******UPDATED July 18, 2008 ********* I added the discussion i had previously this month on VUL Insurance. I will start a small section on Life Insurance to give you just basic understanding of it since it is a very complicated monster. ******UPDATED May 18, 2008 ********* I added the 401K to roth Ira conversion Tax rules that will apply in 2010.. FYI
******UPDATED May 14, 2008 ********* Added a good Traditional vs Roth IRA calculator to show you the tax advantages with the Roth over the 401K
******UPDATED Nov 13, 2007 ********* Took time to discuss the load and 12b-1 fees.. and portfolio Tax examples!
******UPDATED Nov 18, 2007 ********* Discussed the 2 year rule with transfering money from employer 401k's
H-T’s this thread is going to be a work-in-progress. The plan is to alleviate any confusion and to discuss issues that may arise if you are unsure about something dealing with investing, credit, credit cards, loans, the stock market and maybe even real estate etc.. The basics will be discussed here and if anyone feels that you want to add to it feel free to let me know and we can do so. This is for educational purposes and to assist you in making better financial decisions and understand the importance of personal finance.
There is a lot of information on the internet and searching can answer a lot of your questions. I posted a few explanations to items that are discussed quite frequently in this forum. Lets begin…
__________________ FUNDS AND STOCKS _____________________
What are Mutual Funds and ETF’s?
A mutual fund pools money from hundreds and thousands of investors to construct a portfolio of stocks, bonds, real estate, or other securities, according to its charter( or area it focuses on) like energy, oil, precious metals, tech, and so forth. Each investor in the fund gets a slice of the total pie. Mutual funds make it easy to diversify. Most funds require only moderate minimum investments, from a few hundred to a few thousand dollars, enabling investors to construct a diversified portfolio much more cheaply than they could on their own.
Risk Tolerance: What is yours? It’s imperative that you understand your risk tolerance. Knowing your risks tolerance will better allow you to invest in certain funds. The higher the return the riskier the investment will be. In turn the more volatile (meaning it can loose money as fast as it gains).
The risk levels are Very Aggressive, Aggressive, Moderate, Conservative, and Very Conservative. Very aggressive is leaning toward Stocks and Very conservative leaning toward bonds and cash. It is recommended that young investors start on the aggressive- moderate side when starting out since time is on your side and you have this time to ride wave and rebound from any upset in the market. Historically since the 1940’s the stock market has returned and average of 10% per year every year. So even after bear markets and the dot com crash of 2000 the markets have corrected it self and investors have recouped some of the money originally lost. Once you get older you are supposed to switch to a more conservative approach due to preservation of capital (money) and since you are closer to retirement risky investments are no longer needed.
Diversifying - that is, spreading your money among a number of different types of investments - lessens your risk because even if some of your holdings go down, others may go up (or at least not go down as much). On the flip side, a diversified portfolio is unlikely to outperform the market by a big margin for exactly the same reason. Never have all your money invested in one area or one mutual fund, spread it out.
Index funds track the performance of market benchmarks, such as the S&P 500. Such "passive" funds offer a number of advantages over "active" funds: Index funds tend to charge lower expenses and be more tax efficient, and there's no risk the fund manager will make sudden changes that throw off your portfolio's allocation. What's more, most active mutual funds under perform the S&P index.
ETFs
If you looking to make a little edge on a Mutual fund try a Index ETF (Exchange-traded Funds). They are traded exactly like stocks. They are a cheaper alternative than a mutual fund (in expense ratio) and you pay a broker directly instead of the fund manager. ETF's have no manager deciding to by and sell everyday instead you get pure exposure to whatever group of stocks the ETF tracks.. You can by ETF's that track the S&P 500 or EAFE index for foreign markets.
Down side to this ( there is always a down side). Investing in ETF's can get costly if you are investing/ trade on the regular. Some ETF's charge $10 or 1% commission each time you buy shares and that can add up. ETF's only make sense if you are going to invest a large sum of money and trade on a limited basis.
Mutual funds are your other alternative and international is the way to go or an aggressive fund if you are looking to build short term growth and income.
What is an expense ratio?
An expense ratio is "annual operating expenses divided by average annual net assets." That is, you take the costs of running the fund and divide them by the value of the assets under the purview of the fund's managers. The result is expressed as a percentage. In English it’s the price you are paying the manager to run the fund. It’s a culmination of fees, advertising, administrative cost and commissions to run the fund. Expense ratio’s range from as little as 0.13% all the way to 1.8 to 2.3%. Any expense ratio over 1.5% is going to eat away at your Assets. So pick mutual funds with low expense ratio’s and stay away from Front Loaded and Back Loaded Mutual Funds
Example of how expense ratio of 1.5 % or higher look on investments
______________Investment Fee's____________________
What does Load and No Load mean when looking at Mutual Funds?
Load or “Sales Load” in mutual funds is commission paid to brokers or fund managers. Sales loads do not benefit investors. Load fees typically range from 4-8%. Here are some different types of Loads.
Front-end load (usually class A shares) - you pay the sales fee up front.
Back-end load or deferred load (usually class B shares) - you pay the sales fee on your way out if you cash out or sell shares.
Constant load fund (usually class C shares) - you pay the sales fees every year and might even have to pay a full load when you sell.
Never buy a loaded fund.
I’ll give you an example of how a loaded fund will erode your investment. Say you invest $ 10,000 and you put it into a loaded fund with a 5% front-end load, you are really only investing $9,500. That’s $500 bucks that’s went to the manager for his commission and not in your portfolio. From my research I have found quite a few Loaded funds that don’t perform better than no loaded funds, however some fund brokers will insist in investing inthat fund. It happened to me when i first started investing.
There are currently hundreds of no-loaded funds out there. Vanguard,, T. Rowe Price, and USAA for example all nave no-load funds.
If you are interested in a fund, check that fund out either at Google or Yahoo finance, or even call the brokerage house directly and ask for a prospectus of the fund. It will list all the fees associated with the fund, as well as assets managed and dividends paid.
What are 12b-1 Fees?
The 12b-1 fee allows a mutual fund to pay distribution and marketing expenses out of the fund's assets. In English that’s your money paying for advertisement, marketing, etc out of the fund. In theory, the 12b-1 fee was supposed to help investors. By marketing a mutual fund, the funds assets should increase and an increase in assets should provide better economies of scale providing investors with lower annual operational expenses. This has yet to be seen. most 12b-1 fees are limited o 1% annually with maximum of 0.25% going to brokers. Typically only 5% of the 12b-1 fee goes towards advertising the fund, but 63% goes towards compensating broker-dealers
You can avoid paying unnecessary fees by purchasing no-load funds. However, this method can fail you because a fund is allowed to claim it is a "no-load fund" as long as its 12b-1 fee is 0.25% or less per year. No load funds that do not charge 12b-1 fees are called 100% no-load or true no-load funds. The best way to avoid 12b-1 fees is to read the fee table in the funds prospectus. The Security and Exchange Commission (SEC) has forced all fund companies to clearly display a listing of their fees and how it might affect your investment. Look closely for the line that says "12b-1 fees to see how much they are.
What are stocks and why buy stocks?
In financial markets, the stocks are the issuance, sale and distribution of shares of a major corporation or company. A person or organization that holds at least a partial share of stock is called a shareholder. The Aggregate value of a corporation's issued shares is its market value or price. Owning Stocks is like owning a small piece of the company. Stocks are considered to have the most risk followed by bonds and then treasury bills (T-Bills)
Stock investing is the investors opportunity for capital appreciation and growth, (making money getting paid 
). Companies offer stocks or shares of ownership in the company in order to raise capital.
How do I choose a stock?
Choosing a stock can be tricky and it really boils down to your risk tolerance ( see above). Different stocks as well as different investment vehicles carry different risks according to the industry and economic environment. Stocks of a new company typically hold more risk than older established companies. A certain amount of business and market risk is inherent within each company. Changes within the industry, the corporation, environment and politics ( wars, foreign policy altercations) can alter the price and outcome of stocks.
Choosing the right mix of stocks is imperative when developing a portfolio. Keep your goals and risk tolerance in mind. Make sure you also divide your investment portfolio among several different stocks. “Diversify yo bonds Nukka” sound familiar? Don’t invest all your money in high risk investments, when the market takes a shit you loose your money.
Here is a break down of Stocks. You can Google these if you want more information…..
Blue Chip: Large well established companies who are financially Strong. Consistently profitable over time.
Ex. Exxon Mobil, Google,
Volatility: Moderate
Cyclical: Profits are closely tied to the movements of the economy. When the economy is good the profits rise when the economy is bad these stocks slump.
Ex. GM, Ford, Jet Blue, United, Pittsburg Steel, machinery manufactures
Volatility: Moderate
Growth: Expected to deliver unusual rapid earning growth in the future, all or most of the profits are reinvested in the business. Share prices are higher than average and can fall quickly when the company isn’t making any money.
Ex.
Technology-Sprint, IBM, Microsoft,
Pharmaceutical companies- Pizer, Merck & Co, Johnson & Johnson
Bio-Technology- Genentech, UCB, Biogen Idec
Volatility: High to Very High
* think of the dot com bust/crash of 2000-2002…
Income: Consistently provides relatively high dividends (money back to the shareholder). This money is distributed back to you.
Ex: Utilities, PGE, Amerada HESS
Oil and Gas companies- BG group, Saudi Arabian Oil, Texaco Oil and Gas
Volatility: Moderate
Foreign: Headquartered in Foreign companies. These stocks offer a wide range of choice and protection against slumps in the U.S stock market.
Ex. All types- China Overseas land development, Samsung electronics Korea, Taiwan semiconductor Mfg
Volatility: Moderate to Very High.
Small company: These are the fastest growing but generally are the most volatile.( Small-Cap)
Ex: FLIR systems inc, Time Warner Telecom Inc, ON Semiconductor Corp
Volatility: Very High
What are my investment goals?
Is it to keep your money safe or to grow the value of your investment? Once you decide what your goals are it’s a little easier to pick funds, stocks, and investment strategies. Here are examples of invest goal forecasting.
Short-Term = 3 years or less
Intermediate = 4-6 years
Long-Term= 7 or more years.
________________ RETIREMENT______________________
Why is Retirement so important?
There is no need to put this off. Belowwe will talk about 2 simple ways to start to plan for retirement. If you want to live a wonderful life after age 55 you can only do it if you plan now. The key to investing successfully for retirement is spreading your savings among a diverse mix of stocks and bonds. The younger you are the more stocks you need for growth. As you near retirement and get older you gradually shift to bonds for more stability and preservation of capital.
Here is a simple break down of what you should have as a mixture now to the target time you are going to retire.
40-30 years from retirement:
Large Cap Stocks -52%
Mid Cap Stocks -10%
Small Cap stocks -8%
Foreign Stocks -20%
Bonds -10%
20 years from retirement
Large Cap Stocks -49%
Mid Cap Stocks -9%
Small Cap stocks -7%
Foreign Stocks -15%
Bonds -20%
10 years from retirement.
Large Cap Stocks -39%
Mid Cap Stocks -7%
Small Cap stocks -6%
Foreign Stocks -13%
Bonds -35%
Notice any big difference? Yep you see the Large Cap Stocks allocation shrinking and the Bonds allocation increasing as time get closer to you retiring. As you get older you don’t need to invest so heavily in stocks, more volatile and greater chance to loose money in the market.
What is the difference between Traditional and Roth IRA's?
Okay this is going to be long so bare with me. I’ll explain them both to you and then you can decide if it makes sense to you.
2 types of IRA’s Traditional and Roth
Traditional:
Every dollar can be written off your tax return if you are not a part of a qualified retirement plan (401K) at work or if you are single and your AGI( Adjusted Gross Income) is below 33k- 53k if you are married.
Advantages
- Penalties discourage early withdrawal prior to retirement so it encourages saving.
- Interest, dividends, and appreciation are all tax free until withdrawn.
Disadvantages
-IRA’s are not a “Liquid assets” like saving mutual funds, MM accounts. You can take the money out before you retire but you are going to take a penalty for early withdrawal. 10 % before age 59 ½.
-IRA’s can’t be used as collateral
Roth IRA
Money is non tax deductible going in and it is already taxed, meaning you already paid taxes on it before it was included in the IRA. It earns money yearly and tax free. So when you deduct it at 59 ½ you will not pay a single dime in taxes on it.
Advantages for Roth
- Withdrawals after 59 are Tax Free
-You can add onto it after age 70 and over
-You can pass the account over to your heirs
Disadvantage
You don’t get to write it off on Tax returns
Early penalty
401K.
Most of us know what a 401 K is but for those who don’t. Here ill drop some science on you. Basically it is a retirement plan started by your employer. You contribute a certain amount of your annual salary to the retirement account with an authorized institution. The contribution is deducted from your paycheck and is listed on your w-2 and is not included in your “wages, tips, and compensation” block on your w-2 for the year. It reduces your reportable salary and in turn lowers your federal income tax liability to the IRS.
Another bonus is that the employer “matches” a certain percent annually. Some cases dollar for dollar or 50 cents on the dollar for every dollar the employee pays in. Most plans let their employees invest where they want. The typical choices are the company’s stock, stock mutual fund, long term bonds and money market accounts.
401K are different when it comes time for withdrawals under new laws passed you can only take out money if you’re facing serious financial hardship. i.e Your spouse dies and you have to pay for medical expenses, funeral or if you are about to loose your house due to foreclosure. You have to prove that you have exhausted all other avenues of savings and barrowing from banks before you can even qualify for this. It’s the last straw.
Like the IRA you can withdrawal money from your 401K BUT you can only take up to ½ of the total amount in your account not more than 50K. You pay interest on the amount borrowed and in some cases 1-2 % above Prime (9.9% ) By law 50% has to stay in the account and the balance has to be repaid in 5 years, mostly by payroll deduction.
The biggest disadvantage is that your paying 10% on withdrawals PLUS state, federal and local tax on the amount barrowed. So you take out 7,000 you can pay upwards of 900 dollars in taxes. BUT you may not get hit with this tax if you
-die
- become totally disable
- your wife owns you from the divorce with child support
-if you get fired, laid off or took early retirement in the year you turned 55 or later.
401k's raise some eyebroys because of the “company stock” thing.( not all 401k are totally invested in thier employeers stocks) Alot of companies are using outside companies to manage thier 401k's The problem was a lot of people invested all their “eggs” in their employers stock because they feel they have security and their company is the shit and they are going to be rich. So when there company goes belly up all of their life savings are gone. (Ask the employees of ENRON). It is wise to keep only 10-15 percent of your total portfolio in your companies stock and use the other 85-90% in other investment avenues. And also look at the rules for early withdrawal for the 401 Vs the IRA big difference huh.
What IRA is better Traditonal IRA or Roth IRA's?
It really depends on the person and what tax braket you may fall in at retirment but i personall feel both are good but the Roth is more advantagous for the investor! why pay taxes while retired if you dont have to..
Here is a calculator to test some theories and see wht you decide.
http://www.money-zine.com/Calc...lator/
I want to transfer my existing 401K to my new employeers 401k or IRA Plan how is this done?
First off NEVER CASH OUT YOUR MONEY in your 401K. You pay taxes on it if you "Cash out", Automatic 10% Fed and 10 up to 25% for state Taxes depending on your state.
1 question, How long have you been with this current employer?
Reason i ask is this: With IRA rollovers it can get complicated, most rollovers from a SIMPLE IRA plan( retirement plan from a small business, or known as a 401k) are not considered taxable distributions. SIMPLE IRA rollovers are also subject to a two-year rule. This means that beginning on the first day that a deposit is made into a SIMPLE IRA plan, the employee must wait two years before the SIMPLE IRA can be rolled over into any other qualified plan, such as a 403(b), 401(k) or another IRA. If the employee wants to make a tax free rollover before the two year rule has expired, then the transfer must be to another SIMPLE IRA( 401k, 403b or IRA) account.
An early distribution that does not satisfy the rollover rules above is subject to an extra 10% tax on the distribution. If the two year rule is not satisfied and the distribution is taxable, the additional tax is increased to 25%.
When you get to your new employer there are going to be a few forms that you will fill out that will do the transfer for you its simple and takes a few weeks to transfer the money.
You also have the option of leaving the money in the old Plan until you are sure where you want to move the balance, either to your new employer or to a IRA at a bokerage.
Its cheaper to roll over than to cash out.................................
Want to roll over a 401k to a Roth IRA,,, wait till 2010!!
Since I have run into a few of these questions about IRA rollovers and for me this information is good since I have a 401k from leaving the military I need to roll over. I figured I would post this up in case anyone else is wondering about the new tax rule that was passed 2 years ago that few know about. Some of the information I have gathered is from some my own material and research online. So before you do anything make sure you consult a tax advisor and your IRA rule book (found in your prospectus or human resource department if you work in for a company who is managing your account)…
Also if you don’t know the tax rules for conversions and cashing out, the current rules are 10% early withdrawal fee, federal income tax on the account balance, up to 35% (depending on tax bracket you fall in) and Local State income Tax on the account balance as well.
The Current low down
Under the current tax law for Roth IRA conversions - which was written in 1997 - individuals were permitted to convert a traditional IRA to a Roth IRA. There were only two stipulations that taxpayers had to worry about - paying taxes on the converted money and an income limit which determined eligibility to convert.
Currently If an individual wants to convert a traditional IRA to a Roth IRA they have to pay federal income taxes on any pre-tax contributions as well as any growth in the investment's value. A good benefit is l, once converted to a Roth, all of the investment could now be withdrawn on a tax-free basis in retirement and we all are hoping we will be in a lower tax bracket at retirement. If we are in a high tax bracket we could very well pay gobs on money in tax on our retirement distributions…
Unfortunately, that same tax law also contained a provision limiting who could make a conversion. Upper income taxpayers - those with adjusted gross incomes of more than $100,000 - whether single or married were not eligible to make such a conversion.
In addition, if you earned $110,000 or more ($160,000 for married joint filers) then you also weren't eligible to contribute to a Roth IRA. These two tax laws effectively precluded upper income taxpayers from enjoying the benefits of a Roth IRA. They couldn't convert their traditional IRA to a Roth and they could fund one either. I guess lawmakers felt that since you made a lot you could afford/should have retirement accounts outside of these…….
The year 2010 Lowdown
Everyone can convert their traditional IRAs to a Roth IRA
This change applies for one year only - 2010 - and the income taxes due on conversions can be spread over two years.( great if you have a big chunk of an account and you don’t want to be put in the next tax bracket by rolling over, since rollovers are considered income for that year)
So the 2010 conversion amount may be included as taxable income in 2011 and 2012 - helping to spread out the tax bite. Conversions in subsequent years are included in income during the tax year in which the conversion is completed.
The new law will also benefit individuals who make too much to create and fund a Roth IRA but this will allow them to roll over to a Roth when before even that was prohibited.
There is one important rule to keep in mind when it comes to converting a traditional IRA to a Roth IRA - you need to pay federal income taxes on any portion of the conversion that you haven't already paid taxes on.
Conversion examples
Ex. 1
For example, let's say Token started to fund traditional IRAs in 2006 and by 2010 I have $20,000 in my account. Furthermore, let's say this account consisted of four years of $4,000 non-deductible contributions - a total of $16,000 in non-deductible contributions and $4,000 in account growth.
In this example, I would need to pay income taxes on the $4,000 in fund growth when I convert to a Roth IRA. But the good news is Token will never have to pay income taxes on this account again.
Ex.2
In this second example, let's assume that I funded that same traditional IRA with before-tax dollars - meaning I took a deduction on my tax return for the money placed in the traditional IRA.
In this example, I haven't paid income taxes on any of the money in the account, so when I convert it to a Roth IRA taxes are owed on the entire account balance. In this case I would have to pay income taxes on all $20,000 in my fund. Good thing with the new rule I can break it up over 2 years, Also allowing me to take a lesser Tax hit my AGI if I was in a salary that put me on the boarder with a higher tax bracket than the one I am in now.
So depending if you guys want to roll over your accounts and have a substantial amount in them, waiting 2 years might actually be beneficial to you when paying for taxes, Since Uncle Sam wants his money and will get it even when you die…………………………….. and that is a whole different story!!!
Am I Tax diversified in my Investment Portfolio??
So you have a 401k hopefully with a company match but have you considered whether you're tax diversified?
Basically this is making sure that the after-tax value of your savings isn't riding on just one tax rate. Failure to diversify your tax exposure before you retire could reduce what you have to live on later.
The basics of a 401(k) are that contributions are excluded from taxable income, giving you an immediate break, plus your gains compound without the drag of taxes. You have not escaped taxes, you just postponed them until you withdraw the money -- at which point, you assume you'll be in a lower tax bracket.
So what happens if we find ourselves in a higher tax bracket? It could be a marage of things but if that is the case your withdrawals could be less than they would be otherwise.
So through saving and savvy investing you have racked up huge balances in your 401(k) and other tax-deferred accounts such as traditional IRAs, (I recommend everyone get one) you'll face large mandatory withdrawals. That income, combined with fewer or smaller deductions, could nudge you from, say, the 15 % bracket to the 25 %, or from 28% to 33 %.
A downside of having retirement assets heavily concentrated in a 401(k) or similar tax-deferred account: Instead of working the tax system to your advantage by deferring taxes at a high rate and paying them at a lower one, you could end up doing just the opposite.
There are some ways to combat this problem. Investing in a Roth IRA ( I recommend everyone get one of these as well). I think everyone here qualifies for one. To find out the qualifications you can check online. With a Roth, you pay the tax on your contribution today for the promise of tax-free withdrawals in retirement. So you are better off if you end up in a higher tax bracket. Of course, if you fall into a lower tax bracket in retirement, you will have paid taxes at a higher rate than if you'd opted for a tax-deferred account. Sad thing is if we knew for sure which tax rate we would face in retirement, we would know whether a tax-deferred vehicle like a 401(k) or a tax-free account like the Roth would be a better deal.
Here is another system to defeat that, using a 3 Tier Diversification method.
Diversify is key. I’ll try to explain this without going x-eyed and confusing you.
The 3 tier method:
1. Fund accounts that generate tax-deferred income.
2. Fund accounts that generate tax-free income.
3. Fund accounts that will allow your assets in the taxable accounts create
most of their return through unrealized capital gains or a rising share price (i.e
Mutual Funds, ETF’s).
Unrealized gains aren't taxed until you sell, and as long as you hold these investments longer than a year, you're taxed at the long-term capital-gains rate, which now maxes out at 15 percent vs. 35 percent for ordinary income and short-term capital gains.
If it appears that your income needs will be more modest in a given year or you have deductions to lower your taxable income, you can rely on withdrawals from your 401(k) or IRA. If withdrawals from your tax-deferred accounts are likely to push you into a higher tax bracket,( i.e higher amounts of withdrawals- remember you must claim this as income) you can tap your Roth for tax-free income. It sounds confusing but the key at this age is to not fall into a higher tax bracket and eventually outlive your retirement savings.
Oh yeah START INVESTING EARLY
What are Target-Date Retirement funds, Lifestyle Funds (L-Funds)?
These Funds have a mixture of Stocks and Bonds some sitting at 88% stocks and 12% bonds. These funds invest in Stocks (Large cap, Mid cap, and Small cap), cash, bonds, foreign stocks. If you are scheduled to retire in 35 years, the fund will automatically “rebalance” the assets stock bond mix as you get closer to the retirement date. (Reference the retirement mix I have above). Your total portfolio will be more aggressive as you are younger and as you get older stocks start to fall back and cash and bonds increase to preserve capital.. The funds automatically shift their asset mix to become more conservative as you get older to more bonds/cash and less stocks. A lot of 401K’s are doing this. Vanguard and T. Rowe Price are the well known in the Target date accounts.
A list of those respective Target date funds can be found here.
http://money.cnn.com/magazines....html
These accounts are perfect for individuals who want to just invest money and go play golf. It allows the fund to do the work all on its own and doesn’t require you to spend hours rebalancing your portfolio on any given day. Basically it’s for the lazy [freak]s j/k. but yeah it works …
Here is an example of the fund I own. Barclays Global Investors LP 2040(STLEX) Fund.
http://quicktake.morningstar.c...STLEX
I have a portfolio with stocks and bonds but I haven’t looked at it, I heard rebalancing is a good idea?
Rebalancing your portfolio is a must. Rebalancing means selling off your best-performing assets and buying more of the laggards so that the percentage of your portfolio devoted to stocks vs. bonds - as well as different subclasses of stocks, such as big-caps, small-caps, growth or value - returns to your ideal.
If you have a diversified portfolio, a run-up in one asset class can throw your mix out of line, increasing risk and eroding returns. An unrebalanced $10,000 portfolio of 80% stocks and 20% bonds would have grown to $21,620 over the past 10 years.
If you'd rebalanced annually, you'd have $22,213, or $593 more - and taken less risk to get there. Retooling a 401(k) is easy: With a big plan administrator like Fidelity or Hewitt, rebalancing online takes minutes. In a taxable account, simply direct new money into the lagging fund categories.
When should I rebalance?
There are two basic strategies for deciding when to rebalance. You can frequently monitor your portfolio and shift your investments once they have strayed a certain distance from your target allocation. Or you can rebalance regularly - say, once a year - on a pre-selected date. Actually, your best bet is to do a little of both.
______________ LIFE INSURANCE________________
Okay this section will be a work in progress. I will give you a basic understanding on insurance.
Insurance is and should be the foundation of any estate and when I say estate I don’t mean the rich. If you have children you should have insurance if you have a mortgage, a wife who stays at home and cares for the kids, you own a business, or have a stake in a company, insurance should be part of your estate. Failure to have insurance leaves a tremendous burden on your family and loved ones in the event that you die prematurely, not to include federal estate taxes you pay when you die( but that is a whole different story). If you fall into these categories its imperative you procure some type of insurance.
There are two basic forms of insurance. You have permanent and non permanent life insurance. Permanent, being a whole life policy and non permanent meaning a term life insurance policy.
Term Insurance.
Term life insurance is exactly how it sounds its cover an insured for a “term” or time period, it’s similar to renting a house or leasing a car. The insurance will cover you for a certain time and after that time is up its usually up to the insured to either continue the coverage ie. Renewal, convert the policy to a permanent policy or cancel to policy by not renewing it. Term insurance has no cash value meaning all the premiums you pay for the policy go to the insurance company.
Advantages:
It is very cheap compared to a permanent policy. Most Term insurance polices can be converted after the completing of the term to a permanent policy and some even credit the premiums paid in the term policy to the whole life policy.
Disadvantages:
Term only pays a death benefit if the member dies within the term period in witch the policy was written for. So if you have a policy that was for 5 years 100k and you die the day after the 5 years is over your beneficiaries do not receive any death benefits from the insurance company. Term insurance premiums increase with each renewal and over a long period of time the premium becomes expensive and probably un affordable to some.
A lot of term insurance policies are not renewable beyond a certain age and this protection is lost.
Term also does not build any cash value, meaning if you paid 600 a year in premiums you have nothing to show for it, whereas with a permanent life policy the premiums you pay can build cash value since most of those policies have investment accounts attached to them..
Whole Life:
This is a permanent form of life insurance that basically insures you for your entire life or up to the age of 100. This form of insurance is great for a person wishes to lock in a level premium amount that will not increase over his or her lifespan. Whole life policies are fundamental in any estate planning process.
Advantages of a whole life policy:
This coverage lasts the entire life of the insured and in most cases if you develop a life threatening illness such as cancer or heart disease your policy cannot be canceled.
The Premiums are set and do not increase ever, also after you have vested into the policy for years you may be eligible to not make any premium payments and still receive coverage.
Whole life polices build cash value that the insured can borrow against. The cash value usually starts to accumulate after the 3rd year but it is tax deferred.
The money can be withdrawn from the policy tax free doesn’t have to be paid back if the borrower doesn’t want to however; the amount borrowed is reduced from the face value of the policy death benefit payout. It’s great if you want to take a loan out for different things that you couldn’t take out of your qualified accounts (401ks, IRA’s without paying taxes and fees.
Disadvantages:
Whole life policies are expensive compared to term insurance policies. Coupled with different riders (extra incentives and benefits) these policies can be 3x or more than the monthly premium for a term insurance policy for a comparable death benefit payout..
Whole life, Universal life and Variable Universal Life insurance policies are linked to various equity accounts, (mutual funds, bonds, money market accounts, stock market etc..) So for some that are not comfortable with this, these policies can be worrisome unless you have an agent who explains them to you in detail and you are comfortable with these investment platforms.
Variable Universial Life (VUL) explained
You have read up on what Variable Universal Life (VUL) insurance is but for others ill explain it. Basically what happens is a VUL is a flexible premium, permanent form of insurance that allows you to invest your premium dollars into subaccounts that invest in mutual funds, stocks funds, bonds funds and even fixed asset accounts..
The policy provides tax-free death benefits, has a cash value that grows tax-deferred and the cash value money that has grown is accessible through policy loans and/or withdrawals. Also when you take out a loan the money is tax free, you don’t have to pay it back if you choose to do so and the amount loaned ( that you do not pay) will be deducted off the top of the death benefit unless it is paid back before the insured has died. However before you can take money out certain policies have certain and time periods in when you must be vested (3 years in the industry standard) and cannot take out the money without paying high surrender fees. ( ill get into that later).
Some advantages to VUL policy.
Tax-Free Withdrawals: Unlike 401k they money you take out is tax-free and you can take money out for a variety of reasons. Buying a house education, home improvements etc. You can take the money out at anytime and it doesn’t haveto be paid back. You cant do that with a 401k before the 59 ½ age limit where you would be taxed unless it was for a qualified withdrawal. Some insurance policies will let you withdrawal up to 85%- 90% of the cash value you have.
Also depending on the policy it may have the Guaranteed Minimum Death Benefit Rider witch will pay a min death benefit even if you withdrew more than what is left in the account..
Premium flexibility: after a while the premiums in the policy will decrease over time and the extra premium payments ( if you pay the same amount of premium) will go into the cash accumulation account and earns interest based on the rates the mutual funds the account is set up through is returning. Its sort of like paying term insurance prices for a better, larger death benefit. Also as your cash value builds you will have “paid in” enough to where you can ultimately not pay any premiums if you run into a hard month want to take a vacation etc and you don’t have to worry about your policy lapsing. You can increase or decrease coverage amount based on family situations( birth of a child, child graduates school no longer needs to be insured, marriage, divorce etc) without the need to apply for a new policy,
It’s great for retirement since as you near retirement a Universal Life policy will allow you to increase premium payments( since by this time your premiums are realtivly low since you are vested) and increase the plans cash value at a more rapid rate.
Guaranteed insurability: one of the big sellers for these products and I tell this to everyone is with permanent insurance once you lock into that rate your premiums will never increase due to medical issues that may arise later. Most Whole Life (WL), Universal Lfe (UL) or VUL’s will cover you for the life of the insured or up to age 100 so if you buy term policy for say 30 years and when that policy is up at the end at age 55 and you are diagnosed with lung cancer, guess what you may not be insurable anymore.. so there goes all that money down the drain in premiums and now you are SOL.
Okay now here is the downside to VUL’s
Higher Premium: Okay you will here this argument until the end of time that term is better and buy term invest the difference.. Whole life policies premiums are relatively higher than term based on all the different products they offer. I tell individuals who are young and starting out if they can’t afford a WL product to buy a “convertible” term policy. Meaning they can convert that term policy into a permanent policy at any time and not waste the premiums paid. Once you get settled in your job and make more money, have kids; buy a house a WL policy IMO is a better route.
High Fees: With VULs you are paying fees (marketing, sales loads, and annual operating costs of your sub accounts) witch will eat away at the total return of your investment, however you will pay these same fees in some ordinary mutual funds they are called 12b-1 and Front Load. Some VUL’s have higher fees than others so it is imperative to have the agent explain to you what % of these fees are taking off the op of your investment returns and consider that when buying a VUL
Potential Tax Hit- if you took money out of your VUL and you let your policy lapses ( I have yet to see it but I have heard of people doing it) then that money will be triggered as a gain in income and you could pay up to 35% in taxes on that money. Most people don’t let a WL policy lapse and if they are vested they can forgo a few payments here and there and not worry about policy lapse
Surrender charges. VUL’ and Annuities have high surrender charges, basically preventing you form withdrawing your money sooner than allowing it to mature. Some surrender charges are 5-10% of the cash value and some will not let you withdrawal for the first 3-5 years of policy ownership (depending on how much you have invested).
Volatility: With these variable investment contracts you are investing in the stock market (depending on fund) so if you are in an aggressive fund category and you are not ready or comfortable with that, you will loose money when the market is turbulent, so be aware of where you are investing your money, and reseach the funds that insurance products is linked to. Some VUL’s offer fixed assets and conservative funds for the stock market shy investor.
Now my advice!
VUL is a great product but it’s not for everyone. Some feel variable life insurance products are a scam and you can do better with a simple term policy and max out your 401k and IRA accounts and purchase mutual funds that offer the same performance and no loads… VUL’s are great for those who make too much money that they cannot contribute to the traditional retirement accounts or for those that want a little more added protection and the added assurance that they have tax-free income coming if they need it. They can be costly but if you are in good health you can find a company that can actually give you rates that are less or the same as a non permanent term policy.. Guardian has some of the best Whole life products I have seen.
Scaling down to 10% in your 401k isn’t a bad idea. Historically IRA’s will give you more money over time than a 401k would but you don’t get that immediate tax write off now. But they way I look at it is if am making 28-40K now I’m probably paying 15-20% in taxes now I would rather save my ass off now build up a huge nest egg and then not have to worry about paying taxes later. I would hate to have a $3-5 Million dollar 401k balance and then have to take my mandatory withdrawals(annuity payments) that could be 80-120k annually and end up paying 25-35% in taxes on that and who knows what the tax system will be like when we all retire.
I don’t know your tax or financial situation but I say variable insurance products should never be your only investment/retirement option, it should be a supplement to them. Continue to contribute to your 401k, contribute to an IRA (max them out if possible) and then what ever is left you can fund a VUL. Make sure what ever company you go with you are looking at what funds they are investing in and what companies are controlling the investment portion of your sub account. Bottom line also get a GOOD insurance company there are a shitload of companies out there but stick to the companies with AAA, AA+ A and even BBB (being good) ratings and never go less than that. ING is a great company and a lot of guys in my office sell that. Another good company to check out is Northwestern Mutual, Mass Mutual, John Hancock, Geneworth, AIG, and New York Life. Most of them invest in American funds, Marisco funds, and a bunch of others.
Modified by Token Blk Guy at 10:22 PM 7/18/2008
Transamerica Financial Advisors
Insurance, Investments, Retirement, Advisory Services
Ca Lic# 0G23657
http://www.sevafinancialadvisors.com
