Quote
of the Month
"Challenges
are what make life interesting; overcoming
them is what makes life meaningful."
Joshua
J. Marine
RSG welcomes
you to the March 2002 edition
of The Retirement Strategist. We hope you
enjoy
our actionable ideas for implementing a
better retirement stategy. Remember that
time can be your greatest friend; the sooner
you implement excellent retirement savings
ideas, the better.
- Questions From Members
- Timely
Investment Tip$: College Savings Plans
- Fiscal
Therapy: Basics of Long-Term Care - Part 1
- Retirement
Strategies Group
Service Highlight: How We Can Help You
QUESTIONS
FROM MEMBERS
| |
| Q. |
Is
it smart to borrow (take a loan)
from my 401k or 403b?
Richmond, Virginia
|
| A. |
Does
it make sense to borrow from yourself?
What is the "true" cost of taking
that loan? It is probably not the
best idea to borrow from your 401(k)
plan, unless you've explored and
eliminated all other options available
to you. We'll explain why.
Some companies charge a service
fee to process and service your
loan, the same type of fees you would
incur if you had gone to your local
bank. This could add up to as much
as $200 over the life of a five-year
loan, because there is a one-time
processing fee and then annual
servicing fees. This is a hefty
amount to pay for the right to use
your own money.
Plans must charge the current market
rate, which is equivalent to what you
would be charged at that local bank.
There are no sweetheart deals here
even if it is your own money. The interest
rate is usually one or two percentage
points above the prime rate. This rate
is fixed over the life of your loan
but could change for future loans due
to changes in the prime rate.
What happens if you've been terminated
from employment? If you have an outstanding
loan, in most cases, you will have
to pay it back immediately. If
you can't, the outstanding loan is
considered a premature withdrawal and
you'll owe taxes on the outstanding
amount left on the loan. If you are
under age 59 ½ , you will owe a 10%
penalty as well. Ouch, and now
you're unemployed.
If that's not enough to scare you
from taking a loan out on yourself
then how about double taxation? Employees'
contributions are contributed pre-taxed.
When you take a loan out you'll have
to pay back the loan using dollars
that are being taxed before you use
them to pay off the loan. Now when
it comes to your retirement years,
20-30 years later, you are going to
be required to pay income tax on all
of your withdrawals, some of which
you already paid income tax on (from
paying back the loan). Those guys in
D.C. just double-dipped into your pockets
and you never felt a thing.
|
TIMELY
INVESTMENT TIP$
College Savings Plans Paying for college has never been easy,
particularly for families with competing
financial goals. The traditional savings
vehicles have made it more difficult by imposing
restrictions and taxes. In the future, four
years at a private college could cost more
than you paid for your house and, next to
retirement, may be the biggest expense you
and your family are likely to face. The cost
of a four-year education for a public college
in 2020 is estimated to be around $85,816
and a private college at $226,472.
We try to keep members informed about reaching
different financial goals. We would now like
to introduce you to a college savings plan
very different than the Educational IRA.
An Educational IRA allows a maximum contribution
of only $500 per year. The money is tax-deferred
and transfers to the child when s/he reaches
legal age. This is a scary thought to most
parents - putting a lot of money into the
hands of a child - who knows what they will
spend the money on if they don't use it for
a higher education.
Now let's talk about a brand new way to
save for college that takes advantage of
Section 529 of the Internal Revenue Code.
The plan combines tax benefits with professional
portfolio management and allows you to control
withdrawals for the life of the account.
Choose any school in the United States. Change
beneficiaries within the family as often
as you like - you can even name yourself.
The money does not automatically transfer
to your child when s/he reaches legal age.
Traditionally, parents and other family members
have used UGMA or UTMA accounts as a tax-advantaged
way to provide funds for college. But control
over withdrawals remains an issue. With a
529 College Savings Plan the account remains
in your control for the life of the account.
If the designated child decides not to attend
college, for example, you may change beneficiaries
to another child, leave the account untouched
for future use, or withdraw the assets.
The 529 College Savings Plan has great tax
benefits. Pay no taxes while the account
is invested. Qualified withdrawals are generally
taxed at the beneficiary's tax rate, which
should be much lower than your own. And as
a bonus, contributions can help reduce estate
taxes for contributors.
The 529 College Savings Plan is a great
way to start saving for your child's education
today. You can even start it off with as
little as $15 per month!
FISCAL
THERAPY
Basics of Long-Term Care: Part I
The harsh realities of aging in America are coming into sharp focus. Soon,
a 95-year old baby boomer without long-term care insurance may have to rely
on a 90-year old spouse or a 70-year old son or daughter for personal care.
The stark reality is that consumers can't rely on Medicare, Medicare supplementary
insurance, or health insurance to help them meet long-term care costs. The
fact is that none of those sources cover most long-term care expenses. However,
long-term care is not an issue that is easily addressed, just often ignored.
So, to ease ourselves into this difficult discussion, let's just take a look
at the basic facts and make an introduction to long-term care insurance.
- What is long term care? Too often the term long-term care is used
interchangeably with nursing homes. While that may have been true at one
time, the rapid growth of community-based care and in-home services offers
many options to people needing assistance over an extended period of time.
The National Association of Insurance Commissioners (NAIC) describes long-term
care (LTC) as a wide variety of services for people with a prolonged physical
illness, disability, or cognitive disorder. This care is provided in a wide
variety of settings, such as assisted-living facilities, adult day care centers,
and even your own home.
- Who should purchase long-term care insurance? You should consider
buying long-term care insurance if you have significant assets (over $70,000)
and income (over $35,000) and want to stay independent of the support of
others.
- When should someone purchase long-term care insurance? When purchasing
long-term care insurance, your age is a factor in determining its cost. The
younger you are when you get an LTC policy, the cheaper your premiums will
be. Of course, you also will be paying those premiums for a longer period
of time before taking any benefits. A good time to buy long-term care insurance
is between the ages of 50 and 55, according to the American Health Care Association
(ACHA). A policy that costs you $800 annually when you're 55 will cost you
nearly twice as much if you wait to buy it when you're 65.
HOW WE CAN HELP YOUWith
the myriad of financial programs and information available to you, investing
and retirement planning can become rather confusing, but we can help. We
specialize in helping our clients reach their financial goals by designing
specific programs based on each individual's goals.
You have already
taken the first step in requesting to receive our monthly e-bulletin. If
you would like additional information including a free review of your current
portfolio, information on brokerage services, mutual funds, tax-deferred
annuities, or have a question on a specific financial program, please contact
Retirement Strategies Group. |
