Do you think tax rates will be higher or lower in the future?  By placing your money in accounts with differing tax treatment, you may be able to greatly reduce or even eliminate your tax burden in retirement.

Here are some retirement plans you may be familiar with or more specifically the tax codes they are associated with:

401(a) = 401k (Defined contribution plan)

403(b) = Tax advantaged plan for public education (teachers)

408  = IRA (Individual Retirement Accounts)

408(a) = Roth IRA

So what are Retirement Plans?  Simply put, retirement plans are tax codes that dictate the parameters on how money is treated tax wise when you contribute to a plan, when your money grows within a plan, and when you withdraw funds from a plan.   Retirement plans are not investments.  What you choose to do with you money once inside the retirement plan is the investment.

It is incredible what a small number of investors know about the best IRS-approved retirement savings plan. It is not a 401(K), Roth, annuity or whole life.   It’s a specially designed Equity Indexed Universal Life contract.  If the contract meets the requirements under Title 26 US Tax Code 7702, earnings are tax deferred and withdrawals can be considered tax-free.

Before we delve into explaining why Equity Indexed Universal Life is a powerful retirement savings and distribution tool, we must acknowledge that after a generation of use of defined contribution plans, i.e. 401(K) plans, they are considered by many experts as a failure. We have become so accustomed to think that the 401(k) retirement account is the best option but is that because it is often our only option.

The solution: a new type of insurance. Retirement savings, it turns out, are exactly the type of asset we need insurance for. We need insurance to protect against risks we can’t predict (when the market collapses) and can’t afford to recover from on our own.

Before we discuss the basic principles of Equity Indexed Universal Life it’s important to note that they have enjoyed a 14-year track record.  You insure virtually every valuable aspect of your life – health, home, vehicle so why not protect your safe, comfortable retirement against the risks we can’t predict and can’t afford to recover from on our own, and why not cut out the tax man in the process?

These are all legal, and totally above board, established life insurance principles. It may sound too good to be true, but it’s just what life insurance is and does. Yet the general public—and even many financial advisors—have absolutely no idea that a tax-free, market-risk-free, gains-locked-in, congressionally-approved solution has been sitting right under their noses for 14 years. Equity Indexed Life’s primary benefit is the fact that, like an indexed annuity (and unlike a mutual fund Roth), you keep the gains and suffer none of the market losses. But there are many more benefits included that other investment can’t lawfully offer.
What exactly is Equity Indexed Universal Life?  Let’s lay out the basic principles of Equity Indexed Universal Life, and then go through a rough example to demonstrate just how powerful a retirement and Tax savings tool this vehicle is.

Equity Indexed Universal Life’s basic principles:

1. Generally funded with after-tax monies but can be pre-tax monies, as in a defined-benefit pension plan.

2. Assets are protected against market loss and backed by the full faith and credit of the issuing company. While the funds are not FDIC-insured, “legal reserve” requirements apply with the insurers.

3. Assets are “linked” to the market via the selected index: Dow, S&P 500, Global, or a mix of several indices.

4. Any gains, being real, interest-bearing gains (subject to a cap), are locked in and never given back: the policy holder accrues a gain, or a zero (in the case of a down market), but never a market-induced loss.

5. Historical returns, based on actual illustrations from the top carriers going back to the late 1980s, are usually somewhere between 7-9%, mean actual interest rates of return.

6. Income can be pulled out prior to age 59.5 and is “tax-free.” A withdrawal is considered a policy loan against the death benefit, which acts as collateral.

7.  The death benefit is paid out to the beneficiary tax-free.

You can use EIUL both as an alternative to contributing to your IRA/401k over a 20-30 year period, or you can use it as tax efficient strategy to get the money OUT of your IRA/401k after you have already contributed 20-30 years.

Let’s look at an actual case study of a client that has contributed to his IRA/401k his entire life and show you the power of using the tax code in your favor.  Now, this is just an illustration, and if there is one thing to consider about an illustration, it’s that its accuracy can’t be guaranteed, as it’s a hypothetical estimate.

For our example, let’s use a hypothetical client. Jim, age 59 1/2, is unmarried and has one son age 24.

Jim has about 90% of his assets in qualified 401k and IRA accounts.  Jim expects to retire and start collecting Social Security at age 66.   What if Jim were to reposition some of the IRA assets now into an EIUL over the next three years.  Let’s forget for a moment the potential RISK he is taking in his IRA because his assets are non-principal-protected from market loss.

How would that compare to just leaving the funds in the IRA?

Jim moves $84,000 a year out of his IRA into an IUL for the next 3 years for a total of $252,000.  He uses a tax free policy loan to pay the roughly $25,000 in additional income tax each year so the EUIL is funding itself. This example assumes Jim never pays back the policy loan.

After the three years of contributing to the EIUL,  Jim reduces the death benefit by the maximum amount allowed under IRS code 7702. (This important step maximizes accumulation and minimizes death benefit but keeps the distributions tax free.  This step blows away the argument that UL is too expensive as the client gets older because we have reduced the amount of death benefit to just slightly above accumulation value)

Let’s assume both the IRA and the EIUL compound at 7.7% for the next 11 years.   (Keep in mind the market would only need to compound at 5.5% since the participation rate in the EIUL is set at 140%)

At age 70 the EUIL would allow $35,000 a year TAX FREE income to the age of 100 = $1,085,000, plus a tax free family benefit of $630,299.  That is 31 years of TAX FREE income and a TAX FREE family benefit.  TOTAL BENEFITS = $1,715,299

If you continued the current traditional IRA and spread the income for the same 31 years, it would only generate $26,288 after tax each year.  That would equal $814,932 of net income and a difference of $270,068 of lost income and ZERO tax free family benefit.  Total Difference $900,367

Let’s look at this another way and say you continued the traditional IRA but withdrew $35,000 after tax per year to match the EIUL,  You would drain you IRA assets by age 85 having collected only $567,533 and leaving zero family benefit.  Total Difference $1,147,766

This example does not consider the IRA income could cause taxation of you Social Security benefits under the current Tax law.  The EIUL would have no impact on the Social Security calculation.

While past performance is never any guarantee of the future, we really cannot illustrate these products historically at less than 7-9% interest rate returns, since you make a gain or you get a zero and participate 140%.

On top of this, these returns are all passive; you didn’t have to manage anything. Additionally, since there is no age 59 1/2 IRS restriction, many parents can use EIUL cash values for college funding.

Equity Indexed Universal Life may offer you much greater benefit over conventional investments depending on the actual index returns and your tax bracket. This is a result of protection of principal against market losses, the indexing, and legally cutting out the tax man.  Please consult a competent financial advisor and tax professional before making any decisions regarding your specific situation.

Photo credit: Flickr

The post Can You Legally Cut The Taxman Out Of Your Retirement? appeared first on The Baron Group, LLC.

The reality is simple – 2% less income is a lot for most of us. If your annual salary is $50,000, then you are looking at bringing home $1,000 less this year. Here are some of my thoughts I would like to share with my prospective and current clients at the Baron Group on how to deal with the payroll tax hike:

1. Reduce expenses. Of course the most obvious response to a reduction in income would be a reduction in expenses. Think carefully about your spending patterns and see if there is any discretionary spending you can easily reduce. Going out to eat, dry cleaning, daily lattes and buying lunch at work are some of the most obvious ones you can cut or reduce.
2. Go generic. If your budget is already reduced to bare necessities, think if you can save money by buying generic brands as opposed to brand names. You don’t have to immediately look at your groceries list. Realistically, most of us prefer a certain brand of food/drink and even if we can easily see that the ingredients are exactly the same, switching to a generic brand doesn’t happen easily. Instead, consider other household items such as paper towels, cleaning supplies, diapers etc.
3. Don’t reduce retirement savings. Reducing how much you contribute towards your retirement goals may seem like a good way to respond to the payroll tax hike. This couldn’t be further from the truth. Remember with savings you have to always consider the effect of compound interest. Specifically, the amount you chose to not save today will be magnified because you will forgo the benefits of continuously accumulating interest on interest. So, before you decide to reduce your retirement savings contributions, explore every other strategy for cutting expenses. Ideally, you will avoid reducing your retirement savings altogether.
4. Increase debt payments. You may think it is counterintuitive to increase payments when your income is reduced. Not when it comes to debt payments. As you are scrubbing your budget to see where you can find a few extra dollars to respond to the payroll tax hike, you may surprise yourself with reductions increasing 2%. If that is the case, and in an event of any room in the budget, I always recommend increasing debt payments. The sooner you are completely debt free, the closer you get to financial freedom and the realization of your financial goals. (Learn how to Eliminate Debt, including your mortgage in a fraction of the regular time)
5. Deserve a higher raise. Usually 2% of annual income is what the average American receives as an annual raise.  However, since in 2013 this raise will be eaten by the payroll tax hike, maybe now is the best time to really excel and impress at work so you can make a case for an above average increase this year.

How about you? What will you do (have already done) to respond to the payroll tax hike? Please share in the comments section below.

The post How To Deal With The New Payroll Tax Hike appeared first on The Baron Group, LLC.

The History of Identity Theft

While identity theft is not a new crime, it has mutated over time to respond to the ever evolving technology and most importantly the World Wide Web, credit cards and ATMs.

Before the popularization of credit cards in the 1950s, stealing someone’s identity meant getting their passport, driver’s license or Social Security number. However, what made identity theft far less common in those days was the fact that a person had to be physically present at a bank branch in order to open a credit card.

Everything changed in the 1980s when the Fair Isaac Corporation invented the FICO system of credit scoring. This system rates a person’s credibility in a report which also contains other personal and financial information. When an identity thief gets a hold of that information, they are likely going to be able to access other banking and financial information. Unfortunately, with the automation of transactions and the ever more common online banking, stealing one’s identity has become easier than ever. Fortunately though, this ever increasing threat is recognized and today your maximum liability under federal law for unauthorized use of your credit card is $50.

Identity Theft Scams

The criminals specializing in identity theft are very skilled in the “craft” and constantly come up with new and improved ways to scam people just like you and I. No one is really protected because the schemes are getting more and more believable and sophisticated. The best way to find out about identity theft scams is to check out the resources on the website of the Federal Trade Commissions, the FBI, and the websites of your local Better Business Bureau or Chamber of Commerce.

Types of Identity Theft

Although there are many ways to steal an identity, below are the three more common types that everyone concerned about identity theft should know about.

Application Fraud (or True Name Identity Theft) – In this case the thief will use your personal information to open new accounts or purchase large items on credit. Most common forms of application fraud are a thief opening a credit card in your name or cell phone service. The biggest issue with this type of fraud is that it may take a while for it to be noticed. Very often people do not even realize that they have become victims of identity theft until they order a credit report and see consumer credit account that they do not recognize.

Account Takeover – in this case the thief uses your existing accounts to make purchases or withdrawals. This type of fraud is easier to notice and with the protection mechanisms many financial institutions currently have about identity theft, it is usually caught relatively efficiently. Many credit card issuers, for example, have protection mechanisms in place, such that in an event that a transaction meets their suspicion criteria, a call is generated to the credit card holder to verify the transaction was legitimate.

Criminal Identity Theft – possibly the most devastating type of identity theft, this is where the thief uses your identity and presents a counterfeit ID assuming your identity to law enforcement when questioned concerning a crime. This may seem an unlikely scenario to you but it is a form of identity theft that you should guard against.

What Identity Thieves are After

Social Security – a gateway to all your personal information

Date of Birth – to verify identity and confirm most transactions

Account Numbers – to with draw money or make purchases online

Mother’s Maiden Name – the ultimate identity verifier

Pins and passwords – to access various accounts

Driver’s license – to obtain fraudulent identification

How Is Your Identity Stolen

• Identity Theft Online
  • Spyware - is type malicious software that collects information about your online activity. Spyware can come in the form of backdoor entry – which gives thieves access to your computer or keystroke logging when thieves get a log of everything you type online including passwords and account numbers. The presence of spyware is typically difficult to detect.
  • Phishing – is when you receive emails which seem to be coming from a reputable institution, your bank from example, asking you to update personal information. This way thieves can obtain your account numbers and other personal information
  • Fraudulent Sites Online – are fraudulent e-commerce sites offering various goods and services thru spam or online price comparison sites. Therefore, when your purchase something online, the thieves gain access to your personal information.
  • Wireless Snooping – occurs when the thieves access directly your unsecured wireless network and steal your private financial information directly from your computer.
  • Identity Theft At Home
    • Mail – stealing your mail can give thieves access to bank statements, credit carsd information, auto loans etc. Make sure your mailbox is locked or opt for paperless statements from your financial institution.
    • Trash – all personal information from above can be found in your trash. The solution is simple – get a shredder.
    • Phone Fraud – if you receive a call from your “financial institution” notifying you that there has been fraud suspected on your account and need you to verify your personal information, suspect that it may be a fraudulent call.
    • Identity Theft From Third parties – Sometimes thieves can access your information from a third party such as accessing your credit report illegally or hacking in  the records of a business that has your information (stores, restaurants etc.)

How Identity Thieves Can Use Your Information

• Make purchases – usually large ticket items that can later be resold for cash
• Make withdrawals – can be done from both credit and debit cards
• Change your address – so it delays you discovering the fraudulent activity on your accounts
• Open new accounts – using your Social security, a thief can open new credit cards and/or new auto loan or other loan accounts.
• Get employment – it may sound strange but it happens often than you may think. Your identity may be used to secure employment.
• Receive Social Security payments.

To prevent identity theft online you could take these measures:

• Ensure your Operating System is up to date
• Make sure your Browser is up to date
• Get good antivirus software
• Get anti spyware software
• Do not click on pop ups
• Be careful what you download

When using email you could take the following measures:

• To protect yourself from phishing scams, do not respond to emails asking you to verity your personal information. Beware that thieves are very skilled and unfortunately they have succeeded at making those emails appear legitimate. Always use caution and suspect fraud. Keep in mind that it is highly unlikely that your financial institution will ask you for such verification via email
• Make sure your antivirus software scans incoming emails.
• Do not open attachments from people your do not know.
• To open links that friends have sent always copy and paste the URL directly into your browser. Remember that sometimes fraudulent emails appear to come from people you know. This happens when their email accounts have been hacked.
• Consider investing in encryption software to use each time you need to send personal information via email.

Follow these suggestions to protect your wireless network:

• Enable 128-bit encryption
• Change the routers default user ID and password
• Change the default Service Set Identifier (SSID)
• Disable SSID broadcasting

The post What You Need to Know About Identity Theft appeared first on The Baron Group, LLC.

To no one’s surprise, a big percentage of the resolutions on the list are related to two coveted outcomes: to be physically and financially healthy.

Most everyone has been taught that one of the main methods to achieve financial health is to create a budget and stick to it. Same goes for physical health – get on a diet and stick to it.

So what do diets and budgets have in common? They don’t work! And let’s face it; they are not any fun either.

They both focus on what you cannot do and cannot have and do not account for surprises. Psychologically, both diets and budgets are ineffective and even potentially damaging to our wellbeing because the sense of restriction and deprivation create feelings of resentment which only destine the plan for failure. I think most of us know all too well the feeling of being motivated to start a diet just to fail a few days or weeks later.

So my suggestion, although it may seem counterintuitive, is to abandon the budget and the diet altogether. By focusing on the big picture and what you can have you will be more likely to be successful in changing your mentality and be better positioned for success.

It is really quite simple:  in case of financial health – spend less than you bring in; and in the case of physical health – the other way around – expand more than you take in. We all fully understand the theory but once when we try to live by those principles we realize that it may be much easier said than done.

Change the way you see saving and spending. Similar to healthy eating, you would be much more successful if you focus on the nutrition you get from your food rather than obsess with counting calories. The recipe is quite simple – eat whole, “clean” foods, cook more at home, eat less “empty” calories and move more. When it comes to your financial health, the principles are similar. Instead of feeling restricted with an unrealistic budget, develop a spending plan based on trends and be prepared and aware of “surprises” that will come along the way. Think about the purchases you make, the state of mind you are in when you make them. Are you an impulsive buyer? Do you have to have all the latest gadgets? A spending plan and a careful analysis of your historical spending will help you answer all those questions truthfully to yourself.

Budgeting and dieting share another similarity. Regardless of how devoted you are to your budget or your diet, life just happens. You will have that piece of scrumptious chocolate cake at the office birthday celebration party just when you have started your “No Sugar” diet. Or you will have to spend hundreds or even thousands on inevitable car repairs. This often creates the feeling of failure and makes us feel like we are not staying on target and not meeting our goals. That’s why an overly detailed budget will set you up for failure when a spending plan will outline the major categories in your spending: monthly bills, living expenses, saving for retirement, vacation, emergency fund etc.

Reexamine your priorities and consider why are you following the diet or budget anyways. Instead of being forced to focus on the restrictions that come with dieting and budgeting, focus on the long term goals and acknowledge progress along the way.

And last but not least, take advantage of all the tools available. There are so many options, from do-it-yourself programs like Mint.com , through complementary advice from Mymoneyplan.net to customized, comprehensive spending plan you can work on with your advisor, like the ones from Your Family Bank. Whichever one you choose, focus on your goal of financial freedom. The budget is just an imperfect tool to get there and not the goal itself.

The post What Do Diets and Budgets Have In Common appeared first on The Baron Group, LLC.

There was a huge change that took place in the life insurance industry recently.  This was driven by a new rule for calculating insurance costs that went into effect January 2009.  The Insurance Information Institute says that term life insurance premiums are now 50 percent lower than they were a decade ago.

What Happened In January 2009…

The mortality tables changed.  Effective January 2009, all life insurance companies must use the Commissioners 2001 Standard Ordinary Mortality (CSO) table to calculate insurance rates on new policies. This is an update to the Commissioners 1980 Standard Ordinary Mortality (CSO) table that was previously used.  Under the new 2001 CSO, the average 65-year-old male is expected to live to age 81, up from 78 under the previous table. Meanwhile, a 65-year-old female is expected to live to age 85 today, compared with 81 under the old table.  The average consumer isn’t even aware of this.  The life insurance companies aren’t coming out and saying “it’s cheaper to get a new policy today”.   It becomes up to the life insurance agents to communicate this to the consumers.  With such a high turnover rate in the industry as well as a pretty uniform misunderstanding of life insurance there has been a huge disconnect between the insurance companies and the consumers.

What is the Downside…

With every positive there must be negative right?  The biggest downside to this is seen in cash value life insurance.  The IRS has rules and restrictions about how much money can go into permanent life insurance policies.  This makes the design and funding of permanent and cash value life insurance policies all that much more critical.  The typical life insurance agent doesn’t fully understand these concepts properly and could end up doing one of two things: leaving you paying more costs and fees than necessary or leaving you with a tax nightmare that you weren’t prepared for.

Finally… It is easier than ever to save money on your term life insurance policies.  With cash value life insurance policies it has become even more important to work with a qualified professional that truly understands the type of policy that you have and the funding that is available.  Please make sure you are putting yourself in the best situation.  Call your agent today and review your options.

The post Your Life Insurance Might Be Cheaper Now appeared first on The Baron Group, LLC.

We all are fully aware that there are also significant costs associated with long term care. Genworth Financial, one of the largest financial institutions specializing in long term care, has been publishing for nearly a decade now their annual Cost of Care Survey covering nearly 15,300 long term care providers in 437 regions nationwide. This report is particularly useful for Americans who need to plan for the potential cost of this type of care.

The entire cost however is not only financial and spans much further than the impact it has on the family’s finances. To assess the true impact of long term care on its providers and recipients, Genworth conducted a survey of more than 800 consumers with personal involvement in a long term care event lasting more than 30 days. The results of the study are published in a report called Beyond Dollars: The True Impact of Long Term Caring.

The study divides the parties involved in four self-explanatory categories:

- care recipients

- primary caregivers and secondary caregivers – usually spouses, siblings, children or in-      laws

- broader community – religious organizations, community non-profits, friends and neighbors.

The Care Recipient Perspective:

When someone experiences a debilitating health event – short term or long-term – that may require them to be dependent on others, to dip into savings or stop working, the effects can be significant. There are obvious consequences and new circumstances, other impacts are unseen, but real nonetheless.

For example, 42% of the care recipients said that they felt stress with their spouse and 35% reported stress with their children. When it comes to financial impact, 88% said their household income was reduced by an average 34% due to their long tern care event and a whopping 63% reduced their savings by almost 70%. As far as out-of pocket costs are concerned, the study found that on average care recipients spend $14,000 out-of-pocket for their own care and that does not even include the cost of facility care. It is difficult to think about the possibility of needing long term care and 49% of care recipients report that they had not considered the possibility of ever needing it. Yet, 29% required care for 3 or more years and 37% has to move into a family member’s home for an extended period of time.

The report cites participants in the study:

“My wife had to be available 24/7. She also became my chauffeur and needed to help me shower and dress – to help me move at all, really. It impacted her freedom and her lifestyle.”

“I think my son and daughter worried that I would want to move in with them so they could take care of me. Fact is, I didn’t. It was the elephant in the room for the longest time. I have always valued my independence. That doesn’t change with age. But I inevitably ended up needing their help. I am grateful and don’t know what I would have done without them, but it definitely altered their way of living and mine.”

The Primary Caregiver Perspective:

Being the main caregiver has serious impacts on both the emotional and financial well-being of an individual and their family. Juggling time, career, family and finances are the most prevalent stress points, but they are only part of the personal and emotional issues that make providing Long Term Care (LTC) expensive on so many levels for the primary caregiver and their family.

One of the most significant issues with long term care is that it is in most cases an arrangement for considerable amount of time. 43% of the primary caregivers surveyed reported that the care recipient resided in their home for more than 3 years. And 57% of primary caregivers provide care for longer than 16 hours per week. So it is not surpsising that such extended care has a direct impact on the primary caregiver’s life – from their relationships, finances and health to their career and social interactions. Over a third of surveyed caregivers reported direct negative consequences to their own careers resulting from the responsibilities to a care recipient. Many of these family members worked fewer hours with repeated absences. And nearly 20% reported a direct loss of career opportunities. Additionally, 44% had to work fewer hours and 48% lost a job, changed shifts or missed career opportunities.

The relationship and emotional impacts are also present for the primary caregivers. 44% report an increase in stress with their spouse and 23% experienced an increase in stress with their children.

In the words of the study participants themselves:

“In theory, I believed I could take care of my Mom, keep up with her home, and take care of my family, my kids and myself. In reality, I’m running Mom to her doctor appointments and my kids to school and sporting events and sleepovers. I am constantly torn, feeling guilty that I’m not doing enough for anyone, including taking care of myself these days.”

“Caring for my dad has left me with much less time to spend with my own daughter… With three generations living together, there is a whole new set of rules to live by and a new set of frustrations for everyone.”

“I am an only child, and my mother’s plan was to have me care for her. She became ill during the worst financial crisis of our lifetime…She is better now, after 11 months. But I am broke.”

The Caregiver’s Family Perspective:

Spouses, children, in laws and siblings of primary and secondary caregivers are also very much impacted in a long term care situation. Very often the family dynamics changes significantly. Supporting a care recipient requires time, commitment and care beyond physical needs. A spouse may resent the intrusion and withdrawal of attention they are used to receiving.

Additionally, children feel neglected when parents have to tend to their grandparents. Also, financially, college and retirement savings contributions suffer as a result of the changing focus and the increased need to cover long term care expenses.

In the words of the study participants themselves:

“I can’t attend to my children like I used to do anymore because of the care I have to give to my mother… The kids seem to act up more in school or their grades are not as good as they once were.”

“Less time for activities. Homework is stressful if there are things going on with Mom, Dad or Grandmother, and we have to hurry sometimes.”

Plan Ahead

So how can we minimize the impact of long term care? The answer seems very simple yet very few of the surveyed participants in the study have done so: PLAN AHEAD.

More than half of the respondents (55%) reported that their greatest fear regarding a long term care illness or event was being a burden on their family. In fact, they reported being five times more concerned about being a burden than dying.

Although the issue is a top concern, many are still not engaging in open conversations about potential long term care expenses, the costs or the types of care they would prefer or may need in the future. More than 90% surveyed have not talked about critical long term care issues with their spouse/partner, aging parents or adult children.

First step in planning is talk to your family.

Once you have decided what would be the best course of action if a potential need for long term care arises, meet with your trusted financial advisor and explore your options for long term care solutions.

The post The Intangible Costs of Long Term Care appeared first on The Baron Group, LLC.

Should we save for college or should we save for retirement?

Whether your little ones are in diapers or about to head off to college, if you are a parent you have probably asked yourself this question over and over.

The hefty price tag of higher education seems to be increasing every year. According to the College Board, the average fees for four years at a private college is now more than $150,000 — including $38,589 for the 2012-13 school year. Even going to your state’s university, it costs close to half that total at an average of $17,131 a year. As a result most graduates have amassed significant amounts of student loan debt by the time they enter the workforce. You don’t want that for your children. You want to give them the best start in life, right?  After all, good parents are selfless and ready to sacrifice anything for the wellbeing of their babies.

Most experts agree than when it comes to deciding between saving for college or retirement, just wanting the best for our little ones should not be the deciding factor as emotional reasoning should not be applied to this all important decision. This is of course not to say that you should not save for college. It is essential to approach the college saving decision rationally, and carefully balance saving for college with working towards the remainder of your family’s financial goals such as being debt free and being 100% certain that you are going to be able to retire comfortably and when you want.

As parents we learn to juggle so much and here are a few considerations to keep in mind while balancing college and retirement savings.

When in doubt, choose retirement. Reasons are simple and not necessarily selfish. Unlike college education, loans, scholarships and financial aid are not available to finance retirement. As a parent, you might think your most important financial duty is to pay for your children’s education. You’d be wrong. Saving enough money for your own retirement is even more crucial.   Your Family Bank® is a concept that might allow you to a accomplish both. You can have a plan to safely and securely plan for college and have a tax-free source of retirement income simply by redirecting your current spending.  In addition, if you fail to save enough and are not able to retire comfortably, you may in your old age become a burden on those same children whom you tried to protect from being overwhelmed with debt.

Start early. Remember your best friends – time and compound interest. Give them a chance to do their magic by starting saving for college early. If you open a college fund when your child is born and invest $100 every month until it is time to pay tuition bills, assuming a 5% return on investment, in 18 years, the balance will be $35,000. While this may not be enough to cover all college expenses, it is at least something to get started.  It all depends on how much of the total higher education expenses you have decided you are going to cover.

Set expectations and communicate them with your children. This is a very personal decision and it depends on both your financial situation and your parental approach but however much you are going to contribute, make sure you set the expectations and communicate them to your children so they know what to expect. You may decide that you are going to pay for undergraduate degrees only and anything in addition (Master’s, MBA, Professional degree) your child will have to finance on their own. Perhaps you only cover tuition and encourage a part-time job or loans to finance the rest. Instill the right values in your children, encourage them to recognize the value of education and strive to be the best. There are plenty of merit based scholarships for students with good grades and high scores on standardized tests.

Get grandparents and relatives involved. Leverage the thoughtfulness and generosity of grandparents and relatives and suggest that instead of buying toys and cute new outfits for holidays and birthdays they contribute some or all of the money they ordinarily spend to the child’s college fund. Again, this is a personal decision and it depends on values and priorities but even if could get a few relatives on board, with time and compound interest on your side, you may be able to help cover a semester or two.

Consider the tax implications. Even if you end up financing some of the education expenses with loans, remember that there is a student loan tax deduction. You may deduct up to $2,500 per year in the interest paid on student loans if your modified adjusted gross income is less than $70,000 if you are single or less that $145,000 if you are married filing jointly. This deduction can be taken for the life of the loan.

Also, you may be able to take two federal tax credits – the American Opportunity Tax Credit and Lifetime Learning Credit – in the years you pay tuition.  Make sure you work with your tax professional to see if those apply to you.

Have a customized plan in place. College savings and retirement savings are not mutually exclusive and do not have to become the parental catch 22. Many factors play a role – when do you expect to retire, when are your children expected to head off to college, how many do you have, and are they likely to attend expensive private schools or the state college. With the average American paying $0.56-$0.64 of every dollar they earn on interest expense and taxes, it can be a challenge.  Your Family Bank® is one possibility that can allow you to plan for college and have a tax-free source of income during your retirement years.  Many times you can put this plan in place by spending no more than you are already spending now.  We do this by redirecting money normally lost to debt, interest and taxes back into your bank and ensure that your dollar gains a positive rate of return every day.  There are so many strategies to consider and the good news is that with the right financial plan in place it is possible to do both and strike a balance.

And at the end, you may be able to admire your Ivy League graduates without having to move in with them.

The post The Parents Dilemma – Saving for College Retirement or Both appeared first on The Baron Group, LLC.

The unfortunate reality is that so many of us, even the most financially disciplined ones are forced at one time of our life or another to take on debt due to unforeseen circumstances, very often urgent, such as job loss, medical emergencies, funeral expenses etc. And once there is too much debt we all know what happens – higher interest rates which then make it difficult to repay, inability to take advantage of the current lower interest rates environment in order to refinance a home mortgage for example… and it really becomes a vicious circle that it is difficult to get out of.

However, if getting out of debt is approached with a methodical plan which is followed diligently, then being debt-free could become a reality sooner than you had hoped for.

Below I have listed the 5 most important Do’s and the 5 most important Dont’s when it comes to getting out of debt.

DOs:

1. DO Check your credit report

Begin by obtaining a consumer credit report. First, make certain the information reported is accurate and also use it as a guideline to accomplish the second very important step – set a budget.

2. DO Make a budget

Once you have identified all debts from the step above, then compare those against all sources of monthly income and set a budget. It really helps to list all income and expenses and figure out what the difference is. Then identify the debt with highest interest rate and create a plan to repay that debt first, then the one with the second highest interest rate etc. Be systematic and precise in your approach! Also, be realistic! This will make the difference between succeeding and failing to follow your budget.

3. DO Stick to your budget

Even if you create the most efficient budget, it would not mean much if you do not stick to it and are unable to follow. Your budget will probably mean a more frugal lifestyle than what you are used to but keep reminding yourself that it is a temporary solution so you can accomplish your long term financial goals. Think of the day when you will be debt-free and focus on that. Because sticking to your budget is really what will put your on the road to financial freedom.

4. DO Use tools to find savings

The good news is that sticking to your budget may not be so difficult because there is a strong chance that there currently are ways within your own accounts. There is variety of tools to help you accomplish that. From Personal Finance software like Quicken thru completely free online resources like Mint.com to more robust and comprehensive tools like Your Family Bank®, the help is there, so take advantage of it.

5. DO Beware of “Get Out of Debt” Companies

While sometimes it is indeed possible to renegotiate credit terms beware of companies that promise you miracles. In my over 20 years of experience, I have not seen credit card companies lower interest rates drastically just because you asked them to do so. If the promises those “Get out of Debt Fast” companies make seem too good to be true, they probably are.

DON’Ts

1. DON’T Incur more debt to get out of debt

In some cases it makes sense to transfer balances from high interest rates accounts in order to take advantage of zero interest balance transfer option but beware of the zero interest expiration date and include that in your long term budget. But it is important to note that this makes sense to do between already existing accounts. It is rarely prudent to open new credit card accounts in order to repay existing ones. Remember, you goal is to break the vicious cycle, not to keep turning within it!

2. DON’T Cash out a 401(k) to get out of debt

Liquidating a 401(k) account is an option when separating from an employer but it is rarely a smart choice to make considering the early withdrawal penalty incurred by anyone who is younger than 59 ½(usually 10% of the balance) and the income taxes that will need to be paid on that transaction (depending on your tax bracket it could be anywhere up to 35%). Not to mention the interest lost over time if the account is rolled over to another 401(k) or an IRA. As a rule of thumb, think of cashing out a 401(k) as a very last resort when all other options have been exhausted. A plan to get out of debt usually doest not qualify for a life and each situation when you should resort to such drastic measures.

3. DON’T live in denial

Ignoring the reality is never the answer regardless of how unsettling the truth can be. Just being satisfied with the status quo will not help you achieve your financial goals. Creating a financial plan and following it, even if it means some sacrifices along the way is what is going to help you get debt free. Doing nothing will only make your debtors richer.

4. DON’T be late

Sometimes even small mistakes can cost a lot. These days credit cards companies are quite unforgiving when it comes to late payments. Paying a bill late will, in most cases, automatically trigger an interest rate increase which will then set back your efforts and keep you further away from accomplishing your goals. Keep meticulous track of payment due dates, setup for automatic payments, do make all efforts not to be late on payments.

5. DON’T forget your Emergency Savings Fund

Following your financial plan to get out of debt should not come at the expense of your emergency savings fund. Do not liquidate your savings to repay debt and even when you are in the midst of aggressively repaying debt, continue saving. The monthly amount doesn’t have to be huge, as long as you keep adding to your piggy bank.

Getting out of debt takes a good plan, determination to follow it and it may mean sacrificing some “wants” and “nice to have”s… But it is all worth it!

Best of luck!

The post Do’s and Don’ts When Getting Out of Debt appeared first on The Baron Group, LLC.

The most appropriate answer really is: “It depends…”

Below, I will explain the advantages and disadvantages of market linked CDs and in which circumstances I usually recommend investing in market-linked CDs.

A market-linked CD (also referred to as market-indexed or equity-linked CD) is certificates of deposit based on one or more asset classes such as securities or market indices. By purchasing a market-linked CD the investor participates in the growth of the underlying security or index while preserving the characteristics of a traditional CD, Including protection against market decline. When market-linked CD is held to maturity its principal is protected and the investor receives interest based on the performance of the underlying asset class during the term of the CD or on redemption date. In other words, they combine the upside potential of the equity market while providing the traditional security of a bank CD. The best of both worlds! Especially in the current tumultuous economic environment of very low interest rates and volatile stock market returns.

Here are a few specific benefits:

Protected Growth

Market linked CDs provide the potential for capital appreciation based on the performance of an underlying asset or basket of assets with complete protection of the original deposit, when held to maturity. So basically, the value can go up with the market but cannot go down. It is important to remember that if the market-linked CD issued by an FDIC insured Bank (those are the only ones I recommend anyways), the FDIC insures the original deposit if the issuing bank becomes insolvent.

Performance

Market Linked CDs have the potential to earn greater returns than traditional fixed income instruments over the same duration. This performance is generated by the assets the CD is linked to and the payoff structure used. Market Linked CDs can be designed for growth strategies, income strategies or a combination of both.

Diversification

Diversification is achieved through these main characteristics:

Asset Class: Market linked CDs can be linked to a wide variety of underlying asset classes such as equities, commodities, currencies, market indices, fixed income, inflation and more.

Geography: Exposure can be achieved to foreign and emerging markets without the additional currency risks of direct equity investment.

Customization: Market Linked CDs can be structured with various levels of complexity to accommodate specific investment needs that could be difficult to replicate by independent investors.

With the above benefits is mind, we need to also consider the risks of MLCDs.

Liquidity

If the CD is redeemed prior to maturity, the principal will not be protected and the investor may realize a loss, even if the underlying asset has appreciated.

Therefore, I always recommend purchasing market-linked CDs only if the intent is to hold these CDs to maturity.

Performance/Market Risk

The performance of Market Linked CDs is based on the performance of the underlying asset(s) with respect to the type of payoff structure. Generally, a Market Linked CD’s – possessive performance may be less than investing directly in the same underlying asset(s). Clients are at risk of underperforming a traditional fixed income instrument if the asset(s) used to determine the performance of the MLCD devalue over the life of the CD.

Tax Considerations

Just like any certificate of deposit, market linked CDs’ returns are considered interest for tax purposes, therefore the tax rate may be higher than the capital gains rate. However, the investor typically does not have tax liabilities if the market linked CD is purchased in a qualified account like an IRA.

So, back to the original question – is a market-linked CD the right choice for me?

While anyone can invest in MLCDs and they are an excellent compliment to any well-balanced portfolio, there are a few specific types of investors who may benefit from market linked CDs the most. Generally speaking if you are retired, a baby boomer, a family who would not want to see their children’s college fund diminish in value, or if you are any conservative, risk averse investor, then a market linked CD may be the right option for you.

However, just like with any other investment decision, your individual overall investment goals need to be evaluated in order to determine the most effective investment strategy. Although certain general rules apply, there is never a “one size fits all” answer when it comes to investing. Your advisor will help you determine the most favorable strategy in your particular case, shop around for the best combination of rates, minimum deposit requirements, maturity dates, and early withdrawal provisions. With a carefully designed investment strategy, tailored to your individual tolerance for risk, you are best equipped to reach your financial goals.

Best of luck!!

The post Market Linked CD – Is it the right choice? appeared first on The Baron Group, LLC.

But with the right approach, it can be managed.

Forget the blame. It does not matter much whether you are working towards repaying debt that you have accumulated together as a married couple or debt that one of you brought into the marriage. Concentrating on the fact that one of you brought more debt to the marriage is not productive and will not help repay those debts faster. Pointing the finger will not get you far either. Instead of thinking “Your debts will ruin us. You should really repay those debts as fast as possible!” say :” Let’s see what we can do to repay the debts as fast as possible so we can concentrate on our long term financial goals”. Remember you are now a team. Your spouse is not the enemy, debt is!

Create your family’s financial plan together. No goal is successful without a plan. This is particularly true when your goal is to be financially free and repay your debts. To create a plan which will be followed by both partners, it needs to include input from both of you. Your family’s financial plan needs to be realistic and something you could follow with your partner long term. Remember that your family’s financial plan is not something set in stone and is an ever evolving plan that helps you get on the right track.

Choose the right person to manage the finances. Although in some families both partners are very financially savvy and frugal, in most couples one partner is naturally more inclined to be a saver and planner than the other. Sometimes opposites attract and it is not uncommon for two individuals who are on the very end of the financial management spectrum to form a successful union. If one of you is naturally more inclined to being a better money manager, it is an easy choice to delegate managing the finances to that person.

Practice common sense debt management. It is really quite simple – live within your means (below your means is even better), save, create a financial plan and follow it. For more detailed discussion on common sense debt management, see my previous post Do’s and Don’ts When Getting Out of Debt.

Be transparent and communicate. It is not always easy to try and explain to your partner why it is important for you to buy a certain thing. It is very normal to have different priorities and disagree on discretional spending but one of the worst things a couple can do is lie to each other about spending and acquiring more debt. If you feel like you need to hide your purchases and are unable to explain them to your partner, then maybe that purchase is a case of emotional spending versus something you really need. When tackling debt, you and your spouse, as a family should be a united front and keep the lines of communication open. Being transparent will give you an opportunity to identify if there is a need for your financial plan to be adjusted.

Being debt free is much more than just a goal. It’s a way of life that can make a ton of difference in your family dynamics.

So, don’t be a statistic! Don’t let debt ruin your marriage!

The post Til Debt Do Us Part appeared first on The Baron Group, LLC.