Tax Free Interest In Indiana - Shhh, Your Bank Doesn't Want You To Know

Do you live in "The Middle"? Besides unpredictable weather and being referred to as "Hoosiers", there are actually a few perks to living in Indiana.

Indiana offers some tax benefits to investors that are unique to our state. Municipal Bonds are very popular here. These bonds are a great (and Safe) way to earn more interest on your savings. The interest you earn on a bond from ANY STATE is FREE from Federal Tax, State Tax, and Local Taxes!

Municipal Bonds, or Munis have been used for over 200 years as a way to raise money to build or improve schools, hospitals, libraries, and roads. These days, stadiums have also been funded by having bonds issued. Once the bond is issued, you can loan money to the project and be repaid with interest which is free from Federal taxes. When the bond matures, you get the amount back which you loaned to the project.

If the bond is issued by your home state, your interest may also be free from State and Local taxes.

Again, the benefit for us "Hoosiers" living in Indiana is this. It doesn't matter which state the bond came from. We enjoy interest income on any muni bond which is free from Federal, State, and Local Taxes!  
That may be worth an additional 1.5% - 2% or more on your savings, depending on your tax bracket. 
(Check with your advisor when buying bonds to see if you may be subject to Alternative Minimum Tax, depending on your total income.)

Currently, http://www.bankrate.com/ (as of Feb. 4, 2010), shows us what the highest rates are for a 1 Year CD
(1.7%) and a 5 Year CD (3.55%).  Dave Ramsey refers to these as "Certificates of Depression". You can see why!

Did you also know that CDs are RISKY? Why is that, you ask?
Easy - You LOSE Future Buying Power!

Let's do the math, and see which option may be better for long term savings.

5 Year Municipal (Investment Quality) Bond at 5%

$10,000 x .05 = $500/year. 
$500 x 5 years = $2500 (TAX FREE) 
Most Bonds pay interest twice per year, directly to you the investor, so you will get 2 checks each year for
$250 for 5 years. When the bond is due, you get the $10,000 back. That may also happen if the bond is called early, but that's another lesson.

5 Year CD at 3.55%
Remember that was the BEST rate in the US today on http://www.bankrate.com/.

$10,000 x .0355 = $355/year.
$355 x 5 years = $1775, and you WILL PAY TAXES on this.

Hmmmm......let's see.....I can get $2500 in interest that is tax free OR $1775 in interest that is taxable. I wonder which one I should pick......

Did you ever wonder how banks make money? They use your money and either loan it or invest it.
Now you can see why your bank may not share the muni bond idea with you.

If you would like to learn more about Municipal Bonds, please contact me. 
You may also contact me for more information on 401(k) plans or IRAs at http://www.helpmy401k.us/.
You may also contact me on Linked In at http://www.linkedin.com/in/dvoelker or Twitter at http://www.twitter.com/deanvoelker. I also host a weekly financial advice program, Improving Your Financial Health at http://www.blogtalkradio.com/401kcoach.

Retirement Calculators

There are some great tools and calculators you can use for free to help plan for retirement. Some of the best ones are those which you may not even know about.

First, not to toot my own horn, but my website, www.helpmy401k.us has a great tab called Investment Tools .

There are calculators there for almost everything. The most commonly used one is the 401(k) Calculator. You could also use the 457(b) calculator if you are a government employee, but the concept is the same.

Simply go to the 401(k) calculator and plug in your own numbers. For example, lets say you are 29 years old with $1000 in a retirement savings account. Lets also say that you earn $50,000 per year and that you follow Dave Ramsey's advice and put in 10% of your pay into your 401(k) or $5000. If you earn an average return on this 401(k) account of 8% and keep doing this until age 66, you will have saved $1,076,087 for retirement. And that does not include an employer match or a raise in pay - EVER. Personal Finance expert Eric Tyson has an idea which may help provide an incentive to save more in 401(k) or IRAs - instead of calling them those names, we should try calling these "tax-reduction accounts".

What if we did figure those in? Easy - just enter those numbers.

Well, lets say your employer matches your contribution by 50% of whatever you put in up to 4%. If you put in at least 4% or more (and we are doing 10%, remember?), that means you are getting another 2% ($1000) from the employer. Also, lets assume they will raise your pay by

2% per year as a cost of living increase. Keeping the other earlier numbers the same, you will now have saved $1,598,680 for retirement.

Here is another one which my be helpful if you are planning to pay off credit card debt. And you should absolutely do that! It will have you save more in your "tax-reduction accounts."

Let's say you have a balance of $2000 in a credit card account. Your current monthly payment is $125/month and your interest rate on the card is 17.5%. (Ugh!) If you do as Dave Ramsey says and do some "plastic surgery" on your card (cut it up and dont use it anymore!), did you know that you can pay the card off in 12 months by just raising your payment to $183/month? It's true and very easy to figure out using the "Credit Card Payoff" calculator on the site. This can be very helpful to see yourself making progress towards your goal, if you can't pay the entire amount, but know you should pay less than the minimum.

In upcoming blog articles, we will look at a few more of the calculators.

You can see these calculators and many other helpful ideas on my website, www.helpmy401k.us. You can also follow me on Twitter at www.twitter.com/deanvoelker . I also host a weekly internet radio program "Improving Your Financial Health" at http://www.blogtalkradio.com/401kcoach .

Digging A Hole

Do People still invest in CDs anymore? (Don’t answer that.) I know that they are the “investment” of choice for a number of folks and for banks. Let’s be honest though – Rates are TERRIBLE!!

As of today, Oct. 2, 2009, according to bankrate.com, the best rate on a 12 month CD in the USA is 2.05 at India Bank. For a 3 Year CD, the best available rate is 2.97 at Flagstar Bank.

When I called banks in the area, I actually had to keep a straight face when Diana told me about their “Special Rate” of 1.5% on a 13 month CD – only for current customers, though. Woo-Hoo!!

CDs do appeal to those who want “safety”, which means the FDIC Guarantee. That means your money is guaranteed by the Federal Deposit Insurance Corporation (i.e. the U.S. Government) OK, I feel MUCH BETTER about THAT!!

About a year ago, as part of the new financial legislation, the FDIC raised its limit on the maximum amount guaranteed from $100,000 to $250,000. I’m not sure exactly how that helps Joe Lunchbucket, but there was quite a bit of fuss made about it last October.

Dave Ramsey has often referred to CDs as “Certificates of Depression” and with good reason. Did you know that for 11 of the past 20 years, CDs actually have a “Real Return” that is Less Than 1%? Once you consider inflation and taxes on the interest, it is really about the same as burying your savings in the backyard.

As a retiree, wouldn’t you like to get a better return on your savings? What if you could have your nestegg generate income for you of at least 5% of the principal – and have that income paid to you for the rest of your life?

Often when I meet with clients, I learn about their situation and their goals and suggest an appropriate solution which will help them with their long term savings. Clients normally can see the value, but may get hung up on time frames with CD money. A common response may be “That sounds great. I’ve got a CD due in a couple of months. Call me back then, and we will get back together. I can’t touch it until then.” (The Early Withdrawal Penalty looms overhead like the ‘Grim Reaper’.)

So, being a good guy (I don’t want to see anyone lose money.) I mark the date on my calendar and follow up with them as they asked me to. Except now the situation has changed. The CD was renewed. OR the due date was different from what they thought. OR the dog needs braces. OR….. Bottom Line - EVERYONE (most of all the client) LOSES.

Soooo, this being October, I called 3 leading banks in South Bend to see just how “scary” the Early Withdrawal Penalty is. At Wells Fargo , I was told that the penalty would be forfeiting 6 months of interest on a 16 month CD and 3 months of interest on a 12 month. First Source Bank had the best rate locally on a CD – 1.5% on a 13 month CD, which also came with a penalty of 6 months of interest for early withdrawal. National City Bank (soon to be PNC) told me that you could lose 1/2 of your interest for the remainder of your term or 3 months of interest, whichever is greater.

OK, lets do the math. Let’s say you have a CD of $10,000. You have about 3 months left on the term. Let’s give you the BEST rate (a whopping 1.5%) and the stiffest penalty for taking it out early (6 months interest). $10,000 x .015 x .5 (6 months is 1/2 of a year) = a loss of $75.

But what do you gain? There are only 2 types of money – liquid cash (you need it NOW) and investment savings (you need it LATER). What if you invested it into something that gave you an average return of 5% or more? $10,000 x .05 = $500 after 1 year. Last time I checked, $500 – $75 = a GAIN of $425. And I want the best for my clients. So let’s leave the “scariness” to the little ghouls and goblins on Halloween.

Remember to invest for the long term!

You can always contact me through my website, http://www.helpmy401k.us/. You can also follow me on Twitter at www.twitter.com/deanvoelker My weekly Internet Radio Program is “Improving Your Financial Health” on Blog Talk Radio at http://www.blogtalkradio.com/401kcoach

If You Knew You'd Get a "B"

Soon, all the kids will be back in school. My daughter can’t wait to see her friends and show off her new outfits. Back-To-School time usually also means plenty of sales which should get the cash registers ringing in your local retail shops.

Since we are just getting started, it’s too early to think about report cards and grades yet….or is it?

What if you knew at the beginning of the year, that your grade at the end of the year would be at least a “B” and no worse – no matter what? Better still, what if you got an “A” in one quarter, and a “C” in the other quarters – and at the end of the year, you got to keep the “A” as your grade for the year?

If that were true, how would you feel about going to school? Would you be more relaxed? Would you want to learn more? Would school be more fun?

Well, GUESS WHAT!! I can’t do much about Johnny’s math grade, or Susie’s US History Course, but I can provide solutions which may improve your confidence in investing.
How can you do that, you ask? Variable Annuities can provide Safe Growth and Safe Income.

Recently, Leslie Scism of the Wall Street Journal wrote “Because of such guarantees, many holders of variable annuities actually saw their accounts increase 6% or more in value last year, when the Standard & Poor’s 500-stock index dropped nearly 39%.” in her article “Long Derided, This Investment Now Looks Wise”. http://online.wsj.com/article/SB10001424052970204900904574302270919454880.html

Currently, you can earn as much as 7% or more on your principal base when you aren’t using it for income. That means if you start with $100,000, by the end of the year, you would have $107,000 to draw income from later – no matter what happens in the market. (As long as you leave it there.) And it can grow tax-deferred until you begin to take it out.

What if your account does better than 7%? Also, what if it only does better than 7% for one quarter? Wouldn’t it be great to keep the best quarter and lock it in for the year? Well….you CAN!

What if you could do this every year while you are building your Nest Egg? What if you went into the school year knowing you would at least get a “B”….and might get an “A”?

Then when you begin to take income from your savings, you can take 5% from the nest egg you’ve built for the rest of your life. The check would go up or stay the same, but never go down. (As long as you aren’t taking more than 5%.) Would that be OK?

There are some drawbacks to a Variable Annuity, which Ms. Scism also points out in her article http://online.wsj.com/article/SB10001424052970204900904574302270919454880.html the most obvious being the cost of the extra protection. George Lambert also points this out in his article, “The Cost of Variable Annuities” http://www.investopedia.com/articles/pf/06/variableannuity.asp in which he looks at the different types of protection – Growth Protection, Income Protection, and Death Benefit.

Another drawback is that when you consider investing into a Variable Annuity, you need to take a Long Term approach – like any other investment. Speak with a reliable advisor about whether or not it may be appropriate for you based on your time horizon and income needs at retirement. Early withdrawals may result in steep surrender charges, although many plans allow you to withdraw as much as 10% with no surrender charge.

The main advantage of course is taking the uncertainty over today’s economy out of the picture. And if you knew you’d get at least a “B”, wouldn’t you sleep better at night?

For more information on annuities, or other investment ideas, you may contact me at http://www.helpmy401k.us/. You may also follow me on Twitter at www.twitter.com/deanvoelker. I am also hosting a weekly internet radio podcast at http://www.blogtalkradio.com/401kcoach.

This Time Its Different - II

Recently I posted an article, titled “This Time It’s Different”. Most people when asked about the idea of investing in the market, have responded that “They are waiting to see what happens” and yes, “This Time It’s Different because…..”

If you read my previous article, “This Time It’s Different”, http://5reasonsyoushouldownaroth.blogspot.com/2009/07/this-time-its-different.html I referred to a study done by Hartford on the Recession of the mid 1970’s (1973 & 1974), arguably the closest parallel to our present economic situation. The low point in the market was Sept. 30, 1974. The Dow closed at 607.87 (not a misprint) This was down more than 40% from its high in 1972, when it crossed the 1000 mark for the first time. http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389×4124348

The stock market had gone through back-to-back negative years for the first time since the Great Depression.

We should set the stage a bit at this point. In 1972, we were still heavily involved in the Vietnam War, which was highly unpopular, and dragged on for several years. Also, in 1972, the Watergate scandal began. This resulted in the indictment and conviction of several of Nixon’s closest advisors, and ultimately in the resignation of the President himself, on August 9, 1974. http://en.wikipedia.org/wiki/Watergate_scandal

To make matters worse, the Oil Embargo http://en.wikipedia.org/wiki/1973_oil_crisis was put into effect by OPEC, which refused to ship oil to the US due to their support of Israel at that time. Unemployment had reached a high of 6.7% in 1974. http://www.nytimes.com/2008/12/06/business/economy/06jobs.html

So things in 1974 looked pretty bleak. I recently read a letter written by Jim Fullerton of the Capital Group to shareholders at that time(November 1974). Here are some highlights from Mr. Fullerton’s letter.

“Each economic, market, and financial crisis is different from previous ones. But in their very difference, there is commonality….. Today there are thoughtful, experienced, respected, economists, bankers, investors, and businessmen who can (tell) you why this time the economic problems are different; why this time things are going to get even worse – and hence, why this is NOT a good time to invest in common stocks, even though they may appear low…..This time is a whole new ball game.”

“In 1942 everybody knew it was a whole new ball game…..The Germans had overrun France. The British had been thrown out of Dunkirk. The Pacific Fleet had been disastrously crippled at Pearl Harbor. We had surrendered Bataan, and the British had surrendered Singapore. The U.S. was so ill-prepared for a war that……75% of our field artillery was equipped with horse-drawn, French 75mm guns.” (Mr. Fullerton served in WWII.)

“In April 1942, inflation was rampant…..On April 8, 1942, the lead article in the (Wall Street) Journal was: ‘Home Construction, Total far behind last year’s. Private Builders hardest hit.’…..Washington D.C. also considered more drastic rationing with price fixing, or still higher taxes as a means of filling the ‘inflationary gap’ between increased public buying power and the diminishing supply of consumer goods.”

“A leading stock market commentator wrote: ‘The market remains in the dark as to just what it has to discount. And as yet, the signs are still lacking that the market has reached permanently solid ground for a sustained reversal.”

“Yet on April 28, 1942, in that gloomy environment, in the midst of a war we were losing, faced with excess-profits taxes and wage and price controls, shortages of gasoline and rubber…..and with the virtual certainty…..that once the war was over, we’d face a post-war depression, the market turned around.”

“Now I’d like to close with this: ‘Some people say they want to wait for a clearer view of the future. But when the future is again clear, the present bargains will have vanished. In fact, does anyone think that today’s prices will prevail once full confidence has been restored?’ That comment was made by Dean Witter in May of 1932 – only a few weeks before the end of the worst bear market in history.”

“Have Courage! We have been here before – and we’ve survived and prospered.”

Jim Fullerton

As of today, July 23, 2009, the Dow is up nearly 200 points, crossing the 9000 mark for the first time this year. This is a gain of over 38% from its low point of 6547 on March 9, 2009. Yes, This Time It’s Different.

For more information, you may contact me at http://www.helpmy401k.us. You may also follow me on Twitter at www.twitter.com/deanvoelker.

Credit Myths

There is an old saying that if you tell a lie loud enough and long enough, then over time, the lie will become accepted as truth.

Like many of you, I had bought into the credit card myth. I believed that having a credit card was aprt of life and that you "needed" one to rent a hotel room or make other purchases.

Recently, I've discovered that one of the best ways to Improve Your Financial Health is to perform some "Plastic Surgery". There is an overwhelming feeling of freedom and relief when you take a pair of scissors to that piece of plastic in your purse or wallet.

Dave Ramsey discusses this in further detail in his Financial Peace University course.
www.daveramsey.com

Imagine how much simpler your life would be without credit card payments or other loan payments. Imagine being totally debt free, or at lest debt free except for your home.
How much money could you save if that were your situation?

If you had $10,000 or more in a savings account, to be used only for emergencies, would you be able to worry less about the possibility of something happening?

One of the best definitions I have heard of "Financial Security" is this:
Financial Security means being able to afford almost anything you want - AND wanting very little.

When you tell a lie or spread a myth long enough, it will eventually be accepted as truth.

Here are a few "myths" about credit which have been told to us over & over again through marketing and the media.

Myth: You need a credit card to build credit.
Truth: A credit card does not "build" credit. In mnay cases, it can even destroy credit.

There is NO positive side to credit card use. You will spend more if you use credit cards. Even by paying the bills on time, you are not beating the system! Most families don't pay on time. The average family today carries $8,000 in credit card debt according to the American Bankers' Association.

When you pay cash for a purchase, you can "feel pain" of the money leaving your hand. This is not true with credit cards. Flipping a credit card up on a counter registers nothing emotionally. If you use credit cards instead of cash you will spend 12-18% more. This is money you could have saved.

Myth: What about my credit score or FICO score? Don't I need a good score for getting a job,
getting loans.
Truth: The FICO score (Fair Issac Corporation) was created in 1958 as a way of determining the likelyhood that a person will pay their debts. http://en.wikipedia.org/wiki/Credit_score_(United_States)

In other words, it is a debt score. It measures what debts you have and how likely you are to pay them. People with no debt over a period of several years actually have a ZERO score. Wouldn't it be better to have ZERO debt as a measurement of managing your money, than a 'score'?

Myth: Wouldn't it help to get a debt consolidation loan? That is a good way to get out of debt.
Truth: When you do a debt consolidation, you just move the debt from one place to another. 88 percent of the time people do debt consolidation, they don’t change their behavior and go right back into debt. You can't borrow your way out.

The best way to eliminate debt is by putting together a budget, and putting your debts on a sheet and knocking them out one by one, starting with the smallest balance.

Myth: 90 Days Same as Cash or 0% Financing is a good deal.
Truth: This is an advertising gimmick. Businesses are in business to make a profit.

When companies use this method, they simply build the extra right into the price. Then when you don't pay it off in 90 days, they can charge you interest on top of it at rates from 24-35%. Worse, they will backcharge the rate all the way back to the date of purchase. And they know that most of the time, people won't pay it off on time. Again, the reason for doing this is to make a profit - once when they sell the item, and again when they can charge you interest.

Please contact me for more information. You may reach me through my web site. www.helpmy401k.us. You may also follow me on Twitter. www.twitter.com/deanvoelker

This Time Its Different

Last year (2008), the Dow Jones Industrial Average fell about 34% (www.djindexes.com), then dropped ANOTHER 20% in the first 2 months of 2009.

It is estimated that investors accounts have declined in value by about $10 TRILLION DOLLARS TOTAL. http://www.businessweek.com/mediacenter/podcasts/cover_stories/covercast_03_05_09.htm

Severe recessions such as this one can test the resolve of even the most experienced investors.
It is easy to say "This time its different." Many people are still feeling that way.

However, it is important to keep in mind a few points.

* Financial decisions (any financial decisions) should not be based on emotion.
* Historically, after every past recession, the market has gone on to hit new highs.
* Declines in the market & economy, even our most severe ones, have been temporary.
* Since 1926, the Dow Jones has had TWICE AS MANY positive returns as negative ones.
Despite more than 12 recessions dating back to 1926, $1.00 invested in the Dow in 1926
would have been worth $2045.00 at the end of 2008.

The late Sir John Templeton, founder of Franklin Templeton Investments liked to say, "The Four most expensive words in the English Language are 'This time it's Different.' "

The National Bureau of Economic Research www.nber.com http://www.nber.org/cycles/
states that the United States has weathered a recession EVERY decade since the 1920's. https://financialprofessional.hartfordinvestor.com/planco/om/P7135.pdf - Page 4.

As painful as the recessions are, when we are experiencing one, they have always been short lived, about 11 months on average. It can be difficult to predict when one will end, and announcing the "end" may take a while. According to NBER, they have waited an average of 15 months before declaring an "end". This way they avoid confusion. If there is further economic turmoil, it can be linked to a new recession, rather than the old one.

While we are "waiting to see what will happen" rebounds are often quick and robust. Stocks tend to recover about 6 months before the economy does. According to Morningstar www.morningstar.com, stocks are referred to as a leading indicator. On average, stocks have returned about 25% from market lows to the "end of the recession".

Did you know that the Dow Jones has increased by nearly 30% since its low point on
March 9, 2009? Have you been "in" the whole time, or did you go to something "safe"?

3/9/2009 - 6547
7/1/2009 - 8504

"The most expensive words in the English Language are 'This time it's different'."
Sir John Templeton

If you went to cash, thinking you were being "smart", think again. Cash can actually slow your recovery, and make it much harder to get your savings back.

In a recent study, Hartford shows data from the recession of 1973-1974, which had been our most severe until the present one. The study (please contact me at www.helpmy401k.us for more information) shows 4 seperate scenarios, each starting with $100,000 invested in equities on Dec. 31, 1972.
(Equities are represented by the S & P 500 Index. Cash is represented by the 30 Day Treasury Bill Index.)

In the study, they wanted to see how long it would take to recover the original $100,000 for the Low Point in the Market (Sept. 30, 1974)

Investor A (stayed in Equities) - back to $100,000 in July 1976 (1.75 years)
Investor B (moved to cash for 6 months, starting 9/30/1974) (5.3 years, or Jan. 1980)
Investor C (moved to cash for 12 months, starting 9/30/1974) (also 5.3 years)
Investor D (moved to cash for 18 months, starting 9/30/1974) (6.2 years, or Nov. 1980)

Yogi Berra sometimes said, "Its deja vu all over again."

In a challenging economy such as this one, isn't this precisely when you need a financial professional working side by side with you?

For more information, please contact me at http://www.helpmy401k.us. You may also follow me on Twitter at www.twitter.com/deanvoelker.

Lets Say I Live To 100

People are living much longer these days. With modern medicine, technology, and taking better care of ourselves, reaching 100 is much more common than it used to be. According to a Wall Street Journal article from April 14, 2008, Hallmark sold over 85,000 “Happy 100th Birthday”
cards in 2007. And that is just Hallmark. Currently the average life expectancy for a Female is 87 years, and 85 years for a Male.

Living that long is great, but it can also raise concerns about your savings. What are you doing to make sure your money lasts that long also? Can your savings generate income for the rest of your life, even if you live to 100 or beyond?

Also, how prepared are you to keep up with rising costs? Did you know that 20 years ago (1989), the cost of a postage stamp was 0.25 and a gallon of gas was about 0.97? Compare those prices with today. A stamp is 0.44 and a gallon of gas…..well it fluctuates more than the stock market. As of today, it is about 2.45, and last summer had peaked well over 4.00.

If you are retired for 20 years or more, costs will go up. How can your savings handle that? Can you give yourself “Pay Raises” and still make it last?

One last question for consideration - this past year was one of the most challenging ever for investors. How can you grow your income, make your money last, and do it “Safely”?

Here are some tips that may help answer these burning questions.

* Talk with your advisor. And if you don’t have a strong relationship with your advisor, or
you don’t feel they have your best interests in mind, find a new one. Your advisor needs to be a
great listener, and your partner - NOT just a stockbroker. Tell them what your needs are.
What is most important to you about your money?

* Be Open Minded. If your money is going to last for your lifetime, CDs aren’t going to get it
done. Especially at the current bank rates today. There are other ways you can invest, and
let your money grow over time safely. A good advisor should learn as much about you as
they are able - just like a doctor who will learn your history before prescribing anything.

“Whatever you fear most has no power - it is your fear that has the power.”
Oprah Winfrey

* Be Diversified. I’ve always thought of “diversification” like clothes in your closet.
You need to have clothing for summer, winter, fall, casual wear, dressing up,
working in the yard…..ALL occasions and ALL types of weather. Investing needs to be
the same. Would you like less risk? The best way to do that is by diversifying.

“Money, you should pardon the expression, is a little bit like manure. It doesn’t
do any good unless it’s spread around, encouraging young things to grow.”
Barbra Streisand

For more information on how to make your money last to 100 or beyond, please contact me at
www.helpmy401k.us. You may also follow me on Twitter at www.twitter.com/deanvoelker.

Using Protection?

That should have gotten your attention!

In my last post, I discussed some basics of annuities. Annuities can offer some protection for your savings which other investments, such as stocks or mutual funds do not. Keep in mind that the value of your account may still go down.

Lets talk about a few protections which you may get from an annuity.

GUARANTEED DEATH BENEFIT - The first one, common to most annuities, is the Guranteed Death Benefit. What is means is that if you invested a sum of money into an annuity, your beneficiaries will receive at least that amount (minus any income or withdrawals taken).

For example, lets say that John puts $100,000 into a variable annuity. The market goes south, and the value of the annuity dips to $80,000, when John dies. If he has not taken income, his heirs will get the full $100,000. Now lets say that the market goes up, and the account grows to $120,000. When John dies, his heirs get $120,000. In this case, it would not matter if he has taken income - if the account value has grown from his original investment, his heirs get the account value.

GUARANTEED GROWTH - There are a lot of different insurance brokers who provide annuities, and not all of them offer this. Whichever provider you use, I would certainly recommend using a large, stable, reputable (Name Brand) company. The protection is only as good as the insurance company backing it.

I have become familiar with Jackson National Life, one of the largest annuity providers in the US. They have an AA rating in Financial Strength from Fitch & Standard & Poors, which is Very Strong. What that means to a client is that they should feel secure with the protections they are getting on their money. (Source: Jackson Life http://www.jackson.com/)

Jackson offers a Fixed Account Option on its annuities. The Fixed Option offers a 1 Year Interest Rate, which is reset each year, but is never less than 3% (Special Benefit Value). 3% actually looks pretty good right now, doesn't it?

Lets say that John starts out at age 55 by investing his $100,000 in a Fixed Index Annuity. Assuming that the annuity value has grown by 3% per year, by age 65 (10 years) it will be worth $134,392 minimum. (Source: Jackson Ascender Plus Select Brochure, http://www.jackson.com/).

A Variable Annuity should provide more growth over time, however its performance is related to the stock market. The Standard & Poors Index, also referred to as the S & P 500 represents the largest 500 companies in the USA. It has been the measuring stick for comparing investment performance.

If John had been investing his $100,000 in a Variable Annuity using the S & P Index, Jackson lets you have a "win-win". If the market goes up, the account will also go up. If the market goes down, the account value stays the same. This would have been particularly valuable in 2008 when the S & P declined by 42.9%. The value in John's account would have been the same. Had John kept his money invested over the last 10 years, he would have $145,825 today. (Source: Jackson Ascender Plus Select Brochure, http://www.jackson.com/)

I will look at Guaranteed Income Options in another segment. I will also look at additional charges for these features (where they apply). Please keep in mind that an annuity is not for everyone. You should consult with your advisor to determine if an annuity is right for you.

For more information, you may contact me at http://www.helpmy401k.us/. You may also follow me on Twitter at http://twitter.com/DeanVoelker .

"OK, Now What?"

The market has performed much better over the past 3 months. From a low on 3/09/09 to now, the S & P has risen over 34%. This is an encouraging sign for investors.....BUT.....(as a friend of mine might say, "That's a mighty big but you have!")

All kidding aside, the question we all face is - "OK, Now WHAT?" As I talk with clients, attitudes range from "Gloom & Doom" expecting yet another downturn in our roller-coaster ride, to "Cautiously Optimistic". A common quote is "I don't want to lose anymore." (Sound familiar?)

We still have the same issues - we are living longer than we used to. Hallmark sold over 85,000 birthday cards last year for individuals who had reached at least their 100th birthday. The 100+ group is our fastest growing demographic and current life expectancies are 85 for males, 87 for females.

Over that time, being retired for 25 or more years, you WILL see inflation. As certain as death & taxes.

* Do you have enough money to live 25 years or more in retirement?
* Are you prepared to keep up with rapidly rising costs?
* Is your money protected well enough to weather another economic storm?

How can you get growth, income, and protection at the same time? One idea is with a variable annuity. Please meet with your advisor to determine if a variable annuity is right for you. There are several benefits (protections) which annuities offer which are appealing. I'll address these in a future article, but for now lets look at the basics.

According to wikipedia http://en.wikipedia.org/wiki/Annuity_(US_financial_products), an annuity contract is created when an individual gives a life insurance company money which may grow on a tax-deferred basis and then can be distributed back to the owner in several ways.

A variable annuity works much like a mutual fund (or funds). The funds, known as subaccounts, are held and backed by an insurance company. The insurance company can provide protections on your investment for income, death benefit, and in some cases they can even provide a minimum rate of growth. The 'catch' is that you pay for the protection thru annual fees and charges.

Annuities (and insurance) has changed much over the past 10 years. New government regulations has made insurers to become more client friendly, easier to understand, with more benefits to clients.

One way to look at the positive changes in annuities is to think of improvements made in other products. Think of cell phones for example. When they first arrived on the scene in the 1980's, phones were heavy (remember the backpacks!), expensive, with poor reception, and few features. Now think of them today - you can do all kinds of activities on a cell phone, even take pictures, videos, and use the internet - and the phone easily fits into your pocket.

I will be covering more on annuities to come. You may contact me at www.helpmy401k.us. You may also follow me on Twitter at www.twitter.com/DeanVoelker.

Fixing Your 401(k) - Part 7

Problem #6 - Education

Of all the issues we have been discussing that are plaguing 401(k) plans right now, the biggest is EDUCATION on how it works. Why? Very simple. If proper education was taking place, it would help to solve the other issues, and reduce the liability each employer and plan sponsor currently faces.

Jackson Life did a survey of several passers-by and asked them questions about 401(k)s. (Source Rollover Rx, Jackson National Life Insurance) If you have ever watched Jay Leno do his "Jaywalking" bit on the Tonight Show, you have a pretty good idea of how it went.

Here are a few actual responses when people were asked about education offered by their employers for their 401(k) plans.

"I wasn't aware of any education."
"Don't participate in this. Its on a webinar."
"Information meetings are inconvenient to attend. I'm too busy."
"I think there is on line stuff, but I don't think anyone uses it."
"What can you tell me about it?"

I have personally talked to several clients who tell me that when there are "meetings", the advisor simply hands out his card and runs thru a quick power point presentation, then asks if there are any questions. This is usually met with blank "deer in the headlights" looks.

Education must be done on an INDIVIDUAL BASIS. Everyone's situation is different.
John, the 49 year old manager is in a different spot from Brandon, the 24 year old sales rep, who is new to 401(k) investing - although Brandon needs to know he is in a great place to get started now. Kim, the 35 year old customer service rep, may be thinking about borrowing against her plan, and Sue, the 42 year old customer service manager, is new to the company and wants to know how much she should invest, and what funds to pick.

How can you address individual situations in a "webinar" or "power point"?

A survey done by The Spectrum Group (www.spectrem.com - Source Jackson Life, Rollover Rx) tells us that 85% of employees want professional advice, however only 37% of employers offer any real contact with an advisor. That is not good for the employees, or the employer/sponsors, who are exposing their companies to liability and potential lawsuits. http://accounting.smartpros.com/x40690.xml

So what should you be doing?

Let's review the Problems I've covered so far.

Problem Current Situation Solution
Participation We don't participate & Start participating in your plan don't contribute enough. and max it out.

Portability Too many cash out when Roll the old 401(k) to the plan with
changing jobs. your new job, or to an IRA.

Loans Heavy tax consequences Set up an savings fund of 3-6 mos
and penalties. expenses. Don't borrow on 401(k)

Investments We try to 'advise' ourselves. Diversify. Get professional advice.
Its your money, your future.

Education Not enough advice by Find an advisor you can work with.
employers.

Here are 3 key questions you & your advisor should be asking.

1. Do I have enough money to live through at least 25 years or more in retirement?
How can I make my money last for the rest of my life?

2. Will my savings & income keep up with rapidly rising costs?

3. How can my savings be protected against declines in the stock market?

Let me end with this quote from one of my favorite songs.
"Working so hard to make it easy......got to turn....turn this thing around - Right Now!
Its your tomorrow. Right Now! Its everything." (Van Halen - Right Now)

Bet you never thought you'd see a Van Halen reference in an article on retirement!

Get started on your plan - Right Now! Meet with your advisor today and get started on Improving Your Financial Health. For more information, please contact me at http://www.helpmy401k.us. You can also follow me on Twitter - http://www.twitter.com/DeanVoelker

Fixing Your 401(k) - Part 4

Problem #3 - Loans

"Brother, Can You Spare A Dime?" (Bing Crosby 1932)
http://www.youtube.com/watch?v=eih67rlGNhU

There has been a popular myth lately that it is OK to borrow against your 401(k) plan. The most common thing I hear from those I talk with is "I'm paying myself interest!"

If you believe that, I've got some GM stock for you that you should buy!

All kidding aside, this could be the worst idea ever with regards to retirement savings plans. Dave Ramsey, nationally syndicated financial expert, has some thoughts on this as well.
"Never, ever borrow on your retirement." Dave says in response to this question. http://www.daveramsey.com/etc/askdave/index.cfm?event=dspAskDave&intContentItemId=7802

Yet, almost 1 in 5 401(k) plans (18%) have a loan against it. This is according to Transamaerica for Retirement Studies in their annual survey. www.transamerica.org
http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=3838

Reality is NOT "paying yourself interest", but rather paying credit card interest to borrow your own money. OUCH!

What are the Tax Consequences on a 401(k) Loan?

When you borrow, you have 2 options -
1. Pay it back.
2. Don't pay it back.

Of these, the best of course is to pay it back. However, did you know that when you do, you face DOUBLE TAXATION? You are paying interest with after-tax dollars that will be taxed AGAIN
at withdrawal.

What about not paying it back? Well, obviously your investment takes a hit & you could be taxed up to 35%, and face the early withdrawal penalty of 10% if you are younger than 59 1/2. If you leave the company, the loan is automatically listed as a withdrawal, so it is "repaid".
Again, you are paying interest, not to yourself, but to a lender on your own money.

What does this mean to your investment? It lowers the balance, certainly. How much depends on how many times the loan is taken, what amount, investments, payback and several other factors.

Please don't "Spare a Dime" from your 401(k). You will need this money later!!
For more information, please contact me, Dean Voelker, at www.helpmy401k.us

Where You Put Your Money Does Matter

According to Dave Ramsey (www.daveramsey.com), "A Simple one-time investment of $1000 could make a huge difference at retirement...if you know how and where to invest it.

Did you know that 84% of teens have some money saved, with the average being $1044. (I remember being in this position once as a high school student, working & saving. Boy, do I wish someone had shared this with me at that time! $1000 was worth more in 1982 than today!)

Dave Ramsey has a simple chart with some interesting facts.
http://www.daveramsey.com/school/media/pdf/sample_chapter.pdf (Page 9)

He points out on his chart that he learned from a Charles Schwab survey that 81% of teens say that it is important to have a lot of money in their lives. However only 22% say they know how to invest money to make it grow. And only 24% believe that since they are you, saving money now is not that important.

The chart shows what can happen to $1000 over a 40 year period (Age 25 -65) at different rates of return 6%, 12%, and 18% (with no new money added). Because of the compounding effect of interest, a snowball effect is created.

At 6%, $1000 will grow to $10,285 in 40 years.
At 12%, $1000 will grow to $93,050 in 40 years.
At 18%, $1000 will grow to $750,378 in 40 years.

There are some well-established mutual funds which have averaged 12%per year over a 40 year or longer time period. That does NOT mean that the fund will perform at 12% every year. 12% is merely an average.

As Dave often reminds us, saving & building wealth requires discipline and it is a marathon, not a sprint. Plant the seed and let it grow.

Are there any funds which average 18%? None that I can think of which have consistently perform at that level long term - However, think of your credit card lenders, and other forms of revolving credit. Can you see how they make money?

Remember the compound snowball is either working FOR you or AGAINST you. With all of the recent news about credit card lenders gouging, http://njmg.typepad.com/moneyblog/2009/05/credit-card-gouging.html
isn't this a great time to cut up the cards and begin to take control of your finances again?

Do you know a teen who has saved some money?

For more information, please contact me at www.deanvoelker.com.

Retire As A Millionaire!

Want to retire as a Millionaire? As Warren Buffett might say, "It's Simple, but never easy."

Dave Ramsey, the leading expert in helping others to build wealth has an illustration he shows in his classes, to show how Compound Interest works. Dave uses the example of Ben & Arthur. (Why not Ben & Jerry? Just kidding!) http://www.daveramsey.com/etc/cms/index.cfm?intContentId=64

In the example, Ben starts at age 19 and invests $2000 per year at 12% (Well, an AVERAGE of 12%). Ben does this from Age 19 to Age 26 (8 years or a total of $16000 invested) and then stops. He lets the money compound and continues to earn 12%. At Age 65, assuming he never withdraws anything, Ben has $2,288,996.

Arthur, on the other hand, waits until he is 27 to get started, and also invest $2000 per year at 12%. Amazingly, even though Arthur invests a total of $78,000 over 39 years, and is getting the same return, he NEVER catches up with Ben, because Ben started earllier. Arthur's total at Age 65 is $1,532,166. I think many people would be happy with that number though.
Compound interest teaches us a few things.

1. Start early. The eariler you grasp this concept, and apply it for yourself the better.
2. Start now. Don't worry about the past. Make a plan to start today. And STICK TO IT.
3. Down Markets will happen. With disciplined investing (By the way, $2000/year works out to
less than $40/week.) you are buy at a bargain when values are down. The catch is to do it
every week.
4. Compound interest is either working for you or against you. Is it time to do "plastic surgery"
on your credit cards?

For more information, contact me at www.deanvoelker.com

What Else Do You Know About Munis?

Over the past few days, I have been promoting the value of municipal bonds. Right now, they offer a better bargain for your long term savings than CDs.

One of the things I dislike about CDs is that they are really just a holding place for your money.
Money falls into 2 main categories -
*Liquid Money - Money that can be used now or held in an emergency fund (about $10,000
or 3 -6 months of expenses).
*Invested Money - Money that is invested that you don't have an immediate need for.

Looking at those two groups, CDs are kind of a "tweener" - your money seems tied up, so you
can't get to it. Also, the rates are so low currently that it really isn't invested either. Talk about being caught between a "rock" and a "hard place"!

CD yields are so poor, that you may even consider the idea of early withdrawal to take advantage of better (and tax FREE) yields with munis. The penalty usually is forfeiting some interest (WHAT interest??), as much as 6 months.

If you had $10000 in a CD, paying 2% ($200/year, taxable), you would lose $100 to the bank. If you re-invested it in a 5% muni bond, you would earn $500 on the same amount, and not pay federal taxes (perhaps even no state or local taxes) on the interest.

You do the math.

Here are a couple of other articles which support the idea of using muni bonds.

MARKET WATCH - "Muni Yields Aren't Puny"
http://www.marketwatch.com/news/story/bargains-abound-tax-free-muni-bonds/story.aspx?guid=%7B2A55A5F2-2F94-4181-A51A-7FFA12E1A9D2%7D

KIPLINGERS - "Steals In Tax-Free Bonds"
http://www.kiplinger.com/magazine/archives/2008/05/kinnel.html

Warren Buffett likes munis too, and you could do a lot worse than listening to Mr. Buffett!

For more information on municipal bonds, or any other savings ideas, please contact me at
www.deanvoelker.com .

Single Bonds or Mutual Funds?

What's the best way to buy municipal bonds? Should I buy single bonds or mutual funds?

Like most decisions, there are pros & cons with both methods. You should talk with you advisor about which method is right for you - possibly a mix of both.

One of the advantages of owning a single bond is that you have a fixed rate of return - you know exactly what you are getting. For example, on a $100,000 muni bond paying a 5% coupon, you will get $5000 per year in interest income. Because you don't have to pay federal taxes and you may not need to pay state taxes, that may be similar to getting 7% or more, depending on your tax bracket.

Interest from a single bond is usually paid ever; 6 months, so you would get $2500 with each installment. You may also ask your advisor to structure your bonds in such a way that you are able to receive income every month.

Another advantage it that while your advisor does get paid, his or her commission is built into the price of the bond when you buy it. This is a common question I am asked.

Think of buying soup at your local grocery store. The grocer buys soup in large bulk quantities, with all brand names & flavors. Because they buy so much soup at once, they can buy at a wholesale price. When a customer buys soup, they pay a retail price and may only buy 1 can, or a few cans at a time.

Bonds work the same way. If you buy a bond worth $10000, you will get $10000 when it comes due. Along the way, you have gotten a great tax free rate of return every 6 months. If you are fortunate enough to be working with a great advisor, you may have even been able to buy the bond at a discount, so that when it does come due, you even had a small gain. (Woo-Hoo!)
Its great when everyone wins!

One more thing about a single bond - You know exactly which project you are supporting.
(Example - St. Joseph Regional Medical Center Bond)

A big disadvantage is that a single bond is not diversified. This is where mutual funds are better. Going back to the "soup" example, a mutual fund allows you to carry all the "flavors" in one investment, which is managed by professionals at a mutual fund family.

Most bond mutual funds also pay interest monthly, because they own hundreds of bonds. This can be helpful if you are counting on monthly income from your investments, and a huge advantage over CDs.

Also, it is much easier to invest a smaller amount. For those who don't have the 5000 or 10000 minimums required by many single bonds, you can establish a mutual fund for as little as 1000.
Once you have a fund, you can add to it or even withdraw money easily.

Sales charges on bond funds purchased through your advisor may be as high as 4.25%, although you may qualify for volume discounts, also known as "breakpoints" if you are able to invest large amounts of money.

For more information on municipal bonds or other investing, please contact me at www.deanvoelker.com

How To Get Higher Interest and Lower Taxes

Want to get more return on your savings?
What if you didn’t have to pay taxes on the interest you earned?
And you could still sleep at night, knowing that your savings are…..safe?

Sound too good to be true? Well, municipal bonds do all of that. Munis have long provided funding for projects such as libraries, hospitals, schools, airports, and roads. They are a fantastic bargain right now, paying you a much better return on your savings than CDs.

According to www.bankrate.com as of April 9, 2009, the highest CD rate I found was 3.6% for 5 years, and 2.6 for 1 year. Dave Ramsey, Financial Talk-Radio host, likes to refer to CDs as “Certificates of Depression”, and its easy to see why.

You can easily find investment grade (safe, not junk) Municipal Bonds through a good advisor, paying 5% or better, for a period of 5 years or less. When you consider that you don’t have to pay Federal income taxes on the interest, 5% is an excellent return!

If you live in Indiana, where I’m located, you are also exempt from state and local taxes. That can be similar to earning at least 7% on your savings if you paid taxes on the interest.

So why do people still buy CDs? I guess its like the story about the railroad track width measurement. The width is 4 ft 8 1/2 inches. Why? That’s what it was in England. Why? That was the measurement the tramways used before railroads. Why? Tramways were built using the same width as wagons and that was the spacing between wagon wheels. Why? The wagons had to fit the ruts in the road made by Roman Chariots. Chariots were built to accommodate the width of 2 horses. In other words, "We've always done it that way."

If you still believe CDs are better for your savings, ask yourself this -
When you buy a CD, what does your bank do with the money?