Month: January 2009

A Short Intro On Citibank Student Loans For Beginners

Posted by admin – January 26, 2009

Citibank student loans are a way that you can supplement your financial aid package to make certain that you obtain most of the finances needed to make it through higher education. As many federally operated student loans do not fully pay the costs of expensive schools, having the ability to use private Citibank student loans can assist in the stressful process of financing higher education.

When pursuing Citibank student loans, there are a few matters that you will need to keep in mind. First, you will want to possess an established credit score if you desire to register for the money on your own. While it is typically desired among people to want to take care of college with their own financing, the credit score of the majority teenagers is not enough to handle a loan without assistance from a guardian. There are multiple benefits of taking your Citibank student loans with a parent. First, the credit history of your guardian will boost your own, allowing you to be able to get funding you otherwise would not be able to acquire. The benefit to using a parent is in the fact that you will commonly get a better interest rate than if you applied for the funding on your own. This is due to the truth that you are considered a smaller liability when you are applying with a co-signer with a good credit score. Financial institutions assume that the co-signer does not want to ruin their credit history, and will work to ensure that payments are made when owed.

There are a few Citibank student loans that you can research. One of the most commonly researched styles are the ones that are federally funded. These are tied in with the United States government financial aid packages, and are restricted in the amounts that can be used per schooling semester. In addition to this, you can take advantage of one of several private packages presented by Citibank. These private packages can be used with the government financial aid packages, allowing you to supplement your funding. These are the programs that usually require a guardian, and have interest rates that vary on market conditions and your credit score.

It is suggested that you pick a loan that is roughly what you need. Taking out a loan that is too high is a common cause of issues after university is finished. While there is the typical six month grace period, the less funds you take on loan, the lower your monthly bills will be. As getting a job right out of university can sometimes be difficult, this is something that you should look at carefully.

How and where to exchange your currency

Posted by admin – January 24, 2009

When travelling outside your country you might well need to exchange currency.

With currency rates varying from not only place to place but also daily, where and exactly how you decide to exchange your currency can make a big difference to your wallet.
Before you decide to travel, it is always best to do a bit of homework and find out what the foreign currency exchange rate is in the country you are hoping to visit. You can do this by using the Universal Currency Converter which provides you with a fair idea about the latest exchange rates which are based on the mid point between the buying and selling rates of large value transactions in all the global currency.
Most people, mainly those travelling a distance and possibly arriving in a foreign country very early in the morning or even late at night when the banks and currency exchange desks could well be shut, prefer to get a small amount of currency prior to departing on their journey.
In order to find the very best exchange rate, it is better to wait until you arrive at your destination. Whilst most major airports have a currency exchange desk, you are more likely to get a much better rate from an ATM machine affliliated with a major bank.
ATM cards are more than likely to work without any trouble overseas and these are the ones with a four-digit PIN number. Since you may be charged a usage fee by both the local bank and your home one, it is advisable to make one big withdrawal instead of several small ones whenever thats possible. Don’t forget to keep your cash in a safe place out of range of thieves etc.
So long as you have a valid PIN number, you can use the credit or debit card to get cash abroad.
Having a credit card is very invaluable when travelling. With one, it is not necessary to carry large amounts of money. It is better to use a credit card rather than cash to pay for larger expenses, such as hotel bills and big purchases, then you can get a valid receipt for the transactions. Then if you are unfortunate enough to have a bill disputed, your credit card company should be able to help you settle the matter when your holiday is over.
Do bear in mind that credit card companies may possibly levy additional fees for overseas usage. If you’re not certain about this then it is wise to check with your company before you leave home.
Quite often you will find that you have some foreign currency left over by the time you return home. These are just a few ideas as to what you can do with it:
• Treat yourself or friends and family at the airport duty free shop
• Donate it to a charity of your choice. Find a place to do this at the airport or send it to an organisation which deals specifically with charity currency exchange
• Convert it back to your own currency at the airport
• Exchange it when you return home

Things You Should Know about Debt Consolidation Loans for Bad Credit

Posted by admin – January 22, 2009

Check out credit secrets bible review for more tips about “consolidate my debt” and an updated version of debt consolidation loans for people with bad credit.

These days, financial burdens can mount pretty quickly. One day it appears you are doing fine, financially, and all of the sudden you’re experiencing some tough economic issues because of changes in the marketplace or changes in your own personal finances. All of the sudden you can go from feeling great and feeling secure about your financial position to being unsure and worried about exactly where you stand. When it looks like that you’re running into trouble and you find your credit score is starting to slide as payments fall behind, you may consider a debt consolidation loan. In some cases, if your financial condition has become particularly difficult, you may determine that a bad credit debt consolidation loan is necessary to help get your head above water again.

When you think about it, the old adage you often hear is that “the only people who can get credit are those who don’t really need it”. And in a sense, that has some truth to it. Those who once were riding high with excellent credit can find that they’ve fallen on hard times, and their credit score is affected by the late payments or inability to re-pay a loan obligation. That’s when people start to realize they face a problem with the credit, and begin to consider a bad credit debt consolidation loan as an alternative. In many cases, such loans can be a lifesaver.

When payments to creditor begin to fall behind, you may find your credit rating falling right along with them. You may feel that it’s time to turn to a debt consolidation loan as a way to climb out of your financial hole, but because your credit score has taken a dip, you may find yourself facing the prospect of a bad credit debt consolidation loan as your first choice. If you venture into the financial market, you’ll quickly find that there are many loan options available, depending your current credit rating situation. If you have equity available in a large asset, such as a home or a vehicle that has been paid off, you may find that you’ll be able to secure a consolidation at a lower rate because you will be able to provide something tangible as a way to secure the loan.

In situations where you are unable to provide equity to secure financing, you may face the prospect of looking for a bad credit debt consolidation loan that doesn’t require any security. In many cases, these loans will be at a higher rate, and may include a few fees that a secured consolidation doesn’t. Just remember, if entered into with care and caution, a bad credit debt consolidation loan can provide you a method to avoid serious financial consequences.

Avoiding the 5 Pitfalls of Retirement Planning

Posted by admin – January 21, 2009

While we all want to “retire” as soon as possible, planning to pay for our golden years is relegated to the back burner of our daily lives.  When you do spend a few moments on your retirement planning, make sure you avoid these pitfalls that could leave your retirement fund balance with far less than your goal.

 

1. Failing to Save Early

 

What younger workers often fail to realize is that starting a retirement fund early can prevent them from having to save a lot in the future.  A retirement fund started at 25 compared to 35 years of age can mean a compounded interest difference of tens and possibly hundreds of thousands of dollars at retirement.  Saving early, even just fifty dollars a month, can result in an outstanding retirement fund balance.

 

2. Failing to Save for Your Goals

 

To accurately create your retirement plan, you need to know what you want to do while you are retired.  Do you want to travel?  Live on a sailboat?  Or maybe just have a nice house close to the grandkids?  Planning your retirement can help determine how much you need to save, especially if you started saving later in life.  If you want a substantial retirement fund but only began saving at age 45, you have to put away much more per month to achieve your retirement goals. 

 

In addition, remember that Americans’ life expectancy continues to rise.  Be sure to plan your retirement for sufficient age expectancy. 

 

3. Depending on Just One Retirement Savings Option

 

Your 401(k) or IRA has investment options, all of which you have some amount of control.  You have the power to choose which mutual funds, stocks, or other options to place your retirement funds for growth.   Be wise in diversifying your options so that you don’t put all your proverbial eggs in one basket.  Aggressive investing with high yield options at a young age can reap big rewards over decades.  However, a person closer to retirement age may want to retain conservative investment options to maintain a healthy retirement fund balance.

 

4. Ignoring Your Tax Implications

 

Uncle Sam has created a number of tax breaks for your retirement savings.  Take advantage!  Use the free money that your employer will contribute to a 401(k) retirement fund.  Save as much as you can from each paycheck and save paying income tax now.  However, also beware of high penalties and taxes for an early withdrawal of retirement funds.

 

5. Doing it all Alone

 

Remember that you are not alone when it comes to retirement planning.  Enlist the help of a retirement professional at www.iamllc.biz or planning expert at www.kenhimmler.com

 Having help understanding risks and implications of retirement saving can give you more confidence in your retirement planning.  Professional advice can give you a gentle nudge in the right direction and even provide some disciplined action goals to keep you on track.  

 

Authored by Ken Himmler, Sr.

Nassau is the next Caymans

Posted by admin – January 21, 2009

The Bahamas are known as an island of rest, relaxation and luxury vacations. This archipelago of islands is usually not associated as a nation of finance and offshore banking, unlike the nearby Cayman Islands or Playa del Carmen.

However, long after you visit the hundreds of beautiful tropical islands in the area, you will still be wowed by Bahamas offshore banking! Thanks to movies like James Bond, offshore banking has been given a bad name. Some institutions feel that anything offshore is automaticaly mixed with something seedy. Banking internationally and offshore is currently very popular, despite common misconceptions. It is also and completely legal, provided you are forthright with the tax authorities in your home country.

The capital city of the Bahamas is Nassau and it is one of the largest and most widely known business centers in the nation. As a free country, the Bahamas rule themselves. It has its own system of banking privacy laws as well as a no-tax jurisdiction policy. The local government adheres to standard international laws for all offshore tax haven countries.

What’s the upside to banking offshore in the Bahamas?

Well, here there is no income tax on personal gains! So you don’t have to worry about most any kind of tax, including capital gains tax! All it takes to enjoy these benefits is are a corporate and multinational company.

Of course, one of the best advantages besides free taxation is banking secrecy. Your financial information is and will remain private this way. Obviously, this freedom isn’t available to ones who live in countries like the UK. Hold your horses, but what about the IRS? Your income does hold a good deal of interest to the IRS. Indeed what you have invested offshore does have to be reported. While it is possible to force the banks to overturn their privacy agreements, it would take a Supreme Court warrent to do so. That gives clients confidence that they will not be hassled by any legal entities. The Supreme Court has much more to worry about than a suspected case of tax evasion!

Don’t forget that your assets are much more protected in an offshore environment. When you hold assets in America you are always at risk of losing them. Lawsuits make this especially the case, depending on what field your profession is in. However, some overseas businesspersons have avoided this risk by setting up an international corporation free from creditors and civil judgments. An offshore bank account gives the holder an open door to many international markets that would otherwise not have been open to them. Competitive rates are issued on these things in the international markets investment certificates. It also makes the estate planning process go much more smoothly.

With advantages like these it’s no wonder that 50% of the world’s wealth is located in offshore institutions. Often a business will start their offshore banking enterprise with an account in the Bahamas. The Bahamas rely on this as a cornerstone of their economy and market. For more information on this subject check here for a guide to offshore banking.

Top Year-End Investment Tips

Posted by admin – January 21, 2009

Just what you need, right? One more time-consuming task to be taken care of between now and the end of the year. But taking a little time out from the holiday chores to make some strategic saving and investing decisions before December 31 can affect not only your long-term ability to meet your financial goals but also the amount of taxes you’ll owe next April.

Look at the forest, not just the trees

The first step in your year-end investment planning process should be a review of your overall portfolio. That review can tell you whether you need to rebalance. If one type of investment has done well–for example, large-cap stocks–it might now represent a greater percentage of your portfolio than you originally intended. To rebalance, you would sell some of that asset class and use that money to buy other types of investments to bring your overall allocation back to an appropriate balance. Your overall review should also help you decide whether that rebalancing should be done before or after Dec. 31 for tax reasons.

Also, make sure your asset allocation is still appropriate for your time horizon and goals. You might consider being a bit more aggressive if you’re not meeting your financial targets, or more conservative if you’re getting closer to retirement. If you want greater diversification, you might consider adding an asset class that tends to react to market conditions differently than your existing investments do. Or you might look into an investment that you have avoided in the past because of its high valuation if it’s now selling at a more attractive price. Diversification and asset allocation don’t guarantee a profit or insure against a possible loss, of course, but they’re worth reviewing at least once a year.

Know when to hold ‘em

When contemplating a change in your portfolio, don’t forget to consider how long you’ve owned each investment. Assets held for a year or less generate short-term capital gains, which are taxed as ordinary income. Depending on your tax bracket, that rate could be as high as 35%, not including state taxes. Long-term capital gains on the sale of assets held for more than a year are taxed at lower rates: 15% for most investors, 0% (through tax year 2010) for anyone in the two lowest tax brackets. (Long-term gains on collectibles are slightly different; those are taxed at 28%.)

Your holding period can also affect the treatment of qualified stock dividends, which are taxed at the more favorable long-term capital gains rates if you have held the stock at least 61 days. (Those days must occur within the 121-day period that starts 60 days before the stock’s ex-dividend date; preferred stock must be held for 91 days within a 181-day window.) The lower rate also depends on when and whether your shares were hedged or optioned during those 61 days. Check with your tax professional to make sure you don’t inadvertently incur unnecessary taxes by selling or buying at the wrong time.

Make lemonade from lemons

Now is the time to consider the tax consequences of any capital gains or losses you’ve experienced this year. Though tax considerations shouldn’t be the primary driver of your investing decisions, there are steps you can take before the end of the year to minimize any tax impact of your investing decisions.

If you have realized capital gains from selling securities at a profit (congratulations!) and you have no tax losses carried forward from previous years, you can sell losing positions to avoid being taxed on some or all of those gains. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 for a married person filing separately) or carried forward to reduce your taxes in future years. Selling losing positions for the tax benefit they will provide next April is a common financial practice known as “harvesting your losses.”

Example: You sold stock in ABC company this year for $2,500 more than you paid when you bought it four years ago. You decide to sell the XYZ stock that you bought six years ago because it seems unlikely to regain the $20,000 you paid for it. You sell your XYZ shares at a $7,000 loss. You offset your $2,500 capital gain, offset $3,000 of ordinary income tax this year, and carry forward the remaining $1,500 to be applied in future tax years.

Time any trades appropriately

If you’re selling to harvest losses in a stock or mutual fund and intend to repurchase the same security, make sure you wait at least 31 days before buying it again. Otherwise, the trade is considered a “wash sale,” and the tax loss will be disallowed. The wash sale rule also applies if you buy an option on the stock, sell it short, or buy it through your spouse within 30 days before or after the sale.

If you have unrealized losses that you want to capture but still believe in a specific investment, there are a couple of strategies you might think about. If you want to sell but don’t want to be out of the market for even a short period, you could sell your position at a loss, then buy a similar exchange-traded fund (ETF) that invests in the same asset class or industry. Or you could double your holdings, then sell your original shares at a loss after 31 days. You’d end up with the same position, but would have captured the tax loss.

If you’re buying a mutual fund in a taxable account, find out when it will distribute any dividends or capital gains. Consider delaying your purchase until after that date, which often is near year-end. If you buy just before the distribution, you’ll owe taxes this year on that money, even if your own shares haven’t appreciated. And if you plan to sell a fund anyway, you may minimize taxes by selling before the distribution date.

Know where to hold ‘em

Think about which investments make sense to hold in a tax-advantaged account and which might be better for taxable accounts. For example, it’s generally not a good idea to hold tax-free investments, such as municipal bonds, in a tax-deferred account (e.g., a 401(k), IRA, or SEP). Doing so provides no additional tax advantage to compensate you for tax-free investments’ typically lower returns. Similarly, if you have mutual funds that trade actively and therefore generate a lot of short-term capital gains, it may make sense to hold them in a tax-advantaged account to defer taxes on those gains, which can occur even if the fund itself has a loss. Finally, when deciding where to hold specific investments, keep in mind that distributions from a tax-deferred retirement plan don’t qualify for the lower tax rate on capital gains and dividends.

Be selective about selling shares

If you own a stock, fund, or ETF and decide to unload some shares, you may be able to maximize your tax advantage. For a mutual fund, the most common way to calculate cost basis is to use the average cost per share. However, you can also request that specific shares be sold–for example, those bought at a certain price. Which shares you choose depends on whether you want to book capital losses to offset gains, or keep gains to a minimum to reduce the tax bite. (This only applies to shares held in a taxable account.) Be aware that you must use the same method when you sell the rest of those shares.

Example: You have invested periodically in a stock for five years, paying a different price each time. You now want to sell some shares. To minimize the capital gains tax you’ll pay on them, you could decide to sell the least profitable shares, perhaps those that were only slightly lower when purchased. Or if you wanted losses to offset capital gains, you could specify shares bought above the current price.

 

For more information on financial planning, visit www.iamllc.biz 

Understanding Social Security

Posted by admin – January 21, 2009

Nearly 45 million people today receive some form of Social Security benefits, including 90 percent of retired workers over age 65. But Social Security is more than just a retirement program. Its scope has expanded to include other benefits as well, such as disability, family, and survivor’s benefits.

How does Social Security work?

The Social Security system is based on a simple premise: Throughout your career, you pay a portion of your earnings into a trust fund by paying Social Security or self-employment taxes. Your employer, if any, contributes an equal amount. In return, you receive certain benefits that can provide income to you when you need it most–at retirement or when you become disabled, for instance. Your family members can receive benefits based on your earnings record, too. The amount of benefits that you and your family members receive depends on several factors, including your average lifetime earnings, your date of birth, and the type of benefit that you’re applying for.

Your earnings and the taxes you pay are reported to the Social Security Administration (SSA) by your employer, or if you are self-employed, by the Internal Revenue Service. The SSA uses your Social Security number to track your earnings and your benefits.

Finding out what earnings have been reported to the SSA and what benefits you can expect to receive is easy. Just check out your Social Security Statement, mailed by the SSA annually to anyone age 25 or older who is not already receiving Social Security benefits. You’ll receive this statement each year about three months before your birthday. It summarizes your earnings record and estimates the retirement, disability, and survivor’s benefits that you and your family members may be eligible to receive. You can also order a statement at the SSA website, at your local SSA office, or by calling (800) 772-1213.

Social Security eligibility

When you work and pay Social Security taxes, you earn credits that enable you to qualify for Social Security benefits. You can earn up to 4 credits per year, depending on the amount of income that you have. Most people must build up 40 credits (10 years of work) to be eligible for Social Security retirement benefits, but need fewer credits to be eligible for disability benefits or for their family members to be eligible for survivor’s benefits.

Your retirement benefits

If you were born before 1938, you will be eligible for full retirement benefits at age 65. If you were born in 1938 or later, the age at which you are eligible for full retirement benefits will be different. That’s because full retirement age is gradually increasing to age 67.

But you don’t have to wait until full retirement age to begin receiving benefits. No matter what your full retirement age, you can begin receiving early retirement benefits at age 62. Doing so is often advantageous: Although you’ll receive a reduced benefit if you retire early, you’ll receive benefits for a longer period than someone who retires at full retirement age.

You can also choose to delay receiving retirement benefits past full retirement age. If you delay retirement, the Social Security benefit that you eventually receive will be as much as 6 to 8 percent higher. That’s because you’ll receive a delayed retirement credit for each month that you delay receiving retirement benefits, up to age 70. The amount of this credit varies, depending on your year of birth.

Disability benefits

If you become disabled, you may be eligible for Social Security disability benefits. The SSA defines disability as a physical or mental condition severe enough to prevent a person from performing substantial work of any kind for at least a year. This is a strict definition of disability, so if you’re only temporarily disabled, don’t expect to receive Social Security disability benefits–benefits won’t begin until the sixth full month after the onset of your disability. And because processing your claim may take some time, apply for disability benefits as soon as you realize that your disability will be long term.

Family benefits

If you begin receiving retirement or disability benefits, your family members might also be eligible to receive benefits based on your earnings record. Eligible family members may include:

  • Your spouse age 62 or older, if married at least 1 year
  • Your former spouse age 62 or older, if you were married at least 10 years
  • Your spouse or former spouse at any age, if caring for your child who is under age 16 or disabled
  • Your children under age 18, if unmarried
  • Your children under age 19, if full-time students (through grade 12) or disabled
  • Your children older than 18, if severely disabled

Each family member may receive a benefit that is as much as 50 percent of your benefit. However, the amount that can be paid each month to a family is limited. The total benefit that your family can receive based on your earnings record is about 150 to 180 percent of your full retirement benefit amount. If the total family benefit exceeds this limit, each family member’s benefit will be reduced proportionately. Your benefit won’t be affected.

Survivor’s benefits

When you die, your family members may qualify for survivor’s benefits based on your earnings record. These family members include:

  • Your widow(er) or ex-spouse age 60 or older (or age 50 or older if disabled)
  • Your widow(er) or ex-spouse at any age, if caring for your child who is under 16 or disabled
  • Your children under 18, if unmarried
  • Your children under age 19, if full-time students (through grade 12) or disabled
  • Your children older than 18, if severely disabled
  • Your parents, if they depended on you for at least half of their support

Your widow(er) or children may also receive a one-time $255 death benefit immediately after you die.

Applying for Social Security benefits

You can apply for Social Security benefits in person at your local Social Security office. You can also begin the process by calling (800) 772-1213 or by filling out an on-line application on the Social Security website. The SSA suggests that you contact its representative the year before the year you plan to retire, to determine when you should apply and begin receiving benefits. If you’re applying for disability or survivor’s benefits, apply as soon as you are eligible.

Depending on the type of Social Security benefits that you are applying for, you will be asked to furnish certain records, such as a birth certificate, W-2 forms, and verification of your Social Security number and citizenship. The documents must be original or certified copies. If any of your family members are applying for benefits, they will be expected to submit similar documentation. The SSA representative will let you know which documents you need and help you get any documents you don’t already have.

For more information on financial planning, visit www.iamllc.biz 

Common Factors Affecting Retirement Income

Posted by admin – January 21, 2009

When it comes to planning for your retirement income, it’s easy to overlook some of the common factors that can affect how much you’ll have available to spend.  If you don’t consider how your retirement income can be impacted by investment risk, inflation risk, catastrophic illness or long-term care, and taxes, you may not be able to enjoy the retirement you envision.

Investment Risk

Different types of investments carry with them different risks.  Sound retirement income planning involves understanding these risks and how they can influence your available income in retirement.

Investment or market risk is the risk that fluctuations in the securities market may result in the reduction and/or depletion of the value of your retirement savings.

If you need to withdraw from your investments to supplement your retirement income, two important factors in determining how long your investments will last are the amount of the withdrawals you take and the growth and/or earnings your investments experience.  You might base the anticipated rate of return of your investments on the presumption that market fluctuations will average out over time, and estimate how long your savings will last based on an anticipated, average rate of return.

Unfortunately, the market doesn’t always generate positive returns. Sometimes there are periods lasting for a few years or longer when the market provides negative returns.  During these periods, constant withdrawals from your savings combined with prolonged negative market returns can result in the depletion of your savings far sooner than planned.

Reinvestment risk is the risk that proceeds available for reinvestment must be reinvested at an interest rate that’s lower than the rate of the instrument that generated the proceeds.  This could mean that you have to reinvest at a lower rate of return, or take on additional risk to achieve the same level of return.  This type of risk is often associated with fixed interest savings instruments such as bonds or bank certificates of deposit.  When the instrument matures, comparable instruments may not be paying the same return or a better return as the matured investment.

Interest rate risk occurs when interest rates rise and the prices of some existing investments drop.  For example, during periods of rising interest rates, newer bond issues will likely yield higher coupon rates than older bonds issued during periods of lower interest rates, thus decreasing the market value of the older bonds.  You also might see the market value of some stocks and mutual funds drop due to interest rate hikes because some investors will shift their money from these stocks and mutual funds to lower-risk fixed investments paying higher interest rates compared to prior years.

Inflation risk

Inflation is the risk that the purchasing power of a dollar will decline over time, due to the rising cost of goods and services.  If inflation runs at its historical average of about 3%, the purchasing power of a given sum of money will be cut in half in 23 years.  If it jumps to 4%, the purchasing power is cut in half in 18 years.

A simple example illustrates the impact of inflation on retirement income. Assuming a consistent annual inflation rate of 3%, and excluding taxes and investment returns in general, if $50,000 satisfies your retirement income needs this year, you’ll need $51,500 of income next year to meet the same income needs. In 10 years, you’ll need about $67,195 to equal the purchasing power of $50,000 this year.  Therefore, to outpace inflation, you should try to have some strategy in place that allows your income stream to grow throughout retirement.

This hypothetical example is for illustrative purposes only and assumes a 3% annual rate of inflation without considering taxes.  It does not reflect the performance of any particular investment.

Long-term expenses

Long-term care may be needed when physical or mental disabilities impair your capacity to perform everyday basic tasks.  As life expectancies increase, so does the potential need for long-term care.  And the cost of care is growing at a rate faster than inflation. (Source: The National Clearinghouse for Long-Term Care Information, 2007)

Paying for long-term care can have a significant impact on retirement income and savings, especially for the healthy spouse.  While not everyone needs long-term care during their lives, ignoring the possibility of such care and failing to plan for it can leave you or your spouse with little or no income or savings if such care is needed.  Even if you decide to buy long-term care insurance, don’t forget to factor the premium cost into your retirement income needs.

The costs of catastrophic care

As the number of employers providing retirement health-care benefits dwindles and the cost of medical care continues to spiral upward, planning for catastrophic health-care costs in retirement is becoming more important.  If you recently retired from a job that provided health insurance, you may not fully appreciate how much health care really costs.

Despite the availability of Medicare coverage, you’ll likely have to pay for additional health-related expenses out-of-pocket.  You may have to pay the rising premium costs of Medicare optional Part B coverage (which helps pay for outpatient services) and/or Part D prescription drug coverage. You may also want to buy supplemental Medigap insurance, which is used to pay Medicare deductibles and co-payments and to provide protection against catastrophic expenses that either exceed Medicare benefits or are not covered by Medicare at all.  Otherwise, you may need to cover Medicare deductibles, co-payments, and other costs out-of-pocket.

Taxes

The effect of taxes on your retirement savings and income is an often overlooked but significant aspect of retirement income planning.  Taxes can eat into your income, significantly reducing the amount you have available to spend in retirement.

It’s important to understand how your investments are taxed.  Some income, like interest, is taxed at ordinary income tax rates.  Other income, like long-term capital gains and qualifying dividends, currently benefit from special–generally lower–maximum tax rates.  Some specific investments, like certain municipal bonds, generate income that is exempt from federal income tax altogether.  You should understand how the income generated by your investments is taxed, so that you can factor the tax into your overall projection.

Taxes can impact your available retirement income, especially if a significant portion of your savings and/or income comes from tax-qualified accounts such as pensions, 401(k)s, and traditional IRAs, since most, if not all, of the income from these accounts is subject to income taxes.  Understanding the tax consequences of these investments is vital when making retirement income projections.

Have you planned for these factors?

When planning for your retirement, consider these common factors that can affect your income and savings.  While many of these same issues can affect your income during your working years, you may not notice their influence because you’re not depending on your savings as a major source of income. However, investment risk, inflation, taxes, and health-related expenses can greatly affect your retirement income.

 

For more information on financial planning, visit www.iamllc.biz 

Should You Pay Off Your Mortgage or Invest?

Posted by admin – January 21, 2009

Owning a home outright is a dream that many Americans share. Having a mortgage can be a huge burden, and paying it off may be the first item on your financial to-do list. But competing with the desire to own your home free and clear is your need to invest for retirement, your child’s college education, or some other goal. Putting extra cash toward one of these goals may mean sacrificing another. So how do you choose?

Evaluating the opportunity cost

Deciding between prepaying your mortgage and investing your extra cash isn’t easy, because each option has advantages and disadvantages. But you can start by weighing what you’ll gain financially by choosing one option against what you’ll give up. In economic terms, this is known as evaluating the opportunity cost.

Here’s an example. Let’s assume that you have a $300,000 balance and 20 years remaining on your 30-year mortgage, and you’re paying 6.25% interest.  If you were to put an extra $400 toward your mortgage each month, you would save approximately $62,000 in interest, and pay off your loan almost 6 years early.

By making extra payments and saving all of that interest, you’ll clearly be gaining a lot of financial ground.  But before you opt to prepay your mortgage, you still have to consider what you might be giving up by doing so–the opportunity to potentially profit even more from investing.

To determine if you would come out ahead if you invested your extra cash, start by looking at the after-tax rate of return you can expect from prepaying your mortgage. This is generally less than the interest rate you’re paying on your mortgage, once you take into account any tax deduction you receive for mortgage interest.  Once you’ve calculated that figure, compare it to the after-tax return you could receive by investing your extra cash.

For example, the after-tax cost of a 6.25% mortgage would be approximately 4.5% if you were in the 28% tax bracket and were able to deduct mortgage interest on your federal income tax return (the after-tax cost might be even lower if you were also able to deduct mortgage interest on your state income tax return). Could you receive a higher after-tax rate of return if you invested your money instead of prepaying your mortgage?

Keep in mind that the rate of return you’ll receive is directly related to the investments you choose. Investments with the potential for higher returns may expose you to more risk, so take this into account when making your decision.

Other points to consider

While evaluating the opportunity cost is important, you’ll also need to weigh many other factors. The following list of questions may help you decide which option is best for you, also visit http://kenhimmler.com/ for more strategies.

·          What’s your mortgage interest rate? The lower the rate on your mortgage, the greater the potential to receive a better return through investing.

·          Does your mortgage have a prepayment penalty? Most mortgages don’t, but check before making extra payments.

·          How long do you plan to stay in your home? The main benefit of prepaying your mortgage is the amount of interest you save over the long term; if you plan to move soon, there’s less value in putting more money toward your mortgage.

·          Will you have the discipline to invest your extra cash rather than spend it? If not, you might be better off making extra mortgage payments.

·          Do you have an emergency account to cover unexpected expenses? It doesn’t make sense to make extra mortgage payments now if you’ll be forced to borrow money at a higher interest rate later. And keep in mind that if your financial circumstances change–if you lose your job or suffer a disability, for example–you may have more trouble borrowing against your home equity.

·          How comfortable are you with debt? If you worry endlessly about it, give the emotional benefits of paying off your mortgage extra consideration.

·          Are you saddled with high balances on credit cards or personal loans? If so, it’s often better to pay off those debts first. The interest rate on consumer debt isn’t tax deductible, and is often far higher than either your mortgage interest rate or the rate of return you’re likely to receive on your investments.

·          Are you currently paying mortgage insurance? If you are, putting extra toward your mortgage until you’ve gained at least 20% equity in your home may make sense.

·          How will prepaying your mortgage affect your overall tax situation? For example, prepaying your mortgage (thus reducing your mortgage interest) could affect your ability to itemize deductions (this is especially true in the early years of your mortgage, when you’re likely to be paying more in interest).

·          Have you saved enough for retirement? If you haven’t, consider contributing the maximum allowable each year to tax-advantaged retirement accounts before prepaying your mortgage. This is especially important if you are receiving a generous employer match. For example, if you save 6% of your income, an employer match of 50% of what you contribute (i.e., 3% of your income) could potentially add thousands of extra dollars to your retirement account each year. Prepaying your mortgage may not be the savviest financial move if it means forgoing that match or shortchanging your retirement fund.

The middle ground

If you need to invest for an important goal, but you also want the satisfaction of paying down your mortgage, there’s no reason you can’t do both.  It’s as simple as allocating part of your available cash toward one goal, and putting the rest toward the other.  Even small adjustments can make a difference.  For example, you could potentially shave years off your mortgage by consistently making biweekly, instead of monthly, mortgage payments, or by putting any year-end bonuses or tax refunds toward your mortgage principal.

And remember, no matter what you decide now, you can always reprioritize your goals later to keep up with changes to your circumstances, market conditions, and interest rates.

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