Immediate Annuities- Are They Right For You?

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Early this week, The Wall Street Journal published a story on fixed immediate annuities gaining popularity in light of the lower interest rates currently being offered to retirees by traditional fixed income investments such as bonds, CDs and money market accounts. Here is a quick oveview of immediate annuities:

Immediate annuities can provide dependable financial security: a stream of income payments guaranteed to continue for the rest of your life or for a period you select. If you are about to retire, an immediate annuity may be a good place to put a large lump sum of money accumulated for retirement through another savings or investment vehicle. You also can convert your deferred annuity into an immediate annuity to start receiving income.

To purchase an immediate annuity, you make a one-time payment, and distributions typically begin within a month. Immediate annuities can be fixed or variable, just like deferred annuities. The income payments you receive from fixed immediate annuities are based on the amount you contribute, your age and the interest rate environment at the time of purchase. The payments to you will not change. The payments from variable immediate annuities fluctuate based on the performance of the investment options you choose. Although payments may go up or down, variable annuities are designed to provide income that can rise over time to help you keep pace with inflation.

The principal in an immediate annuity is not readily accessible. If you need more money than the income provided by the immediate annuity, you can minimize this drawback by keeping some of your retirement funds in a liquid account, such as a savings account or money market fund. There also is a chance you may lose some of your principal. If you choose an income for life option with no refund guarantee, and you should die before your principal is all paid out, the balance of your principal and any earnings will go to the insurance company rather than to your heirs. Fortunately, annuities offer several guaranteed payout options.

An immediate annuity is most appropriate for people who want to:

• Retire in the very near future, or are already retired
• Begin drawing an income from a lump sum of money that they currently have
• Derive an immediate return on their investment
• Receive a steady monthly check for the rest of their live

Remember that a fixed annuity guarantees you a set payment for a long period of time – possibly the rest of your life. But you might live longer than you think. Those payments you started getting when you first retired won’t change at all- so you loose purchasing power if the is inflation. Also, be sure to understand what happens to the annuity payments when you die.   If the annuitant opts for a ‘life income’ option, the insurance company will be under an obligation to pay income for the rest of his life. However, if he dies within a month of buying an immediate annuity plan, the insurance company will pocket the entire contribution and his heirs will not get a single dime.  Be sure to fully understand all the terms and conditions of an immediate annuity before signing on the “dotted” line.

Reverse Mortgages—As the Market Tanks, More Seniors Are Considering This Option

This Blog Is Sponsored By Soundview Financial’s Reverse Mortgage Guide. For more information on Reverse Mortgages, please visit the Reverse Mortgage Guide by clicking here.

As the value of retirment accounts have been dramatically reduced, seniors are looking at alternative strategies to fund ongoing living expenses in retirement.  A reverse mortgage allows you to tap the equity in your home without having to sell or take out another type of loan.  The proceeds of a  reverse mortgage allow you to pay your bills and stay in your home.

Here’s a basic overview on reverse mortgages.  Remember, to consult with your financial advisor before taking out a reverse mortgage since this type of mortgage may not be right for you and always remember to read the fine print.

Until recently, there were two main ways to get cash from your home:
• you could sell your home, but then you would have to move; or
• you could borrow against your home, but then you would have to make monthly loan repayments.

Now reverse mortgages give you a third way of getting money from your home. And you don’t have to leave your home or make regular loan repayments.

A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live there. It can be paid to you all at once, as a regular monthly advance, or at times and in amounts that you choose. You pay the money back plus interest when you die, sell your home, or permanently move out of your home.

Who’s Eligible

All owners of the home must apply for the reverse mortgage and sign the loan papers. All borrowers must be at least 62 years of age for most reverse mortgages. Owners generally must occupy the home as a principal residence (where they live the majority of the year).

Single family one-unit dwellings are eligible properties for all reverse mortgages. Some programs also accept 2-4 unit owner-occupied dwellings, along with some condominiums, cooperatives, planned unit developments, and manufactured homes. Mobile homes are generally not eligible.

How They Work

Reverse mortgage loans typically require no repayment for as long as you live in your home. But they must be repaid in full, including all interest and other charges, when the last living borrower dies, sells the home, or permanently moves away.

Because you make no monthly payments, the amount you owe grows larger over time. As your debt grows larger, the amount of cash you would have left after selling and paying off the loan (your “equity”) generally grows smaller. But you generally cannot owe more than your home’s value at the time the loan is repaid.

Reverse mortgage borrowers continue to own their homes. So you are still responsible for property taxes, insurance, and repairs. If you fail to carry out these responsibilities, your loan could become due and payable in full.

What You Get

These loans can be paid to you all at once in a single lump sum of cash, as a regular monthly loan advance or as a creditline that lets you decide how much cash to use and when to use it. Or you may choose any combination of these payment plans.

Some reverse mortgages are offered by state and local governments. These “public sector” loans generally must be used for specific purposes, such as paying for home repairs or property taxes. Other reverse mortgages are offered by banks, mortgage companies, and savings associations. These “private sector” loans can be used for any purpose.

The amount of cash you can get from a private sector reverse mortgage generally depends on your age, your home’s value and location, and the cost of the loan. The greatest cash amounts typically go to the oldest borrowers living in the most expensive homes on loans with the lowest costs.

The amount of cash you can get also depends on the specific reverse mortgage plan or program you select. The differences in available loan amounts can vary greatly from one plan to another. Most homeowners get the largest cash advances from the federally insured Home Equity Conversion Mortgage (HECM). HECM loans often provide much greater loan advances than other reverse mortgages.

What You Pay

The lowest cost reverse mortgages are offered by state and local governments. They generally have low or no loan fees, and the interest rates are typically low or moderate as well. Private sector reverse mortgages are very expensive, and include a variety of costs. An application fee usually includes the cost of an appraisal and a credit report. Other loan costs typically include an origination fee, closing costs, insurance, and a monthly servicing fee. These costs generally can be paid with loan advances, which mean they are added to your loan balance (the amount you owe). Interest is charged on all loan advances.

Reverse mortgages are most expensive in the early years of the loan, and then become less costly over time. The cost can be very high in the short term, and is least costly if you live longer than your life expectancy. The federally insured Home Equity Conversion Mortgage (HECM) is generally less expensive than other private sector reverse mortgages.

Consumers considering a private sector reverse mortgage other than a HECM should carefully consider how much more it may cost before applying. Other articles in The Basics section of this web site’s Reverse Mortgages information provide more details on measuring and comparing the total cost of these loans.

Taxes, Estates, and Public Benefits

Reverse mortgages may have tax consequences, affect eligibility for assistance under Federal and State programs, and have an impact on the estate and heirs of the homeowner.

An American Bar Association guide states that generally “the IRS does not consider loan advances to be income.” The guide explains that if you receive SSI, Medicaid, or other public benefits loan advances are counted as “liquid assets” if you keep them in an account past the end of the calendar month in which you receive them. If you do, you could lose your eligibility for these programs if your total liquid assets (for example, money you have in savings and checking accounts) are greater than these programs allow.

Visit Soundview Financial’s Reverse Mortgage Guide for helpful links and tips on reverse mortgages by clicking here.

Important New IRA Rules

For more information on IRAs, be sure to visit The IRA Guide and The Roth IRA Guide.

One of the most notable features of your IRA account is the requirement to begin withdrawing assets once you become 70 ½ years of age.  On December 23, 2008, President Bush signed into law the Worker, Retiree and Employer Recovery Act.  This Act includes a provision that provides tax relief to seniors by suspending the Required Minimum Distribution (RMD) for IRA and other retirement accounts in 2009.

If you are subject to the RMD, this may be good news for you.  Normally, you would be forced to withdraw money from your retirement account or face a 50% penalty on the amount of the RMD you were required to withdraw.  However, in 2009, if you do not need to draw down on this money, you can elect to forego this year’s distribution and realize the benefits of tax-deferred growth until RMD is reinstated in 2010.  Please note that those who turned age 70 ½ in 2008 and elected to defer their first distribution until April 1, 2009, must still take that 2008 distribution prior to April 1, 2009.

Additionally, there are changes being made next year for those who may not want to take their annual IRA distributions.  In 2010, an IRA holder can choose to convert his or her Traditional IRA to a Roth IRA.  Once it is a Roth IRA, no mandatory distributions exist and any growth from that point forward grows tax-free.  You could pay taxes on the entire amount in 2011, or, taxes for the Roth conversion can be paid 50% in 2011 and 50% in 2012.  So, if you are not in need of the annual income from your IRA, it may be more beneficial to consider converting your Traditional IRA into a Roth.

For more information on IRAs, be sure to visit The IRA Guide and The Roth IRA Guide.

Making The Best of a Bad Year- Consider Taking Tax Lossess

This Blog is sponsored by Soundview Financial’s Tax Preparation Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for tax preparation and tax planning.

Great article in today’s Wall Street Journal on year-end tax planning strategies.  Basically, suggesting making some lemonade out of the series of lemons that were thrown our way in 2008.  Here goes:

With New Year’s Day less than a month away, it’s time to consider converting investment lemons into lemonade.

For most investors, this has been an abysmal year. But if you’re stuck with hefty losses, here’s a way to help soften the blow: Take a fresh look at what’s left of your wounded portfolio, dump losers you were thinking of ditching anyway and use your losses to cut your taxes for this year.

Tax professionals refer to this as “tax-loss harvesting.” While it may not make you feel much better about those ill-starred investments, it certainly can help fatten your wallet at tax time next year — and possibly in future years, too. “It’s a great year to tax-loss-harvest,” says Lawrence Glazer, managing partner of Mayflower Advisors, an investment advisory firm based in Boston.

The basic tax rules are fairly simple. But in your haste to save taxes, try to avoid wrong turns. For example, steer clear of a painful pothole known as the wash-sale rule, says Bob D. Scharin, a senior tax analyst at the tax and accounting business of Thomson Reuters in New York.

Here is a summary of the basic rules of the road, a few twists and turns to watch out for, and advice from investment and tax professionals.

THE BASICS: Although losing money is painful, you can use capital losses to soak up an unlimited amount of capital gains. If your capital losses are bigger than your gains or you don’t have any gains at all, you typically can deduct as much as $3,000 of net losses from wages and other income. The limit is $1,500 if you’re married and filing separately from your spouse, says Mr. Scharin.

Additional net losses get carried over onto your federal returns in future years, which can mean tax savings for years to come. However, capital-loss carryovers survive only as long as you do. You can’t leave them in your will for your heirs.

Naturally, paper losses don’t count. To be able to use your capital losses for tax purposes, you have to actually sell the investments.

These rules aren’t limited to stocks. They also apply to bonds and other securities.

During this year’s presidential campaign, Sen. John McCain proposed increasing the $3,000-a-year limit to $15,000 a year. President-elect Barack Obama hasn’t said whether he favors this idea.

IT’S A WASH: A “wash sale” typically happens when someone sells a stock or some other security at a loss and then buys the same stock, or something “substantially identical,” within 30 days of the sale. That means 30 days before or after the sale — not just 30 days after. Break this rule, and you aren’t allowed to deduct your loss. Instead, you add the disallowed loss to the cost of the new stock; that becomes your basis in that stock.

Thus, if you sell a security at a loss and want to be able to deduct that loss, don’t buy the same security, or something “substantially identical,” within the banned period. What does “substantially identical” mean? It can be a gray area, says Gregory Rosica, tax partner at Ernst & Young LLP in Tampa, Fla. The IRS says it depends on the facts and circumstances of your particular case, and the issue can get surprisingly tricky.

The safest bet: Wait until after the banned period to purchase the security — or buy something completely different. For more details, see IRS Publication 550, or check with a trusted tax expert.

The IRS has finally answered a separate question that lawyers and accountants had debated for years: Could an investor dodge the wash-sale rule by selling a stock at a loss in a taxable account and then buying it back a few minutes later for an IRA or some other tax-advantaged account? The IRS said no: That would violate the wash-sale rule.

TAX RATES: Under current law, the top rate on long-term capital gains on stocks, bonds and other securities is 15%. “Long term” means something you’ve owned for more than a year. If you sell an investment you’ve owned for a year or less, that’s a short-term gain, and it’s usually subject to tax at ordinary income rates. There’s also a capital-gains rate of zero — yes, zero — for people in the lowest brackets, but it’s complicated. To see if you qualify, consider buying inexpensive tax-preparation software programs, such as Intuit Inc.’s TurboTax. For more details, see IRS Publications 550 and 564, available on the IRS Web site (irs.gov).

During the presidential campaign, Sen. Obama called for raising the top long-term capital-gains rate on stocks and other securities to 20% — but only for households making more than $250,000, or individuals making more than $200,000. He also indicated he might delay the idea of raising taxes next year if the economy is weak.

If you sell art, jewelry or other collectibles for a profit, the top long-term capital-gains rate is 28%.

TAX TRAP: With stock prices down sharply, many investors may be looking for opportunities to jump back into the market and scoop up bargains. But if you’re thinking of buying stock mutual funds this month for a regular taxable account, do some homework first. Otherwise, you could get hit with a large tax bill that could easily have been avoided.

This is the time of year when mutual funds typically make their required capital-gains distributions. Those payouts are taxable — unless you’re investing for a tax-advantaged account such as an IRA. Thus, before investing in a fund, be sure to contact the fund and ask whether it’s planning a distribution, how much and when it will be paid, says Mr. Glazer of Mayflower Advisors. If getting a large distribution would have a significant impact on your taxes, consider deferring your investment in that fund until shortly after the date to qualify for the payout — or pick another fund, Mr. Glazer says. Otherwise, you’ll essentially be getting back part of your own investment and owing taxes on it, which would be “adding insult to injury,” he says.

It may seem this couldn’t possibly be an issue this year since most funds have lost money. Logical — but wrong. Not every fund is going to have a distribution, but many will this year despite the decline of your investment, Mr. Glazer says.

STRATEGIES: Don’t ever sell a stock solely for tax reasons. But if you’re considering selling something for solid investment reasons, be sure you at least consider the tax consequences.

Many investors who have ordinary income and who also are stuck with investments that are underwater routinely try to arrange their affairs so that they take full advantage of the net capital-loss rules. That typically means taking enough losses during the year so that they wind up with at least $3,000 in net realized capital losses, which can be used to offset ordinary income. This can be especially helpful for upper-income investors since ordinary income-tax rates range as high as 35%.

Considering giving away stock to charity? If so, don’t donate stocks that are selling for less than you paid for them. Instead, sell the losers so that you can claim a loss that can help you cut your taxes. Then, if you wish, donate the proceeds to charity. If you want to donate stock, donate shares that have gone up significantly in value and that you’ve owned for more than a year.

When making your decisions, take a look at all your investments, not just your deeply depressed stocks. For example, a friend is thinking of selling the New York City apartment that he and his wife have lived in as their primary residence for many years. They expect to make a profit well in excess of $500,000.

Under current law, joint filers who sell their primary residence typically can exclude a gain of as much as $500,000 if they’ve owned it — and lived there — for at least two of the five years prior to the sale. (For most singles, the limit is $250,000.) Gains of more than that are subject to capital-gains taxes.

So how could this New York couple avoid those taxes? They could sell their apartment and also get rid of stocks or other securities at a loss to reduce or even eliminate the excess gains on the apartment sale.

—Mr. Herman is a Wall Street Journal staff reporter in New York.

NOTE FROM EDITOR:  If you’re worried about selling to take advantage of tax loss harvesting because you would potentially lose exposure to the stock market (and therefore miss any potential rebound), consider reinvesting the sale proceeds in a tax efficient ETF until you can reinvest in the stock you sold (31 days).

This Blog is sponsored by Soundview Financial’s Tax Preparation Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for tax preparation and tax planning.

Tips on Social Security

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning

Great article provided by SmartMoney on Yahoo! Finance providing tips maximizing your Social Security payments. Here you go:

While the idea of receiving any sizable Social Security benefits come retirement will likely be a pipe dream for current 20-somethings, it’s still a stark reality for those looking to retire in the next decade or so.

Of course, that’s great news for baby boomers, but it far from guarantees them a worry-free retirement. After all, many soon-to-be retirees will live well into their 80s or even 90s, and their nest eggs need to last along with them. Once that personal savings is gone, they’ll have to depend almost entirely on Social Security for income.

n fact, one out of five elderly married couples (and more than 40% of elderly single retirees) already do, according to the Social Security Administration (SSA). And given that Social Security benefits comprise about 40% of what the average retiree was making when they were working, that means every penny counts.

“People are living so much longer and retirement is lasting 20, 30 years. [Meanwhile,] health plans are disappearing as well as regular pensions,” says Kathryn Hanson, who oversees retirement planning initiatives at financial-services firm SecurePath by Transamerica. “This makes Social Security even more important to plan.”

Here are four ways to get the most out of your Social Security benefits:

Don’t Dip In Too Early

It’s tempting to start taking your Social Security benefits as soon as you can at age 62. Exhibit a little patience, however, and it will really pay off.

Waiting until you hit full retirement age (depending on the year you were born, that can range anywhere from age 65 to 67) can increase your benefits by up to 30%, according to the SSA. And for each year that you delay taking the benefits between your full retirement age and age 70, you can receive an additional 8% in benefits, says Mark Lassiter, spokesman for the Social Security Administration. (This applies to those born in 1943 or later.) While you may end up receiving the same amount in benefits in your lifetime as someone who started collecting earlier, your monthly benefits will be larger.

For example, a 62-year-old who made an average of $60,000 a year and who decides to retire in 2008 will get roughly $13,200 in annual Social Security benefits, according to Clarence Rose, professor of finance in the College of Business and Economics at Radford University. If they wait until age 66, they’ll receive roughly $18,700 per year. Should they hold off until age 70, that amount will grow to $26,100 per year.

Of course, this strategy isn’t right for everyone. Those who are strapped for cash or who don’t expect to live much past their 70s, may be better off taking reduced benefits at an earlier age, says Lisa Featherngill, a Winston-Salem, N.C.-based certified public accountant and director of financial and estate planning at Calibre, a unit of Wachovia.

Make a Little Extra on the Side

Just because you’ve retired doesn’t mean you can’t earn a little cash on the side. Retirees (who have reached their full retirement age) can still collect full Social Security benefits even if they take on a part-time (or for the more ambitious, full-time) job, says Ben Jacoby, a certified financial planner at Morristown, N.J.-based Brinton Eaton Wealth Managers, a fee-only financial planning firm.

Holding down a job gives retirees more flexibility as well as earning power. They can either take their earnings and invest them, or use their earnings for living expenses and hold off on collecting Social Security so they’ll get higher benefits further down the road, says Christine Fahlund, a senior financial planner at T. Rowe Price.

Spread the Wealth Around

Spouses and children up to the age of 19 who are full-time high school students can also take advantage of your Social Security benefits. In fact, each can receive up to half your total benefits (on top of whatever you receive). There are limits, however: the maximum amount a family can receive is typically capped at 150% to 180% of the recipient’s benefits, according to the Social Security Administration. So, say your spouse and two children collect full benefits; collectively, they can receive 150% of your benefits.

Most current spouses are eligible to receive their husband or wife’s Social Security benefits. Typically, a couple may maximize their benefits when the spouse with the smaller amount of benefits takes only from their spouse’s more plentiful benefits and leaves their own Social Security untouched. That way, their Social Security benefits continue to grow, explains Jacoby.

Tap Into an Ex-Spouse’s Benefits

Just because you haven’t seen or spoken to your ex-spouse since the divorce doesn’t mean you’re completely cut off from them. In fact, just like a child and a current spouse, you can also receive a percentage of your ex-spouse’s Social Security benefits.

The criteria for eligibility is a little more strict, however. You have to have been married to your ex for at least 10 years and you can’t currently be married to someone else. Still fit the bill? You could be eligible for up to 50% of your ex’s benefits. Even better, your ex will never know — they will continue to receive their full benefits — and it won’t impact their current spouse’s benefits either, says Fahlund. “There’s no exchange of information, and you don’t have to go back to the life you’ve left behind, but you can maybe get more money from it,” she says.

Copyrighted, SmartMoney.com. All Rights Reserved.

For more information on Social Security, visit Soundview Financial’s Retirement Savings Guide by clicking here.

Is A $1million Nest Egg Enough To Fund Retirement?

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning

Great article provided by US News on Yahoo! Finance discussing whether a $1 million nest egg is sufficienct to fund your retirement. Here you go:

Becoming a millionaire once conjured up images of wealth and luxury, or at the very least financial security. But is a million bucks enough to retire comfortably on anymore? Many baby boomer millionaires don’t think so, at least for the lifestyle they want to lead.

If you drew down 4 percent of your $1 million nest egg every year, a share many financial advisers recommend as prudent, you would receive about $40,000 annually, before adjusting for inflation–a pretty comfortable salary outside major metropolitan areas, especially if your house is paid off. Of course, how far that $3,333 a month goes depends on your lifestyle, health, and inflation. Here are three viewpoints on the $1 million question:

It’s probably not enough. Even at a faster rate of tapping a million-dollar nest egg, Michael Farr, president of the Washington, D.C., investment firm Farr, Miller, & Washington and author of A Million Is Not Enough: How to Retire With the Money You’ll Need, thinks it’s insufficient for most retirees. “A million dollars in liquid reserves like stocks, bonds, and real estate investments you are not living in will generate $50,000 a year [according to Farr's calculations]. After you adjust for inflation it will be entirely gone after about 30 years,” Farr says. “Most people tell me it takes them more than $50,000 a year to cover their expenses. If $50,000 a year will cover your expenses, it is enough.” To increase your capital, Farr recommends budgeting, cost cutting, and saving–and investing the spoils in the stock market to guard against inflation. “Take a look at what your current expenses are, and that is what you need to live,” he says.

For security, try an annuity. The answer to the million-dollar question seems to depend upon who is asking it. “One million dollars should be enough to maintain living standards for the majority of households, including healthcare expenditures,” says Mauricio Soto of Boston College’s Center for Retirement Research. “But more might be needed for households that make over $120,000.”

If you’ve got a million-dollar nest egg, Soto recommends that you set aside $200,000 off the top for medical expenses in retirement and use the remaining $800,000 to purchase an inflation-protected annuity that would pay out $45,000 a year. This amount plus Social Security (typically about $25,000 for the maximum earner, plus $12,500 for the spouse) will generate an income of about $82,500 for a couple. Many financial advisers tell you to try to replace 80 percent of the income needed while working. By this conservative standard, $1 million would maintain the standard of living of a household making $103,000.

Stop worrying so much, and get out your golf shoes. Most workers aren’t even striving to become millionaires. Nearly two thirds of employees think they’ll be perfectly fine retiring with less than $1 million, according to the nonprofit Employee Benefit Research Institute. “The financial services industry has made a good living for themselves scaring people,” says Jonathan Pond, a financial planner and author of You Can Do It! The Boomer’s Guide to a Great Retirement. “For many people, $100,000 to $200,000 is enough to retire on.”

Pond argues that you need only to replace 65 percent of your working income to have a comfortable retirement if your house is paid off. He adds that Social Security will replace 45 percent of income for middle-income Americans. So, he concludes that most employees need only save enough to generate 20 percent of what they made while working.

The key is choosing a lifestyle that fits your budget. A million bucks will no longer finance a lavish retirement, but it could certainly provide a reasonably comfortable one.

When $1 Million Isn’t Enough

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning

Great article provided by US News on Yahoo! Finance confirming the need to develop a diversified investment portfolio. Here you go:

Is a million dollars enough to retire comfortably on? Many baby boomer millionaires don’t think so, especially once recession fears come into play. Almost 30 percent of 60-year-old baby boomers with investable assets of $1 million or more say they feel more financial stress now than six months ago, according to a new survey from Bell Investment Advisors and Opinion Research Corp.

The admittedly small survey of 500 boomers born in 1948 found that 40 percent are “downsizing” their lifestyles this year by contributing less to charity (22 percent), canceling, shortening, or postponing vacation plans (21 percent), reducing retirement savings (18 percent), or putting off retirement altogether (11 percent).

Of course, a millionaire also has the luxury of rejiggering investments to try to come out ahead. And 54 percent of affluent boomers cited chasing higher returns on investments as a primary goal for the next five years.

But even millionaires aren’t immune to making irrational investment choices as the media endlessly report a looming recession. Some 23 percent of affluent boomers say they are planning to change their investment strategy in response to a potential recession, with 69 percent seeking more conservative investments like money market funds and bonds. Only 21 percent said they would invest more in stocks or stock mutual funds.

That could be a mistake, says Jim Bell, founder and president of Bell Investment Advisors. In many cases, these conservative investments barely keep pace with inflation, especially as interest rates on consumer products like certificates of deposit have dropped with each Federal Reserve cut in interest rates.

“Bonds and cash have the false allure of safety since their principal fluctuates less than that of equities, but equities along with commodities will better allow boomers to maintain their standard of living over decades,” Bell says. “Boomers must learn to live with the volatility of equities if they want to keep their purchasing power intact.”

Most financial advisers will tell you that a sound investment strategy and diversified portfolio will create regular returns if you don’t mess with it too much, which Bell reiterates: “The key to navigating the slowdown is to remain rational and stick to a plan, rather than letting emotions steer you off track.”

For more information on retirement planning and strategies, visit Soundview Financial’s Retirement Savings Guide by clicking here.

Common Mistakes in Retirement Planning

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

I read a recent article on the common mistakes people make when approaching retirement. Here goes:

1. No current will. Even if you created a will when you were younger, it may be out of date as you approach retirement and no longer consistent with your state of affairs or assets. Update it.

2. Out-of-date beneficiary designations. Beneficiaries named in life insurance policies and retirement accounts (such as IRAs and 401(k)s) must be up to date to avoid misunderstandings and possibly adverse tax consequences for your heirs.

3. Concentrated stock holdings.  Whether through long association with a single employer or as owner of your own business, you may have a significant portion of your wealth tied up in a single stock.  Nearing retirement, it’s too risky to keep so many eggs in one basket.  Diversify.

4. No excess liability insurance.  Auto and homeowners’ insurance policies offer liability protection if someone comes to harm on your property or in an accident involving your car.  If claims exceed your policy limits, plaintiffs could come after your personal assets.  Carry an excess or “umbrella” policy for added protection.

5. No estate or tax planning.  Many retirees craft an investment plan but overlook estate and tax planning.  Start the process now if you haven’t already, both to minimize tax bills for you and your heirs and ensure that your estate is distributed according to your wishes.

6. No planning for health care or long term care. Costs associated with ill health can overwhelm an otherwise sound investment and retirement income strategy. Learn hothe federal Medicare health insurance program for people 65 an older works, how private insurance can plug gaps in Medicare, and whether long term care insurance might be right for you.

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

There’s Still Time to Make 2008 IRA Contributions

This Blog is sponsored by Soundview Financial’s IRA Guide. Click here to visit Soundview Financial’s IRA Guide  to get access to helpful articles, tips and resources for IRAs and retirement planning.

If you haven’t contributed funds to an Individual Retirement Account (IRA) for tax year 2008, or if you put in less than the maximum allowed, you still have time to do so.  You can contribute to either a traditional IRA or Roth IRA until April 15, the due date for filing you 2008 tax return.  Be sure to tell you IRA trustee that the contribution is for 2008 so they can record it correctly.  Please visit Soundview Financial’s IRA Guide for articles, tips and insight on IRAs and other retirement planning strategies.

Nine Critical Retirement Planning Mistakes

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Our friends at Yahoo! Finance have a great article on nine critical retirement planning mistakes. Here goes:

1. Cracking your nest egg before retirement. A study by Hewitt Associates found that 45% of workers cash in their 401(k)s when they switch jobs. In other words, they take the money — paying income taxes and a 10% penalty if they’re not yet 59 1/2 years old — rather than leave it in a retirement account. That’s no way to build the retirement of your dreams. When you change jobs, you can transfer the money in your employer-sponsored retirement plan to an IRA, which will allow the money to continue growing tax-deferred. You might also be able to leave the money in your old plan or transfer it to the plan at your new job, depending on the plans’ rules. But your best bet is the IRA. You’ll have many, many more investment choices, usually at far lower costs.

 

2. Spending your retirement money way too early. Cashing in your 401(k) at a young age isn’t the only way for your retirement to meet an early demise. Not saving enough in the first place will guarantee that your retirement will be DOA. Of course, no one wants to be told to “save” — it’s so boring, so ungratifying, almost Puritanical.

But this is what low-savers (and non-savers) are really doing: They’re spending their retirement now — which may mean they won’t be able to retire at all. Buy that Coach purse now, or buy time in retirement tomorrow. Take a Carnival cruise this year, or take time off several years from now. Those are the choices you have to make. Building a nest egg isn’t a decision of whether to consume, but when to consume. Do it now, and you won’t be able to do it later without having to work for a paycheck.

3. Having no clue about how much to save. According to the 2007 Retirement Confidence Survey from the Employee Benefits Research Institute, only 43% of workers have calculated how much they need to retire. But you can’t get to where you want to go if you don’t know how to get there. You need a plan.

4. Spending your retirement savings too fast. If you’ve made it to retirement, congrats! You’ve amassed enough money to create your own portfolio-generated paycheck. Excellent work.

But you can’t take it too easy, because you’ll receive a severe pay cut if you deplete your portfolio too fast. How much can you take out each year and be almost certain that you won’t outlive your savings? Just 4% a year. That’s the withdrawal rate that would have sustained a mix of stocks and bonds over most 30-year historical periods. Sure, if you retire on the eve of the next bull market, you can take out more. However, if you quit working right before the next bear market, then taking out more than 4% a year could have your portfolio beating you to the grave.

5. Not giving a hoot about asset allocation. And speaking of mixing stocks and bonds, nothing can wound a retirement like bad investment decisions, whether it’s owning too much of one stock, letting emotions take over, chasing the latest fad, or letting short-term events affect your long-term strategy.

You basically have two choices: You can be a master stock-picker like Warren Buffett or Peter Lynch and try to find the next Wal-Mart. Or you can broadly diversify your assets, mostly via low-cost index funds such as Vanguard Total Stock Market (VTSMX). This way, you enjoy hefty exposure to giants like Apple (Nasdaq: AAPL), CVS Caremark (NYSE: CVS), and Medtronic (NYSE: MDT) as well as to mid- to small-sized growth firms such as Priceline.com (Nasdaq: PCLN) and SanDisk (Nasdaq: SNDK). But until you’ve established your skill at finding great investments, keep the bulk of your assets in a broadly diversified, regularly rebalanced portfolio.

6. Letting Uncle Sam eat your retirement. There are many types of investments and investment accounts, and they all have their own quirks when it comes to taxes. Not knowing all the rules can lead to too much taxation — and less money for retirement.

For example, profits from stocks that are held for at least a year will be taxed as long-term capital gains — a rate no higher than 15%. Interest from corporate bonds, on the other hand, is taxed as ordinary income — a rate as high as 35%. Yet many investors keep their stock investments in their tax-advantaged accounts and their bonds in regular, taxable accounts. That just doesn’t make sense. Asset location can be just as important as asset allocation.

7. Depositing your retirement in your fatty deposits. As Americans’ savings rate has dropped, our obesity rate has risen. Just a coincidence? All I can say is, the more we stuff our faces, the less we can stuff our IRAs. So before you make your next visit to the Olive Garden, find out how much you need to save every month to retire when you want, how you want. Then make sure that amount gets deposited in your retirement accounts. If you get that far, then visit the Olive Garden as a reward. You deserve it.

8. Paying too much for help. There’s nothing wrong with getting financial advice. If we Fools didn’t think investors could use ideas, feedback, and answers, we wouldn’t be here.

But we firmly, strongly, passionately believe that such help should be objective and affordable.

Paying too much for advice (especially if it’s bad or at least conflicted) does a lot for your broker’s retirement, not yours. Paying just 1% a year on a $100,000 portfolio over 20 years could result in your forking over more than that amount in fees. That’s a hundred grand that could have been in your pocket. Of course, if the advice you received had your portfolio performing better than what you could do on your own, then the price might be worth it. But if you’re paying 1% or 2% a year to lose to an index fund — as most mutual fund managers do — then you’re better off taking control of your own investments.

9. Retiring permanently when you really just needed a break. If you’re in your 60s, you should plan on living at least another two decades. Can you stand full-time leisure for 20 years? Sure, it may sound good now, but many retirees find they get pretty bored after a while. But by then, they have already severed many of their professional ties. Before you decide to retire fully and permanently, discuss a phased or gradual retirement with your employer and/or business partners. Or the possibility of working on a project basis, allowing you to take several months off each year. Or maybe just a one-year sabbatical. Explore your options before you no longer have them.