Having children could be the biggest financial decision people make, even bigger than a home purchase. According to the USDA the cost of raising a child to age 17 is $222,360. If you send your child to private school in Chicago that could add an additional $260,000 on top of that. A top private collage? Add another $240,000 and your up to $722,360. If you tack on the costs of buying a larger car or a larger home, or if you hire a nanny for child care, your cost could easily top $1 million.
Many of my clients have been sold a type of variable annuity that has a guaranteed value and a minimum guaranteed annual payout after a holding period. The guaranteed payout is often 5% of the guaranteed value. So if the guaranteed value is $100,000 you would get $5,000/year regardless of what the investment value of the annuity is. If the value of the annuity rises above $100,000 you would get 5% of that higher value.
Sounds like a great deal. Upside potential and downside protection.
Well a fellow NAPFA advisor analyzed one of these annuities on the insurance company’s website. Here is what she found:
On a $100,000 contract the guaranteed payout was $416/month. This compares to $609/month for an immediate annuity (a different animal)
In order for the contract value to grow above $100,000 there would have to be a return of at least 9%/year. This is because the internal expenses (fees, premiums, commissions etc. were 8% per year!)
Assuming 3% inflation the annuity growth would have to be 12% per year. That would be very difficult to achieve over the long-term!
If someone offers this type of product to you. Take the time to analyze it looking at what rate of return you would have to achieve in the long-term in order for your payout to rise.
As an alternative consider a combination of an immediate annuity at retirement for some guaranteed income, along with a combination of stock mutual fund investments for long-term growth.
Well the numbers are in and the Money Bus (www.yourmoneybus.com) served over 100 people in two days in the Chicago area. The Money Bus was sponsored by the NAPFA Consumer Education Foundation, Kiplingers, TD Ameritrade, and FiLife/WSJ. The bus travels the country and at each stop local NAPFA advisors provide free advice (no product sales!!) to consumers. We answered questions about retirement planning, 401ks, credit card debt, college savings, emergency funds, layoffs, foreclosures, mortgages, etc.
The Labor department is proposing new 401k fee disclosure rules which will require written agreement in place to provide services to disclose both direct and indirect compensation for plan advisors. This will affect many advisors who do not work with plans as fiduciaries and who’s compensation arrangements are not transparent. For more watch this video.
Many of us face a dilemma: Should I invest in a Roth IRA, my 401k plan, or a Traditional IRA or some combination? Here are some simple rules of thumb:
If you employer matches your 401k contributions:
Invest in your 401k up to the amount to get the maximum match
Then invest in a Roth IRA if you are eligible
Then invest in your 401k again (no match)
If you employer does not match
Invest in a Roth IRA if you are eligible
Invest in your 401k
The situation is more complex if you are not eligible to contribute to a Roth IRA with many contingencies that are best handled on a case by case basis. Also, if your employer has a high cost 401k plan you may actually be better off investing some of your funds outside of your 401k in a regular taxable account once you have invested enough to receive the maximum 401k match.
The reason why Roth IRA contributions are a better bet for most people vs. a regular 401k contribution include:
Tax rates are likely to be higher than they are today in the future when you withdraw your 401k contributions.
You will have Required Minimum Distributions from a 401k plan at age 70-1/2.
Your heirs will required to take distributions from your 401k plan and pay taxes on them. There are no required distributions from a Roth IRA and any distributions are tax free.
According to my good friend and mortgage broker John Noyes, it is once again possible to get conventional financing with a 5% down payment. Below are John’s comments:
“It appears that at least some parts of the lending environment are getting a bit better. We are now able to do 95% Financing on conventional loans. . . . The financing is available for owner occupied single family homes, condominiums, and townhomes. It requires a 680 credit score and a maximum 41% Debt to Income ratio.”
When I wrote about the advantages of index funds a few years ago I left one out: Because index funds don’t trade as often they generate much lower trading fees vs. actively managed funds. Unfortunately these fees are not included in the expense ratios reported by the fund, so actively managed funds are really at a greater cost disadvantage that you would expect. Check out today’s WSJ for more details
I’m sure you have seen those mutual funds ads where they brag about their performance. Well I have a new fund that blows most of them away! It’s called Bet on Red — 100% return last year — really! Watch the video for the whole story . . .
With the Bush tax cuts expiring at the end of this year and unlikely to be renewed, taxpayers in the highest income brackets that are considering a Roth IRA conversion should think about doing it this year.
The highest federal tax bracket next year will go from 35% to 39.6% meaning the taxes on a $1,000,000 conversion will increase by $40,600 in 2011. If you will turn 59 and ½ next year you may want to consider waiting because the penalty for early withdrawal will expire for you next year lowering the tax on your conversion form 45% in 2010 (35% + 10% early withdrawal penalty) vs. 39.6% next year.
Young tax payers in any tax bracket with small IRA balances may also want to convert this year. That is because by converting now they will be able to shelter any future gains on their current IRA from taxes, and for a young person those gains could be substantial. For example the future gain on $10,000 for a 30year old could be $310,000 by the time the person reaches 70. In addition if your current IRA contributions were not tax deductible because your income was too high, most or all of your Roth conversion could be tax free.
One last benefit for converting in 2010 is that you are able to spread any taxes you do owe over a 3-year period vs. paying them all this year.