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Money Coach

May 2007 - Posts

  • A Look at Bonds

    A bond mutual fund is an investment company created solely to manage a pool of investments—or a
    portfolio—of primarily individual bonds. Investors purchase shares in the fund, with each representing a
    proportional ownership interest in the pool. Professional money managers use the money invested by
    shareholders to buy and sell bonds for the portfolio in alignment with the fund’s investment objective.
    Because of the pooling of resources, bond mutual fund shareholders can invest in a greater variety of
    bonds than the average investor could individually.

    One drawback of bond funds is, unlike traditional bonds, like Treasury or municipal bonds, they have no maturity date.

    That’s not good, because when the risk of inflation—and interest rates—escalate, you’ll want to know when your bonds mature (hopefully, sooner rather than later) so you can plan effectively for replacing them with lower-price alternatives.

    Without a maturity date, investors are essentially locked into a bond price—and value—at the market’s discretion, and not their own.

    Obviously, interest rates have a big impact on bond performance. The price of a bond changes throughout its life in response to many factors, not the least of which is interest rates. And, in fact, interest rates and bond values typically have a converse relationship. So when rates drop, bond prices increase. And when rates go up, bond prices will drop. Not necessarily the best news for investors, who are often faced with falling bond values particularly when inflation risks escalate, for example, enough to spur a rate hike.

    So how does this relationship work? Say you buy a newly issued $10,000 bond when interest rates are at eight percent. In that case, your bond yields eight percent or $800 annually. Now let’s say that, after your purchase, the prevailing interest rates increases to nine percent. A newly purchased $10,000 bond now yields $900 annually.

    If, at that point, you wanted to sell your bond, nobody would pay you $10,000 to get $80 interest when the going rate is $90. So, you’d most likely have to reduce your price, making your bond less valuable than one that’s newly issued. And while rising and falling interest rates affect the price of bonds, they also affect the share prices of mutual funds that hold bonds.

    So what can investors do?

    • Stay on your toes. Because while no one can predict what will happen to interest rates in the near future, there is always the chance that the Federal Reserve Board will raise them. And since higher interest rates lead to lower bond prices, it’s good to anticipate a fall, in response, with one exception: when bond prices have already fallen in anticipation of the Fed’s rate hike.

    The fact is bond prices will likely only fall more if the Fed raises interest rates higher than the bond market anticipated. This is the good news for owners.

    • Look for bonds and mutual funds with a lower maturity and average duration.

    • Pay attention to municipal bonds, which are debt securities issues by a state or local government. They’re typically used to raise money for building roads, schools, etc. and tend not to be as affected by interest rates as others.

    • Diversify. When you have a mix of different types of investments, such as stocks and bonds, you can better weather the ups and downs of the market.

    Posted May 29 2007, 01:02 PM by moneycoach with no comments
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  • More On Wills

    We've spent the past fewl blogs talking about the importance of taking care of your family after you're gone. That's the essence and value of estate planning.

    Now, let's examine some additional methods of taking care of your money -- and your loved ones.

    Living Wills

    If you want to relieve your family of the burden of making life-sustaining treatment decisions in the event of your mental or physical incapacity, you should consider a living will. Under it, you can make those decisions in advance as a living will stipulates the medical and health care instructions to be carried out should you be on life support. A power of attorney must be named in conjunction with a living will.

    Assign power of attorney.

    If you become physically or mentally incapacitated, the execution of a properly drafted Durable Power of Attorney can be good protection for your family. It lets you appoint whoever you want to handle your business and financial affairs in the event you are unable to do so at any time.

    You can also appoint somebody to make health care decisions on your behalf by executing a Health Care Power of Attorney. This document allows you to provide instructions to your appointed agent regarding basic health care decisions.

    Choosing a Power of Attorney

    Designating a power of attorney (POA) for your retirement account helps insure that actions will continue even when you are unable to provide direction to your plan administrator. To avoid any confusion or doubt as to the actions that are permitted under the POA, you may want to list all the actions it covers, such as:

    • Providing direction for investments.
    • Requesting distributions.
    • Making contributions.
    • Changing beneficiary designations.

    That’s because financial institutions are more likely to accept a POA for a certain action or set of actions if it clearly indicates what’s allowed. Here are a few useful questions and tips to keep in mind to help you go through that process. Ask yourself if:

    • The POA is durable or non-durable. The difference is that a durable POA stays in effect after you, the account owner, are determined to be legally incompetent. A non-durable POA, on the other hand, ceases to be in effect.
    • Does the POA clearly state that it covers the retirement account or retirement account transactions? If so, are the types of transactions listed?
    • Is the POA still in effect?
    • Does the financial institution or plan administrator have a copy of the POA? And, if so, have they acknowledged that it satisfies their requirements?

    • Have you designated a POA that will help ensure your person of choices makes appropriate decisions for applicable transactions? If not, the courts may designate a “guardian” or “conservator” to handle your affairs and this may not be the person you’d have picked.

    Choosing a Beneficiary

    While designating a POA is important, it’s also important to designate a beneficiary for your retirement account. That’s because, unlike your other assets, your retirement account (and life insurance policies) is not governed by your will. Instead, the people who inherit these assets are those you have on record at the time of your death as your beneficiaries.

    If you fail to provide these designations to your plan administrator or financial institution, like a POA, they will be determined according to the default provisions of your plan document:

    • For qualified plans, the default provision is usually your surviving spouse.
    • For IRAs, the default provision is usually your surviving spouse or estate. If you’re not survived by a spouse, some accounts will designate your children.

    To make sure that your assets go to the people you want, it’s imperative you provide a designation of beneficiary form during the estate planning process—while you’re alive to do it. Here are a few useful questions and tips to keep in mind to help you make your beneficiary designations. Ask yourself if:

    • The designation is current or has it been updated for recent events, like divorce, death, marriage and birth?
    • Does your plan administrator or financial institution have a copy of your designation of beneficiary forms? (This is especially important since many financial institutions won’t accept them after your death.)
    • Is your “customized beneficiary designation,” if you have one, acceptable? If you’re not sure, ask for a written acknowledgement.
    • Are the options available to your beneficiaries consistent with your estate planning needs? For example, will they have to take immediate distributions or can they stretch them over time?

    The trick to designating Living Wills, POAs and Beneficiaries is keeping things clear and simple. This will ensure that your estate planning objectives will be seamlessly fulfilled.

    Posted May 15 2007, 12:45 AM by moneycoach with no comments
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  • Draw Up a Will

    You know the old adage "where there's a will, there's a way"?

    In estate planning, you have to flip that phrase over to say "where's a way, there's a will". That's because the path to true financial security for your family after you're gone is through a will.

    Consider the story of John and Jane Doe. John married Jane, his second wife, several years ago. Since then, they’ve been living fairly well with his two children from a previous marriage, Mary and Mark.

    Then, one day, John, always physically fit, had a fatal heart attack. He didn’t have a valid will at the time. So the state stepped in for him. It gave Jane one-third of his assets, leaving Mark and Mary to split the rest.

    Unfortunately, that was not enough for Jane to live comfortably. And Mark and Mary disagreed with Jane and the state regarding the division and distribution of these assets. All of which led to a contested hearing before the Family Division of the Superior Court. Add to that the unquantifiable emotional toll left on John’s family upon his death, and they were all left with a real mess.

    This is something that could have been avoided if only John had been a better planner—and properly drafted a will. You don’t want your family to have this experience.

    The fact of the matter is that if you want to have any control over the final distribution of your assets once you pass, you should express your decisions now in a properly drafted will. It should stipulate, among other things, where you’d like your assets and property to go.

    Most banks draw up and execute wills, or you can go to a lawyer or an accountant. Any of them can guide you through the process that requires you to consider:

    • Your assets and liabilities.
    • Your beneficiaries—and whether you need to change those already named. After all, a change in your family situation can necessitate a change in your beneficiaries.
    • Your heirs and what benefits you want them to receive.
    • Provisions for the possibility that you and your partner will die at the same time. This is especially important if you have minor children or incapacitated dependants, who rely on you for an income. You need to name guardians and decide how your dependant's financial interests will be protected.
    • How to divide and control your estate. For example, you may want to guarantee income to one person and leave capital assets to someone else. Let’s say you want to use a capital amount to generate income for your child’s education. Then, once he or she graduates, you want the capital to fund your spouse’s retirement.

    In addition to these and other considerations, you’ll need to determine if your will is conditional or unconditional.

    • Conditional wills mandate heirs receive assets only if, for example, they reach a certain age, acquire a certain skill or obligation, satisfy an obligation, or are part of a succession planning plan.
    • Unconditional wills allow your assets to pass directly to heirs on your death, after the legal formalities have been completed.

    As you can see, there is much to be covered in a will. You can imagine the questions and problems that can arise without one. And, in fact, without a properly drafted will, a legal formula will dictate how your assets (less your liabilities) will be divided among your relatives.

    Just as critical as developing a will is making sure to revise it periodically—I suggest every two years—as your personal circumstances, finances, and tax legislation change. After all, a stale document is a dangerous document and can cost you in terms of taxes and unnecessary duress on your family.
    Posted May 08 2007, 01:31 PM by moneycoach with no comments
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  • Estate Planning Tips

    Protect Your Assets and Your Family by Estate Planning

    When talking about financial planning, I would be remiss not to devote some time to estate planning. Because while a good offense (i.e., making a good income) lays the foundation for financial security, a good defense like estate planning ensures your ability to protect your earnings and your family when you’re gone.

    So what exactly is estate planning? In a nutshell, it’s how you intend to dispose of everything you own (i.e., your assets) after paying off what you don’t own (i.e., your liabilities) when you die.

    The best time to plan for your estate is while you’re healthy and able to make sound financial decisions. It’s these decisions that will:

    • Ensure your wishes are carried out when you’re gone.
    • Act as guideposts for providing for your dependents and efficiently distributing your assets.

    Unfortunately, too many people put off estate planning or skip it entirely. Many don’t want to talk about anything that relates to their death, financial or otherwise. Some figure they’re too young—it’s just not urgent. Others find it boring, confusing and complicated. They don’t think they have enough money to bother. Although no matter what your circumstance, planning for what you do have is always good practice.

    With those things in mind, I’ll lay out a foundation for understanding how estate planning should fit into your financial outlook, why it is so important, and what you need to get started. As with all other subjects in this blog series, I also encourage you to work with a professional to navigate through the more detailed process that, like most financial matters, is involved.

    Tips for good planning


    There’s no better place to start thinking about estate planning than at the beginning. That means establishing how much you have and don’t have by doing a needs analysis of your finances. This means evaluating:


    • Your current and future assets, including anything from your home, furniture, and cars, to stock shares, life insurance policies, and retirement funds.
    • Your current and future liabilities, including your debts and what you expect to pay out to support dependents.
    • Your tax commitments at death.

    Once you have this information, a number of tools and techniques exist that you can use to structure your estate. They should ensure that you pay the minimum amount in estate duty and other tax, while delivering the maximum inheritance for your heirs.

    In the next few blogs, I'll go into greater detail on how to set up an estate plan. You may not see it as the most glamorous financial exercise, but believe me, your family's future is depending on it.



    Posted May 01 2007, 03:05 PM by moneycoach with no comments
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