Honing Cash Control Skills

It is easy to spend a great deal of time and effort thinking about stocks, bonds and other investments, yet forget the very important, but somehow less glamorous, aspect of a portfolio – cash. In soaring markets, cash can get shunted aside. In poor markets and in uncertain economic times, the importance of cash reasserts itself.

Now may be a good time to examine whether your cash is being managed for maximum benefit.

While there are many aspects to savvy cash management, the chief questions are simple enough. Is the cash you are likely to need readily available? Is it working for you as well as possible? Develop a well-rounded cash management program, and you’ll be able to give positive answers to both.

How Much Cash?

There is no settled opinion on how much cash to keep aside for a rainy day. Recommendations range from three to 12 months of regular house-hold expenses.

However much you decide is right for you, it should be an amount adequate to see you through most emergencies, yet not be so great as to condemn yourself to a relatively low rate of return on a massive portion of your portfolio. Regardless of the amount, your cash should be at work, drawing the best rates of return you can safely obtain. Federal Deposit Insurance Corporation-member banks offer account holders insured deposits of up to $250,000 per holder per eligible account, at least until December 31, 2009.

You can keep cash you want immediately available in interest-bearing savings accounts or money market funds, with more cash waiting in a laddered series of short-term certificates of deposit, if you choose. If you need to build up your cash reserves, you can do it in the same way you fund your retirement savings or taxable investments – arrange for a set amount to be whisked out of every paycheck or once a month, whichever you prefer.

Managing Money

You may have other cash available, too, and managing it should be part of your financial plan. Your brokerage account probably has a “sweep” option whereby cash from an equity sale is automatically swept into an interest-bearing account until needed for a new investment. That avoids simply storing idle cash. Make sure you know the rules and the sweep minimums so that your uninvested cash can work as hard as it can for you.

Streamlined, successful cash management also means using your income wisely and avoiding unnecessary expenses. Paying off any ongoing credit card debt (and the interest that accompanies it) should be a priority. And it is wise to avoid unnecessary fees by arranging for no-fee or low-cost checking, as well as online bill-paying arrangements. And if you use a charge or debit card regularly, you might as well use one that provides rewards of the kind that would benefit you most, whether that’s travel, a cash-back percentage or gift cards usable at retailers you frequent.

No matter what specific arrangements you make, keep in mind that your cash management skills can be as important to your lifestyle as your general investment preferences. Smart, coordinated cash management can have a positive impact on your portfolio’s performance.

If you have questions about your cash management options, please don’t hesitate to call me.

THINK CAREFULLY BEFORE ALTERING COLLEGE SAVINGS

In unsettled markets such as what we’ve been experiencing, some investors cast a wary eye on their college savings. No wonder. Instead of steadily growing to fund your child’s or grandchild’s college education, the value of your portfolio has undoubtedly hit a speed bump, its value dropping along with the rest of the market this year.

Even conservative portfolios have been rocked, so you may be wondering if you should be making major changes to your overall strategy. For most, the idea has been to invest aggressively in equities when your child is a toddler, switching gradually to more conservative – and therefore, theoretically, less volatile – investments as college nears.

However, market observers caution against switching strategy. Withdrawing the money altogether may have tax consequences, and you may have to pay a penalty, depending on the investment vehicle you chose for saving for college. If you decide to switch assets into a portfolio of cash or short-term bonds, you’ll lock in any equity losses and shut yourself out of any potential future market upswings. Missing even a few such moves, as historical market data shows, can be devastating to a portfolio’s potential future value.

What if college savings will be needed soon? Of course, put any new contributions into the most conservative portfolio. Alternatively, consider using other savings in the near term.

Reconcile Your Goals For a Mutually Pleasing Retirement Lifestyle?

As a couple, are your retirement goals compatible?

While many know exactly how to spend their working years, their plans for retirement can be vague and unformed. For the sake of retirement happiness, however, it’s important to match lifestyle projections with those of your spouse or partner.

Couples who develop sound financial planning habits are well positioned to tackle life’s bigger questions, such as what to do when one wants to open a bookshop in a country town while the other pictures life among the stimulating cultural offerings of a metropolis. Do your retirement goals match? If not, can they be made compatible?

Divergent Ideas

Ideas about how to achieve personal fulfillment – and what it is – will almost certainly change for each partner over a lifetime. Caught up separately in the day-to-day details of managing careers and family, partners can develop significant differences in how they see the future. The range of retirement lifestyle options has grown and will continue to do so. It’s critical to take time to identify and appreciate the changes taking place in each other’s goals and aspirations.

Planning for life is inexact, so maintaining a flexible attitude is critical. For couples who want to sail together into the future, there are some basic concepts that can make that possible.

Encourage experimentation. If your partner harbors romantic dreams of living abroad, help make it possible for him or her to visit that country. Keep an open mind about what is possible.

Healthcare advances allow retirees to maintain active lives. The chance to pursue sports or other interests and contribute to worthy causes can be a satisfying use of insight and wisdom you’ve both collected over a lifetime.

Try to reconcile wildly divergent dreams. If your partner announces a desire to join the Peace Corps, take a deep breath and do some research rather than immediately rejecting the idea.

You and your partner will likely find that many of your interests can be satisfied. Bring a sense of humor to the planning table and you may find you’re able to combine even the most unlikely retirement dreams.

Investmentmyth

No Same-Year Investing In both 401(k) and IRA

Surveys say many Americans believe this. But you can indeed contribute the maximum to both an employer retirement plan and an IRA in the same year. If you don’t qualify for the tax break on a traditional IRA contribution, you may want to investigate opening a Roth IRA. You’ll receive no tax break up front, but you’ll pay no tax on withdrawals.

Bring Some Structure to Your Philanthropic Goals

When the economy is clearly in the doldrums, it’s not unusual for givers to think about scaling back their philanthropic contributions. At such times, it may be worth exploring avenues of giving whereby you can leave some of your wealth to a favorite charitable cause, yet still reap financial rewards and avoid capital gains taxes. There are several ways to do just that.

Essentially, the trusts outlined below combine giving with receiving, because when it comes to philanthropy, one often leads to the other. By properly structuring your charitable giving, you can enjoy the multiple benefits of supporting your cause and...

• Avoid capital gains tax on highly appreciated assets;
• Receive an immediate charitable tax deduction;
• Reduce the size of your taxable estate; and
• Retain an income stream for life or for a set term.

CRAT or CRUT?

A prime example of how to accomplish this is through a Charitable Remainder Annuity Trust (CRAT). This tax-exempt irrevocable trust reduces your taxable income and provides you an income stream while ensuring that your designated charity ultimately benefits.

It works quite simply. Instead of leaving money to your alma mater in your will, for example, you place the funds into a CRAT and derive a fixed annual income for life or a term of years. Whatever funds remain in the trust after that time go to the educational institution you’ve named. In the meantime, you’re entitled to a charitable deduction when you place the property in the trust.

If you’re looking for a useful hedge against inflation, then a Charitable Remainder Unitrust (CRUT) might be the right fit. The CRAT gives you a fixed annual dollar amount (a mandatory annual distribution), but a CRUT provides you an annual set percentage of the trust’s assets.

If the trust’s assets grow in value, next year that percentage will provide you more income – the same percentage of a larger number.

Wealth Replacement Trusts

The drawback to these plans is that your heirs may feel shortchanged. One way to remedy that situation could be to create a Wealth Replacement Trust (WRT).

In this scenario, you create an irrevocable trust for your heirs’ benefit – an irrevocable life insurance trust (ILIT). When you receive your WRT income, you transfer a portion into the ILIT, whose trustee then uses that money to pay life insurance premiums for a policy on your life. The intent is to use life insurance to replace the amount being given to the charity. However, this technique can also be used to increase family wealth. If this possibility interests you, ask about the details, as they are too complicated for this space.

Estate Concerns

Do you want to reduce taxes on your estate? You might look into the idea of a Charitable Lead Trust (CLT). The idea of a CLT is to endow your preferred charity now, while you’re still around to enjoy seeing the money put to good use. You could, for example, provide your favorite charity with an annual income stream for a term of years. At the expiration of the term, the remaining trust assets would then pass to your intended heirs. This technique works somewhat differently from a WRT, so there will be different tax benefits, too.

Alternatively, you could consider setting up a private family foundation. If you prefer to retain control over your charitable assets, desire to involve your family in gift-making decisions and want to time your bequest to maximize tax advantages, consider a private foundation. This is an excellent means by which to honor your family's name.

Finally, you may want to explore simplifying the process by opting for a donor-advised fund, which can offer better tax benefits.

Philanthropy is a very personal process. But by thinking strategically instead of emotionally, you can create a lasting legacy, while doing it in such a way that your estate benefits as well. If you would like to discuss your charitable goals, please give me a call.

Health in Retirement:
Sooner or Later, You May Have to Demystify Medicare

Medicare looms as the country’s largest health insurance program, yet a survey earlier this year found that baby boomers heading toward retirement are essentially clueless about it.

Released by the National Association of Insurance Commissioners in April, the survey found that only 36% realized that Medicare eligibility begins at 65 - not 62 - while 66% acknowledged they were not familiar with the plan or its options. At the same time, even wealthy investors tend to overestimate how much they’ll be able to pay for healthcare in retirement.

Even if you don’t see Medicare in your future, you should be aware of some basics.

If you retire at 62, you’ll need three years of private health insurance before you’ll be allowed to opt for Medicare. Keep in mind that healthcare costs are rising at roughly 7% a year compared to the general annual inflation rate of approximately 3%. You can see that spiraling healthcare costs could easily undermine the value of even the most carefully arranged income stream.

It may also pay to consider long-term care insurance as part of your financial plan. Medicare covers only the first 100 days of nursing home care.