirement, at least not in this world or not yet anyway, and it wouldn’t make sense for anyone to lend you money you can never pay back. (Don’t get me started on subprime mortgages. J).

Want to know more? Let’s talk, and create a plan that’s right for you and your family.

Technorati Tags: tax deduction, tax rebate, tax refund, US finance

Why Shouldn’t I Just Buy An Index Fund?

mlarkin19 — Mon, 28 Jun 2010 01:52:01 +0000

Okay, on this one, I’ll start off by noting that, just like the idea of doing-it-yourself, it’s entirely possible that this could work, and in some specific time periods in the past it has worked. Of course, funds which follow the same index but are from different fund families behave a little differently, and within fund families there are funds which track dozens of different indexes. My English teacher would remind me that I should say “indices”, but I do what I do, and she does what she does.(That lesson did actually stick, I’m just having fun today.)

Let’s look at one of the most popular indexes, the S&P 500.

Lots of fund companies offer a version of this, which essentially is designed to take a weighted average of the top 500 performing stocks and roll that into one entity which many of us decide should be called “the market”. The market is actually a much bigger thing, but we’ll go with this common viewpoint for now.

Here’s what happens: the 500 stocks which make up the average are not randomly chosen. They are the best performers at the time, according to the parent firm which runs the index, Standard and Poor’s. Standard and Poor’s (or S&P), decides on a fairly frequent basis whether or not a given stock should be added to the index because of its great performance. The index, however, cannot become the S&P 501, which means simply that in order to add a stock, another one must be removed.

If a company merges with another company or goes out of business, that’s an easy situation. The index cannot become the S&P 499, either, so the next best performer gets added and the weighted average is recalculated.

Now, remember what I’ve said before about buying low and selling high, and, although it can be emotionally difficult, how it doesn’t take much of an intellectual stretch to see why that’s a good idea. Does this index work that way? Or not?

Remember, when there’s a vacancy, the next best performer is added. If a great performer just cannot be ignored, then the index’s worst performer, at the moment, can be removed in its favor. What does that mean? It means that the index is effectively selling low, by removing low performers, and buying high, by adding top performers. Read that again, selling low and buying high. If you own that index, or any other index, that’s what happening, and you don’t have any choice in the matter.

Last but not least, are you comfortable owning all 500 of those stocks? While many investors are okay with whatever they’re invested in as long as it makes money, many other investors have an explicit desire to stay away from certain things that don’t appeal to them. Let’s take the so-called “sin” stocks of alcohol and tobacco. The S&P 500 of April 1^st, 2010, contained Altria (MO, the former Philip Morris), and Phillip Morris International (PMI), formerly part of Altria but spun off to reflect the European market separately from the US. It also contained Brown-Forman Corporation (BF.B), the maker of Jack Daniel’s, Southern Comfort, Canadian Mist, Korbel Champagne and many others.

It also included American International Group (AIG), Goldman Sachs (GS), and Bank of America (BAC) which you may have read about in recent books or on the web and about which you may or may not have an opinion.

What if you personally don’t like energy companies? Would it bother you to own Chevron (CVX), Conoco Phillips (COP), or Exxon Mobil (XOM)? Or maybe you don’t like defense when you discover yourself owning General Dynamics (GD) and Lockheed Martin (LMT).

These are just a few examples of which there are many similar ones in the same industries. I am not saying anything about the companies, or my personal preferences, nor am I accusing them of anything. I’m just mentioning their inclusion in the index. The index also contains other companies, some of which I recommend for certain clients when it is appropriate for them. The question is, are they all right for you, and even if they are, is the index buying (or adding) them at the best possible time for you?

Want to know more? Let’s talk, and create a plan that’s right for you and your family.

Technorati Tags: how to invest, index funds, Invest Stock, learning index funds, What to Invest In

What’s A Dumb Financial Question?

mlarkin19 — Sun, 27 Jun 2010 03:36:12 +0000

Oh good, an easy question! ?

There isn’t one.
Say you came into my office and asked me a question, I explained the answer, and you nodded and went about your business, understanding a little bit of the answer but not really why or well enough even to remember a week later. Would I have done my job? Not really, or at least not yet.

That’s how a lot of information gets “shared” these days though. “Answers” are disseminated across the TV and the Web by people who know what they’re talking about and by people who don’t. Some of them are in official positions and so “should know” and others are not so official, like many bloggers, but could and do really know.

The opposite is also true,but what’s really important to you is, do YOU know? After all, it’s YOUR money.

Here’s my approach: you can ask me whatever financial questions you have. One-on-one. It’s not like you’re at a seminar with 100 other people, and you don’t want to raise your hand because the other questions seem far more advanced. Then you can ask me again, the same way or a different way. Next week you can call me and ask for a little more clarification. I might even encourage you to read another source on the topic as well.
I used to teach a series of technical courses at a community college, and I discovered early on that different people have different learning styles. So, I might explain a concept a certain way, and some of the people got it, and others didn’t, and they were all listening. Because of that, I made sure to tell them not only to ask questions about what I was saying, but if they really wanted to know what the textbook author was saying, to read another text from another writer on the same topic. That other author might be saying the same thing, but in such a different way that it “clicks” with a given person, the way the original information did not.
There are also different styles of learning. Some surveys have established that in the United States alone, some 70% of us are visual learners. The same surveys tell us that about 10% of us are auditory (listening) learners, so for example we might prefer storytellers to books. The remaining 20% of us are “kinesthetic” learners, meaning we learn best via one or more of the other of our five senses: touch, taste and smell. Many of us are a close combination of more than one of these.
The point here is that, because there’s more than one “right” way to learn, then by definition there can be no “dumb questions”. This is a difficult business to understand sometimes, and it’s my job to make sure that my clients who are serious about providing for themselves and their families in the future know what to do next.
Want to know more? Let’s talk, and create a plan that’s right for you and your family.

Technorati Tags: Financial Question, How to Invest Stock, What to Invest In

Why Shouldn’t I Use A Discount Brokerage?

mlarkin19 — Tue, 22 Jun 2010 14:03:42 +0000

This is a really great question, especially since many of the most popular investment books available today say exactly the opposite.

They tell you that you can do it yourself, and for a lot less money, and you know what? They’re right! But as you probably suspect, there’s a hidden catch that they’re not telling you about. The catch is you.

You see, most of us are really skilled at one or more things, but there’s thousands of things we could be skilled at. I could walk down the street and stop any one of you and find out maybe that you’re a top-notch web designer, or a first-rate auto mechanic, or that you run an Alaskan fishing expedition, or any number of other possibilities that I don’t do.

Could I learn Adobe’s Photoshop and InDesign? Sure. Would that make me a web designer? Nope. Could I go to a nearby technical college and learn how to be an auto mechanic? Yes, but that wouldn’t make me a good one. And in the interest of full disclosure, I do my fishing at the local Kroger. I could certainly save some fees on those tasks by doing them myself, and so mathematically the do-it-yourselfers are correct, but that’s not really the issue when it comes down to it.

So can you invest by yourself and save some fees? Yes, you can. But that doesn’t make you good at it. And it doesn’t mean you have time for it. For example, you could get totally up-to-speed on all 4,000 or so mutual fund choices out there by reading their prospectuses, free to the public. If you read only five of those a day, you’d know everything there was to know about them in only 26 months! Doesn’t that sound like fun? J

And what’s more, you are emotional about your money – you can’t help it. The same thing is true for everyone else, and they can’t help it either. In fact, 80% of all investors lose money because they don’t have the experience to do what seems intuitive to all of us: that is, buy low and sell high.

Why is that? Well, buying low is pretty terrifying. How many people do you know who put a ton of money into the market on or around March 9^th, 2009? That was the day of the most recent absolute market low at 6,547.05, as compared to today’s close (June 17^th, 2010) of 9,816.49. If they had, they could be looking at gains of 50%. Of course, I could point you to over 120 individual stocks which have gained by more than 100% in that time. Now, did I know about that in advance? Am I like those guru’s all over the web selling you newsletters about their 1000’s of percent gains overnight? No. I just knew it was a pretty good bet, though not a sure bet (because there isn’t any) and I’m willing to talk to naturally concerned people about how it works.

On the opposite side, selling high tends to not work so well either, because that’s when the newspapers and television are all crowing about how wonderful everything is, again, finally. Who would sell then, when that great pick you made is headed to the moon (even though it’s not)? Sounds crazy, but that’s how we are.

Briefly back to the car mechanic analogy: would you study mechanics for a few minutes a week, open your hood, take off a few things and put on a few other things and then go tearing off down the road expecting the best? I hope not, and neither should you. That’s why we need professionals who take the time to hear us and coach us, and that’s what I’ll do for you if you want.

Want to know more? Let’s talk, and create a plan that’s right for you and your family.

Technorati Tags: discount brokerage, How to Invest Stock, Investing Stock, Learn To Invest, Stock Market Education, What to Invest In

Royalty Income Trust

Investopedia.com Headlines — Tue, 22 Jun 2010 13:00:00 +0000

Term of the Day for Tuesday, June 22, 2010

Technorati Tags: Financial Ideas, Investing strategy, Retirement

Investing With A Purpose

Investopedia.com Headlines — Wed, 16 Jun 2010 15:26:21 +0000

Setting goals is the first step in determining which investment vehicles are right for you.

Technorati Tags: Financial Ideas, Investing strategy, Retirement

4 Retail Stocks Near All-Time Highs

Investopedia.com Headlines — Wed, 16 Jun 2010 06:00:00 +0000

4 Retail Stocks Near All-Time Highs

Technorati Tags: Financial Ideas, Investing strategy, Retirement