All's Fair

June brings us the traditional beginning of the summer season, and with the weather we've been having, this year is no exception. For those of you that know me well, you know that this includes a healthy portion of Fair time - that is, the Sangamon County Fair. I am heavily involved in the Fair, and I'd like to take this opportunity to invite all of you to join us at the Fair, beginning on Wednesday, June 18, and running through Sunday, June 22. As always, we have some great entertainment lined up, with Little Big Town on Thursday evening, Kelly Pickler (of American Idol fame!) on Friday, and Randy Owen, formerly of the legendary group Alabama, on Saturday evening. If you're not familiar with the way the Sangamon County Fair works, once you've paid the admission price, you have access to the grandstand shows and all other entertainment, rides, and shows throughout the fair, for no additional cost. You can find out more by going to www.SangCoFair.com.

Given the volatility we've been experiencing of late in the financial world, I thought it would be timely to revisit some of the ways that we can help ourselves to maintain confidence throughout these uncertain periods. This month's article addresses these concerns and I hope will help your confidence in your financial matters. As always, I am available to talk about your concerns if you'd like, just give me a call!

Maintaining Confidence in an Uncertain World

All around us, every day, we see signs of an unstable financial world. The price of gasoline is out of sight, and instability continues in the Middle East; while at home we're confronted by a presidential election that offers little choice other than to hold your nose and vote for the one that you believe is likely to do the least damage. Add to this the stock market's volatility, the rising cost of "getting by", and the subprime mortgage crisis, and there's little wonder many folks are very concerned about the future.

What Can You Do?

I don't suggest hiding under your bed - this has never worked for me, and sometimes you find things there that you would rather not! On the other hand, there are few things that you can do to help get through this uncertainty, and maybe you'll decide that it's not so scary after all.

For starters, all of the headlines we see, especially the financial ones, must be taken with a grain of salt. For example, back in early 2001, CNN reported that seven cows, born and raised in Germany, had been diagnosed with mad cow disease. Within six weeks, beef consumption in Germany dropped in half. Yet, throughout the 20+ years since mad cow disease was discovered, a total of 150 deaths have been attributed to this disease. On the other hand, we are told that salmonella poisoning kills more than 600 people in the US every year, along with making an additional 1.4 million of us sick. But the popularity of chicken, the primary food source that hosts salmonella poisoning, continues to increase.

This odd behavior comes about because of how we perceive and interpret information. Obviously, our personal experiences have the greatest weight, followed by experiences related to us by friends and family. The next most believable source of information is mass media, including the largely undocumented internet, while last in line is documented, statistical evidence. So, while most folks have had enough experience with food poisoning to put the salmonella statistics in their proper context, Mad Cow disease, with its sensational name and (at the time) largely unknown characteristics, made us sit up and take notice. And, more importantly from the perspective of the media provider, the sensational SELLS!

So What Does This Mean For My Finances?

Consider how this phenomena impacts your financial decisions. For several years, the watch-word has been to stay out of medium- and long-term bonds as investments, because the long-term rates are going up. This talk began in 2001 - and long-term rates have gone up since then, a little, but not enough to make an appreciable difference in using medium- and long-term bonds in your portfolio.

This is not to say that you should ignore the news - but rather, you should keep your trusty grain of salt handy as you do follow the news. And ask your trusted advisor to help you interpret the news that you find particularly troubling. In addition, it doesn't add value to check your portfolio's value every day and wring your hands over every headline in the various financial news outlets. Generally speaking, these headlines provide no value to the average investor, and more often than not they serve to distract you from the aim of your long-term plans.

Understand Why You Choose Investments

One of the more difficult things for most folks to understand is that it is near impossible to always choose a "big winner" mutual fund. Consider this: if, over the past five years, a mutual fund manager has had a better-than-average result from his mutual fund (meaning, he's beating the indexes over that period), he's one of approximately 3% of all mutual fund managers. When you consider that new funds are introduced every year, replacing old "losers", you begin to realize that this 3% is actually a smaller number, since the losing funds have disappeared from the list.

Add to this mix the fact that "past performance doesn't guarantee future results". In other words, just because a particular fund manager has beaten the average in the past doesn't mean that he will do so in the future. What I'm driving at is this: There is no point in chasing the "best" managed mutual fund, especially when the index is likely to beat or equal any given manager 97% of the time, at a cost of far less than half (in terms of internal expense ratios). You're much better off spending time making sure that your portfolio is well diversified and matches your risk tolerance, and then maintaining solid discipline to not run for the exits when a headline looks scary to you.

Have a Trusted Adviser to Lean On

This goes for all facets of your life, obviously - and of course it's a bit self-serving when coming from me. The point is, while we all would like to believe we can "do it on our own", we eventually come to realize that we need some additional expertise to help us plan. And once we've made those plans, having someone to help us review and consider options is a must - because simply having a plan isn't enough, we must execute and review results. Once we've seen those results, we can then determine how to make minor adjustments for the future, and then again, execute the plans. Especially when the environment has been volatile, it's important to review our results and make sure we're still on track.

You might think that the work a financial planner does is based primarily in the future, but the past is at least as important - especially when things haven't gone the way we'd hoped. In other words, while we're aiming for a particular goal in the future, it is where we are "today" that gives us our starting point. Confucius said "A journey of a thousand miles begins with a single step". But if you never stopped during that thousand miles to consider where your destination is relative to where you are right now, you'd likely end up somewhere else.

The Point of All This (FINALLY!)

I know I've rambled a bit, but I think you get the gist of my message - Lay out careful plans, don't allow the "pundits" and headlines to distract you, use the market averages to your advantage, diversify to match your risk tolerance, and check your progress regularly. The author Michael Pollan presented a seven-word mantra in his best-selling book "In Defense of Food" that provides clarity when making choices there:

"Eat food. Not too much. Mostly plants."

From this idea, I've built the following mantra for investing and planning:

"Plan regularly. Don't be distracted. Save lots."

I hope this will help you as you go forward in your financial life. In these uncertain times, having a sound foundation to guide you is your most important tool. Take care, and best wishes for this month.

May Flowers?

Throughout the month so far, we've had much more rain than normal - I thought the saying was "April showers bring May flowers"!! Instead, the April showers seem to just be bringing more May showers, at least around here. The flowers have been coming up, though, and right now the iris outside my office door is just about to bust with blooms.

Even with the weather being as it has been, we still have made it out to find a few mushrooms, and even got to take in a Cubs/Cards game. I won't go into detail on the outcome - let's just leave it that we had a nice time at the game and at least one of us (not me, the Cubs fan in the house) came home happy.

One of the big issues that many people face when planning for retirement is getting a handle on their income needs. This month's article should help to shed some light on that calculation. By gaining an understanding of the retirement income requirement, we can look forward to our golden years without the fears associated with not knowing if we've done enough saving, or if we're retiring too soon.

Retirement Income Requirement

You know how important it is to plan for your retirement, but how do you get started? One of the first steps should be to come up with an estimate of how much income you'll need in order to fund your retirement. Easy to say, not so easy to do! Retirement planning is not an exact science. Your specific needs will depend on your goals, lifestyle, age, and many other factors. However, by doing a little homework, you'll be well on your way to a comfortable retirement.

Start With Your Current Income

A rule of thumb suggests that you'll need about 70 percent of your current annual income in retirement. This can be a good starting point, but will that figure work for you? It really all depends on how close you are to retiring. If you're young and retirement is light years away, that figure probably won't be a reliable estimate of your income needs (and let's face it, over a long period of time it's not much more than a wild guess!). That's because many things will change dramatically between now and the time you retire. As you near retirement, the gap between your present needs and your future needs will likely narrow. But remember, you're only going to use your current income only as a general guideline, even if retirement is well within sight. In order to accurately estimate your retirement income requirement, you'll have to do some more cipherin'.

Project Your Retirement Expenses

As with any budgeting exercise, annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That's why estimating expenses is a big piece of the retirement planning puzzle. It's bound to be difficult identifying all of your expenses and projecting how much you'll be spending in each area, especially if retirement is still a ways off. To help you get started, here are some common retirement expenses:

• Food and clothing
• Housing: Rent or mortgage payments, property taxes, homeowners insurance, property upkeep and repairs
• Utilities: Gas, electric, water, telephone, cable TV
• Transportation: Car payments, auto insurance, gas, maintenance and repairs
• Insurance: Medical, dental, life, disability, long-term care
• Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs
• Taxes: Federal and state income tax, capital gains tax
• Debts: Personal loans, business loans, credit card payments
• Education: Children's or grandchildren's college expenses
• Gifts: Charitable and personal
• Recreation: Travel, dining out, hobbies, leisure activities
• Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living
• Miscellaneous: Personal grooming, pets, club memberships

Don't forget that the cost of living will go up over time. The average annual rate of inflation over the past 20 years has been approximately 3 percent. And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children's education early in retirement. Other expenses, such as health care and insurance, are bound to increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it's always best to be conservative). Finally, have a financial professional review your estimates to make sure they're as accurate and realistic as possible. Don't forget to factor in insurance benefits (especially medical) as your out-of-pocket costs are likely to be much different in retirement than when you're working.

Decide When You'll Retire

To determine your total retirement needs, you can't just estimate how much annual income you need. You also need to figure out how long you'll be retired. Why? The longer your retirement, the more years of income you'll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it's great to have the flexibility to choose when you'll retire, it's important to remember that retiring at 50 will end up costing you a lot more than retiring at 65.

Estimate Your Life Expectancy

The age at which you retire isn't the only factor that determines how long you'll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you'll have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. To guard against that risk, you'll need to estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you'll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There's no way to predict how long you'll actually live. With life expectancies on the rise, it's probably best to assume you'll live longer than you expect. To be conservative, you might project out to age 100 (or longer, if longevity is in your genes!).

Don't Forget to Inflate!

But you can't just come up with an expense figure and simply multiply it by the number of years you're planning on living... remember that little factor we talked about earlier - inflation? Not considering the impact of inflation can cause your plan to run off the rails - and soon you'd run out of money altogether. As we sometimes morbidly joke in this business, you may want to increase your bacon intake to match up with your portfolio's longevity!

It's a fairly simple matter to project out the future value of your retirement income requirement, using the average inflation rate of 3% (or higher to be more conservative), to give you a pretty good picture of the amount of money you'll need when you retire. There are many calculators available on the internet to help you with this process - just go to your favorite search site (MSN, Yahoo!, Google, etc.) and search for "retirement calculator". As an alternative, I'll be happy to work with you to come up with a reasonable figure for your own circumstances.

Identify Your Sources of Income

Once you have an idea of your retirement income requirement, your next step is to determine just how prepared you are to meet those needs. In other words, what sources of income will be available to you in retirement? Your employer may offer a traditional pension that will pay you monthly benefits (although this is becoming increasingly rare, especially in the private sector). In addition, you can likely count on Social Security to provide a portion of your retirement income, although many younger folks are making their plans without factoring in Social Security, just in case it's not there in the long run. You should be receiving an annual update of your estimated Social Security benefits. If not, to get an estimate of your Social Security benefits, visit the Social Security Administration website (www.ssa.gov) and order a copy of your statement.

Other sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and additional investments. The amount of income you receive from those sources is dependent upon the amount you invest, the rate of return on your investments, the internal costs of the investments, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.

Make Up Any Shortfall

If you've been diligent about saving, or are fortunate enough to have a funded traditional pension plan, your expected income sources may well be more than enough to fund even a lengthy retirement. But what if it looks like you're going to come up short? Don't run screaming down a hallway -- there are always steps that you can take to bridge the gap. A financial professional can help you figure out the best ways to do that, but here are a few suggestions:

• Try to cut current expenses (in your working years) so you'll have more money to save for retirement. This will have the added benefit of teaching you to get by on a little less both now and in the future, as well.
• Shift your asset allocation to increase the potential returns on your portfolio (always keeping in mind that a portfolio that offers higher potential returns most likely involves greater risk of loss)
• Lower your expectations for retirement so you won't need as much money (no beach house on the Riviera, instead maybe you'll plan to buy a Buick Riviera to drive to the rental beach house once a year!)
• Work part-time during retirement for extra income. Many folks are doing this nowadays, as the "kick back and relax" style of retirement is not their cup of tea. Staying active tends to maintain your health as you age, both physically and mentally.
• Consider delaying your retirement for a few years. Instead of a big fat "I QUIT" at your planned age, consider shifting gears and pursuing a different career, something that you're passionate about that you always dreamed of doing.

I hope the above discussion helps you to be better prepared as you plan toward your retirement. Too often, I talk to folks about their goals for retirement, and they've never considered the income side - the primary aim they have in mind is a particular age. By focusing on the retirement income requirement, you can be much better prepared for a long, happy, restful vacation from "work".

April Greetings

Well, it seems that I was a little premature in my call for Spring in last month's letter. As I write these lines, we had a bit of snow earlier in the day, so I'm thinking that the groundhog's call was better than mine altogether, and he really pushed it this year! This makes more than 10 weeks of Winter after he saw his shadow back in February...

Enough about the weather though - it's April, so what should we be focusing on? I mean, besides the fact that the Cardinals and the Cubs are both playing very well... With the cold weather, we haven't had much thought of mushroom hunting or turkey hunting, so - I thought now was a good time to bring up some issues surrounding inter-family loans, which I've addressed in my second article. Many times this issue comes up and you may find some interesting tidbits in that article.

The first article this month covers the question "what can I do to prepare more for retirement goals beyond my 401(k) and IRA?" While most folks are, understandably, at their limits by making the maximum annual contributions to the "regular" kinds of accounts, some folks would like additional avenues to use. This article should help you to think through some of the possibilities, and as always, I'm available to talk it over if you'd like.

Beyond 401(k) and IRA

You're contributing as much as you're allowed to a 401(k) or other employer-sponsored retirement plan. You're also contributing the maximum annual amount to your Roth or traditional IRA. But you want to set aside still more money to make sure your retirement is everything you hoped for. What options do you have? Here are some things to consider...

Before moving beyond - are you really maxing our your 401(k) and IRA?

IRAs and employer-sponsored retirement plans like 401(k)s have some real advantages when it comes to saving for your retirement. So, before you go any further, make sure you're really contributing all you can.

In 2008, most individuals can contribute up to $15,500 to a 401(k) plan, and up to $5,000 to a traditional or Roth IRA. If you're age 50 or better, though, you can make up to an additional $5,000 in "catch-up" contributions to your 401(k) in 2008, and an additional $1,000 to your traditional or Roth IRA. What's more, if you file a joint tax return with your spouse, your spouse may be able to make a full IRA contribution, even if he or she has little or no taxable compensation. (Call my office if you need help with the details on this one.)

Looking at deferred annuities

If you are looking beyond 401(k)s and IRAs, one option you may be aware of is a deferred annuity. Deferred annuities are generally funded with after-tax dollars, but earnings are tax-deferred; you don't pay tax until you take a distribution from the annuity, and then you only pay tax on the portion of each distribution that represents earnings. There is also no annual limit on contributions to an annuity.

The tax deferral offered by a deferred annuity is a nice feature, but it comes with some tradeoffs that you'll need to weigh carefully:

• There are associated fees and costs, including annual fees, investment management fees, and insurance expenses
• A surrender charge may be imposed if you withdraw funds within a certain period of time (generally 7 years!)
• A 10% federal penalty tax (in addition to any regular income tax) may apply if you withdraw funds from an annuity before age 59 1/2
• Investment gains are taxed at ordinary income tax rates, not at the lower capital gains tax rates

Annuities do have some unique benefits beyond tax deferral. With annuities, you can elect an annual payment amount that is guaranteed for the rest of your life (the guarantee is subject to the payment ability of the issuing institution) - this relative degree of certainty can be psychologically and financially comforting. In addition, annuities may offer some creditor protection under state law.

Taxable investment accounts

Your other basic option is to invest through a taxable investment account. The lower federal income tax rates that apply to long-term capital gains and qualifying dividends go a long way toward taking the bite out of holding investments outside of a tax-advantaged retirement account like a 401(k) or IRA. And, a taxable investment account offers one enormous advantage: You gain a tremendous amount of flexibility. You can choose from a virtually unlimited selection of specific investments, and there's no federal penalty for withdrawing funds before age 59 1/2.

Investment options worth mentioning:

• Mutual funds or separately managed accounts (SMAs) managed for tax efficiency intentionally minimize current taxable distributions
• Indexed mutual funds and exchange-traded funds (ETFs) trade infrequently and therefore tend to have low annual taxable distributions
• Tax-free municipal bonds and municipal bond funds generate income that is free from federal and/or state income tax

Always keep the big picture in mind

Your investment decisions should be based on your individual goals, time frame, risk tolerance, and investment knowledge. You should evaluate every investment decision with an eye toward how the investment will fit into your overall investment portfolio, and whether it will meet your general asset allocation needs. A financial professional can be invaluable in helping you evaluate your options.

Inter-Family Loan Topics

Often, the topic of Inter-Family Loans comes up in my discussions with clients. Many times a parent wishes to help out a child with the purchase of a home, or some other financial goal - but they don't want to just hand over the money with no responsibility attached. Inter-family loans can be a good way to approach this topic - the child continues to have fiscal responsibility, and the parent is able to earn a bit on the loan, while still feeling as if they're in a "helping" position with the child. Below are a few items to think about, along with the additional topic of co-signing loans with family members.

Should I lend money to a family member?

Lending money to a family member may seem like the right thing to do. After all, what could go wrong? Your son, sister, father, or cousin really needs your help, and there's no question that he or she will pay you back.

Or is there? Lending money to anyone, even someone you trust, is risky. No matter how well-intentioned the borrower is, there's always the chance that he or she won't be able to pay you back, or will prioritize other debts above yours.

When deciding, consider these tips:

• Don't lend money you can't afford to lose. If you make the loan, will you still be able to meet your savings goals? If the loan isn't paid back, will the financial effect be negligible or substantial?
• Avoid becoming an ATM. Relatives (especially your children) may ask you for a loan because it's convenient, but they may be able to obtain the money easily elsewhere. Explore other options with them first.
• Think through the emotional consequences. Will you be able to forgive and forget if loan payments are sporadic or if the loan isn't paid in full? How hurt will you be if your relative freely spends money (on a vacation, for example) before paying you back?

If you decide to go through with the loan, make sure expectations on both sides are clear. Discuss all terms and conditions and consider putting them in writing. You may even want to draft a formal loan agreement. At the very least, settle on the amount of each loan payment and the date by which the loan must be paid in full. Open-ended obligations inevitably lead to misunderstandings.

On the other hand, don't feel guilty if you decide to turn down your family member's loan request. It's hard to say no, but it's still easier than repairing a damaged relationship if things don't work out.

Is it a good idea to cosign a loan?

At some point, you may be asked to cosign a loan for a friend or relative who is unable to qualify for one independently. While it's noble to want to help someone you care about, think carefully about the consequences. Some people readily agree to cosign a loan because they believe it won't affect their own finances, but unfortunately, that's not the case.

When you cosign a loan, you're guaranteeing the debt. Legally speaking, this means that you're equally responsible for paying back the loan. If the primary borrower misses a payment, the lender can ask you to make the payment instead. If the borrower defaults on the loan, you may have to pay off the outstanding loan balance as well as cover late fees and collection costs, if any. In many states, creditors can even try to collect the debt from you before trying to collect from the borrower.

You should also keep in mind that when you cosign a loan, it becomes part of your credit history and may negatively affect your ability to get credit if the borrower makes late payments or defaults on the loan. And when you apply for credit, lenders will generally include the monthly payment for the cosigned loan when calculating your debt-to-income ratio, even though you're not the primary borrower. This ratio is one of the most important factors lenders use when making credit decisions, so the outstanding loan debt could make it harder for you to obtain a mortgage, buy a car, or secure a line of credit.

Cosigning a loan is risky enough that the federal government requires creditors to issue a notice to all cosigners that explains their obligations. If, after careful consideration, you decide to cosign a loan, make sure you also get copies of the loan contract and the Truth-In-Lending Disclosure and thoroughly read them. Monitor the loan as closely as possible (you may want to ask the loan officer to contact you in writing if the borrower misses a payment), and occasionally review your credit report so that there are no unfortunate surprises down the road.

March Forth

Greetings – I think Spring has sprung (or it’s about to!).

I don’t think I can recall a Winter that has seemed as long as this one has… it seems like we’ve had bad weather, bitter cold, and dreary skies for six months! It’s awful nice to begin to see the warmer weather returning to Central Illinois .

In this month's newsletter, I talk about a couple of issues I've uncovered recently in the area of income taxes. Then I've included an article about identity theft that I think we can all learn from - and put to use. Let me know if you have any questions!

Income Tax Items of Interest

I received something in the mail that was a bit disturbing to me, so I thought I’d mention it for your information. There is a tax preparation outfit in the Springfield area (I won’t mention it by name, but if you have been on Wabash Boulevard recently you’ve seen their pitchman dressed in green waving at cars), who has sent a notice out to, presumably, the entire area, advertising that they will do your taxes for free.

I’m as big of a bargain hunter as the next guy, so when I see something for free it piques my interest. When I read the fine print on the ad, it points out that the free tax preparation doesn’t apply to refund anticipation loans (RALs). Now we’ve arrived at the crux of the matter. As it turns out, this outfit (and most other “tax prep in a box” stores) have very little vested interest in preparing your return accurately – except for the fact that they want to saddle you with the fees associated with a refund anticipation loan.

According to the Center for Responsible Lending, RALs are nothing short of the Pay-Day check cashing stores in sheep’s clothing – offering short-term cash advances at amazing rates: starting at around 40%, and ranging as high as 700% in some cases. Obviously this is a lucrative game, as the big name tax preparation firms are into it in a big way, and many other, smaller firms (like the one I received the advert from) are also looking for a piece of the pie.

The long and the short of it is this – as enticing as it may sound to get your refund immediately when you sign your tax return, don’t do it! With e-Filing and direct deposit, most of the time you’ll have your refund back in just a few weeks. And if you’re getting so much back that this becomes a life-changing event for you, you should probably review your W4 and have a little less withheld – thereby giving yourself a raise with every paycheck.

Another point that I wanted to mention, regarding tax refunds: Does everyone realize that the Economic Stimulus payments (the one that Congress has decided all of us Americans need to fix the economy) are simply a refund of your own money? And that at some point we’re going to have to give it back, with interest?

Identity Theft Protection

Whether they’re snatching your purse, diving into your dumpster, stealing your mail, or hacking into your computer, they’re out to get you. Who are they? Identity thieves.

Identity thieves can empty your bank account, max out your credit cards, open new accounts in your name, and purchase furniture, cars, and even homes on the basis of your credit history. If they give your personal information to the police during an arrest and then don’t show up for a court date, you may be subsequently arrested and jailed.

And what will you get for their efforts? You’ll get the headache and expense of cleaning up the mess they leave behind..

You may never be able to completely prevent your identity from being stolen, but here are some steps you can take to help protect yourself from becoming a victim.

Check Yourself Out

It’s important to review your credit report periodically. Check to make sure that all the information contained in it is correct, and be on the lookout for any fraudulent activity.

You may get your credit report for free once a year, from each of the three national credit reporting agencies. To do so, contact the Annual Credit Report Request Service online at www.annualcreditreport.com or call (877) 322-8228.

If you need to correct any information or dispute any entries, contact the three national credit reporting agencies:

• Equifax – www.equifax.com – phone 800-685-1111
• Experian – www.experian.com – phone 888-397-3742
• TransUnion – www.transunion.com – phone 800-916-8800

Secure Your Number

Your most important personal identifier is your Social Security number (SSN). Guard it carefully. Never carry your Social Security card with you unless you need it for a specific purpose (such as applying for a passport or driver’s license). The same goes for other forms of identification (such as health insurance cards) that include your SSN. If your state uses your SSN as your driver’s license number, request an alternate number. Don’t have your SSN pre-printed on your checks, and don’t let merchants write it on your checks. Don’t give it out over the phone unless you initiate the call to an organization that you trust. Ask the three major credit reporting agencies to truncate it on your credit reports. Try to avoid listing it (where possible) on employment applications; offer instead to provide it during your interview.

Don’t Leave Home With It

Most of us carry our checkbooks and all of our credit cards, debit cards, and telephone cards with us all the time. That’s a bad idea – if your wallet or purse is stolen, the thief will have a treasure chest of new toys to play with.

Carry only the cards and/or checks you’ll need for any one trip. And keep a written record of all your account numbers, credit card expiration dates, and the telephone numbers of the customer service and fraud departments in a secure place – at home. It may be useful to make a photocopy (or as I do, a computer-scanned image) of all of your credit cards, driver’s license, insurance cards, etc., and keep those images in a safe place where you can get to them quickly in the event that your cards are stolen.

Keep Your Receipts

When you make a purchase with a credit or debit card, you’re given a receipt. Don’t throw it away or leave it behind – it may contain your credit card number, plus it is your sole defense in the event of fraud within the store. And don’t leave it in the shopping bag inside your car while you continue shopping either; if your car is broken into and the item you bought is stolen, your identity could be stolen as well.

Save your receipts until you can check them against your monthly statements, and watch your statements for purchases you didn’t make, or for amounts that don’t match. When you’re finished matching them, shred them!

When You Toss It, Shred It

Before you throw out any financial records such as credit or debit card receipts and statements, canceled checks, or even offers for credit cards you receive in the mail – shred the documents, preferably in a cross-cut shredder. If you don’t, you may find that the panhandler going through your dumpster was looking for more than just discarded leftovers. These cross-cut shredders are very affordable (around $20) and available at most discount stores and office supply outlets.

Keep A Low Profile

The more your personal information is available to others, the more likely you are to be victimized by identity theft. While you don’t need to become a hermit in a cave, there are steps you can take to help minimize your exposure:

• to stop telephone calls from national telemarketers, list your telephone number with the FTC’s National Do Not Call Registry by calling 888-382-1222 or registering online at www.donotcall.gov
• to remove your name from most national mailing and e-mailing lists, as well as most telemarketing lists, write the Direct Marketing Association at 1120 Avenue of the Americas, New York, NY 10036-6700, or register online at www.optoutprescreen.com
• when given the opportunity to do so by your bank, investment firm, insurance company, and credit card companies, opt out of allowing them to share your financial information with other organizations.
• You may even want to consider having your name and address removed from the telephone book and reverse directories.

Take a Bite Out Of Crime

Whatever else you may want your computer to do, you don’t want it to inadvertently reveal your personal information to others. Take steps to help assure that this won’t happen.

Install a firewall to prevent hackers from obtaining information from your hard drive or hijacking your computer to use it for committing other crimes. This is especially important if you use a high-speed connection that leaves you continuously connected to the internet, such as cable or DSL. Moreover, install virus protection software and update it on a regular basis as well.

Try to avoid storing personal and financial information on a laptop; if it’s stolen, the thief may obtain much more than the value of your computer. If you must store such information on your laptop, make things as difficult as possible for a thief by protecting these files with a strong password – one that’s at least eight characters long, and that contains uppercase and lowercase letters, as well as numbers and symbols.

“If a stranger calls, don’t answer.” Opening emails from people you don’t know, especially if you download attached files or click on hyperlinks in the message, can expose you to viruses, infect your computer with “spyware” or “malware” – software that captures information by recording your keystrokes – or lead you to “spoof” websites (websites that impersonate legitimate business sites) designed to trick you into revealing personal information that can be used to steal your identity.

If you wish to visit a business’s legitimate website, use your stored bookmark or type the URL address directly into your browser. If you provide personal or financial information about yourself over the internet, do so only at secure websites – to determine if a website is secure, look for a URL that begins with “https” instead of “http” or a padlock icon in the bottom of the browser’s status bar.

And when it comes time to upgrade to a new computer, remove all your personal information from the old one before you dispose of it. Using the “delete” function isn’t sufficient to do the job; overwrite the hard drive using a “wipe” utility program (several are available on the market). The minimal cost of investing in this software may save you from being wiped out later by an identity thief.

Lastly, Be Diligent

As the grizzled old duty sergeant used to say on the television show “Hill Street Blues” – Be careful out there. The identity you save may be your own!

Happy February!

Seems like the groundhog was right... we have been continuing to have winter weather and it doesn't seem like it's going to end any time soon. Guess that's what we get for living in the midwest, but as I was telling someone (who lives elsewhere) the other day: All my stuff is here!

I ran across a good one the other day, or at least I got a kick out of it, and I thought I'd share it with you. You can click on the following link for a Dilbert cartoon that I got a kick out of. Keep in mind that I don't necessarily advise using Dogbert's recommendations, but he may have a good idea there!

Well, they've done it to us again - with the signing of the Economic Stimulous Package, Congress has given us another reason to file tax returns when we didn't otherwise need to. If a person doesn't normally earn enough income to require filing a return, they are still required to file a return for 2007 in order to be eligible for the rebate checks. If you or a friend or relative needs to file a return in this fashion, I will, just like last year, prepare this return for you for free. All you have to do is ask.

In this month's newsletter, I have outlined a couple of things that are new in the financial planning world. This is certainly not an exhaustive listing of new laws and the like, but rather just a couple of things that I thought you might find interesting. Let me know if you have any questions about them!

New Laws in Effect for 2008

Every year in early January, a new spate of laws on the books goes into effect, and 2008 is no exception. I've listed a couple of financial-planning-related items below that have just come into effect that may have an impact on your life.

Direct conversion from 401(k) to Roth IRA. Beginning in 2008, if you hold a 401(k), 403(b), 457, or other CODA plan, and you're hoping to convert some of those funds to your Roth IRA, you can move these funds directly from one plan to the other.

The reason this is different for 2008 is that, in the past, you would need to take care of this activity in two steps: 1) rollover the funds from the 401(k) to a traditional IRA; and then 2) convert from the traditional IRA into your Roth IRA account. This removal of a step helps out with the paperwork in the process, most certainly, but it also opens up a new avenue that was previously not available. If your 401(k) or other plan has a provision for in-service withdrawals (some do, most do not), you can effectively convert some of your account to a Roth IRA while you're still working. You'll need to check with your HR representative to find out if this option is available to you. If so, it might make sense to do a partial conversion - you should check it out!

Why would you want to do this? As I've mentioned before, the Roth IRA is a very valuable asset to own. If you wait until age 59 1/2 or later, all of the funds in your Roth IRA are tax-free when withdrawn, and *under current law* they will never be taxed. In addition, the Roth IRA account is flexible, in that you can withdraw your contributions at any time for any purpose, without tax or penalty - the exception being that you must wait five years after establishing the account (in the case of a conversion) before the funds are available for use tax-free. With careful planning, this should not be a problem for most folks.

This conversion option is still subject to the $100,000 income limit as in the past. This will change in 2010, when any person, regardless of income, will be eligible to convert from either a traditional IRA or a 401(k) or other plan directly to a Roth IRA. Many of you are taking advantage of non-deductible IRAs now in order to utilize this rollover option when you are eligible in 2010. Again, there are some careful planning steps that need to be taken when working out such a plan, but it's a good way to provide yourself with tax-free income in the future.

Another benefit of the Roth IRA is that you are never required to take minimum distributions (RMD's) from the account at age 70 1/2 as you are with the traditional IRA plans. This way, if you don't need the funds, you can let the account continue to grow until you need it, or pass it on to your heirs... which brings me to a second law that recently came into effect:

Non-spouse heirs of 401(k) accounts. This rule actually came into effect previously, but has recently gotten some clarification by the IRS. In the past, spousal heirs of qualified plans were treated differently from non-spousal heirs. The spouse as an heir could rollover the plan to an IRA and "stretch" distributions out over a lifetime, whereas a non-spouse was required to take all of the funds from the account either immediately or over a five-year timeframe at most.

This new arrangement allows the non-spouse beneficiary to use the same rules as a spouse, thereby making the inherited plan much more flexible and allowing for continued tax-free growth over their lifetime. The new clarity that has been brought forth is that, previously, unless a special provision were in place, then the plan rules (not IRA rules) would still be in effect. An employer would need to specifically allow the application of the IRA rules in order for this special treatment to apply.

Exclusion of Gain on Sale of Principal Residence by Surviving Spouse. Beginning in 2008, a surviving spouse can exclude up to $500,000 in gain on the sale of a principal residence, as long as the sale occurs within two years of the other spouse's death. In the past, this was only allowed within the year of death of the spouse, which required an expedient sale in some cases, otherwise the surviving spouse was only allowed an exclusion of $250,000 in gain.

January

Greetings to you all from beautiful downtown New Berlin!

Quite often in this newsletter I've mentioned that a particular time of year is my favorite - autumn being the most favorite. However, this time of year, in the midst of the high school and college basketball seasons, with a promising new year ahead of us, comes a close second for me. If you know me very well at all, you'll know that I make an extra effort to attend as many high school basketball games as I can (I recently spent nearly fourteen hours in one day watching games at the Waverly Holiday Tournament).

In addition to all of the sports happenings around us, we're getting geared up for the coming tax season - with some good news for those of you who have me prepare your income tax returns... lower cost! I've recently changed software providers, which has resulted in reduced software expenditures over the previous software, and I am passing that savings on to you. If your return hasn't changed materially from the return prepared last year, you can expect that the cost will be approximately $10 less than in the past. It's not much, I agree, but every little bit helps.

In this month's newsletter, I found an article provided by the Financial Planning Association on actions that homeowners who find themselves in trouble (as a result of adjusting mortgage rates) should take in order to ease the impact of the problems. Hopefully this doesn't directly apply to any of you reading this newsletter, but if it does impact you or someone you come in contact with, the suggestions are very helpful and useful. By all means, if you have problems with such a situation and need help exploring your options, don't hesitate to call me.

Homeowners in Trouble Need to be Proactive

According to a November report by Standard & Poor’s, about half a trillion dollars' worth of adjustable-rate mortgages are due to reset to higher rates in 2008 when their two-year teaser rate periods come to an end.

Even though general interest rates have been headed down recently, you should know that it may not affect the mortgage market all that much. And if you suspect the lapse of your teaser rate will make your future monthly payments unaffordable, you need to take action now, not when higher payments take hold.

Mortgage trouble can be a sign of other concerns in a person or family’s financial life, and it makes sense to review your entire financial picture. One way to do this is to seek out the advice of a trained financial expert such as a Certified Financial Planner™ professional. A CFP can examine what you’re doing right and wrong with credit as a whole and make suggestions on how to circumvent immediate problems. In general, their advice might be the following:

Act first: If you believe that you are going to be late with a payment of any kind – not just your mortgage lender’s – contact the lender first. A recent Freddie Mac survey reported that of 2,000 homeowners reporting they were behind in their payments, 31 percent said they had not contacted their lenders despite repeated warnings of penalties and foreclosure in the mail.

Use every contact you have: If you have a person-to-person relationship with your lender, start by talking to a branch manager or an actual human you can use as a stepping stone to getting the right answers. If you have worked with a mortgage broker for years, perhaps they can help you get closer to a lending official who can consider your case more quickly and effectively.

Know the best time to act: There’s a key window to exploit. At 15 days past due, a file is typically referred to a lender’s collection department, and at 30 days, the delinquency is reported to the credit bureau. Once the 15-day notice arrives, immediately respond to the letter, and try to reach a department manager during the day to explain your situation and formulate a plan of action. If you are late, it won’t prevent a ding in your credit rating, but it may save your loan and your home.

Know your mortgage rights: Check your loan agreement and learn what your lender can or cannot do if you fail to make payment. Check the State government housing division and get information on the applicable law.

Go back to the basics: Review your spending plan and make appropriate changes. Now is the time to prioritize.

Ask for a change in your loan agreement: Under certain circumstances, such as loss of a job, medical problems or evidence of other financial burdens beyond your control, a lender might either renegotiate the terms of your loan or temporarily grant a forbearance agreement that would suspend payments or allow you a lower payment over a period of time. Ask under what conditions you might be eligible for either option.

Refinance if you can: The best option to rescue yourself from a huge jump in your monthly mortgage payment is to refinance, preferably into a fixed-rate mortgage. Keep in mind your lender won’t be all that excited about it if your credit picture isn’t that healthy and if your home value has dropped, refinancing will be even less likely. Have a conversation with a tax advisor or a financial planner to see if there are options.

If foreclosure is looming: Use your advisors to see if they know legal or other resources to help you negotiate with your lender to prevent the loss of your home. Obviously, the time to act was before the foreclosure notice was issued, but as a situation worsens, it’s obviously no time to go it alone. Keep in mind that a lender doesn’t want you to go into foreclosure any more than you do – lenders almost always lose money in foreclosure. Do consult with tax and legal advisors during this process, and stay away from foreclosure prevention companies since their fees are high. Always keep in mind that foreclosure victims are easy targets for scams.

December 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Jim Blankenship, a local member of FPA.

It's December

Merry Christmas to all, and Happy Holidays!

Here in New Berlin, we were quite fortunate in that we side-stepped the worst of the ice storms of the past week. My friends, clients and colleagues just a little further west from here haven't faired as well, although I believe everyone came through without too much inconvenience or damage. Our hearts go out to you, as we have experienced the power outages and feelings of utter helplessness that a major ice storm can bring about. We are reminded to be truly thankful that we have our families, our homes, and our livelihoods.

As we round out this year, I wanted to take a moment to thank each and every one of you for your business over the past year. 2007 was a very good year for Blankenship Financial Planning - our best yet. Also, thanks to all of you who have passed my name along to your family and friends. As I've always said, the people who I have helped to be successful are the only "advertisement" I need. I sincerely thank you all for the privilege of knowing you and for the opportunity to work with you.

In this month's newsletter, I thought it might be useful to review the reasoning behind diversification. It's always helpful to me (and hopefully to you!) to go back and reconsider the very foundations of what we believe. Since diversification is one of the most important pillars of sound investment philosophy, we'll review it this month.

Diversification: I Know I Should, But Why?

Any discussion of the tenets of long-term investing that covers the disciplines that we should follow as we invest for the long term includes the recommendation to diversify. This concept is delivered almost without thought - after all, as children we are taught "Don't put all your eggs in one basket!". But have you ever stopped to consider just why we should diversify?

Of course, in the example of the saying about the eggs, it's simple spreading of risk: if you have all your eggs in one basket and you drop that basket... all your eggs have broken! By spreading your eggs into a second basket, if one basket is dropped, only those eggs in that basket will break, and you've still got one basket of good, unbroken eggs.

What if we add a third basket? A fourth? As you might imagine, it soon becomes too costly to own so many baskets (potentially one for each egg), as well as too unwieldy. One person couldn't possibly carry twelve baskets effectively just to harvest that dozen eggs. So, while diversification makes sense to a degree, you always must keep in mind that before long, you lose the efficiency of the basket, and your costs increase.

Enough about eggs for now though. Why do we preach diversification in investing? The roots of this concept (at least in the modern age) run toward a theory called "Modern Portfolio Theory", which was developed by a fellow named Harry Markowitz. The overall theory is pretty weighty so we won't cover it completely here (although I'd be happy to discuss it with you if you wish). The gist of the benefit of diversification follows.

Decisions about investments are always made in an environment of uncertainty. This is because, even though we have a belief that our investments will hold their value and hopefully increase in value over time, there is no certainty that this will be the case. We can study the past performance, the present activity, and many pieces of information about the particular security - but we have no surety that the increase we hope for will occur.

This uncertainty is due to the continuous up and down volatility in investment prices. As an example, if a stock is worth $20 now and was worth $15 last week, we have no idea if it will be worth $30 tomorrow or possibly even $10. This shouldn't be a surprise: how many times have you seen something in the news that seems like a good thing for the economy, like an interest rate cut - only to see the market drop like a stone at the release of the news. The opposite happens just as often.

So - what's a guy to do? Enter diversification.

Diversification - Your Key to Reduce Volatility
It's not hard to understand that every dollar you save in taxes and overall costs of investments equates to increases in your bottom line total return. What may be difficult to follow though, is the concept that diversification of risk can reduce volatility, and therefore reduce loss. An example may be the best way to get this point across.

Let's say you have $1,000 in your overall portfolio, and through the year you have achieved a 20% gain. Shortly thereafter, your investment experiences a correction, amounting to a 20% loss. Most folks would think that you've just held ground and broke even in your account - but most folks would be wrong to think so. What happened is that your account gained 20% to a value of $1,200, and then the account lost 20% or $240 (.20 times $1,200), so in the end you have actually lost a net amount of $40. Just for grins, the result is the same if you work things in the reverse as well: a 20% loss gives you a balance of $800, and then a 20% gain ($160) gives you a final balance of $960, for a loss of the same $40.

For purposes of comparison, let's look at another situation: a 10% gain followed by a 10% loss. From our previous example, we know that this isn't just "holding ground" - we have lost a total of $10 in the process. We started with $1,000 and gained 10% to a value of $1,100, and then experienced a 10% loss ($110), for a final balance of $990.

What's truly important to note about these two examples is the relationship of the volatility (the percentage size of the gains and losses) to the actual dollar loss realized. In the first case, the volatility was double that of the second (20% versus 10%), but the resulting loss was quadrupled!

If we took the first example and changed the volatility to a 40% swing in either direction, the resulting loss is even greater - a gain of 40% gives us $1,400, and the following loss of 40% ($560) brings us to a final balance of $840, for a loss of $160, which is sixteen times the loss we suffered in the 10% example. If you're a mathemetician, you'll notice the relationship here: the level of volatility that we experience results in an exponential loss in the account. If we had a 50% gain followed by a 50% loss, our overall loss would be twenty-five times the loss in the 10% example, and so on.

It doesn't take long to understand why it is important to keep volatility in your portfolio low: the smaller the "swings" of volatility, the lower your potential loss. When you increase the "swings" of volatility by a factor of one, your potential losses increase exponentially.

So - if I've done my job and explained this properly, the question on your mind at this point should be: "How do I get myself some of this low volatility?" And if you've been reading carefully up to this point, the answer should be obvious: diversify.

And how do we do that? Much the same as the eggsample from earlier, you want to find a place (or group of places) to invest your money that will result in less volatility. All investments are affected by various things around them - oil and gas companies are impacted by the cost of crude oil, banks are impacted by interest rates and the credit crunch, department stores are impacted by inflation, employment, and the seasons. What we look for are investment vehicles that are diverse enough to not all be impacted by the same kinds of things at the same time - hence, we diversify into different capitalization-weightings, different countries, and different sectors, all in an effort to reduce the overall risk of loss (volatility) in our portfolio.

For example - by investing in the S&P 500 index, we are diversifying across many different companies, sectors, and industries in the US marketplace. In addition to this investment, we might add a holding in the EAFE index (Europe, Asia and Far East), further diversifying across different countries, companies, sectors and industries. By doing so, if something happens that makes the company United States Steel lose 20% in value, the impact on our portfolio is minimized, since US Steel is only a very small portion of our portfolio. By the same token, if an event should occur that caused the stock market in Singapore to suddenly crash, and this event was limited in its exposure to just Singapore, then as before, since we're diversified among many countries, our exposure to volatility is minimized.

I hope this explanation helps you to understand one of the very basic pillars of investing discipline. I would be remiss, though, if I didn't point out that diversification will also have a negative impact on your gains. When you reduce the volatility in your investments, you're not only reducing the downside swing, but the upside swing as well. What we give up is the "once in a lifetime" homerun-type of investments.

For example, if you happened to put all of your money in Google at it's initial offering in August of 2004, by the end of that year you could have doubled your money. In the diversification example using the S&P 500, you would have had a small percentage of your portfolio in Google, and your overall return from August to December in 2004 would have been 10.8%. For an example on the other side of the coin, if you had placed your nest egg in Enron stock in late 2000, by mid 2001, you could have virtually nothing left, while the S&P 500 had fallen by a mere 17% during the same period. Reducing volatility, while it causes you to give up the spectacular gains, will also save you from the spectacular crashes. And we all know which one happens more often.

That's all for now. Talk to you again next month!