This is not the time of year when everyone wants to stay indoors with their finances. But a midyear review of your tax situation, retirement and spending issues can be far more valuable than the rushed attempt most people make at the end of the year -- or when it’s too late at tax time.

Summer is actually a good time to do this task because there’s still enough time to correct lapses in savings, spending or tax planning. Here’s what most people should review:

Budget: How’s your spending going? It’s a good time to see what’s being spent on non-essentials and whether you can make some cuts and redirect those funds towards debt or savings. A look at the last six months of spending may reveal opportunities to reduce spending and redirect money toward more necessary goals. Also, take a look at such things as gym memberships, magazines that are piled up, and coffee expenses. If you’re not using these things, you can probably live without them. Doing this exercise can identify a surprisingly large amount that’s unaccounted for that can be redirected to debt payment, savings and investments.

Taxes: If you received a sizable refund in April or found it necessary to empty savings to pay Uncle Sam, it’s definitely time to reassess what you’ll owe at tax time next year. Also, if you think you’ll have some losing stocks in your taxable investment accounts, keep an eye on those in case you’ll need to offset gains in your portfolio at the end of the year.

Retirement savings: If you are on schedule to max out your contributions to your company retirement plan this year, great. But don’t forget to check your existing IRAs and other retirement accounts to see if you’ll have enough cash on hand to contribute the maximum in each account by their respective deadlines next year.

Health and health insurance: Increasingly, what we pay for health insurance will be tied to the state of our health. While the weather is good, commit to a plan to walk or hit the gym a specific number of hours a week. Many insurers reset premiums at mid-year in a rising cost environment, so make sure you’re ready to switch plans or negotiate different coverage if necessary during open enrollment in the fall.

Emergency fund: We encourage you to have between three to six months of living expenses in an emergency fund.  If you don’t have that minimum, go back to your spending review and see where you can start socking money away.

College savings: College planning begins early so if you are saving for your child’s education, check to see if you’re on track with the goals you made for the year. It’s also a good idea to read the latest news on financial aid since colleges change their financial aid policies annually.  Even if your kid’s are still in grade school, this is the time to learn about college financial aid while you still have plenty of time to learn. Here are some resources:

1. College planning software: www.collegeaidcalculator
2. College Tuition Solutions: www.collegetuitionsolutions.com
3. College Planning Authority: www.thecollegeplanningauthority.com

Special goals: If your car is suddenly looking like it will need to be replaced or if this might be the last year for your furnace, see if you can direct more money into a reserve fund to cover replacement costs or at least a heavy down payment. If there’s a vacation you want to take by the end of the year or a special household purchase you want to make, focus on the cash you’ll set aside to make that happen.  Of course, if you have credit card debt rolling over from one month to the next, maybe that should be your initial focus.

Credit: If you haven’t set a schedule for receiving your three credit reports throughout the year, do it now. You have the right to get all three of your credit reports – from Experian, TransUnion and Equifax – once a year for free. You can do so by ordering them at http://www.annualcreditreport.com. By staggering each receipt of your credit reports at different points in the year, you’ll get a continuous picture of how your credit picture looks. Also, you’ll have the opportunity to focus on possible errors in a single report, which will give the other two credit agencies time to update their files.

The 4 Percent Rule...
What Amount Should You Withdraw
from Your Retirement Fund Each Year?

With stagnant incomes and roller-coaster investment returns over the past decade, individuals on the brink of retirement might wonder what became of all those “rules of thumb” affecting how they handle their nest egg once they walk away from their jobs.

“Rules of Thumb” are still there. But the question of how well they work comes down to the individual.

Chief among them is the “Four Percent Drawdown Rule” first revealed by CFP professional William Bengen in the October 1994 issue of the Financial Planning Association’s Journal of Financial Planning. Bengen wrote that retirees who took out no more than 4.2 percent of their mostly stock-based portfolio in the initial year and adjusted their remaining portfolio toward a 60/40 split in stocks and bonds each year, that money could last an average of 30 years. That approach made Bengen’s work a gospel in the financial planning industry.

But after this decade, which ended with the worst recession in 70 years, some experts are taking a new look at the 4 percent rule.

1990 Nobel Laureate William Sharpe of the Stanford Graduate School of Business reported last month that this particular rule can be harmful to many simply because of its level of risk tied to stocks and other assumptions including lifespan. He suggests financial advisors and investors continually review risk tolerance’s and consider more stable investment choices such as fixed income among other low-risk options as a foundation for post-retirement drawdown’s (a strategy Capital Advantage, Inc. already practices).

In other words, consider client risk tolerances and the content of the portfolio more and less emphasis on a standard percentage of drawdown. In fact, Sharpe points out those investors actually risk wasting money by adhering to a percentage drawdown that actually could leave more money behind after a few good investment years – in essence, the annual strict drawdown concept could lower a retiree’s standard of life unnecessarily.

So what do you do? You work on the big questions first, not the numbers, and the best time to do this is as far in advance of your retirement date as possible. Here are some conversation starters for key discussions you should have with your financial advisor as well as your tax and estate experts:

Set a vision of retirement and revisit it every year before and after you’re retired:  If you’ve already been working with a good investment manager or financial advisor, you might have already done this. But retirement goals change as most life goals do, so treat the subject organically. Talk about the fun stuff, but state your objectives for a post-retirement work picture if you want to create a new career or simply want healthier finances. Set your lifestyle expectations now and revisit them as necessary.

Track your working-life expenses for 3-6 months and examine how well your current retirement nest egg and other resources could support that spending: This is where your imagined vision of retirement becomes real -- or falls apart. A thorough examination of your current spending habits is a great first step in determining how realistic your preparation for retirement has actually been. It will also provide a picture of what else has to be done.

Consider worst-case scenarios: For many retirees, increasing healthcare expenses and the cost of end-of-life-care account for significant spending. As a result, many retirees may pay for expensive experimental treatments to fight disease or long-term home or nursing home care. Current statistics from AARP show that the average home health care aide makes $18 an hour and a private nursing home room costs $78,000 a year. While public aid picks up medical expenses for those who exhaust their assets in most states, most of us desire more than minimal standards of care. Health care reform is not even close to solving this problem, so it’s time to plan.

Build a phased-in retirement: Many companies are becoming more open-minded about keeping older workers on the payroll or actually hiring more workers over age 60. Stay apprised of such opportunities and the skills it will take to take advantage of them – a successful phased-in or post-retirement work plan will require more than sensible financial planning. It may also require training and other personal investments, so keep your ear to the ground and always be ready to consider a fresh perspective on your value in the workplace.

Please call our office at (925) 299-1500 or toll free (888) 299-1500 if you are interested in scheduling a review of your investment strategy and/or financial plan. If you are not a client of Capital Advantage, Inc., we offer free no obligation consultations.

Paying for
Long-Term Care

Many of our clients have been inquiring about Long Term Care and if they need it.

Current estimates from AARP put the annual cost of a private nursing home room at a national average of $78,000. As older Americans are still struggling to reassemble their retirement plans from the worst economic downturn in 70 years, relatively few are considering the potentially most devastating threat to their
plans: the spiraling cost of long-term care.

On January 1, some important provisions of the Pension Protection Act of 2006 went into effect to help pay for those costs. Individuals no longer have to pay federal income tax on the proceeds from an annuity if those proceeds are used to pay for long-term care coverage. That means that chronically ill or disabled people will no longer have to rely on their own private long-term care policies or Medicaid to pay for costs related to long-term care.

The change is spurring the creation of hybrid deferred annuity policies that also carry long-term care coverage. These products allow policyholders to use the proceeds for LTC coverage, for income or for both. The proceeds that went to pay for long-term care costs for the policyholder would not be subject to federal tax.

However, annuities are not for everyone and it’s important to consult your Capital Advantage, Inc. advisor and more importantly, a tax expert to decide if this alternative is for you. Proceed with caution or better yet consult with your Capital Advantage, Inc. financial advisor. It’s also important to compare the offerings of standard long-term care policies and these annuity/LTC hybrids since the hybrids are generally regarded to offer less LTC coverage in duration of benefits. Unless you have a significant amount to invest, these hybrid policies may not last beyond a year or two of benefits.

Before studying these products more closely, it’s important to look at the big picture of your finances and your expectations for care if you became temporarily or permanently disabled:
What resources do you have? This question goes beyond monetary issues. While care giving puts a strain on family, it’s important to consider whether family and friends are truly willing and able to help with your care, which can provide a considerable financial and emotional benefit.

Check your health history: People in good health purchasing long-term care insurance at the age of 55 usually get the most affordable deal in LTC insurance. But an individual’s family health history and current health status are the real determinants of what your LTC insurance policy will cost – or if you’ll qualify for coverage at all. Also, it’s important to note that 40 percent of long-term care is provided to individuals between the ages of 19 and 65, so the need for care can strike at any time.

Are you a single female? Again, personal and family resources come into play here, but since women typically live longer than men – and they still earn less on average than men – women should take a heightened interest in providing for their long-term care safety net. Long-term care insurance might be a good solution given their other investments and their health history.

What types of services are covered? Over the course of time, long-term care policies have evolved to place more emphasis on home-based care or assisted living, since most people would choose to recover or live out their last days in a familiar environment. A basic LTC insurance policy pays for assistance with activities of daily living including eating, dressing, bathing, toileting, incontinence, and transferring (bed to chair, etc.). Each policy lists the types of services that are covered under nursing home care and under home health care. Homemaker services are generally covered as listed in the policy.

What triggers the coverage? A qualified LTC policy won’t go into effect until the covered individual can’t perform two tasks of daily living for a specific period of time, typically 90 days, or when that person needs substantial supervision related to cognitive impairment. This is where you have to read the fine print since some policies are more restrictive than others. More affordable policies generally take longer to kick in. See if coverage for other physical ailments is available as part of the policy and what per-diem or monthly allowances are offered.

What if I never want to go to a nursing home? The best-designed LTC policies will pay the same amount of benefit whether care is received in a long-term care facility, an assisted living facility, an adult day care center, or in the home. Some policies do offer reduced percentages for home health care versus nursing home care, but it’s a better idea to keep full percentages on home health care benefits since most people would rather stay in their homes.

How good is the insurer? Do your homework on the financial health and track record of the insurer you choose, and that’s particularly important if you’re buying a hybrid policy.

Capital Advantage, Inc. is happy to consult you on LTC insurance and if needed, can refer you to a qualified LTC Insurance professional. Please give us call at (925) 299-1500.