Should You Invest In Annuities?
Annuities are an interesting investment option, especially now a days when the market is all over the place. Unlike stocks that move up and down seemingly on a whim, fixed annuities provide a guaranteed rate of return either for a set period of time or for the life of the annuity contract. This is obviously one of the major benefits for investors who are more concerned with receiving a rate of return that they can plan on rather than one they simply just hope for.
Perhaps the most important benefit from a financial planning aspect is that annuities grow tax deferred over time.
Essentially you are not taxed on your income until you begin receiving payments or withdrawing your investment. Usually if you begin payments at your retirement age then you will be taxed at a lower rate than you would have during your working years so this, combined with the time value of money, provides a higher than usual return. On the flip side though annuities are not taxed as capital gains as most investments are, but they are instead taxed as regular income.
Another benefit of annuities is that the payments an annuity provides usually last as long as you continue to live, even if that amount extends beyond the amount of money you invested initially. The payments you receive over time is based on a number of factors including the amount of money you invest, the amount of interest that the annuity pays, and also your expected lifespan. If you outlive your expected lifespan the annuity provider will continue sending you payments every month in the same amount regardless if you have already received more than you initially invested. A great benefit isn’t it? Of course on the flip side of that is that if you die earlier than expected then you may not receive the full amount you invested.
One of the drawbacks to annuities is that the fees that some annuity providers charge can be rather high and will eat away at your rate of return. One of these fees is known as a surrender charge and is applied should you withdraw your money earlier than expected. Other fees include maintenance charges, and investment charges so it is important to understand what you are investing in before you sign the contract.
So are annuities right for you? Well only your financial planner can answer that question but they are a good option for many investors.
How to Open Your First Roth IRA
If you’ve undertaken the necessary analysis and have determined that you are qualified for a Roth IRA, and that it is the best retirement vehicle for you, then the next step is to decide where you want to open the account. Part of that decision, however, will involve what sort of investments you’re willing to make, as all providers don’t offer a full spectrum of investment possibilities. If you want to accept more risk, in hopes of greater gains, you will probably find fewer providers able to accommodate you. More conservative investments, however, are widely available. You can open your Roth IRA very easily at a number of banks, mutual fund companies, brokerage firms or insurance companies. Just be certain to ask about all fees and services, as these can vary greatly from one provider to another. All you’ll need is your checkbook and social security number, and you’re on your way to providing for your retirement.
Administration methods of Roth IRAs is fairly uniform, from one provider to another, although charges may vary greatly. Some providers, for example, may waive transaction charges, in the event of early withdrawals, or have no annual administration fee. It’s advisable to sit down with two or three different providers, and carefully compare all aspects of their service and their investment history, before committing.
If you already have an IRA, you may be able to transfer that over to the Roth. However, it’s important to recognize the differences between a Roth and other IRAs. Most IRAs will allow deductions for the contributions you make to the fund, but once you start receiving distribution of the funds, they are taxable. With a ROTH IRA, no deductions are allowed, so you will pay standard income tax on the monies you contribute now. However, once you start receiving distributions, that money is not taxable as income. This is a very important consideration in structuring your IRA, depending upon what your tax bracket is now, and what you expect it to be later.
Selecting the types of investments for your portfolio is dependent on a number of factors.
1. The size of your Roth IRA
2. The time-frame of your investment
3. What other investments you already have
4. Your investing style
Tax law doesn’t set a minimum size for a Roth IRA, but the provider can. If your Roth is a small one, don’t try to get too fancy… just select a simply investment that won’t involve a lot of fees or manipulation. There’s time to get fancy once your fund is larger.
Diversifying Your Retirement Portfolio For the Best Yield
"Diversify" is a term we’ve all heard about investment portfolios, but it’s important to understand exactly what it means to our portfolio, in order to do it properly.
While it can mean different things for different investment portfolios, here, we’ll be specifically talking about retirement portfolios. The goal of that type of portfolio is to provide a reliable, steady (and hopefully, growing) stream of income. Therefore, it’s important to build a network of investments that will compensate for the ups and downs of the others. So what do we do first?
Determine your spending rate. This refers to your living expenses… the amount of cash you need to take out of the portfolio each year, adjusted for inflation.
If, for instance, you have a portfolio with a total market value (TMV) of $500,000, and a $50,000 spending rate, you will need to build an investment plan that will give you a ten percent net yield, which is an ambitious package.
However, if your TMV is $1,000,000, then you could maintain the same spending rate with a five percent net yield. That means you would not have to undertake investments of such a high risk level. As you can see, the larger the TMV, the more flexibility you will have.
Next, examine the risk profiles of different investments. In order to achieve an adequate spending rate, for instance, many retirees opt to carry around half their portfolio in equities. These carry a better yield, but their downside is a higher risk factor. The remainder of their portfolio will be spread amongst lower risk and lower yield investments, of a diverse nature.
This second half of the portfolio will typically be broken up into much smaller individual investments, spread across various investment classes and markets. The idea is to structure your investments such that when any one investment falls in value, at least one other will rise an equal amount, compensating for it. The equity portion of your portfolio is making the most money, while the remainder is providing stability.
Diversification, however, does not offer complete protection against a market downturn. It simply mitigates the effect, which effectively gives you more time to take corrective action. Your broker can help you select a good cross section of investments, in the value or growth, small, mid or large classes, in order to ensure a positive growth of your portfolio, often even in a bear market.
How to Use Your Credit Cards Wisely
There are three major factors that you should always consider, if you own a credit card.
When to use it
Don’t use a credit card for your day to day expenses. Even if you pay off the card every month, before any interest can accrue, you are still leaving yourself open to inadvertently overspending. Better to use cash and checks, so you always know where you stand, or try a prepaid card.
The other side of that, of course, is that if you leave your credit card in your wallet, and never use it, you’ll probably have your credit limit reduced. These days, it’s not even uncommon to have cards in good standing cancelled by the provider, when they’re not used. After all, they’re in the business of making money, and if you don’t use it at all, they make none. Use the card a couple of times a year, then pay it off, before any interest comes into play.
How to pay it
NEVER pay only the minimum amount! By doing so, you will be paying more interest, and simply extending the time it should take to pay it off. Always pay more than the minimum, and if possible, pay the total amount due each month.
When to cancel it
It is probably more appropriate to outline when NOT to cancel a credit card, since it is rarely advisable to do so.
1. Never close any credit card that still has a balance.
When you close a credit card that still has a balance, your total available credit is lowered to $0. Since you still have a balance on that credit card with no credit limit, it looks like you’ve maxed out.
2. Never close your only credit card with available credit.
Closing out that card will decrease the total available credit and increase your credit utilization, which also affects your credit score.
3. Never close your only credit card.
Since your credit score takes into consideration the different types of credit you have, keeping a credit card will add points to your credit score.
4. Never close your oldest credit card account.
Closing out your old credit cards shortens your credit history, making it look as though you have a shorter credit history.
5. Never close the credit card with the best terms.
If you have a credit card that has a low interest rate, no annual fee, or other perks such as travel insurance, keep it.
The right way to close a credit card is by sending a written notice to the card issuer. If you’re going to close a card out, you should request written confirmation that the account was closed in good standing, for your records. Always be just as selective about the credit cards you close as the ones you open.
Putting together a personal budget
Building a budget is neither complex nor difficult. A series of simple steps will get you started.
First, you must identify your disposable income. This refers to the income left over after paying your taxes. From this amount, you should deduct those fixed costs such as rent or mortgage, car payment, insurance, loan notes, etc., that remain the same month after month.
The next step is slightly more complex, as you need to forecast as accurately as possible, your ongoing variable costs, such as groceries, telephone, celular phone, and the like. What is left over after deducting these is termed discretionary income. This is the money you have left over after covering all your essential expenses, which can be used for savings, entertainment, vacation planning, gifts, etc.
It is highly recommended that you set aside in savings, a percentage of your discretionary income as a contingency fund, in case of unforeseen expenses such as car breakdowns, illnesses or home repairs (I recommend a minimum of 10% of your disposable income). That will allow you to cover them (or at least lessen the impact), without severely affecting your lifestyle. Now take what is left, and divide it up among the sundry expenses that may arise. Perhaps you’ll want to set aside $40 a week for entertainment, which might include a drink after work on Friday afternoon, a movie or a night at the county fair… all discretionary expenses, without which you can still meet your obligations. An upcoming birthday for your favorite nephew, a subscription to your favorite magazine, or a good bottle of wine can all be planned for at this time.
Review your budget and try to see if you have forgotten anything, and adjust it as necessary. Once you have this completed, you need to give it a chance, by following it as rigidly as possible. As you go along, you may identify other costs that you hadn’t thought of, and your budget can be adjusted to accommodate them.
A suggestion I would make is this: if you find that you don’t spend the amount you have allocated for one of your discretionary expenses, such as entertainment, don’t “roll it over”, to increase your allocation for the following month. Instead, add it to your savings. This has the benefit of leaving you better prepared for unexpected costs, and also helps you build the mindset for adhering to your budget.
Stretch Your Paycheck
How to maximize the spending ability of our paycheck is a question that most of us have asked ourselves at some point. Unfortunately, we tend to look for big results, rather than a swarm of small results. Here are some tips that can help you make it through to the next paycheck, without finding your pocket empty.
1. Don’t allow yourself to purchase ANYTHING on impulse. Marketing gurus know that impulse buying is a consumer’s weakness, and they capitalize on that. Take a look at the type of products that are always displayed in the vicinity of the cashier’s stand, and it’s quite evident.
2. Never purchase any non-essential item without shopping elsewhere for a better price. In this internet age, it is extremely easy to cross-check pricing, without spending a lot of time or gas doing so. A lot of sites use promo codes and coupons like Medifast coupons to save money on products that would otherwise be very expensive. If you feel you MUST buy it, don’t you want to at least assure yourself that you’re getting the best bargain around?
3. Put yourself on a budget. Determine realistic amounts to spend in various aspects of your life, and stick to them. Assuming your essential needs (rent, utilities, insurance, etc.) are already allowed for, allocate a realistic amount for other items like entertainment, eating out, hobbies, etc.
4. Put your credit card in a safe place, and LEAVE IT THERE! Nothing will destroy your budget faster than an unexpectedly high invoice from your credit card provider. Credit is too easy to spend, and the minimum payment often covers only the interest, if that. Pay cash, or do without!
5. As part of your budget, make savings a high priority. Unexpected car breakdowns, illnesses and home repairs can sink your budget as fast as a shopping binge at the computer store. Always set something aside, so you’ll be able to absorb those surprises without facing a diet of bread and water until your next check comes in.
6. Don’t be afraid to scold yourself if you fail to follow your budget. Then, fix the problem. You could return the purchase, or simply change your behavior and enforce your own self-imposed rules, but just allowing it will only reinforce the behavior that put you in difficulty to begin with. Make the necessary adjustments, and you’ll find that your paycheck will stretch further than before, giving you more buying power.
How Does a 529 College Savings Plan Work?
A 529 Plan, named after Section 529 of the Internal Revenue Code, is an educational savings plan operated by a state or educational facility, designed to help families set aside funds for future college costs.
A 529 Plan can be used to meet educational costs of any qualified colleges nationwide. In most plans, your choice of school is not affected by the state in which your 529 savings plan is located. You can be a TX resident, invest in a SC plan and send your student to college in NY.
Since the 529 Plan was created in 1996, every state now has approved at least one 529 plan. Each state gets to decide whether it will offer a 529 plan (or plans) and how it will be structured. This means that 529 plans can differ greatly from state to state. You should research the features and benefits of your plan before you invest. Your investment counselor or broker can assist you with this process.
As long as the plan satisfies a few basic requirements, the federal tax law provides special tax benefits to you, the plan participant. For instance, although you cannot claim deductions for the annual contributions to the plan, the gains are tax-deferred, online and providing the fund is used for its intended purpose, tax exempt. Should the beneficiary decide not to attend college, the donor still has exclusive control of the funds, and can reclaim them, but will then have to pay federal income tax on the gains, as well as a 10% penalty.
Some states also offer substantial tax benefits on state income tax, so it becomes even more important to carefully research and compare all your options before deciding on a plan.
The allowable contributions, up to $300,000.00 in many states, are quite substantial, and management of the Plan is usually handled by either the State Treasurer or an appointed independent fund manager.
There are two specific types of 529 Plans: either prepaid plans or savings plans.
Savings Plans work much like a 401K or IRA by investing your contributions in mutual funds or similar investments. The plan will offer you several investment options from which to choose. Your account will go up or down in value based the performance of the particular option you select.
Prepaid Plans let you pre-pay all or part of the costs of an in-state public college education. They may also be converted for use at private and out-of-state colleges.
What You Need to Know About a First Time Mortgage
Facing all the options for loan structure when buying your first home can be a very intimidating experience. You’ve probably heard of fixed-rate mortgages, and adjustable-rate mortgages, but you may not be familiar with the seemingly endless number of variations between the two.
Without a substantial income and a considerable nest-egg to lay out as a downpayment, it isn’t always easy to qualify for a first time mortgage. Add to that the fact that you’re being peppered with terms you don’t fully understand, and the intimidation factor is understandable. There are some very basic things to consider, which may help reduce the intimidation you feel.
First, make a realistic decision about how much you can afford for a downpayment. Don’t unreasonably discount your ongoing living expenses or the hidden costs of owning a home, particularly one with no drapes, worn carpet or faded paint. Give yourself a cushion for those other immediate costs.
Now, take a serious look at what you can afford to pay on a monthly basis, both initially, and after any potential rate adjustments. Don’t assume you’ll get a 10% raise every year, because you won’t.
Then ask your financing company to show you what they can offer you, within those limitations, for the term of the loan. Don’t be surprised if they say they have nothing within those parameters. Ask them how close they can come to your capabilities. That is when it will get interesting.
There are various types of stepping rate adjustment loans, where the payment remains the same for a few years, then adjusts. Those adjustments may occur once or twice during the term, or annually. There are balloon loans, wherein a monthly payment is computed on a 20 or 30 year term, but the loan becomes payable in full after a lesser number of years. The variations are virtually unlimited.
The first time home buyer must accurately predict his income for the entire term of the loan, or have a plan to sell the home after a certain period. Fluctuations in the interest rates, changes in employment status and the home market can all affect your ability to meet the obligation, or sell the home, so it is important to be realistic in your expectations. Make this important decision with your mind, not your heart! The last thing you want to do is to “find a way” because you’ve fallen in love with the idea of owning your own home. That is how many first time home buyers get in trouble.
How to Ask For a Raise and Get It
Asking for a raise requires preparation, skill, timing and a fallback plan. Don’t expect to stop your boss in the hallway on a whim, and walk away with a big raise. Or ANY raise, for that matter.
A pay increase is based on performance and the market for your skills. Build your case for a raise by making a list of your accomplishments in the previous year. Don't be bashful about listing your accomplishments, but don't brag, either.
Before talking to your boss, try to learn what your company can afford. If it’s a public company, read its quarterly earnings report, filed with the SEC. If it's a private company, get a feel for its general economic health. If desks are remaining unoccupied after someone leaves, your timing may be poor.
If you ask for a raise and don't get it, don’t just walk away. Ask, “What do I need to do to get the raise I think I deserve?" If the response isn't encouraging, it may be time to start looking for another job. No job lasts forever, and you may have exhausted prospects for advancement with your current employer.
Be conscious of the timing of your request. Chances are, first thing Monday morning or late Friday afternoon won’t be the best time to make your plea. Think through what you want to say… rehearse it in front of a mirror. Summarize your pitch for a raise in a short written statement, and have a trusted colleague read it. Everything you do to better prepare your presentation will give you a better chance of success.
If cash is an issue for the company, you may want to consider asking for more or better benefits. Educational reimbursement child care assistance, and health coverage are all possibilities that may appeal more to your boss, and be more affordable for the company, as well.
Above all, remember that a raise should be based on your performance and the market data establishing the value of your job. Your time with the company has little to do with your worth.
Here are seven rules regarding arguments to never use for a raise:
1. Don't act like you're entitled to a raise – you’ll turn him off!
2. Don't tell the boss why you need more money – he doesn’t care!
3. Don't stamp your feet, pound the desk or cry – babies don’t get raises!
4. Don't say you should be paid the same as Joe Smith – you’re not Joe Smith!
5. Don't threaten to quit – he may call your bluff!
6. Don't get personal – don’t be confrontational… you’ll lose!
7. Don't go for overkill – keep your spiel short and sweet!
Ten Painless Ways to Save Money Every Day
Saving money isn’t really as hard as we often make it seem. The key is to make it painless! Here are ten painless methods, some of which are bound to work for you:
1. Make Your Lunch Instead of Buying It – The cost is a fraction of eating out, and probably healthier, too. Make a sandwich, and throw some chips in a baggie. You’ll probably save at least $25 a week this way.
2. Rent Instead of Going to the Theater - $2 for a movie, and nobody kicking the back of your seat! What a deal!
3. Don’t Throw Away Yesterday’s Leftovers – Don’t throw away food. You’re throwing away money! Or buy some Tupperware and take it to work for lunch.
4. Carpool – Pretty obvious savings, and it can be very relaxing, too. Let the other guy handle the stress, while you plan your day.
5. If You Aren’t Using It, Turn It Off – Enough said!
6. Be Smart With Your Car - The manual may say “premium fuel”, but check with your mechanic… you may be able to save $0.20 per gallon. That can add up to a few hundred dollars a year.
7. Send away for and follow up on rebates – you’d be surprised how much diflucan money you can get back this way. I regularly get $10 to $25 back on items I’ve purchased.
8. Don’t pay interest on credit cards – Pay off that card every month, before the charges can accrue any interest.
9. Replace incandescent bulbs with compact fluorescent light (CFLs) bulbs – They use ¼ the energy, and last 10 times longer.
10. Get rid of your home telephone – use your cell phone, or even better, VOIP, like MagicJack. $20 a year, for unlimited nationwide service? Not a bad deal!
Did I say ten? Well, here’s a bonus method, one your father and grandfather may have used:
11. Coins in the bottle – At the end of the day, put all your change in a piggy bank, a 5 gallon water bottle, or a sturdy drawer. I did this for years, and never saved less than $350 a year by this method alone! I actually bought my son a used pickup truck one year, with what was in a 5 gallon water bottle… over $1,800!
None of these methods are difficult to put intp practice, and once you’ve gotten into the habit, you do it without even realizing it. And you can easily pocket a couple thousand dollars a year, by implementing just a few of them!
So what are you waiting for?